India Nepal - International University of Japan

COUNTRY REPORT

3rd quarter 1999

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

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ISSN 0269-5294

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EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999

Contents

3 Summary

5 Political structure

6 Economic structure

7 Outlook for 1999-2000

12 The political scene

16 Economic policy

18 The domestic economy

18 Economic trends

22 Oil and gas

25 Industry

27 Agriculture

29 Infrastructure and services

31 Foreign trade and payments

35 Political structure

36 Economic structure

37 Outlook for 1999-2000

38 The political scene

42 Economic policy and the economy

46 Foreign trade and payments

48 Quarterly indicators and trade data

List of tables

11 India: forecast summary

18 India: real gross domestic product growth

19 India: industrial growth, May

20 India: consumer prices

28 India: cotton harvest

32 India: current account, Jan-Mar

34 India: external reserves

38 Nepal: final election results

42 Nepal: main economic indicators

43 Nepal: 1999/2000 budget

48 India: quarterly indicators of economic activity

49 Nepal: quarterly indicators of economic activity

49 India: foreign trade

51 India: major partners’ trade

List of figures

12 India: gross domestic product

12 India: Indian rupee real exchange rates

38 Nepal: gross domestic product

38 Nepal: Nepalese rupee real exchange rates

Summary

3rd quarter 1999

The BJP-led electoral alliance, the NDA, is likely to win the general election inSeptember-October. Although a BJP-led government may not be stable, it willprobably survive for at least the first half of its term. Policymaking will remainon hold until year-end. The battle in Kargil and its aftermath will hurtgovernment finances. Growth will accelerate as the industrial recovery gatherspace. Inflation will remain very low in 1999, but will rise in 2000 as low year-on-year comparisons pass through and domestic demand picks up. The budgetdeficit will remain high in 1999/2000, but some narrowing is possible in2000/01. The external deficit will increase, but will remain manageable. Therupee is forecast to depreciate by 6.5% in 1999 and 9.3% in 2000.

India won the frontier war and the diplomatic battle over Kargil, but the costof the conflict will hurt public finances. The prime minister, Mr Vajpayee, hastaken the credit for the end of the war. The party split has continued to hurtCongress, while the BJP has cemented its alliances. The former “third force”has become more vulnerable. The BJP is capitalising on Mr Vajpayee’s charismain the run-up to the election, and internal party tensions have been subdued.

The fiscal deficit has widened, despite improved revenue collection. Realinterest rates have moved sharply. Policymaking has been slowed by thegovernment’s caretaker status. Regulation, not reform, is dominating policydiscussions. Some sectors have been warned to step up preparations forproblems associated with the millennium bug.

• GDP figures for 1998/99 have been revised. Agriculture boomed in January-March. Industry has continued to recover. The stock exchange has risensharply, led by cyclical stocks, pharmaceuticals and information technologycompanies. Net portfolio inflows have increased, and business confidence hasimproved. Annual inflation has continued to fall. Foreign direct investmentdeclined in 1998/99.

• Shell has struck oil on the border of Rajasthan and Gujarat, but India’s oilexploration policy has failed to attract much interest from major internationaloil companies and a major rationalisation of the state-owned oil companieshas been proposed. India needs additional refining capacity. Politicking atPetronet may hurt associated gas projects, but the Enron-Petronas LNG projecthas progressed. The electricity sector has improved its efficiency, but theinstallation of new capacity has fallen behind target.

• Cement and finished steel production has risen. Government efforts to assistSAIL have faced opposition. Car and commercial vehicle sales have boomed,but sales of some consumer goods have reached a plateau.

August 16th 1999

Outlook for 1999-2000

The political scene

The domestic economy

Economic policy

• Another good monsoon appears to be in prospect. Food-grain productionreached record levels in 1998/99. The cotton and sugar supply positions appearcomfortable. Supply of onions and edible oils have been carefully monitored.Tea exports are expected to fall in 1999, but coffee exports rose to an all-timehigh in 1998/99. Local commodity markets are failing to fulfil their role.

• Private telecommunications companies will be aided by the government’snew policy. New guidelines for ISPs have been introduced. Port activity hasincreased, and competition between domestic airlines has mounted. Bankfinances remain in bad shape. Equity funds have been buoyed by the stock-market boom.

The trade deficit has narrowed, and the IMF has reported a current-accountsurplus in the first quarter of 1999. Software exports have continued to boom,while gold imports have fallen. India has been involved in several WTOdisputes. Foreign-exchange reserves have held steady, but the rupee has fallenslightly. The industrial group Essar has defaulted on its foreign debt.

Despite its strong mandate, the Nepali Congress (NC) will be plagued byfactional fighting. The rivalry between the new prime minister, Krishna PrasadBhattarai, and his predecessor, Girija Prasad Koirala, is set to continue. Astronger performance by the agricultural and trade sectors and a reboundingIndian economy could push GDP growth to over 4% in 1999/2000.

The NC has formed a majority government, but in-fighting within the partyhas already begun. The CPN-UML is consolidating its position as the mainopposition, and managed to prevent the NC from winning the chairmanshipof the National Assembly. The king has attracted criticism for intervening inparty politics. Violence by Maoist insurgents in the west and north-east is onthe rise, and government efforts to control the CPM have so far been futile.Amnesty International has accused the police of abuses.

GDP grew by 3.4% in 1998/99. The finance minister’s maiden NRs77.2bnbudget for 1999/2000 is wildly overoptimistic. Small businesses continued tooppose efforts to speed up the implementation of VAT and widen its reach, buteventually capitulated. The government is dithering on the construction of aNRs14bn toll road between Kathmandu and Hetauda. Government employeeshave switched to a five-day week. Petrol-powered tuk-tuks are to be bannedfrom Kathmandu’s streets in an effort to reduce pollution.

Stronger exports and falling imports have reduced the trade deficit, and thecurrent-account deficit has almost disappeared. The balance of paymentsrecorded a surplus for the first three quarters of 1998/99.

Editor: Elisabeth PaulsonAll queries: Tel: (44.20) 7830 1007 Fax: (44.20) 7830 1023

Next report: Our next Country Report will be published in December

Foreign trade andpayments

The political scene

Economic policy and theeconomy

Foreign trade andpayments

India 5

Political structure

Republic of India

Federal republic, 26 states and six union territories

President, currently Kocheril Raman Narayanan, indirectly elected for a five-year term bythe national and state legislatures

The prime minister heads a Council of Ministers chosen from elected membersof parliament

Bicameral: upper house, Rajya Sabha, of 250 members (238 indirectly elected by statesand union territories and 12 appointed by the president); lower house, Lok Sabha, of543 members elected from single-member constituencies (79 seats reserved forScheduled 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 onMarch 19th 1998, fell on April 17th 1999. The BJP government is serving as the interimadministration until a fresh election is held

February-March 1998 (Lok Sabha); next election scheduled to be held over five days inSeptember-October 1999

Bharatiya Janata Party (BJP); Indian National Congress (Indira—Congress (I) orCongress); 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; DravidaMunnetra Kazhagam (DMK); Bahujan Samaj Party (BSP)

Prime minister Atal Bihari Vajpayee (BJP)

Chemicals & fertiliser Surjit Singh Barnala (Akali Dal)Civil aviation Anant Kumar (BJP)Commerce Ramakrishna Hegde (Lok Shakti)Defence George Fernandes (Samata)External affairs Jaswant Singh (BJP)Finance Yashwant Sinha (BJP)Home affairs Lal Krishna Advani (BJP)Human resources development Murli Manohar Joshi (BJP)Industry Sikandar Bakht (BJP)Information & broadcasting Sushma Swaraj (BJP)Law, justice & company affairs Thambi Durai (AIADMK)Petroleum & natural gas Vazhapady K Ramamurthy independent)Power Rangarajan Kumaramangalam (BJP)Railways Nitish Kumar (Samata)

Bimal Jalan

a Caretaker government.

Official name

Form of state

Head of state

The executive

National legislature

State legislatures

Legal system

National government

National elections

Main political organisations

Council of Ministersa

Key ministers

Central bank governor

6 India

Economic structure

Latest available figures

Economic indicators 1994 1995 1996 1997 1998a

GDP at market pricesab (Rs bn) 10,472 12,268 14,281 15,636 17,683

GDP at market pricesab ($ bn) 333.5 366.7 402.7 420.8 420.1

Real GDP growthbc (%) 7.8 7.6 7.8 5.0 6.0

Consumer price inflation (av; %) 10.2 10.3 8.9 7.2 13.2d

Population (m) 900.0 916.0 939.4 955.2 970.6

Merchandise exports fob ($ m) 25,523 31,239 33,737 35,702 34,076d

Merchandise imports fob ($ m) 29,673 37,957 43,789 45,730 44,828d

Current-account balance ($ m) –1,676 –5,561 –5,957 –2,965 –6,903d

Reserves excl gold ($ m) 19,698 17,922 20,170 24,688 27,341d

Total external debt ($ bn) 102.6 94.4 93.4 94.4 100.6

Debt-service ratio, paid (%) 28.6 28.9 23.3 19.8 19.9

Exchange rate (av; Rs:$) 31.37 32.43 35.43 36.31 41.26d

August 16th 1999 Rs43.57:$1

% of % ofOrigins of gross domestic product 1998/99ab total Components of gross domestic product 1998/99ab total

Agriculture, forestry & fishing 29.3 Private consumption 67.6

Mining 1.7 Government consumption 10.8

Manufacturing 16.0 Investmente 24.8

Utilities 2.5 Exports of goods & non-factor services 8.2

Construction 4.5 Imports of goods & non-factor services –11.4

Services 45.9 GDP at market prices 100.0

GDP at factor cost 100.0

Principal exports (fob) 1997/98f $ bn Principal imports (cif) 1997/98f $ bn

Textile goods 8.0 Capital goods 9.2

Handicrafts 6.0 Petroleum & petroleum products 8.2

Gems & jewellery 5.1 Uncut gems 3.1

Engineering goods 5.0 Iron & steel 1.5

Chemicals 3.1 Fertiliser 1.1

Leather & leather goods 1.4 Non-ferrous metals 0.9

Total incl others 34.0 Total incl others 41.0

Main destinations of exports 1998g % of total Main origins of imports 1998g % 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.

India 7

The general election will be held over five days in late September and earlyOctober, and could produce one of several possible results. Earlier in the yearthe most plausible scenario was a victory for the Congress (I) party. Theminority coalition government, led by the Bharatiya Janata Party (BJP), seemedinept and indecisive, particularly over its perceived mishandling of inflation,and the anti-incumbency mood was gaining strength.

The position has now changed radically. Congress enters the tail-end of thecampaign period with several disadvantages, some of which result from therecent tensions in Kashmir. First, the BJP will probably reap the political rewardsof the effective resolution of the Kargil conflict. In addition, the sidelining ofparty politics in recent months has prevented Congress from campaigningagainst the BJP. In May and June Congress tried to capitalise on the apparentfailure of the government’s intelligence structures, which did not detect orreport the first signs of the invasion. But these efforts were not well received bythe electorate and were quickly abandoned. Even now, Congress has to phraseits attacks on the BJP carefully, given that the caretaker government’s firm linevis-à-vis Pakistan and the insurgents enjoyed wide public support. With itsability to challenge the BJP on Kargil blunted, and other BJP failings—such asthe government’s inability in late 1998 to check food price rises—a distantmemory, Congress will find it hard to make inroads into the BJP’s support.

Moreover, the defection of the former Congress leader, Sharad Pawar, and hisdecision to form the Nationalist Congress Party (NCP) has dealt a severe blowto Congress’s electoral prospects. Mr Pawar’s desertion could cost Congress alarge pool of seats in the state of Maharashtra and erode its share of the votenationwide. A poor showing by the BJP in India’s largest state, Uttar Pradesh,could make up some of the loss. But Congress, led by Sonia Gandhi, will dowell to retain its 141 seats in the Lok Sabha (lower house of parliament).

The BJP, by contrast, has profited from a wave of patriotic sentiment during thefighting in Kargil and the resolution of the conflict in India’s favour. Moreover,the economy is seemingly in good shape: industrial growth is beginning torecover, wholesale inflation is at a 17-year low, and the rural population isenjoying the fruits of last year’s bumper crops. The prime minister, Atal BihariVajpayee, the acceptable face of the BJP’s Hindu nationalism, is personallyrespected and popular. Smaller parties have been queuing up to join the BJP-ledelection coalition, the National Development Alliance (NDA), which suggeststhat the ruling coalition could win a decisive majority. However, more prob-able than either of the above is the prospect of another hung (or nearly hung)parliament, with the BJP-led coalition, NDA, as the largest bloc, forming thebasis for the next government. A plausible range of probabilities in terms of theelection result is: a 10% chance of a Congress victory (if the Kargil crisis fails tosway vast numbers of rural voters in the BJP’s favour and the dynastic allure ofMrs Gandhi has not been dented by the recent debate about her nationality); a35% chance of a landslide victory by the BJP-led coalition (which would leavethe BJP firmly in control); and a 55% chance of another period of coalitiongovernment, probably led by the BJP, but struggling to last a full term.

A BJP victory is highlylikely—

8 India

Even if the NDA does win an outright—albeit modest—majority, it will notprovide the strong leadership it has promised, which many Indians crave. Asthe BJP extends its regional and caste base through political alliances, itbecomes more dependent on allies that do not share its outlook or have anydeep attachment to it, such as the socialist Samata party, the southern,linguistic parties like the Telegu Desam Party in Andhra Pradesh and theDravida Munnetra Kazhagam (DMK) in Tamil Nadu, or some of the remnantsof the Janata Party that are offering “backward caste” support. In government,their support would be fickle. In addition, the stability of the grouping reliesheavily on the leadership of Mr Vajpayee. If he were to step down, a BJP-ledgovernment would be unlikely to survive the succession battle, which wouldprobably pit the hardline outgoing interior minister, Lal Krishna Advani,against the moderate foreign minister, Jaswant Singh. However, assuming thatMr Vajpayee remains in office, a BJP-led government has a good chance ofsurviving at least the first half of its term.

Major economic decisions will remain on hold until the general election—thethird in three years—is completed in October and it is clear who will be inpower. To some degree, the Indian economy is “politician-proof”: the economyhas achieved respectable growth and low inflation in the past three years,despite constantly shifting parties of government and ministerial portfolios.This is partly because within most parties—from free-market liberals, to Hindunationalists, to nominal communists—there is little deviation from the beliefthat the liberalisation of the economy achieved over the past two decadesshould be carefully advanced. In addition, non-political technocrats in thecivil service have considerable influence over the government machine—asystem that is more in line with the British or French model than with the USsystem of government.

The state of near war on the line of control (which separates Indian-held andPakistan-held Kashmir) has so far failed to jar the financial markets or the realeconomy. But the febrile state of relations with Pakistan poses risks andeconomic costs on several levels. First, the added current cost of reinforcingand patrolling the mountainous line of control, on top of the added cost of therecent fighting, estimated at Rs20bn-40bn ($460m-920m), will severely dentthe government’s already unrealistic budget deficit target of 4% of GDP in1999/2000. Second, there is strong pressure to re-equip the Indian armedservices with more sophisticated weapons. India lags behind Pakistan quali-tatively, if not quantitatively, in some areas of weaponry, having economisedon defence spending in the past. Re-equipment will be very expensive. Finally,there is the possible, rather than probable, risk of a major bilateral conflict.Unless measures are taken to de-escalate the quarrel, India will—at the veryleast—pay a price in political risk premiums and scepticism about its potential.

Following two years of slower growth—5% in 1997/98 (April-March) and 6% in1998/99, compared with an annual average of 7.7% in the preceding threeyears—the EIU expects real GDP growth (at factor cost) to accelerate in1999/2000 and 2000/01. In 1999/2000 there will almost certainly be a slow-down from the remarkable 7.6% growth in agriculture recorded in 1998/99,

—but stable governance isnot assured

Policymaking will remainon hold until year-end—

—and the war will take afiscal toll

GDP growth will accelerate

India 9

despite provisional projections of another good monsoon this year, simplybecause the 1998/99 base is so high. (If India does receive adequate rains in1999/2000, it would be the 12th year in succession that the rains were good oraverage.) But manufacturing is also showing signs of strength, suggesting thatgrowth rates will accelerate from the last three years of industrial “recession”,when annual manufacturing growth slowed to 7.7%, 6.8% and 5.2%respectively. Several sectors, such as cement, vehicles and steel, are showingsigns of a recovery which we expect to be stronger than most Indian surveyssuggests. The outlook for investment is also strengthening, buoyed by thebooming stockmarket and strengthening domestic demand, which shouldpush gross fixed investment growth up to 9.5% in 1999/2000. We forecast7.7% industrial growth in the current fiscal year. Assuming that agriculturemanages growth of little more than 2%, and that the large (but difficult tomeasure) services sector expands by 8%, real GDP (at factor cost) will rise by6.4% in 1999/2000.

