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Country Profile 2007

India This Country Profile is a reference work, analysing the country�s history, politics, infrastructure and economy. It is revised and updated annually. The Economist Intelligence Unit�s Country Reports analyse current trends and provide a two-year forecast.

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ISSN 1473-9127

Symbols for tables �n/a� means not available; �� means not applicable

Printed and distributed by Patersons Dartford, Questor Trade Park, 151 Avery Way, Dartford, Kent DA1 1JS, UK.

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(Bangalore)

HyderabadHyderabadHyderabad

NagpurNagpurNagpur

BhopalBhopalBhopalIndoreIndoreIndore

AhmadabadAhmadabadAhmadabad

JaipurJaipurJaipur

KanpurKanpurKanpur

Mumbai(Bombay)

SuratSuratSurat

NasikNasikNasik AurangabadAurangabadAurangabad

NandedNandedNanded

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CoimbatoreCoimbatoreCoimbatore

Puduchcheri (Puduherry)

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June 2007

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Country Profile 2007 www.eiu.com © The Economist Intelligence Unit Limited 2007

Comparative economic indicators, 2006

Gross domestic product(US$ bn)

Sources: Economist Intelligence Unit estimates; national sources.

Gross domestic product(% change, year on year)


Consumer prices(% change, year on year)


Gross domestic product per head(US$ '000)


0 200 400 600 800 1,000

Afghanistan

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29.5

India 1

© The Economist Intelligence Unit Limited 2007 www.eiu.com Country Profile 2007

Contents

India

3 Basic data

4 Politics 4 Political background 5 Recent political developments 9 Constitution, institutions and administration 11 Political forces 15 International relations and defence

21 Resources and infrastructure 21 Population 22 Education 23 Health 24 Natural resources and the environment 25 Transport, communications and the Internet 28 Energy provision

30 The economy 30 Economic structure 32 Economic policy 34 Economic performance 36 Regional trends

37 Economic sectors 37 Agriculture 38 Mining and semi-processing 39 Manufacturing 41 Construction 42 Financial services 44 Other services

45 The external sector 45 Trade in goods 46 Invisibles and the current account 47 Capital flows and foreign debt 48 Foreign reserves and the exchange rate

50 Regional overview 50 Membership of organisations

52 Appendices 52 Sources of information 53 Reference tables 53 Population statistics 53 Transport statistics 54 Energy statistics 54 Government finances

2 India


55 Gross domestic product 55 Nominal gross domestic product by expenditure 55 Real gross domestic product by expenditure 56 Gross domestic product by sector 56 Real gross domestic product growth by sector 56 Gross domestic savings 56 Money supply 57 Interest rates 57 Prices and earnings 57 Agricultural production 58 Mineral production 58 Industrial production 58 Stockmarket indicators 59 Main composition of trade 59 Main trading partners 60 Balance of payments, IMF series 60 Balance of payments, national series 61 External debt, World Bank series 61 Foreign reserves 61 Exchange rates

India 3


India

Basic data

3,287,263 sq km (including Indian-administered Kashmir); 57% is agricultural land and 16% forest area

1.129bn (mid-2007 estimate)

Population in millions, 2001 census

Mumbai (Bombay) 16.4 Kolkata (Calcutta) 13.2 Delhi 12.8 Chennai (Madras) 6.4 Bangalore 5.7 Hyderabad 5.5

Varied; humid subtropical in Ganges basin, semi-arid in the north-west, tropical humid in north-east and most of the peninsula, tundra in the Himalayas; all areas receive rain from the south-west monsoon in June-September; the south is also served by the north-east monsoon in January-March

Hottest month, May, 26-41°C (average daily minimum and maximum); coldest month, January, 7-21°C; driest month, November, 4 mm average rainfall; wettest month, July, 180 mm average rainfall

Hindi is the national language and primary tongue of 30% of the population. There are 14 other official languages: Bengali, Telugu, Marathi, Tamil, Urdu, Gujarati, Malayalam, Kannada, Oriya, Punjabi, Assamese, Kashmiri, Sindhi and Sanskrit. English is widespread in business circles and as a second language

Hindu (80.5% in 2001 census); Muslim (13.4%); Christian (2.3%); Sikh (1.9%); Buddhist (0.8%); Jain (0.4%)

Metric system. Numbers are often written in lakhs (100,000) and crores (10m)

Rupee (Rs)=100 paise. Average exchange rate in 2006: Rs44.25:US$1. Exchange rate on June 18th 2007: Rs40.53:US$1

