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Issues and PrioritiesBudget 1998-99
Budget 1997-98
Budget 1996-97
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Production
 | After a decline in net agricultural output by 1.0 per cent in 1997-98,
agricultural value added is expected to rebound by an estimated 5.3 per cent in 1998-99.
Indications are that growth rate in production of agriculture would be about 3.9 per cent
in 1998-99. |
| Foodgrain production estimated at 192.4 million tonnes in 1997-98 was
quite a let down from the preceding year’s record output of 199.4 million tonnes.
Major setbacks were in wheat with production lower by 3.5 million tonnes and coarse
cereals with production lower by over 3 million tonnes. The overall prospects of food
grain output for 1998-99 are quite good mainly due to Rabi crops sown in November-December
1998. Rabi foodgrain output is likely to be 96.5 million tonnes, which would be higher
than Rabi 1997-98 by 5.2 million tonnes. Thus 1998-99 food grain output is expected to be
about 195.3 million tonnes. |
| The 1998 monsoon turned out normal as predicted by the Meteorological
Department. Despite this, fiscal 1998-99 experienced set- backs related to the weather.
The first occurred in May-June when northern India experienced unprecedented heat wave
conditions for many days with maximum temperature touching a high of 48°C. This unusual
phenomenon caused extreme moisture stress in some crops, particularly fruits and
vegetables. Second, there were severe floods and associated damage in Eastern India. The
third weather related aberration occurred in late October 1998 when heavy rainfall
resulted in damage to standing and matured paddy and cotton crops, as well as to
vegetables such as potato and onion. |
| As measured by the Index of Industrial Production (IIP) industrial growth
revived slightly to 6.6 per cent in 1997-98 from 5.6 per cent in 1996-97. This revival
however faltered in 1998-99. The growth rate for April-December 1998 was only 3.5 per
cent, down from a 6.7 per cent for April-December 1997 (Table 1.1).
The mining sector (includes crude oil) has witnessed the greatest deceleration in growth,
from 5.5 per cent for the first nine months of 1997-98 to –1.1 per cent in 1998-99
(same months). Manufacturing sector growth also fell from 6.9 per cent for the same months
of 1997 to 3.7 per cent in 1998. Electricity growth on the other hand, improved from 6 per
cent in 1997 to 6.6 per cent in 1998 over the same months. |
| The greatest deceleration in 1998 was in basic goods, from 6.8 per cent
growth in April-December 1997 to 1.4 per cent in 1998. The small recovery in consumer
goods production from a growth of 5.2 per cent for 1996-97 to 5.7 per cent in 1997-98 was
reversed in 1998-99. Consumer goods production increased by only 2.8 per cent during
April-December 1998 compared to 4.6 per cent growth during the corresponding period of
1997. Though the recovery in 1997-98 had been led by consumer durables growth from 4.7 per
cent in 1996-97 to 7.8 per cent in 1997-98, the reversal in 1998-99 (April-December) was
due to a decline in both sub-sectors. Consumer durables growth fell from 6.8 per cent in
the first nine months of 1997-98 to 2.3 per cent in the same months of 1998-99 and
non-durables growth fell from 4 per cent to 3 per cent. |
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| The continuing slowdown in the manufacture of consumer goods suggests
that an autonomous slowdown in the growth of private consumption has contributed to slower
growth of aggregate demand. The decline in agriculture production affects the demand for
industrial goods with a lag. The decline in asset prices, as reflected in stock prices and
real estate, have probably brought the ‘wealth effect’ (on consumption) to
Indian shores for the first time. Such negative effects on consumption are common in
developed countries but have not previously been attributed to Indian consumers. The
earlier boom in Non-bank financial companies (NBFCs) coincided with and was perhaps
related to the increase in consumer credit for automobiles and other consumer durables.
The subsequent difficulties of NBFCs may have contributed to the slowing of this credit,
and consequently a decline in credit-financed consumption. |
| Greater global uncertainty, domestic uncertainty arising from
non-economic factors and a heightened appreciation of risk and uncertainty may have also
dampened demand. For instance the obverse of the high salaries offered to financial
professionals in the boom years is the job uncertainty and job losses which follow in a
downturn. This uncertainty combined with poor performance of stock markets since the boom
of 1994 and lack of trust in issuing companies and market intermediaries has also led to a
shift of retail investors from riskier investments into safe havens like bank deposits and
post office saving. |
| The only industrial sub-sector, which bucked the trend of declining
growth rates, was capital goods. Though growth in capital goods had declined to 5.2 per
cent in 1997-98 (from 9.3 per cent in 1996-97), it seems to have staged a recovery. The
growth rate of 9.8 per cent for April-December 1998 was significantly higher than the
fairly respectable growth of 6.7 per cent in the corresponding period of 1997. |
| The import of capital goods (machine tools, mechanical and electrical
machinery, transport equipment and project goods) in US $ value also increased
substantially during April-November 1998. The growth rate of 7 per cent represents a large
turn around from the 16.6 per cent fall in the corresponding period of 1997-98. This was
despite a decline in foreign direct investment, and net FII outflows during 1998-99. On
balance, total domestic investment has probably grown at a faster rate during the first
eight months of 1998-99 than in the corresponding months of 1997-98. |
| The Government initiated several reforms for providing a stimulus to
industrial growth (Box 1.1). Coal and lignite, petroleum (other
than crude) and its distillation products and bulk drugs were delicensed, as was the very
important agro-processing industry, sugar. Coal and lignite and mineral oils were
de-reserved from exclusive public sector production. The Budget also announced
dis-investment of specified portions of equity from select Public Sector Enterprises like
GAIL, IOC, CONCOR and VSNL and a separate policy package for the small-scale sector. Nine
items (six from ‘farm implements and tools’ and three from ‘leather’)
and electronic toys, were removed from the list of industries reserved for exclusive
manufacture by the small sector. Companies were permitted to buy-back their own shares
subject to restriction of buy-back to 25 per cent of paid-up capital and free reserves.