The industrial recovery should gather pace the following year; however, we donot foresee a return to double-digit industrial growth until after 2000/01, whenexport-oriented industries will benefit from a more favourable externalenvironment, firmer prices for non-oil commodities, and cheaper inputs (asimport controls and interest rates continue to ease). We expect growth in theservices sector to remain strong, supported by soaring demand for the servicesof Indian information technology exports (particularly those targeted ataddressing euro conversion and electronic commerce, as well as simply out-sourcing operational IT services). Assuming slightly slower agricultural growth,GDP growth is projected to remain at 6.4% in 2000/01.

A remarkably low rate of annual wholesale inflation of 1.85% recorded in mid-July looks too good to be true—and almost certainly is. Although wholesaleinflation has fallen sharply (from 6.3% in December 1998), India has notdiscovered the “new economic paradigm” of non-inflationary growth. Lowwholesale inflation reflects deflation in some temporarily depressed manu-facturing sectors (where there are excess stocks and fierce price competition),the collapse in world crude oil prices in 1998, soft commodity prices, and theample supply of agricultural goods following last year’s bumper harvest. Allthese trends are reversible—and will be reversed in the coming year.

Moreover, consumers’ perception of inflation is quite different: in Mayconsumer prices rose by 7.7% year on year (albeit down from nearly 20% inlate 1998). In urban areas there is much variation; for example, the Mayconsumer price index (CPI) was 15% in New Delhi and 6.1% in Mumbai. Inthe second half of 1998 the CPI rate should fall—reflecting the very high baseestablished by double-digit inflation in late 1998, as well as the lagged effect onretail prices of lower wholesale inflation earlier this year—an event that istimed nicely to coincide with the general election. However, again, we expectthat this will prove to be a temporary phenomenon. We expect annualinflation to fall to 4-6% in the latter months of 1999, producing an annualaverage rate of about 6.7%.

Inflation will remain lowin 1999—

10 India

Inflation will begin to rise from the beginning of 2000 as domestic demandcontinues to firm and the distortions from last year’s high inflation rates beginto lessen. The depreciation of the rupee and the continuing monetisation ofthe budget deficit will also put upward pressure on inflation, preventingannual average inflation from falling below 8%.

The key to financial stability will be the government’s management of thebudget deficit. As is often the case with Indian governments, ministers’ spiritmay be willing, but the flesh is weak. There is an understanding that unless thefiscal deficit is curbed—it rose to 6.5% of GDP in 1998/99, in addition to theaggregate deficit of the state governments, which is equivalent to a further3.8% of GDP—there will inevitably be high inflation (as the deficit is financedthrough monetisation), or high real interest rates for commercial borrowersand farmers (as the government tries to raise money from domestic capitalmarkets), or both. For this reason, the government has set the ambitiousbudget deficit target of 4% of GDP for 1999/2000. It has even floated the ideaof enacting a Fiscal Responsibility Act, such as that in place in New Zealand,under which the government would be bound by law to treat the reduction ofthe deficit as an overriding objective.

However, once again, the deficit reduction objective will slip badly. In additionto the cost of the war, the government must now add the cost of maintainingforces on new fronts and accelerating its re-equipment plans. General electionsalso contain hidden costs, in the form of extravagant promises to the electorate(especially by state governments), which will boost spending this year. On therevenue side, increased trade activity will buttress tariffs revenue, but this willbe offset by the decision to waive Rs17bn ($390m) of telecommunicationslicence fees. Although the buoyant equity market, if it is sustained until March2000, will help any sale of equity in public enterprises, the Rs100bn target for1999/2000 is likely to be missed, in part because sales will be delayed until atleast late 1999 (after the formation of the next government). In addition, theinclusion of any left-wing parties in the post-election coalition could slow theprocess further. In the first few months of the financial year the deficit wasalready 50% above target. We expect the central government deficit to remainaround 6.5% of GDP this year, placing upward pressure on inflation andinterest rates (as demand for funds by the private sector picks up). However,looking a year ahead, there is a fair possibility that a new government—andone that may be able to last for a longer portion of its term than the lastthree—can begin to reduce the deficit in stages.

India’s current account swung into surplus in the first quarter of 1999, to$307m, from a $1.2bn deficit in the fourth quarter of 1998 and a $2.6bndeficit in the first quarter of 1998. However, this surplus is unlikely to bemaintained. Exports are picking up, but not booming. For example, inJanuary-June exports of cotton textiles rose by 4.5% year on year in dollarterms, led by 10% growth in exports of cotton made-ups and yarn (althoughthese exports appear to be losing market share in the US and EU). Increasingcompetition will contain export growth to 5.5% in dollar terms in 1999,following a contraction of 4.6% in 1998.

—before rising againin 2000—

—partly owing topersistent budget deficits

External deficits will bebigger, but manageable—

India 11

However, after contracting by 2% in 1998 and 16% in the first quarter of 1999,imports (in dollar terms) will grow in the remaining three quarters of 1999.Higher crude prices, which began to rise in the second quarter, will add severalbillion dollars to the oil bill. The industrial recovery will draw in capital andintermediate goods. Meanwhile, the rural consumer spending boom, fuelled byreceipts from the last harvest, will boost sales of domestically made consumerdurables such as cars, indirectly boosting imports of components. As a result,imports could rise by around 8% year on year, causing the trade deficit to widento $12.5bn in 1999. However, services exports are also growing strongly andshould help reduce the services deficit to $2.6bn from $2.8bn in 1998. Assumingthat inward transfers remain just above 1998 levels, at $10.7bn, the current-account deficit will widen only slightly, to $7.8bn (1.6% of GDP) from $6.9bn(1.5% of GDP) in 1998. In 2000 a further lowering of import barriers, a continuedupturn in demand and a strengthening of world commodity prices will boostimport volumes and prices, pushing the trade deficit to $15.1bn and the current-account deficit to $8.8bn (which translates into a manageable 1.7% of GDP).

Even with some modest deterioration in the current-account balance, we donot expect the government to have any difficulty sticking to its currentexchange-rate strategy: a managed float of the rupee that allows it to slipgently to reflect India’s relatively high inflation. In fact, strong foreign port-folio investment inflows and lower inflation will contain average annualdepreciation at only about 6.5%, to a year-end rate of Rs45.45:$1, comparedwith a 7.5% nominal depreciation in 1998. The rupee will not require muchsupport from the central bank, allowing foreign-exchange reserves to reachnearly $35bn. We project a 9.3% average annual depreciation in 2000, to ayear-end rate of Rs50.11:$1, reflecting higher inflation differentials (as India’sdomestic inflation rate rises) and a deepening current-account deficit.

India: forecast summary(% change year on year unless otherwise indicated)

1997a 1998b 1999c 2000c

Real GDP at factor costd 5.0 6.0 6.4 6.4 Agriculture –1.0 7.6 2.2 2.0 Industry 5.9 4.1 7.7 8.5 Services 8.2 6.2 8.0 7.5

Real GDP at market pricesd 4.8b 5.8 6.3 6.6 of which: private consumption 6.8b 7.5 5.1 7.0 public consumption 8.0b 11.0 7.0 8.0 gross fixed investment 9.0b 7.0 9.5 7.0 exports of goods & services 2.0b –1.0 6.0 8.0

imports of goods & services 4.0b 10.0 5.0 11.0

Consumer price inflation (av; %) 7.2 13.2a 6.7 8.0

Merchandise exports fob ($ m) 35,702 34,076a 35,967 39,660

Merchandise imports fob ($ m) 45,730 44,828a 48,438 54,737

Current-account balance ($ m) –2,965 –6,903a –7,795 –8,818

Exchange rate (year-end; Rs:$) 39.28 42.48a 45.45 50.11

a Actual. b EIU estimates. c EIU forecasts. d Fiscal years beginning April 1st. New national accountsseries with 1993/94 base year.

—but the managed floatof the rupee will not

become a problem

12 India

India (a)

Asia excl Japan

India: gross domestic product% change, year on year

(a) Fiscal years beginning April 1st. (b) EIU estimates. (c) EIU forecasts. (d) Nominal exchange rates adjusted for changes in relative consumer prices.Sources: EIU; IMF, International Financial Statistics.

1990 91 92 93 94 95 96 97 98 99 2000

India: Indian rupee real exchange rates (d)1990=100

Rs:$Rs:$Rs:$Rs:$Rs:$Rs:$Rs:$Rs:$Rs:$Rs:$Rs:$Rs:$Rs:$Rs:$Rs:$Rs:$Rs:$Rs:$Rs:$

Rs:¥Rs:¥

Rs:DMRs:DMRs:DM

Rs:¥Rs:¥

Rs:DMRs:DMRs:DM

The political scene

India was humiliated by the discovery in late May that Pakistani soldiers,Kashmiri insurgents and Afghan irregulars had infiltrated across the line ofcontrol into Indian-held Kashmir. These fighters entrenched themselves alonga line of Himalayan peaks, commanding the vital highway connecting twomain towns, the summer capital, Srinagar, and Leh. At first, India sufferedembarrassing military reverses, as the invaders’ heavily fortified positionsappeared impregnable. Two Indian planes were shot down and hundreds oftroops were killed in two months of fighting. But after an offensive in the firstweek in July several important positions were recaptured; the remainingpositions were either vacated by withdrawing fighters or taken in their turn.

The results of the two months of intense fighting and accompanying diplo-matic efforts were deeply gratifying for India. First, the battle created a palpablesense of patriotic fervour, which brought together India’s different castes andcreeds in a way that only seems to occur in wartime, cemented by a feeling ofsuccess. This feeling spilled over into the stockmarket, with the Bombay StockExchange (BSE) gaining 20% in the two weeks of the July offensive.

India also “won” the diplomatic war. The US government called for Pakistan’sunconditional withdrawal, backed by threats to stall its IMF loan, overturningits previously neutral position, whereby it had not publicly acknowledgedPakistan’s direct involvement in the Kashmiri insurgency. Moreover, Chinaturned down pleas to take Pakistan’s side. The Chinese government—perhapswary of the parallels between the Kashmiri movement for self-determinationand the status of Tibet, as well as the Muslim insurgency in its own Xinjiangprovince—advised Pakistan’s prime minister, Nawaz Sharif, to respect the lineof control and resolve his problems with India bilaterally. Improved relationswith the US and China would have major long-term benefits for India, ifPakistan is pushed—as it seemed to be during the conflict—into the arms of“rogue states” such as North Korea (which has been found to be supplyingsophisticated weapon systems to Pakistan).

India wins the frontierwar—

—and the diplomaticbattle—

India 13

Wars, even small ones, cost money. The cost of the eight-week battle is un-officially estimated at Rs20bn-40bn ($460m-920m), although this is probablyconservative. It will cost about $1.5m-2.3m a day to supply and provision thenewly installed troops on the mountain tops near Kargil, compared with the$700,000 a day spent provisioning troops on the Siachen glacier. (Previously,these posts near Kargil were abandoned during the winter—a loophole thatwas exploited by the infiltrators this year—whereas Siachen is posted year-round at great expense.)

The early days of the conflict revealed that India’s forces were underequipped.The three armed services are likely to present a long shopping list to thegovernment, believing—not unreasonably—that with only 2.5% of GDP spenton defence, India has pared its military budget to the bone. The army has longbeen pressing for modern, self-loading rifles, battle tanks, self-propelled gunsand battlefield radar. The air force has been clamouring for 15 years for a newjet trainer. The navy will chip in with its long-standing demands for an aircraftcarrier. The fighting also underlined the need for much more advancedsatellite-based intelligence systems and electronic listening devices. None ofthis is good news for the finance minister trying to stabilise the fiscal position.

The decision of the Congress party president, Sonia Gandhi, to precipitate anearly election by calling a no-confidence vote in parliament on April 17th nowlooks even more misjudged than it did at the time (2nd quarter 1999, page 12).The unprecedented delay before the election is held—voting will take placeover five days between September 5th and October 3rd, with counting onOctober 6th—has helped the ruling Bharatiya Janata Party (BJP)-led caretakergovernment to cement its position. The BJP will take much of the credit for thesuccessful war, enabling it to play to its strengths as a nationalist party. Thegovernment has set up an official inquiry into the incursions to fend offopposition criticisms of negligence in the early stages of the fighting. But if theBJP can persuade the electorate that it is the most convincing guardian ofIndia’s national security, it will enjoy a big electoral dividend.

Meanwhile, the split in the Congress party has already severely damaged itselection prospects (2nd quarter 1999, page 14). The Nationalist Congress Party(NCP), formed by the former parliamentary leader, Sharad Pawar, has forged aseries of alliances in Mr Pawar’s home state of Maharashtra that could seriouslyerode support for Congress in the state. Maharashtra currently provides 33 ofCongress’s 141 MPs. The NCP could also damage Congress’s prospects in thenorth-east, where the Congress dissident and NCP leader, P A Sangma, is arespected figure. Preliminary estimates suggest that the Congress split will costthe party 3-5% of the vote across the country, taking it down from an alreadylow 25% share in 1998 to around 20%. Even assuming Congress is able to con-struct certain electoral alliances, it will find it hard to hold on to all its 141 seats.

The National Democratic Alliance (NDA), the election grouping led by the BJP,has forged a formidable array of alliances, in addition to the parties it carrieswith it from its previous turn in government (with the exception of theAll-India Anna Dravida Munnetra Kazhagam—AIADMK). In Tamil Nadu, the

—but the hidden costs willhurt finances

Mr Vajpayee takes creditfor the war’s end—

—while the party splithurts Congress

The BJP cements itsalliances—

14 India

BJP is now aligned with four Tamil parties—the Dravida Munnetra Kazhagam(DMK), the Pattali Makkal Katchi (PMK), the Marumalarchi Dravida MunnetraKazhagam (MDMK) and the Tamil Maanila Congress (TMC)—against Congressand its electoral partner, the AIADMK, led by Jayalalitha Jayaram. In AndhraPradesh, the ruling Telegu Desam Party (TDP), led by the chief minister,Chandrababu Naidu, will run under the NDA banner. In West Bengal, the NDAhas aligned itself with the Congress dissident party the Trinamul Congress, ledby Mamata Bannerjee. In Uttar Pradesh (85 seats) and Bihar (54) the alliancesare not yet clear.

The recent polarisation between Congress and the NDA has increased thevulnerability of the former “third force”, which had been based around thealready much fragmented Janata Dal and the various leftist parties (the lattergrouping dominated by the Communist Party of India-Marxist, or CPI-M). TheJanata Dal has now split again. The splinter Janata Dal (United) has joined theNDA, following in the footsteps of the Samata Party, led by George Fernandes,and the Lok Shakti, led by Ramakrishna Hegde, both of whom were onceJanata Dal stalwarts. However, the BJP has mixed feelings about its new JanataDal (U) allies. On the negative side, they strengthen the non-BJP element ofthe alliance, are mistrusted by state-level BJP units, and may be a politicalliability in their own states. But on the positive side they give the NDA abroader geographic and caste base, for example in Karnataka and Bihar.

The various leftist parties are also disorientated. Having fought for decadesagainst Congress in West Bengal, the CPI (M) is toying with the idea of anelectoral alliance with Congress against the BJP and its allies. Of the other twomain components of the old “third force”, the Rashtriya Janata Dal (RJD) inBihar (set up by Laloo Prasad Yadav after he was thrown out of the Janata Dal)has formed a seat-sharing pact with Congress and some leftist parties, while theBJP has formed a tentative pact with the dissident Janata Dal (U). TheSamajwadi party, led by Mulayam Singh Yadav, is probably strong enough totake on the BJP in the biggest state, Uttar Pradesh. But he is trying to create anew “third force” with Mr Pawar’s NCP in Maharashtra and perhaps elsewhere.

