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Macroeconomic Overview
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Budget 1998-99
Budget 1997-98
Budget 1996-97



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

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