April 1st-March 31st

5 hours 30 minutes ahead of GMT

January 26th; August 15th; October 2nd; also major Hindu, Muslim, Christian and other religious holidays

Land area

Population

Main towns

Climate

Weather in New Delhi (altitude 218 metres)

Languages

Measures

Currency

Fiscal year

Time

Public holidays

Religion

4 India


Politics

India is a parliamentary federal democracy with an indirectly elected president, currently Abdul Kalam. The prime minister, Manmohan Singh, leads the United Progressive Alliance (UPA), a coalition dominated by the Congress party, which fell short of a majority in the May 2004 general election. The minority UPA government is currently being supported by the Left Front, a group of left-wing parties dominated by the Communist Party of India (Marxist).

Political background

The urban Indus civilisation flourished in west and north-west India around 5,000 years ago. India was a major exporter of textiles and spices and traded with Arabia, Egypt, Rome, south-east Asia and China. Migrants and invaders from central and western Asia have entered India many times since, if not before. As a result India, the world's second-largest country by population and sixth-largest in terms of area, exhibits a great diversity of people, religions and culture.

In 1526 a central Asian warrior, Babur, invaded India and established the Mughal empire. After Vasco Da Gama discovered the sea route to India via the Cape of Good Hope in 1498, a series of European chartered companies�Portuguese, British, Dutch, French and Danish�set up trading posts and colonies in India. The British East India Company eventually dominated, and in 1757 the Mughal emperor granted it the right to administer Bengal. By then the Mughal dynasty was in decline and the Marathas from the west had become the dominant power. After the East India Company defeated the Marathas in 1818, it had no military rival. Following a major Indian revolt in 1857, the East India Company deposed the last Mughal emperor, Bahadur Shah. Within months its charter to trade with India was abrogated by the British government, which annexed the Company's Indian territories, and India became a fully-fledged British colony.

British rule in India ended in 1947 after a sustained campaign for independence, led by the Indian National Congress (Congress). British India was partitioned, amid great bloodshed, to create Muslim-majority Pakistan and the secular state of India. India's first prime minister was the Congress leader, Jawaharlal Nehru. Under his government, India established a complex system of socialist economic controls that remained in place until the 1980s. Congress and its successor�Congress (Indira), or Congress (I), named after Nehru's daughter, Indira Gandhi, who became prime minister in 1966�dominated politics in India until the 1990s. Indira Gandhi's administration continued to implement an inward-looking economic policy and adopted increasingly authoritarian measures. In 1975 she declared a state of emergency that lasted for two years. Civil rights were suspended, the press was controlled, many of her critics were imprisoned and her son, Sanjay, began an unpopular mass-sterilisation programme to stem population growth. In the 1977 general election voters rejected Mrs Gandhi. Her party was defeated and she lost her seat.

Early history

Independence and dominance of Congress

India 5


Having returned as prime minister in 1980, Mrs Gandhi tacitly supported a violent movement against the Akali Dal, the ruling Sikh party in Punjab. However, the violence became uncontrollable and she finally ordered the army to storm the Golden Temple, the prime Sikh shrine in Amritsar, and kill the terrorists' leader. In retaliation, in 1984 she was assassinated by her Sikh bodyguards, and her elder son, Rajiv Gandhi, succeeded her as prime minister. In a sympathy vote he won an unprecedented majority in an election later that year, and his administration began to take cautious steps towards economic liberalisation. However, Congress lost its majority in the 1989 general election amid a series of corruption scandals, and Mr Gandhi stepped down. He was assassinated by a Sri Lankan Tamil extremist during the 1991 election campaign.

Following the 1991 general election Congress formed a minority government under Narasimha Rao, which initiated a series of economic reforms that set India on a path of stronger economic growth. The May 1996 election returned another hung parliament. The Hindu-nationalist Bharatiya Janata Party (BJP) formed a government that lasted just 13 days; this was followed by a left-leaning United Front (UF) coalition, which was supported from the back-benches by Congress. The UF government continued to implement the econ-omic reforms begun under Congress, but when Congress withdrew its support in November 1997, the government fell. A general election held in February-March 1998 produced yet another hung parliament. The BJP finally formed a governing coalition, the National Democratic Alliance (NDA), with 22 other parties under the leadership of Atal Behari Vajpayee, a moderate.