The main political groups are gambling on largely unproved hypotheses aboutvoter behaviour in their election strategies. The BJP is calculating that patrioticappeal and a sense of elation following the victory in the border conflict willweigh heavily with the electorate. But it is far from clear that these issues—which have certainly caught the imagination of the cities—will play all thatwell in the villages. Mrs Gandhi’s influence could also work both ways: the factthat she is a foreigner is being used against her by the BJP and the new NCP(whose core members were expelled from Congress after publishing a letterarguing that only a “native-born” Indian should eligible for the post of primeminister), but among villagers she may retain a strong dynastic appeal.

It is more certain that economic issues—mainly inflation and livingstandards—can swing votes. On both counts, the incumbent BJP-led govern-ment has improved its position, although public opinion can be quicklyturned by a spurt in the prices of household essentials (as occurred a year ago

—and the leftist partiesfragment

Although the electoralappeal of Kargil is

uncertain—

—the BJP will benefit fromsome better economic

figures—

India 15

with onion and potato prices). Corruption is also an important issue. Althoughneither of the major parties is perceived to be totally clean, the BJP govern-ment’s reputation is less tarnished than those of previous Congress admini-strations, notably the P V Narasimha Rao government. On assuming the partyleadership, Mrs Gandhi implied an intention to “clean up” the party’sreputation, in part by limiting the participation in party politics of people withcriminal records. But Congress has chosen to ally itself with individuals whocurrently face major corruption trials and have badly tarnished reputations—the AIADMK leader, Jayalalitha Jayaram, in Tamil Nadu and the RSP leader,Laloo Prasad Yadav, in Bihar—indicating that for Congress public account-ability can take a back seat to state-level politics and electoral calculations.

The BJP has long viewed itself as a “movement”, unlike Congress, which hasoften had little to offer the electorate but the latest product of the Nehru-Gandhi dynasty. But in this election, the BJP will campaign, as never before, onthe personality of its leader, the prime minister, Atal Bihari Vajpayee.

Mr Vajpayee is the principal beneficiary of the recent fighting, having beenseen as the military and diplomatic leader of the country during the height ofthe conflict. However, his appeal runs deeper. He is the BJP leader leasttarnished by religious extremism; he is also the embodiment of the currentstrategy of broadening the party’s appeal to all castes and regions, andincluding other secular parties in a broadly based coalition. He entered politicsin 1952, became an MP in 1957, and then became the public face and orator ofthe Jan Sangh party, the BJP’s predecessor. He earned a reputation as a moderateby building closer relations with Pakistan during his tenure as foreign ministerin the 1977-80 coalition government. In the early 1990s he resisted militantand violent agitation by BJP activists campaigning to build a temple at Ayodhya,on the site of a mosque, and established a reputation for moderation in the13-day BJP government he led in 1996. As if to underline his credentials as amoderate, Mr Vajpayee launched his election campaign by saying there wouldbe a moratorium on “controversial issues”—generally thought to be a referenceto religious matters. He has also clarified India’s nuclear strategy as being basedon “no first use” and minimum deterrence to dampen fears of aggression.

Mr Vajpayee has great political strengths, including experience, composure,oratory and personal integrity, but he is also criticised for a lack of assertive-ness, decisiveness and clarity of vision. But it would be a serious mistake to seethe BJP as a one-man band. The party is supported by the powerful Hindumovement, Sangh Parivar, with 1m active members. This army of politicalworkers has, at its core, the Rashtriya Swayam Sevak Sangh, a militant cadreorganisation that believes in uncompromising political nationalism, and isanti-Muslim and anti-Western. That Mr Vajpayee is apparently heading in theopposite ideological direction is a source of latent tension, which occasionallysurfaces. But the BJP is remarkably disciplined by the standards of Indianparties—and it has become more politically astute. The painful political com-promises involved in winning and holding power, as well as accommodatingnew allies, have been handled with impressive skill—all of which suggests thatthe BJP may be replacing Congress as the natural party of government.

—while playing on thepersonality cult of

Mr Vajpayee—

—and managing itsinternal tensions

16 India

Economic policy

The central (and persistent) problem of government policy is reining in thefiscal deficit, which deteriorated from 4.7% of GDP in 1996/97 (April-March) to5.2% in 1997/98 and 6.5% in 1998/99. The government’s objective—to cut thedeficit to 4% of GDP in 1999/2000—inspired widespread scepticism even priorto the onset of the Kargil conflict (see The political scene). The additionalfinancial commitments of the Kargil war are in the range of Rs20bn-40bn($460m-920m) excluding re-equipment and new recurring commitments, andperhaps Rs70bn overall, adding to the deficit target of Rs800bn for 1999/2000.In the first two months of the financial year the cumulative deficit wasRs220bn; if continued, this would cause the deficit to exceed its target by over50%. The government is considering a one-off tax (or cess) on individuals orcorporate incomes to cover the cost of the recent battle, but has been inhibitedby the constitutional restrictions on caretaker governments and the likelyreaction from voters.

The high deficit occurred despite impressive revenue collection: indirect taxreceipts grew by 21% year on year in the first quarter of 1999/2000, with exciseduties up 29% and customs duties up 12%. But looking further ahead in1998/99 the government has committed itself to waiving Rs17bn of telecom-munications licence fees, despite the protests of the president, Kocheril RamanNarayanan, who believes the government has exceeded its powers as a care-taker administration (see Infrastructure and services). There is also some doubtas to whether the government will be any more successful in meeting its divest-ment target for 1999/2000 (of Rs100bn) than it has been in the last few years.Another obstacle is the possibility that some leftist parties will join a coalitiongovernment in October and exercise a veto over the sale of state shares. Therecent upturn in the country’s stock exchanges and broadly improvingeconomic conditions may provide a better backdrop for privatisation, but thenew government will have only a few months to meet the 1999/2000 target.

The central government budget deficits have been compounded by growingfiscal imbalances in the states. In 1996/97 the states had a combined deficit of2.9% of GDP. This rose to 3.6% of GDP in 1997/98 and 3.8% in 1998/99. Theparlous condition of state-level budgets reflects some deep-seated problems,notably a commitment to increase salaries for civil servants (salaries rose by76% in 1997/98-1998/99) and subsidised electricity (which cost, cumulatively,more than Rs300bn during the same period). But some states are trying to curbthe problem and have signed memorandums of understanding (MOUs) withthe finance minister, under which, in return for progress on serious reforms(including cuts in civil service salaries and increased revenue from electricitydistribution), the central government will make cash advances to the states.

In an open market economy with efficient bond markets, real long-term ratesreflect the supply and demand for savings and investment (and increasinglyapproximate to global rates). India’s more closed and regulated economyproduces big fluctuations in real rates, which reflect government decisions

The fiscal deficit is likely toovershoot targets—

—despite better revenuecollection—

—and efforts by the statesto cut their deficits

Real interest rates movesharply

India 17

about interest rates and sharp changes in annual inflation rates. However, it isnot altogether clear what real interest rates mean in India. At present, withinterest on long-term government paper around 12% and a wholesale priceinflation rate of 2%, the real rate could be said to be 10%. But on the basis ofconsumer price inflation, the real rate is around 4% and has oscillated between8% and –7% over the last two years. Therefore, the policy implications are notentirely clear. However, given that actual lending rates are often well aboveeither long-term government paper or prime lending rates—in part because ofthe inefficiency of much of the banking sector—future moves in governmentinterest rates are much more likely to be down than up.

As a caretaker administration, the Bharatiya Janata Party (BJP) government isnot in a position to press ahead with radical new policy initiatives to liberalisethe economy—even if it had the will to do so. Its boldest initiative has been anattempt to sort out the mess in the telecommunications sector by waivingoverseas licence fees (see below). This was made possible by the assembly of abroad coalition of supporting politicians—from Congress and Samajwadi, aswell as the Communist Party of India (Marxist) CPI-M—and the shifting of thehostile communications minister, Jagmohan Malhotra. There are stillformidable legal and financial obstacles; moreover, the president has objectedto the change, on the grounds that the caretaker government may beexceeding its powers under the constitution.

The government has also indicated that it will consider allowing foreign directinvestment (FDI) in the alcoholic beverages sector, mainly breweries anddistilleries, but no firm decision has been taken. A more definite commitmenthas been made to allow the automatic approval of 74% foreign investment inthe automotive sector; however, this is a minor concession, and a large numberof foreign investors (such as Ford, Daewoo and Hyundai) are already in Indiawith investments that surpass that ownership threshold.

Increasingly, government policy is becoming less ideological. The debate overpublic versus private ownership, or foreign versus indigenous investment, isgiving way to issue-by-issue, sector-by-sector turf battles over regulation. Forexample, the vehicle industry is reeling from recent court rulings tighteningcar emission standards. As of April 2000 the only cars that will be allowed toregister in Delhi are those that are Euro-II compliant; the original deadline was2005. At the moment, only a handful of cars meet the standards, includingDaewoo’s Matiz, Cielo and Nexia, the Ford Escort petrol version, Mercedesmodels, and the Telco Sierra. The new regulations will be a severe blow tomakers of diesel cars (such as the new Telco Indica), Maruti (all of whose non-export cars are substandard), Fiat and others. At present, the regulations onlyapply to Delhi. But Delhi is a big market, representing roughly 25% of totalnational sales, and other cities may follow. Carmakers are now anxiouslypreparing to adapt their cars to low-emission petrol or compressed natural gas.Coca-Cola has also found itself up against a tough legal battle over standardsapplying to the sweeteners used in its soft drink Diet Coke. The company haswon the latest battle in the courts, but the initial action was indicative of atough approach to standards enforcement.

The government’scaretaker status limits its

policymaking power

Regulation, not reform, isthe buzzword—

18 India

Numerous computer problems in the US and Europe involving Y2K (the year2000, a date which will be incompatible with older computing systems—popularly known as the “millennium bug”) are being defused using Indiansoftware expertise. Unfortunately, not enough thought has been given to theimpact of the millennium bug on India’s own public utilities. Although agovernment taskforce was set up a year ago, Hindustan Lever has publiclywarned that India is unprepared. The main problem areas include: the powersector, which is way behind in its preparations and could face serious dis-ruption through the grid system because of compliance failures in some states;the telecommunications sector, where a lot of preparatory work has been done,but where there are hidden problems with Soviet-era telephone exchanges; thefinance sector, with an estimated 20% of banks unprepared for the transitionand where the newly computerised stock exchanges are under threat; andwater supply. There is more confidence that preparations at national airlinesand airports, railways and major hospitals are on schedule. The armed forcesmay well have problems with their Russian-made equipment.

The domestic economy

Economic trends

According to new figures, real GDP (at factor cost) expanded by 6% in 1998/99,up from the previous “quick” (preliminary) estimate of 5.8%. As expected, theestimate for manufacturing output was downgraded, from 5.7% to 5.2% for theyear. A sharp upward revision to the estimate for agricultural growth—from apreliminary estimate of 5.3% to a revised estimate of 7.6%—underpinned theupward revision in overall GDP growth. Quarterly GDP figures, which wererecently introduced in order to comply with the special data-disseminationstandards introduced by the IMF, show that agricultural output grew by 13.7%year on year in the fourth quarter of 1998/99, compared with growth of 7.4%in the same period of 1997/98, buoyed by a record grain crop of an estimated203m tonnes.

India: real gross domestic product growth(% change; at factor cost)

1997/98 1998/99 Revised Preliminary Revised

Agriculture, fishing & forestry –1.0 5.3 7.6

Mining 2.7 0.1 –2.0

Manufacturing 6.8 5.7 5.2

Electricity, gas & water 6.6 6.5 6.3

Construction 4.1 2.3 2.1

Trade, transport & communications 5.7 6.8 6.7

Finance 8.4 7.7 6.2

Social & personal services 13.6 5.8 5.4

GDP 5.0 5.8 6.0

Source: Central Statistical Organisation, Revised Estimates of Annual National Income 1998/99.

—and some sectors receiveY2K warnings

GDP figures for 1998/99are revised

India 19

The latest revised, but very provisional, official GDP statistics show that themost dynamic parts of the Indian economy have recently been in the servicessector (which, unsurprisingly, is also the most difficult sector on which togather output data). Even in years in which a disappointing performance hasbeen recorded for agriculture, personal services, financial services and communi-cations have expanded faster than the economy as a whole. This process is likelyto continue, as a revolution in Indian shopping is beginning with the intro-duction of organised retailing. Moreover, the development of IT services,particularly exports, will continue to expand strongly.

Most forecasters are projecting a similar GDP growth rate for 1999/2000, withagricultural output growth slowing (largely owing to the high base in 1998/99)and industrial growth accelerating. The National Council of Applied EconomicResearch (NCAER) forecasts 5.7% growth this year (up from its own revisedestimate of 5.4% for 1998/99); the Economic Times Research Bureau forecasts 6%growth, up from 5.5% last year; and the Centre for Monitoring the IndianEconomy (CMIE) 5.9% growth (with 6% industrial growth and 1.3% agriculturalgrowth). The EIU is forecasting 6.4% growth (see Outlook for 1999-2000).

The most tangible sign of a more robust economic performance is thestrengthening of industrial production figures. In May industrial growthreached 7.2% year on year—led by 8.4% annual growth in manufacturing—compared with 3.7% in the same month of 1998. However, individual sub-sectors have grown at sharply different rates. Output of basic goods is flat,while that of capital and consumer goods is soaring. Among consumer dur-ables, output and sales of air conditioners, refrigerators, wrist-watches, cars, softdrinks, detergents and commercial vehicles are surging.

India: industrial growth, May(annual % change)

1998 1999

GeneralMining & quarrying 0.0 –0.3Manufacturing 3.4 8.4Electricity 9.9 3.3

Used-based classificationCapital goods 5.1 19.5Intermediate goods 4.4 10.5Basic goods 3.8 1.5Consumer durables 4.5 17.1Consumer non-durables 2.0 4.3

Source: Ministry of Finance, Monthly Economic Report.

The fighting on the frontier, and accompanying fears of war, could easily haveled to a collapse in share values on India’s stock exchanges. However, theopposite has occurred. There has been a powerful bull run since April, whichhas taken the Bombay Sensex index from around 3,300 in April (and a troughof 2,750 a year ago) to an all-time high of 4,808 in late August. (The previouspeak was 4,500 in 1994.) The discovery of the large insurgency into IndianKashmir in late May caused a temporary downward blip.

Steady economic growth isforecast for 1999/2000—

—driven by fasterindustrial output growth

The stock-exchange boomleads confidence

indicators—

20 India

Leading the rally are cyclical stocks (cement, paper, aluminium, polymers andcars), as well as pharmaceuticals and information technology companies. Clearsigns of an economic upturn have sustained the rise, as have signs of corporaterestructuring and the prospect of domestic political consolidation after the LokSabha (lower house of parliament) and state government elections in September-October (see The political scene). Confidence in the operation of the stockmarkethas been buttressed by the introduction of electronic trading, transparentsettlement and the development of more effective, honest regulation.

Portfolio investment in the stockmarket is booming—and is both a cause and aconsequence of the bull market. Net portfolio inflows rose from $274m inJanuary-March to $685m in April-June and $312m in the first three weeks ofJuly alone. Low price/earnings ratios (by international standards, as well as byrecent national standards)—at about 14.5, based on projected 1999 earnings—have added to the sense that India can offer bargains for investors. However,cautious investors are aware of the downside, which includes the risks ofanother weak coalition government and a hung parliament that postponesnecessary reforms, a deteriorating fiscal position, and a relapse in profit results.

A survey by the Federation of Indian Chambers of Commerce (FICCI) suggeststhat 90% of Indian corporate leaders polled envisage an economic recovery,but that it will only reach full force in 2000/01. None of the sample expectedindustrial growth to surpass 7% in 1999/2000, and 60% expected only 3-5%growth. About 90% of the sample expected real GDP growth of 4-6%. Askedabout factors retarding growth, the items in descending order of priority were:demand weakness; political instability; infrastructure bottlenecks; publicexpenditure costs; poor exports; administrative obstacles; high interest rates;and the lack of credit availability. Government red tape—once the bugbear ofIndian business—no longer ranks very highly in this survey.

