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COUNTRY REPORT

India

Nepal

3rd quarter 1998

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

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Contents

3 Summary

India5 Political structure6 Economic structure7 Outlook for 1998-99

13 Review13 The political scene17 Economic policy22 The economy25 Agriculture27 Industry28 Energy, infrastructure and telecommunications30 Foreign trade and payments

Nepal36 Political structure37 Economic structure38 Outlook for 1998-9939 Review39 The political scene42 Economic policy and the economy

46 Quarterly indicators and trade data

List of tables9 India: forecast summary

11 India: the current account24 India: ownership of consumer goods, 1994/9532 India: balance of payments34 India: debt ratings by Moody’s Investors Service46 India: quarterly indicators of economic activity47 Nepal: quarterly indicators of economic activity47 India: foreign trade49 India: major partners’ trade

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EIU Country Report 3rd quarter 1998 © The Economist Intelligence Unit Limited 1998

List of figures13 India: gross domestic product13 India: Indian rupee real exchange rates22 India: food prices, Jul 199823 India: loan growth38 Nepal: gross domestic product38 Nepal: Nepalese rupee real exchange rates

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August 21st 1998 Summary

3rd quarter 1998

India Outlook for 1998-99: The BJP-led government could collapse at any time.But the strategy of the main opposition party, Congress, will be crucial indetermining the government’s longevity. External political relations will re-main sour. The impact of sanctions cannot be completely discounted. GDP isforecast to rise by 5.8% in fiscal 1998/99, boosted by an improved outlook foragriculture. Government borrowing will drive up interest rates. Inflation willcontinue to trend upwards. The trade gap will widen and capital inflows willshrink. The rupee will slide, although there is uncertainty over intervention.

The political scene: The BJP’s hold on power remains fragile. The govern-ment relies heavily on the support of fickle allies and has committed a series ofpolicy blunders. An anti-BJP alliance, centred on Congress, has been formed,and is backed by a merger between two northern leaders, Mulayam Singh Yadavand Laloo Prasad Yadav. The president of Congress, Sonia Gandhi, has workedto counter the influence of the parliamentary leader, Sharad Pawar. Congresswill bide its time before making a bid for power. Recent local elections havefailed to reveal any new voting patterns. The persistent stand-off with Pakistanhas continued, but neither India nor Pakistan is well prepared for a war.

Economic policy and the economy: The already poor perceptions aboutthe country’s outlook have been worsened by the nuclear tests, the impositionof sanctions and a disappointing budget. Criticism of the budget has forced thefinance minister to back-track on several proposals. The government has madeencouraging moves towards the privatisation of blue-chip companies, and onfinancial sector reform. The government’s foreign policies have sent mixedsignals to foreign investors. A surge in inflation has caused some alarm. GDPgrowth has slowed. The Ministry of Finance’s annual report has highlighted thepersistent constraints on the economy. Industrial growth statistics have beenrevised. Consumer spending power has spread. The stockmarket has suffered adownturn and the property market has crashed.

Agriculture and industry: The monsoon has arrived, which may help toease the supply conditions and benefit cash and plantation crops, but goodmonsoons have masked deeper structural problems in the sector. Informationtechnology has been given a push. The dispute between Maruti, the govern-ment and Suzuki has been resolved. The steel sector has faced a downturn.

Energy, infrastructure and telecommunications: Power projects havebeen hit by funding problems. The central government has approved privateparticipation in power transmission. The government’s policy on coal hasregressed. Lower oil prices have offered some relief. Cellular operators haveappealed for help despite growth in the market. British Telecom will proceedwith a regional hub project. Private broadcasting companies have been allowed toconstruct uplinking facilities. Road investors have been offered foreign-exchange guarantees.

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Foreign trade and payments: Exports have contracted, year on year, inApril-June owing to structural constraints and budget disincentives. Exportcredit rates have been reduced. The balance of payments has remained manage-able. The rupee has fallen further, which has some negative implications for theeconomy. A downgrade from the US credit-rating agency Moody’s has affectedIndian borrowers. Foreign portfolio investors have lost confidence in the Indianmarket. Foreign-exchange reserves have declined. A foreign-currency bond di-rected at non-resident Indians has been launched.

Nepal Outlook for 1998-99: Policymaking will remain stalled until after the generalelection, which is not expected until early 1999. The ruling NC’s alliance withthe communist splinter party, CPN-ML, will have drawbacks—the CPN-ML’sradical credentials could render it an embarrassing ally for the NC. Economicperformance will remain disappointing. Political extremism will flourish.

Review: The CPN-ML has joined the NC minority government. The NC hassurvived two parliamentary votes as a result of the alliance, but both the NCand the CPN-ML would like to avoid an early election and the prospect of a winfor the CPN-UML, the main communist party. The National Democratic Partyhas been sidelined. The Maoist rebel insurgency has gathered momentum,prompting a police operation. Foreign-donor fatigue has surfaced. The CPN-MLhas manipulated anti-India sentiment. The Gurkhas have continued to protestdespite a new offering from the UK government. The Nepali government hasannounced its budget for 1998/99, and more money has been earmarked foragriculture. VAT has remained controversial. GDP growth has been slow. Thetrade deficit has narrowed but the rupee has slipped and inflation is high.

Editor: Elisabeth PaulsonAll queries: Tel: (44.171) 830 1007 Fax: (44.171) 830 1023

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India

Political structure

Official name Republic of India

Form of state Federal republic, 26 states and six union territories

Head of state President, currently Kocheril Raman Narayanan, indirectly elected for five-year terms,by national and state legislatures

The executive Prime minister heads a Council of Ministers chosen from elected members ofparliament

National legislature Bicameral: upper house, Rajya Sabha, 250 members (238 indirectly elected by statesand union territories, 12 appointed by the president); lower house, Lok Sabha, 543members elected from single-member constituencies (79 seats reserved for ScheduledCastes, 40 for Scheduled Tribes) and two appointed by the president; the lower househas final authority over finance; elections to the Lok Sabha are held every five years

State legislatures Uni- or bicameral, elected members, state governor appointed by the president; a stateelection is held every five years

Legal system Based on 1950 constitution and English common law

National government Following a general election in February-March 1998, a Bharatiya Janata Party(BJP)-led coalition government assumed office on March 19th

National elections February-March 1998 (Lok Sabha); next election due by February-March 2003

Main political organisations 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;Dravida Munnetra Kazhagam (DMK)

Council of Ministers Prime minister Atal Behari Vajpayee (BJP)

Key ministers Chemicals & fertiliser Surjit Singh Barnala (Akali Dal)Civil aviation Anant Kumar (BJP)Commerce Ramakrishna Hegde (Lok Shakti)Defence George Fernandes (Samata)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 (Ind)Power Rangarajan Kumaramangalam (BJP)Railways Nitish Kumar (Samata)

Central bank governor Bimal Jalan

India 5


Economic structure

Latest available figures

Economic indicators 1993 1994 1995 1996 1997a

GDP at market pricesb (Rs bn) 8,098 9,537 11,190 12,770 14,070

GDP at market pricesb ($ bn) 258.1 303.7 334.5 360.1 378.6

Real GDP growthbc (%) 6.2 7.8 7.2 7.5 5.0d

Consumer price inflation (av; %) 6.4 10.2 10.3 8.9 7.2e

Population (m) 883.9 890.0 916.0 939.4 955.2e

Merchandise exports fob ($ m) 22,016 25,523 31,239 33,663 34,133

Merchandise imports fob ($ m) 24,108 29,673 37,957 43,125 45,123

Current-account balance ($ m) –1,876 –1,676 –5,561 –5,299 –6,056

Reserves excl gold ($ m) 10,199 19,698 17,922 20,170 24,688e

Total external debt ($ bn) 94.5 102.6 94.4 89.8 87.6

Debt-service ratio, paid (%) 27.3 28.7 29.1 25.9 24.8

Exchange rate (av; Rs:$) 30.49 31.37 32.43 35.43 36.31e

August 14th 1998 Rs43.115:$1

% of % ofOrigins of gross domestic product 1996/97 total Components of gross domestic product 1996/97 total

Manufacturing, construction & utilities 29.3 Private consumption 65.1

Agriculture, forestry, fishing & mining 27.8 Government consumption 9.8

Trade & hotels 14.6 Investmentf 25.8

Transport, storage & communications 12.4 Exports of goods & non-factor services 10.2

Real estate & finance 12.1 Imports of goods & non-factor services –10.9

Other services 3.7 GDP at market prices 100.0

GDP at factor cost 100.0

Principal exports 1996/97g $ bn Principal imports 1996/97g $ bn

Agriculture & allied products 6.8 Petroleum & petroleum products 10.1

Engineering goods 4.8 Capital goods 9.2

Gems & jewellery 4.7 Gems 3.0

Cotton yarns & fabric 3.8 Iron & steel 1.5

Garments 3.7 Fertiliser 0.9

Total incl others 33.1 Total incl others 38.5

Main destinations of exports 1996h % of total Main origins of imports 1996h % of total

US 17.0 US 9.1

Japan 7.3 Germany 8.4

Germany 7.0 UK 7.0

UK 6.6 Japan 6.6

Hong Kong 5.8 Belgium 5.7

UAE 4.8 Saudi Arabia 5.2

a EIU estimates. b Fiscal years beginning April 1st. c At factor cost. d Official estimate. e Actual. f Including change in stocks. g Reserve Bank of India,Annual Report 1996-97. h IMF, Direction of Trade Statistics.

6 India


Outlook for 1998-99

The government’s hold onpower remains fragile—

The multiparty coalition government, led by the Bharatiya Janata Party (BJP),could collapse at any time. The government won a confidence motion in Juneby a narrow 13 votes. But it has since lost some allies, reducing slightly itsnumber of supporters in the 545-member Lok Sabha (lower house).

Moreover, the commitment of other parties of the coalition to the governmentis not entirely solid. The government’s survival depends heavily on the supporton the 18 MPs of the All India Anna Dravida Munnetra Kazhagam (AIADMK),a Tamil party led by the mercurial Jayalalitha Jayaram. Her commitment to thegovernment, which has always been tenuous, has become nearly non-existentas it has become clear that the central government will not respond to herdemands for the toppling of the Dravida Munnetra Kazhagam (DMK), theparty state government of Tamil Nadu, which is led by her political rival,Muthuvel Karunanidhi. The commitment of various other members of thecoalition is also less than solid.

Sensing a potential opportunity, opposition groupings are lining up behind theIndian National Congress (Indira) party (which is better known Congress (I) orCongress) and demanding that it make a bid for power. These groups includethe so-called Left Front, comprising around 50 MPs, which is dominated by theCommunist Party of India (CPI) and the Communist Party of India Marxist (orCPI (M)); and the alliance between the leader of the Rashtriya Janata Dal (RJD)in Bihar, Laloo Prasad Yadav, and the leader of the Samajwadi Party, MulayamSingh Yadav, which includes 37 MPs.

—but it may be allowed areprieve—

The government is indeed vulnerable, but it may be able to remain in office fora year or two if it is able to manipulate some of the regional and smaller parties.For example, if the AIADMK were to break away from the coalition, the partywould probably split. However, its regional rival, the DMK, may fill its place inthe coalition. This would limit the loss of parliamentary support from 18 MPsto around 10 MPs. The coalition may also be boosted by MPs presently not inthe government: some opposition MPs, such as the former prime minister,Inder Kumar Gujral, have been hinting that they will offer guarded support toa BJP coalition.

—by a Congress preparedto remain in opposition

But the major factor determining the longevity of the BJP-led government isthe strategy of the Congress party. The Congress leadership—its president,Sonia Gandhi, and the leader of the parliamentary party, Sharad Pawar—hasno wish to inherit a government coalition dependent on such unreliable part-ners as Ms Jayaram. The party leadership also recognises that the BJP is stillgenerally popular and that another quick election—the third one in threeyears—is unlikely to produce a decisive outcome.

Moreover, Congress must attend to some internal housekeeping. Mrs Gandhiis in the process of consolidating her grip on the party, which may create aserious rift with Mr Pawar. There are serious doubts, even within Congress,whether a return to dynastic politics in the form of the ascendancy ofMrs Gandhi—the widow of the former prime minister, Rajiv Gandhi—is in the

India 7


interests of Congress, let alone India. Mrs Gandhi’s helpful intervention as aCongress campaigner in the last election—although polls dispute the extent ofher contribution to Congress’s electoral performance—does not necessarilyrender her elevation to the prime minister’s office an inevitability. As a result,the BJP and Congress find themselves in a rare position of agreement: the BJPwants more time in office to prove itself; Congress wants time in opposition toprepare for a decisive bid for power.

External politicalrelations will remain

sour—

Domestic political uncertainty is compounded by problems abroad, mostly ofthe government’s own making. It appears to have operated on a somewhat naivebelief that it could conduct nuclear tests and then, having asserted its nuclearstatus, reach a cool understanding with Pakistan and sign international nuclearnon-proliferation agreements as a fully fledged member of the nuclear club.

The government appears to have made several miscalculations. Regarding Pakistan,the prospect of a normalisation of relations is more remote than ever. Pakistancontinues to insist that a discussion about the disputed state of Kashmir must beon the agenda of any bilateral talks. A meeting in August between India’s primeminister, Atal Behari Vajpayee, and the Pakistani prime minister, Nawaz Sharif,bore no fruit. Crossborder infiltration and tension appears to be escalating andspreading. War with Pakistan is not likely, but cannot be ruled out completely.Moreover, the assumption that India would score a quick and easy victory in awar with Pakistan is belied by some alarming reports of obsolete and inadequateequipment (see The political scene). India is in no position to finance a large-scale upgrade or replenishment of its armed forces. In addition, its governmentministers appeared to think that they could deflect attention from the nuclearblasts by exaggerating the threat from China. As a result, relations with China,which although cool had begun to improve, have suffered a setback and India’salready thinly spread border forces will be stretched further.

The government also failed to anticipate or miscalculated the impact of eco-nomic sanctions resulting from the nuclear tests. Idle talk about “retaliating”against the US for imposing bilateral sanctions is giving way to a sober realis-ation that, while sanctions are not comprehensive, they will have a damagingeffect on the economy in the medium term.

—and the impact ofsanctions cannot be

completely discounted

Early estimates of the monetary cost of sanctions, in the form of lost, trade, aidand credit, have been scaled down. But sanctions will still affect India in severalways. Crucially, there will be a deferment or loss of direct aid and concessionalloans, from multilateral agencies (notably the World Bank) and bilateral do-nors (the US, Japan and Canada, among others). Not all aid is affected, withmost of the donors agreeing to continue provision of humanitarian relief andfunding for social projects. In addition, there is an enormous backlog of aidthat has already been approved but is waiting to be spent. But new projects willbe hit. Loss of export credit and guarantees, notably from the US Export-ImportBank (Eximbank), will, at the very least, delay and increase the cost of largeinfrastructure and foreign investment projects, notably private power plants.Among other effects, India will lose access to sensitive advanced technology inthe military, computing and telecommunications fields and there will be someloss of trade preferences.