In April 1999 the NDA government collapsed after narrowly losing a vote of confidence. It remained as a caretaker administration for six months before re-establishing itself in power following a general election held in September-October 1999. The alliance of more than 20 parties included a number of smaller regional and caste-based parties, which exercised disproportionate influence in government, often holding the administration to ransom to gain concessions in their home states. Coalition governance has become a continuing feature of Indian politics at the federal level, and increasingly also at the state level, since 1996. On both levels it seems that coalition governments have found it hard to push through policies, particularly those requiring legislative action.

Recent political developments

The BJP government in 1998 gave the go-ahead for the testing of nuclear bombs�a reflection of the party's determination to raise India's profile as an aspiring world power�even at the cost of economic sanctions. Economically, the BJP remained pragmatic during its time in government and pursued reformist policies. Politically, the BJP had to abandon some of the party's policy cornerstones, including the building of a Hindu temple on the site of the Ayodhya mosque and abolishing India's separate civil code for India's Muslims to get the support of secular parties. Mr Vajpayee's popularity and integrity did much to move the party towards the political mainstream and put pragmatism over ideology. Consistent with this attempt to reinvent the essentially still

The age of coalition politics

The BJP leads a coalition government from 1998 to 2004

6 India


Hindu-nationalist party, the BJP government toned down its hardline Hindu-nationalist rhetoric in a bid to appeal to more mainstream voters as the 2004 general election approached. It presented itself both as a party that delivered economic prosperity and as a steward of a strong India with a presence on the global stage. The BJP promoted its "India Shining" campaign, which aimed to capitalise on a buoyant economy�partly the result of its economic reforms, but also of good fortune. In contrast, the opposition Congress party presented itself as the defender of India's inclusive, secular heritage. It tried to appeal to voters across castes and religions, as well as to the poor, who had not seen the fruits of economic reform.

Composition of the Lok Sabhaa, Jun 2004 United Progressive Alliance (governing coalition) 222 Indian National Congress 145 Rashtriya Janata Dal 24 Dravida Munnetra Kazhagam 16 Nationalist Congress Party 9 Pattali Makkal Katchi 6 Telangana Rashtra Samithi 5 Jharkhand Mukti Morcha 5 Marumalarchi DMK 4 Lok Jan Shakti Party 4 Others 4

Left Front (supporting the governing coalition) 59 Communist Party (Marxist) 43 Communist Party of India 10 Others 6National Democratic Alliance (opposition) 186 Bharatiya Janata Party (BJP) 138 Shiv Sena 12 Biju Janata Dal 11 Shiromani Akali Dal 8 Janata Dal (United) 8 Telugu Desam Party 5 All India Trinamool Congress 2 Nagaland People's Front 1 Mizo National Front 1

Other parties 76 Samajwadi Party 36 Bahujan Samaj Party 19 Other parties 13 Independents 8Totalb 545

a The lower house of parliament. b Including two representatives of Anglo-Indians appointed by thepresident.

The "India Shining" campaign backfired, with poor rural voters denied any new-found prosperity, and in a surprise victory a Congress-led coalition, the UPA, was narrowly elected to power in the May 2004 general election�the Congress party (on its own) won only eight seats more than the BJP. However, the UPA fell short of a majority and is being supported in parliament by the Left Front group of communist parties, although these parties have chosen not to join the government and are supporting it "from outside". The minority

Congress returns to power

India 7


government is led by Manmohan Singh, who was sworn in as prime minister following the refusal of the Congress leader, Sonia Gandhi, to take up the post. Mrs Gandhi remains the Congress party president and is the Congress leader in parliament. Mr Singh, who has held many important positions in the economic and civil service hierarchy in India, is a respected economist and a pragmatist and is highly regarded across the political spectrum. In his first three years in government he has managed to hold together an unwieldy coalition and has pursued a gradualist economic reform agenda. On the foreign policy front, Mr Singh, a Sikh born in the Pakistani portion of Punjab province, has continued a policy of rapprochement with Pakistan and has pushed India's bid for a permanent seat on the reformed UN Security Council. The cornerstone of his foreign policy, however, has been a �strategic alliance� with the US. A proposed nuclear deal with the US (it was still pending approval as of June 2007) has changed US-Indo relations and is likely to make India a vital US military and economic ally in coming years.