Annual inflation continues to fall. From 6.3% year on year in December,wholesale inflation has fallen every month to a mere 1.85% in the secondweek of July, a 17-year low. But the consumer price index (CPI), the statisticthat matters to voters, continues to run at a higher rate. The CPI rose by 7.7%year on year in May, but was higher in certain cities (such as Delhi, at around15%). Nevertheless, the national average is still well below the double-digit raterecorded at the end of 1998. Annual inflation figures may dip further in theremainder of 1998, given the very high base established at the end of 1998.

India: consumer prices(% annual change)

1998 1999 Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May

12.4 14.8 15.0 16.3 18.6 19.7 15.3 9.4 8.6 8.9 8.4 7.7

Source: Ministry of Finance, Monthly Economic Report.

—and business records a“feel-better” factor

Low inflation completesthe rosy picture—

India 21

There are several reasons for the low level of inflation. The (earlier) slowdown inmanufacturing generated excess stocks and spare capacity, and led to aggressivediscounting and price wars. Depressed demand for basic industrial goods, suchas chemicals and metals, and increased import competition, has prevented theraising of prices. Low world crude oil prices in the first quarter of 1999 and thepersistent weakness in world commodity prices have contained rises in importprices, as has the modest depreciation of the rupee. Moreover, the agriculturalposition is very comfortable, following bumper crops and stocks from the1998/99 harvest, especially of food grains, sugarcane and cotton.

But several of these factors are only temporary. For example, the industrialrecovery will reduce excess stocks and spare capacity, while the strengtheningof world oil prices since March will boost the price of oil and oil products(although price rises will not fully reflect the increase in world prices, giventhat domestic prices were not allowed to fall as sharply as world prices lastyear). Most worrying, the weakening budgetary position could tempt thegovernment to monetise any deficit resulting from shortfalls in revenue, withinflationary implications emerging in the medium term.

Low inflation, if sustained, will have enormous political benefits for the rulingparty, since much of the anti-incumbency factor in recent elections has beenattributed to anger over rising prices among the poor. (Unlike in moredeveloped countries, there is little indexation of pay in India, and most of therural and urban poor have little bargaining power in the face of any squeeze ontheir real earnings from farming or informal sector activities). Low inflationalso helps economic management, for example by maintaining the nominalexchange rate. In the short run real interest rates have risen—real yields onone-year securities rose to a five-year high of 8.4% in July, compared with 2.3%a year earlier.

Recent corporate data have underlined the optimistic outlook for the broadereconomy. According to a study by the Confederation of Indian Industry (CII),net profits before tax for the top 165 Indian companies rose by 11.1% year onyear in 1998/99; profits after tax rose by 9.2% during the same period. Thesefigures are somewhat deceptive, however, as they mix public- and private-sector companies, and may be flattered by the small number of profit-makingpublic-sector monopolies.

More recent corporate data for the first quarter of 1999/2000 show that manycompanies posted a healthy increase in sales and profits compared with thesame period of 1998/99. Reliance, the biggest private company, recorded a5.3% increase in sales, but profits rose by 12.7%, while sales and profits at TataEngineering (Telco) rose by 24.6% and 19.3% respectively. Among thecompanies recording exceptional sales and profit growth were severalcomputer software companies (Mirc Electronics, Infosys, Satyam, Pentafour,DSQ, Sonata and BFL). A few companies, such as Tata Chemicals and Hoechst,recorded very poor results, but the overall story was very positive.

—and brings other benefits

Company results areimproving—

22 India

Although there has been a revival in portfolio investment, new foreign directinvestment (FDI) declined last year. In rupee terms, FDI fell by 27% in 1998/99,to Rs86.5bn ($2bn). This is the first time since foreign investment wasliberalised in 1991 that the level of inflows has fallen year on year. However,there has long been a huge gap between the value of foreign investmentapprovals and actual investments. As of January 1999 the cumulative value offoreign investment approvals in India was $54bn, but total inflows were only$16bn. Major investments are still being made—most recently by the carmakerFiat and the satellite company Loral. But there is still enormous frustration overthe bottlenecks to implementation among foreign companies that havecommitted themselves to India. This is especially true in the power sector (inwhich only 16% of cumulative approvals have translated into actual invest-ment), telecommunications (15%) and oil refining (10%).

Oil and gas

Shell India, a unit of Royal Dutch Shell, found oil on August 15th during on-shore exploratory drilling on the border of Rajasthan and Gujarat. Shell is thefirst private foreign firm to have made a discovery in India. The find wasflowing at 2,000 barrels/day of exceptionally light, high-grade crude.

However, the discovery has come too late to resuscitate interest in explorationbids in India. The new package of incentives available to oil exporters under theNew Exploration Licensing Policy (NELP) has failed to attract much interestfrom major international oil companies. Of the 48 blocks offered, most are inareas that have already been partially explored; 10 are onshore blocks, 26 areshallow-water and 12 are deep-water. India received 45 bids for 27 of the blocks.

The fact that, before the Shell discovery, India had never generated a majorfind has deterred prospective bidders. The fluctuation in world oil prices—crude oil prices have jumped in recent months after remaining depressed in1998 and early 1999—has also been a deterrent. The incentives were the mostgenerous India has offered in a long period of dealing with foreign oil com-panies. The NELP provides a seven-year tax holiday from the start ofcommercial production; exempts firms from paying signature, discovery orproduction bonuses; incorporates a profit-sharing formula; and does notinclude a minimum expenditure commitment. However, despite these incen-tives, interest has been weak, suggesting that India has once again misjudgedits bargaining power in relation to the oil industry.

The Sengupta report, which recommends a major rationalisation of operationsamong the various state-owned oil companies, is currently under governmentconsideration. The report envisages the formation of two downstreamcompanies: the Indian Oil Company (IOC) with annual refining capacity of31.7m tonnes and 6,700 retail outlets, and a new holding company whichbrings together Bharat Petroleum (BPCL), Hindustan Petroleum, CochinRefineries, Madras Refineries, Indo-Burma Petroleum and BongaigaonRefineries. The latter six companies have an aggregate annual refining capacityof 32.5m tonnes, and 10,000 retail outlets.

—but FDI has declined

Shell strikes oil—

—but too late to boostinterest in the new oil

exploration licensing bids

Other plans for the sectorare considered—

India 23

It is far from clear how the private sector will fit within this new structure.Although in the past the government has talked openly about allowing theprivate sector to dominate refining and exploration activities, its latest ideaseems to be geared towards the creation of a stronger state enterprise. Atpresent, private companies (including foreign firms) can import and sellliquefied petroleum gas (LPG), kerosene, naphtha and bitumen, but not petrol,high-speed diesel or aviation fuel. Moreover, foreign oil companies havehitherto been denied access to marketing rights until after they demonstrate acommitment to refining.

Shell seriously examined—but then dropped—a greenfield refinery project incollaboration with BPCL, which also involved marketing rights. Saudi Aramcoand Exxon looked at a new refinery with Hindustan Petroleum (HPCL). Morerecently Shell and Saudi Aramco have explored a 50:50 joint venture withHPCL in which the Indian company would transfer one of its refineries and1,000 retail outlets, enabling Shell to avoid the frustrations associated with agreenfield refinery and developing a retail marketing network from scratch.Not to be outdone, Exxon has offered a similar deal with HPCL. The threeIndian private refiners (Essar, Reliance and Mangalore Refineries) are separatelyseeking marketing rights.

Although the government does not seem to have made its mind up on theseissues, it is resisting any move that would allow foreign companies to gainaccess to marketing rights without making a substantial investment in refiningor exploration. The petroleum ministry has suggested allowing major oilcompanies to make a comparable investment in ports if they cannot reachterms on a refinery. Another entry route is via petrochemicals: Shell, DowChemicals and IOC are vying to buy a 25% stake in the state-run IndianPetrochemical Company (IPCL).

India badly needs additional refining capacity. Annual product demand isprojected by private companies at 122m tonnes in 2002/03, and capacity isforecast at 120m tonnes. However, the gap is set to widen thereafter. Annualdemand is forecast to rise to 156m tonnes by 2007/08 and 300m tonnes by2020/21. The government is unlikely to focus on these long-term concerns,since in the short term the country’s dependence on imported petroleumproducts will decline sharply as additional refining capacity is brought onstream in the next few years by Mangalore Refineries (from 3m tonnes to9m tonnes by 2001/02), Reliance (whose giant refinery at Jamangar in Gujaratwill have capacity of 27m tonnes by 2001/02) and Essar (10m tonnes capacity).It is estimated that product import demand will fall from 26m tonnes in1998/99 to 12m tonnes on 1999/2000 and 7m tonnes in 2001/02.

India is soon expected to become the world’s largest liquefied natural gas(LNG) market as gas-powered electricity rapidly comes on stream. Numerousprojects are planned, with at least 17 international companies planning LNG-related activities. The key player is Petronet, a consortium of state-ownedcorporations, with some foreign collaboration. Which company will dominatePetronet has been the subject of fervent politicking among the various state oilcompanies; according to the current set-up, four state companies—the Gas

—although the role ofprivate companiesremains murky—

—but India badly needsadditional refining

capacity

Uncertainty at Petronet—

24 India

Authority of India (GAIL), the Oil and Natural Gas Corporation (ONGC), IOCand BPCL—each hold 12.5% of the total equity, with the balance distributedamong state-owned financial institutions and foreign companies, includingGaz de France. But the participation of IOC and BPCL is in doubt—IOC has itsown planned LNG projects—and the main customer for Petronet’s output, theNational Thermal Power Corporation (NTPC), is also pressing for a 26% stake.

These uncertainties could affect several associated projects. Petronet is trying tofinalise a supply contract with Qatar Rasgas, which will provide LNG forPetronet terminals at Dahej in Gujarat and Kodu in Kerala. But negotiationshave run into trouble over Petronet’s attempts to secure a role in the shippingof the LNG, with Rasgas doubting Petronet’s competence. If this projectunravels, it will affect the prospects for GAIL’s proposed 550-km pipeline fromDahej, which is to transport most of the gas to a group of industrial customers,mainly fertiliser and power companies. The Ennore LNG project, negotiatedbetween Rasgas and a consortium involving Siemens, may also be affected.

One project that does seem to be progressing smoothly is an agreement byPetronas of Malaysia with Enron to supply 2.6m tonnes/year of LNG to theLNG terminal at Dahbol in Maharashtra, which will help fuel the next phaseof the Enron power plant.

As the first company to secure LNG contracting for its gas-based activities,Enron has the second building block in place for its ambitious expansion plansin India. With the second (1,444-mw) phase of its power plant now welladvanced (operations are expected to begin in 2001), Enron wants to proceedwith a 1,000-km gas pipeline to supply gas to industries on the West coast. Theonly cloud on the horizon—for a company that has already weathered manystorms in India—is the questioning about the cost of its electricity. The issuehas become increasingly sensitive: demand in Maharashtra is growing lessrapidly than expected, but the State Electricity Board (SEB) is under contract tobuy this expensive power even if demand is insufficient. However, one boostto LNG market in general has been a reduction in the budget in the import taxon LNG, from 12% to 5%.

In some respects, the electricity sector is performing well, with much greaterefficiency than in the past. In 1998/99 the plant load factor (the percentage ofthe energy in fuel that is transformed into electricity) in thermal stations was64.7%, representing a steady improvement from the situation in the early1980s, when it was under 50%; however, distribution and transmission lossesby the SEB are still over 20%. Power shortages were brought down to anaverage of 5.5% in 1998/99 from 8.1% a year earlier, though there is an averagepeak deficit of 11% and the position in some states is much worse.

The installation of new capacity is not progressing as quickly as expected, orrequired. As a result of delays in the installation of private power projects, thetarget for the addition of new capacity in 1998/99 was missed by over 50%.The central and state governments have not yet found a way to manage thenumerous technical and financial problems that plague the independent

—may unsettle other LNGprojects—

—although the Petronasproject is progressing well

On some indicatorsthe electricity sector is

becoming more efficient—

—but installation ofcapacity is behind target

India 25

power projects (IPPs). In Madhya Pradesh IPP development is stymied by anargument over escrow accounts. Karnataka has approved 28 projects with totalcapacity of 700 mw, but progress is very slow. Other than the Enron project,Maharashtra has little to show for its pioneering role with IPPs.

Many obstacles remain. In general, the IPPs are holding back until they aremore certain about the characteristics of the increasingly deregulated Indianmarket. Meanwhile, the SEBs are opposed to the preferential price advantagegiven to IPPs. Moreover, the operation of the National Grid has not beensettled. In the meantime, the gap in capacity is being partly filled, if at all, bycaptive power plants (with a current total capacity of 11,600 mw). The set-upof captive power bypasses the problems associated with negotiating contractswith inefficient SEBs (which consistently fail to settle their accounts). But theyalso further impoverish the SEBs by removing a progressively large amount ofpower capacity from revenue streams. The other way of filling the generationgap is through public-sector thermal power or hydropower projects, as well asnuclear power; the Atomic Energy Commission plans to install 880 mw ofcapacity over the next year.

Industry

In the first quarter of 1998/99 (April-March) cement production—a keyindicator of economic activity—shot up by almost 25% year on year, to24.4m tonnes from 19.9m tonnes in April-June 1998. Growth in housingconstruction, combined with a boom in the rural economy (rather thaninfrastructure projects, which have stagnated) underpinned the expansion inoutput. In response, listed cement shares have rallied.

Steel is also showing signs of recovery, albeit in a less spectacular fashion.Production of finished steel by the two main producers, the state-owned SteelAuthority of India (SAIL) and the private Tata steel company, Tisco, rose by13% year on year in the first two months of 1999/2000. But national steeloutput, which includes numerous small producers, rose by only 1% in thesame period. Moreover, domestic steel consumption fell by 5%, although thiswas partly cushioned by export growth, with spectacular expansion of exportsof flat products (hot- and cold-rolled coils, plates and galvanised steel).

The finances of SAIL are as unhealthy as ever. Losses in the first quarter wereRs6.1bn ($140m), double those recorded in the same period of 1998/99. Lossesfor the whole of 1998/99 totalled Rs15.7bn. The immediate financial problemis higher capital charges, but the underlying problem has been weak domesticdemand, tough competition and low prices.

The government’s efforts to address the problem are facing opposition fromall fronts. Tisco argues that by helping SAIL the government is distortingcompetition. If Rs50bn of SAIL’s debts are written off, as planned, Tisco wantscomparable treatment. As a result, the finance minister is being forced torethink the SAIL deal.

Cement leads the recovery

The steel sector stuttersinto life—

—but SAIL’s accounts are aspoor as ever—

—while government helpmeets many forms of

resistance—

26 India

There is also strong resistance from steel executives and workers to proposals torationalise SAIL on the basis of a report by the management consultancyMcKinsey. These critics are alarmed by proposals to hive off or close loss-making operations such as the ancient Burnpur Steelworks, Indian Iron andSteel Company (IISCO), power plants, and the Salem stainless steel plant. Thegovernment has also been stymied in its attempts to use trade policy to helpthe steel industry. The floor price system designed to stop the “dumping” ofimports in the Indian market has attracted criticism from the EU, which iswarning that India’s rapidly growing steel exports to the EU could also attractrestrictive measures.

Essar Steel defaulted on its $250m floating-rate note (FRN) to foreign lenderson July 20th, a reflection of the difficulties that have plagued the Indian steelindustry in the last two years (see Foreign trade and payments). The combi-nation of stagnant demand and increased competition has produced heavylosses, perhaps rendering smaller players more vulnerable. In 1998/99 Essarrecorded losses of Rs5bn. Mukund, the largest private-sector alloy and stainlesssteel bar and rod producer, recorded a Rs3.25bn loss in 1998/99, its first loss forten years, but it is looking to exports for salvation in 1999/2000. Jindal, thelargest producer of stainless steel in India, suffered a profit squeeze, but avoideda loss, and has an aggressive strategy of expansion and overseas acquisitions.Overall, the steel industry lost Rs20bn in 1998/99, after recording a profit ofRs4.2bn in 1997/98.

The ferocious competition among carmakers in India’s currently small markethas eased. A timely cyclical recovery has helped spur sales, as have deepdiscounts. In the first quarter of 1999/2000 sales of small cars rose by 36%, toover 127,000. Sales were led by Maruti, with over 87,000 cars (which,nonetheless, represents a slip to a market share of below 70%, compared with85% a year ago). Hyundai sold about 12,000 cars, followed by Telco, Daewooand Indo Auto (Fiat).

