Country Report 1St Quarter 1998 © the Economist Intelligence Unit Limited 1998 2

COUNTRY REPORT

India Nepal

1st quarter 1998

The Economist Intelligence Unit 15 Regent Street, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The EIU delivers its information in four ways: through subscription products ranging from newsletters to annual reference works; through specific research reports, whether for general release or for particular clients; through electronic publishing; and by organising conferences and roundtables. The firm is a member of The Economist Group.

London New York Hong Kong The Economist Intelligence Unit The Economist Intelligence Unit The Economist Intelligence Unit 15 Regent Street The Economist Building 25/F, Dah Sing Financial Centre London 111 West 57th Street 108 Gloucester Road SW1Y 4LR New York Wanchai United Kingdom NY 10019, US Hong Kong Tel: (44.171) 830 1000 Tel: (1.212) 554 0600 Tel: (852) 2802 7288 Fax: (44.171) 499 9767 Fax: (1.212) 586 1181/2 Fax: (852) 2802 7638 e-mail: [email protected] e-mail: [email protected] e-mail: [email protected]

Website: http://www.eiu.com

Electronic delivery EIU Electronic Publishing New York: Lou Celi or Lisa Hennessey Tel: (1.212) 554 0600 Fax: (1.212) 586 0248 London: Moya Veitch Tel: (44.171) 830 1007 Fax: (44.171) 830 1023 This publication is available on the following electronic and other media: Online databases CD-ROM Microfilm FT Profile (UK) Knight-Ridder Information World Microfilms Publications (UK) Tel: (44.171) 825 8000 Inc (US) Tel: (44.171) 266 2202 DIALOG (US) SilverPlatter (US) Tel: (1.415) 254 7000 LEXIS-NEXIS (US) Tel: (1.800) 227 4908 M.A.I.D/Profound (UK) Tel: (44.171) 930 6900

Copyright © 1998 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited. All information in this report is verified to the best of the author’s and the publisher’s ability. However, the EIU does not accept responsibility for any loss arising from reliance on it.

ISSN 0269-5294

Symbols for tables “n/a” means not available; “–” means not applicable

Printed and distributed by Redhouse Press Ltd, Unit 151, Dartford Trade Park, Dartford, Kent DA1 1QB, UK 1

Contents

3 Summary

India 5 Political structure 6 Economic structure 7 Outlook for 1998-99 13 Review 13 The political scene 20 Economic policy 24 The economy 26 Agriculture 28 Industry 30 Infrastructure and telecommunications 32 Energy 35 Foreign trade and payments

Nepal 38 Political structure 39 Economic structure 40 Outlook for 1998-99 41 Review 41 The political scene 44 Economic policy and the economy 47 Energy 48 Tourism 48 Aid and development

50 Quarterly indicators and trade data

List of tables 13 India: forecast summary 14 India: the 11th Lok Sabha 19 India: progress in reforms 28 India: company performance 29 India: value addition by Indian companies, 1996/97 35 India: import duties on petroleum products 50 India: quarterly indicators of economic activity 51 Nepal: quarterly indicators of economic activity 52 India: foreign trade 54 India: major partners’ trade

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 2

List of figures 10 India: non-food credit, 1997 13 India: gross domestic product 13 Indian rupee real exchange rate 24 India: bank investment 25 India: industrial production, 1997 26 India: inflation 41 Nepal: gross domestic product 41 Nepal: Nepalese rupee real exchange rate

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 3

February 1st 1998 Summary

1st quarter 1998

India Outlook for 1998-99: A general election will take place in February and March. The BJP will be strengthened by Congress defections and new alliances. A “fourth force”, including the BSP and RJP, may develop. Three or four major groupings could emerge from the election, none with an overall majority, and each rent by internal divisions. The broad consensus on economic policy will remain intact. A tax windfall will prevent a sharp increase in the budget deficit. Industry will remain sluggish. GDP growth will slow in both 1997/98 and 1998/99. Inflation will rise. The rupee will depreciate further in 1998, and bouts of volatility are likely. The trade and current-account deficits will widen, but foreign-exchange reserves will remain ample. The capital account will stay susceptible to negative sentiment.

The political scene: The UF government has fallen. The BJP has formed alliances with regional parties in the south and east. Sonia Gandhi has reinvig- orated the Congress campaign. The UF has remained largely united. The breakaway RJD has hurt the UF’s prospects in some important states. The BJP is likely to win the most seats. The tally for the UF and Congress will determine the next government. The UF government’s record on reform has been laudable.

Economic policy and the economy: The rupee’s fall has dominated economic concerns. The central bank has raised interest rates and tightened liquidity. Concerns about the budget deficit have abated. The tax amnesty scheme has been a success. Privatisation has stalled. Indian banks have so far avoided a financial crisis. The outgoing industry minister has cleared all pending investment projects. Official growth forecasts have been lowered. Industrial growth has been disappointing, although select sectors have fared well. Infla- tion has slowed. The number of new primary market issues has slumped.

Agriculture and industry: The monsoon was normal, but there have been sharp regional variations. Foodgrain output will rise, but the kharif harvest will contract. Some 3m tonnes of wheat and rice have vanished from government stocks. Output of some cash crops has fallen. Tea output has increased. British Gas has bought Gujarat Gas. The vehicle industry has remained depressed, fuelling competition. Steel and cement have recorded modest growth.

Infrastructure and telecommunications: Access to the Internet has been unlocked. Public telecommunications companies have become more competitive. Indian Railways has blocked a mine development. More incentives have been offered to private road projects. Tatas have bid to launch a new airline.

Energy: Enron’s projects have advanced, as have some “fast-track” private power projects. Poor power transmission has remained a concern. Political considerations have stalled an India-Bangladesh gas pipeline. Two LNG terminals have been approved. The downstream oil market has been deregulated further. Domestic petroleum demand has slowed.

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 4

Foreign trade and payments: Imports have outpaced exports in the April- October period. Garment exports have contracted. A five-year export strategy has been announced. Threats of credit rating downgrades has caused alarm. Indian companies have been less active in foreign capital markets. Foreign portfolio investors have been net sellers. FDI flows have risen.

Nepal Outlook for 1998-99: The NDP-NC-NSP coalition government will face a no-confidence vote. If the Thapa government falls, the CPN-UML and the NNDP will form a government. The CPN-UML will try to force an election, which they will win. The trade and budget deficits will widen.

Review: The king has intervened in a constitutional crisis. The main parties are riven by factional divisions. The NDP has split. Exports of garments and carpets have slowed, as has inflation. The trade and current-account deficits have widened. Tax targets have been missed. VAT has been introduced. Food subsidies have been cut but fertiliser prices have been raised. The rupee has slipped. Tourist arrivals have risen slightly. The Pancheswar power project has stalled. Bilateral and multilateral donors have pledged aid.

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

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 India 5

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, re-electable for five-year terms, elected indirectly by national and state legislatures

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

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

State legislatures Uni- or bicameral, elected members, state governor appointed by president; state elections every five years

Legal system Based on 1950 constitution and English common law

National government The United Front (UF) coalition government fell in late 1997 following the withdrawal of parliamentary support by the Congress (I) party. The first UF government came to power in June 1996, lost a confidence motion in April 1997, but was succeeded by another UF government, led by I K Gujral. The coalition was made up of 13 different parties and did not have a parliamentary majority

National elections April and May 1996 (Lok Sabha); next election scheduled for February/March 1998.

Main political organisations Indian National Congress (Indira) (Congress (I)); Bharatiya Janata Party (BJP); Janata Dal; Communist Party of India (Marxist) (CPI (M)); Communist Party of India (CPI); Tamil Maanila Congress (TMC); Telegu Desam Party (TDP); Dravida Munnetra Kazhagam (DMK)

Council of Ministersa Prime minister, external affairs, civil supplies & public distribution Inder Kumar Gujral (Janata Dal)

Key ministers Agriculture Chaturanan Mishra (CPI) Civil aviation C M Ibrahim (Janata Dal) Commerce Bolla Buli Ramaiah (TDP) Defence Mulayam Singh Yadav (Samajwadi) Finance Palaniappan Chidambaram (TMC) Home affairs Indrajit Gupta (CPI) Human resources development S R Bommai (Janata Dal) Industry Murasoli Maran (DMK) Information & broadcasting Jaipal Reddy (Janata Dal) Railways Ram Vilas Paswan (Janata Dal) Rural areas & development Yerran Naidu (TDP) Water resources Janeshwar Mishra (Samajwadi)

Central bank governor Bimal Jalan

a Outgoing. New council of ministers to be formed following the general election in February- March 1998.

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 6 India

Economic structure

Latest available figures

Economic indicators 1993 1994 1995 1996a 1997a GDP at market pricesb (Rs bn) 8,096 9,537 10,986 12,466 13,872 GDP at market pricesb ($ bn) 258.1 303.7 328.4 351.6 370.2 Real GDP growthbc (%) 6.0 7.2 7.1 6.8 5.4 Consumer price inflation (%) 6.4 10.2 10.3 8.9d 6.5 Population (m) 883.9 918.6 935.7 954.5 973.5 Merchandise exports fob ($ m) 22,016 25,523 31,239 32,992 34,393 Merchandise imports fob ($ m) 24,108 29,673 37,957 39,353 41,466 Current account ($ m) –1,876 –1,676 –5,561 –4,129 –4,882 Reserves excl gold ($ m) 10,199 19,698 17,922 20,170d 24,688d Total external debt ($ bn) 93.8 101.2 94.3 93.2 91.0 Debt-service ratio, paid (%) 27.3 27.5 29.9 20.7 23.8 Exchange rate (av; Rs:$) 30.49 31.37 32.43 35.43d 36.31d

January 30th 1998 Rs38.82:$1

% of % of Origins of gross domestic product 1995/96 total Components of gross domestic product 1995/96 total Manufacturing, construction & utilities 29.2 Private consumption 62.0 Agriculture, forestry, fishing & mining 28.8 Government consumption 9.9 Transport, communications & trade 20.0 Investmente 26.0 Real estate & finance 11.3 Exports of goods & non-factor services 8.9 Other services 10.7 Imports of goods & non-factor services –6.8 GDP at factor cost 100.0 GDP at market prices 100.0

Principal exports 1996/97f $bn Principal imports 1996/97f $bn Agriculture and & allied products 6.8 Petroleum & petroleum products 10.1 Engineering goods 4.8 Capital goods 9.2 Gems & jewellery 4.7 Gems 3.0 Garments 3.7 Iron & steel 1.5 Cotton yarn & fabric 3.8 Fertiliser 0.9 Total incl others 33.1 Total incl others 38.5

Main destinations of exports 1995/96 % of total Main origins of imports 1995/96 % of total EU 26.5 EU 26.6 UK 6.3 Germany 8.6 Germany 6.2 UK 5.2 Belgium 3.5 Belgium 4.6 US 17.4 US 10.5 Japan 7.0 Japan 6.7 OPEC 9.7 OPEC 20.9 a EIU estimates. b Fiscal years beginning April 1st. c At factor cost. d Actual. e Including change in stocks. f Reserve Bank of India figures.

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 India 7

Outlook for 1998-99

Congress’s miscalculation India will have a new government by mid-1998, following a mid-term parlia- forces an early election— mentary election, scheduled for February and March. The United Front (UF) coalition government, led by the prime minister, Inder Kumar Gujral, fell from power in December following the withdrawal of parliamentary support by the Congress (I) party, led by Sitaram Kesri. The party had threatened to withdraw its support for the UF unless the Dravida Munnetra Kazhagam (DMK)—a Tamil Nadu-based party—was removed from the coalition following fresh allegations of links between the DMK and the Tamil Tiger rebels in Sri Lanka in the assassination of the former Congress prime minister, Rajiv Gandhi. The UF refused to comply. In this way, Mr Kesri allowed himself to be trapped in a position where he had raised the stakes to a point where he had no alternative but to force an election, even though it spelt possible disaster for his own party.

—which will probably Initial calculations and electoral polls suggested that the Bharatiya Janata Party produce another hung (BJP), strengthened by defections from Congress and by the formation of party parliament— alliances throughout India, would substantially improve its parliamentary position. Together with its allies, the BJP held 195 seats in the last parliament, and needs around 240 to be able to form a stable central government. At the time the election was called in December, the formation of a BJP government seemed a reasonable prospect, the alternative being another UF government with backing from a weaker and more chastened Congress.

—complicated by the As the election has unfolded, two uncertainties have clouded the picture. entrance of Mrs Gandhi— The decision by Sonia Gandhi (and her daughter Priyanka) to campaign for Congress, though not running for election herself, has changed the political equation. Despite her political handicaps—including her Italian origin, her poor command of both English and Hindi and her association with the Bofors bribery case which ensnared her late husband—Mrs Gandhi has drawn large and enthusiastic crowds. She has totally eclipsed the uninspiring Mr Kesri, who suffers acutely from a lack of charisma, leaving the opposition parties rattled. Congress might be able to avoid disaster by polling well among poor Indians, who are attracted to the dynastic principle of the Gandhis, and come close to maintaining or even surpassing its present tally of 144 seats.

—and the emergence of a The second complicating phenomenon is the formation of a “fourth force” “fourth” force around the Rastriya Janata Party (RJP), formed by the ex-Janata Dal leader, Laloo Prasad Yadav (whose wife, Rabri Devi, is standing in for him as the chief minister of Bihar while he faces a corruption probe), and the party of Dalits, or “untouchables”, the Bahujan Samaj Party (BSP). Between them, the two parties are expected to win many seats in north India, damaging the prospects of the biggest party in the United Front, the Janata Dal.

Hence, the election outcome could be very messy with three (or perhaps four) major groupings emerging, none with an overall majority, and each—even the BJP and Congress—rent by internal divisions among the electoral partners and within the parties themselves. Under India’s first-past-the-post system, last- minute tactical voting considerations will be critical to the outcome.

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 8 India

The BJP is likely to Barring a momentous (and unlikely) shift behind Congress or the UF, the BJP “win”— will “win” the general election, securing—as it did in 1996—the largest share of the popular vote and the largest number of parliamentary seats. If, however, the party fails to improve much upon its 1996 result— when, together with its allies, it won 195 seats—there would be insufficient support to form a government since the secular parties would not provide the BJP and its allies with the 75-odd seats it needs to rule with an overall majority. However, if the BJP wins 235 seats, there might just be enough defectors from the secular parties to bring the BJP to power. The arithmetic is tight.

—but the race for second The race for second place is, arguably, more important. It is plausible that the place is pivotal— UF can win 160-199 seats in the 1998 poll, compared with 177 in the 1996 election. If the number of seats won by the UF falls within the upper end of this range, and if the tally for Congress and its allies is at the lower end or the middle of a probable range of 80-120 seats (down from 144 in the 1996 election), then the UF will clearly be in the ascendancy. In that case Mr Kesri or his successor would be unlikely to risk destabilising a UF government again, and Congress might even join it as a junior partner. But if support for the UF falls below 160, and if Congress can secure at least 110 seats, then Congress will be key to the formation of a non-BJP government and will be able to dictate the terms. Some of the flakier bits of the UF, such as the Samajwadi Party, might cross over to Congress.

—and will determine the The exact point at which Congress becomes a kingmaker or the UF has the next government ascendancy is difficult to predict. The role of maverick groupings, such as the RJP in Bihar and the BSP, which have already demonstrated a capacity for mischief out of all proportion to their political strength, may further compli- cate the calculation. It is possible that, by joining forces, the RJP, led by Mr Yadav, and the BSP, led by S Mayawati, could emerge as a powerful force in their own right, thereby destabilising national politics further.

Economic policy Economic policy is unlikely to be an important election theme. There is a platforms will not swing surprising consensus on economic matters. Economic grievances are few: the the vote— level of growth is respectable, if not spectacular, and inflation is low. The BJP is campaigning on a platform which could broadly be described as pro-market and pro-business, although it is tinged with anti-foreign investment sentiment. (Although, having agreed to let the US energy company, Enron, stay in India the party can no longer be accused of rampant economic nationalism.) How- ever, the BJP will have to contend with electoral allies who may not support fully its platform, such as the Samata Party, led by the veteran socialist, George Fernandes.

