Ti ii WomI) BAx\K Public Disclosure Authorized Interinal Discussion Paper AsIA REGIONAL SERIES Report No. DP188 Public Disclosure Authorized Asia Region Seminar on Policy Challenges in India Public Disclosure Authorized October 1990 Public Disclosure Authorized T he vitws rre ntted here art, theNt ot the author. and the should nt be imterpreted as reflecting tho of the World Bank ASIA RI(ION DISCUSSION PAP)iR Sli FlliS T[t Author 1)atc )I iginaot I1)' Ithe I ab' r I orce Partit ipatin of Women in the Republic of Korea Eolution and Polhe Issues C Grxgnert May 1988 1- Ibal II)PIS The Role of tchange Rate Polik sin I-our Last Asian Countries Sang Woo Nam May 1988 ) Leisper (91388) ID128 The Sinall Scale Enterprise Credit Program (S S u P ) Under the Second and Third Calcutta Urban Dev elopiment Projcets I Kahnert March 1988 1- Kahnert (81411) (CUDI 1 and CUDII 1Il) An Assessment IDP35 Improving Tax Policy Adiice. Lessons and UnresolNed Issues from Asia Experience IH Fkisig June 1989 IH Flcisig (81413) IDP36 Direct Taxes and Fiscal Poliey Issues An Illustration for East Asia A Virmani June 1989 II-leisil (81413) IDP37 Commodity Taxation in Selected Countries in Soth East an. East Asia Z Shalii June 1989 I, Flcisig (81413) IDP38 Tax Analysis in Developing Country Settings R Musgrave June 1989 11. Fleisig (81413) IDP39 Indonesia- External Shocks, Policy Response and Adjustment Performanc S Ahmxi June 1989 Sadiq Ahmed (82467) IDP42 An Analysis of the Nature of W.T. Dickens July 1989 R. Zagha (80433) Unemployment in Sri Lanka and K. Lang IDP44 Assisting Poor Rural Areas Through Groundwater Irrigation F Kahnert August 1989 C. Chamberlin (81409) IDP51 Educational Development in Asia A Comparative Study Focussing on Cost Je-Peng Tan October 1989 J"c -Peng Tan (81408) and Financing Issues Alain Mingat IDP52 Chinese Reforms, Inflation and the Allocation of Investment in a Socialist Economy Oktay Yenal October 1989 Oktay Yenal (81415) IDP63 Public Policy to Prof.,ole Induslrialization: The Experience of the East Asian NICs and Lessons for Thailand D. Dollar May 1990 D Dollar (80518) IDP65 A Study of the Poor in Sri Lanka C Rouse June 1990 Y. Huang (80434) IDP68 Health Sector Financing in Asia C Griffin August 1990 Jcc Peng Tan (81408) Note I straO es na1% be bau 1Tuin th; Asia 1Iil rmnittlin ic k in PREFACE This volume contains the proceedings of a Seminar organized by the Asia Region on October 5, 1990. It was prompted by the fortuitous presence in Washington of several eminent Indian economists and their willingness to convene for a frank discussion of India's economic policy choices. The well- known Indian economist, Dr. Abid Hussain, was serving in Washington as the Ambassador of India. Professor Bagicha Minhas had joined the World Bank as a Visiting Research Fellow, while Dr. Raja Chelliah was resident (as a Visiting Scholar) in the International Monetary Fund. All three had been prominent members of the Indian Planning Commission. Mr. Jagdish Sharan Baijal, who had been a Secretary of the Planning Commission in addition to his service in policy-making positions, was serving as the Executive Director in the World Bank representing India, Bangladesh, Bhutan and Sri Lanka. And Mr. Gopi Arora, the former Secretary of Finance, was the Executive Director in the Fund. Professor T.N. Srinivasan of Yale University, a prominent economist, was visiting Washington to help in the preparation of the World Development Report. This, then, was a unique opportunity to hear their views, reflections and advice on policy issues of considerable urgency in India today. We are grateful to all of them for accepting our invitation and for consenting to the publication of their informal remarks. Oktay Yenal Chief Economist Asia Region Asia Region Seminar on POLICY CHALLENGES IN INDIA October 5, 1990 TABLE OF CONTENTS Page No. I. INTRODUCTORY REMARKS - A. Karaos1anoglu . 1 II. INDUSTRIAL AND TRADE POLICIES - T.N. Srinivasan . 3 III. ISSUES IN FISCAL POLICY AND FISCAL FEDERALISM - R. Chelliah 9 IV. AGRICULTURE AND POVERTY ALLEVIATION - B. Minhas . 15 V. PERFORMANCE AND PROSPECTS OF THE INDIAN ECONOMY - A. Hussain 23 VI. COMMENTS AND QUERIES - 0. Yenal, S. Bhalla, J.S. Baijal, T.N. Srinivasan, G. Arora, S. Acharya . 28 VII. SUMMING UP - A. Karaosmanoglu . 