8 India


These individual steps may not be as important as the impact of the sanctionson creditor and investor confidence. Sanctions were one factor contributing tothe downgrade in India’s sovereign debt rating on June 12th by the US credit-rating agency Moody’s Investors Service (see Foreign trade and payments),which has raised the cost of overseas capital. They also spurred a minor sell-offamong foreign institutional investors, which has driven down the rupee ex-change rate and trading on the stockmarkets. In addition, non-resident Indians,who remit billions in foreign currency to India each year, may delay repatriationof these funds until the mood improves.

GDP growth forecasts aremore bullish—

Although the political outlook is gloomy and uncertain, the economic outlookappears marginally more promising owing to a number of factors, most ofwhich the government cannot fairly claim much credit for. The monsoon hasbeen plentiful and promises better harvests. Weak oil prices will help to cush-ion any rise in corporate costs arising from higher interest rates or higher rupeeimport costs. There has been a modest recovery in corporate performance,following the rationalisation and restructuring of several large companies andconglomerates, and there are indications of increased investment activity.Moreover, the (perfectly genuine) revision to the statistical base suggests thatindustry is growing more strongly than originally anticipated and may havegreater growth momentum.

—boosted by higheragricultural growth

next year

The summer monsoon arrived two weeks early with none of the 35 meteoro-logical districts suffering “scarcity” or no rain by mid-July (only 7 districtsposted deficient rain). Although, at this stage in the crop year, predictions canbe misleading, initial indicators are positive, not merely for the main kharifcrop but for the winter rabi crop as well. After a poor crop year in 1997/98—when the sector contracted by 2%—the good monsoon should boost agricul-tural growth in 1998/99 to about 2% and, after the harvest, boost spending byfarmers as well.

India: forecast summarya

1996b 1997c 1998d 1999d

Real GDP at constant factor cost (% change) 7.5 5.0 5.8 6.2 Agriculture 7.9 –2.0 2.0 1.5 Industry 6.4 5.7 6.0 8.0 Services 8.1 8.9 7.7 7.3

Real GDP at constant market prices (% change) 6.0 4.7e 5.3 5.7 of which: private consumption 6.1 2.6e 6.3 6.4 public consumption 5.1 7.0e 11.0 9.0 gross fixed investment 6.5 5.0e 9.0 8.0 exports of goods & services 10.1 –1.0e –3.0 6.0 imports of goods & services 5.4 6.0e 4.0 9.0

Consumer price inflationf (av; %) 8.9 7.2b 10.5 9.3

Merchandise exports fobf ($ m) 33,663 34,133e 33,433 34,924

Merchandise imports fobf ($ m) 43,125 45,123e 44,815 47,611

Current-account balancef ($ m) –5,299 –6,056e –7,297 –7,598

Exchange rate (year-end; Rs:$)f 35.93 39.28b 45.05 48.77

a Fiscal years beginning April 1st unless otherwise indicated. b Actual. c Official estimates. d EIU forecasts. e EIU estimate. f Calendar years.

India 9


Industry also appears to be showing tentative signs of a modest upturn.Industrial surveys suggest that, despite the poor political environment, confi-dence levels are beginning to strengthen. In addition, investment financing bydomestic financial institutions is also rising, as is public investment, which willbegin to translate into slightly faster industrial growth in this financial year. Arevision to the base for the industrial production index from 1980/81 to1993/94 has given greater weight to rapidly growing “new” industries such assoftware, cars and white goods. According to the new index, industrial prod-uction grew by 5.4%, year on year, in April-June, up from 3.7% in the year-earlier period.

Industry is expected to grow only marginally faster in fiscal year 1998/99(beginning April 1st)—by 6%, up from 5.7% in 1997/98. However, the upwardrevision to the agriculture forecast is sufficient to boost our forecast for overallGDP growth (at factor cost) to 5.8%, up from 5% in 1997/98. In 1999/2000 aslightly faster rate of industrial growth—generated by a moderate pick-up indomestic investment—will drive GDP growth (at factor cost) up to 6.2%.

Government borrowingwill drive up interest

rates—

After a widely derided budget, which did little for the reputation of the financeminister, Yashwant Sinha, in particular, or for the government in general, themanagement of public finances is clearly deteriorating. A fairly permissive targetfor government borrowing was set by Mr Sinha, but the government was com-pelled to make further revenue concessions to get the budget through parlia-ment. Assuming some slippage from the budget targets, the central governmentborrowing requirement is expected to exceed 6% of GDP in 1998/99. States arealso expected to spend beyond their means, resulting in a combined public-sector borrowing requirement of over 10% of GDP for that year.

Although the banking system appears to have a reasonable level of liquidity atpresent—following nearly 20% growth of aggregate deposits in 1997/98 and arelaxation of reserve ratios—government funding is expected to crowd outriskier financing for industry and agriculture. This will result in upward pres-sure on interest rates this year; there is evidence that this is already occurringin the domestic bond market (five-year bond issues in July were floated at 25basis points higher than bond coupons issued two months earlier).

—while inflation will be agrowing concern

Inflation appeared to be well under control in calendar 1997; wholesale priceinflation averaged 5.3% and consumer price inflation 7.2%. But price pressureshave returned, bringing wholesale price inflation to 8.3%, year on year, in July,and consumer price inflation to 10.5%. Various factors lie behind the trend.The devaluation of the rupee has raised import costs, which were further in-creased by an additional surcharge on imports introduced in the 1998/99budget. Supply shortages for some foodstuffs, such as fresh fruit and vegetables,have produced large increases in the price of certain commodities. Some re-sponsibility also lies with the Reserve Bank of India (the central bank) and thegovernment which have allowed growth in money supply (measured by M3) ofover 17% per year, exceeding the target range of about 15%, and surpassing thegrowth of nominal GDP (12% in 1997/98). Supply shortages should ease laterthis year.

10 India


However, with little chance of a slowdown in the growth of the money supply,nor a firming of the exchange rate, the rate of inflation is forecast to remainhigh—above 10%—in 1998. The poor management of public finances does notbode well for money-supply targets in 1999. However, higher agriculturalgrowth in 1998/99 and a slower depreciation in the value of the rupee againstthe dollar will allow consumer price inflation to ease slightly, to around 9%,in 1999.

The trade gap will widen— The EIU’s forecast for import growth (in dollar terms) in calendar 1998 isbroadly unchanged. We expect that moderate growth in import volumes (ow-ing to subdued demand) and a sharp contraction in import prices (as a result ofa softening of world prices for oil, agricultural and industrial raw materials) willtranslate into only minimal growth in dollar-denominated imports.

However, despite very soft import prices, the trade deficit could widen furtherin calendar 1998 if export growth remains weak. In dollar terms, exports con-tracted by 7.5%, year on year, in January, 17% in May and 11.8% in June.(Annual growth reached only 1.4%, 6.4% and 2.2% in February, March andApril respectively.) Import growth has been similarly erratic, but average year-on-year growth has remained positive in the first six months of 1998.

However aberrant the May export data, it is clear that exports continue to beaffected by supply bottlenecks and by the economic downturn in Asia and theMiddle East, which has dampened demand and, in some cases, increased com-petition for some export items. The budget only exacerbated the situation byraising import barriers, as it skews the structure of incentives away from exportstowards domestic sales, discouraging increases in efficiency and compet-itiveness and raising import costs. Consequently, we now expect the tradedeficit (fob-fob) to widen, to $11.4bn, in calendar 1998.

India: the current accounta

($ bn unless otherwise indicated)

1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99b

Trade balancec –3.3 –1.7 –2.3 –4.9 –5.7 –6.8 –8.0

Trade balanced –5.4 –1.7 –9.1 –11.4 –14.3 –15.0 –16.5

Invisibles balance 1.9 2.9 5.7 5.5 10.6 9.7 8.5

Current-account deficit –3.5 –1.2 –3.4 –5.9 –3.7 –5.3 –8.0 % of GDP –1.4 –0.4 –1.1 –1.8 –1.0 –1.4 –2.0

a Fiscal years beginning April 1st. b Official forecasts. c Customs-based data sourced from the Ministry of Commerce. d Payments-bases estimatesfrom the Reserve Bank of India.

Sources: Reserve Bank of India; Ministry of Commerce (DGCIS).

The invisible account is also expected to deteriorate. Invisibles receipts grewstrongly between 1992/93 and 1996/97 (from $9.3bn to $21.3bn, according tonational statistics, which are calculated on a fiscal-year basis) mainly owing toa sharp rise in private transfers from expatriate Indians. But the confidence ofnon-resident Indians is likely to have been negatively affected by the events ofthe last few months, resulting in a slowdown in the growth of inward transfers(mainly workers’ remittances). We therefore expect the current-account deficitto widen from 1.6% of GDP in 1997 to around 2% of GDP in 1998, a reversal ofour forecast in the second quarter. A strengthening of import prices and

India 11


volumes in 1999 will lead to a widening of the trade deficit to $12.7bn, whichwill in turn cause the current-account deficit to expand further, to $7.6bn (or2% of GDP).

—and capital inflows willshrink

India is also likely to face a fall in capital inflows this year. Net foreign aidtotalled about $1.5bn in 1997/98. With many programmes now in abeyancebecause of the sanctions associated with India’s nuclear tests, net aid inflowscould become negative. Foreign commercial loans are likely to thin, partly as aresult of poor sentiment, exacerbated by the Moody’s downgrade which hasrendered Indian borrowing very expensive. Net foreign portfolio flows will alsofall sharply. Some committed foreign direct investors will remain involved inIndia, although an improvement on last year’s foreign direct investment in-flows of about $3.2bn may not materialise. One positive inflow will be anexpected $3.5bn in receipts from India Resurgent Bonds targeted at non-resident Indians (see Foreign trade and payments). Nevertheless, capital in-flows are likely to slump from the 1997 level. This would imply a fall in foreign-exchange reserves. However, with foreign-exchange reserves abundant at thebeginning of the financial year—$26bn, plus an additional $3bn if specialdrawing rights and gold are counted—the country could easily absorb even a$10bn drop in foreign-exchange reserves without jeopardising the balance-of-payments position.

One potential problem remains. Markets do not function in a slow, orderly wayin India; capital flight can easily spiral out of control, especially if non-residentIndians begin to withdraw foreign exchange from their foreign-exchange ac-counts. While the capital-account numbers may tally in 1998 and 1999, with-out a turnaround in the trade position and a restoration of confidence (leadingto increased, new capital inflows), the external payments position could be-come more precarious in later years.

The rupee will slide— The rupee has fallen sharply against the dollar so far this year—by 9.6% fromRs39.25:$1 at the beginning of the year to Rs43.42:$1 on August 20th. Weexpect that the government will allow the nominal exchange rate to slide fur-ther in 1998 and 1999 in order to maintain the competitiveness lost as a resultof persistent inflation differentials between India and its main trading partners,a view shared by most economists in India. Consequently, our forecast for therupee remains unchanged: we expect a nominal depreciation of about 13%between January and December 1998, finishing the year at a rate of Rs45:$1.

—but intervention cannotbe ruled out

India’s very thin foreign-exchange market, together with the persistent volatil-ity of other “emerging market” currencies, renders the currency vulnerable toperiods of instability within this broad trend. A sharp, short-term fall in thecurrency could prompt action by the Reserve Bank of India to smooth over anyvolatility. Nevertheless, a weakening of the nominal exchange rate is inevitablein the medium term. A marginal improvement in the performance of Indianexports in 1999 will ease demands on the central bank for a sharp depreciation,while a slight slowdown in inflation will slow the loss of competitiveness. Thuswe expect the rupee to depreciate more slowly, by about 8%, in 1999, resultingin a year-end rate of Rs48.8:$1.

12 India


Review

The political scene

The BJP’s hold on poweris fragile—

Six months ago, the leadership of the Bharatiya Janata Party (BJP) hoped thatthe population would warm to the idea of a BJP-led government, one whichcould provide a stable, honest leadership under a popular prime minister, AtalBehari Vajpayee. But the first few months in office have been a profound disap-pointment, and the government’s hold on power has become increasingly fragile.

—and it relies heavily onthe support offickle allies—

From the beginning, the government suffered from certain inherent weak-nesses stemming from precarious parliamentary arithmetic (2nd quarter 1998,page 14). To hold its government together, the BJP remains dependent on somevery fickle allies. The support for the BJP offered by the All India Anna DravidaMunnetra Kazhagam (AIADMK), led by Jayalalitha Jayaram (who is known asJayalalitha), is tenuous. Yet its 18 MPs are crucial to a government which wona confidence vote in May by a narrow 13 votes.

However, the BJP-led government is unwilling to concede Ms Jayaram’s maindemand: the ouster by the central government of the state government inTamil Nadu, which is led by her party’s political enemy, the Dravida MunnetraKazhagam (DMK), and its chief minister, Muthuvel Karunanidhi. Many timesin recent months the AIADMK has appeared on the verge of withdrawingsupport for the government as this demand (among many others) has not yetbeen met.

—who, however, may bereplaceable

An AIADMK withdrawal does not necessarily signal the immediate demise ofthe BJP government. However, Mr Karunanidhi is, in turn, developing a rel-ationship with the BJP, raising the possibility that should the AIADMK decideto act upon its threats and leave the government, a new Tamil alliance couldtake its place. This grouping could comprise the DMK’s six MPs along withanother six from the AIADMK, who might defect.

60

70

80

90

100

110

1990 91 92 93 94 95 96 97 98 99

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

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0

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6

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1995 96 97(b) 98(c) 99(c)

India (a)

Asia excl Japan

India: gross domestic product% change, year on year

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

India 13


The BJP-led governmenthas committed a series of

blunders—

Several major misjudgements and serious mismanagement have compoundedthe government’s weaknesses. The first mistake was not to anticipate the conse-quences of the nuclear tests, particularly their impact on the Indian economy(see Economic policy). In addition, the BJP leadership did not appreciate theimportance—to both external perceptions of the economy and domestic per-formance—of economic management. A lightweight finance minister, YashwantSinha, produced a damaging, badly judged budget for fiscal year 1998/99, whichdestroyed some of the credibility for the reform programme built up over thepreceding seven years by the former Congress finance minister, ManmohanSingh, and his successor, Palaniappan Chidambaram (United Front). Mr Singhand Mr Chidambaram operated under even greater political difficulties butnonetheless managed to maintain domestic financial stability, a momentumtowards reform and external confidence—all of which are presently being lost.

—has displayed periodiclapses in discipline—

Lastly, and most surprisingly, the legendary discipline of the BJP has beensubverted by deeper ideological splits and confusion. Some BJP ministers havesounded off in favour of protectionism, anti-foreign investment policies, orleaving the World Trade Organisation (WTO), as well as for fighting a war withPakistan, and were only reined in after the statements had done their damage.By comparison, the United Front coalition, which comprised free-marketliberals and unreconstructed communists, was a model of consistency andideological coherence.

—and is vulnerable to newopposition alliances

A further new development is the emergence of a common front against the BJP,led by the Indian National Congress (Indira) party (which is also known asCongress (I) or Congress). A central part of this development was the formationof a common movement, Rashtriya Loktantrik Morcha (RLM), between twoparty leaders from the Yadav (a caste of cow herders) who have dominated northIndian politics, Mulayam Singh Yadav and Laloo Prasad Yadav. Mulayam SinghYadav leads the socialist Samajwadi Party, which has 20 MPs in the Lok Sabha(lower house). Laloo Prasad Yadav, who split from the Janata Dal to form theRashtriya Janata Dal (RJD; 4th quarter 1997, page 15), which has 17 MPs, controlsthe Bihar government through an administration led by his wife, Rabri Devi.