Congress will continue to campaign on an overtly pro-liberalisation platform, which it hopes to enhance by pushing to the fore the former finance minister, Manmohan Singh, who is closely identified with both the reform process and clean politics. The views of the UF member parties will remain more diverse, ranging from aggressively pro-reform politicians such as the UF finance minister and Tamil politician, Palaniappan Chidambaram, and the industry minister, Murosoli Maran, to the most hardened Communist Party members, who reluctantly accept reform in theory but resist measures which

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 India 9

might negatively affect trade unions or threaten employment in public-sector industries. The grouping we call the “fourth force” consists mainly of shame- less populists whose main aim is to obtain more resources for their own caste supporters while paying scarce attention to the economy.

Our forecast still assumes that the next government is unlikely to reverse, or even slow, liberalisation. But, as under the last government, battles must be fought sector by sector, project by project, state by state to achieve further relaxation of India’s still highly regulated economy.

—as populism, not It is the ascendancy of populism, and not economic nationalism or socialism, socialism, remains the that will remain the greater threat to India’s economic health. Mrs Gandhi, problem among others, has made a few statements in support of socialism, but few Indian politicians still believe in it. The ability of pro-market and socialist politicians in broadly reformist state and national governments to forge common cause is proof of this ideological swing.

The main dividing lines in Indian politics now have little to do with left-wing or right-wing ideologies. Divisions will remain based on religion; despite the BJP’s pitch towards Muslims, it will still be seen as a religious (Hindu) party. Caste will remain divisive, with only Congress still purporting—albeit with difficulty—to project a casteless image. Parties will also remain divided over the balance of power between the states and the centre. Only Congress—and increasingly the BJP—will argue for strong central government. The loyalties inspired by powerful personalities such as the RJP leader, Laloo Prasad Yadav, the BSP leader, Ms Mayawati, and the leader of the Samajwadi Party, Mulayam Singh Yadav, will also continue to consolidate support for their respective parties. The issue around which all parties tend to converge is populism: demanding government subsidies—which affect budget discipline—on food, power and transport, among other items.

A clever move to stem the Faced with a widening budget deficit, which threatened to exceed substantially budget deficit may work— the 4.5% of GDP target for 1997/98, the finance minister came up with a brilliant gimmick: a tax amnesty programme for tax avoiders. Beyond all ex- pectations, the programme has netted a staggering Rs100bn ($2.5bn). This windfall collection will help to offset the expected shortfall from an abortive state asset divestment (which was budgeted to earn Rs70bn), the cost of the election (Rs6bn), the cost (so far unspecified) of writing off the deficits of state energy companies accumulated as a result of price controls, and a shortfall on revenue caused by slower growth. There is likely to be some slippage from the budget deficit targets, perhaps to 4.8% of GDP—due in part to the pay award to central government employees, which has already led to similar awards from state governments—but it will not be disastrous.

—but growth will remain According to revised estimates recently released by the Central Statistical in the doldrums— Organisation (CSO), GDP growth in 1996/97 was 7.5%, compared with a previous “quick” estimate of 6.8%. This change is largely brought about by a substantial revision of the growth of the agricultural sector, which is now reported to amount to 7.9%, buoyed by a 6% increase in agricultural production.

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 10 India

(We have not incorporated these revised estimates into our forecast, as a com- plete breakdown of growth by sector was not yet available.)

However, estimates for GDP growth (at factor cost) for the current financial year are now being downgraded by domestic and overseas forecasters to around 5.6% as the EIU predicted in its last report (4th quarter 1997, page 11). Following record monsoon crops in 1996/97, agricultural output was expected to be subdued; it may grow by no more than 1% in 1997/98. In addition, industry remains lacklustre, with only a few sectors performing better than in 1996/97. Factors hindering industrial growth include recession in some consumer goods industries, depressed conditions in the capital markets, where there is little appetite for investment, and supply bottlenecks, for example in the oil and power generation sectors. In April-September 1997, industrial output rose by 4.7%, year on year, compared with 10.7% in April-September 1996, prompting us to lower our forecast for industrial growth to 5.7%. Assuming growth in the services sector of 8%, we forecast GDP growth at factor cost at 5.4% in 1997/98, down slightly from our forecast of 5.6% in the previous quarter’s report. How- ever, a further downward revision is possible: if the CSO’s revised estimates for agricultural growth in 1996/97 are confirmed, agricultural output in 1997/98 could stagnate or even contract, pulling GDP growth down nearer to 5%.

—in 1998/99 as well Our forecast for a further slowdown in the economy in 1998/99 rests on several assumptions. First, we are projecting that interest rates, which have risen across the board in the last two months, will begin to translate into higher lending rates and will remain above mid-1997 levels—when the prime lending rate fell to nearly 13% from 16-17% one year earlier—until mid-1998/99. Any pick-up in growth of non-food credit, which has been lacklustre in 1997/98—ranging between 10-12% in the eight months to November—will be arrested by the recent rise in interest rates, aimed at stemming the fall of the rupee. Bank investment in corporate bonds, debentures and preference shares, and commercial paper issued by private and public-sector companies has grown more sharply than non-food credit. Bank investment in commercial paper alone had increased from Rs7.3bn ($190m) at the end of 1996/97 to Rs56.9bn ($1.5bn) by December 5th. However, many companies will freeze their investment plans India: non-food credit, 1997 % change, year on year until the general election and the subsequent period of government formation

13 are over, while continued uncertainty about the rupee will prevent others from going ahead with their approved foreign borrowings. The modest upturn in

12 fixed investment which we had anticipated in the final quarter of 1997/98 may not materialise until late in 1998/99, delaying an acceleration of industrial 11 growth until 1999/2000.

Our forecast also assumes that agriculture will suffer the negative effects of the 10 first bad monsoon in 11 years in 1998/99. Moreover, although the El Niño weather system has only had a limited impact on Indian weather patterns so 9 far in 1997/98, a few crops—such as sugar and tea crops in north India—are threatened by its effects in 1998/99. A further slowdown in agriculture growth, Jan..Apr..Jul..Oct. to a forecast 0.5%, coupled with a marginal deceleration in industrial growth to Source: Centre for Monitoring the Indian Economy (CMIE). 5.5%, suggest that GDP growth will decelerate slightly, to 5.2%, in 1998/99.

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 India 11

Inflation will begin Inflation had been slowing steadily throughout most of 1997, with the decel- to rise— eration most marked in wholesale prices, where annual inflation remained in the 3-4% range in the five months from July. Various factors explain the downward pattern. Monetary policy has been generally disciplined. Domestic demand has been subdued. The success of the government’s borrowing programme in 1997/98—banks were enthusiastic investors in gilts, which meant that the government had nearly completed its gross annual market borrowing of Rs510bn ($13bn) by October—precluded resort to deficit financing, which has in the past swelled the money supply. Harvests have been good in the last few years, while liberal imports of scarce goods have averted shortages. More- over, the gradual liberalisation process has sharpened price competition for manufactures and some services. However, consumer price inflation, which slowed to 4.7% in August, accelerated to 4.9% in September and 5.5% in October. High inflation in the first half of the year—annual consumer price inflation was rising by over 10% in the first few months of 1997—is expected to prevent annual average inflation from falling below 6.5% in 1997, despite a slowing of inflation in the middle of the year.

Cost-push pressures will strengthen in 1998, fuelled by the depreciation of the Indian currency, which will push up some import prices—but not for oil imports, the dollar price for which is forecast to fall in 1998—and a disappointing harvest for some crops. The election and the associated increase in transfer payments and cash with the public will also boost inflationary pressures, as it has in past election years. However, these pressures will be offset in part by tighter liquidity and the weakness of domestic demand, which are forecast to contain average consumer price inflation at around 6.5% in 1998.

—but the rupee “crisis” is The slide of the rupee from Rs35.8:$1 to over Rs40:$1 in early January has overplayed generated a great deal of nervous comment. (The rupee had recovered to Rs38.8$1 at the end of January following intervention by the central bank and a slight rise in interest rates.) However, it would be a mistake to view the recent movement of the Indian currency as a critical situation comparable to that facing several South-east Asian countries. The 10% devaluation of the rupee in 1997 has returned the real effective exchange rate to its position of four years ago. Exporters are pleased, believing that some of their lost competitiveness has been restored, while the foreign-exchange reserves position remains comfortable (at $24.7bn at the end of 1997, compared with $20.2bn at the end of 1996). The corrective increase in short-term interest rates is trivial by comparison with, say, the 300% rate increase which was employed by the Hong Kong Monetary Authority to defend the Hong Kong dollar peg. Provided the exchange rate stabilises at around Rs40:$1, we can treat the devaluation as an early correction of an overvalued rate which was due for adjustment.

However, the fall in the rupee’s value carries costs too, which could become serious should the slide continue. Private investment in infrastructure, and Indian corporate balance sheets, are being hit by the higher domestic costs of dollar-based debt and foreign public debt becomes more expensive to service. Moreover, a further fall could drag down an already depressed stockmarket and hurt import-dependent production.

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 12 India

We maintain our forecast that the rupee will continue to slide in 1998, finishing the calendar year at Rs43:$1.The monetary authorities will act to smooth over any rupee volatility, especially during the election period. However, over the next 12 to 18 months the possibility of some exchange-rate turbulence— perhaps sparked by reports of net foreign portfolio investment sales or, later in the year, by a small devaluation in the Chinese currency, and accompanied by periods of “overshoot”, when most of the players in India’s thin foreign- exchange market all buy and sell in the same direction—cannot be ruled out.

The balance of payments The devaluation of the rupee should ensure that export growth is sustained, will remain strong— and help to stem the growing visible trade deficit. Exports with a low import content, and those destined for non-Asian markets, may benefit from the rupee’s depreciation. However, a few exports will be affected by the financial and currency crisis in South-east and North Asia. For example, gems and jewellery exports, which account for about 15% of India’s dollar export earnings, will be affected by a slowdown in demand in the once-buoyant Asian markets.

World oil prices are forecast to contract (in dollar terms) in 1998, helping to cap import growth (in dollar terms) to under 6%. In addition, domestic demand will remain subdued, curbing the demand for imports of capital goods. Thus, export growth will marginally outpace import growth, but not by enough to prevent a widening of the trade deficit to $7.4bn (fob-fob) in 1998. Also assuming lower private transfers in 1998—as non-resident Indians delay some remittances until the uncertainty surrounding both the currency and the political scene dissipates—the current-account deficit will widen to $5.5bn. However, the current-account deficit will remain small in comparison with India’s economy (at 1.5% of GDP).

In 1999 a recovering industrial sector will begin to draw in more imports and produce more exports, lifting both import and export growth (in dollar terms) above 10%. Inward private transfers will also rise, reflecting renewed confidence in the Indian economy, and helping to contain the current-account deficit to $5.9bn, or 1.5% of GDP. Ample foreign-exchange reserves, rising levels of foreign direct and portfolio investment and private foreign debt, as well as foreign aid, will comfortably cover India’s current-account imbalance.

—but capital flows must However, the Indian monetary authorities must remain alert. A large outflow of be watched capital from India’s portfolio investors or from non-resident Indians holding deposits in bank deposits in rupees or foreign exchange (this latter group were the source of the financial crisis in 1990/91) could alter the comfortable balance- of-payments scenario, as could the sudden inability of Indian companies to borrow overseas. The possible precariousness of the payments position explains the nervousness over unconfirmed reports that the main international rating agencies will pass on the Asian flu to India by downgrading Indian credit rating to junk bond status. This seems unlikely—and would be unfair. But there is a small—outside—risk that India could be caught in the financial contagion leading to a heavier devaluation of the Indian currency than we currently forecast.

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 India 13

India: forecast summarya (% change year on year unless otherwise indicated) 1996b 1997b 1998c 1999c Real GDP at factor cost 6.8 5.4 5.2 6.4 Agriculture 5.7 1.0 0.5 3.5 Industry 6.9 5.7 5.5 7.0 Services 7.4 8.0 7.7 7.6 Real GDP at market prices 6.8 5.3 5.1 6.4 Private consumption 7.1 6.1 7.1 6.1 Public consumption 8.0 11.0 7.5 9.0 Gross fixed investment –8.2 7.0 9.5 13.7 Exports of goods & services 6.7 3.5 4.5 6.0 Imports of goods & services 0.0 6.0 14.5 12.0 Consumer price inflation (av; %)d 8.9e 6.5 6.5 7.0 Merchandise exports fob ($ m)d 32,992 34,379 36,495 40,198 Merchandise imports fob ($ m)d –39,353 –41,466 –43,901 –48,480 Current-account balance ($ m)d –4,129 –4,900 –5,484 –5,895 Exchange rate (av; Rs:$)d 35.4e 36.3e 41.2 43.8

a Fiscal years April-March unless otherwise indicated. b EIU estimates. c EIU forecasts. d Calendar years. e Actual.

India: gross domestic product India: Indian rupee real exchange rate (d) % change, year on year 1990=100

8 India (a) 110 7 Asia excl Japan

6 100

5 90 4 Rs:DM 3 80 Rs:$ 2 70 1

0 60 1995 96(b) 97(b) 98(c) 99(c)

(a) Fiscal years beginning April 1st. (b) EIU and official estimates. Rs:¥ (c) EIU forecasts. (d) Nominal exchange rates adjusted for changes in relative consumer prices. 1990 91 92 93 94 95 9697 97 98(c) 98 99(c) 99 Sources: EIU; IMF, International Financial Statistics.

Review

The political scene

The mid-term general India will hold a mid-term general election over four days in February and election— March, 21 months after the formation of the first United Front (UF) coalition government in June 1996. This election—which is unwanted, unplanned and unnecessary—resulted largely from miscalculation and accident.

—the product of political The catalyst for the political drama which resulted in the fall of the UF govern- miscalculation— ment on December 3rd was the publication of a report by a Supreme Court justice, M C Jain, on the circumstances surrounding the assassination of the

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 14 India

late Congress (I) prime minister, Rajiv Gandhi, by supporters of the Sri Lankan Tamil Tigers guerrillas in 1990. The report is very long and can be interpreted in different ways. In response to the report the Congress leader, Sitaram Kesri, apparently prompted by a faction close to the Gandhi family (who may or may not have been acting on the instructions of Rajiv’s Italian-born widow, Sonia), demanded the exclusion from the UF coalition of the Tamil Nadu party, the Dravida Munnetra Kazhagam (DMK), which is alleged in the report to have been sympathetic to the Tigers. The prime minister, Inder Kumar Gujral, and his coalition refused to budge and, as a minority government dependent on Congress support, it fell.

India: the 11th Lok Sabha

Seats Congress (I) & allies 144 Congress (I) 138 Muslim League 2 Congress (Tiwari) 2 Kerala Congress 1 United Goa Democratic Party (UGDP) 1 BJP & allies 193 Bharatiya Janata Party (BJP) 162 Shiv Sena 15 Samata 5 Akali Dal 8 Haryana Vikas Party (HVP) 3 United Front 161a Janata Dal 29 Communist Party of India (Marxist—CPI (M)) 32 Communist Party of India (CPI) 12 Revolutionary Socialist Party (RSP) 5 Forward Bloc 3 Tamil Manila Congress (TMC) 20 Dravida Munnetra Kazhgam (DMK) 17 Telugu Desam Party (TDP) 17 Samajwadi Party 17 Asom Gana Parishad (AGP) 5 Congress (Tiwari) 2 Maharashtra Gomantak Party (MGP) 1 Bhartiya Kisan Kamgar Party (BKKP) 1 Others 46 Bahujan Samaj Party (BSP) 11 Rastriya Janata Party (RJP) 16 Independents and others 15b Vacancies 4 Total 544c

a Total does not include the 16 former members of the Janata Dal who joined the Rastriya Janata Party, formed by Laloo Prasad Yadav. b 11 independents normally vote with the UF. c Not including the speaker of the house.

Source: Lok Sabha.

The parliamentary arithmetic precluded any other group forming a government and, as in the crisis last year (2nd quarter 1997, page 13), Mr Kesri wholly

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 India 15

miscalculated his ability to split the government coalition. Probably uninten- tionally, he stumbled into this election, which occurs at a time when the main beneficiary is likely to be the Bharatiya Janata Party (BJP), the main adversary of both Congress and the UF, and when Congress itself risks a self-inflicted electoral disaster.