However, in the same period there was a 13% year-on-year decline in the saleof mid-sized cars (to around 10,000). The Ford Escort, the General MotorsAstra, the Maruti Esteem, the Daewoo Cielo, the Honda City and MitsubishiLancer are all struggling in this crowded market segment, with Honda andMitsubishi leading the pack. One factor shaping future competition is theapplication of tougher emission controls in metropolitan areas, notably Delhi,which has already hurt Maruti’s sales.

The commercial vehicle market is showing the same signs of expansion as thebroader car market. In the first three months of 1999/2000 sales grew by 24.3%(to 31,834 in 1998/99 from 25,618 in the first quarter of 1998/99). Thisrepresents a sharp recovery from the recession of 1998/99, when annual salesfell by 11.6% (to 139,565 from 157,898 in 1997/98).

—and smaller producersare suffering as well

Car sales boom—

—as do sales of commercialvehicles—

India 27

The idea that India has inexhaustible market potential for consumer goods hasbeen substantiated by growing evidence of a vast “middle class” of consumers.But this so-called middle class is often much smaller than optimistic marketingmanagers believe. Recent examples of hyped marketing opportunities, whichled to the creation of large excess capacity, include the mid-sized car market,cellular phones and foreign clothing brands. A recent topical problem area isrefrigerators. In the early 1990s annual demand grew by over 20%, but it hasstagnated at around 1.9m since 1995/96. Competition is centred on six foreigncompanies (and their Indian alliance partners), led by the GE-Godrej pairing,Whirlpool and Electrolux, and the three local groups, led by Videocon.Videocon is now launching cut-price models to tap lower-income demand. Asimilar pattern may be starting to arise in colour television, where the markethas hitherto grown rapidly—by over 30% a year between 1992/93 and1997/98. But the dominant Indian companies, BPL and Videocon, haverecently faced ferocious competition from leading Japanese, Korean andEuropean brands, which is driving down prices and margins. At present,around 25m households have colour televisions—a market penetration of 20%.

Agriculture

According to preliminary indications, India has had another satisfactorymonsoon—but a full assessment will not be possible until the late rains havefallen in September. If the first judgements are correct, total rainfall in1999/2000 will be 108% of the historical average, enabling the country torecord its 12th year of good or average rains since the drought year of 1987/88.

In 1998/99, despite severe floods and pre-monsoon scorching, crop productionwas excellent. Food-grain production is estimated at a record 203.5m tonnes (ofwhich 73.5m tonnes was wheat, 84.5m tonnes rice and 15.3m tonnes pulses)compared with 192m tonnes in 1997/98 (of which 65.8m tonnes was wheat,80.3m tonnes rice and 13.2m tonnes pulses). Last year’s result may reflect theeffects of a painfully slow shift from rain-fed to irrigated agriculture, as well asbetter seeds, which can overcome the effects of delayed monsoon. But com-placency is not in order; Indian crop yields remain far below world averages andare not improving rapidly. For example, food-grain yields were 1,551 kg/ha in1997/98, only slightly higher than the 1,548 kg/ha recorded three years earlier.

The most recent estimate for cotton output in the 1998/99 crop year (October-September) is 16.25m bales which, together with stocks of 3m bales andimports of 800,000 bales, creates total supply of 20.05m bales. Consumptionby textiles mills will use an estimated 14.3m bales, small mills will consume600,000 bales, 900,000 bales will go to other domestic uses and 200,000 baleswill be exported. A residual stock of 4.05m bales was reported on October 1st.The underlying trend however, is less reassuring, as the cotton harvest is stillbelow the 1995/96 level.

Another good monsooncontinues India’s

lucky streak

The cotton position iscomfortable—

—but consumer goodsmanufacturers collide

with reality

28 India

India: cotton harvest(m bales)

Production Exports

1988/89 10.6 0.10

1989/90 13.6 1.37

1990/91 11.7 1.19

1991/92 11.9 0.80

1992/93 13.8 1.37

1993/94 12.2 0.39

1994/95 13.9 0.11

1995/96 17.0 0.80

1996/97 17.8 1.68

1997/98 15.8 0.35

1998/99a 16.3 0.20

a Estimates.Source: Press reports.

According to end-June forecasts, the 1998/99 (October-September) sugar cropwill reach 15.5m tonnes white value, up from 12.6m tonnes in 1997/98. Withinherited stocks of 5.4m tonnes and with 1.8m tonnes of contracted imports,the supply position appears very secure, given that consumption is estimatedat 15m tonnes. Growers are keen to promote exports and control imports tohold up prices, however.

After the rapidly rising price of onions almost led to the collapse of theBharatiya Janata Party (BJP) government in late 1998, the caretaker BJPgovernment is making no more mistakes. Onion imports are currently beingliberalised and exports banned to hold down market prices. Even without thesemeasures, the position is quite comfortable, with onion production of4.8m tonnes expected in calendar 1999, up from 3.6m tonnes in 1998.

Edible oils are another highly sensitive commodity. Next to the price of grain,the price of cooking oil is the one politicians watch most nervously. This yearpoliticians are in luck. At end-August world prices had fallen by around 40%year on year, allowing the government to agree to liberal imports. Productionof the main oilseeds in the 1998/99 crop year (November-October) is estimatedat 28.2m tonnes, resulting in 7.1m tonnes of oil (compared with 6.8m tonnesin 1997/98). The government hopes to meet the estimated 1.4m-tonne supplyshortfall by authorising 3m tonnes of imports. It is also proposing to importincreasing amounts of seed (rather than oil) to boost the seed milling andrefining sectors, but is facing heavy resistance from growers’ representatives.

Tea exports are expected to fall to 185m kg in 1999 from 206m kg in 1998,owing to poor demand in Russia and the loss of other markets in the face ofintense competition from Sri Lanka and Kenya. To add to growers’ woes, unionsare threatening strike action in support of a campaign for more guaranteedemployment. But coffee exports touched a high of 207,266 tonnes in 1998/99(April-March), earning $424m, compared with 179,059 tonnes the previous year.

—as is sugar

Preventative imports ofonions and oil—

—should avert shortagesand public anger

The outlook for tea andcoffee is mixed—

India 29

India’s internal commodity markets are failing to provide traders with a rangeof activities, such as futures trading. Twelve of its 30 exchanges have shutdown. There is currently no recognised trading in jute, potato, turmeric orcotton. Stringent admission and regulatory conditions have deterred thoseseeking to create such markets.

Infrastructure and services

In a brave effort to push through some of the legal and financial obstaclesholding back development of the telecommunications sector, the governmenthas landed itself in some difficulty. The prime minister, Atal Bihari Vajpayee,took the lead by extending cellular licences by six months—in effect writingoff Rs14bn owed in licence fees by the cellular telecommunications operators.Although the decision is being described as a bail-out, the government wasimplementing a report by the Bureau of Industrial Costs and Prices (BICP)which judged that licensees had been delayed in starting operations for sixmonths by government inefficiency. The decision has run into a wall ofopposition from several sources: the president, Kocheril Raman Narayanan,who feels that the government is exceeding its remit as a caretaker admini-stration (although the decision was taken in principle by the cabinet inMarch); political parties that are hostile to the government, notably thecommunist parties; and even ministers within the government (including thefinance minister, Yashwant Sinha, who argued that the late dues should bepaid in instalments).

In fact, the government’s decision is quite tough on the industry. The packagerequires 35% of the dues to be paid promptly; owners of licences are lockedin for five years; and the financial relief is accompanied by the introductionof competition into the licence-holders’ areas of operation. (However, existinglicensees will not have to pay an entry fee, like new entrants, and they will beallowed to continue to operate.) The government write-off is part of a radicalchange in the telecommunications rules under which in future licensees willoperate on a revenue-sharing basis rather than paying a fixed fee. In addition,licences will run for 20 years instead of ten, and there will be no restrictionson competition.

The changes will not have a uniform effect. The four cellular operators inDelhi and Mumbai were doing well under the old system, and will now doeven better. Moreover, the changes could be the salvation of operatorsstruggling to establish themselves in smaller cities and rural areas. However,Reliance, which won licences with very low bids, will presumably lose underthe new arrangement. Uncertainties persist, including over the level ofpotential competition from the state-owned telecommunications company,Mahanagar Telephone Nigam (MTNL), as well as over the way in which theTelecommunications Regulatory Authority of India (TRAI) will implement thepolicy of greater competition. (The manner in which the government haspushed through its new policy—ignoring TRAI—is in itself worrying.)

—but local commoditymarkets are in trouble

The government’s telecoms“bail-out”—

—is actually quite tough—

—but will not have auniform effect

30 India

The government has set out the rules under which Internet Service Providers(ISPs) can achieve international connectivity. Authorised Indian ISPs (thosewith a maximum 49% foreign equity) are the only agencies that can establishgateways. All gateway connections above 2m bps require monitoring facilitiesto be established for the security agencies. Gateway operators can lease theircapacities to other ISPs, subject to the above conditions. With these changes,the government will put into effect its commitment to break the monopoly ofthe state-owned international telecommunications company, Videsh SancharNigam (VSNL). Although India has been slow to adjust its regulatory regime tothe realities of the Internet, there are many high-tech entrepreneurs waiting toexploit it. For example, a Bombay information technology company islaunching an Internet shopping service.

The 11 main ports recorded 9.6% annual growth in the first quarter of1999/2000. Kandla, the biggest port, with 10.5m tonnes of traffic, saw 22%growth, and growth was above average in Calcutta (26%), Cochin (26%) andParadip (23%). Although attracting the participation of the private sector hasproved easier for ports than other infrastructure, progress is slow. For example,three major ports are being stopped from converting themselves into corporateentities by the failure of parliament to clear the necessary legal amendments.

The domestic airlines have embarked on a ferocious war for passengers. At theend of 1998/99 the national carrier, Indian Airlines, had a 60% market share,Jet Airways had 31% and Sahara 9%. The market has tightened, with annualdomestic air traffic currently 1m below its 1995 peak of 12m passengers.Occupancy has fallen to around 60% from 72.5% in 1997/98. To improve itsmarket share, Sahara is offering passengers stays at five-star hotels, gifts rangingfrom televisions to cellular phones, and 20% fare cuts. Jet followed suit with a20% fare cut of its own. Indian Airlines has retaliated by cutting fares by 25%and adding flights on the crucial Delhi-Mumbai route. Passengers are enjoyingthe benefits of this heightened competition, though airlines’ finances maysuffer. The international carrier, Air India, has fallen on hard times. Thegovernment has agreed to inject Rs10bn into Air India in return for a 40% sell-off of equity, which could go to a private strategic partner.

The most recent analysis of the state-owned banking sector shows littleimprovement on earlier—and poor—financial performance levels. According toa recent study by the Reserve Bank of India (RBI, the central bank), ten of the27 public-sector banks had non-performing assets (NPAs) of over 10% of netadvances in 1998, with one bank recording an NPA ratio of over 20%. None ofthe nine new private-sector banks had NPAs above 10%, and only 4 of the 25older private banks did. The performance of the 42 private banks was mixed:14 had negligible NPAs; 20 had NPA ratios of under 10%; 6 had NPA ratios of10-20%; and 2 had NPA ratios of over 20%. The poor position of the bankssuggests, according to a study by the credit rating agency Standards & Poor’s,that over the next two years they will need an estimated Rs200bn torecapitalise themselves to safe levels. Since these funds are unlikely to comefrom the government, the banks will have to raise capital from the equitymarkets and sell some of the public sector’s stake.

There are new guidelinesfor ISPs—

—a big expansion in portactivity—

—and a price war inthe skies

Bank finances remain inbad shape

India 31

With the stockmarket at a five-year high, Indian and foreign equity investorsare seeking to maximise their gains. Mutual funds have seen 25-30% growth inequity fund collections so far in 1999/2000. One positive result has been aturnaround in the fortunes of the Unit Trust of India (UTI), whose US-64scheme suffered a disappointing run a year ago. It has now wiped out negativebalances and managed to pay a respectable 13.5% dividend.

India’s capital markets are growing in depth and sophistication, as well as inbreadth. A rupee derivatives market has been opened, with 30 interest- andforward-rate swaps worth Rs6bn traded on the first day alone. Corporate debtissuance and offerings are enjoying a boom, the former led by softwarecompanies. In addition, trading in unlisted securities from new ventures onthe over-the-counter (OTC) market, as a result of a new initiative by themarket regulator, the Securities and Exchange Board of India (SEBI), will offerfurther options for investors.

Foreign trade and payments

The trade deficit (fob-cif) rose from $6.4bn in 1997/98 to $8.3bn in 1998/99,according to national data (on a fiscal year basis). The government has beenalert to any signs of further deterioration, especially given that in the last twoyears the value of merchandise imports has been kept low by depresseddomestic demand and low international oil and commodity prices. Preliminaryfigures for the first two months of the 1999/2000 offer some comfort:merchandise exports rose by 6.1% year on year in dollar terms compared witha 7.5% contraction in the same period of 1998/99; imports (cif) fell by 3.8%(despite a 36% rise in oil imports), compared with a 9.7% rise in 1997/98. Thetrade deficit for April-May fell to $1.3bn, compared with $1.85bn in the sameperiod of last year, but is still close to $8bn on an annualised basis.

The most recent figures from the IMF show a similar picture. India’s currentaccount swung into surplus in the first quarter of 1999, to $307m, from a$1.2bn deficit in the fourth quarter of 1998 and $2.6bn deficit in the firstquarter of 1998. According to the IMF, a 16.5% year-on-year drop in dollarterms in merchandise imports (fob) drove the sharp reduction in the tradedeficit (fob-fob). Merchandise exports rose by just 2.5%. But the largestimprovement was recorded by services, exports of which rose by 63% year onyear; services debits rose by 35% in the first quarter.

The trade picture could deteriorate quickly. A rise in oil prices from the secondquarter of 1999 could boost the value of oil imports by $3bn over the year.Non-oil imports are likely to be pushed up by a combination of industrialrecovery and stronger consumer demand, although most commodity priceswill remain soft.

Equity funds are buoyed bythe stockmarket boom—

—reflecting growingdiversity and

sophistication

The trade deficit narrowedin April-May—

—and IMF figures show thecurrent account in

near-balance

32 India

India: current account, Jan-Mar($ m)

1998 1999 % change

Merchandise exports (fob) 9,318 9,548 2.5

Merchandise imports (fob) –12,092 –10,096 –16.5

Trade balance –2,773 –548 –80.3

Services: credit 2,390 3,889 62.7

Services: debit –3,467 –4,676 34.9

Services balance –1,077 –787 –27.1

Income & transfers: credit 2,875 3,254 13.2

Income & transfers: debit –1,583 –1,614 2.0

Income & transfers balance 1,292 1,640 26.9

Current-account balance –2,559 307 –112.0

Source: IMF, International Financial Statistics.

India’s exports also face severe obstacles, including infrastructure bottlenecks,the bureaucratic hurdles associated with import duty rebates and otherincentives, inferior quality (because of the long-standing preoccupation withthe undemanding domestic market), external trade barriers to farm and textileexports, and the impact on export competitiveness of the recent Asiancurrency devaluations.

However, there are some bright spots. Software exports are continuing theirbrilliant run. In 1998/99 software exports grew by 68%, to Rs109bn ($2.5bn),according to the industry federation, Nasscom; another industry associationputs the figure at nearer Rs125bn. In 1999/2000 growth of 50% in softwareexports is projected. This growth is attributed in part to the fact that manyforeign companies (such as US airline companies) have set up “offshore”export units in India to do back-office work. There is also a boom in“millennium bug” solutions, which account for about 20% of 1998/99 softwareexports. The industry is looking for new outlets in e-commerce, euro currencyconversions and a wide range of information technology services.

Unlike other Indian export industries, software is of top quality, attracts someof the best brains in the country and is linked to the world’s top companies;for example, according to a Nasscom survey, 200 of the Fortune 500companies outsource their software requirements to India. There is a certainamount of hype surrounding India’s software industry and there are someserious problems (notably bottlenecks in recruitment and rapidly risingsalaries), but it is likely that software and software-related services will soonbecome India’s leading exports. It is not implausible to envisage exports of$50bn by 2008, as forecast by the National Task Force on IT.