The so-called Left Front—a grouping dominated by the two communist parties,the Communist Party of India (CPI) and the Communist Party of India Marxist(or CPI (M))—has swung behind this new alliance against the BJP despite itshistorical antipathy towards Congress. One factor behind the groupings’ calcu-lations is that the BJP’s ally, the Trinamool Congress, led by Mamata Bannerjee,is trying to destabilise the CPI (M) state government in West Bengal. The LeftFront commands around 50 MPs in the Lok Sabha.

However, this broad anti-BJP structure has several weaknesses. The individualparties have different levels of commitment to an early move against the BJP,with Congress leaning towards delaying any offensive that could bring downthe government. In addition, several of the leading figures in the formerUnited Front coalition—such as the former prime minister, Inder KumarGujral, and a former railway minister, Ram Vilas Paswan, who is in deep rivalrywith Laloo Prasad Yadav—are believed to have begun some form of negotiationwith the BJP.

14 India


But Congress—currentlyled by Mrs Gandhi—

The BJP government has been in power for about four months, but alreadythere is speculation about the next Congress government and who will lead it.This is all the more remarkable as its leader, Sonia Gandhi, is a political novicewho is barely coming to terms with the Hindi language, let alone the intricaciesof Indian politics.

The ascendancy of Mrs Gandhi was not an inevitability, as it was for herhusband, Rajiv Gandhi, and mother-in-law, Indira Gandhi. She has rivals orenemies, real or perceived, inside the party, notably the parliamentary partyleader, Sharad Pawar, who is the leading political force in Maharashtra. Tocounter his influence in recent months Mrs Gandhi has been trying to appointanti-Pawar officials to key positions, but this strategy risks alienating Mr Pawar,a powerful regional baron and proven vote-winner. Other strategies couldprove similarly fractious, such as her insistence on the overriding loyalty ofparty members to the Gandhi dynasty. She and her allies also seem committedto the dubious assumption that the dynasty (that is, she and her children) haselection-winning appeal, despite the mixed result of the last general election.Moreover, she assumes that coalition partners will prefer to work with herrather than with seasoned politicians, such as Mr Pawar. This is an unlikelyoutcome, especially if Mrs Gandhi decides to recreate the personalised, un-democratic, methods of party control favoured by her mother-in-law. IfMrs Gandhi were sufficiently self-effacing to step aside, a possible compromisefigure as the next Congress party prime minister would be the former financeminister, Manmohan Singh.

—is biding its time— Mrs Gandhi does echo the prevailing view within Congress that the partyshould wait for a year or two before making a bid for power and risk precipitat-ing a general election. The calculation is based on several assumptions.First, the BJP and some of its allies—such as the Samata Party (led by GeorgeFernandes), the Telegu Desam Party (TDP) and Shiv Sena—are still popular.Also, any Congress-led coalition formed in the existing Lok Sabha would de-pend not only on the fickle favours of the AIADMK leader, Ms Jayaram, but alsothe large egos of the two leaders of the RLM, and the ideological sensitivities ofthe two communist parties, the CPI and the CPI (M). Most Congress membersbelieve it is better to wait until the party can expect to win an outright majoritybefore forcing an early election. But it is precisely because the BJP and thevarious non-Congress components in an anti-BJP front want to avoid thisoutcome, that they may try to engineer an earlier crisis.

—as recent local electionsfail to reveal any new

voting shifts—

Recent by-elections at the state level have provided only mixed signals for themain political parties. The BJP did well in Uttar Pradesh but nowhere else.Congress polled well in Orissa but slipped in Maharashtra. The TDP, led by theAndra Pradesh chief minister, Chandrababu Naidu—whose 12 MPs give tacitsupport to the BJP government—also fared well in the elections. Despite theseconflicting signals, the elections served as a reminder that personal, regionaland caste factors have a greater influence on election results than nationalissues, such as nuclear policy.

India 15


—while the BJP’s cadreorganisation remains

strong

It would be too easy to write off the BJP at this stage just because it is stillstruggling to come to terms with the compromises that accompany govern-ment. It has deep roots, notably in its associated cadre organisation, theRashtriya Swayamsevak Sangh (RSS), to which the high-ranking BJP leaders—Mr Vajpayee and Lal Krishna Advani—belong (2nd quarter 1998, pages 16-17).Its 500,000 voluntary workers remain a powerful force—they represent the con-stituency that sought the nuclear tests. Opponents of the BJP underestimate theBJP’s cadre organisation at their peril. Opposition politicians also fear that ifeconomic and political stability remains elusive, the BJP will unleash a morepowerful political force than the nuclear bomb by stirring up religious andcultural tensions, perhaps centred around the Ayodhya temple issue.

The persistent stand-offwith Pakistan continues—

The Indian-Pakistani frontier in Kashmir remains one of the most dangerousborder areas. Three wars have been fought in Kashmir in the last 50 years.Fighting on the frontier has escalated in the period before and after the nucleartests in May. The nature and frequency of border hostilities fluctuates, but threemain areas of conflict persist. The first is shelling and firing across the so-calledline of control. An artillery duel in early August killed 90 people, most of whomwere civilians. The second is crossborder terrorism. The activities of Kashmirimilitants appear to be under greater control after successful counterinsurgencyactivities by the Indian government, but there has been growing penetration byrebels based in Pakistan and Afghani mercenaries. Recently, over 100 peoplewere killed in mainly Hindu areas located away from the frontier and raids havebeen reported outside Kashmir, in the north Indian state of Himachel Pradesh.Terrorist bomb attacks in New Delhi and other Indian cities are also blamed(sometimes unfairly) on the Pakistani government or Pakistan-based rebels.Third, there has been full-scale fighting in remote areas, such as the disputedSiachen glacier, although this has been geographically isolated from the rest ofthe frontier.

If no progress in improving relations between India and Pakistan was possibleduring the tenure of Mr Gujral, who was also an urbane, former foreign min-ister, it is unlikely that the situation will improve much under the Hindu-nationalist BJP. However, a BJP-led government can take greater risks in movingtowards the normalisation of relations. There may also be a willingness to con-cede Pakistan’s demand to include discussions about Kashmir in any bilateraltalks, although India will be uncompromising about other issues of substance.India is also discussing with the US government the possibility of India signingthe Comprehensive Nuclear Test Ban Treaty. However, Pakistan may find itdifficult to follow this lead, particularly given the furore among hardline Is-lamists over the US bombing of Sudan and Afghanistan and, consequently, thePakistani government’s reluctance to appear to be too co-operative with the US.

—but neither country isprepared for an actual war

This is a dispute in which a “cold war” is the more optimistic scenario. If thedispute between India and Pakistan were to escalate (and if nuclear optionswere not to be used), India, in theory, would have military superiority overPakistan. India has 980,000 troops to Pakistan’s 520,000; 3,314 battle tanks toPakistan’s 2,120; 777 combat aircraft to Pakistan’s 429; 25 destroyers or frigatesto Pakistan’s 11; and 17 submarines to Pakistan’s 9.

16 India


However, these statistics are grossly misleading. First, India’s forces arestretched over several internal insurgencies, notably in the north-east (2ndquarter 1998, page 20), and also have to be prepared to deter an attack fromChina which has military superiority over India in terms of numbers of soldiersand equipment. By building up China as an adversary to justify the nuclearexplosions, India has increased the risk of confrontation with China as well asPakistan—for example, the navy has to worry about the Andaman and Nicobarislands which India believes are potentially threatened by military forces fromboth Myanmar and China.

Second, and more serious, Indian forces are reported to be seriously under-equipped following a long period during which, in the interests of economicdevelopment, defence budgets have been held to about 2.5-3% of GDP. TheIndian Air Force has claimed that one-half of its fleet of MIG planes is tech-nically obsolete or approaching obsolescence. There has been a lengthy delay inthe delivery of new Sukhoi-30 planes, while procurement of light combat air-craft is also overdue. The Indian Air Force also complains that the communi-cations system on the frontier with Pakistan is only functioning at 20%capacity. Trainer aircraft are in short supply. The navy has been seeking, unsuc-cessfully, to procure a new aircraft carrier and there is a huge shortage of spareparts from the former Soviet Union. Overall, the navy is estimated by somedefence analysts to be functioning at half its capability. Meanwhile, the armysuffers from ageing tanks (Russian T-72s), a lack of spare parts for Bofors guns,deficiencies in electronic warfare equipment and old infantry weapons (which,like tanks, the government has been promising to replace for 15 years). India’seconomy in not in shape to finance an arms race but, then, neither is Pakistan’s.

Economic policy

The poor perceptionsabout the economic

outlook—

The Indian government’s decision to explode nuclear devices in May (2ndquarter 1998, page 19) was the catalyst for a heightening of existing, pessimis-tic perceptions about the country’s economic future. By triggering limited eco-nomic sanctions and highlighting the dangerous nature of the securityrelationship with Pakistan, the tests highlighted doubts about the country’sdirection—doubts that had already been sown by the drift in economic policyand by perceived political instability since the accession of the BJP-led govern-ment in March.

—are exacerbated by thenuclear tests and the

imposition of sanctions—

The direct impact of sanctions may prove to be less draconian than the $20bnestimate of lost aid and credit initially quoted by the Indian government.About $2bn-$3bn in lost direct aid and credit in fiscal year 1997/98 (beginningApril 1st) is now being cited as the likely result of sanctions, although this totalexcludes the potentially large, negative impact of sanctions on foreign investorconfidence. The main identified sanctions are as follows.

• Multilateral lending agencies: several World Bank loans—worth$750m and earmarked for projects including the national power grid, high-ways in Haryana and renewable energy—have been blocked, while a loan fromthe International Finance Corporation (IFC) has been postponed. Other WorldBank infrastructure projects, which involve loans worth $3.4bn, are potentially

India 17


at risk although aid for social and humanitarian purposes, worth $2bn, is notaffected. Other multilateral aid, notably from the Asian Development Bank(ADB), which has $1.3bn of loans planned for India for this financial year, is atrisk too (notably for railway development). There is, however, a large pipe-line—$18.5bn—of unutilised, multilateral aid still to be drawn down.

• Under US sanctions, certain US agencies must cease assistance earmarkedfor the Indian market. The US Eximbank has stopped issuing new approvals offinancing and guarantees for US exports to India, while the Overseas PrivateInvestment Corporation (OPIC) has frozen political risk insurance. The Exim-bank estimates that the sanctions will have an immediate effect on around$500m of US exports to India in pending transactions, and that an additional$3.5bn of exports could be affected in the longer term. The freeze on these fundscould affect financing of, among others, the Hughes-Ispat telecommunicationsservices project in Maharashtra, the Cogentrix power project in Mangalore, thesecond phase of Enron’s Dabhol power project, and Boeing aircraft investments.In some cases, the US, rather than India, will lose out—Enron has threatened toswitch its procurement to countries other than the US—but, nonetheless, Indiasuffers from delay.

• Several bilateral aid programmes are affected, notably those from the US(except for humanitarian aid and food), Japan (affecting in particular severalbillion dollars of funding for power projects), Germany, Sweden and Canada.

More worryingly for India, the lifting of sanctions may still be far off: eightyears after the crackdown on student protesters in Tiananmen Square in Bei-jing, some US sanctions are still applied to China. Although sanctions are likelyto be irritating rather than deeply damaging to the economy, they will donothing to help to persuade nervous foreign investors, especially Americans,that India is the place to send their capital and business.

—and a disappointingbudget—

The 1998/99 budget, introduced by the finance minister, Yashwant Sinha, onJune 1st, attracted widespread criticism. The main provisions of the budgetinclude the following.

• Customs duties: the tariff on imports was raised by 8% (later lowered to4%—see below) over and above the existing tariff, an existing special (5%) dutyand countervailing duty. There are various exemptions covering imports ofcoal, newsprint, crude oil and power. The emergent structure is highly com-plex, and includes 64 different rates and duties ranging from zero to 105%. Asa result of the tiering of import duties, the effective rate of protection of an 8%import surcharge is closer to 16%. Aside from distorting the incentive structure,the tariff charge was criticised for being inflationary.

• The fiscal deficit: the 1998/99 budget projects a fiscal deficit of 5.6% ofGDP, down from 6.1% of GDP in 1997/98, 5.2% in 1996/97 and 5.4% in1995/96. The actual deficit is likely to exceed the estimate, not least because thegovernment’s forecast is based on optimistic growth projections (6.5% in1998/99; we are forecasting growth of just 5.3%). The government has commit-ted itself to substantial increases in public spending and public investment.Defence spending is forecast to rise by 14%, public capital spending will rise by19%, while the allocation to infrastructure investment will expand by 35%.

18 India


• Privatisation: there are plans to press ahead with the divestment of stateassets (which, for the first time, is explicitly called “privatisation”). In thecurrent financial year, the government hopes to raise Rs50bn ($1.2bn) throughthe sale of holdings in the telecommunications carrier, Videsh Sanchar Nigam(VSNL), the main state oil company, Oil and Natural Gas Company (ONGC),and the Container Corporation (Concor).

• Insurance: the state-controlled insurance sector was opened to privateIndian—but not foreign—companies.

—prompting a hastyretreat by the finance

minister

The market reacted poorly to the budget; the exchange rate fell, as did the mainstockmarket indices. Faced with a barrage of criticism that the budget was simul-taneously protectionist and inflationary, Mr Sinha has since softened or re-versed several of the budget’s principal components. The main changes include:

• a cut in the customs surcharge from 8% to 4% at an estimated cost, in termsof lost revenue, of Rs3bn ($69.6m); exporters were also exempted from theduty;

• an increase in fertiliser prices, originally designed to reduce the subsidy billby Rs20bn, was abandoned;

• an increase in petrol duty was revised from 15% to 12%;

• a proposal to regulate state power entities (in an attempt to reduce the powersubsidy) was abandoned; and

• a 20% withholding tax on interest paid on overseas borrowing—whichwould have supplemented the increased borrowing costs arising from the im-position of sanctions—was withdrawn.

The changes were well received in political circles. But many of the concessionsinvolved a reduction in a source of new revenue, suggesting that the officialbudget deficit target may be raised to at least 5.8% of GDP (from 5.6% previously).

Plans to privatiseblue-chip companies are

encouraging—

The budget does reveal that the BJP administration is making a more deter-mined effort to privatise state-owned enterprises than its predecessor, theUnited Front. The sale of several blue-chip companies—such as the GasAuthority of India (GAIL), the Indian Oil Corporation (IOC) and VideshSanchar Nigam Ltd (VSNL)—is being prioritised. Modern Foods, India TourismDevelopment Corporation (ITDC), Bharat Aluminium Company (Balco),Kudermukh Iron Ore (KIOCL) and Bongaigaon Refineries (BRPL) are all beingconsidered for “strategic sale”, in which 50% or more of the equity will beoffered to private buyers. The National Aluminium Company (Nalco) has beencleared to sell 30% of its equity, while a 51% share of Indian Airlines is to besold over a period of three years, as is 60% of Air India. Unfortunately, thesuccess of such sell-offs depends on the sentiment in the overseas investormarket, which has been negatively affected by the regional political turmoiland by the Moody’s downgrade (see Foreign trade and payments).