The opposition BJP has been plagued by internal tensions and in-fighting since it fell from power and is therefore unlikely to pose a substantial threat to the UPA government. A major Islamic terrorist attack or sectarian violence could, however, galvanise its traditional Hindu constituency. At the end of 2005 Lal Krishna Advani was forced to step down as party president, because of ideo-logical differences with the Rashtriya Swayamsevak Sangh (RSS), the party's powerful parent organisation. Under a new president, Rajnath Singh, seen by many as an interim leader, the debate over the party's ideology has continued. The outcome of what could be a long-drawn-out leadership struggle will deter-mine whether the BJP will go back to its traditional values of Hindu nation-alism, or whether it will evolve into a more moderate force in Indian politics.

The government faces no immediate threat to its survival and looks on course to last a full five-year term until 2009. However, it is severely hampered in its ability to formulate and implement policy. Politics remains centred more on tensions within the UPA coalition and between the UPA and its notional allies, than on competition from the BJP. The main tension is between the reformist economic liberalism of several leading Congress figures, notably Mr Singh and the finance minister, P Chidambaram, and the leftist populism of many govern-ment supporters. These include members of Congress and of its coalition part-ners, and in particular the communist parties, which are not in the UPA but which lend parliamentary support to it. Curiously, the largest, the Communist Party of India (Marxist), or CPI (M), has come to resemble the official oppos-ition. It has stood in the way of economic liberalisation�ranging from opening up India�s vast retail sector to fast-tracking industrial development through the creation of special economic zones. The party's strategy appears to be to use the leverage it now enjoys to expand its influence beyond those states where it is already a major force�West Bengal, Tripura and Kerala�to the rest of India. To do this, it is relying on its supporters in the trade unions. This means that it has tried to block any reform seen as damaging to the interests of the workforce in the "organised" sector�a definition covering workplaces with more than ten employees. There are about 30m such workers out of a total labour force of more than 400m, but they have become disproportionately powerful.

The BJP has been in disarray

The Left has come to resemble the official opposition

8 India


Important recent events

November 2003

India matches Pakistan's offer of a ceasefire along the Line of Control in Kashmir. Pakistan's unilateral offer followed measures announced unexpectedly by the Indian government in October to improve ties with its neighbour.

January 2004

A groundbreaking meeting is held between the Indian government and moderate Kashmiri separatists, marking a new chapter in the 14-year stand-off between the Indian government and the separatists.

February 2004

Formal peace talks over the disputed region of Kashmir are held in the Pakistani capital, Islamabad.

May 2004

A general election brings the Congress-led United Progressive Alliance (UPA) to power. Sonia Gandhi, the Congress leader, refuses to become prime minister. The post goes to Manmohan Singh, a former finance minister and reformer.

December 2004

Thousands die in the Asian tsunami; the Andaman and Nicobar Islands are devastated.

July 2005

Islamist militants attack a holy site in Ayodhya�the flash-point of Hindu-Muslim strife in 1992�raising concerns over possible renewed inter-community violence in India and a stalling of improving relations between India and Pakistan.

October 2005

Three bombs in a crowded marketplaces in Delhi kill 62 people and injure over 200. A little-known Kashmiri group claims responsibility for the attack.

February 2006

India's largest-ever rural jobs scheme is launched with the aim of lifting around 60m families out of poverty.

May 2006

Congress performs poorly in four important state elections in Assam, Kerala, Tamil Nadu and West Bengal. The communists, on whose support the UPA relies, win convincingly in West Bengal and Kerala.

July 2006

Several bombs target Mumbai's commuter train system, killing over 200 people. Pakistan's president condemns the attack, and the Indo-Pakistani peace process continues.

December 2006

US President George W Bush approves a controversial law that would allow India to buy US nuclear reactors and fuel for the first time in 30 years, subject to congressional approval.

India 9


February 2007

Bomb blasts on the �Friendship Express�, a train travelling from New Delhi to the Pakistani city of Lahore, kill 68 people, most of them Pakistanis. India and Pakistan sign an agreement aimed at reducing the risk of accidental nuclear war.

May 2007

The big parties--Congress and the BJP--fare poorly in the important state election in Uttar Pradesh. A regional caste-based party, the Bahujan Samaj Party, wins a majority and displaces the Samajwadi Party, an ally of Congress at the federal level.

Constitution, institutions and administration

The Republic of India is a constitutional federal democracy made up of 28 states and seven union territories. The Indian constitution defines the division of most powers between the centre and the states, although the centre takes precedence in relation to residual powers. Representation in parliament has been frozen on the basis of the results of the 1971 census. Given that population growth is much higher in the northern states, the relative value of votes cast in the north in terms of political representation has fallen. The National Population Council has recommended an extension of the "freeze" on representation until 2026. This is likely to become a source of major tension between the country's northern and southern states. India's federal structure often leads to demands for further devolution of powers to the states, as well as demands for new states to be created. In 2000 three new states�Chhattisgarh, Jharkhand and Uttaranchal (all three northern states with strong tribal representations)�were formed from Madhya Pradesh, Bihar and Uttar Pradesh, respectively.

