gramme of policies that was implemented in 1991-92, supported by the IMF, was the basis of the economic reforms of the subsequent years, it is not possible to ignore the perform- ance of the economy in that year in a review of the post- reform performance of the Indian economy. Although the Eighth Plan started in 1992-93, all its policy assumptions and initial conditions were based on the programme of reforms. An appraisal of the Eighth Plan there- fore cannot be separated from a review of the performance of the entire post-reform period. However, to follow the usual chronology, we shall present the data in all the Tables sepa- rately for 1991-92 and 1992-95 in order to distinguish between the performance in the respective periods. Finally, it needs to be noted that much of the data for the recent years are of' a provisional nature and are subject to change as more complete information be- comes available. Therefore, reliance has been placed on such data as are available from the most recent official publications, such as the National Accounts Statistics (NAS) 1995.
2. Growth Performance 1.15 The response of the economy in terms of growth performance since the initiation of the reforms in 1991 appears somewhat less than expected when compared to the past trends or to the trajectories embodied in the Eighth Plan targets. The average rate of growth of the GDP during the period 1980-1991 was 5.63 per cent per annum. The growth rate came down to 0.9 per cent in 1991-92, and rose to 4.3 per cent in 1992-93. If the advance estimates of growth made by the C.S.O. of 4.3 per cent In 1993-94 and 5.3 per cent in 1994-95 materialise, the average growth during the first three years of the Eighth Plan (1992-95) would average to 4.6 per cent - almost one percentage point lower than the Eighth Plan target, However, the economic performance of 1991-92 could not be taken as entirely the outcome of the "crisis", with the policies implemented having had no role to play, although the decomposi- tion of the changes in the major economic variables during 1991-92 into "crisis-induced" and "policy-induced" is not easy to do. At the time that the reforms were being designed, in the "Memorandum on Economic Policies for 1991/92-1992/93" submitted along with the Letter of Intent by the Finance Minister to the IMF on August 27, 1991 it was stated that the growth rate of GDP in 1991-92 was likely to be in the range of 3 to 3.5 per cent. The estimate of GDP growth was reduced by Janu- ary 1992 to 2.5 per cent for the year in the "Economic Survey 1991-92". In the event, the actual growth rate turned out to be 0.9 per cent. If the initial exercises were done prop- erly, the difference between the estimated and the actual growth of 1.6 percentage points can be regarded as due to policy failure, which could be taken as the expected outcome of the policies introduced that year, with the shortfall from the trend of 3 percentage points being attributable to the crisis.
1.16 The Eighth Plan used the latter estimate of 2.5 per cent GDP growth in 1991-92 as the base for working out the macro parameters of the Plan. If the trajectory of the real GDP derived from the Eighth Plan targets is taken into account, the expected level of real GDP in 1994-95, even with the CSOs advance esti- mates of growth, would be 3.9 per cent below the level that had been targeted in the Eighth Plan. More importantly, a sharp acceleration in the growth rate to 7.65 per cent per annum will be required each of the last two years of the Plan if the planned terminal year value of real GDP is to be attained.
1.17 In order to understand the principal causes behind the sharper deceleration of the Indian economy in 1991-92 as compared to the expectations, it is instructive to compare the behaviour of some key macroeconomic vari- ables against the targets that were set in the "Memorandum on Economic Policies for 1991/92-1992/93" submitted to the IMF. The comparative statement is placed in Table 3:
As may be seen, the most striking variation between the expected and the actual was in the behaviour of imports, which declined much more sharply than expected. This, on one hand, resulted in a better than expected improvement in both the current account deficit and the level of foreign exchange reserves. On the other hand, the excessive import compression ap- pears to have reduced the growth rate of the economy much more than expected. The higher than targetted growth of money supply, partly as a result of a higher than targetted growth of foreign exchange reserves, was as- sociated with a much higher than targetted rate of inflation although the fiscal deficit of the Central Government was below its target value.
1.18 A comparison of the sectoral growth rates over the two periods, ie. 1980-1991 and 1991- 1994 [Table 4], shows that the performance of
436
Table 3
Key Economic Variables In 1991-92
Memorandum Actual
1. Real GDP growth 3-3.5% 0.9%
2. Inflation rate 9.0% 13.6%
3. Fiscal Deficit/GDP 6.5% 5.9%
4. Growth rate of Money Supply (M3) 13.0% 19.3%
5. Current Account Deficit/GDP 2.7% 0.4%
6. Foreign exchange reserves $2.2 bill $5.8 bill
(in months of imports) 1.3 mos 5.3 mos
7. Growth rate of imports -5.0% -24.5%
the manufacturing sector has suffered se- verely. Manufacturing had been a leading sec- tor during the eighties and, after a relatively low growth performance during the first three decades of planning, it had achieved a growth rate of 7.6 per cent on average for a whole decade. Even with an estimated revival in growth of 3.6 per cent in 1993-94 and 8.7 per cent in 1994-95, the average growth rate for the Plan period 1992-95 will be 5.1 per cent, considerably lower than the Plan target of 7.3 per cent. Much of this adverse development in the manufacturing sector can be attributed to the excessive import compression in 1991-92, which carried on to a lesser extent In 1992-93. The retardation in manufacturing growth in the early years of the reforms has made the sub- sequent adjustment more difficult for com- modity balance and export prospects as well as fiscal revenues.