The government is less clear about how it hopes to deal with state-owned,loss-making companies, which cannot be sold. Any decision-making on thefuture of these companies will involve such sensitive issues as closures and

India 19


redundancies. Ten enterprises accounted for one-half of the public-sector lossesin 1996/97; of these ten, most were involved in the production of fertiliser andcoal, two sectors that generate a high level of political sensitivity.

—as are some helpfulreforms for the financial

sector

The budget did include several reforms designed to improve the financial serv-ices sector, such as the opening of the insurance market to private companies.In addition, the budget provisions call for the strengthening of debt-recoverytribunals and the establishment of asset-reconstruction companies designed tohelp banks and insurance companies recover their loans—although, for bla-tantly populist reasons, farmers will be exempted. Banks will be pushed moreaggressively to issue equity in order to comply with capital-adequacy norms,but they will also be able to issue their own credit cards, bringing indigenousplastic money to India. The budget also includes a series of legal reforms aimedat helping India to cope with the era of electronic money, derivatives andcomputerised records.

But the government sendsmixed signals to foreign

investors—

The nationalistic ideology of the BJP renders many of its supporters deeplyhostile to foreign investment by multinational companies. However, prior tothe formation of its national coalition government, the BJP’s state-level experi-ence in government persuaded the party leadership that at least some foreigndirect investment (FDI) is in India’s interest and not necessarily at variancewith its ideology. Pre-election rhetoric directed against foreign consumer-goods manufacturers in India has been quietly forgotten. As we expected, tradepolicy bore the brunt of the BJP’s nationalistic tendencies (2nd quarter 1998,page 8). In fact, the treatment of foreign investment is alternatively encourag-ing, ambivalent or difficult, depending on the sector in question—suggestingthat foreign investment policy has changed little from that adopted by theprevious United Front government.

• The new government has given its approval for several wholly ownedforeign subsidiaries—including the Indonesian company Polysindo—toparticipate in power transmission, and for the involvement of a US company,Structural Dynamics, and Rebucs of the UK in software. More remarkably, it haslifted ownership restrictions on Perfetti, an Italian maker of chewing gum andtoffee, among others.

• The government has not closed down one of its favourite targets—foreigndrinks companies, such as Coca-Cola and PepsiCo—but it is enforcing theirexport obligations; in fact, Pepsi has been fined for not exporting enough. Awider investigation into Coca-Cola is being undertaken. Liquor companies,such as Seagram and United Distillers, are also finding it difficult to meetexport obligations.

• The insurance industry is to be opened to domestic but not foreignprivate investors. There were sketchy reports that foreigners would be allowedto acquire a substantial stake in the private insurance companies (up to 25% fordirect investment plus 40% for portfolio investment) but the cabinet is re-ported to be divided on the issue.

• The bar on foreign investment in civil aviation introduced by the pre-vious United Front government (3rd quarter 1997, page 25) has been tightened

20 India


by plugging various loopholes, through which foreigners were able to investindirectly through institutional funds. An Indian company, Tata, was so infu-riated by the government’s policy that it dropped its proposed new airline.

• Majority foreign ownership is being blocked in pharmaceuticals, as evi-denced by the treatment of an application by a Dutch company, DSM, to investin Alpha Drug India.

• In a continuation of the policy and sentiment of the previous United Frontgovernment, foreign investment in broadcasting and print media is beingtreated with hostility.

• Foreign investment in the automotive industry is being made easier. Thegovernment has allowed the Japanese carmaker Suzuki to increase its stake inits joint venture with Maruti, while the US carmaker Ford can now acquire a95% stake (up from 50%) in its joint venture with Mahindra. However, itrejected a request from a German car manufacturer, Daimler-Benz, to easeconditions for its 10% stake in the Tata company, Telco.

• A US company, Phelps Dodge, was allowed to start up a 100% foreign-ownedcopper project in Bihar, in July—the 44th mining project with foreign partici-pation approved since 1993.

• Agreement has been finalised on production-sharing agreements with oilexploration companies, several of which involve US companies.

• The government has further opened port development to foreign invest-ors by lifting the maximum foreign equity in ports to 74%.

• Foreign-financed power projects are now welcomed. In July a projectbetween the South Korean carmaker Daewoo and ABB Asea Brown Boveri wascleared, blurring the memory of the notorious treatment of the US companyEnron by the BJP-Shiv Sena government in Maharastra in 1996 (2nd quarter1996, page 26). However, the so-called fast-track power projects are still besetby serious financial and technical problems.

—which may explain flatFDI inflows

The government cleared FDI projects worth $375m in April, rising to $550m inMay and $1.43bn in June. However, actual flows were, as usual, substantiallyless at $270m in April, $215m in May and $380m in June. In the first threemonths of this year, foreign investment inflows totalled $700m. Inflows arelikely to be deterred by apprehension over the Indian political scene and thegovernment’s ambiguous approach to FDI. Therefore actual FDI inflows in1998 may only just surpass the $3bn total achieved in 1997.

The government is believed to be considering a new package of measures toincrease FDI inflows. This could include the opening-up of several sectors toforeign investment, such as the railway system; non-conventional energy;grain handling; parts of agriculture; dairy; floriculture and horticulture; thecoal sector; water resources; and biotechnology. The urban affairs minister,Ram Jethmalani, has already hinted that projects for housing will be open toforeign investors. Like the United Front government before it, the currentgovernment is also investigating ways to accelerate the investment approvalsprocess and may allow more sectors to be subject to “automatic” clearance.

India 21


The economy

A surge in inflation causesalarm—

The rate of inflation slowed to single figures in calendar 1997—wholesale priceinflation averaged 5.3% and consumer price inflation 7.2%—but is showingsigns of acceleration. In mid-July annual wholesale price inflation rose to 6.8%,while consumer price inflation rose to 10.5%. Anecdotal data suggest that theposition is worse than the headline inflation figures suggest, mainly becausecertain sensitive foodstuffs are awarded a low weighting in the inflation indi-ces. According to one survey of price changes in four of India’s biggest Indiancities, the prices of important food items have risen sharply.

Inflation has not emerged as a political issue for several years. However, thereturn of double-digit inflation has provided ample ammunition to govern-ment critics who accuse the BJP of economic mismanagement. For most Indianfamilies, large increases in food prices have a much greater impact on familyincome than more moderate increases in prices of manufactured goods, theconsumption of which can be deferred. Moreover, millions of families are onthe borderline of subsistence; an increase in the price of essential foods causesreal hardship for these families.

There are several reasons for the rise in the rate of inflation. A contraction inagricultural output in fiscal year 1997/98 (beginning April 1st), particularly forvegetables and oilseeds, has led to supply shortages—a source of inflationarypressure which previous governments have addressed by manipulating importlevels. The introduction in the 1998/99 budget of import surcharge and exciseduties has boosted the rupee cost of imports, as has the sharp depreciation ofthe rupee. The fast growth in the money supply—M3 has been rising at anannual rate of over 17% compared with the official target rate of 15-16%—mayhave also contributed to the rise in the rate of inflation.

—while a slowdown inGDP growth prompts

laments

According to the Central Statistical Office (CSO), GDP grew by 5.1% in1997/98, a revision of the initial GDP growth estimate of 5% (although, asabsolute numbers are not yet available, this has not yet been incorporated intothe EIU’s forecast). While elsewhere in Asia at the moment any positive growthwould be celebrated, in India this represents a slowdown on the growth rates ofprevious years—annual GDP growth at factor cost averaged about 7.5% in thelast three years—and is regarded as well below potential.

A government reporthighlights the constraints

on the economy—

The Ministry of Finance’s annual Economic Survey, published in June, is theIndian government’s well-regarded attempt at a critical appraisal of the eco-nomy’s strengths and weaknesses. The latest report outlines the government’sthree central concerns for the economy: infrastructure bottlenecks, which areconstraining industrial growth in particular; exports, which grew by 5.3% indollar terms in 1996/97 and a mere 2.6% in 1997/98; and fiscal imbalances,which widened to 6.1% of GDP in 1997/98, reversing three years of improve-ment. The report also highlighted three other serious concerns.

• Agriculture has suffered from falling levels of investment and, in two ofthe last three years, has seen a contraction in output despite good weatherconditions. (Agricultural output contracted by 2.6% in 1997/98 and averagedonly annual growth of 2% in the last four financial years.) As a majority of

0 20 40 60 80 100 120

Tomatoes

Mangoes

Bananas

Onions

Potatoes

Chicken

Milk

Cooking oil

Rice

Wheat

India: food prices, Jul 1998 % change, year on year

Source: Press reports.

22 India


Indians are farmers, problems in the agricultural sector have both political andeconomic consequences.

• Fiscal mismanagement by state governments is compounding the fiscalprofligacy of the central government. State governments find it politicallyeasier to subsidise services than to invest in infrastructure.

• Capital markets, although much more transparent and effective than inthe past, are not responding quickly to reforms. This is hindering the restruc-turing of Indian companies and is a potential stumbling-block to effectiveprivatisation.

—which are echoed by theWorld Bank

The World Bank’s annual status report on India, the 1998 Macro EconomicUpdate, praises the country for achieving a growth rate of 5% in 1997/98despite the economic downturn in the rest of Asia. But it argues even moreemphatically than the Indian government’s Economic Survey that there aredeepening problems, most notably the deteriorating fiscal account. (The com-posite fiscal deficit of the central and state governments may exceed 10% ofGDP in 1998/99.) The World Bank is also concerned that the current account,which has not posed a problem for the economy since the 1991 crisis, couldbegin to do so, especially if capital inflows are deterred or frozen as a result ofthe imposition of sanctions.

A statistical revision— As has been the case in past years, GDP figures for recent years have again beenrevised in the 1997/98 Economic Survey. Critics suspect this “growth creep” tobe politically driven. However, in this case, adjustment works to the advantageof no party in particular and there are solid technical reasons for revisingweights and data.

—twists the picture ofindustrial stagnation

The early official figures for 1997/98 suggested a poor performance by theindustrial sector, with only 4.2% annual growth. But a change in the base yearfor the industrial growth index, from 1980/81 to 1993/94, suggests that growthmay have reached 6.6%. (The new weighting better reflects the composition ofindustry: software, white goods and cars had a negligible weight in the oldindustrial index.) On the same revised basis, the provisional figure for indus-trial growth in April, year on year, was 6.3%, although this rate slumped to4.5%, year on year, in May. In that month, mining recorded zero growth, whileseveral other subsectors performed poorly, including consumer goods (3.1%)and capital goods (3.6%). However, in the same month, production of inter-mediate goods grew by 7.8%, and electricity by 9.1%.

Given these conflicting estimates, it is difficult to discern an underlying growthtrend. The Confederation of Indian Industry and the Industrial DevelopmentBank of India believe that industry is recovering. Evidence to support this viewis provided by the gradual pick-up in sanctioned and disbursed loans in1998/99. But the performance of the industrial sector so far in 1998/99 is veryuneven, with a slump in production for commercial vehicles, machine tools,vehicle components, pulp and paper and diesel engines, but with stronggrowth in the production of cars, cement, televisions and other consumerelectronics, white goods, software and computers.

10

11

12

13

14

15

16

17

Jul . . Oct . . Jan . . Apr . .

Non-food creditScheduled commercial bank creditBank credit to the commercial sector

India: loan growth% change, year on year

Source: CMIE.

1997199719971997199719971997199719971997199719971997199719971997199719971997 981997 98981997 981997 98981997 981997 981997 981997 981997 981997 981997 981997 981997 981997 9819971997199719971997 98

India 23


Consumer power isspreading—

A recent survey shows that the ownership of consumer durables among theurban population is spreading. Even four years ago, over 40% of all urbanhouseholds had televisions or videos—rising to almost 65% among house-holds in the Punjab—and about 12% of households had washing machines ormotorcycles/scooters.

India: ownership of consumer goods, 1994/95(% of urban households)

Motorcycles/ Washing Televisions/scooters machines videos

Andhra Pradesh 10 7 37

Bihar 8 4 25

Gujarat 20 16 46

Haryana 12 29 56

Kerala 7 12 28

Maharashtra 11 19 51

Punjab 18 34 64

Tamil Nadu 8 5 30

Uttar Pradesh 10 8 39

West Bengal 4 12 39

All India 12 12 41Source: National Sample Survey Organisation..

Projections, based on recent trends, suggest that the number of householdsconsidered “very rich”, defined as those with an annual income of overRs215,000 (about $6,850), will increase from 1m in 1994 to 6.2m by 2006. The“consuming classes”, households with annual incomes of Rs45,000-215,000,will rise from 29m to 91m over the same period; less than half of the total willreside in cities. Meanwhile, the number of Indian households in the “climbers’group”, those with an annual income of Rs22,000-45,000, will rise from 48m to74m (of which 10.7m will reside in urban areas). Together, these three groupsconstitute what is sometimes called the Indian “middle class”; based on theseprojections, their combined population would rise from 78m households (outof 161m), to over 171m (out of 199m) by 2006. However, marketing analystsnow distinguish between those in the “consuming classes”, who are increas-ingly concerned with premium brands and personalised consumption, andthose who simply own consumer goods.

—but businesses aresqueezed

A recent survey of the business results of 1,041 leading companies for 1997/98shows that while sales declined (in real terms) last year, profits have grownsolidly. Sales rose by 8.3% in 1997/98—which implies flat growth in realterms—after rising by 15.9% in 1996/97 and 22.3% in 1995/96. But grossprofits rose by 13.3%, compared with 4.7% growth in 1996/97. Net profits grewby 14.8%, following a 3.1% contraction in 1996/97. These results suggest thatthe business sector is indeed achieving improved performance by cutting costs,financial restructuring and improved productivity, as well as lower rates of tax.

The stockmarket suffers adownturn—

The stockmarkets have taken a beating from bearish investors since the an-nouncement of the 1998/99 budget. In the first 14 days after the budget an-nouncement, the Bombay Stock Exchange 30-share Sensitive Index (Sensex)

24 India


fell from 3,642 on June 1st to 3,347 on June 14th. This drop in the indexreflected both the market’s negative judgment on the budget as well as thegrowing awareness on the part of foreign institutional investors of the realimpact of sanctions on the economy as well as the effect of the falling value ofthe rupee (which erodes gains for dollar-based investors). After a brief upturn inlate June and early July, which saw the index rise to almost 3,500, the Sensexresumed its fall, reaching 2,950 on August 24th.

—and the propertymarket crashes

Over the last three years, commercial and residential property prices in Indiancities have fallen sharply. Prime commercial property in Mumbai has lost 50%of its value during this period, while prices in comparable locations in NewDelhi and Bangalore have fallen by 25% and 30% respectively. The fall inresidential property prices has been less dramatic, however.

Several contributing factors account for the fall in property prices. The generalslowdown in investment and industrial growth has curbed demand for prop-erty. Many corporate restructuring exercises have required a trimming, ratherthan an acquisition, of corporate assets. In addition, sky-high urban pricesencouraged many to relocate to the suburbs. Planned government moves todecontrol rents and restrictions on land use and ownership will help the pro-cess. While this will not help property speculators, it is good news for urbanmiddle-class households looking to buy a home.