The Indian constitution provides for an independent judiciary, with high courts in every state and a Supreme Court in New Delhi. In early 2007 an unprecedented debate about the role of the judiciary in the Indian democratic system took hold, when Mr Singh accused judges of �judicial over-reach�, claiming that the judiciary had encroached on the powers of the executive and the legislature. Frustrated by an ineffectual and corrupt executive, particularly at the state level, the public often regard the courts as a benevolent authority that can protect them against misuse of executive power.

There are two houses of parliament. The lower house, or Lok Sabha (house of the people), is elected every five years by universal adult suffrage. The prime minister is elected by the Lok Sabha. Members of the upper house, or Rajya Sabha (house of the states), are elected by their respective state legislatures, according to state quotas based on population. The president is elected every five years by both houses of parliament and the state legislatures. He is confined to acting on the advice of the Council of Ministers, which is chosen by the prime minister.

Federalism

The judiciary and the legislature

10 India


India is the world's most populous democracy and has held regular and largely free elections since 1947. For members of parliament, the chances of re-election to the Lok Sabha are low (as anti-incumbency is a key trend in Indian politics), tending to increase the incentives for politicians to maximise their personal gains rather than working for the welfare of their electorate. The Election Commission of India (ECI) has wide powers to requisition the government machinery for elections and has ensured fairly orderly elections; in 2003 it won the right to make candidates disclose criminal records. However, there are occasional cases of poll rigging and intimidation; spending limits on candidates are poorly enforced and candidates with criminal records are often elected, particularly to the state assemblies. In the May 2007 Uttar Pradesh state assembly polls, one-third of all candidates had a criminal record. Generally, a high level of political awareness and the sheer size of the electorate nevertheless ensure that the final results reflect the wishes of the people, and the ousting of incumbent administrations has become increasingly frequent.

Congress, which led the agitation for independence, emerged as the dominant party thereafter and won elections in most states in the 1950s and 1960s, although the communists and Tamil separatists occasionally won state-level elections. The situation changed following the 1975-77 state of emergency. Caste and regional splinters from the opposition alliance that won the 1977 election were increasingly successful in state elections. In the current political landscape, none of the three national parties�Congress, the BJP and the CPI (M)�can hope to win a majority in the central government on its own, and each needs to ally itself with regional or caste-based parties.

India's 28 states vary enormously in size, population and natural resources. The centre's powers to tax income, production and foreign trade give it far greater access to revenue, a large part of which is shared out among the states by the planning commission and by finance commissions that are appointed every five years. The states cannot borrow without the centre's permission. However, as the central government has become increasingly reliant on the support of regional allies, it has found it harder to refuse the states' demands to manage their own finances. The deficits of both the centre and the states are largely financed by banks and financial institutions, which channel public savings to the governments.

As central controls on industry, finance and foreign trade have been relaxed since the early 1990s, industry has received the freedom to relocate, but has faced greater competition. These competitive pressures have been passed on to the states, which have tried to attract and retain industry. In this competition, the advanced coastal western and southern states have been more successful: as foreign trade has become freer, industry has moved closer to Gujarat, Maharashtra, Karnataka and Tamil Nadu.

The centre versus the states

Democracy and corruption

India 11


Political forces

Congress led the campaign for independence and has remained a powerful force in Indian politics, transcending religious, ethnic and caste divisions. However, it is also a party tightly focused on its heritage: members of the Nehru-Gandhi family have led the party throughout most of its history. India's first prime minister, Jawaharlal Nehru, was succeeded by Lal Bahadur Shastri, who died within a year of taking office. The party then turned to Nehru's daughter, Indira Gandhi, who remained leader until her assassination in 1984, after which her son Rajiv took over as party leader. He was assassinated in 1991, and Congress is now led by his widow, Sonia. The decline of Congress began when Indira Gandhi declared a state of emergency. Her opponents combined to form the Janata Party, which won the 1977 election. In 1980 Mrs Gandhi brought down the Janata government and returned to power. Rajiv Ghandi came to power in 1984 with the largest majority ever and the aim of liberalising and modernising government, but he was soon mired in a corruption scandal and lost the 1989 election. He managed to split and finally bring down the Janata Dal government that followed him, but he was killed before the 1991 general election. Although falling just short of a majority, Congress formed a government, and after the election carried out considerable economic liberalisation in an attempt to solve the country's balance-of-payments crisis. That did not, however, save it from defeat in the 1996 election.