Another success story is gems and jewellery. Gem and jewellery exports rose to$6bn in 1998/99. With 50% of the world diamond-cutting market, almost allthese exports were cut diamonds. But exports of gold jewellery are growingrapidly and are expected to approach $1bn in 1999/2000. However, the importcontent of both cut diamonds and gold jewellery is very high, at 75-80%.

Exports face manyobstacles—

—but there are somesuccess stories—

India 33

A major influence on the trade figures is gold. In 1998/99 the value of goldimports rose by 200%, to $6.5bn, in large part because the import of goldthrough trade channels (rather than transfers) was liberalised. So far in1999/2000 gold imports have fallen sharply, perhaps because falling gold priceshave persuaded consumers to delay additional purchases until the price hassettled. A slight tightening of the rules governing gold imports could also causeimports to fall slightly this year.

India is involved in several trade policy battles with its main trading partners.The biggest issue concerns its high overall level of trade protection. A WorldBank director has reportedly described India as the world’s most protectionistcountry. India is under considerable pressure to remove quantitative restric-tions (QRs) and the level of bound tariffs within the near future. The WorldTrade Organisation (WTO) dispute panel has already ruled against it in a casebrought by the US demanding the rapid elimination of QRs. Although India isfighting the ruling, its confirmation should not present enormous problems,since only 667 items remain on the QR list, compared with 2,714 when Indiawas originally dragged before the WTO. Moreover, some more enlightenedspirits, such as the caretaker trade minister, Ramakrishna Hegde, are preparingthe way for the elimination of QRs. India is also currently working out a morepositive strategy for the next WTO meeting in Seattle, where its current refusalto cut bound tariffs could risk leaving the country isolated and unable to pressits own demands for cuts in high tariffs in the EU, US and Japan on items suchas textile garments and leather goods.

India has separately been dragged into a dispute with the EU and US over itsautomotive policy; its trading partners believe that this policy conflicts withthe terms of the trade-related investment measures (TRIMs) agreement. India isaccused of setting unreasonable export and indigenisation requirements, andof imposing QRs on vehicles imports (which are due to be lifted in 2003). Thedomestic car industry is suggesting a tariff structure that would impose a 100%tariff on second-hand vehicles, 70% on new vehicles and 40% on kits—ratesthat are roughly comparable to those prevailing in Korea and Brazil. But theother issues are not being addressed.

From time to time, Indian isolationists threaten to delink the country from theglobal trading system, but this is becoming increasingly implausible. India ispart of the global trading system, and must abide by its rules. Moreover, thereare many instances in which Indian exporters need the support of a rules-based system. For example, India is currently seeking a WTO panel ruling onEU anti-dumping duties on imports of bed linen. India increasingly invokesanti-dumping rules itself. In general, Indian officials, businessmen andgovernment ministers understand that India must try to conform to globalnorms, which is why the government is trying to ensure that its intellectualproperty regime is compatible with the WTO trade-related intellectualproperty (TRIPs) agreement and why the swadeshi (self-reliance) doctrine isnow effectively obsolete.

—while gold imports arecoming down

Some WTO disputes weighagainst India—

—but the rules-basedsystem also offers support

34 India

India: external reserves($ bn)

1997 1998 1999 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr

Reserves incl gold 29,002 29,146 27,568 28,757 26,769 28,895 29,833 32,610 n/a

Reserves excl gold 25,702 26,017 24,688 26,260 24,297 26,490 27,341 30,193 31,212

Source: IMF, International Financial Statistics..

Foreign-exchange reserves excluding gold and special drawing rights with theIMF were $31.2bn at the end of June, exactly the same level as two monthsearlier but nearly $7bn higher than at end-June 1998.

The exchange rate has fallen a little from the Rs42.5:$1-Rs42.7:$1 range it heldfor the best part of a year. The rupee stood at Rs42.43:$1 at the end of March, arate which had been largely unchanged for six months, before beginning toslip slightly in early April. The Reserve Bank of India (RBI) intervened when therupee touched Rs43.2:$1, but the rate had subsequently dropped to aboutRs43.5:$1 by the end of August. However, gradual devaluation of this kind isnot a cause for concern, and goes some way towards offsetting the loss ofcompetitiveness from (usually) high inflation.

A leading Indian industrial group, Essar, has defaulted on a $250m, five-yearfloating-rate note (FRN)—the first Indian company to do so. Essar Steel, whichis owned by the Ruia family, has asked to have its FRN rolled over, but is alsotrying to refinance at least a proportion of the total. Following the default, thebonds fell to a 15% discount, and they now quote a yield of 9%, comparable tothat on junk bonds.

Essar’s problems started when it was unable to raise a new loan last year as ithad planned; the imposition of economic sanctions following the testing ofnuclear devices made fundraising difficult. Domestic, state-owned financialinstitutions refused to bail out the company (itself a new feature of thedomestic financial market). The underlying weakness of the company can betraced to the recent recession in steel prices—which caused Essar Steel to loseRs5bn in 1998/99—although the steel market is now beginning to firm, andthe government has protected the domestic market with anti-dumping dutiesand a minimum price scheme.

The international financial community demonstrated a reassuring ability todistinguish between Essar and other Indian businesses. Essar is not like theSouth Korean chaebol Daewoo or the Guangdong International Trust andInvestment Corporation (GITIC) of China, whose bankruptcies were viewed asindicative of deeper, systemic problems in their respective countries. Spreadson other Indian papers have remained steady. The day after the default thePower Finance Corporation successfully concluded a $100m FRN issue, andwas able to place its seven-year paper at the favourable rate of 145 basis pointsover Libor (Essar’s original 1994 FRN issue was at 265 basis points over Libor).Other Indian FRNs now trade at small discounts or, in the case of manyissuers—most of which are state-owned, however—none at all.

—or the rupee

An Indian group foreigndebt default—

—does not spark off adomino effect

The border crisis does notunsettle reserves—

Nepal 35

Political structure

Kingdom of Nepal

Constitutional monarchy

The sovereign, currently King Birendra, is head of state and commander-in-chief of thearmed forces

The prime minister heads a Council of Ministers appointed from among the electedmembers of the House of Representatives

Bicameral: upper house, National Assembly, of 60 members (35 elected by the lowerhouse, 15 elected by heads of local committees and others in the electoral college, 10appointed by the sovereign); lower house, House of Representatives, of 205 memberselected to five-year terms from single-member constituencies

The Supreme Court acts as the court of appeal and review, as well as having powers oforiginal jurisdiction; presides over 11 appellate courts and 75 district courts

The Nepali Congress won 111 seats in the general election in May-June 1999. It formeda majority government

May 3rd, 17th and June 27th, 1999; next election due by May 2004

Nepali Congress (NC); Communist Party of Nepal-Unified Marxist Leninist (CPN-UML);Communist Party of Nepal-Marxist Leninist (CPN-ML); National Democratic Party (NDP,Thapa faction); National Democratic Party (NDP, Chand faction); Nepal Workers’ andPeasants’ Party (NeWPP); Nepal Sadbhavana Party (NSP); National People’s Front(Rastriya Jana Morcha); United People’s Front (Sanyunkta Janamorcha Nepal)

Prime minister & minister of defence & royal palace affairs Krishna Prasad BhattaraiAgriculture Chakra Prasad BastolaCommerce Ram Krishna TamrakarEducation Yog Prasad UpadhyayaFinance Mahesh AcharyaForeign affairs Ram Saran MahatForest & soil conservation Mahanta ThakurGeneral administration Siddha Raj OjhaHealth Ram Baran YadavHome affairs, information & telecommunications Purna Bahadur KhadkaHousing & physical planning & labour Bal Bahadur K CIndustry Omkar Prasad ShresthaLocal development, women & social welfare Chirinjibi WagleSupplies Prakash Man SinghTourism & civil aviation Bijay Kumar GachhadarWater resources Govinda Raj JoshiWorks and transport Khum Bahadur KhadkaYouth, sports & culture Sharad Singh Bhandari

Satyendra Pyara Shrestha

Official name

Form of state

Head of state

The executive

National legislature

Legal system

National government

National elections

Main political organisations

Council of Ministers

Central bank governor

36 Nepal

Economic structure

Latest available figuresa

Economic indicators 1994 1995 1996 1997 1998

GDP at factor costb (NRs bn) 199.3 219.2 248.9 280.6 293.5

Real GDP growthbc (%) 7.9 2.9 5.7 3.9 2.3d

Consumer price inflation (av; %) 8.4 7.6 9.3 4.0 n/a

Population (mid-year; m) 20.9 21.5 21.1 22.6 21.8

Exports fob ($ m) 368.7 349.9 388.7 410.5 484.9

Imports fob ($ m) 1,158.9 1,310.8 1,494.7 1,718.6 1,233.2

Current-account balance ($ m) –351.9 –356.4 –326.6 –418.1 –58.4

Reserves excl gold (mid-Dec; $ m) 693.6 586.4 571.4 626.2 756.3

Public external debte (year-end; $ m) 2,328 2,418 2,411 2,398 n/a

Exchange rate (av; NRs:$) 49.4 51.9 57.0 58.0 66.0

August 16th 1999 NRs68.41:$1

% of % ofOrigins of gross domestic product 1997/98b total Components of gross domestic product 1996/97b total

Agriculture, forestry & fishing 40.8 Private consumption 78.1

Mining & quarrying 0.5 Government consumption 9.1

Manufacturing 8.8 Gross fixed capital formation 20.9

Electricity, gas & water 0.8 Change in stock 4.2

Construction 9.2 Exports of goods & non-factor services 26.3

Trade, hotels etc 11.3 Import of goods & non-factor services –38.6

Transport & communications 7.8 GDP at market prices 100.0

Finance & real estate 10.2

Social services 10.4

GDP at factor cost (less bank charges) 99.8

Principal exports 1997/98bd NRs m Principal imports 1997/98bd NRs m

Woollen carpets 8,485 Petroleum products 9,093

Garments 7,006 Transport equipment & parts 3,960

Pulses 1,051 Medicine 2,842

Jute goods 725 Cotton fabrics 2,583

Hides & skins 544 Chemicals & fertiliser 1,895

Total incl others 27,468 Total incl others 88,797

Main destinations of exports 1997/98f % of total Main origins of imports 1997/98f % of total

India 32.8 India 30.7

US 26.1 China (incl Hong Kong) 16.4

Germany 24.8 Singapore 14.2

China (incl Hong Kong) 2.3 UAE 4.9

Bangladesh 2.2 Japan 3.1

France 1.8 Saudi Arabia 2.1

a All figures are sourced from IMF, International Financial Statistics, unless otherwise indicated. b Fiscal years ending July 15th. c At factorcost. d Central Bureau of Statistics. e World Bank, Global Development Finance. f FNCCI, Nepal and the World: A Statistical Profile, 1998.

Nepal 37

The surprisingly decisive victory of the Nepali Congress (NC) in the House ofRepresentatives election in May 1999 sent a clear signal that Nepali voterswant an end to the in-fighting that has characterised the last five years ofcoalition government. However, although the new prime minister, KrishnaPrasad Bhattarai, commands widespread respect for his personal integrity, in acountry in which the description is thought to apply to few politicians, it isunlikely that he will emerge as a decisive—or long-lasting—leader of either theNC or the nation.

Mr Bhattarai has already been plagued by internecine sniping within the NC,reflecting the continued rivalry between him and the other major leader of theparty, the former prime minister, Girija Prasad Koirala. Some political analystsin Kathmandu are giving Mr Bhattarai’s government a year at most. There issome concern that there could be a repeat of the events of 1994, whenMr Koirala’s majority government fell after NC dissidents failed to support thegovernment programme, this time with Mr Koirala leading the dissidentcharge. The depth of divisions within the party suggests that the party will, inany case, be unable to survive its full term with Mr Bhattarai at the helm.

The new prime minister has so far failed to respond rapidly and effectively tothe burgeoning Maoist insurgency in the west and north-east of the country.Some fear that the government has been lulled into a false sense of security bythe electoral demolition of the Communist Party of Nepal-Marxist Leninist(CPN-ML), a hardline group that supports the Maoists.

So far the government has simply continued the existing policy of eliminatingsuspected Maoists in so-called encounters with the police (a practice de-nounced by the human rights organisation Amnesty International as extra-judicial killings), combined with offering amnesty to defectors. This will notsucceed: what is required is a more aggressive effort to lift Maoist-dominateddistricts out of their dire poverty, combined with a more credible policepresence and a stronger judiciary.

Most economic indicators remain positive, compared with 1997/98 figures, butreal GDP growth will not be brisk this year. Preliminary figures indicate thatreal GDP (at factor cost) grew by 3.4% in the fiscal year 1998/99 (July 16th-July 15th). A strengthening of GDP growth to 4% or more in 1999/2000 isquite possible, owing to three factors: an improvement in the performance ofthe agricultural sector—which posted lacklustre growth of only 2.4% in1998/99; continued robust growth in exports; and a strong recovery in theIndian economy, which should increase the inflow of Indian investment, aswell as India’s capacity to absorb Nepali exports. The trade outlook isparticularly bright, as very strong garment exports have narrowed the tradedeficit substantially and gold imports have not increased by as much aspreviously expected.

Despite its strongmandate—

—factional fighting willplague the Nepali

Congress—

—while the Maoist problemwill demand more

attention

GDP growth may reach 4%in 1999/2000

38 Nepal

1994 95 96 97 98(b)

Nepal (a)

Asia excl Japan

Nepal: gross domestic product% change, year on year

(a) Fiscal years beginning July 16th. (b) EIU estimates. (c) Nominalexchange rates adjusted for changes in relative consumer prices.Sources: EIU; IMF, International Financial Statistics; World EconomicOutlook.

1980. 82 . 84 . 86 . 88 . 90 . 92 . 94 . 96 . 98

NRs:$NRs:$NRs:$NRs:$NRs:$NRs:$NRs:$NRs:$NRs:$NRs:$NRs:$NRs:$NRs:$NRs:$NRs:$NRs:$NRs:$NRs:$NRs:$

NRs:¥

NRs:¥NRs:¥

NRs:DMNRs:DMNRs:DM

NRs:¥

NRs:¥NRs:¥

NRs:DMNRs:DMNRs:DM

NRs:¥

NRs:DM

98(b)98(b)

The political scene

On May 31st the 74-year-old stalwart of the Nepali Congress (NC), KrishnaPrasad Bhattarai, was sworn in as prime minister of Nepal’s first majoritygovernment since 1994. The event marked a return from the political wilder-ness for Mr Bhattarai, who served as interim prime minister in 1990-91 beforethe first elections in the restored democracy, but who has since been over-shadowed by his canny NC rival, Girija Prasad Koirala. Following five co-alition governments in as many years under the former hung parliament,Mr Bhattarai’s government holds out the prospect of stability.

The final election returns gave the NC 111 seats in the 205-seat House ofRepresentatives, or lower house. (Mr Bhattarai himself finally got rid of hisreputation for losing elections by winning in the Parsa-1 constituency.) Themoderate Communist Party of Nepal-United Marxist Leninist (CPN-UML)decisively emerged as the major opposition, winning 71 seats.

Nepal: final election results(no. of seats)

Nepali Congress 111

Communist Party of Nepal-Unified Marxist Leninist 71

National Democratic Party (Thapa) 11

Nepal Sadbhavana Party 5

National People’s Front 5

United People’s Front 1

Nepal Workers’ & Peasants’ Party 1

Total 205

Source: Nepal Election Commission.

By far the biggest loser in the election was the hardline Communist Party ofNepal Marxist-Leninist (CPN-ML), which fielded 196 candidates and did notwin a single seat. The CPN-ML, which split from the CPN-UML in early 1998

Mr Bhattarai forms amajority government

The hardline Communistsfall flat—

Nepal 39

and formed a coalition government with the NC later that year, seems to havealienated voters by voicing support for the Maoist insurgency. Its defeat demon-strates that alignment with the Maoists is a poor electoral strategy, but does notnecessarily suggest any weakening among the Maoists themselves (see below).

Within the royalist National Democratic Party (NDP), Surya Bahadur Thapaemerged from the election with his prestige enhanced, as his faction won11 seats. The NDP faction led by his rival, Lokendra Bahadur Chand, did notwin any seats, even though it contested 182 constituencies.