Agriculture

The monsoon arrivesearly again—

The summer monsoon arrived two weeks early for the 11th successive year.Nation-wide droughts are now becoming a distant memory (although areas ofIndia still suffer even in a good year). Not one of the 35 meteorological districtssuffered “scarcity” or no rain by mid-July; seven districts had insufficient rain(the lowest number since 1994); 17 districts recorded normal rainfall; and 11had “excess” rain (the largest number since 1994). Most agricultural areas—with the exception of the Bihar plateau, Orissa, Tamil Nadu and some of thecentral Deccan area—will have received sufficient rainfall by the time of themain kharif harvest.

Some government ministers are touting the possibility of record rice andfoodgrain production; the rice crop could exceed the record harvest, of 83.5mtonnes, recorded in crop year 1997/98 and foodgrain production could top the199m tonnes produced in 1996/97. (The 1997/98 foodgrain harvest was 194mtonnes.) At this stage in the crop year, it is difficult to attempt precise predic-tions but the good monsoon bodes well for both the kharif crop as well as thewinter rabi crop, which depends on good groundwater conditions.

—and may ease the supplyposition—

The prospect of a good harvest should soften prices. Rice prices rose by 10%between the end of March and the end of June, while wheat prices also rose by12% in June alone, on the expectation of scarcity. The rice stock of 13m tonnesat the end of 1997/98—it has been roughly stable at this comfortable level forthree years—will be boosted by the good monsoon. The wheat stock is seen asmore precarious, measuring 5m tonnes at the end of 1997/98, despite importsof 2m tonnes over the two previous years. Another 1.5m tonnes of wheat

India 25


imports have already been contracted from Australia, and, with good crops inprospect, the stock (and price) position should ease. On June 1st there werestocks of 28.6m tonnes (12.7m tonnes of rice and 15.9m tonnes of wheat)following procurement from the winter crop (mainly wheat), which is wellabove the level deemed prudent.

—and benefit cash crops— Most cash crops will also benefit from the good rainfall. Industry sources ex-pect sugarcane production to rise from 260m tonnes in 1997/98 to 267mtonnes, and possibly more, in the 1998/99 crop year (October-September).Production of white sugar could rise from 13m tonnes in 1997/98 to 15m-16mtonnes. Despite this improved outlook and comfortable stocks, the govern-ment has ordered 700,000 tonnes of imported sugar at a cost of $210m.

Preliminary estimates suggest that oilseed production, which has stagnated ataround 25m tonnes for the past three years, could also improve. However, thisis unlikely to dampen demand for oil imports, which rose to record levels(1.75m tonnes) in 1997/98, as a result of growing demand outstripping supply.

An increase in the cotton crop is expected in 1998/99 although the cotton-growing areas of Maharastra did not receive the rainfall that spread across mostof India. Early projections suggest a rise in production from 11.5m bales in1997/98 to 13m bales in 1998/99, despite a fall in acreage. However, juteproduction is predicted to fall from 11.5m bales in 1997/98 (the harvest yearfor jute and mesta is July-June) to 10m bales in 1998/99.

—and plantation crops— According to the latest estimates by the National Tea Board, tea productionmay reach 860m kg in fiscal year 1998/99 (beginning April 1st), compared with825m kg in 1997/98 and 776m kg in 1996/97. Following last year’s bumper teacrop, there is now a large surplus of tea for export, given that domestic teaconsumption is projected at only 650m kg in 1998/99. Exports could rise from171m kg in 1997/98 to well over 200m kg in 1998/99.

The outlook for coffee is less rosy, with industry sources predicting a contrac-tion in production from a record 4m 60-kg bags in 1997/98 (although thisfigure may have been exaggerated and could be as low as 3.6m bags) to 3.84mbags for 1998/99.

—although good rainsmask deeper structural

problems

The apparently endless series of average or better monsoons has helped toconceal some worrying trends in this sector. Since Indians have not sufferedextreme drought or hunger (except in pockets of the country), and food stockshave remained broadly adequate, there is a growing perception that all is well.However, this may not be the case. Since the beginning of the 1990s annualagricultural growth has averaged about 2.3% and foodgrain production 1.7%,which is less than half the average annual rate achieved in the same period inthe 1980s when the impact of the “green revolution” in agriculture practices wasstrongly felt. However, as 60% of the cropped area is dependent on rain, eventhis modest performance has depended to a degree on luck.

Moreover, the average growth rate conceals large areas of rural misery. Manysmall farmers, some of whom are hopelessly in debt on unviable farms anddependent on a combination of loan sharks and weather for survival, succumb

26 India


to premature death, beggary, or—in a large area of central India—suicide. Fastpopulation growth and the subdivision of land have shrunk the average landholding to only 1.6 ha. Except where irrigation can provide the basis for multi-ple cropping and scientific farming—on 37% of the cultivable area—the law ofdiminishing returns applies. Fortunately, the government is beginning to focuson the need for some policy initiatives to stimulate agriculture: by liftingbarriers to movements of produce; liberalising exports; promoting minor irriga-tion schemes in rain-fed areas; or legalising land-lease arrangements.

Industry

Information technology ispushed to the fore—

The government is trying to launch a strategy to make India a “software super-power” and has assigned a task force to draft a National Infomatics Policy. Thegovernment’s strategy involves improving the information infrastructure fortelecommunications, the railways and power grid; rapidly expanding Internetuse; encouraging the spread of personal computers; and promoting softwareexports. One specific initiative being considered is to allow 100%-foreigninvestments in software development with automatic investment approval;currently, only those investments with up to 51% foreign ownership are eligi-ble for automatic approval. The business sector seems to share the govern-ment’s enthusiasm: a US software company, Oracle, is to invest $40m in India.India’s own software industry is booming, with sales growth of 58% in fiscalyear 1997/98 (to over Rs100bn, or about $2.8bn), of which Rs63bn is exports($1.75bn).

—while Maruti, thegovernment and Suzuki

are reconciled

The long-running dispute between the Japanese carmaker Suzuki and its Indianjoint-venture partner Maruti has been amicably resolved (4th quarter 1997,page 20): an improbable achievement for a government thought to be muchmore nationalistic than its predecessor, which was unable to find a compro-mise. Under the agreement, the Indian nominee for managing director,R Bhaskarundi, will be allowed to continue in office until the end of 1999 (not2002 as originally demanded), at which time the Japanese nominee, JagdishKhattar, will assume the post.

The industry minister, Sikander Bakht, made some large concessions to theJapanese company. In return, Suzuki has withdrawn its appeal to the Inter-national Council for Arbitration and will speed up technology transfer. Thegovernment’s decision may have been driven by the realisation that a projectwhich provides over 80% of cars made in India could not be allowed to failbecause of an internal power struggle. Maruti needs commercial capital andSuzuki expertise to modernise its 15-year-old plant in order to fend off compet-ition in the economy car segment (from Daewoo, Hyundai and Tata) and fromits mid-sized competitors (Daewoo, Ford, Honda and General Motors). Themost recent results reflect the underlying strength of Maruti’s position: in1997/98 net profits rose by 28%, year on year, as a result of a 6.3% increase inturnover, and a 7.7% increase in sales volume (to 326,840 cars) in a marketwhich is growing by 4% a year.

India 27


The government relaxesits stance on swadeshi

(self-reliance)—

The Suzuki-Maruti agreement is not the only case in the automotive industrywhere the government has not resisted protectionist pressures. Approval hasbeen given to the US carmaker Ford to raise its equity share in the joint venturewith Mahindra from 50% to 95%. (This concession was awarded at a time whenother US companies were leaving India as a result of sanctions.) The additionalRs17bn investment by Ford will finance a 100,000 unit/year plant for makingFiestas in Chennai (Madras). The government is also considering a relaxationof its policy that requires a high proportion of locally produced parts.

—but there are toughertimes ahead for steel

In fiscal year 1997/98 steel production stagnated: finished steel output in-creased by only 2%, from 22.7m tonnes in 1996/97 to 23.1m tonnes, whileconsumption rose from 22.1m tonnes to 22.9m tonnes. In the short term,Indian producers have benefited from higher import duties that have helpedthem to raise their prices (and profit margins). But trade protection is hardly along-term solution for an industry that has become a net exporter. If demanddoes not pick up and profits remain depressed, the ambitious new entrants tothe industry—such as Ispat, Jindal and Essar which have borrowed heavily,often in dollars, to finance their expansion—may face financial difficulty.

Energy, infrastructure and telecommunications

Financing power projectsare affected by sanctions—

Private power projects in India, in addition to the more long-standing impedi-ments to their development, have been hit by funding problems. The impos-ition of sanctions by the US has raised the cost of capital raised overseas, as hasthe downgrade of the country’s rating by Moody’s Investors Service, a UScredit-rating agency. Moreover, the sharp devaluation of the rupee has raisedthe cost of projects financed with foreign loans, threatening their viability.

The 1000-mw Cogentrix project in Mangalore relies on a US Eximbank loan of$350m to cover about 25% of its capital cost. The project’s promoters areconsidering switching their supply order to a UK company using British exportcredit. Several other project promoters——including those for the 250-mwsponsored Neyveli project, the 500-mw Ib Valley project, the 550-mw powerproject at Tuticorin and the Guna project in Madhya Pradesh—will also beforced to switch to non-US suppliers and export creditors in order for projectsto proceed. Meanwhile, as a result of sanctions, a $450m multilateral loan tothe PowerGrid Corporation is in jeopardy.

Given the continued problems facing private power projects, the central govern-ment has moved quickly to provide a counter-guarantee for a $1.4bn, 1,084-mwproject in Maharastra involving Alsthorn (Alcatel), GEC of the UK, EDF ofFrance and an Indian conglomerate, Ispat. Following the counter-guarantee, thestate electricity board has placed a purchase order.

—although some privatecompanies are managing

The US company AES, possibly one of the largest independent power com-panies, has been involved in a long-term bid for an independent power projectin Ib Valley, in Orissa. It is now taking a more direct route by buying a 49%stake in the Orissa Generation Corporation following a round of competitivebids for its privatisation. The stake in the corporation will give AES access to thecapacity of 80 plants—to which the Ib Valley plant will be added.

28 India


Private participation inpower transmission is

approved—

Private companies can now acquire power lines, subject to competitive bid-ding, as a result of recent legislation passed by India’s parliament that allowsprivate involvement in power transmission. The legislation has been modifiedto remove guaranteed rates of return. However, loss-making state electricityboards (SEBs)—which currently control 60% of transmission and 97% of dis-tribution, and make massive losses—will continue to distort the market. SEBsstill set tariffs at subsidised rates, which will undermine the commercial func-tioning of this sector. Until the SEBs themselves are privatised and operatecommercially—subject to regulation—power transmission may remain woe-fully inadequate.

—although things aremoving faster at the state

level—

As with other areas of reform, some progressive steps in energy policy are beingtaken at the state level. Orissa is planning to privatise its entire distributionnetwork and, in the first stage of prequalification, has shortlisted 12 consortiaincluding several large, multinational companies (including AES, EDF, Enronand Hydro Quebec) as well as two local companies, Reliance and Tata. Maharashtrais floating a joint-venture company for suburban areas (New Mumbai) and NewDelhi is seeking private bids for its distribution system. Privatisation of thedistribution system in Rajasthan and Andhra Pradesh may be delayed by thedeferral of loans from the World Bank. The partial privatisation of distributionsystems has occurred in several states, for example in Uttar Pradesh and Gujarat.

—but the governmentretreats on coal

An attempt to sell equity in three of Coal India’s profit-making subsidiaries hasbeen abandoned. The costs of the delay will have serious implications. In thenext two years, the gap between estimated coal demand and projected coalproduction is expected to widen to about 20m tonnes. In 1997/98 coal prod-uction totalled 296m tonnes while coal demand was 308m tonnes; India im-ported 11m tonnes of coal, although coal stocks of 42m tonnes are adequate.Moreover, several power projects were held up because of delays in clearingcoal supply agreements (even though 20 were cleared in July).

Lower oil prices offer relief Fortunately for India, a period of stagnation for domestic oil production andtherefore greater import demand has coincided with a period of weak inter-national prices. The government projects that crude oil imports will rise to 39mtonnes in 1998/99 (with flat domestic production of 34m tonnes) and productimports to 22.5m tonnes. Despite increased import volumes, the collapse of oilprices to $11/barrel may help to reduce the import bill from an initiallyprojected $9bn to $7.5bn in 1998/99, which is very close to the 1997/98 oilimport bill.

Cellular operators appealfor financial relief—

The multinational telecommunications operators, which rushed into India tomake money from the perceived growing appetite for mobile telephones, arenow experiencing financial difficulties. They have appealed to the govern-ment, with the backing of the chief minister of Andhra Pradesh, ChandrababuNaidu, for a two-year moratorium on licence fees, an extended licence period(from 10 years to 20 years) and a special duty concession on handsets.

—despite the growth ofthe market

The market for mobile telephones did indeed materialise. Subscribers arehigher than predicted: in February there were 556,000 subscribers in the big

India 29


cities and 323,000 in the states. But their usage is about half of estimated levels.Moreover, many of the foreign operators paid too much to Indian promoters.Licences were generally won with inflated bids, to the extent that seriousbidders, such as France Telecom, Deutsche Telekom and Bell Atlantic, wereoutbid. Only one of the eight operators in the big cities—a group includingBritish Telecommunications (BT) that is operating in New Delhi—is making aprofit. Appeals from loss-making companies for charity are likely to be treatedwithout sympathy. However, were large numbers of operators to default ontheir licence fees or to close down, this would send unhelpful signals to poten-tial operators in basic telecommunications.

BT is left with a regionalhub project—

BT is to proceed with a $500m international hub project in partnership withVidesh Sanchar Nigam Ltd (VSNL) after the withdrawal of two other consortia—Global 1 (which includes Deutsche Telekom, France Telecom and Sprint) andCable and Wireless. The project involves the establishment of a substantial huband terrestrial links for routing regional telecommunications traffic throughIndia. The pairing between BT and VSNL was already envisaged two years ago,but VSNL was then required to consider other partners in a competitive bid-ding process. However, the two other groups withdrew because of the govern-ment’s insistence on the use of the department of telecommunication’sexisting network for long-distance services.

—and uplinking is nowallowed

In a small, but potentially important concession, private broadcasting com-panies operating in India will be allowed to install uplinking facilities. Atpresent, in order to preserve a state monopoly, television news broadcastersmust establish uplinking facilities to satellites from Singapore, Hong Kong orBangkok, which is a costly and logistically complex procedure.

Road investors are luredwith foreign-exchange

guarantees

The surface transport ministry has put forward a proposal to give exchange-ratecover to foreign companies investing in roadbuilding. The proposal was madein response to growing frustration at the lack of foreign interest in this sector,which is now compounded by the imposition of sanctions and the weakness ofthe rupee. However, such a proposal would saddle the government with poten-tially large and uncertain contingent liabilities and does not address the realdeterrent to investment in this sector: the lack of clarity in the toll-road pay-ment mechanism. Paradoxically, strong protests prompted the government todrop plans to introduce a 5% service tax on road haulage; the tax would haveprovided Rs50bn ($1.2bn) a year for road development.