34 I. INTRODUCFORY REMARKS Attila laraosmanoglu Vice-President, Asia Region Good morning to you all and welcome to this Asia Region Seminar on Policy Challenges in India. Let me extend our special appreciation to His Excellency, the Indian Ambassador to the United States, Mr. H.E. Abid Hussain, for finding time from his schedule to attend. Looking around this table at the guests who have joined us here today leaves me reassured that the topic at hand will receive the attention of some of the most able minds in international development. The current circumstances in India and globally are of such complexity and volatility that no less than this distinguished group could do the subject justice. The challenges facing India today - and here I need to be careful to avoid hyperbole and pay due regard to the many momentous junctures in India's economic history - today's challenges touch the very foundations of India's development philosophy and strategy. Let me explore this notion for just a few minutes, then I will sit down and listen to those who understand these issues better than me. Three contextual points immediately come to mind. First, the problems that India faces today in its key macro balances are not the product of a sudden lurch in policy or of massive external shocks. These problems are the harvest from a decade of fiscal and monetary management that have gradually, almost imperceptibly, left this economy vulnerable to relatively modest shocks. The Gulf crisis has served to unmask, if you will, the size and seriousness of India's macro problems. My second point is that these macro imbalances coexist with some very favorable developments in the economy, which reflect the growing dynamism and openness achieved in recent years and which draw from the rich physical but especially human capacity built up with dedication and much sacrifice, over the past three decades. So we see unprecedented industrial growth performance in the second half of the decade and a breakout from the years of stagnant exports to high annual increases in volume terms. My third point concerns the political environment. Indian governments have always served under pressures and demands from a vast tapestry of interests and groups. This is to be expected in a vibrant democracy, but more recently those pressures and conflicts seem to have intensified as a new government struggles to achieve a sustainable coalition. There is a new fluidity in Indian politics, at least from this distant vantage point, and this has important implications for economic policy formulation and implementation. Again, let me not stray into hyperbole, but the convergence of these trends and recent developments has sharpened choices and hardened up the dilemmas facing India's policy makers. There are no easy answers that I am aware of. But the choices do seem to fall into one of two general directions, one more cautious and responsive to short-term concerns, and the other, a bolder approach, ushering India forward into a modern, open, competitive industrial state equipped with a literate, healthy and well-nourished population. It is on that second path that I. INTRODUCTORY REMARKS Attila Karaosmanoglu Vice-President, Asia Region Good morning to you all and welcome to this Asia Region Seminar on Policy Challenges in India. Let me extend our special appreciation to His Excellency, ih, Indian Ambassador to the United States, Mr. H.E. Abid Hussain, for finding time from his schedule to attend. Looking around this table at the guests who have joined us here today leaves me reassured that the topic at hand will receive the attention of some of the most able minds in international development. The current circumstances in India and globally are of such complexity and volatility that no less than this distinguished group could do the subject justice. The challenges facing India today - and here I need to be careful to avoid hyperbole and pay due regard to the many momentous junctures in India's economic history - today's challenges touch the very foundations of India's development philosophy and strategy. Let me explore this notion for just a few minutes, then I will sit down and listen to those who understand these issues better than me. Three contextual points immediately come to mind. First, the problems that India faces today in its key macro balances are not the product of a sudden lurch in policy or of massive external shocks. These problems are the harvest from a decade of fiscal and monetary management that have gradually, almost imperceptibly, left this economy vulnerable to relatively modest shocks. The Gulf crisis has served to unmask, if you will, the size and seriousness of India's macro problems. My second point is that these macro imbalances coexist with some very favorable developments in the economy, which reflect the growing dynamism and openness achieved in recent years and which draw from the rich physical but especially human capacity built up with dedication and much sacrifice, over the past three decades. So we see unprecedented industrial growth performance in the second half of the decade and a breakout from the years of stagnant exports to high annual increases in volume terms. My third point concerns the political environment. Indian governments have always served under pressures and demands from a vast tapestry of interests and groups. This is to be expected in a vibrant democracy, but rare recently those pressures and conflicts seem to have intensified as a new government struggles to achieve a sustainable coalition.