As repeated efforts to form a national alternative failed, the electorate turned to regional and caste-based parties. Following Congress's poor performance in the 1998 general election, Rajiv Gandhi's Italian-born widow, Sonia, gave in to repeated requests and took over as party leader. However, her foreign birth has prompted criticism in parts of Congress as well as from the BJP. Following Congress's surprise victory in the 2004 general election, Mrs Gandhi declined to take up the post of prime minister, instead nominating Manmohan Singh. But Mrs Gandhi remained the leader of Congress, and until March 2006 chair of the National Advisory Council�a post she had to relinquish on technical grounds, which also led to her resignation as member of parliament in early 2006. However, in May 2006 she was re-elected with a landslide victory in the Nehru-Gandhi stronghold constituency of Rae Bareilly in Uttar Pradesh. Most commentators believe that the centre of power within the government lies with Mrs Gandhi rather than Mr Singh.

The stability of the current Congress-led minority government depends crucially on how readily the Left Front parties withdraw their support in case of disagreement over policy. They boycotted the co-ordination committee, in which the Left Parties agree policy with the UPA, for four months in 2005 and eventually got their way, scuppering the economic reforms the government sought to implement. The Left Front has an effective veto over any reform that requires a vote in parliament. Following the communist parties' landslide wins in state elections in West Bengal and Kerala in the first half of 2006, they became more assertive at the national level. The Left Front has already stymied several important reforms, notably labour market reform and privatisation. Given that it has two years of its five-year term still to run, the government will

The Congress party

12 India


need to tread a fine line between its reform ambitions and policy compromises with its political allies. While the government will try to distribute the benefits of economic growth more widely, its overriding objective will be to ensure the continuation of India's economic boom.

Equally important, however, are divisions within Congress that could result in government instability. Loyalties in the Council of Ministers are likely to be split between Mr Singh and Mrs Gandhi. Mrs Gandhi will have to reconcile the demands of individual members of the government as well as interest groups within the diverse Congress party to secure a stable government. Congress's success in the 2004 general election is evidence that the dynastic claim still exerts considerable force, particularly in rural areas. Mrs Gandhi's son, Rahul, is being groomed to play a prominent role in the party, but his performance in the state election in Uttar Pradesh in April-May 2007 was disappointing. Mrs Gandhi's daughter, Priyanka, is considered more charismatic than her brother, but she has avoided the political spotlight so far.

The Bharatiya Janata Party (BJP) traces its roots back to the Bharatiya Jan Sangh, a party representing traditional Hindu values and the interests of small businesses, traders and the middle class. It is the political wing of a group of interconnected cultural and religious movements�the Sangh Parivar�of which the most politically significant is the Rashtriya Swayamsevak Sangh (RSS), a disciplined cadre organisation that counts the president of the BJP, Rajnath Singh, and the party's senior leaders, Lal Krishna Advani and Atal Behari Vajpayee, among its former members. A member of the RSS assassinated Mahatma Gandhi, and the group is seen by its critics as sinister and anti-Muslim.

The BJP emerged as a significant force in the 1989 general election, winning 88 seats. A central campaign issue was the demand that a Hindu temple be constructed on the site of the Babri mosque in Ayodhya in Uttar Pradesh�which many Hindus believe was built upon the site of a temple marking the birthplace of the Hindu god-king Ram. In the 1991 election the BJP established itself as the main national opposition and won power in four states. In December 1992 Sangh Parivar activists demolished the Babri mosque, triggering communal riots that left thousands dead. In the 1993 state elections the BJP suffered setbacks and won control of just one state, but in the 1996 general election it won 160 seats in the Lok Sabha.

In May 1996 the BJP formed its first national government, led by Mr Vajpayee, which lasted just 13 days. The BJP re-emerged as the power broker in 1998, when it won 182 seats in the general election and cobbled together a coalition of 13 parties under Mr Vajpayee's leadership. The coalition proved unwieldy, collapsing in April 1999. However, Mr Vajpayee proved himself able to rally parties of disparate political persuasions to form a government. Another election in September-October 1999 returned a BJP-led coalition of 20 partners to power. Members of the new coalition, the National Democratic Alliance, campaigned under a common platform and won 302 seats. Despite the increased majority, however, the range of parties involved in government left the alliance vulnerable to the whims of smaller regional parties.