Foreign trade and payments

Exports fall— Preliminary data suggest that exports (in dollar terms, year on year) contractedby 17% in May and 11.8% in June, after recording a mere 2.2% annual growthin April. Data for one month can be misleading; for example, May and Juneexport data could reflect the impact of cyclone damage on the large port atKandla; the figures are also consistent with the recent poor performance of theexport sector and reinforces the prevailing pessimism. Exports rose by under2% in dollar terms in fiscal year 1997/98 (beginning April 1st). In five of the lastsix months of the financial year, exports declined in value on the year-earlier

30 India


period. There are exceptions to the poor trend—software exports grew by 50%year on year in the first quarter of 1998/99—and the outlook for engineeringgoods, pharmaceuticals and jewellery is improving. But weak internationalprices are hurting commodity exports, and textiles and garments have beenaffected by increased competition from exporters in East and South-east Asia aswell as by trade barriers.

Exports also suffer from broader structural constraints and economic disincen-tives. India’s economic policies have, historically, been inward-looking.Despite the liberalising reforms of this decade, the structure of incentives is stillskewed towards import substitution rather than export promotion. This hasbeen made worse by the introduction of a government with an unthinkingcommitment to swadeshi (self-reliance), a protectionist budget and a (naive)belief that India can cope with international competition by evading it.

—pummelled by thebudget—

It is difficult to overestimate the damaging impact on exporters caused by thefinance minister’s decision to introduce an 8% levy on imports (with a fewarbitrary exceptions) in the 1998/99 budget. The government did not at thetime appreciate that the effective increase in tariffs was nearly double the 8%rate. Neither had the government appreciated that the levy would not onlyskew the structure of incentives away from exports—which were alreadystruggling—towards the home market but would also hit exporters directly byraising the cost of imports that are subject to duties. Companies operatingunder various export incentive schemes—such as the export promotion capitalgoods scheme (EPCG), advanced import licences, duty entitlement pass-book,export-oriented units and export-processing zones—would also be adverselyaffected since the government declared that the duty would not be lifted forbeneficiaries of these schemes. Under pressure from exporters, the levy was cutfrom 8% to 4% but still remains a costly irritant.

—but the central bankaims to lend a hand

Exporters were encouraged by a suggestion in June by the Reserve Bank of India(RBI, the central bank) that export credit rates be cut from 11% to 6.5% for allcredit directed to incremental exports (over the base-year level of exports in1997-98). However, the proposal was withdrawn, after consultation with ex-porters. In addition, the commerce minister, Ramakrishna Hegde, publiclyridiculed the concession as “eyewash” in a nation-wide interview in which hecanvassed the idea of a much more unified “one-stop shop” approach to exportincentives and promotion. Instead, in August the RBI lowered the export creditrefinance rate by 2 percentage points to 7% (2 percentage points below thebank rate) compared with the previous 9%.

The BJP president calls forIndia’s exit from the WTO

One of the BJP’s influential backroom figures, the party president, K Thakre, haspublicly called for India to leave the World Trade Organisation (WTO). Thisstatement is wholly contrary to the government’s original commitments tohonour WTO obligations on import liberalisation—which was already renderedquestionable following the introduction of a new import tax in the budget—andto introduce patent laws compatible with global WTO standards. The govern-ment has no intention of leaving the WTO and has confirmed its intention toaccept international disciplines in patent law. But the contribution of the BJP

India 31


radical fringe to the debate does little to help the government’s credibility, nordoes it reflect well on the BJP’s much-vaunted internal discipline.

The trade deficit widens— The government’s recently released estimates for the merchandise trade gap in1997/98 show a widening of the trade deficit to $6.8bn from $5.8bn in1996/97, based on customs data. (The RBI publishes a different set of tradestatistics, based on payments data, which record a rise in the trade deficit to$15bn from $14.3bn in 1996/97.) Our estimates, which are based on a calendaryear, also show a rise, to nearly $11m, in 1997.

—but the balance ofpayments remains

manageable, for now

However, India’s external position remains comfortable, with a modestcurrent-account deficit, rising (until recently) levels of foreign-exchange re-serves and improving debt-service ratios. But this apparently solid positionrelies to some extent on India’s ability to retain the large capital inflows thathave in the past been subject to a loss of confidence.

The estimates for the trade account vary widely, even among official Indiansources. There is a massive disparity between the statistics of the DirectorateGeneral of Commercial Intelligence and Statisticians (DGCIS), whose monthlydata on volumes and values traded and declared to customs is the standardsource for trade data, and the RBI, which tracks actual payments made. More-over, the DGCIS does not include in its trade estimates gold and silver importsbrought in by Indians returning from abroad, as well as unrecorded trans-actions (such as those of a military nature). However, it is the large stock ofnon-resident Indian foreign-currency deposits and foreign institutional invest-ments, which could be liquidated in a panic, that pose the greatest potentialrisk to the balance of payments.

India: balance of paymentsa

($ bn unless otherwise indicated)

1994/95 1995/96 1996/97 1997/98

Merchandise exports 26.30 31.84 33.50 34.02

Merchandise imports –28.60 –36.73 –39.17 –40.83

Trade balanceb –2.30 –4.89 –5.67 –6.81

Trade balancec –9.05 –11.36 –14.30 –15.00

Net invisibles 5.68 5.46 10.64 9.70

Current-account balance –3.37 –5.90 –3.66 –5.30 (% of GDP) –1.1 –1.8 –1.0 –1.4

Foreign aid (net) 1.53 0.88 1.11 1.50

Commercial borrowing (net) 1.03 1.28 1.01 1.00

NRI deposits (net) 0.17 1.10 3.54 1.14

Foreign direct investment (net) 1.23 1.94 2.52 3.20

Foreign institutional investment (net) 1.50 2.01 1.93 0.75

Global depository receipts 2.08 0.65 1.38 0.50

Capital-account balance net incl others 8.01 2.96 9.41 7.70

Foreign-exchange reserves (year-end) 20.81 17.04 22.37 25.98

a All figures are for the financial year, beginning April 1st. They may differ from EIU trade estimates, which are for the calendar year. b Directorateof General Commercial Intelligence and Statisticians (DGCIS). c Reserve Bank of India.

Sources: Centre for Monitoring the Indian Economy; Economic Survey.

32 India


The rupee slides, but doesnot collapse—

India’s currency has fallen sharply against the dollar in recent months—fromRs39.25:$1 at the beginning of the year to Rs43.42:$1 on August 20th. But theslide is far more shallow than the falls recorded by other Asian currencies. FromJuly 1997 to June 1998, the Indonesian rupiah fell by 82% against the dollar;the Thai bath, 40%; the Malaysian ringgit, 36%; the Philippine peso, 34%; theSingapore dollar, 18%; and the Indian rupee by 15.5%.

The real effective exchange rate (REER), which takes into account trade-weighted changes in the nominal rate against a basket of currencies and alsorelative inflation, reveals the significance of the rupee’s long-term slide. Unfor-tunately, government REER statistics are only available after a time lag. Butthey suggest that while the nominal rupee:dollar exchange rate depreciated bynearly 40%, from an average rate of Rs28.2:$1 in 1992 to Rs39.3:$1 in March1998, the real effective rate of the rupee actually appreciated by about 3%,owing to relatively high inflation in India. Indeed, following the 1991 deval-uation, the rupee real effective rate has been roughly constant. For this reason,most key policymakers are reasonably relaxed about the depreciation of theexchange rate. They have avoided intervention except to avert bursts of specul-ative pressure or smooth over volatility. This was the case in August, when theRBI bolstered the rupee by increasing the cash reserve ratio from 10% to 11%,and raising the rate at which it sells repurchase agreements from 5% to 8%.

—although there are someknock-on effects

Although minor in comparison with the devaluation recorded by several otherAsian currencies, the slide of the rupee has nonetheless had a significant nega-tive impact on the economy.

• Inflationary pressure: the weaker currency raises the rupee cost of im-ports, notably oil products and fertilisers. This places upward pressure on infla-tion and increases pressure on the government to expand subsidies to holdprices down.

• Raised borrowing costs: projects funded with offshore, dollar loans—such as telecommunications and power projects—become costlier to serviceand less viable.

• Exchange-rate investment losses: exchange-rate losses by foreigninvestors in India may discourage new inflows.

• Higher cost of imported inputs: export receipts will not increase com-mensurately with the depreciation because some exports—notably jewelleryand software—have a high import content.

Policymakers in India are divided as to the interpretations of these effects ofexchange-rate movements. The “doves” argue that devaluation will stimulateindustry and help India to regain lost world market share. The “hawks” arguethat India’s export problems are far deeper than price disadvantage—notablyan inadequate infrastructure—and believe that a devaluationist strategy willratchet up inflation without achieving a significant advantage.

A downgrade fromMoody’s affects Indian

borrowers—

A US credit-rating agency, Moody’s Investors Service, has unceremoniouslyplaced Indian paper into the speculative category of junk bonds: from Baa3 toBa2 for long-term debt, placing it below Thailand and well behind China.

India 33


Moody’s justifies its revisions as reflective of political indecisiveness, slow pro-gress on reform and loss of foreign-investor confidence in the aftermath of thenuclear weapons explosions and the sanctions imposed by the US. However, itis possible that Moody’s downgrade also reflects a correction of its previous,overly sanguine rating. By comparison, another US rating agency, Standard &Poor’s, already rated the country below investment grade, although this agencyrevised its outlook for India from stable to negative in late May. This down-grade will raise the cost of borrowing by Indian blue-chip companies and statecorporations.

India: debt ratings by Moody’s Investors Service

Long-term Short-term Long-termbonds & notes bonds & notes bank deposits

India Ba2 NP (not prime) Ba3

Thailand Ba1 NP B1

Indonesia B3 NP Ca

South Korea Ba1 NP Caa1

Malaysia A2 P2 Baa1

Philippines Ba1 NP Ba2

China A3 P2 Baa2Source: Press reports.

—who are discouragedfrom seeking foreign

funds

With the cost of external borrowing now so high, the finance ministry isdiscouraging Indian companies from seeking foreign finance except whereessential in order to complete infrastructure projects. (Loans have just beenapproved for three power projects.) Indian companies are being advised to raisecapital on the domestic market instead. Indian companies are scrambling tosecure domestic borrowing to pay off foreign loans.

Foreign portfolioinvestors lose their nerve—

Overseas portfolio investors have lost their confidence in the Indian market, asreflected in several months of net sales. They were net buyers in February andMarch but in April there was a net outflow of Rs650m ($16.5m), which swelledto Rs3.8bn in May. These outflows are one of the factors depressing the stockexchange. Another manifestation of this loss of confidence is the slump in themarket for global depository receipts (GDRs) of some Indian companies (whichare traded in international markets rather than in India). By mid-June 42 of the65 GDRs were trading at a new low, with most GDRs offering large discounts totheir issue price.

—and foreign-exchangereserves decline—

The recent loss of external confidence and the imposition of sanctions limitingsome foreign capital inflows have caused some depletion in foreign-exchangereserves. The level of foreign-exchange reserves stood at $24.3bn at the end ofJune, a fall of $2bn since the end of March. Overall foreign-exchange reservesincluding gold and special drawing rights (SDRs) are estimated to be worth$27.2bn. However, with import cover estimated at about five months, and theunlikelihood that the government will dip heavily into its reserves cache todefend the rupee, the reserve position is comfortable.

34 India


—while NRIs are tappedfor funds

With India appearing less attractive to foreign equity investors and foreignlenders, non-resident Indians (NRIs) were tapped for funds through a five-yearResurgent Indian Bond. The bond is denominated in pounds, dollars orD-marks and carries interest rates a few percentage points above those prevail-ing in the main European and US markets. The scheme, which is targeted atNRIs in the Middle East, UK and US, was launched in August by the State Bankof India, and may raise nearly $4bn.

India 35


Nepal

Political structure

Official name Kingdom of Nepal

Form of state Constitutional monarchy

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

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

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

Legal system Supreme Court acts as court of appeal and review as well as having powers of originaljurisdiction; presides over 11 appellate courts and 75 district courts

National government In April 1998 the Nepali Congress party (with 88 seats) formed a minoritygovernment. In August, with the addition of the CPN-ML (40 seats), it formed amajority government

National elections November 15th 1994; next election due by November 14th 1999

Main political organisations Nepali Congress (NC); Communist Party of Nepal-Unified Marxist Leninist(CPN-UML); Communist Party of Nepal-Marxist Leninist (CPN-ML); NationalDemocratic Party (NDP); New National Democratic Party (NNDP); Nepal Workers’ andPeasants’ Party (NeWPP); Nepal Sadbhavana Party (NSP)

Council of Ministers Prime minister, minister of royal palace affairs, defence, foreign affairs, forest & soil conservation, & supply Girija Prasad Koirala (NC)Deputy prime minister & minister for water resources Shailaja Acharya (NC)

Key ministers Agriculture Trilochan Dhakal (CPN-ML)Education Arjun Narsing K C (NC)Finance Ram Sharan Mahat (NC)Health K B Gurung (NC)Home Gobind Raj Joshi (NC)Information & communications Radha Krishna Mainali (CPN-ML) Land reforms & management, & commerce Chiranjibi Wagle (NC)Law & justice Sita Nandan Raya (CPN-ML)

Central bank governor Satyendra Pyara Shrestha

36 Nepal


Economic structure

Latest available figures

Economic indicatorsa 1993 1994 1995 1996 1997

GDP at factor costb (NRs bn) 171.5 199.3 219.2 248.9 280.6

Real GDP growthbc (%) 3.3 7.9 2.9 5.7 3.9

Consumer price inflationb (av; %) 8.9 8.9 7.6 8.1 2.9

Population (mid-year; m) 19.3 20.9 21.5 21.1 n/a

Exports fob ($ m) 397.0 368.7 349.9 388.7 410.5

Imports fob ($ m) 858.6 1,158.9 1,310.8 1,494.7 –1,718.6

Current-account balance ($ m) –222.5 –351.9 –356.4 –326.6 –418.1

Reserves excl gold (mid-Dec; $ m) 640.2 693.6 586.4 571.4 n/a

Public external debt d (year-end; $ m) 2,004 2,320 2,399 2,413 n/a

Exchange rate (av; NRs:$) 48.6 49.4 51.9 57.0 58.0

August 14th 1998 NRs68.33:$1

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

Agriculture, forestry & fishing 42.4 Private consumption 78.1

Mining & quarrying 0.5 Government consumption 9.1

Manufacturing 9.2 Gross fixed capital formation 20.9

Electricity, gas & water 0.8 Change in stocks 4.2

Construction 9.5 Exports of goods & non-factor services 26.3

Trade, hotels, etc 11.8 Imports of goods & non-factor services –38.6

Transport & communications 8.0 GDP at market prices 100.0

Finance & real estate 10.3

Social services 10.4

GDP at factor cost (less bank charges) 100.0

Principal exports 1996be NRs m Principal imports 1996be NRs m

Woollen carpets 8,164 Basic manufactures 28,844

Garments 5,360 Machinery & transport equipment 15,312

Pulses 662 Chemicals & drugs 8,804

Jute goods 453 Mineral fuels & lubricants 5,613

Hides & skins 387 Food & live animals 5,478

Total incl others 19,844 Total incl others 76,699

a All figures are sourced from the IMF’s International Financial Statistics unless otherwise stated. b Fiscal years ending July 15th. c At factor cost.d World Bank, Global Development Finance. e Central Bureau of Statistics, Statistical Yearbook of Nepal 1997.