—has sent politicians back For the Indian politician there are three stages in any general election. The first on the campaign trail stage is alliance formation to prevent votes being “wasted” on candidates who cannot win under the first-past-the-post system. Under the Indian (as in the British) system, parties must try to avoid being marginalised. Winners take all the seats in the constituencies that they win. Tactical voting is quite well developed in contests with three (or more) candidates but parties prefer pre- election pacts. The second stage is the campaign itself, which will continue up to voting day. Although the use of mass media in Indian campaigns is evolv- ing, to a remarkable degree campaigns still depend on mass rallies and on word of mouth, particularly to mobilise the support of caste and sub-caste “vote banks” at a village level (though castes are increasingly cut across by other differentiations). The third stage, which occurs after the election results are announced, is coalition formation. Whether, after an adversarial campaign, Congress and its allies can still make common cause with the UF will be the key determinant of the composition of the next government.

The BJP shows its The BJP has endured the division between its purist, fanatical and nationalist strength— leanings and its more pragmatic inclinations, embodied by the prime minister designate, A B Vajpayee, who headed India’s briefest government, a 13-day BJP administration, in mid-1996 (3rd quarter 1996, page 13). For this election, at least, the more pragmatic approach is in the ascendant. Sensing the possibility of a major political advance, the BJP has pushed Mr Vajpayee, a popular and respected politician, into the spotlight. The party has also made a pitch for voters in south India, from lower castes and from religious minorities who have traditionally viewed the BJP with antagonism and suspicion.

—with new alliances— The BJP appears to have overcome its own previous “untouchability”, and has already concluded an impressive array of alliances. Prior to the campaign, the BJP was allied with four groups: the virulently sectarian Shiv Sena in Maharashtra; the Sikh Akali Dal Party (ADP); a small party in Haryana, the Haryana Vikas Party (HVP); and—more improbably—the Samata Party, led by the veteran socialist leader, George Fernandes.

The BJP has added to its array of allies. New ones include the All India Anna Dravida Munnetra Kazhagam (AIADMK), led by Jayalalitha Jayaram. Based in Tamil Nadu, the AIADMK was trounced in the 1996 election after revelations about Ms Jayalalitha’s ostentatiously corrupt lifestyle but is now staging a comeback (although the BJP’s link with Ms Jayalalitha may weaken the party’s efforts to capitalise on its own clean image). The BJP has also allied with a breakaway Congress group in West Bengal, the Trinamul Congress (TMC), led by the former Congress chief minister, Mamata Banerjee, with the former Janata Dal leader, Ramakrishna Hegde, in Karnataka and, in Orissa, another defecting Janata Dal heavyweight, Biju Patnaik. It has also formed links with a breakaway group from the ruling Telegu Desan Party (TDP) in Andhra Pradesh,

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 16 India

with an influential group of 22 Congress state assembly defectors in Bihar, and with assorted individuals across the country. These alliances may not all cohere. Worse, several of the alliances run the risk of making the BJP look just as opportunistic and indifferent to corruption as its adversaries. But for the first time in its history, the BJP is acquiring the broad reach of support that will establish it as India’s leading party.

—while a collapsing In the weeks after the fall of the UF government, Congress appeared to be Congress— heading for terminal collapse. It had failed, dismally, to win over any of the UF coalition partners. Even the Samajwadi party, led by Mulayam Singh Yadav, with which it has the closest links, remained with Mr Gujral’s government. Congress has almost certainly lost ground since the 1996 election, when it garnered less than 30% of the popular vote, marking a historic low for the party that had dominated India since independence. The issue on which it launched the election—the findings of the Jain Report into the assassination of Rajiv Gandhi—has no popular resonance at all. On the issues that build support— concerns over health clinics, water, schools, electricity—local state and national governments led by Congress have failed over the years to deliver.

Congress activists also faced the awful prospect of campaigning under the leadership of a party president, Sitaram Kesri, widely considered to be both uncharismatic and a poor speaker. He is bereft of ideas, has never won an election, even as an MP, and is surrounded by Congress members who supported the palace “coup” (4th quarter 1996, page 12) which gave him the leadership, but have little else to commend them.

—looks to the Gandhis for Into this apparently hopeless situation, with Congress party members desert- salvation— ing in growing numbers, enters Rajiv Gandhi’s widow, Sonia Gandhi, willing to lend her support to the campaign. She has been attracting huge and enthusiastic crowds to her appearances, at which she has often been accompanied by her daughter, Priyanka.

Mrs Gandhi’s liabilities are almost as numerous and as debilitating as Mr Kesri’s. She is a foreigner who speaks limited Hindi and heavily-accented English, she has no oratorical skills and no political experience. She and her Italian family and friends are associated with an unsavoury corruption scandal which emerged during her husband’s tenure as prime minister. She is thought to be a target for assassination, as were her husband and mother-in-law. More- over, she has spent the last seven years cultivating an influential role in the political background which has drawn strength precisely from her lack of ambition and limited political exposure.

But she has, of course, one unique qualification: her husband’s surname. Referred to deferentially as “madam”, she is the surviving head of the Gandhi dynasty. This ensures her a solid block of popular support, especially among the very poor. Even before she had spoken a single word on the campaign trail, surveys placed her as the second most popular choice for prime minister, after Mr Vajpayee but far ahead of other candidates, including Mr Kesri and Mr Gujral.

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 India 17

It is conceivable that Mrs Gandhi can create a “bandwagon” effect, as did both her husband and her mother-in-law in past elections, drawing new or wayward supporters to Congress. Of the optimistic scenarios, the most plausible is that she helps her party avoid annihilation and achieve a respectable third place in the election. This result would create a platform for her supporters, such as the former Congress minister, Arjun Singh, and possibly her daughter, and lay the groundwork for the future recovery of Congress. However, this result also requires the party to capitalise on Mr Kesri’s single strength: his capacity for backstage wheeling and dealing to create favourable electoral alliances. Congress may try to forge alliances with the RJD leader, Laloo Prasad Yadav, and his party in Bihar; with the Dalit (“untouchable”) BSP in Uttar Pradesh and in Madhya Pradesh; and with the breakaway Lok Shakti party, led by Ramakrishna Hegde, in Karnataka (which is also being targeted by the BJP). Congress could also work to attract BJP defectors in Gujarat and various leftist groupings in Maraharstra. If Mr Kesri manoeuvres successfully and if Mrs Gandhi draws the crowds, this unlikely duo may do surprisingly well for the party.

—while the United Front The UF government—an improbable line-up of 13 parties, including the two remains largely united— communist parties, free-market liberals and politicians representing narrow and incompatible state interests—proved to be remarkably resilient during its 18 months in office. The coalition survived the recent assault from Congress by refusing to expel the DMK from the fold, while individual parties and politicians in the UF withstood the temptation to switch allegiances.

—except for damaging Its one major fracture—the breakaway from the Janata Dal of the Bihar chief splits in the Janata Dal minister, Mr Yadav, and the formation of his own party—led to the Janata Dal’s loss of 16 of its 45 parliamentary members (4th quarter 1997, page 15). The split may hurt the Janata Dal’s electoral prospects in Bihar where, in the event of a tie-up between Mr Yadav and Congress, the Janata Dal could lose over 20 parliamentary seats. The split in Bihar has spread to Karnataka, where a former chief minister, Mr Hegde, has formed a regional group, Lok Shakti, and discussed an electoral pact with the BJP, and to Orissa, where the breakaway Biju Janata Dal, led by the former Janata Dal heavyweight, Biju Patnaik, has forged an electoral alliance with the BJP. The Janata Dal has also been embarrassed by a corruption scandal around the chief minister of Assam, P K Mahanta, whose party has five seats in parliament. The splits in the Janata Dal, the original cornerstone of the UF, will cost the party seats and underscore its failure to develop as a pan-Indian, secular, alternative to Congress.

The UF will fight for Uttar The UF will fight a fierce battle in Uttar Pradesh, where the UF has 20 seats, the Pradesh— BJP 52 and Congress five. The formation of alliances between the UF (led in the state by the Samajwadi Party of Mulayam Singh Yadav), Congress, the BJP and the BSP (the Dalit party led by S Mayawati) will be closely watched. Politics in Uttar Pradesh are turbulent, opportunist and corrupt. Almost any permut- ation of alliances is possible with radically different political outcomes.

—and will fare best in The UF parties will fare best in Tamil Nadu, Andhra Pradesh and West Bengal. three states In Tamil Nadu, the DMK and the party of the finance minister, Palaniappan Chidambaram, the Tamil Maanila Congress (TMC), are reasonably secure. In

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 18 India

Andhra Pradesh, the competent and reformist chief minister, N C Naidu, should manage to limit any anti-incumbent sentiment. In West Bengal, the Communist Party of India (Marxist), or CPI(M), should profit from a state-level split in Congress. Together, these three states should provide around 100 seats for the UF in the Lok Sabha. Whether the tally rises higher will depend very much on the success of electoral alliances in Uttar Pradesh.

Political weakness need The UF’s time in government has coincided with a period of respectable growth, not stall reforms— low inflation and freedom from major financial crises. Despite the trenchant opposition of leftist parties in the UF—primarily the two communist parties, the Communist Party of India (CPI) and CPI(M)—the economic reforms of the previous Congress government, initiated by the former finance minister, Manmohan Singh, have been continued by his UF successor, Mr Chidambaram (who served as a reformist minister in the Congress government before switching his loyalty). Mr Singh and Mr Chidamabaram regularly square off in the financial press about their respective records but their approaches have been virtually identical: gradual reduction in the budget deficit, a gradual liberalisation, and reductions in personal and corporate tax and tariffs.

—as evidenced by the UF Mr Singh moved faster on reform, but Mr Chidamabaram earns credit for hav- reformers— ing made progress in building consensus across the ideological spectrum and advancing his agenda despite the handicap of a very weak government. As the outgoing finance minister during the caretaker administration ahead of the election, Mr Chidambaram—along with other reformist ministers, such as the industry minister, Murosoli Maran—has been pressing ahead with several pieces of outstanding business, including the completion of the sales of stock in four state-owned companies, the issue of sovereign guarantees to four long- delayed “fast-track” private power projects, and the reorganisation of the boards of Indian state companies. As a parting shot, Mr Maran cleared all outstanding foreign investment applications (see Economic policy).

If these measures are completed, the UF’s record of reforms passed through or initiated during its tenure will not be insignificant. Achievements include:

• Telecommunications: the establishment of the Telecommunications Regulatory Authority of India (TRAI), the liberalisation of Internet services and the issuance of basic telecommunication licences for five states;

• Finance: the partial deregulation of the banks, including moves to allow banks more freedom to set interest rates;

• Oil: launching a programme to dismantle the administrative pricing structure which has prevented the liberalisation of the oil industry;

• Urban land ceiling act: the launching of a legislative process to repeal the Urban Land Ceiling Act, which has long distorted the market in urban land and property;

• Taxes: a decrease in both personal and corporate tax rates;

• Exchange controls: the repeal of the Foreign-Exchange Regulation Act (FERA) which was the basis for exchange control;

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 India 19

• Incentives: the award of tax credits for private investment in roads, power and ports (albeit against a background of continued frustration over the regulatory environment for private infrastructure);

• Licensing: a continuation and extension of industrial delicensing; and

• Foreign investment: an efficient clearance of foreign-investment projects.

There is, however, a price to be paid by the government’s failure to implement some crucial legislation which would have been necessary to carry forward the broader reform process. Several measures got stuck. The one major piece of insurance legislation to have escaped the veto of critics—the establishment of an independent regulator with statutory powers—was postponed, as was an already emasculated piece of reform legislation for the civil aviation sector. There were also delays in introducing measures for dealing with “sick” (loss- making) companies, new foreign-exchange legislation to replace FERA and a money laundering bill, and in establishing a new regulatory body for the power sector. The UF government was also planning to bring forward other new laws to reform the coal and mining industry, to regulate private power transmission, to set up a tariff commission and to establish a hydrocarbon agency.

—but business gives a A recent poll of ten private-sector executives by the Mumbai-based Economic mixed verdict Times gives a fair assessment of recent progress on reforms.

India: progress in reforms

Most Reform Least Reform Lower interest rates Divesting public sector shares Lower inflation Promoting infrastructure Tax reforms Labour reforms Currency management Public expenditure control Banking reform Attracting foreign investment Source: Economic Times

The assessment awards the government high marks for macroeconomic management, tax reform and some financial sector reform. The government gets low marks for non-performance in those areas where promises and talk have led to no action, such as the sale of public-sector shares and infrastructure development. There is also a strong feeling that while foreign direct investment is coming in, there is far too little.

The next government will Mr Chidambaram or even Mr Singh (who is seeking election for a Delhi seat) remain reformist— may return to the finance ministry. But it is also possible that in the new parliament both the forces of the nationalist right, represented mainly by the BJP, and the hard left, led by the two communist parties, will be stronger than in the last. Though they may go along with the broad consensus on liberalisation, they will be hawkish in protecting their own constituencies, which include domestic business and organised labour, respectively.

—but the BJP must also During its very brief period in minority government after the last election (3rd listen to disparate quarter 1996, page 13), the BJP tried to demonstrate that it was in favour of constituents speeding up liberalisation and privatisation. The short-lived BJP government

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 20 India

even pushed through the approval for the Enron private power project in Maharashtra, towards which the party had earlier been hostile.

But if a government were to be formed by the BJP and its allies, it would contain such politicians as the Samata party leader and socialist, Mr Fernandes, who has devoted his life to opposing multinational companies. Moreover, the BJP president, L K Advani, has cultivated the so-called Bombay Club, a group of Indian businessmen led by the founder of the Bajaj Scooter empire, Rahal Bajaj, whose members echo his protests over the “indiscriminate invasion” by multinational companies, especially in the consumer goods field. Mr Advani has reasserted his views on the campaign trail, promising to throw multinational companies out of the consumer goods sector and to increase protection against imports. But the Bombay Club also advocates some aspects of liberalisation—such as the removal of the remaining industrial licences, a reduction in the size of the government workforce and privatisation—which the BJP would take forward.

Economic policy

India has not caught the Geography is not the only reason why India has remained on the outer peri- Asia contagion phery of the Asian crisis. The Indian economy is comparatively insulated. Exter- nal debt, both private and public, is at a manageable level and trade is small as a percentage of GDP. The capital account is closed, barring a few exceptions. The economy is hardly overheated, while the country’s “bubble economy” of overvalued property and stocks collapsed some time ago. However, there are some problems similar to those faced by the countries of the Association of South-East Asian Nations (ASEAN). India has its share of technically insolvent banks stuffed with bad loans, and badly conceived investment projects are rife. But, for once, India is grateful not to be seen as part of the Asian miracle.

The rupee’s fall dominates Yet it has been caught up in the eddies at the edge of the storm. The rupee held economic concerns— its nominal value at around Rs35.5:$1 for around two years until August 1997, when comments by the deputy governor of the Reserve Bank of India (RBI, the central bank) about the rupee’s value prompted a wave of speculative selling. The currency recovered to finish at Rs36.4:$1 by the end of October, before a fresh wave of selling in December took the value of the rupee to just below the psychological floor of Rs40:$1. By January 23rd it had again recovered to Rs38.7:$1. Foreign portfolio investments recorded two successive months of net sales, as redemption requirements led to sales and the rupee’s slide deterred new purchases. This trend shifted the thin Indian foreign-exchange market, causing the nominal rupee rate to fall.

—but may be a blessing in It is debatable whether the fall in the rupee is the harbinger of a crisis or a disguise blessing in disguise. A 10% devaluation is minor when compared with the massive devaluations of several South-east Asian currencies. Moreover, according to the RBI’s real effective exchange rate index, the currency appreciated by 12.7% between March 1993 and August 1997, and so the recent adjustment almost exactly cancelled out the previous real appreciation. At Rs38.50:$1 the exchange rate is roughly where it should be, taking into account relative inflation and devaluation elsewhere. Exporters and import-competing industries

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 India 21

are delighted with this lower rate, which they hope will boost their competitiveness. The currency’s fall is expected to have only a limited effect on domestic inflation rates, since imports only account for around 10% of GDP.

The government resorts to Yet despite the firm conviction that this was only a tactical adjustment in the intervention— value of the rupee, the government has been intervening to stop the slide. Around $3bn of foreign-exchange reserves have been used to defend the currency. However, the reserves position remains extremely comfortable and, at an estimated $24bn at the end of December, excluding gold, there is enough to cover five months of imports.