The BJP

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Mr Vajpayee sought to rein in the party's more extreme Hindu-nationalist members, particularly in relation to questions of economic reform. But the party's reformist credentials proved increasingly shaky in the face of conflicting demands from coalition members and resistance from the BJP's nationalist wing. The close relations the party cultivated with leading industrialists also resulted in increased protection for some industries from foreign competition. On the foreign policy front, Mr Vajpayee sought improved relations with neighbouring Pakistan and paved the way for further confidence-building measures implemented by the UPA government.

Since the electoral defeat in May 2004, the BJP has been in disarray. Following a further electoral defeat in October of that year in the politically important state of Maharashtra, the party appointed Lal Krishna Advani, one of the founders of the BJP and previously Mr Vajpayee's right-hand man, as party president. The BJP's identity crisis worsened in June 2005, when Mr Advani offered to stand down as party president after an official visit to Pakistan, during which he described Pakistan's founder, Mohammed Ali Jinnah, as a "secular" leader. The comments, possibly made by Mr Advani in an attempt to shed his image as a hardliner and to move the party more towards the mainstream, divided the BJP down the middle and outraged Hindu-nationalist organisations close to the BJP�one of the cardinal tenets of modern Indian history is that Mr Jinnah was the non-secular architect of the two-nation theory (an India for Hindus and a Pakistan for Muslims).

Eventually, a considerably weakened Mr Advani was forced to resign at the end of 2005. His successor is the less controversial Rajnath Singh, who is seen as a skilful grass-roots organiser and effective administrator, but his appointment has only temporarily suspended a divisive succession battle. Few of the younger generation of BJP leaders, such as Arun Jaitley, have the mass base enjoyed by Mr Advani or Mr Vajpayee. An exception on the Hindu right is the chief minister of Gujarat, Narendra Modi, who commands grass-roots support in right-wing Gujarat, but few see him as a potential national election-winner (as he remains too far to the right). The outcome of the struggle is likely to determine whether the BJP will go back to its traditional values of Hindu nationalism or evolve into a more moderate force in Indian politics.

The Communist Party of India (CPI) emerged from Congress, splitting from the Indian National Congress during the second world war. The CPI itself later split to form a Marxist group, the Communist Party of India (Marxist) or CPI (M). The CPI (M) is strongest in West Bengal, where it has been in power for 27 years, and it has frequently held power in Kerala and Tripura. Although the "third force" includes several powerful regional parties that are increasingly important in a fractured political scene, these parties have no strong ideological commitment to a common agenda. Instead, they are motivated by state or caste interests that can often be better served through alliances with the BJP or Congress. After the May 2004 general election the Left Front group of communist parties decided not to join the Congress-led UPA government formally, but to support it from "the outside". The communists strongly oppose the deregulation of the labour market and privatisation, but have at times been more pragmatic on other policy issues, such as foreign investment.

The communist parties

14 India


Main political figures

Manmohan Singh

Prime minister. Mr Singh has held many important positions in the economic and civil service hierarchy, including governor of the Reserve Bank of India (the central bank) and deputy chairman of the Planning Commission. An Oxford-educated economist, Mr Singh is widely respected across political parties and has a reputation of being a pragmatist. Throughout his political life he has been an appointee�he has never won a seat in India's lower house of parliament, the Lok Sabha.

Sonia Gandhi

Indian National Congress party leader in parliament, and Congress party president. Mrs Gandhi is the Italian-born widow of a former prime minister, Rajiv Gandhi. She led Congress to success in the 2004 general election but declined the offered post of prime minister. This move enhanced her moral stature in a culture with a long history of renunciation. In March 2006 Mrs Gandhi resigned as member of parliament and chair of the National Advisory Council, an "office of profit" she was not supposed to hold under Indian law to avoid a conflict of interests. She was re-elected with an overwhelming majority from her constituency, Rae Bareilly in Uttar Pradesh, in May 2006.

P Chidambaram

Finance minister. Mr Chidambaram is a suave, articulate politician from the southern Indian state of Tamil Nadu. He is well-known for his pro-market reforms, particularly tax reform and budgetary discipline, during his tenure as finance minister in 1996-98. A Harvard-educated lawyer and a strong supporter of the World Trade Organisation, Mr Chidambaram is popular in business circles.