Nepal 37


Outlook for 1998-99

There is little chance ofprogress until after the

general election—

Little constructive policymaking is expected by the current minority NepaliCongress (NC) government until after the next general election, which is un-likely to take place until the first quarter of 1999 at the earliest. Two of Nepal’sthree main political parties have much to gain from postponing the election.Both the governing NC and the Communist Party of Nepal-Marxist Leninist(CPN-ML), which supports the government and is represented in the cabinet,must consolidate their organisational foundations in order to compete success-fully with the Communist Party of Nepal-Unified Marxist Leninist (CPN-UML).Despite the ordeal of schism, the CPN-UML remains the strongest party in Nepal.

—despite a new coalition The NC’s alliance with the CPN-ML has its drawbacks. The CPN-ML, a newlyformed party, is tinged with desperation as it scours for supporters (2nd quarter1998, page 40). Moreover, its scramble to appear the more radical of the twomain communist parties could make it an embarrassing ally for the NC and aliability in terms of the party’s international standing. Ideological differenceswill also make joint governance difficult. The handling of the rebellionlaunched by the so-called Maoists will be particularly tricky, as the CPN-ML haspublicly stated its support for the rebels.

Economic performancewill be inadequate—

The preoccupation with political horsetrading and managing minority coali-tion governments bodes ill for Nepal’s economy. GDP grew by only 1.9% infiscal year 1997/98 (July 16th-July 15th)—the lowest rate in 22 years—owingmainly to a slowdown in the rate of agricultural growth to 1.1%. Agriculturalgrowth may edge up in 1998/99, but this will largely reflect the low base in1997/98 rather than any sustained turnaround in productivity. However, themanufacturing sector will remain constrained by the poor outlook for exports,particularly carpets and textiles, while the slowdown in tourism will pull downgrowth in services, preventing GDP growth from rising above 3%.

—and political extremismwill flourish

The political vacuum and the dismal economic performance will create fertileground for political extremists. Although the government has taken steps toresolve the Maoist insurgency through firm policing, it has not addressed the

0

1

2

3

4

5

6

7

8

9

1993 94 95 96 97(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.

40

60

80

100

120

140

160

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

Nepal: Nepalese rupee real exchange rates (c)1980=100

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

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NRs:$

NRs:¥NRs:¥

NRs:DMNRs:DMNRs:DM

NRs:$

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NRs:$

NRs:¥NRs:¥

NRs:DMNRs:DMNRs:DM

97

NRs:$

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NRs:$

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NRs:$

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NRs:$

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NRs:$

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NRs:$

NRs:¥

NRs:$

NRs:¥

NRs:$

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NRs:$

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NRs:$

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NRs:DM

9797

38 Nepal


underlying causes of disorder. The Maoists will not disappear, and appallingpoverty and discrimination persist. In May 1997 the government was forced tocancel local elections in 15 districts in the Mid-Western region that were de-stabilised by the insurgency. The government of the prime minister, GirijaPrasad Koirala, has rescheduled these elections for September 1998, by whichtime they will stand as a test of his government’s ability to contain disaffection.

Review

The political scene

The Nepali Congresssurvives two votes—

The minority Nepali Congress (NC) government has managed to hold ontopower. However, its survival so far has relied more on the intense competitionbetween the two communist parties—the Communist Party of Nepal-UnifiedMarxist Leninist (CPN-UML) and the splinter party, the Communist Party ofNepal-Marxist Leninist (CPN-ML)—rather than its own strength.

—owing to the tacitassistance of the CPN-ML—

In recent months the prime minister, Girija Prasad Koirala, has moved closer tothe CPN-ML. In two parliamentary votes—on June 28th and July 15th—theCPN-UML voted against the government but Mr Koirala was saved from defeatby the CPN-ML’s decision to stay away from the parliament and thereby ab-stain from the vote. The CPN-ML insisted that it would boycott parliamentuntil the government launched an investigation into charges of repression inits handling of the Maoist insurgency, although this boycott was widely viewedas a way for the party to support the government without having to vote in itsfavour. Once the two crucial votes were won, the government began an in-vestigation into charges of repression and the CPN-ML lifted its boycott.

—which later joins thegovernment

The CPN-ML’s support for the NC was then formalised on August 10th, whenthe NC’s Central Working Committee allowed the CPN-ML to join the NC in acoalition government. The CPN-UML tried to avert this alliance by calling forthree stay motions in a noisy parliament in the preceding three weeks. How-ever, in the event all three motions were unsuccessful.

Both the NC and theCPN-ML want to avoid an

early election—

Concerned that the holding of election under an NC government will result ina biased result, the CPN-UML has been calling for an all-party government tooversee an early general election. Mr Koirala has, however, insisted that he willnot go to the polls before April or May 1999.

Both the NC and the CPN-ML want to delay elections, in order to allow them-selves time to reorganise and consolidate. This is especially important for theNC, which is vulnerable to its own simmering internal conflicts. These divisionsre-emerged at the beginning of August over the government’s handling of con-flicts over water resources, particularly the apparent rebuffing of the renewedinterest in the giant Karnali Chisapani project by the US oil company Enron.

The NC also has an interest in the strength of the CPN-ML, which splinteredfrom its parent CPN-UML in March. While the CPN-ML is not large enough to

Nepal 39


be a direct challenge to the NC, the CPN-ML does have the potential to erodethe support base of the CPN-UML and divide the communist vote. In May theCPN-ML launched a reorganisation of the party, naming C P Mainali, ahardliner, as its organisational chief. This may please radical cadres but it willnot do much for the party’s international credentials. Given Nepal’s heavyreliance on foreign assistance, this is not something any political party canafford to ignore. Mr Mainali’s radicalism, combined with the opportunism ofthe CPN-ML’s senior figure, Bam Dev Gautam, may win the party short-termpolitical support but it does not create the basis for an effective and long-livedgovernment.

—and the prospect of aCPN-UML success

In contrast to its rivals, the CPN-UML is keen to go to the polls as soon aspossible. As expected, the party has been seriously damaged by the defection ofmany of its party workers but its core appears to have been strengthened. Itwould like to go to the electorate while its rival communist party, the CPN-ML,is still suffering from weak organisation.

NDP MPs become extrason the political stage

As expected, both the National Democratic Party (NDP) led by the former primeminister, Surya Bahadur Thapa, and the party which split from it, the NewNational Democratic Party (NNDP), led by another former prime minister,Lokendra Bahadur Chand, have been marginalised in the political process bythe division of the CPN-UML. The NNDP supported the Koirala government inmid-1998 but Mr Thapa’s NDP was still smarting from the NC’s jettisoning ofthe NDP-NC alliance in April 1998 (2nd quarter 1998, page 41). A snubbedMr Thapa responded by setting up in opposition to his erstwhile coalition partner.

The Maoist insurgencygathers momentum—

Successive governments have been too preoccupied with the problems of coali-tion management and political opportunism during the past two years to dealadequately with the spread of a so-called Maoist insurgency in the hills of Nepal.This military and political movement began in February 1996, at which time itwas centred in the Mid-Western region, particularly in the Jajarkot district of theBheri zone and the Rukum, Rolpa and Salyan districts of the Rapati zone. Themovement remains strong in these latter districts; in fact, in Rolpa the Maoistshave established a parallel administration. The movement then spread to theGorkha district of the Western region and Sindhuli district of Central region. Itis now gathering momentum in several other districts, including Lamjung,Tanahu, Dhading, Sindhupalchowk, Ramechhap, Dolakha, Udayapur, Kalikot,Kavre and Dolpa.

—and the governmentfights back—

On July 5th the home minister, Gobind Raj Joshi, informed parliament that atotal of 257 people have died as a result of the insurgency. Between May 19thand 24th, Mr Koirala toured the most seriously affected districts; the Maoistsresponded to his visit by increasing guerrilla activity.

At the end of May a massive police operation, referred to in the press as KiloSera, began, accompanied by the offer of amnesty to rebels who surrendered.According to government sources, by the end of June more than 50 Maoistrebels had been killed in the operation and over 600 Maoists had taken advan-tage of the amnesty and had surrendered. However, these numbers were dis-puted by the CPN-ML, which claimed that at least 300 Maoist rebels had been

40 Nepal


killed and that the government was suppressing information. The operationwas also criticised for its heavy-handedness.

—but does not tackle thesource of the real problem

This radical movement, for which support has grown, first emerged mainly as aresult of the appalling poverty in rural Nepal and the government’s inability toaddress this problem. According to the Nepal Living Standards Survey Report 1996,published by the Central Bureau of Statistics, the bottom 40% of the populationshare 11% of the country’s total income, while the top 10% share 52%. Conse-quently, despite the government’s efforts to curb the Maoists, it is possible thatthe movement will continue to flourish within the context of extreme poverty,massive income disparities, and caste and racial discrimination.

Moreover, some of the districts in the Mid-Western development region whichhave been affected by the insurgency have also been beset by serious foodshortages in 1998. Many people in these districts customarily suffer extremelevels of poverty and chronic food deficits. This situation has been exacerbatedby unfavourable weather conditions and the disruption to administrative pro-cedures following the cancelling of local elections. Reports from local organis-ations indicate than hundreds may have fallen victim to disease as a result ofsevere malnutrition.

Donor fatigue surfaces— International donors have become increasingly frustrated with the slow pace ofeconomic development and the ongoing political instability. On May 15thJapan’s ambassador to Nepal, Tomohiko Yanasa, said that Japan may be forcedto make a cut of more than 10% in its aid budget to Nepal if the country doesnot address problems such as poor management of development projects andinadequate budget allocation. He claimed that frequent changes of governmentand high-level officials were holding up trade and investment. The repre-sentative of the United National Development Programme (UNDP) and aspokesperson for the donor community, Carroll Long, expressed similar senti-ments about the need for administrative efficiency, accountability, transpar-ency, as well as the problems created by the politicisation of the administration.

—with warnings from theADB—

The Asian Development Bank (ADB) is also prominent among the country’scritics. On June 26th the ADB representative in Nepal, M Shah, criticised thegovernment over the Melamchi project to provide drinking water to theKathmandu Valley. He claimed that the director had been changed, that aMelamchi Water Supply Board had been constituted without the participationof the donors and that consultants had not been appointed as planned. Theproject was also alleged to be beset by delays and bureaucratic tangles. The ADBconsidered this unacceptable given the large input of several foreign investorsin the $300m project. The ADB issued another warning in late July during avisit by the director of programmes, Geert Van der Linden. He suggested thatADB assistance to Nepal could be reduced and that the bank was lookingcarefully at the performance of ADB-funded projects to assess whether assis-tance was being utilised efficiently. This review was set within the context ofgrowing competition for ADB assistance from other countries in Asia.

—and the World Bank The World Bank added its own voice of criticism. On July 7th the bank issueda report at a press conference in Kathmandu which highlighted the poor

Nepal 41


economic performance and economic prospects. Moreover, the bank indicatedthat a deteriorating fiscal situation was leading to a “paralysis” of developmentimplementation.

The CPN-ML manipulatesanti-India sentiment—

The Nepali government expressed measured concern that the nuclear testsconducted by India and Pakistan in May would ignite a regional arms race.Relations have been strained, despite the visit to Nepal by India’s president,Kocheril Raman Narayanan, in May.

However, more virulent condemnation of India came from the CPN-ML. Theparty’s activities exacerbated growing tensions between India and Nepal overborder problems, and particularly over the stationing of an Indian borderpatrol in the disputed territory of Kalapani in Nepal’s north-western frontier inDarchula district. An Indian border patrol has been stationed at this strategiclocation near the Nepal-Tibet-India border since the Sino-Indian war in 1962.The issue has simmered for years and is presently being used by the CPN-ML toprove its nationalist credentials and build support for the new party.

—and marches toKalapani

In a press statement on June 3rd the Indian ambassador to Nepal, K V Rajan,claimed Kalapani to be part of India. A march to Kalapani to protest againstIndia’s presence was organised by the CPN-ML and its student wing. OnJune 13th it was claimed that the Indians had erected a barrier in Nepali terri-tory and had threatened to open fire on the marchers. On June 15th India’sambassador was summoned by the Nepali foreign secretary, who lodged a strongprotest against what he termed the new “no entry zone”. India denied erectinga permanent barrier but claimed that it had only constructed a temporary barri-cade to stop the protesters and that it had subsequently been removed. Discus-sions on the demarcation of the border between India and Nepal are continuing.

The Gurkhas continue toprotest

On June 11th the UK government announced that the pensions extended toGurkha soldiers will be increased by between 23% and 51%. These increaseswill be paid from October 1998 and will be backdated to January 1st 1996.They include an 8% cost-of-living increase for 1998. However, the Gurkha Ex-Servicemen’s Organisation (GAESO), dissatisfied with the new offer, repeatedits determination to file a lawsuit against the UK government in pursuit of itsclaim that Nepalis serving in the British army should receive the same pensionsas their British counterparts. The case has yet to be brought to court because aNepali parliamentary committee is studying the issue and is expected to reportto the government with recommendations. In the meantime, the GAESO hascontinued to organise a protest programme and demonstrations in support ofits claims.

Economic policy and the economy

An uninspiringprogramme and a bigger

budget—

The government’s programme for the new parliamentary session and the1998/99 budget which followed offered a standard menu of policy goals. Itsslogan, “Development in each village, employment in each family”, couldhave been adopted by any of Nepal’s revolving-door governments in the pastfive years.

42 Nepal


On July 10th the finance minister, Ram Sharan Mahat, released the budget forfiscal year 1998/99 (ending July 15th). Planned expenditure is expected to in-crease by just over 20% in nominal terms, to NRs69.7bn ($1bn) from NRs57.7bnlast year. Of this, regular expenditure is expected to total NRs31.9bn, whiledevelopment expenditure is expected to rise by about 25% on the previousyear’s revised estimates to NRs37.7bn this year.

—suggest that increases inexpenditure—

The demands on expenditure are expected to grow. The government mustmake provision for greater spending on internal security and the forthcominggeneral election, in addition to the increased servicing costs of Nepal’s inter-national debts and increases in the salaries and pensions of current and formercivil servants.

—will not be met byincreased revenue

Total revenue is estimated to rise from NRs32.8bn in 1997/98 to NRs39.5bn in1998/99. Existing revenue sources are expected to yield NRs34bn, while thegovernment hopes to earn an additional NRs5.5bn from new tax initiativesand administrative reforms. The government hopes to bring 25,000 new tax-payers into the tax net by the end of the financial year. In addition, afterlowering tax rates in a final effort to increase revenue mobilisation, the govern-ment has imposed a 2.5% surcharge on personal income tax for those earningmore than NRs75,000.