—and monetary The Indian authorities are sufficiently sophisticated to realise that they could tightening— not stop a major run on the currency, but they can burn speculators’ fingers with intervention, as they did in February 1996 (1st quarter 1996, page 20).

Moreover, realising that confidence is fragile, the authorities have introduced several other measures to lend support to the currency. Since early December the RBI has tightened liquidity, raising the interest rate on its fixed rate repo auction in increments from 4.5% to 9% (which in turn has raised overnight money rates), the bank rate from 9% to 11% and the cash reserves requirements of banks by 1 percentage point to 10.5%. This may not be welcome news to industrialists crying out for cheap credit. Although banks are still being encouraged to compete for customers by cutting their lending rates, tighter liquidity and a rise in the bank rate are likely to bring about an upward realign- ment in lending rates (in contrast to the situation earlier in the year when banks, awash with liquidity, lowered lending rates). Finally, banks have been told to charge 20% on overdue export bills and apply a 30% interest rate surcharge on bank credit for imports to stop speculation through delayed settlement in bills denominated in dollars, as well as to reduce export and general refinance limits.

—but some critics want a The government is facing some criticism from those who believe that deval- stronger defence uation—even a modest one—is an inappropriate response to the current problems and are calling for a more aggressive defence of the currency. The argument should not be ignored, as it is influential and may have some bearing on future policy. As a general rule the real exchange rate has only a modest influence on export performance. Many of the gains in export competitiveness from a devaluation are eaten up by higher import costs. Moreover, devaluation inflates the rupee value of external debt, putting pressure on an already stressed government budget. Finally, the expectation of continuous devaluation under- mines the long-term confidence of new inward investors. These factors may go some way towards explaining the ambiguous response of the authorities to the pressure on the currency.

Worries over the budget Overseas rating agencies have criticised India’s budgetary management and deficit— expect the central government to miss its fiscal deficit target of 4.5% of GDP (compared with 4.8% in 1996/97). The EIU has argued that several recent developments—notably a scandalously generous pay award to public-sector workers and escalating subsidies—have increased the likelihood of slippage

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 22 India

(4th quarter 1997, page 17). Moreover, the planned sales of equity in nationalised industries, budgeted to raise Rs70bn ($1.8bn) in 1997/98, has been badly hit by turbulence in international equity markets.

—and its associated The need to take on extra government borrowing as the budget deficit widens problems— frequently leads to two problems: higher domestic debt and the “crowding out” of private investment. However, internal debt levels, though high, appear to be easing—the ratio of public debt to GDP has fallen from 50.5% in 1995/96 to 48.7% in 1996/97 and a projected 46.6% in 1997/98, according to government sources. “Crowding out”—when private borrowing becomes more expensive as the government and the private sector compete in the market for the same funds—is not apparent either. This fiscal year, the government had largely completed its annual borrowing by November (and is indirectly buying back its debt, by investing its temporary surplus with the RBI, which in turn buys government securities).

—are eased by creative The government has addressed concerns about the budget with a mixture of accounting— technical and tax-raising initiatives. In mid-January the government increased the so-called “contingency fund” from Rs147bn ($5.6bn) to Rs324.9bn ($8.4bn). Among other expenditure items, this was meant to cover Rs70bn of the pay award to public-sector workers which was not already included in the budget (although only Rs40bn of the total falls due this fiscal year), as well as Rs6bn towards the cost of holding the general election. (The contingency fund, initially set at Rs500m, can be expanded either through a presidential ordinance or by sanction from the Lok Sabha. The fund will be expanded “temporarily” to accommodate essential expenditure items. Once the Lok Sabha reconvenes, this additional expenditure will have to be ratified and the contingency fund reduced to its original size.) A separate accounting dodge will be created to deal with the Rs180bn of bonds given to the state oil companies to clear the accumulated deficit from price controls on petroleum products (4th quarter 1997, page 18).

—and a tax windfall— However, worries about the size of the 1997/98 deficit were appeased by the finance ministry’s surprisingly successful tax amnesty scheme. Under the Voluntary Disclosure of Income Scheme (VDIS), announced in July, the government gave tax-evaders an opportunity to declare their unaudited income without risk of prosecution or interest charges provided that they paid tax on the income at the current—and much reduced—rates of 35% for companies and 30% for individuals. (In the past, tax rates had peaked at 57% for companies and 97% for individuals.) The scheme, which was expected to net Rs30bn ($770m), raised a staggering Rs100bn, collected from 460,000 people and based on Rs330bn of assets.

—although privatisation The programme for the divestment of government shares—the government’s is deferred term for privatisation—has been deferred. In November a global depository receipt (GDR) issue by the telecommunications operator, Mahanagar Telephone Nigam (MTNL), was three times oversubscribed. However, the government postponed the international equity offering by the state-owned gas company, Gas Authority of India (GAIL), in November, and other GDR issues are in doubt, mainly because of the turbulence on the international markets.

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 India 23

The government is using another technique for divestment which may have the added benefit of sweetening the prospect of privatisation for the unions: issuing stock options to employees at a 15% discount. Where state ownership has already been reduced substantially—for example, in Indian Petrochemicals (IPCL) it is down to 59% and in MTNL down to 57%—an extra 5% divestment of shares through the issuance of stock options will take the government’s share close to 50%. This share will fall further when other convertible bonds mature, as will be the case for IPCL in February 1999.

Monetary conditions for At the end of 1997 there was growing evidence that monetary conditions were businesses are easing— no longer unfavourable to business borrowers, which was to some extent the result of the RBI’s October credit policy (4th quarter 1997, page 17). In 1997 interest rates fell to a point where the interest rate differential between domestic- and foreign-currency borrowings was lower than the currency risk (as reflected in the forward cover rate), which meant that it made more sense for businesses to borrow at home than abroad. The A V Birla group recently cancelled a foreign loan for precisely this reason.

Prior to the introduction of this package, there had been signs that the offtake of commercial credit was beginning to pick up. Companies started using their sanctioned limits to the full. It is at this point—the upswing in the corporate cycle—that the government must rein back its bank borrowing to avoid “crowding out” commercial borrowers. Over the past few years the government has accounted for the bulk of bank lending—nearly 50% in 1996/97 and almost 80% in the current financial year—while private credit demand was depressed. If the recovery in private credit demand were to coincide with a deepening budget deficit, this could easily lead to a credit crunch. However, the expected rise in lending rates, following the introduction of a package of measures aimed at defending the rupee by tightening liquidity and raising interest rates, may delay any revival in private credit demand.

—but money supply is One way of avoiding “crowding out” in capital markets is for the government only just above target to monetise the deficit by borrowing from the RBI, effectively printing money rather than borrowing from the banking system. It is for this reason that a close watch is kept on money supply figures. However, money supply growth has not spiralled out of control. In the last quarter of 1997, M3 growth was—at about 17%—a little above its target range of 15%-15.5%. However, this overshoot was probably caused by the growth of foreign-exchange assets in the banking system rather than government profligacy.

Indian banks avoid a Indian bankers have no doubt watched the growing banking problems in South-east Asian style South-east and North Asia with concern. India has a history of forced and crisis— directed lending which has resulted in a large portfolio of bad loans. But because the Indian banking sector remains nationalised and (still) quite tightly controlled, it is not subject to crises of confidence.

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 24 India

—but cannot be But the steady, albeit stuttering, deregulation of the India banking sector re- complacent about bad quires a clean-up of balance sheets. Otherwise India risks becoming another loans South Korea, where most banks are private but operate in a opaque, highly regulated and inflexible financial environment. The slowdown in commercial India: bank investment (a) bank lending for most of 1997 may have been due to the concern of bank Rs bn managers that they would be held to account if they made bad loans (although Commercial paper; left scale Debentures & bonds; right scale banks’ investment in commercial paper, public-sector bonds and corporate 60 240 debentures increased). A recent report by the RBI suggests that average non- 50 200 performing loan ratios for public sector banks were around 17%, compared with

40 160 ratios of under 1% for foreign banks operating in India, such as ANZ Grindlays and Bank of America. This survey revealed that all the foreign banks operating 30 120 in India, as well as the nine new private banks and 23 of the 25 old private 20 80 banks, had non-performing loan ratios of under 10%. Across the banking sector, 10 40 a large portion of the bad loan portfolios has been accumulated as a result of

0 0 “priority” (directed) lending to agriculture and small-scale firms, as required by Mar 1996 Nov 1996 Mar 1997 Nov 1997 government. The government still pressurises banks—albeit more subtly—to (a) In commercial paper and corporate debenture and bonds issued by private and public sector companies. Source: Economic Times. direct lending in this way.

Investments are pushed The DMK industry minister, Murosoli Maran, has worked closely with a fellow through by the outgoing Tamil politician, the finance minister, Mr Chidambaram, to clear the bureau- minister— cracy which is impeding foreign or domestic investment. Mr Maran increased the number of industries where approval for foreign investment is automatic from 35 to 57 and, as a parting gesture before the election, cleared his desk of pending foreign investment projects. Among the controversial foreign investments cleared by Mr Maran is approval for PepsiCo to increase its investment in India from $255m to $405m. (This particular decision has angered the BJP, which sees the presence of PepsiCo, as well as Coca-Cola, as the most offensive symbol of foreign investment in the country.) Mr Maran also advocates the gradual dismantling of the Foreign Investment Promotion Board (FIPB) which, in practice, acts as an approval agency rather than as a promotion body, passing the authority for investment approval entirely to the state governments.

—who also dumps some In a symbolic but helpful gesture, Mr Maran also eliminated 696 central public-sector guidelines government guidelines concerning state enterprises. These guidelines covered a myriad of administrative details, down to the size of playgrounds in an industrial township and the optimum size of an office floor. However, 171 guidelines on salaries, allowances and service conditions remain, more than enough to enmesh enterprises in red tape. Moreover, despite grand talk of awarding greater operating freedom to a small number of the better-managed state enterprises—the so-called navaratnas, or “jewels”—little has changed (3rd quarter 1997, page 18; 4th quarter 1997, page 18). Companies have not yet been reconstituted and majority government ownership remains.

The economy

Official growth forecasts The 1997/98 fiscal year (ending March 31st) was a disappointing time for are revised downwards— growth, with industrial output depressed and agricultural production growing only moderately from a high base. The Reserve Bank of India (RBI, the central bank) has downgraded its GDP forecast from 7% to 6% for 1997/98, which is

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 India 25

still above the EIU’s forecast of 5.4%. The Centre for Monitoring the Indian Economy (CMIE) is projecting a 5.5% GDP growth, equal to the forecast arrived at by a recent gathering of economists at the Mumbai (formerly Bombay) Chamber of Commerce. Compared with the GDP growth rates achieved in the past three fiscal years, growth has slowed, but by past Indian standards the economy is still doing extremely well.

—reflecting the ongoing At the start of 1997/98 the government had high hopes that, with a supportive industrial slowdown budget and cuts in interest rates, industry would recover. It has not. Statistics on industrial production for the first half of the 1997/98 fiscal year are generally gloomy. In April-September industrial output rose by 4.7%, year on year, compared with a 10.7% growth in April-September 1996. India: industrial production, 1997 % change, year on year A survey by the Federation of Chambers of Commerce (FICCI) found that,

10 among 300 top companies, 44% expect the slowdown to continue for at least another year. Only 3% believe that it will end in the next six months. A combi-

8 nation of overcapacity, high real interest rates (aggravated by recent rises in interest rates to defend the rupee), import competition and political uncertainty 6 are all advanced as negative factors, with the central problem—weak domestic demand—blamed on the dearth of government investment spending. 4 But there are exceptions and indications to the contrary, reflecting the vast size 2 and complexity of the Indian economy. In the first seven months of 1997/98, 25 sectors—including consumer electronics, personal computers, fertilisers (both 0 Apr May Jun Jul Aug Sep Oct nitrogen and phosphetic), synthetic textiles, computer software, oil and gas

Source: Central Statistical Office. equipment and capital equipment—showed annual growth of over 20%. The aggregate industrial growth figures were pulled down by negative growth rates recorded in over 40 sectors, including cars, scooters and commercial vehicles, sugar, steel, telecommunication equipment and power cables.

But sales and profits Sales and profits appear to be recovering. In a survey of 151 companies carried recover out by the Industrial Development Bank of India (IDBI), they collectively recorded 15% growth in net sales and 25% growth in net profits in the first half of 1997/98 compared with the same period in 1996/97. The good results achieved by this group may reflect the progress made by the big, public-sector companies in the sample in improving their profit performances—net profits rose by 27% in April-October 1997/98, compared with a 6% increase in the same period in 1996/97—relative to their sales, which rose by 11% in the first half of 1997/98, compared with 18% in the comparable period the year before. These public companies are passing on higher prices to the rest of the industrial sector—a pattern which may explain in part the recent rises in profits.

Another study of 37 big companies, conducted by the Economic Times, corrobo- rates these results. Collectively, these companies recorded 11% growth in net sales and 16% growth in net profits growth. The survey also highlighted a divergence between relatively successful big companies, both public and private sector, and a weaker performance among small and medium-sized companies.

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 26 India

Inflation is still slowing Inflation, which has remained stubbornly high in recent years, slowed sharply in 1997. Wholesale inflation is running at very low levels, continuing the India: inflation downward trend which began in 1994/95. % change, year on year Since July wholesale price inflation has remained in the 3-4.5% range. At the Consumer prices Wholesale prices end of December the wholesale price index was 4% higher on a point-to-point 11 basis compared with one year earlier. The energy component of the wholesale

10 price index rose by around 12%, year on year, in September, October and November—a reflection of the increase in administered prices of oil products in 9 September—but low price rises for manufactured goods, and even lower inflation for primary articles, has kept wholesale price inflation under 4% in recent 8 months. Lower wholesale price rises are generating lower consumer price rises.

7 Annual consumer price inflation fell to 4.7% in August, with virtually no inflation for agricultural workers, although it rose to 4.9% in September and

1993/94 94/95 95/96 96/97 5.5% in October—again, in part the result of increases in the price of petroleum

Source: Reserve Bank of India. products and the consequent rise in transport costs.

The stockmarket lags— The equity market has suffered, as the falling rupee, political uncertainty and the pan-Asian crisis have taken their toll of investor confidence. Having surged in the earlier part of the year, from a low of under 3,000 at the end of 1996 to 4,548 in August, the benchmark BSE Sensex index fell to under 3,800 in October and then to 3,500 at the end of November. A recovery in December proved short-lived, and the Sensex fell back to 3,500 in January in the wake of rumours of a reduction in India’s credit rating.

—and the primary market The industrial slowdown in 1997 and the accompanying slowdown in invest- slumps ment translated into a disastrous year for primary market issues. There were only 128 public issues in 1997, which raised Rs50bn ($1.3bn), a decline of 90% in number and 60% in value on 1996 levels (which was in itself considered a bad year). Only 10% of the Rs50bn raised was earmarked for manufacturing. In an eloquent testimony to private-sector confidence, around 85% of the total raised was directed to government undertakings.

Indians are becoming Until recently India’s savings performance was unimpressive, equalling only better savers about half the 40% savings ratios recorded in South Korea and China. How- ever, the savings ratio in India has slowly risen, reaching 26% in 1996/97, according to official estimates. Unlike in East Asia, where the corporate sector or the state is responsible for much of the total saving, in India households account for the bulk (76%) of savings, and Indian families are developing growing confidence in financial assets. Cash fell as a share of household savings in 1996/97 from 14% to 9% and deposits rose from 40% to 53%, a reflection of growing confidence in a lower inflation environment.

Agriculture

Rain and production The 1997/98 monsoon was normal, but there were sharp regional variations. In patterns vary parts of Andhra Pradesh, Maharastra, Karnataka and Tamil Nadu—including areas highly dependent on the weather and characterised by extreme poverty— there has been severe drought, which will affect millions of Indians.

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 India 27

The foodgrain output for 1997/98 (July-June crop year) is expected to be 199.1m tonnes, up from last year’s 198.2m tonnes, according to estimates from the independent think-tank, the Centre for Monitoring the Indian Economy. However, the output from the monsoon (kharif) harvest is likely to be around 103.5m tonnes, down from 105.1m tonnes last year. A good monsoon in the south-west of India should ensure a rise in rice production, the main crop, from 71.5 tonnes to 73m tonnes, although exports may be adversely affected by a drop in the value of the currency of several export-competing Asian countries. A shortfall in production, of around 3m tonnes, is projected for coarse grains, such as maize and millet.