Four constituencies were decided in the elections on June 27th. Three ofthem—Kathmandu-1, Kathmandu-3 and Siraha—were won by the CPN-UML,while one—Sunsari-3—went to the NC. The CPN-UML profited from analliance with the NDP, under which the latter supported CPN-UML candidatesin Kathmandu and Siraha, while the CPN-UML returned the favour (not, as itturned out, effectively) in Sunsari.

Mr Bhattarai’s cabinet, which was first formed on May 31st with 16 members,was later expanded to include 32 members (19 full ministers, 8 ministers ofstate and 5 assistant ministers). Most are veterans either of Mr Koirala’s NCcabinet of 1991-94 or of the cabinets of one or more of the coalition govern-ments since then. For example, the minister of finance, Mahesh Acharya, wasminister of state for finance in the 1991-94 NC government. The new foreignminister, Ram Saran Mahat, is likewise a former NC finance minister. Thehealth minister, Ram Baran Yadav, also resumes the post he held in the1991-94 government.

The biggest question about Mr Bhattarai is whether he is strong enough tohold the faction-ridden NC together for anything close to a full five-year term.(Mr Koirala ultimately failed in a similar task in the early 1990s, and had tocall for a mid-term poll, even though he had a majority in parliament.)Mr Koirala, who led the caretaker government preceding the May election,willingly allowed Mr Bhattarai to be declared the NC candidate for primeminister in the election, perhaps on the assumption that the NC would farebetter in the polls under Mr Bhattarai’s leadership. However, soon after theformation of the government, Mr Koirala’s destabilisation campaign began. Hegrumbled loudly that he was not sufficiently consulted in the formation of thecabinet, thereby holding out hope to disgruntled backbenchers that they couldgain plum posts in a Koirala government. Moreover, much of the NC press stillseems to side with Mr Koirala, and has begun to carp about Mr Bhattarai’s realor imagined weaknesses, such as his supposed lack of decorum during a statevisit by the Sri Lankan president, Chandrika Kumaratunga, in early July.

The CPN-UML, meanwhile, has begun to regroup after the death in April of itspresident, Man Mohan Adhikari. CPN-UML MPs unanimously elected thegeneral secretary, Madhav Kumar Nepal, as their parliamentary leader. ButMr Nepal’s position is not wholly secure, as another faction has begun tocoalesce around a senior party leader, K P Sharma Oli.

—and Mr Thapa wins thebattle for NDP supremacy

The CPN-UML does well inspecial elections

Mr Bhattarai forms a newcabinet with old faces—

—but Mr Koirala’s effortsto undermine him are

beginning

The CPN-UML elects a newleader—

40 Nepal

No sooner had it formed its majority government than the NC suffered a set-back in the June 27th election for six vacant seats in the largely ceremonialNational Assembly. The seats were filled through voting by the heads of localdevelopment committees and municipalities in each of the country’s fivedevelopment regions. Each region elected one member for a full six-year term;the Mid-Western region elected a second member for a four-year term.

The CPN-UML took all five of the six-year seats, while the NDP won the extrafour-year seat. The CPN-UML now holds 17 of the 50 elected seats in the60-member National Assembly (ten members are appointed by the king). TheNC remains the largest party in the assembly, with 24 seats; the NDP has three.

In opposition, the CPN-UML in general seems to be inclined to lie fairly lowand wait for the NC to implode. However, it has shown that it will go on theoffensive against the NC if the conditions are right. The party has alreadydisrupted parliament several times, demanding an inquiry into supposedelection irregularities in a handful of districts. But in August it pulled off adramatic coup by using its increased strength in the National Assembly (theupper house of parliament) to prevent the NC from winning the chairmanshipof the assembly. Chairmanship carries automatic membership of the five-member Constitutional Council, which has the power to investigate highgovernment officials, including the prime minister.

A first round of voting on July 20th sparked controversy when King Birendra,contrary to precedent, allowed one of the ten royal appointees to the NationalAssembly, Ramesh Nath Pandey, to stand for the chairmanship. Following thereturn to democracy in 1990, the king tacitly agreed that his appointees in theassembly would not contest leadership posts, lest he be seen to be leading hisown private political party. Mr Pandey’s reputation as a hardline anti-democrataggravated the concerns raised by his candidacy.

Mr Pandey narrowly failed to be elected, winning 29 votes—including the17 votes of the CPN-UML, whose main objective was to prevent the election ofthe NC candidate, Basudev Risal. In the second round of voting three weekslater the CPN-UML achieved its goal with a last-minute manoeuvre. In thatround the NC—which, with 24 seats, is the largest single party in the NationalAssembly—withdrew Mr Risal’s candidacy and threw its support behindMohammad Mohsin of the NDP, calculating that he, too, would fall short ofthe 30 votes necessary to win, and that Mr Risal could be elected on asubsequent vote. But just before the vote, the CPN-UML leadership directedfour of its members to vote for Mr Mohsin, giving him a narrow majority.

This jousting has significance beyond the limited importance of the post atstake. The surprising candidacy of Mr Pandey and the final victory of theroyalist Mr Mohsin indicate that the power of the palace in Nepal’s parlia-mentary politics remains strong. The most cynical observers fear that somemembers of the royal family—though perhaps not King Birendra himself—aretrying to discredit democracy by making it difficult for the ruling party togovern effectively.

—wins in the NationalAssembly elections—

—and helps an NDP manwin the assembly

chairmanship

The king draws fire forintervening in party

politics—

—prompting fears over thepalace’s intentions

Nepal 41

The insurgency of the Communist Party-Maoist (CPM), although it is stillscattered and has only limited resources, is gaining strength. Moreover, thereis some evidence that foreign residents of Nepal, who were previously ignoredby the Maoists, may become targets. Internal CPM documents intercepted bythe government earlier this year suggest that the CPM leaders, BaburamBhattarai and Prachanda (Puspa Kamal Dahal), now believe that attacks onforeign non-governmental organisations (NGOs) could help the party’s cause.A few NGOs have suffered minor bomb attacks—notably a regional office ofSave the Children USA in April—but so far there have been no casualties orserious damage.

One recent attack, however, involved the use of plastic explosives—markedlymore sophisticated than the crude weaponry used by the Maoists in the past.The Maoists appear to be working hard to improve their access to modernarmaments, both through clandestine talks with like-minded leftist rebels inIndia’s Bihar state and through fundraising efforts—notably by robbing small-town bank branches.

The new government has continued the “carrot-and-stick” approach to dealingwith the Maoists, which combines an amnesty policy for Maoists who chooseto give themselves up and increased police deployment in the 20 or so districtsthat have been most affected by the insurgency. The amnesty has supposedlynetted over 2,000 defectors, although there is no evidence that any of the coreMaoists have surrendered.

Mr Bhattarai is drawing fire from various quarters on the one hand for doingtoo little and on the other for doing too much. Many analysts in Kathmanduhave detected some complacency on the part of the government following thewipe-out of the pro-Maoist CPN-ML in the May polls. Following this debaclesome officials have drawn the conclusion that the insurgency has little popularsupport and can easily be contained. However, this theory ignores the fact thatthe Maoists draw their support precisely from people who have given up onthe electoral system, and that in any case they enforce their writ through terrorrather than by inspiring affection.

Amnesty International criticised Mr Koirala’s caretaker government for itshandling of the insurgency. In a report released in mid-June it estimated that thepolice had killed about 200 people in alleged “encounters” with Maoists in 1998;police had also routinely tortured Maoist suspects and one suspect had died inpolice custody. About 1,800 people were arrested on suspicion of being Maoistsor sympathisers, 400 of whom remained in detention without trial. Amnestyalso reported that Maoists had killed at least 29 civilians during the year.

Investigation of police abuses is supposed to be handled by a Human RightsCommission (HRC). The commission was authorised by the House ofRepresentatives in January 1997, but has yet to be constituted. In July theSupreme Court finally lost patience and ordered the government to set up theHRC as soon as possible. In late August Mr Bhattarai said that he would formthe commission by the end of this year.

The Maoist insurgents gainstrength—

—and the governmentfights back with both

carrots and sticks—

—which may not beenough

Amnesty accuses the policeof abuses—

—while the Human RightsCommission awaits

formation

42 Nepal

Kathmandu will be the location for two major regional events this year: theeighth South Asian Federation (SAF) Games, scheduled for September 25th-October 8th and the seven-nation South Asian Association for Regional Co-operation (SAARC) summit in December. Kathmandu’s hosting of the SAFgames was mostly underwritten by a Chinese government grant, whichcovered NRs1.17bn ($17.9m) of a total of NRs1.46bn spent on the project inthe last fiscal year.

Economic policy and the economy

Real GDP grew by 3.4% in 1998/99 (July 16th-July 15th), according topreliminary figures from the Central Bureau of Statistics. This represents animprovement on the 2.7% growth registered in 1997/98. The main factor inthe improvement was a stronger contribution by the agricultural sector, whichgrew by 2.4% compared with just 1% in 1997/98. The non-agricultural sector,which accounts for around 60% of GDP, grew by 4.1% last year, up from 3.9%the year before.

The medium-term outlook, however, is clouded by disappointing investmentfigures. Gross domestic investment fell by 5.5% year on year in current priceterms. Investment dropped to just 17.3% of GDP from 20.7% of GDP theprevious year (and 21.3% in 1996/97). Sluggish business growth is also reflectedin disappointing credit figures. Domestic credit rose by 12.2% in the first11 months of the 1998/99 fiscal year, according to the Nepal Rastra Bank (NRB,the central bank). However, when adjusted for consumer price inflation—11.8% during the same period—there was very little real credit growth.

Nepal: main economic indicators(fiscal years, Jul 16th-Jul 15th)

1997/98 1998/99

Real GDP growth (%) 2.7 3.4 Agriculture 1.0 2.4 Non-agriculture 3.9 4.1

GDP per heada (NRs) 13,776 14,655

Investmenta (% of GDP) 20.7 17.3

Savingsa (% of GDP) 9.5 10.6

M2 growthab (%) 17.0 16.8

Consumer price inflationb (%) 7.9 11.8

a Current prices. b 11-month figures. Sources: Central Bureau of Statistics; Nepal Rastra Bank.

Inflation remains another persistent problem, owing mainly to a rapid rise infood prices. The national urban consumer price index (NUCPI) for May-Junerose by 11.8% year on year, buoyed by a 39% rise in the price of rice (whichaccounts for about one-quarter of the index).

Kathmandu will hostregional games and a

SAARC summit

GDP grew by 3.4%in 1998/99—

—but investment declinedsharply

High food prices buoyinflation

Nepal 43

Price rises in most other major categories were much more modest: 3% forhousing; 3.6% for clothing; and a 5.3% decline for fruits and vegetables.Overall, annual inflation in this period was most severe in the Terai (14.4%)and the hill regions (13.9%), but much more moderate in the KathmanduValley (7.6%).

The NRB, which compiles the index, notes that prices for food and beverageshave been rising much faster than those for non-food items: at 15.9%compared with 4% year on year in May-June. However, the bank adds that therate of food price hikes has moderated substantially over the past few months,which suggests that NUCPI inflation should fall back into single digits in thesecond half of the year.

After less than a month in the job the finance minister, Mahesh Acharya,belied his reformist reputation by presenting a wildly overoptimistic budget for1999/2000. The budget projects a trebling of the rate of growth in governmentexpenditure, to 22.5%, assuming a near-doubling in the rate of GDP growth (to6.5%), which will in turn will double the rate of growth in governmentrevenue (to 20.8%). An increase of nearly 50% in foreign aid is also forecast,despite the dissatisfaction voiced by most donor agencies about how theirmoney has been spent over the past two decades.

Mr Acharya proposes spending NRs77.2bn ($1.18bn) in 1999/2000, withNRs35.4bn going on regular expenditure and NRs41.8bn on developmentspending. Domestic revenue is forecast to hit NRs44.5bn and external grantsNRs8.7bn. The resulting deficit of NRs24.1bn (which is equal to 6.3% of GDP),would represent an increase on the 1998/99 deficit of NRs20.3bn (6.1% ofGDP). Excluding foreign grant aid from the revenue side, the projected deficitrises to NRs32.7bn, or 8.6% of GDP.

Nepal: 1999/2000 budget

NRs bn % annual change

Revenue 53.18 20.8 Indirect taxes 25.98 20.8 of which: value-added tax 10.46 30.2 Direct taxes 8.67 19.2 Non-tax domestic revenue 9.86 22.4 Foreign grants 8.66 47.0

Expenditure –77.24 22.5 Regular expenditure 35.39 12.1 Development expenditure 41.85 32.9

Balance –24.06 18.5

FinancingForeign loans 18.56 27.1Domestic borrowing 5.50 16.8

Source: Ministry of Finance.

The new finance ministerpresents an optimistic

budget—

44 Nepal

These forecasts appear absurdly rosy, particularly the assumptions for GDPgrowth (6.5%) and inflation (7%). Moreover, the projected revenue increasedepends heavily on an extremely aggressive rollout of the planned value-addedtax (VAT). But, as usual, it is the projections for development spending thatappear most unrealistic. The forecast increase in regular governmentspending—social services, defence and administration—is reasonable and caneasily be funded by a modest increase in domestic revenue. But the proposedincrease in development spending (infrastructure and poverty-alleviationschemes) defies credence, as do the corresponding revenue increases.

A more realistic alternative budget released by the Institute for DevelopmentStudies (IDS), a Kathmandu-based think-tank, assumes real GDP growth of just4.3% (which, it admits, is probably optimistic). Although it projects the sameregular expenditure as Mr Acharya’s budget, it projects NRs7bn less in develop-ment expenditure. Assuming a continuation of last year’s 11.9% growth inrevenue, the IDS projects total domestic revenue of NRs41.4bn, about NRs3bnless than budget projections. The budget deficit (excluding foreign grants)would be NRs 28.7bn, or 8.5% of GDP.

More troubling, the budget contained a plethora of politically convenienthand-out pledges, including low-cost loans for poor people, subsidies for oldpeople and students, and concessional loans for exporters. But commitmentsto structural reforms, the necessity of which Mr Acharya eloquentlyproclaimed in his budget speech, were few and far between. The main reformsannounced in the speech were:

• an accelerated rollout of the long-delayed VAT;

• a new Nepal Rastra Bank Act, aimed at strengthening the central bank’sbank-supervision powers;

• an increase in the 50% cap on foreign ownership of joint-venture banks; and

• a new formal policy on the use of foreign aid.

Of these, only the VAT rollout is likely to bear fruit in 1999/2000. Meanwhile,Mr Acharya conspicuously avoided mentioning privatisation of governmententerprises, and suggested no concrete measures for reversing the precipitousslide in domestic investment.

Mr Acharya’s boldest stroke was to insist on the quick implementation of VAT,which was applied only half-heartedly by the previous government. Herevoked a complex phase-in accord made earlier this year with major taxpayersand set August 17th as the deadline for businesses to register and start payingVAT. He also widened the tax net by requiring all businesses with at leastNRs2m a year in taxable transactions to pay VAT (the original threshold wasNRs4.5m). This edict prompted a lot of complaints from the businesscommunity, but in the end Mr Acharya had his way. On deadline day, mostshops in the towns of Pokhara and Butwal closed in protest, and the deadlinehad to be extended by eight days. But the protests were short-lived, and mosteligible businesses now appear to have registered.

—and budget targets areunlikely to be met

Structural reforms are stillfar off

VAT will come in faster andhit more businesses

Nepal 45

The government has sent out contradictory signals on a long-awaited tolltunnel road linking Kathmandu and the town of Hetauda in the south. OnJune 24th the government rashly promised that a NRs14bn contract for the55-km route (which includes at least 7 km of tunnels) would be let to aconsortium of a private developers on a 50-year build-operate-transfer (BOT)basis. Foreign participation of up to 50% would be allowed.

However, on August 18th the transport minister, Khum Bahadur Khadka, saidthat the contract could not be let until the targeted development consortiumhad completed a detailed project report. The consortium of private developershoping to be awarded the scheme—the Hetauda-Kathmandu Tunnel RouteConstruction Concern Committee—objected that the completion of such areport would require two years and several million rupees, and that thecommittee could not invest such a large amount of money unless it wascertain to get the construction contract afterwards. The committee alsopointed out that the route has already been the subject of numerous domesticand foreign feasibility studies, most recently by the Finnish InternationalDevelopment Agency in 1993.