But the government believes that it will be able to improve collection more byimproving administrative efficiency rather than through new tax proposals.This appears optimistic. In 1997/98 revenue collection was below target byNRs5bn, bringing in NRs32.5bn compared with a target of NRs37.5bn. A Vol-untary Disclosure of Income Scheme was not well-received. The level of reve-nue collection improved significantly after May 1998, when Mr Mahatassumed control of the Ministry of Finance. But it is unlikely that Mr Mahat’smore rigorous approach to tax collection will result in the predicted increases.

Foreign assistance is projected at NRs7.8bn, leaving a deficit of NRs22.4bn. Thegovernment hopes to meet this gap through foreign loans (NRs17.7bn) anddomestic borrowing (NRs4.7bn). Predictions for increased foreign assistanceappear to be optimistic given that donors—and even Japan, one of the largestbilateral donors—have expressed reservations about continued high levels ofassistance.

More money is earmarkedfor agriculture—

In accordance with the Agricultural Perspectives Plan, the budget has increasedspending on the agricultural sector (by 26%, to NRs6.64bn in 1997/98), partic-ularly for irrigation (up 41.5% to NRs3.34bn). In a populist gesture (that couldbe used in the distribution of political patronage), the budget also included aprovision to encourage employment by providing loans to help 200 unem-ployed youths from each of the 205 constituencies find work abroad. Other-wise it is an odd policy decision given that migrant labour is being retrenchedin many Asian countries and that there are serious concerns over the mistreat-ment of Nepali workers in the Middle East.

—VAT remainscontroversial—

Despite protests from the business community, Mr Mahat remains committedto the implementation of value-added tax (VAT). The finance minister was one

Nepal 43


of the first to advocate the imposition of VAT when he was vice-chairman ofthe Nepal Planning Commission (NPC) in 1993. Although the leading businessorganisation, the Federation of Nepalese Chambers of Commerce and Industry(FNCCI), is working towards a compromise with the government over VAT, asection of the business community has formed a Valley Anti-VAT Committeeto organise a protest programme of strikes and demonstrations against the tax.This committee is dominated by those closely involved in the export-importtrade. On August 10th the committee called off its protests and agreed to beginnegotiations.

—and some efforts towardincreased transparency

are made

Some efforts were made to make the functioning of government and statecorporations more transparent. On May 17th the Nepal Electricity Authorityimplemented measures aimed at encouraging transparency in evaluating ten-ders and selecting advisers. This was particularly timely following a controversyover the awarding of contracts for the Kali Gandaki hydropower project. TheCommission for the Investigation of the Abuse of Authority (CIAA) was alsoasked to investigate a deal arranged by Royal Nepal Airlines Corporation withAviogenix of Yugoslavia for a four month lease of an aircraft.

GDP growth is weak— Real GDP is estimated to have grown by only 1.9% in 1997/98, down from3.9% in 1996/97. Agriculture, which accounts for 40% of GDP, grew by a mere1.1% as a result of poor weather. About 80% of Nepalis depend on agriculture,suggesting that the downturn in growth will translate into lower private con-sumption and a lower standard of living. The non-agriculture sector grew by3.1%, down from 3.8% last year.

—and targets for theNinth Plan are lowered

On July 17th the NPC published the Ninth Plan (1997-2001). Poor GDP growthrates have led to a slight downward revision of its ambitious targets. The planoriginally estimated growth to average 6.5% during the five-year period butthis has been lowered to an annual average of 6%. However, this figure alsoappears optimistic in the light of Nepal’s recent economic performance.

The trade deficitnarrows—

Figures from the Nepal Rastra Bank (the central bank) on the trade deficitprovided some positive news. In the first 11 months of 1997/98 (July 16th-May 16th), the trade deficit contracted by 15.9%, year on year, to NRs56.6bn.In the corresponding period of 1996/97, it increased by 37.7%. Merchandiseexports increased by 20%, year on year, compared with 12% growth in thecorresponding period of 1996/97. Imports contracted by 7.4% compared witha year-on-year increase of 30.7% in the first 11 months of 1996/97.

—but the rupee slipsfurther—

The Nepali rupee has continued to depreciate, tracking its Indian counterpartto which it is pegged. A new period of volatility followed the deterioration inexternal sentiment toward India following the nuclear tests, the imposition ofeconomic sanctions and a poorly received budget. The Nepali rupee has fallenfrom NRs63.4:$1 in May to NRs68.3:$1 in early August.

—and inflation is high Inflation is high, but is remains within single digits. At the end of the first 11months of 1997/98, the national consumer price index rose by 7.8%, year onyear, compared with a 2.9% rise in the year-earlier period.

44 Nepal


A new hydropower projectmoves ahead

On May 11th an agreement was signed between the NB group of Nepal and theLeiz-Craft Company of Norway for joint investment in the Indravati IIIhydropower project. The 5-mw project is expected to be completed withinthree years at a cost of NRs1bn. Some 60% of the paid-up capital has beeninvested by the NB group and other Nepali investors and the remainder by theNorwegian company.

Nepal 45


Quarterly indicators and trade data

India: quarterly indicators of economic activity

1996 1997 1998

1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr

Agricultural production Annual totals

Tea ’000 tonnes ( 780 ) ( 785 ) ( n/a )

Fruit “ ( 36,126a ) ( 36,126a ) ( n/a )

Vegetables ” ( 53,723 ) ( 53,723a ) ( n/a )

Industrial production Monthly av

General 1990=100 152 135 142 147 156 146 148 153 n/a n/a

Mining “ 126 128 110 124 139 118 114 129 141b n/a

Manufacturing ” 160 135 143 142 152 145 148 149 157b n/a

Electricity “ 149 145 144 151 155 153 157 157 167b n/a

Mining

Crude petroleumc m b/d 0.68 0.73c 0.73 0.73 0.75 0.76 0.76 0.76 0.76 0.74d

Employment End-Qtr

Applications for

employment m 36.74 37.02 37.74 37.43 37.60 n/a n/a n/a n/a n/a

Prices Monthly av

Consumer prices 1990=100 170.0 176.3 183.6 187.0 188.1 189.9 192.9 197.4 206.2e n/a

change year on year % 8.8 9.3 8.6 9.2 10.6 7.7 5.1 5.6 n/a n/a

Wholesale:

domestic 1990=100 168 172 178 180 181 182 184 188 191 n/a

agricultural productsf “ 175 187 194 187 201 199 200 202g n/a n/a

manufacturing “ 166 168 170 173 173 175 177 178g n/a n/a

Money & banking End-Qtr

M1, seasonally adj Rs bn 2,006.2 2,060.5 2,120.1 2,192.8 2,249.4 2,328.6 2,374.0 2,439.7 2,453.2 2,506.9h

change year on year % 10.7 13.1 13.9 14.0 12.1 13.0 12.0 11.3 9.1 n/a

Bank rate “ 12.00 12.00 12.00 12.00 12.00 10.00 10.00 9.00 10.50 9.00i

Monthly av

Share price index 1990=100 235.7 276.6 259.7 214.1 223.2 221.4 245.3 223.2 211.3 236.8j

Foreign trade Qtrly totals

Exports fob Rs bn 312 287 285 285 318 299 311 302 n/a n/a

Imports cif “ 350 323 315 340 390 355 351 370 n/a n/a

Exchange holdings End-Qtr

Reserve Bank & govt reserves:

goldk $ m 3,837 3,739 3,687 3,606 3,367 3,287 3,102 2,929 2,812 2,616i

SDRs “ 82 128 57 122 2 3 30 77 1 81

foreign exchange ” 17,044 17,526 18,433 19,742 22,367 25,404 25,697 24,324 25,975 23,933

Exchange rate

Market rate Rs:$ 34.33 35.06 35.76 35.93 35.91 35.82 36.18 39.28 39.50 42.47

Note. Annual figures of most of the series shown above will be found in the Country Profile.a Estimate. b Average for January-February. c Revised from 2 Qtr 1996. d Forecast for 3 Qtr, 0.76; forecast for 4 Qtr, 0.76; forecast for 1 Qtr 1999,0.75. e January only. f Food, non-food and minerals. g Average for October-November. h End-April. i End-May. j Average for April-May.k End-quarter holdings at quarter’s average of London daily price less 25%.

Sources: FAO, Quarterly Bulletin of Statistics; IMF, International Financial Statistics; Reserve Bank of India, Bulletin; IEA, Monthly Oil Market Report.



Nepal: quarterly indicators of economic activity

1995 1996 1997 1998

4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr

Prices Monthly av

Consumer prices 1990=100 177.2 173.6 181.0 193.3 194.6 189.4 190.2 192.2 192.2 192.2a

change year on year % 6.8 8.2 9.1 10.3 9.8 9.1 5.1 –0.6 –1.2 1.5

Money End-Qtr

M1, seasonally adj NRs m 34,238 36,509 35,862 35,652 36,266 37,162 38,315 38,603 39,420 n/a

change year on year % 10.0 16.3 11.5 6.7 5.9 1.8 6.8 8.3 8.7 n/a

Foreign trade Qtrly totals

Exports fob NRs m 4,549 5,472 5,692 4,698 5,894 5,813 5,661 5,658 n/a n/a

Imports cif “ 16,785 18,261 21,726 20,434 20,713 27,270 26,875 23,666 n/a n/a

Exchange holdings End-Qtr

Goldb $ m 44.2 45.9 44.8 44.1 43.2 40.3 39.4 37.1 35.2 n/a

Foreign exchange “ 577.9 606.0 598.3 585.9 563.1 609.6 641.8 611.7 624.4c n/a

Exchange rate

Market rate NRs:$ 56.0 55.5 56.0 57.0 57.0 57.0 57.0 57.8 63.3 63.4d

Note. Annual figures of most of the series shown above will be found in the Country Profile.a Figure for April, 192.3. b End-quarter holdings at quarter’s average of London daily price less 25%. c End-November. d End-2 Qtr, 68.3.

Source: IMF, International Financial Statistics.

India: foreign trade($ m)

Total US Germany Belgium-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 0

Wood & cork 233 256 1 4 1 1 0 1 0 0

Pulp 275 232 86 90 4 4 0 0 0 0

Textile fibres 631 448 90 38 10 8 7 5 31 20

Crude fertilisers & minerals 441 356 46 17 4 2 0 1 4 2

Metal ores & scrap 824 826 264 179 26 37 12 15 19 20

Coal 923 994 0 1 0 0 0 0 18 12

Petroleum & products 7,602 10,162 66 67 10 5 1 2 12 14

Chemicals 5,617 4,961 790 661 422 336 78 80 311 296

Paper etc & manufactures 467 493 26 44 34 46 4 3 11 8

Textile yarn, cloth & mnfrs 345 339 14 18 21 19 3 4 19 14

Diamonds 2,050 2,867 45 41 2 8 1,334 1,883 1 2

Iron & steel 1,429 1,359 53 75 237 205 68 62 201 202

Non-ferrous metals 1,241 1,426 49 89 43 45 16 29 25 38

Metal manufactures 278 313 40 53 53 56 9 9 41 44

Machinery & transport equip 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 2

Scientific instruments etc 769 635 191 143 108 73 21 18 182 148

Total incl others 36,592 39,113 3,830 3,615 3,137 2,829 1,691 2,235 2,462 2,186

continued

Quarterly indicators and trade data 47


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 11

Fruit & vegetables 682 665 124 154 35 46 31 29 19 19

Coffee 449 402 49 49 4 2 26 20 43 52

Tea 349 292 9 15 38 41 9 9 22 18

Spices 180 253 33 84 9 13 4 7 5 5

Animal feeding stuffs 706 997 0 1 10 4 38 57 8 3

Tobacco & manufactures 133 213 3 4 23 41 1 1 7 21

Textile fibres & waste 90 475 3 8 10 12 14 42 2 5

Crude minerals & fertilisers 276 277 21 18 3 3 31 22 7 5

Metal ores & scrap 699 695 23 28 1 3 295 267 0 1

Crude animal & vegetable

materials 310 356 113 126 18 20 33 43 26 28

Petroleum & products 463 490 0 0 0 0 0 0 0 0

Chemicals 2,580 3,009 275 421 136 155 65 89 192 196

Leather & manufactures 469 390 30 32 24 19 9 4 62 51

Textile yarn & thread 1,349 1,800 21 83 88 109 52 78 39 33

Cotton fabrics 960 1,008 171 195 127 115 7 8 47 47

Other 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 21 176 178

Diamonds 4,582 4,028 1,366 1,325 26 28 703 439 38 33

Iron & steel 941 983 86 108 28 33 111 100 39 20

Metal manufactures 652 715 156 206 76 77 16 8 40 36

Machinery & 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 28

Clothing & footwear 4,702 4,796 1,346 1,497 510 519 127 96 697 681

Total 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.



India: major partners’ tradea

($ m; monthly averages)

Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Mar Jan-Mar 1991 1992 1993 1994 1995 1996 1997 1997 1998

Exports to India fobUS (fas) 166.6 159.8 230.1 191.2 274.7 277.4 301.3 309.3 256.1 Belgium- Luxembourg 115.6 117.8 153.8 154.3 220.3 209.9 239.4 304.8 n/a Japan 126.9 123.9 127.5 170.6 211.9 202.9 184.0 175.8 192.3 Germany 121.3 151.2 151.4 172.9 266.2 259.7 214.0 202.7 179.7 UK 149.5 138.0 141.2 167.3 221.3 221.5 215.1 229.6 163.0 Saudi Arabia 91.3 119.5 110.6 109.1b 116.8b 183.9b 204.2b 181.0b n/a

UAEb 75.3 55.1 49.8 93.2 110.9 125.6 139.3 143.7 n/a Australia 43.6 48.8 51.7 52.7 67.8 78.8 104.8 129.3 94.6 South Korea 39.1 36.5 150.3 96.7 93.7 101.8 88.8c 82.0 n/a Italy 37.4 40.3 41.1 58.2 92.7 94.3 86.4 76.3 82.4

Imports from India cifUS 285.3 338.7 407.1 472.6 506.7 544.1 642.7 599.7 718.6 Japan 182.5 169.8 189.8 221.1 243.1 237.4 221.8 243.8 211.9 UK 114.2 125.8 136.1 164.4 188.8 209.5 221.6 216.2 202.6 Germany 140.1 143.5 163.1 179.0 209.5 220.5 199.7 210.8 200.8 Hong Kong 59.2 62.8 101.8 121.8 156.2 164.1 177.2 192.0 n/a UAE 52.4 69.2 90.6 97.3b 109.4b 136.8b 132.8b 134.3 n/a Italy 57.4 63.9 63.2 82.7 113.6 103.4 108.4 110.3 141.3 Belgium- Luxembourg 55.7 52.8 65.9 78.0 93.2 100.3 98.5 112.1 n/a France 52.3 59.9 63.8 75.3 96.9 95.6 91.5 97.1 106.9 South Korea 40.4 39.8 43.6 48.7 66.3 82.3 83.9c 84.3 n/a

a Figures from partners’ trade accounts; imports cif; exports fob, unless otherwise indicated. b Estimate. c January-November.

Sources: OECD, Monthly Statistics of Foreign Trade; IMF, Direction of Trade Statistics, quarterly.

Quarterly indicators and trade data 49


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