The rules were changed to allow companies to make inter-corporate investments without
prior approval of the Government. |
| A special additional duty of 4 per cent was levied on a large number of
imports so as to offset the sales tax and other local taxes imposed by the States and
provide a level playing field. Special ‘Task Forces’ were set up by the
Government to look into the problems of steel, cement and capital goods industry. As
recommended by them, seven imported inputs critical to steel manufacturing have been
exempted from special additional duty and import of their seconds and defective have been
allowed against specified c.i.f. values. Depreciation norms for income-tax purposes
applicable to purchases of commercial vehicles have been relaxed. |
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| Foreign investment norms were liberalised further :
 | Scope of foreign direct equity investment under RBI’s automatic
approval scheme has been enhanced. Indian companies have been permitted to accept
investment under the automatic approval route without the prior permission of RBI.
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| Requirement of prior approval from RBI for FDI/NRI/OCB investment and
issue of shares to foreign investors after FIPB/Government approval has been done away
with. |
| Investment limit for individual NRIs/PIOs/OCBs in the total paid-up
equity capital of a company has been increased to 5 per cent from 1 cent and the aggregate
investment ceiling has been raised to 10 per cent from 5 per cent. |
| NRIs/PIOs/OCBs permitted to invest in unlisted companies. |
| Liberalisation of existing norms for NRI/PIO/OCB investment in health
services sector. |
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| Infrastructure performance during April-December 1998 has declined as
compared to the corresponding period of 1997. Growth of six infrastructure and core
industries (electricity generation, coal, steel, crude oil, refinery throughput and
cement) decelerated to 2 per cent during April-December, 1998 from 4.1 per cent growth in
April-December 1997. Crude oil and steel have displayed negative growth rates. Rates of
growth have also declined for coal, refinery throughput and cement in 1998-99. Electricity
generation recorded an increased growth rate of 6.6 per cent in April-December 1998 as
compared to 5.6 per cent in April-December 1997 (Table 1.5). |
| Growth of sectors such as railways, ports and telecommunications, that do
not appear in the IIP, showed divergent trends. Revenue earning goods traffic on railways
in April-December 1998 was lower than in April-December 1997. The telecommunications
sector, however, maintained the high levels of growth in the current year. The decline in
many of these infrastructure and core sub-sectors seems to be primarily due to reduced
demand from industry. |
| In keeping with the firm commitment of the government, and the growing
consensus, a number of reforms were introduced in infrastructure, with a view to improving
quality, availability and viability. These include the following :
| The Indian Electricity Act, 1910 and Electricity (Supply) Act, 1948 were
amended to provide for private investment in power transmission. |
| Following enactment of the Electricity Regulatory Commission legislation,
the Central Electricity Regulatory Commission was set up, with an enabling provision for
states to set up regulatory commissions. A few States have already established such
commissions, while a number of them are in the process of doing so. |
| Procedures for extending sovereign counter guarantees, to the Fast Track
Power Projects which had been held up for some time, have been simplified and several
counter guarantees issued. |
| Foreign equity participation up to 100 per cent allowed for electricity
generation, transmission and distribution (except those of atomic reactor plants) and in
construction and maintenance of roads, highways, vehicular bridges, toll roads, vehicular
tunnels, ports and harbours. This is subject to the provision that the total foreign
equity in any such project does not exceed Rs. 1500 crore. |
| The tax holiday, granted to the power sector, has been extended up to the
year 2003. |
| Inland waterways and inland ports accorded infrastructure status for
fiscal concessions. |
| The policy for issuing licenses for providing Internet services has been
announced. There will be no license fee for the first 5 years and after 5 years a nominal
license fee of Rupee 1 will be charged. Private Internet service providers can also set up
international gateways after obtaining security clearance. |
| Concessions to imports of equipment for construction of National highways
extended to other road construction projects. |
| The Companies Act was amended to designate IDFC as an All India Public
Financial Institution with attendant fiscal incentives and the fund raising benefits. |
| The Urban Land (Ceiling and Regulation) Act, 1976 was repealed by
Ordinance. This could contribute significantly towards the development of urban
infrastructure including housing, especially in states, which have approved the repeal. |
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