Tonnes of government In an extraordinary development, 3m tonnes of wheat and rice have vanished grain disappear from the government stock. From a relatively comfortable 22.4m tonnes at the beginning of July, stocks had fallen to 16.5m tonnes on September 1st. Only half of the decline can be explained by offtake from consumers. The rest was spoilt or stolen, an example of serious negligence by the nationalised Food Corporation. Another 1m tonnes of wheat are being imported to compensate for the depletion, but the stock position is now tighter than it has been for several years. Rice stocks should be sufficient to allow rice exports of around 1.5m tonnes, according to the EIU’s World commodity forecasts, assuming that domestic rice prices do not rise sharply.

Output of other cash Oil seed production from the kharif harvest is estimated to have fallen by 8% crops slips— on last year’s levels. The shortage of seed for crushing and refining into vegetable oil, coupled with rising domestic demand, is expected to result in a rise in imports of edible oil in the 1997/98 crop year (November-October), to 1.9m-1.95m tonnes (from 1.75m tonnes in 1996/97). Cotton production is also expected to be a little lower—down to 17m bales from 17.2m bales in the 1996/97 crop year.

Droughts caused by the El Niño weather system are expected to damage sugar crops throughout Asia, including India in both 1997/98 and 1998/99. According to the EIU’s World commodity forecasts, sugar production will fall from 17.9m tonnes in 1995/96 (September-August) and 14m tonnes in 1996/97 to 12.5m tonnes in 1997/98. Carry-over stocks are comfortable, at 6m tonnes. With domestic demand forecast by the EIU to rise slightly, from 15.2m tonnes (raw value) in 1996/97 to 15.5m tonnes in 1997/98, there is a danger that even a small shortfall in supply could result in scarcity, forcing the government to expand imports.

—but plantation crops In the first half of the 1997/98 financial year tea output rose by 16% to 121m fare better kg, compared with 104m kg in the first six months of 1996/97. Exports rose from 18.7m kg to 20.1m kg in the same period. The El Niño weather system is expected to result in drier weather in the north, damaging tea crops in that region. However, the same weather phenomenon will bring wetter weather to the south, benefiting tea crops in the southern tea-growing states. According to the Coffee Board, coffee output in the crop year (October-September) has reached a record 3.9m bags, although reports from planters are less optimistic.

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 28 India

Industry

British Gas buys Gujarat The liberalisation of Indian industry and of foreign direct investment inflows Gas has shaken corporate India out of its hidebound structures. Corporate reorgan- isations are continuing and the number of takeovers and mergers is increasing. The purchase of Gujarat Gas, part of the Mafatlal Group, by British Gas is the biggest take-over of the year. Mafatlal, a textile group which developed into a multi-sector conglomerate, wants to return to its core business. Mafatlal is also trying to sell its chemical business, Nocil, which was formerly a joint venture with Shell.

Capacity utilisation stays Despite slack demand, many of India’s top companies maintained high levels of high in big Indian capacity use in 1996/97. Overall, 52 out of 74 product divisions recorded utilis- companies— ation rates above 75%, including 18 divisions reporting rates of over 100%.

India: company performance

1996/97 Capacity utilisation Company production 1996/97 1995/96 ITC cigarettes 46.1bn 58.9 57.3 Ever Ready Batteries 730.6m 68.8 70.8 Birla Cement 3.4m tonnes 96.6 100.2 Dunlop Tyres 914,000 98.0 155.6 Hindustan Motors Cars 29,000 63.1 67.0 Grasim Cement 4.1m tonnes 82.2 64.3 Hindalco Aluminium Metal 166,000 tonnes 79.2 83.5 Reliance Polyester Yarn 146,000 tonnes 96.0 113.2 Bajaj Scooters 1.44m 78.6 84.0 Tata Trucks (Telco) 218,000 86.7 78.5 Ballapur Paper 203,000 tonnes 102.3 110.2 ACC Cement 9.0m tonnes 91.5 90.5 Mukund Wire Rods 165,500 tonnes 49.3 64.4 Crompton Greaves Fans 1.39m 73.0 90.1 Crompton Greaves Pumps and Motors 821,000 36.5 30.7 Voltas Refrigerators 356,000 64.9 72.6 Source: Economic Times Research Bureau, Calcutta

—which are looking at The Indian corporate sector is rapidly accepting the importance of “share- shareholder value holder value”, and concepts such as value destruction and creation are widely understood and used.

In 1996/97 several large Indian companies—including the scooter company, Baja, two of the Tata companies (which are arguably the most professionally managed companies in India), and the cigarette company, ITC, which recently fought a takeover by BAT—added considerable value (operating profits less the cost of capital) in their operations. Surprisingly, a few top Indian companies were “value destroyers” in 1996/97, reporting negative value-addition, including Reliance, the largest Indian conglomerate, as well as Essar Steel, the engineering company Larsen and Toubro and even Tata Steel (Tisco), all of which are highly regarded in international capital markets. Of the companies surveyed by the Calcutta-based Economic Times Research Bureau (a sample of

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 India 29

which are listed above), only 24 of the 50 companies analysed earned more than they could have earned by investing in risk-free capital, a testimony on the inefficiency of many top companies. However, in contrast to the financial environment in several other Asian countries, in India this information is freely available, and financial records of top public companies are well researched and reasonably transparent.

India: value addition by Indian companies, 1996/97 (Rs m) Value-addeda Capital employed Bajaj Auto 375 2,962 India Tobacco (ITC) 310 3,074 Tata Engineering (Telco) 279 8,600 Tata Chemicals 234 3,363 Tata Steel –128 1,260 Indo Rama Synthetics –133 160 Southern Petrochemicals Industry Corp (SPIC) –145 282 Ispat Industries –335 276 Essar Steel –376 724 Larsen and Toubro –447 906 Reliance –716 19,536

a Operating profits less the cost of capital.

Source: Economic Times Research Bureau, Calcutta.

The vehicle industry is The vehicle market is languishing from stagnation and inventory accumulation. depressed— In the first half of 1997/98 sales of medium and heavy commercial vehicles dropped by 29%, year on year, from 69,354 in 1996/97 to 48,977 in 1997/98. Sales by Telco, which dominates the market, dropped by 31% to 34,588. The decrease in sales of light commercial vehicles was smaller.

Car sales grew, albeit sluggishly, from 191,600 to 209,354. Sales of Maruti cars, which continue to dominate the market, grew by 9% to 169,555. Sales of scooters and mopeds dropped from 1,011,000 to 924,900, although motor- cycles saw some growth in sales (from 464,200 in the first half of 1996/97 to 513,643 in the first half of 1997/98).

—intensifying The stagnation in the market has intensified competition. In the depressed, competition— medium-car market—where there is capacity of 150,000 cars and estimated sales in 1997/98 of 35,000, down from 50,000 in 1996/97—Daewoo, which provides nearly half of capacity and barely one-third of sales, has slashed prices of its Cielo by 20% to put pressure on its main competitor, the Maruti Esteem.

The small-car market is more buoyant. The industry is still expecting a big jump in the market from expected sales of 320,000 in 1997/98 to almost 600,000 in 2000/01. Maruti is likely to retain over half of the small-car market but competition will heat up. Daewoo is launching the 800cc D’Arts at the end of 1998, aiming to capture 30% of the market. Other projects due to enter the market include Hyundai Auto (with a 120,000 car capacity), Ford with the Fiesta or another small car (100,000 car capacity), the Fiat Uno Diesel (40,000 vehicle capacity by the end of the century), a General Motors Opel Corsa and

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 30 India

two indigenous vehicles, the Telco Indico (150,000 vehicle capacity) and Ki- netic Engineering.

—and straining some Some car joint ventures are thriving. Daimler-Benz is increasing its stake in tie-ups— Telco—the dominant player in commercial vehicles and shortly to launch a small car—to the 10% equity limit allowed under the takeover code.

But the pressures within the industry have strained some tie-ups between foreign and domestic companies. Peugeot has pulled out of its collaboration with Premier Autos, which made 8,000 cars in 1997, mainly on the basis of assembled kits, from a 60,000-vehicle capacity. The continuing rift between Suzuki and Maruti over the appointment of a chief executive of the 50:50 joint venture has not been resolved (4th quarter 1997, page 20). The joint venture has reached a crucial juncture, where it must upgrade its designs and technology to compete aggressively or else face serious threats to its massive dominance of the car market.

A recent government decision to raise the “indigenisation” requirements for foreign vehicle manufacturers will do little to improve relations with foreign investors. Under the new requirement, 50% of manufacturing components must be sourced domestically by the third year of operation, rising to 70% by the fifth year. In addition, minimum equity requirements have been tightened, requiring $50m from the foreign partner within three years from start-up. At first sight, the idea of encouraging a domestic components industry, and discouraging knockdown kit assembly, appears attractive. But protection will produce uncompetitive components and might discourage investors interested in globally competitive car production.

—but other top industries Recent production figures from the steel and cement industries suggest a less are doing better serious setback for output than we previously projected (4th quarter 1997, page 23). In the first six months of 1997/98, finished steel output from the state steel company, Steel Authority of India Limited (SAIL), rose by 11% to 2.9m tonnes, and the leading steel company, Tisco, increased sales by 3% to 1.1m tonnes. Between them the two companies more than doubled steel exports to 550,000 tonnes in April-September. However, output of saleable steel contracted by 0.6%, year on year, in April-November 1997. Cement output in April-November 1997 rose by 8.1%, year on year. However, some of the smaller companies are suffering from falling output and profits, suggesting that there may soon be a wave of takeovers and mergers.

Other segments of the so-called infrastructure industry also recorded positive growth in the first eight months of the year. Coal sector production rose by 5.3%, year on year, output from the crude oil industry rose by 3% and electricity production (thermal and nuclear) rose by 6.8%.

Infrastructure and telecommunications

The Indian The UF government has unlocked access to the Internet for millions of poten- “superhighway” takes tial Indian users—a genuine achievement. In addition to sanctioning the pro- shape— vision of Internet connections by private Internet Service Providers (ISPs, see

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 India 31

4th quarter 1997, page 24 and 3rd quarter 1997, page 27), the government has extended the exemption from the licence fee from two to five years (on a 10-year licence). Moreover, foreign ISPs will be allowed up to 49% equity in Indian ISPs. ISPs have also been promised full international interconnectivity. Perhaps in response, the current monopoly supplier, Videsh Sanchar Nigam (VSNL), has cut its tariffs, although these still remain high by international standards. (Internet access is almost free in North America and Europe, but in India the tariff plus connection charges is steep: 500 hours of connection cost around Rs18,400—$460—in a big city.) Other initiatives include opening up the railway system and the power grid for telecommunications transmission, with the addition of fibre-optic cables to existing networks. VSNL is also to invest $300m in an information infrastructure system.

—and public The two public sector telecommunications companies, Mahanagar Telephone telecommunications Nigam (MTNL) and VSNL, are trying to respond to new private-sector compet- companies sharpen up ition and technological change. Major developments at MTNL include the launch of cellular mobile phone services, an Internet service (hitherto a monopoly of VSNL) with junctions connecting to VSNL’s gateway, toll-free services for businesses which want customers to make free calls, account-card calling and virtual private networks. MTNL boasts it has now eliminated waiting lists in Mumbai, introduced effective fault calls and various extra, “phone plus” services. India is moving fast from the days when making a telephone call required a rare combination of persistence, good luck and repeated appeals to operators.

VSNL is pressing for greater commercial autonomy, although its request has been stuck with the Department of Telecommunications which is, in turn, fighting a battle for influence with Telecommunications Regulatory Authority of India (TRAI), the new independent regulator. VSNL wants to move into domestic, long-distance calls and the cellular phone market (which it could enter by providing calls outside the area covered by mobile phone operators). VSNL has a problem: it receives 2.8 calls from overseas for every one it sends abroad, rendering it vulnerable to a change in the settlement system. Conse- quently, it must develop new business.

The railways block mine The decision of Indian Railway services to reject an offer from Rio Tinto to development— build a 270-km rail track illustrates the capacity of India’s monopoly providers of infrastructure to block development. The line is intended to transport iron ore from prospective mines in Orissa which Rio Tinto hopes to develop in a joint venture with Orissa Mining Corporation—part of a $1bn project which will have widespread benefits for the state in the form of infrastructure development and employment. However, as it bypasses an existing line, the new railtrack might weaken the railways’ monopoly over freight. Following the recent opening of the mining sector to foreign investors, the mining project has now been approved by the central government and the licensing requirements have been cleared with the blessing of the Orissa state government. The construction of the track may therefore still go ahead over the objections of Indian Railways.

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 32 India

—but there are more The reluctance of private investors to invest in Indian toll roads on a build- financial sweeteners for operate-transfer (BOT) basis (4th quarter 1997, page 25) is frustrating the road projects government’s attempts to launch a series of major expressways, including the 400-km Vadodora and Mumbai expressway (estimated to cost Rs40bn, about $1bn), and the 280-km Kanpur and Agra route (costed at Rs30bn). The government has responded by offering more generous financial support. It is consid- ering a capital subsidy of 60% (up from 30%) and a capital grant or equity of 60% (up from 40%). This is on top of concessions which have already been agreed, including traffic guarantees, an agency to acquire land on developers’ behalf and tax concessions.

Tatas take a fresh airline Tatas has made a fresh bid to launch a new airline, following its ill-fated initiative attempt to launch a joint venture with Singapore Airlines which was blocked by nationalist politicians in the UF government (3rd quarter 1997, page 26). The new proposal does not involve a foreign airline but envisages a 40% holding by Tatas and 40% investment by foreign institutional investors. The proposal is modest—seven aircraft compared with 19 in the Tatas-Singapore Airlines project—but will give stiff competition to Indian Airline and the remaining private airline, Jet.

Energy

Enron moves forward— After its long and often bitter battle to set up its operations in India, Enron is now moving ahead with its projects. The first phase of a 826-mw power project in Maharashtra is nearing completion. Negotiations on the second phase, add- ing an additional capacity of 1624 mw, are close to completion, following confirmation by the state government—which had once famously threatened to throw Enron into the Arabian Sea (2nd quarter 1996, page 26; 3rd quarter 1996, page 36)—and by Enron that they wish to proceed.

Enron’s progress in India is a triumph for tenacity and negotiating skills in a very difficult operating environment. Buoyed by its success, Enron has proposed a clutch of new proposals which include a 1,500-km pipeline from Bangladesh to India (which is running into political difficulty in Bangladesh; see below) and a natural gas marketing project in West Bengal, using liquefied natural gas (LNG), if not gas from Bangladesh. Enron also plans to build new generating capacity, concentrating on south India where a 2,000-mw project has been approved, as has a 500-mw plant in Kerala. The value of Enron’s plans, at $20bn, signal that the company sees India—and not China, let alone Pakistan—as the focus of its business in Asia.

—and some fast-track The slowness of India’s “fast-track” private power projects has become a source projects are coming of immense frustration for those involved and the butt of jokes for those who to fruition are not. Apart from Enron’s Dahbol project and other two small projects, there has been little tangible achievement (3rd quarter 1997, page 28; 4th quarter 1997, page 26). Repeated renegotiation of terms, the difficulty of fixing repay- ment responsibility with the state electricity boards (SEBs), delays in central and state government clearances, disagreements over legal responsibility and environmental protesters have all have played a part in delaying progress.

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 India 33

More recently the devaluation of the rupee has caused complications, with debate over the extent to which state electricity boards can pass on the higher rupee costs of servicing foreign debt in the form of higher tariffs, although a compromise has been reached.

But some projects are creeping ahead. The AES Transpower 500-mw project at Ib Valley in Orissa appears to have overcome the remaining negotiating hurdles. As with the Cogentrix-China Light and Power thermal project at Mangalore in Karnataka, the Ib Valley project was given final clearances, leading to a counter- guarantee by the central government in the last days of the UF government. The government claims that 20 projects with 7,500 mw of private power have achieved financial closure and that another 35, with 20,000-mw capacity, have been cleared by the Central Electricity Authority.

Concerns about poor India continues to suffer from a shortage of power. Currently the gap between power delivery— demand and supply is 11.5% during periods of average demand and 18.3% at demand peaks. According to official estimates, this is projected to rise to 18% and 26% respectively by 1998/99, according to official estimates. An increase in private power generation will help to remedy this shortage. However, the problem may be more one of transmission, not capacity. Less than two-thirds of installed capacity is being utilised, mainly because of high transmission and distribution losses (although in the early 1990s less than 55% of capacity was used).