The project has the potential to improve both domestic commerce andinternational trade by linking Kathmandu more conveniently with the Terai.At present, the only paved road between Hetauda and the capital is a circuitous230-km route meandering far to the west.

The government has made two changes in labour policy. On August 17thgovernment officials in the Kathmandu Valley switched from a six-day to afive-day work week, although the total number of working hours remainsunchanged at 40. Previously, government offices opened between 10 am and5 pm on Sunday-Thursday and between 10 am and 3 pm on Fridays. The newschedule is 9 am-5 pm, Monday to Friday. The measure is expected to save thegovernment NRs120m a year, mostly on utility costs. Traffic congestion onSundays should also be reduced.

More significantly, the labour minister, Bal Bahadur K C, announced onAugust 20th that within two months he would publish new regulations onlabour exports, making it easier for Nepalis to go abroad to work. Overseasemployment brokers claim that government red tape delays or prevents manyNepalis from taking foreign jobs and encourages the use of illegal brokers.

Working abroad is an unfortunate necessity, as the domestic economy canabsorb only about 20% of the 200,000-300,000 Nepalis who enter theworkforce each year. In 1998/99 about 27,000 Nepalis went abroad to work,according to official figures, although the true number may be higher.Employment brokers estimate that the figure could be increased to at least50,000 a year. The main destinations for Nepali labourers are the Gulfcountries, as well as Hong Kong, Singapore, South Korea, Malaysia and Japan.

The government sendsmixed signals about a

toll-road scheme

Government officials moveto a five-day working

week—

—and a new policy onlabour exports is due

out soon—

—which could double theexport of workers

46 Nepal

Mr Bahadur indicated that the new regulations would aim to increase annuallabour exports to at least 41,000, reduce the processing time for workers goingabroad, which is currently a month, and increase protection for Nepali workersin other countries. The last objective will also be met by setting up labour desksat Nepali diplomatic missions, especially in the Gulf countries.

In a gesture towards relieving the smog-ridden capital of pollution, theKathmandu city government has ordered the delicensing of all petrol-poweredthree-wheeled, six-seater taxis (tempos or tuk-tuks) by September 11th. Theyare scheduled to be replaced by electric-powered tuk-tuks; however, these are inshort supply. Such a ruling is not new—the city government has issued thesame order three times in the past few years, only to back down each timeunder pressure from tuk-tuk drivers, who do not want to invest in newvehicles. This time, however, the government insists that it is serious; onemotive is to clean up the streets slightly in time for the eighth South AsianFederation Games, which begin in Kathmandu on September 25th.

Foreign trade and payments

In the first 11 months of 1998/99 (to June 14th) exports (fob) rose by a robust34.2% year on year, to NRs33.2bn ($510m). Imports (cif), by contrast, fell by2.9%, to NRs78.9bn. The resulting deficit of NRs45.7bn was 19.2% smallerthan the deficit for the corresponding period of 1997/98.

Export growth was fuelled by strong performance from ready-made garments,exports of which soared by 37%, to NRs8.8bn. Unfortunately, continuedgrowth in garment exports will be constrained because exporters have nearlyexhausted their quotas for exports to the US, one of their principal markets. Bythe end of June Nepali makers of several major types of cotton ready-madeshad used up 80% or more of their quotas for 1999, and appeals to the US toincrease the quota for the year have so far been declined.

The news in other sectors is mixed. Woollen carpets, still the top export item,were up 15.7%, at NRs9bn. Carpets and ready-made garments together accountfor about 54% of Nepal’s total exports. The third largest export, pulses,however, recorded a more modest 7.6% rise in value, to NRs884m. Exports oftwo other major items, tanned skins and nigerseed, dropped in value by 30%and 16% respectively.

India is still by far Nepal’s main trading partner. In the 11 months to mid-June India absorbed 36% of Nepal’s exports and provided 37% of its imports.In the comparable period two years ago, it accounted for just 23% of Nepal’sexports and 27% of its imports. In keeping with this trend, exports to Indiasoared by 51% in the 11-month period, to NRs11.9bn, while exports to therest of the world rose more modestly, by 26% to NRs21.3bn. Imports fromIndia rose by 19%, to NRs29bn, while imports from other countriesplummeted by 12%, to NRs49.9bn.

Petrol-powered tuk-tuksare on the way out

Exports rise strongly—

—thanks to higher sales ofgarments and carpets

India’s share of total tradeincreases sharply

Nepal 47

In the first three quarters of 1998/99 Nepal registered a current-account deficitof NRs944m, representing a dramatic improvement from the NRs12.3bndeficit recorded in the comparable period of 1997/98. The improvement wasalmost entirely the result of a dramatic reduction in the fob-cif trade deficit, toNRs35.6bn from NRs46.8bn a year earlier. The surplus on the services accountfell by NRs2.7bn, to NRs19.6bn, while the surplus on transfers rose byNRs2.9bn, to NRs15.1bn. (The main items in transfers are remittances fromNepalis working abroad and foreign aid).

The capital account recorded a surplus of NRs10.4bn: NRs6.3bn in foreignloans net of amortisation, NRs547m in net foreign direct investment (FDI), andNRs3.5bn in miscellaneous capital items including errors and omissions. Thefigures for foreign loans and FDI were both significantly lower than in the year-earlier period. Overall the balance of payments recorded a surplus of NRs9.5bnin the first three quarters of 1998/99.

The current-account deficitalmost vanishes—

—and the balance ofpayments records a

NRs9.5bn surplus

Quarterly indicators and trade data

India: quarterly indicators of economic activity

Agricultural production Annual totalsTea ‘000 tonnes ( 810 ) ( 870a ) ( n/a )Fruit “ ( 37,795 ) ( 37,795a ) ( n/a )Vegetables ” ( 55,774 ) ( 55,774a ) ( n/a )

Industrial production Monthly avGeneral 1990=100 153 146 150 161 150 150 156 167 160 Mining “ 123 121 131 141 123 121 130 135 123 Manufacturing ” 143 145 152 158 148 149 158 169 158 Electricity “ 153 157 157 169 169 165 166 179 176

MiningCrude petroleum m b/d 0.76 0.76 0.76 0.76 0.73 0.73 0.73 0.77 0.75b

Employment End-QtrApplications for employment m 38.05 39.05 39.14 39.19 39.53 40.20 40.09 40.21 40.08c

Prices Monthly avConsumer prices 1995=100 115.5 117.3 120.0 124.7 127.4 135.4 141.5 135.9 n/a change year on year % 7.7 5.1 5.5 9.0 10.3 15.4 17.9 9.0 n/a Wholesale: domestic 1995=100 111 112 114 115 118 121 122 121 122d

agricultural productse 1990=100 199 200 202 209 218 233 245f n/a n/a manufacturing “ 175 177 179 180 183 187 188f n/a n/a

Money & banking End-QtrM1, seasonally adj Rs bn 2,326.3 2,369.1 2,456.1 2,495.7 2,552.9 2,650.8 2,707.4 2,820.5 2,872.5g

change year on year % 13.0 11.7 12.5 10.9 9.7 11.9 10.2 13.0 n/a Bank rate “ 10.00 10.00 9.00 10.50 9.00 9.00 9.00 8.00 8.00g

Monthly avShare price index 1995=100 82.0 90.8 82.6 78.2 84.0 73.0 71.8 78.4 78.1h

Foreign trade Qtrly totalsExports fob Rs bn 300 315 320 359 317 370 341 388 226i

Imports cif “ 355 352 398 432 429 465 437 430 282i

Exchange holdings End-QtrReserve Bank & government reserves: goldj $ m 3,287 3,102 2,929 2,812 2,584 2,487 2,532 2,471 2,359 SDRs “ 3 30 77 1 81 14 83 8 0 foreign exchange ” 25,404 25,697 24,324 25,975 23,933 26,184 26,958 29,522 30,559

Exchange rateMarket rate Rs:$ 35.82 36.18 39.28 39.50 42.47 42.49 42.48 42.43 43.36

Note. Annual figures of most of the series shown above will be found in the Country Profile.

a Estimate. b Forecast for 3 Qtr, 0.74; forecast for 4 Qtr, 0.73; forecast for 1 Qtr 2000, 0.72. c End-April. d Average for April-May. e Food, non-food and minerals. f Average for October-November. g End-April. h April only. i Total for April-May. j End-quarter holdings at quarter’s average ofLondon daily price less 25%.Sources: FAO; IMF, International Financial Statistics; UN, Monthly Bulletin of Statistics; Reserve Bank of India, Bulletin; IEA, Monthly Oil Market Report; Bloomberg.

Quarterly indicators and trade data 49

Nepal: quarterly indicators of economic activity

Prices Monthly avConsumer prices 1995=100 111.6 112.1 114.9 115.8 116.4 119.3 128.5 135.8 n/a change year on year % 9.1 5.2 1.4 1.0 4.3 6.4 11.8 17.3 n/a

Money End-QtrM1, seasonally adj NRs m 37,245 38,315 38,604 39,708 41,522 42,711 46,326 46,191a n/a change year on year % 1.9 6.9 8.3 8.7 11.5 11.5 20.0 n/a n/a

Foreign trade Qtrly totalsExports fob NRs m 5,813 5,661 5,658 6,206 6,919 7,851 7,441 9,084 9,419 Imports cif “ 27,270 26,875 23,666 21,738 21,245 22,822 18,679 18,980 23,516

Exchange holdings End-QtrGoldb $ m 40.3 39.4 37.1 35.2 34.4 33.1 33.1 33.7 32.9 Foreign exchange “ 609.6 641.8 611.7 618.4 649.0 713.9 700.1 748.2 782.7

Exchange rateMarket rate NRs:$ 57.0 57.0 57.8 63.3 63.4 68.3 68.3 67.7 67.7c

Note. Annual figures of most of the series shown above will be found in the Country Profile.a End-October. b End-quarter holdings at quarter’s average of London daily price less 25%. c End-2 Qtr, 68.5.Source: IMF, International Financial Statistics.

India: foreign trade($ m)

Total US Germany Belg-Lux Japan Apr-Mar Apr-Mar Apr-Mar Apr-Mar Apr-Mar Apr-Mar Apr-Mar Apr-Mar Apr-Mar Apr-Mar

Imports cif 1994/95 1995/96 1994/95 1995/96 1994/95 1995/96 1994/95 1995/96 1994/95 1995/96

Food 769 862 125 122 9 3 1 2 1 0 of which: cereals & preparations 24 130 19 13 0 0 0 0 0 0 fruit & vegetables 539 589 47 49 2 1 0 1 0 0Wood & cork 233 256 1 4 1 1 0 1 0 0Pulp 275 232 86 90 4 4 0 0 0 0Textile fibres 631 448 90 38 10 8 7 5 31 20Crude fertilisers & minerals 441 356 46 17 4 2 0 1 4 2Metal ores & scrap 824 826 264 179 26 37 12 15 19 20Coal 923 994 0 1 0 0 0 0 18 12Petroleum & products 7,602 10,162 66 67 10 5 1 2 12 14Chemicals 5,617 4,961 790 661 422 336 78 80 311 296Paper etc & manufactures 467 493 26 44 34 46 4 3 11 8Textile yarn, cloth & mnfrs 345 339 14 18 21 19 3 4 19 14Diamonds 2,050 2,867 45 41 2 8 1,334 1,883 1 2Iron & steel 1,429 1,359 53 75 237 205 68 62 201 202Non-ferrous metals 1,241 1,426 49 89 43 45 16 29 25 38Metal manufactures 278 313 40 53 53 56 9 9 41 44Machinery & transport eqpt 7,375 7,320 1,340 1,434 1,414 1,231 87 79 1,088 1,060 of which: road vehicles 456 578 16 24 93 80 0 0 249 291 other transport equipment 638 904 334 464 36 9 3 2 18 2Scientific instruments etc 769 635 191 143 108 73 21 18 182 148Total incl others 36,592 39,113 3,830 3,615 3,137 2,829 1,691 2,235 2,462 2,186

continued

Total US UK Japan Germany Apr-Mar Apr-Mar Apr-Mar Apr-Mar Apr-Mar Apr-Mar Apr-Mar Apr-Mar Apr-Mar Apr-Mar

Exports fob 1994/95 1995/96 1994/95 1995/96 1994/95 1995/96 1994/95 1995/96 1994/95 1995/96

Fish & products 1,000 1,122 98 109 54 51 415 478 7 11Fruit & vegetables 682 665 124 154 35 46 31 29 19 19Coffee 449 402 49 49 4 2 26 20 43 52Tea 349 292 9 15 38 41 9 9 22 18Spices 180 253 33 84 9 13 4 7 5 5Animal feeding stuffs 706 997 0 1 10 4 38 57 8 3Tobacco & manufactures 133 213 3 4 23 41 1 1 7 21Textile fibres & waste 90 475 3 8 10 12 14 42 2 5Crude minerals & fertilisers 276 277 21 18 3 3 31 22 7 5Metal ores & scrap 699 695 23 28 1 3 295 267 0 1Crude animal & vegetable materials 310 356 113 126 18 20 33 43 26 28Petroleum & products 463 490 0 0 0 0 0 0 0 0Chemicals 2,580 3,009 275 421 136 155 65 89 192 196Leather & manufactures 469 390 30 32 24 19 9 4 62 51Textile yarn & thread 1,349 1,800 21 83 88 109 52 78 39 33Cotton fabrics 960 1,008 171 195 127 115 7 8 47 47Other fabrics & manufactures 2,049 2,128 410 484 189 200 88 70 295 300 of which: carpets etc 624 656 206 225 25 29 31 21 176 178Diamonds 4,582 4,028 1,366 1,325 26 28 703 439 38 33Iron & steel 941 983 86 108 28 33 111 100 39 20Metal manufactures 652 715 156 206 76 77 16 8 40 36Machinery & transport eqpt 2,376 2,736 301 515 184 226 20 26 112 110 of which: road vehicles 876 870 73 136 41 41 3 3 33 28Clothing & footwear 4,702 4,796 1,346 1,497 510 519 127 96 697 681Total incl others 31,650 33,404 5,502 6,554 1,998 2,046 2,208 2,005 1,967 1,888

Source: UN, External Trade Statistics, series D.

Quarterly indicators and trade data 51

India: major partners’ tradea

($ m; monthly averages)

Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Mar Jan-Mar1994 1995 1996 1997 1998 1998 1999

Exports to India fobUS (fas) 191.2 274.7 277.4 300.6 295.4 256.1 315.0Belgium-Luxembourgb 154.3 220.3 209.9 240.4 221.4 211.3 254.6Saudi Arabia 104.3 130.0 183.9c 207.1c 194.8c 200.7c n/aJapan 170.6 211.9 202.9 184.0 200.7 192.2 192.0UK 167.3 221.3 221.5 215.1 173.4 163.1 175.5Germany 172.9 266.2 259.7 214.0 183.6 179.9 168.8South Korea 96.7 93.7 98.1 95.9 139.1 120.5 94.4UAEc 99.0 120.8 125.6 127.8 136.5 171.3 n/aFrance 67.7 88.1 89.5 71.6 65.2 60.1 70.1Australia 52.7 67.8 78.8 104.8 111.8 94.6 69.6

Imports from India cifUS 472.6 506.7 544.1 642.8 721.6 718.6 759.1Germany 179.0 209.5 220.5 199.7 200.2 200.9 208.2Japan 221.1 243.1 237.4 221.8 181.6 212.6 203.6UK 164.4 188.8 209.5 221.6 200.7 202.5 189.1Hong Kong 121.8 156.2 164.1 177.2 157.5 165.7 n/aUAE 95.2 107.5 117.8 133.0c 149.1c 167.0c n/aBelgium-Luxembourg 78.0 93.2 100.3 106.7 124.2 150.5 141.3Italy 82.7 113.6 103.4 110.9 115.9 141.9 126.0France 75.3 96.9 95.7 88.3 97.4 107.6 111.6South Korea 48.7 66.3 82.3 78.0 50.6 65.0 69.9

a Figures from partners’ trade accounts; imports cif; exports fob, unless otherwise indicated. b From 1997, Belgium only. c Estimate.Sources: US Department of Commerce News, FT900; OECD, Monthly Statistics of Foreign Trade; IMF, Direction of Trade Statistics, annual, quarterly.

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