1.19 Infrastructural sectors had done well dur- ing the eighties and their performance has been somewhat lower during the 1991-94 period. Although agriculture and allied activities re- corded negative growth in 1991-92, insofar as the Plan is concerned, agricultural growth has been more than satisfactory at an expected average of about 3.5 per cent for the three years 1992-95, as compared to the targetted 3.1 per cent. Investments made in the past in electric- ity, gas and water and transport sectors have sustained their growth, although at a somewhat lower rate than during the eighties.
1.20 The sectors which have clearly performed better in the post-reform period are the Com- munications and Financial sectors. The growth in the communications sector was fa- cilitated by a large back-log of unfulfilled demand and the ability of the Government to raise resources by raising the tariffs. Cost re- ductions arising from induction of new tech- nologies also contributed significantly. Inso- far as the financial sector is concerned, much of the boom is attributable to an active stock market, supported to an extent by excess li- quidity in the system during this period and the recessionary conditions prevailing in the real sectors of the economy.
1.21 In order to appreciate the divergence be- tween the Plan targets and the actuals, and the extent of shortfalls in the broad sectors, a sum- mary picture can be provided by indicating, after taking into account the first three years performance, the required growth rates in the different sectors in the next two years to achieve the terminal year target values of pro- duction of the Eighth Plan. The agricultural sector is well ahead of the Plan targets, and needs to achieve only 2.6 per cent growth lit each of the last two years of the Plan in order to achieve the terminal year target. The manu- facturing sector, on the other hand, has fallen behind substantially, and would have to aver- age 10.7 per cent growth for the next two years in order to attain the target level. The other sectors collectively have performed moder- ately, and would need to grow at 7.6 per cent per year to achieve the Plan targets.
1.22 The relatively poor growth performance during the first three years of the current plan need not in itself be a source of concern Indeed, if this is seen in the context of Inter- national experiences in stabilisation and struc- tural adjustment, the Indian experience of low growth has been both brief and mild. At no stage has the Indian economy had to suffer a negative growth rate of GDP, and in the year 1994-95 the growth rate has picked up almost to the Seventh Plan level. In contrast most other countries have had to suffer extended
437
TABLE 4
Sectoral Growth Rates
S.No. Sectors Eighth 81-82 91-92 92-93 93-94
Plan to
Target 90-91
1. 2 3 4 5 6 7
1. Agriculture 3.85 -2.74 5.3 3.0
2. Forestry & Logging 3.1 -0.44 -1.29 0.4 0.5
3. Fishing 5.56 5.65 6.4 6.1
4. Mining & Quarrying 8.0 8.46 3.66 1.5 4.8
5. Manufacturing 7.3 7.59 -3.23 3.1 3.6
6. Electricity, Gas & Water 7.8 8.82 7.52 7.5 5.9
Supply
7. Construction 4.7 4.44 4.60 0.5 1.2
8. 'Trade 6.0 6.12 0.32 6.5 4.4
9. Hotels & Restaurants 6.0 6.42 0.06 6.0 5.8
10. Railways 4.15 6.02 -1.1 -0.7
6.7
11. Transport by other means 7.92 6.91 6.1 6.5
12. Storage 6.0 4.09 -1.66 -0.6 -1.7
13. Communication 6.1 6.22 6.86 10.8 11.0
14. Banking & Insurance 6.0 11.99 21.68 2.8 12.9
15. Real Estate, ownership 6.0 3.57 3.81 3.3 3.3
of dwelling & business
services
16. Public administration 6.0 6.99 2.21 5.1 4.4
and Defence
17. Other services 6.0 5.60 5.81 3.7 5.2
18. Gross Domestic Product 5.6 5.63 1.10 4.3 4.3
periods of negative growth and it has taken even longer for them to regain their historical growth rates. The 1991-94 recessionary epi- sode in India was no doubt the outcome of the stabilisation efforts, particularly the strong im- port compression, and the effects of the struc- tural adjustment programme are expected to be felt on output and employment growth in the next few years. The success or failure of this programme will however depend critically on the Government's ability to identify the areas of vulnerability and to take appropriate action for addressing them.