—may open the door for The government has proposed to introduce legislation allowing private parti- more private participation cipation in transmission to bring in higher technical and commercial standards. However, the SEBs, which control 60% of transmission and 97% of distribution and make massive losses, are blocking the way. The SEBs are heavily over- staffed, tolerate large-scale pilferage (from 7% to 25%, according to some estimates) and set tariffs at subsidised rates. The government, recognising that the existing system of electricity distribution is unsustainable, has been consid- ering further changes, including permission for new private distribution companies to operate in India, and privatising the SEBs. Management contracts to private firms are another option.

An India-Bangladesh gas Bangladesh and India have potentially complementary interests in gas develop- pipeline is on hold— ment, with India as a buyer and Bangladesh a seller, but cannot do business because no Bangladeshi government can allow itself to be accused of “selling out” to Indian interests. The possibility of transporting gas by a private pipeline could remove the gas supply issue from government-level negotiations. Multi- national energy companies could potentially make a valuable contribution to the development of South Asia by helping to establish grids based on energy interdependence.

Enron recently expressed enthusiasm for the project. Earlier, Shell and Unocal—which already have exploration and production concessions in Bangladesh—had also pronounced themselves in favour. However, the Bangladeshi prime minister, Sheikh Hasina, has temporarily dampened expect- ations by asserting that Bangladesh must first be “self-sufficient” and then criticising the multinational companies for talking up the project.

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 34 India

—but LNG terminals get Two big liquefied natural gas (LNG) terminal projects have been approved in the green light— principle by the central government. Shell has received cabinet approval for a $600m joint venture with Essar to develop a regassification LNG terminal, with a 2.7m tonnes/year (t/y) capacity, at Hazira in Gujarat. Reliance received clearance for an even bigger LNG regassification project involving two terminals, also at Hazira in Gujarat and at Jamagar, each with 5m t/y capacity, and linked to a gas pipeline network which would take gas to Delhi and Rajasthan in a 1,500-km link. The Reliance project suffers from one complication: it com- petes directly for customers with a proposed public-sector 5m-t/y LNG project at Hazira by Petronet backed by the Gas Authority of India (GAIL), Oil and Natural Gas Company (ONGC) and Indian Oil Corporation (IOC) and Bharat. Reliance is offering to invest in the Petronet project (as does Shell) to help avoid damaging competition.

A separate project, for which Shell is now among the front runners, is being further developed at Ennore in Tamil Nadu. Shell proposes to transport gas from its gas fields in Australia to a terminal and 2,000-mw power project in India. Yet another LNG project being launched by Total of France and Tata provides for a 1.25m-2.5m-t/y LNG terminal in Maharastra at Trombay, linked to the 1,350-mw Tata power project which supplies Mumbai. The Tata power project is currently struggling to obtain adequate gas from the Bombay High fields.

—while privatisation Attempts to sell equity of the state gas corporation, GAIL, have floundered for moves slowly the moment because of difficulties in floating issues in the global depository receipt (GDR) market. The proposed divestment—of up to 200m of the 845m shares—was expected to raise at least $300m. However, the government has not abandoned the basic idea, and there is likely to be a fresh attempt to sell stock abroad later in 1998, depending on market conditions.

One of the smaller players in the industry, the Gujarat State Petroleum Company (GSPCL), owns fields at Hazira which produce 115,000 barrels per day (b/d) of oil, with reserves which would allow the production of 350,000 b/d. Gas production is currently 350,000 cubic metres per day (cu metres/ day) and projected to rise to 3m cu metres/day by 2000. British Gas is trying to buy out GSPCL, having recently acquired Mafatlal’s gas interests in the state, while two other Indian companies, Torrent and Gujarat Pipavav, also want to launch a takeover bid. GSPCL has so far rejected the moves, arguing that it can develop fields and power-generating capacity on its own.

Downstream oil The cabinet has approved draft plans to deregulate the downstream oil sector. deregulation lumbers Several steps have already been taken (4th quarter 1997, page 27), with measures ahead— aimed at reducing and rationalising the structure of import duties, liberalising crude oil imports, phasing out hidden subsidies, allowing private operators to compete in refining and distribution and allowing for prices to be set through the market.

Under the proposals the prices of bitumen, fuel oil and naphtha are being liberalised with immediate effect. Petroleum products, such as aviation fuel, diesel and gasoline, will be freely imported and exported by private refineries, and import duties will be reduced. The government hopes that a freer market will attract private capital into refining (which, under the new duty structure,

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 India 35

will enjoy 21% effective protection). In return, private companies will be allowed to market fuels only if they invest Rs20bn in a refinery and produce 3m t/y of crude. The state oil companies, which have been forced to face fierce competition in the lubricants and LPG market, now expect to have to defend their network of 16,000 retail outlets. Many of these outlets operate under maturing leases and are therefore potentially available for acquisition by private companies.

India: import duties on petroleum products (proposed reductions, %) 1996/97 2002/03 Crude 27 0 High speed diesel 32 15 Petrol 32 15a Aviation fuel 32 15 LPG (bottle gas) 12 10 Kerosene 0 15

a Plus special excise which will give an equivalent duty of 165%.

Source: Press reports.

—upstream companies The liberalisation of the oil industry has major implications for the upstream prepare for competition— oil sector as well. Although the state oil producers, ONGC and OIL, will begin to benefit from the move toward world prices for crude, they also face fiercer competition for which they are not well prepared (4th quarter 1997, page 29). Average exploration and development costs in ONGC are around $5.20 per barrel, compared with $3.90 per barrel for Mobil. ONGC’s drilling costs can be up to 50% higher than US costs. Moreover, ONGC frequently fails to gain ready access to the latest technology in seismic or horizontal drilling because of hold-ups in obtaining official approval.

—and there is some slow Petroleum demand will grow by 7% in 1997/98, rather than the projected down in demand 11.7%, according to industry forecasts (based on April-September figures). The reason for this is the slowdown in economic activity, especially in manufacturing. Forecasts for demand for aviation fuel and industrial fuels (fuel oil, sulphur heavy stock and naphtha) have been subject to the steepest downward revision. Demand for diesel—the biggest product category, which is used for road and railways and for captive power—grew by 9.2% in the first half of 1997, against a projected 10.8% increase. There was also a sharp slowdown in growth for petrol demand (4.8%, compared with an estimated 13.3%) and kerosene (1.6%, compared with an estimated 3.5%).

Foreign trade and payments

Unimpressive export In October exports rose by 9.6%, year on year, in dollar terms, while imports growth— rose by only 1.1%. However, in April-October exports grew by only 5.6% in dollar terms, year on year, compared with an annual growth of 11% in April- October 1996.

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 36 India

Garment exports, the largest foreign-exchange earner, contracted by 1.7%, year on year, in dollar terms, in January-November. Falling dollar prices may be to blame. According to the Apparel Export Promotion Council, the dollar value realised per garment fell by over 9% in the same period, probably as a result of the massive devaluation by some South-east Asian export-competing countries.

Imports grew by 6.5%, in dollar terms, in the first seven months of the year, pushing the trade deficit out to $2.7bn, compared with a $1.8bn deficit in the same period a year earlier. (This widening can be partly explained by currency factors: exports grew by 11% in special drawing rights (SDR) terms in the same period, twice the dollar growth, reflecting dollar appreciation.)

—is the target of a The commerce ministry announced a five-year strategy to promote exports. five-year export strategy The idea that government bureaucrats can formulate marketing strategies is not taken seriously these days, even in India, but the government does offer some genuine practical help. The 11 sectors singled out for their export poten- tial include largely the familiar ones—textiles, plantation crops, leather and chemicals—but they also include some interesting newcomers such as electronic hardware and software, sports goods and seafood.

The rating agencies One of the main uncertainties hanging over India’s external position, and the threats cause alarm— value of the rupee, is the attitude of the rating agencies, Moody’s and Standard & Poor’s. In October Standard & Poor’s revised India’s rating from “positive” to “stable” in the wake of the Pay Commission award (4th quarter 1997, page 17). In January a report that Moody’s might downgrade India’s credit rating from investment to sub-investment grade caused more alarm. The Indian monetary authorities are extremely nervous that a rating revision would damage the confidence of portfolio investors in India and deter Indians working abroad from sending remittances (usually via non-resident bank deposits) estimated at $11bn in 1996/97.

—and add to foreign There have been a few signs that overseas investors are picking up the general investor nervousness air of nervousness. India seemed to benefit from the early stages of the Asian crisis. Between the fourth quarter of 1996 and the second quarter of 1997, India’s share of global offshore emerging market funds rose from 4.8% to 5.8%, while most East and South-east Asian countries saw a withdrawal, mainly in favour of Latin America. In November and December, however, foreign portfolio investors were net sellers, although the net outflows in these two months were small and net purchases in the April-October totalled $1.8bn.

Indian companies bring Indian companies have recently been very inactive in external capital markets. loans back— In April-October Indian companies raised only Rs13bn ($360m) in foreign GDRs and commercial loans as against Rs84bn in the same period in 1996. This decrease does not necessarily signal a lack of confidence in Indian paper, as Indian companies over the same period saw their borrowings in domestic capital markets fall by the same proportion. Moreover, before the recent interest rate increases (see Economic policy), some Indian companies, such as Reliance, were switching from dollar to rupee borrowing because of lower domestic interest rates and the perceived higher currency risk.

But there are also signs of loss of confidence. The spreads on Indian paper traded in overseas markets widened by over 400 basis points in four days in November: one stock, a floating rate note (FRN) of Essar Gujarat, recorded a 518 basis point widening. Of the 64 outstanding GDR issues, 62 are trading at a premium, which is over 100% in some cases. Most bond and GDR issues have been put on hold and the $800m offering by the gas utility, GAIL, is one of the casualties.

But there are some bright spots. MTNL, the telecommunications utility, went ahead with a scaled-down GDR issue which was three times oversubscribed. Moreover, those companies which raised GDRs before the rupee began to fall and parked the proceeds overseas have made a big windfall gain. An estimated $1.7bn were parked in this way, waiting to be disbursed.

—and FDI flows in Foreign direct investment (FDI) is much less susceptible to changes of mood in financial markets. FDI inflows in the first seven months of 1997/98 grew to $2.1bn, compared with $1.2bn in the same period in 1996/97 and $2.5bn for the entire year. However, the pace has slowed since April and May, when the largest inflows occurred.

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

The executive Prime minister heads Council of Ministers appointed from among the elected members of the House of Representatives

National legislature Bicameral: upper house, National Assembly, 60 members (35 elected by the lower house, 15 elected by heads of local committees and others in the electoral college, ten appointed by the sovereign); lower house, House of Representatives, 205 members elected to five-year terms from single-member constituencies. Lower house has final authority over finance

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

National government In October 1997 a coalition government was formed by the National Democratic Party (19 seats), the Nepali Congress (86), the Sadbhavana Party (three) and two independents.

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); National Democratic Party (NDP); Nepal Workers’ and Peasants’ Party (NeWPP); Nepal Sadbhavana Party (NSP)

Council of ministers Prime minister and minister of Royal Palace Affairs Surya Bahadur Thapa (NDP) Agriculture Prakash Chandra Lohani (NDP) Commerce Ram Bilas Yadav (NDP) Defence Fatteh Singh Tharu (NDP) Finance Rabindra Nath Sharma (NDP) Foreign Affairs Kamal Thapa (NDP) Health Bipin Koirala (NC) Home Khum Bahadur Khadka (NC) Housing and Physical Planning Balaram Gharti Magar (NDP) Local Development Gayendra Narayan Singh (NSP) Supplies Moti Prasad Shrestha (NC) Water Resources Pashupati Shumsher Rana (NDP) Works and Transport Bijaya Kumar Gachchhadar (NC)

Central bank governor Satyendra Pyara Shrestha

Economic structure

Latest available figures

Economic indicators 1993 1994 1995 1996 1997 GDP at factor costa (NRs bn) 161.7 187.1 204.9 230.5 n/a Real GDP growthab (%) 3.3 7.9 2.9 6.1 n/a Consumer price inflationa (%) 8.9 8.9 7.6 8.1 n/a Population (m; mid-year) 19.3 21.4 21.9 n/a n/a Exports fob ($ m) 397.0 368.7 349.9 388.7 n/a Imports fob ($ m) –858.6 –1,158.9 –1,310.8 –1,494.7 n/a Current account ($ m) –222.5 –351.9 –356.4 –326.6 n/a Reserves excl gold (mid-Dec; $ m) 640.2 693.6 586.4 571.4 n/a Public external debt (year-end; $ m) 2,004 2,320 2,398 n/a n/a Exchange rate (av; NRs:$) 48.6 49.4 51.9 57.0 58.0

January 30th 1998 NRs61.05:$1

% of % of Origins of gross domestic product 1996/97a total Components of gross domestic product 1995/96a total Agriculture, forestry & fishing 42.4 Private consumption 81.7 Mining & quarrying 0.5 Government consumption 9.7 Manufacturing 9.2 Gross fixed capital formation 21.8 Electricity, gas & water 0.8 Change in stocks 1.3 Construction 9.5 Exports of goods & non-factor services 22.5 Trade, hotels etc 11.8 Imports of goods & non-factor services –37.0 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 1995/96a NRs m Principal imports 1995/96a NRs m Woollen carpets 8,164 Machinery & transport equipment 15,312 Garments 5,360 Chemicals & drugs 8,804 Pulses 349 Mineral fuels & lubricants 5,613 Jute goods 453 Food & live animals 5,478 Hides & skins 387 Crude material 5,036 Total incl others 19,844 Total incl others 76,699 a Fiscal years beginning July 16th. b At factor cost.

Outlook for 1998-99

Mr Thapa will face a The three-party coalition government, comprised of the National Democratic no-confidence vote Party (NDP), the Nepali Congress (NC) and the Nepal Sadbhavana Party (NSP), and led by the prime minister, Surya Bahadur Thapa, will soon face a no- confidence vote. However, given the blatant opportunism displayed by Nepali politicians throughout the constitutional confusion of January and early February, a confidence vote could go either way.

If the prime minister wins the vote, he may continue the alliance with the NC and NSP, following some renegotiation of the spoils of office. He is less likely to call a general election, not least because the decision on February 4th by King Birendra to call a special session of parliament effectively restricts the prime minister’s power to do so.

Political manoeuvring To lose the vote, the political equations must become more complicated. The will continue combined weight of the opposition Communist Party of Nepal-Unified Marxist Leninist (CPN-UML) and the New National Democratic Party (NNDP), recently formed by the disgruntled ex-NDP leader, Lokendra Bahadur Chand, will be insufficient to form a government. Therefore, the role of the NC will be crucial. The possibility that the opposition could capitalise on the poor relations existing between the NC’s two senior leaders in order to encourage NC MPs (as well as NDP MPs) to abstain or even vote against their own government cannot be ruled out.

The communists will win If the government loses the no-confidence vote, a new coalition will be formed an election, eventually— by the CPN-UML and the NNDP. This government will be as ineffective and lacklustre as the previous NDP (Chand)-CPN-UML alliance, and as prone to collapse. The CPN-UML will try to force their coalition allies into an election, a move which Mr Chand will resist.

However, there is one sure prediction in Nepali politics: despite its internal difficulties, the CPN-UML will win the next general election, which could take place before the end of 1998. There is no other credible alternative. The NC is weakened by disputes between its senior leaders reminiscent of the quarrels leading up to the 1994 general election, in which the NC fared miserably, while the split of the NDP into two parties will not threaten the CPN-UML’s support base.

—while the economy Nepal’s economy will remain a mess. Although the current-account deficit nar- deteriorates rowed marginally in 1996, from $356m in 1995 to $327m, according to recently released IMF figures, the trade deficit widened sharply, from $961m in 1995 to over $1.1bn. The trade deficit widened to $360m—its largest quarterly deficit in over three years—in the first quarter of 1997, a pattern which is set to continue in 1998 and 1999. Nepal’s two largest export items, carpets and garments, are faltering. Garments will continue to suffer from increased competition from South-east Asian garment exporters, whose currencies have collapsed, as well as from India and Sri Lanka. Without a recovery in the carpet export market, the trade deficit is expected to remain above $1bn in 1998. The slowdown in carpet and garment exports, coupled with a disappointing year for agriculture, will

prevent an acceleration of GDP growth in 1997/98. The budget deficit is also likely to widen. Tax collection will fall short of the ambitious targets set in the 1997/98 budget, and the implementation of VAT will be hampered by an ob- structive business community. Consequently, Nepal will remain dependent on foreign grant aid to keep the economy afloat.