3. The External Sector 1.23 Since the stabilisation efforts were initi- ated, the country has been able to tide over in a most impress manner the balance of pay- ments crisis that erupted in early 1991. Both the balance of payments situation and the for- eign exchange reserves position have im- proved considerably in the last three years [Annexure II]. The current account deficit, which was about $10 billion in 1990-91, has come down to less than a billion dollars in 1993-94 and increased only mildly 1994-95. As a percentage of GDP it has declined from 3.2 per cent to about 0.7 per cent over the period. This sharp reduction in the current account deficit has obviated the need for ex- ceptional external financing within a short pe- riod of three years.
1.24 The improvement In the current account balance has also been accompanied by a major
438
TABLE 5
External Capital Account
(US$ billion) -
Annual
Average
1985-91 91-92 92-93 93-94 94-95(Est)
Capital Account 7.35 3.97 2.97 8.99 7.99
Direct and Portfolio
investment 0.21 0.15 0.59 4.11 4.90
Net Aid 2.53 2.49 1.45 1.34 1.53
Net commercial
Borrowing 1.95 1.46 -0.36 1.14 0.43
NRI Deposits 1.92 0.29 2.00 0.94 0.85
Other 0.74 -0.42 -0.71 1.46 0.28
Memorandum Items
----------------
Current Account -7.47 -1.18 -3.53 -0.32 -2.08
overall Balance -0.12 2.78 -0.56 8.68 5.90
Change in FE Reserves -0.61 3.58 0.73 8.87 4.76
turn-around in the capital account [Table 5]. Not only has the capital flight that had started in 1990-91 been arrested, there has also been a surge in capital inflows, especially in the form of foreign portfolio investments, in re- cent years. Total foreign investment, which was about $165 million in 1990-91 has gone up to about $4.1 billion by 1993-94 and to $4.9 billion in 1994-95. Most of the surge in foreign investments is accounted for by portfolio in- vestments, which increased from only $65 mil- lion in 1990-91 to about $3.5 billion by 1993-94 and $3.6 billion in 1994-95. Thus the decline in both net aid and net commercial borrowings has been more than offset by this factor.
1.25 The surge in capital inflows coupled with a sharp decline in the current account deficit has led to a substantial build-up of foreign exchange reserves (excluding gold and SDRs), which increased from $2.2 billion at the end 1990-91 (equivalent to about one month of imports) to over $15 billion by the end of 1993-94 and stands at about $19.4 billion at present. This is certainly a positive response o the economy to the stabilisation and adjust- ment efforts. However, it has also brought with it certain problems in managing monetary and exchange rate policies, and has some adverse long-run implications which will be discussed further in later sections.
1.26 Imports declined in absolute terms in 1991-92, and although they have picked up since 1992-93, their annual growth rate has been lower on the average in comparison to 1990-91 [Table 6]. While the decline in im- ports consequent to the devaluation of the rupee was to be expected, other factors some of which are exogenous to the reform process have also influenced the behaviour of imports Imports of POL measured in dollars have declined in absolute term in the post-reforms period, even though the domestic output of petroleum was falling. This decline has largely occurred due to the fall in the interna- tional prices of crude oil since 1991 associated with the general recovery of world on output after the dislocations caused by the Gulf War Non-POL non-food imports in 1993-94 had not crossed the pre-reform level primarily due to the recessionary conditions in the manufac- turing sector. The indications, however, are that with industrial revival in 1994-95, im- ports have grown at a rate above 28 per cent. Thus during the three years of the Plan period import growth will have averaged about 13.4 per cent per annum as compared to the Plan target of 12.5 percent in value terms.
439
TABLE 6
GROWTH OF IMPORTS
(Percentage)
Items 90-91 91-92 92-93 93-94 94-95
(1) (2) (3) (4) (5) (6)
1. Total Imports 14.4 -24.5 10.3 3.2 28.0
2. DGCIS Imports 13.2 -19.4 12.7 6.5 21.2
3. Non-DGCIS Imports 22.4 -57.0 -18.0 -49.9 262.0
4. POL Imports 60.0 -11.0 13.7 - 5.7 2.2
5. DGCIS Non-POL Imports 3.1 -22.2 12.4 11.2 27.4
6. Food Imports* 1.5 -50.8 85.0 -37.3 244.7
7. Non-Pol Non-Food Imports 3.1 -21.2 10.9 12.8 23.4
8. Memo Items:
(a) Non-DGCIS 3842.0 1653.0 1355.0 679.0 2458.0
Imports($Millon)
(b) Non-DGCIS
(% of Imports) 13.8 7.8 5.8 2.8 8.0
9. Capital Goods 10.0 -27.5 7.0 37.8 18.2