Nepal: gross domestic product Nepal: Nepalese rupee real exchange rate (c) % change, year on year 1980=100 Nepal (a) 160 Asia excl Japan 9 NRs:DM 140 8 7 120 6

5 100 4 NRs:$ 3 80 2 1 60 0 1993 94 95 96 97(b) 40

(a) Fiscal years beginning July 16th. (b) EIU estimates. (c) Nominal NRs:¥ exchange rates adjusted for changes in relative consumer prices. Sources: EIU; IMF, International Financial Statistics; World Economic 1980. 82 . 84 . 86 . 88 . 90 . 92 . 94 . 9697 . Outlook.

Review

The political scene

Mr Thapa calls for his On January 8th the prime minister, Surya Bahadur Thapa, recommended that government’s parliament be dissolved and general elections be held in May—only three dissolution— months after the coalition government, comprising the National Democratic Party (NDP), the Nepali Congress (NC) and the Nepal Sadbhavana Party (NSP), had come to power (4th quarter 1997, page 37). Mr Thapa insisted that his only wish was to bring some political order to Nepal. However, his attempt to call a new general election was more likely a pre-emptive move to thwart the formation of an alternative coalition by the Communist Party of Nepal-United Marxist Leninists (CPN-UML), the faction of the NDP led by Lokendra Bahadur Chand and a splinter group of the NC.

Heightened factionalism Heightened factional warfare in both the NC and the NDP in late 1997 in the NDP— prompted rumours that disaffected members of both parties might join forces with the opposition CPN-UML to topple the government. At the NDP’s second general convention in November, which Mr Chand refused to attend, Mr Thapa was elected party president for a five-year term. Mr Thapa’s control over the party had never been in doubt, but his decisive victory ended the collective leadership of the party and left the Chand loyalists isolated.

At the time the consolidation of Mr Thapa’s position in his party was also thought to benefit the coalition, as it implied that he would have greater control over unruly NDP MPs, for whom he was now able to provide cabinet posts. If that was not enough to ensure loyalty of NDP MPs, the recent defection law can

now punish those who oppose leadership with expulsion. Moreover, Mr Chand is no longer considered capable of engineering a re-alliance with the CPN-UML.

—and the NC— However, this interpretation of the power balance shifted as tensions in the NC increased, giving Mr Chand more room to manoeuvre. A rumour about the ex- istence of an informal power-sharing agreement in the NDP-NC-NSP coalition— under which the NDP was to hand over the leadership of the government to the NC, elevating the NC president, Girija Prasad Koirala, to the office of the prime minister—left the anti-Koirala faction of the NC unsettled. Indeed, it appeared in late 1997 as if Mr Koirala was already preparing for government by issuing “directives” to the government and by launching yet another shake-up of his own party at the NC’s Maha Samiti (General Council) meeting in Nepalgunj in late October.

—where cabinet The disaffection of the anti-Koirala faction intensified following the cabinet assignments prompt reshuffle in early December, which added 23 NC MPs—most of them Koirala a furore— supporters—to the cabinet, increasing its size from 24 to 47. This revived a long-standing struggle within the party between Mr Koirala and the former party president, Krishna Prasad Bhattarai, whose supporters were sidelined during the cabinet appointments. Mr Bhattarai resigned his seat on the party’s central working committee and in a letter to Mr Koirala threatened to split the party if Mr Koirala did not relinquish one of his two offices, either as parliamentary party leader or as party president. Although a formal split was averted, the anti-Koirala lobby remains disaffected.

—caused by rumours of Mr Thapa had no reason to doubt rumours of an impending alliance between an alliance the opposition and disaffected members of his coalition government (namely Bhattarai supporters in the NC and the Chand faction of NDP). His long-time adversary in the NDP, Mr Chand—who had been routed as both prime minister and leader of the NDP’s parliamentary party—had nothing to lose by recreating an alliance with the CPN-UML. He could be guaranteed to win back his erstwhile supporters if he appeared likely to play a leading role in a new government. However, it was growing disaffection within the NC that changed the equation: the anti-Koirala MPs who had been left out of the cabinet were thought to be particularly vulnerable to the offer of alliance with the CPN-UML and the Chand faction of the then united NDP.

The opposition demands a Within hours of the prime minister’s recommendation to dissolve parliament, special session— the opposition submitted a petition to King Birendra, demanding a special session of parliament to move a no-confidence motion. The petition was signed by 96 members of parliament from the CPN-UML, the Chand faction of the NDP and by one member of the NC. The opposition argued that parliament could not be dissolved and a fresh election called while a new coalition government was ready to take power.

In practice the CPN-UML should have welcomed the apparent demise of the coalition and the calling of a general election: the party had performed well in recent local and by-elections and is predicted to win an impressive victory in the next general election. These considerations, however, were overridden by two other important factors, which prompted the party to try to form a government

from within the existing parliament instead: the CPN-UML wanted to be in office and controlling the powers of patronage when the election took place.

—and a constitutional The conflicting demands and the confusion over the prerogatives of the prime crisis looms minister plunged Nepal into a constitutional crisis which King Birendra was asked to resolve. According to the 1990 constitution the king must abide by the advice of the prime minister and his cabinet, suggesting that the king should have accepted Mr Thapa’s request to call a general election. In 1994 the then prime minister, Girija Prasad Koirala, requested the dissolution of parliament and a mid-term election—a move deemed constitutional by the Supreme Court. However, in 1995 a request for the dissolution of the lower house of parliament by the then prime minister, Man Mohan Adhikari, was judged unconstitutional because opposition parties were able, and willing, to form an alternative government which commanded a majority. This decision led to the fall of the CPN-UML government and the formation of the NC-NDP- Sadbhavana coalition under Sher Bahadur Deuba. Given the complexity of the situation, King Birendra asked the Supreme Court for clarification of the constitution. The court began to debate the issue on January 19th. On February 4th, acting on an opinion delivered by the Supreme Court, King Birendra called a special session of parliament, as requested by the opposition.

The implications of the king’s announcement are far-reaching. His decision establishes that the prerogatives of Nepal’s House of Representatives take precedence over the wishes of the prime minister and effectively places severe restrictions on the prime minister’s power to call a general election. In the long term, the decision may have a destabilising effect on the Nepal political scene which, since 1995, has been plagued by weak prime ministers who have struggled to maintain discipline and control over their governments. This decision will only tilt the balance of power further.

The NDP finally splits The call for a special session of parliament by the opposition CPN-UML and the Chand faction of the NDP was accompanied by a request for recognition of the Chand faction as a separate party from the NDP. Mr Chand obtained the support of 10 of the 23 NDP parliament members, just passing the 40% thresh- old required in the Defection Act (1997) for the establishment of a separate party. On January 16th parliament recognised Mr Chand’s New National Democratic Party (NNDP) as a separate and legal political party, formalising what had been a long-standing de facto split in the NDP between the Chand and Thapa factions of the party (4th quarter 1997, page 38).

Economic policymaking is Amidst all this factional infighting the government struggled to give the impres- sidelined sion of meaningful activity. On December 7th the government presented a 21-point programme which produced few surprises, apart from the commit- ment to hold local elections in areas where they had been cancelled in the summer because of the presence of Maoist insurgency guerrillas. The government also pledged to reduce unemployment by 65,000 per year, to eliminate kamiya (bonded labour), to establish specialised universities and to present the Ninth Five-Year Plan in its entirety.

The anticorruption drive Only a tiny minority of ministers in Mr Thapa’s coalition government disclosed falters details of their assets, despite the recommendation that they do so within 15 days of taking office. Officials from the Commission for the Investigation of the Abuse of Authority (CIAA) also complained that they could not take action against corrupt officials because they enjoyed the protection of their ministries. Reports of suspected corruption are passed from the CIAA to the ministries, but it is then the responsibility of the ministries to approve action against the suspects. The CIAA has sent reports to 18 ministries detailing allegations and suggesting action but so far only six ministries have acknowledged the reports. The chief commissioner of the CIAA, Ram Prasad Shrestha, stated in December that his commission was losing the battle against corruption.

The guerrillas are active— In October the Communist Party of Nepal (Maoist)—which has orchestrated guerrilla activity in the hills of Nepal since February 1996—claimed to have 1,600 fighters in its guerrilla force. Despite more intensive local policing, the security forces show no sign of containing the insurgency.

—and the Gurkhas Dissatisfaction amongst former and current Gurkha soldiers continued, despite prepare for a legal fight the announcement in February 1997 that Gurkhas working for the British Army were to be paid salaries equivalent to those of their British counterparts. However, the Gurkha Ex-servicemen’s Association (Gaesco) is preparing to take the UK government to court over the pensions offered to Gurkhas, which remain a fraction of that offered to British servicemen and women. Gaesco will argue that Gurkhas are part of the British Army, according to the British Army Act, and therefore entitled to the same benefits as British soldiers. In addition, they will cite the Race Relations Act 1976, according to which no one working in British government service can be discriminated against on the grounds of race or nationality.

Disease control is wanting The World Health Organisation estimates that there are approximately 15,000 people infected with human immunodeficiency virus (HIV) in Nepal, although government numbers of AIDS-related deaths appear underestimated. A large proportion of the thousands of Nepali women returning from prostitution in Indian brothels are HIV-positive. However, the Nepali health service, particularly in rural areas, is ill equipped to monitor the spread of AIDS or even to recognise its victims.

In October tests conducted by the World Health Organisation identified multi- drug resistant tuberculosis (MDRTB) in Nepal. Approximately 16,000 people die of tuberculosis in Nepal each year, and the presence of a drug-resistant strain is seen as a serious health concern. Japanese encephalitis is also on the rise, claiming over 300 lives in 1997. The disease peaks every 10-12 years: the last serious outbreak was in 1986-87, when 415 deaths were recorded. Evidence suggests that 1998 will again witness a rise in the number of cases.

Economic policy and the economy

Tax receipts fall short In the first five months of 1997/98, government expenditure increased by 4.6%, of target year on year, while total resources decreased by 6.3%. Despite the ambitious

aims of the 1997/98 budget, which projected a 19% increase in revenue, revenue collection declined by 0.2%, year on year, in the first five months of 1997/98. As a result, the budget deficit widened to NRs2.4bn ($41m). Foreign cash loans have financed 78% of this deficit, with the remainder covered by overdraft facilities. Total foreign cash assistance (loans and grants) rose to NRs2.3bn in the first five months of 1997/98, compared with NRs1.5bn in the corresponding period in 1996/97.

VAT is introduced— Value-added tax (VAT) came into operation on November 16th, replacing sales, hotel, entertainment and contract taxes. The new tax has attracted widespread hostility from the business community and the Nepal Chamber of Commerce, which campaigned against VAT and criticised the government’s “unilateral decision” to impose the new tax. Even though the Federation of Nepalese Chambers of Commerce and Industry (FNCCI) was less hostile, it too expressed serious concerns about VAT and its implementation. After the introduction of the tax there were widespread complaints in urban areas that traders were raising their prices and blaming the rises on VAT, although it was suspected that many businesses had not even registered for VAT. The prices of some basic commodities, particularly unprocessed agricultural products, which are ex- empted from VAT by law, were also reported to be rising.

—although resistance Business and industry have argued that VAT is too sophisticated to be applied persists efficiently in Nepal. However, their opposition is more likely based on a fear that with increased transparency in the recording of business transactions, the opportunity for tax evasion and other illegal practices will shrink. Conse- quently, many businesses are failing to register: by the end of December 1997 only 2,700 of the 10,000 businesses which the government had hoped to bring into the VAT tax net had registered. Reluctant VAT payers were given a grace period of three months in which to register, but there was no certainty that they would comply by the deadline.

Attempts to heal the rift that has developed between the government and the business sectors over VAT have failed. A meeting between the government and the FNCCI only served to create more confusion, with the FNCCI implying that businesses would not be compelled to register for VAT and the government asserting that no such agreement had been made. The Nepal Chamber of Commerce (NCC) announced a three-day strike, starting on November 21st. Businesses closed in the capital and the NCC claimed that the strike was successful in many urban centres. VAT is not seen as a partisan issue—all recent Nepali governments have been committed to its implementation. The government’s failure to implement the scheme is therefore seen as a sign of weakness.

Fertiliser prices increase— On November 25th the government announced a 10% increase in the price of chemical fertiliser. The price of urea rose from NRs6.72 per kg to NRs7.40/kg and diammonium phosphate from NRs16.88/kg to NRs18.57/kg. The increase was part of a strategy to reduce agricultural subsidies, thereby limiting the mounting debts of the Agricultural Inputs Corporation. The Asian Development Bank (ADB) has pressured Nepal to cut subsidies by mid-1999 as part of a long-term $50m ADB support programme for Nepal’s agricultural sector. However, urea is still heavily subsidised, with the government paying around 50% of the market

price for fertiliser. All the parties will be anxious to avoid the political fallout associated with a further reduction in subsidies and the consequent rise in fertiliser prices.

—the private sector is In mid-November the fertiliser sector was opened to the private sector in an welcomed— effort to meet rising demand for fertiliser. The Agricultural Inputs Corporation has been unable to satisfy the heavy demand, which has gown by 70% in the past decade. Hence, private companies will now be allowed to purchase, import, distribute and sell fertiliser. They will also be entitled to receive the government subsidy on urea. However, as fertiliser imports have long been associated with corrupt practices, there is some concern that opening the sector may simply widen the opportunity for corruption.

—and food subsidies In November the ministry of supplies announced that the government was to are cut end subsidies provided by the Nepal Food Corporation on foodgrain supplied to easily accessible urban areas such as the Kathmandu Valley. However, subsidies on food supplies to remote areas will remain.

Agricultural growth Growth in agricultural production is expected to fall below target in the may falter 1997/98 fiscal year (ending July 15th). Cold weather and heavy monsoon rains have affected rice and wheat output and may lead to a contraction in production of these two crops this year. The agricultural sector, which contributes over 40% of the kingdom’s GDP, grew by 3.3% in 1996/97. The slowdown in carpet and garment exports, coupled with stagnation in the real estate and construction sector, suggests that GDP growth, which fell to an estimated 1.5% in 1996/97, may slow further in 1997/98.

Inflation slows— In mid-November the rate of inflation measured by the National Consumer Price Index increased by 1.2%, on a point-to-point basis, compared with an increase of 12.9% in the corresponding period last year. The price of food and beverages declined by 1.2%, compared with a rise of 10.3% in mid-November 1996. Prices in the non-food and services group increased by 5.8%, compared with a rise of 8% in the previous year.

—but the trade and Nepal’s trade gap widened to NRs16.7bn ($290m) in the first quarter of current-account deficits 1997/98, an increase of 21.2% from NRs13.8bn in the first quarter of 1996/97. widen According to the Nepal Rastra Bank (NRB, the central bank), merchandise imports rose by 17.6% to NRs22.2bn, while merchandise exports rose by only 7.7% to NRs5.5bn. Foreign sales of Nepali rugs contracted by 11.8%, year on year, falling from NRs2.2bn in the first quarter of 1996/97 to NRs1.9bn in the same period this fiscal year. Sales of ready-made garments fell by 3.9%, from NRs1.16bn to NRs1.1bn. Germany is the top market for Nepali carpet exports while the United States is the largest buyer of Nepali garments.

The Nepali rupee falls— A depreciation of the Nepali rupee has followed the depreciation of the Indian rupee, to which the Nepali currency is pegged at a rate of NRs1.6:Rs1. The Nepali rupee fell from NRs58.95:$1 at the end of October to NRs64.75:$1 in mid-January. In late 1997 the NRB intervened three times to prop up the

Nepali currency through sales of dollars but has so far refused requests from commercial banks to intervene again in 1998.

—and interest rates are cut On December 4th the NRB reduced its refinance rate, the interest rate it charges to financial institutions, from 11% to 9%. The move was prompted in part by a cut in the bank rate of the Indian central bank, the Reserve Bank of India, a few months previously (although interest rates in India have since risen). The NRB also hoped to encourage a reduction in the rates extended by the main commercial banks to corporate borrowers.

Energy

Deadlock on Pancheswar— The Detailed Project Report (DPR) on the Pancheswar project, an outline of the terms and conditions of the Makahali Treaty on water-sharing signed by India and Nepal, was not completed by the December deadline (4th quarter 1997, page 46). Some progress was made in the negotiations. For example, the capacity of the hydroelectric plant to be constructed on the Makahali river had been a bone of contention between the two countries, with India arguing for a plant with 2,000-4,000-mw capacity and Nepal preferring a larger plant with a production capacity of 6,480 mw. According to the latest information available, India has agreed to Nepal’s requests to build a larger plant.

—centres on the “prior Discussions on the “prior use” clause remain deadlocked. Under the Mahakali use” clause— Treaty (1st quarter 1996, pages 38-39) waters from the Mahakali river are to be shared between India and Nepal. Before this division can take place, India has demanded a guaranteed supply of water for the Indian Sharada Barrage and also for the lower Sharada Auxiliary Canal, 160 km from the India-Nepal bor- der. If this principle is accepted, India and Nepal will share what is left of the water resources of the Mahakali river after India’s existing requirements have been met. Nepal has objected strongly to this demand. Water resource officials from Nepal and India have requested another two years for the preparation of the DPR in order to overcome such political and technical difficulties.

—and water resource The development of hydroelectric power has suffered other setbacks. The award development slows of a licence to Enron Renewable Energy Corporation to survey the Karnali Chisapani hydroelectric project has been delayed. In addition, on November 14th the proposed 20-mw Chilime Hydropower Project in Rasuwa district was shelved. The Ministry of Water Resources failed to approve the financial arrangements for the sale of electricity and the dividend to shareholders proposed by the private sector Chilime Hydropower company, which was granted a licence to develop the project in June 1997. A provision in the agreement made between the company and the government stipulated that the licence would lapse in November 1997 if agreement on the price of electricity could not be reached.

Tourism

Tourist arrivals increase, a Tourist arrivals in the first nine months of 1997 rose by 2.4% compared with little— the same period in 1996, according to the director-general of the Department of Tourism, Prachanda Man Shrestha. However, this increase falls short of the target increase of 7-8% projected by the government for 1998, which has been designated “Visit Nepal Year 1998”.

—and RNAC may be able In December the Royal Nepal Airlines Corporation (RNAC) signed an agree- to carry them ment with Avionics of Yugoslavia to lease a Boeing 727-200 from December 24th. The three-month lease may be extended. The new contract was arranged when RNAC’s lease of an aircraft from a Turkmenistan company expired and was accomplished with little of the customary panic that has characterised the corporation’s recent acquisition of aircraft.

Aid and development

Aid for infrastructure— On November 14th the Asian Development Bank (ADB) approved a technical assistance grant of $450,000 to support rural electrification, improve distribution systems and develop transmission systems. The Swiss government pledged grant assistance of NRs197.8m ($3.2m) under two separate agreements on November 10th. The first grant of NRs99.5m was for the construction and maintenance of suspension bridges by the Department of Roads. About 40 new bridges are expected to be constructed under the project. Under the second agreement NRs98.3m will be made available for the implementation of a local level bridge building programme. The British government pledged grant assistance of NRs390m ($6.4m) for a bridge renovation programme in Morang district and for the construction of two new bridges on the Mahendra Highway. In addition, an agreement was signed on December 4th between Nepal and Germany for grant assistance of NRs1.4bn for the expansion of a Load Despatch Centre Project.

—grants from UNICEF and The United Nations Children’s Fund (UNICEF) pledged grant assistance of the World Bank— NRs3.4bn for programmes operating in 1997-2001, with emphasis placed on health, nutrition, childcare and education.

On December 19th the World Bank pledged NRs5.2bn in loan assistance to Nepal for the Irrigation Sector Project. This will bring over 59,000 ha of land under irrigation in the eastern, western, mid-western and far western development regions and is targeted at small and medium-sized farms. An additional loan of NRs1.48bn was extended to the Nepal Multi-Modal Trade and Transit Project, which is intended to streamline trade and transit procedures. Under the project an Inland Container Depot will be constructed in Birgunj to provide container transportation services via rail freight. Container depots will also be constructed in Bhairahawa and Biratnagar to provide road-based con- tainerised cargo facilities. The private sector will be responsible for operating all three depots.

—from USAID for The United States Agency for International Development (USAID) signed a $5m hydropower and women Special Objective Agreement on December 20th to support increased private- sector participation in hydropower. The strengthening of the Electricity Development Centre of the Ministry of Water Resources will be a priority. USAID also signed agreements for the implementation of a Women’s Empowerment programme, to be funded with a three-year, $7.4m grant.

Food for the poorest The World Food Programme has pledged grants of $15m to provide free mid-day meals for 250,000 primary schoolchildren. It will also continue to provide food assistance for the Bhutanese refugees in Nepal during 1998, at an estimated cost of $8m.

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 50 Quarterly indicators and trade data

Quarterly indicators and trade data

India: quarterly indicators of economic activity

1995 1996 1997 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Agricultural production Annual totals Tea ’000 tonnes ( 715a ) ( 715a ) ( n/a ) Fruit “ ( 39,347 ) ( 39,347a ) ( n/a ) Vegetables ” ( 64,671 ) ( 64,672a ) ( n/a ) Industrial production Monthly av General 1990=100 129 138 152 135 142 147 156 146 149b n/a Mining “ 109 121 141 114 109 125 141 121 121b n/a Manufacturing ” 130 139 150 134 144 145 154 145 149b n/a Electricity “ 140 143 149 145 144 151 155 153 158b n/a Mining Crude petroleumc m b/d 0.71 0.69 0.68 0.73c 0.73 0.73 0.75 0.76 0.76 0.76d Employment End-Qtr Applications for employment m 37.28 36.86 36.74 37.02 37.74 37.43 n/a n/a n/a n/a Prices Monthly av Consumer prices: 1990=100 169.1 171.3 170.0 176.3 183.6 187.0 188.1 189.9 192.5e n/a change year on year % 10.7 10.2 8.8 9.3 8.6 9.2 10.6 7.7 n/a n/a Wholesale: domestic 1990=100 167 168 168 172 178 180 181 182 184 186f agricultural productsg “ 175 174 175 187 194 187 201 n/a n/a n/a manufacturing “ 164 164 166 168 170 173 173h n/a n/a n/a Money & banking End-Qtr M1, seasonally adj: Rs bn 1,868.7 1,922.0 2,048.6 2,062.5 2,135.4 2,192.8 2,301.5 2,305.1 2,328.5i n/a change year on year % 17.8 11.1 11.2 13.2 14.3 14.1 12.3 11.8 n/a n/a Bank rate “ 12.00 12.00 12.00 12.00 12.00 12.00 12.00 10.00 10.00 9.00j Monthly av Share price index 1990=100 256.4 243.0 235.7 276.6 259.7 214.1 223.2 221.4 245.3 226.1k Foreign trade Qtrly totals Exports fob Rs bn 240 282 312 287 285 285 318 298 311 106f Imports cif “ 288 319 350 323 315 340 390 354 345 113f Exchange holdings End-Qtr Reserve Bank & govt reserves: goldl $ m 3,684 3,694 3,837 3,739 3,687 3,606 3,367 3,287 3,102 3,015j SDRs “ 49 139 82 128 57 122 2 3 30 77 foreign exchange ” 19,064 17,467 17,044 17,526 18,433 19,742 22,367 25,404 25,697 24,324 Exchange rate Market rate Rs:$ 34.01 35.18 34.33 35.06 35.76 35.93 35.91 35.82 36.18 39.28

Note. Annual figures of most of the series shown above will be found in the Country Profile. a Estimate. b July only. c Revised from 2 Qtr 1996. d Estimate. Forecast for 1 Qtr 1998, 0.77. e Average for July-August. f October only. g Food, non-food and minerals. h Average for January-February. i End-August. j End-November. k Average for October-November. l 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; International Energy Agency, Monthly Oil Market Report.

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 Quarterly indicators and trade data 51

Nepal: quarterly indicators of economic activity

1995 1996 1997 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Prices Monthly av Consumer prices: 1990=100 165.9 175.3 177.2 173.6 181.0 193.3 194.6 189.4 190.2 192.2a change year on year % 7.2 8.2 6.8 8.2 9.1 10.3 9.8 9.1 5.1 n/a Money End-Qtr M1, seasonally adj: NRs m 32,781 32,949 34,064 36,436 36,578 35,133 36,081 37,089 39,118 38,773b change year on year % 11.8 9.4 9.9 16.0 11.6 6.6 5.9 1.8 6.9 n/a Foreign trade Qtrly totals Exports fob NRs m 4,250 4,026 4,549 5,472 5,692 4,698 5,894 5,813 5,661 5,658 Imports cif “ 16,911 18,536 16,785 18,261 21,726 20,434 20,713 27,270 26,875 23,666 Exchange holdings End-Qtr Goldc $ m 44.1 44.1 44.2 45.9 44.8 44.1 43.2 40.3 39.4 37.1d Foreign exchange “ 724.8 611.0 577.9 606.0 598.3 585.9 563.1 609.6 641.8 611.7 Exchange rate Market rate NRs:$ 50.4 54.3 56.0 55.5 56.0 57.0 57.0 57.0 57.0 57.8e

Note. Annual figures of most of the series shown above will be found in the Country Profile. a July only. b End-August. c End-quarter holdings at quarter’s average of London daily price less 25%. d End-October, 37.3. e End-4 Qtr, 63.3.

Source: IMF, International Financial Statistics.

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 52 Quarterly indicators and trade data

India: foreign trade ($ m) Total US Germany Japan UK Apr-Mar Apr-Mar Apr-Mar Apr-Mar Apr-Mar Apr-Mar Apr-Mar Apr-Mar Apr-Mar Apr-Mar Imports cif 1992/93 1993/94 1992/93 1993/94 1992/93 1993/94 1992/93 1993/94 1992/93 1993/94 Food 608 1,424 136 146 2 8 1 1 1 11 of which: cereals & preparations83234617000000 fruit & vegetables 414 520 36 44 1 1 0 0 0 1 Wood & cork 14021300000011 Pulp 159 202 52 62 1 2 0 0 0 0 Textile fibres 316 621 13 38 4 19 12 23 10 14 Crude fertilisers & minerals 281 403 33 27 1 2 3 5 2 2 Metal ores & scrap 456 755 73 166 23 33 10 13 67 105 Coal 467708010191200 Petroleum & products 5,803 6,023 11 49 0 5 1 8 1 23 Chemicals 3,002 4,213 452 561 257 331 187 239 92 119 of which: elements & compounds 1,371 2,138 163 282 115 146 123 143 30 47 fertilisers 632 764 140 110 33 37 0 1 0 0 plastics 433 604 52 64 35 46 30 53 11 16 Paper etc & manufactures 220 243 15 17 11 20 5 7 25 12 Textile yarn, cloth & mnfrs 228 325 9 15 12 15 39 31 8 8 Diamonds 2,583 1,633 32 48 2 3 0 1 757 463 Iron & steel 775 1,147 18 28 191 211 92 129 63 55 Non-ferrous metals 485 974 7 21 17 32 12 18 33 111 Metal manufactures 180 212 26 29 36 39 20 28 21 19 Machinery incl electric 3,067 4,333 531 686 632 840 531 642 209 299 of which: textile machinery 461 671 10 20 148 215 80 95 37 47 Road vehicles 222 292 34 17 13 23 147 210 7 10 Other transport equipment 1,047 820 668 493 39 12 2 13 16 15 of which: aircraft 935 733 664 484 35 10 0 3 14 13 Scientific instruments etc 492 555 127 140 65 72 109 132 41 52 Total incl others 23,304 28,655 2,683 2,892 1,773 2,185 1,513 2,037 1,508 1,556 continued

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 Quarterly indicators and trade data 53

Total US Germany Japan UK Apr-Mar Apr-Mar Apr-Mar Apr-Mar Apr-Mar Apr-Mar Apr-Mar Apr-Mar Apr-Mar Apr-Mar Exports fob 1992/93 1993/94 1992/93 1993/94 1992/93 1993/94 1992/93 1993/94 1992/93 1993/94 Fish & products 807 1,120 100 145 364 495 6 8 39 52 Fruit & vegetables 545 649 149 163 27 31 13 20 39 41 Coffee 655 335 70 38 19 18 64 63 53 6 Tea 338 311 15 13 8 10 18 23 43 52 Spices 142 149 42 44 5 6 4 3 8 8 Animal feeding stuffs 748 582 0 0 16 10 50 28 28 12 Tobacco & manufactures 147 81 1 2 1 1 7 1 15 19 Textile fibres & waste 226 79 1 2 30 10 1 2 2 8 Crude minerals & fertilisers 194 249 9 14 38 46 8 5 3 3 Iron ore & scrap 438 413 0 0 239 218 0 1 0 0 Crude animal & vegetable materials 207 225 71 69 31 37 17 19 13 14 Petroleum & products 399 423 n/a 0 n/a 0 n/a 0 n/a 0 Chemicals 1,545 2,155 176 225 39 57 122 162 87 103 Leather & manufactures 323 467 24 28 6 12 42 65 21 26 Textile yarn & thread 655 1,050 10 12 32 55 21 32 68 85 Cotton fabrics 683 913 116 153 8 11 31 34 121 136 Other fabrics & manufactures 1,579 1,866 314 367 71 93 299 277 118 160 of which: carpets 604 609 193 205 31 41 200 171 20 22 Diamonds 3,573 3,935 1,168 1,252 522 554 34 31 21 24 Iron & steel 771 699 79 106 95 99 8 26 4 12 Metal manufactures 499 563 107 133 6 9 25 38 57 72 Machinery & transport eqpt 1,511 1,890 153 225 8 10 59 79 84 115 of which: road vehicles 567 717 39 59 4 3 18 23 29 41 Clothing & footwear 3,468 4,265 895 1,283 101 119 556 615 380 457 Total incl others 22,206 26,309 3,988 5,013 1,740 2,026 1,531 1,745 1,378 1,690 Source: UN, External Trade Statistics, series D.

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998 54 Quarterly indicators and trade data

India: major partners’ tradea ($ m; monthly averages) Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Sep Jan-Sep 1991 1992 1993 1994 1995 1996 1996 1997 Exports to India fob US (fas) 166.6 159.8 230.1 191.2 274.7 276.5 256.7 308.3 Belgium-Luxembourg 115.6 117.8 153.8 154.3 220.3 209.4 206.6 257.5 UK 149.5 138.0 141.2 167.3 221.3 221.5 223.9 224.4 Germany 121.3 151.2 151.4 172.9 266.2 259.7 261.8 209.4b UAEc 75.3 55.1 49.8 93.2 110.9 136.0 137.0 162.5d Japan 126.9 123.9 127.5 170.6 211.9 203.0 203.7 157.1 Saudi Arabia 91.3 119.5 110.6 109.1c 116.8c 157.0c 135.6c 155.5d South Korea 39.1 36.5 150.3 96.7 93.7 101.8 99.3 114.2b Italy 37.4 40.3 41.1 58.2 92.7 94.3 105.0 88.1b France 62.7 56.1 63.4 67.7 88.1 89.5 90.3 66.9 Imports from India cif US 285.3 338.7 407.1 472.6 506.7 544.1 544.4 636.4 UK 114.2 125.8 136.1 164.4 188.8 209.5 207.6 219.9 Germany 140.1 143.5 163.1 179.0 209.5 219.4 228.3 202.7b Japan 182.5 169.8 189.8 221.1 243.1 237.7 243.1 198.2 Hong Kong 59.2 62.8 101.8 121.8 156.2 164.0 164.7 191.8e UAE 52.4 69.2 90.6 97.3c 109.4c 134.6c 131.7c 176.0d Italy 57.4 63.9 63.2 82.7 113.6 103.4 117.7 111.4b Belgium-Luxembourg 55.7 52.8 65.9 78.0 93.2 99.9 104.0 100.3 South Korea 40.4 39.8 43.6 48.7 66.3 82.3 84.2 96.9b France 52.3 59.9 63.8 75.3 96.9 95.5 99.3 95.0 a Figures from partners’ trade accounts; imports cif; exports fob, unless otherwise indicated. b January-August. c Estimate. d Estimate for January-April. e January-April.

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