Rahul and Priyanka Gandhi

Mrs Gandhi's children and heirs to the Nehru-Gandhi dynasty. In the 2004 election campaign Rahul and his sister Priyanka emerged as the Congress's star campaigners, emphasising the fact that the century-old Gandhi-Nehru dynasty remains India's most powerful and charismatic political family. Rahul was elected to the lower house of parliament for the first time and is being groomed to play a prominent role in Congress, but his political performance has been mixed.

Pranab Mukherjee

Foreign minister (from May 2004-October 2006, defence minister). A prominent Gandhi family loyalist, Mr Mukherjee held at least half a dozen important ministries in past Congress governments, including finance and external affairs. He has close links with the left.

Laloo Prasad Yadav

Railway minister. He formed the Rashtriya Janata Dal (RJD) in 1997, after breaking away from the Janata Dal party. His party is a key ally of Congress in the United Progressive Alliance (UPA) government. After almost two decades of dominating politics in Bihar his party lost power in the state in 2005.

Rajnath Singh

President of the opposition Bharatiya Janata Party (BJP) since the start of 2006. Mr Singh held various important posts in his political career, including chief minister of Uttar Pradesh and minister of agriculture in the Vajpayee government. He is an effective administrator and grassroots organiser, but has the reputation of being uncharismatic.

Lal Krishna Advani

A senior figure in the BJP, Mr Advani is credited with making the party a major political force since 1984, when it held only two parliamentary seats. He resigned as party president in December 2005, but remains the leader of the opposition in the Lok Sabha.

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Atal Behari Vajpayee

Former prime minister and former foreign minister (in a left-right anti-Indira Gandhi coalition in the late 1970s), Mr Vajpayee has had a distinguished parliamentary career. Following the BJP's defeat in the May 2004 general election he became the party's chairman, a newly created and largely symbolic position, and has been acting as an elder statesman guiding the party.

Mayawati

Chief minister of Uttar Pradesh and president of the Bahujan Samaj Party. Uttar Pradesh accounts for about one-sixth of all seats in the Lok Sabha, making Mayawati a potential major player at the federal level if her party can repeat the overwhelming electoral success it displayed in May 2007 at the state level in national parliamentary elections that are due to be held by May 2009.

Somnath Chatterjee

Speaker of the Lok Sabha. A veteran Marxist leader, Mr Chatterjee is the first communist leader to occupy this position. A member of parliament for the tenth time, Mr Chatterjee has established a rapport with politicians across party lines.

Abdul Kalam

President of India. A former scientist and founding father of India's nuclear-missile programme, Mr Kalam is widely respected. He was elected president by an overwhelming majority in July 2002. His term expires in July 2007.

International relations and defence

India became independent in 1947 at the start of the cold war. Mr Nehru had visited the Soviet Union in the 1930s and felt that it provided the best economic model for India's development. Consequently, India did not join the Western alliance, and instead followed a policy of neutrality between the two blocs. Pakistan, meanwhile, joined the US-led South-East Asian Treaty Organisation. India's defeat by China in a short war in 1962 brought the US and India briefly closer, but as Indian relations with Pakistan deteriorated, US sympathy for India waned. In 1971, when Hindu refugees from East Pakistan flooded into India, India decided to attack Pakistan, and to ward off the US, entered into a treaty with the Soviet Union. The treaty provided India with low-cost security for the next 18 years.

Since the collapse of the Soviet Union India has built closer relations with the US and the West. Its liberal reforms in the early 1990s also made it more receptive to foreign trade and investment and led Western countries to take a greater interest in India. The 1998 nuclear tests caused a glitch in the process, but it has continued nevertheless, boosted in recent years by India�s booming economy. Indian-US relations entered a new era in 2005, when the two countries agreed to deepen their co-operation in the area of defence, including joint weapons production, greater technology sharing, and increased trade in arms. In March 2006 the US president, George W Bush, visited India and signed a landmark deal that welcomed India into the club of states that the US permits to possess nuclear weapons. The proposed deal changes the world's nuclear order by amending the Nuclear Non-Proliferation Treaty (NPT). However, the deal had not been finalised as of June 2007; it faces opposition in India, where critics say it would compromise India�s nuclear independence, including its right to test nuclear weapons and reprocess spent fuel. Meanwhile, in the US (and elsewhere), critics warn of the potentially disastrous consequences of the

Independence and its aftermath

16 India


US-India deal for reining in other nuclear-weapons seeking countries, especially Iran. Under the proposed agreement the US offers India "full civil nuclear energy co-operation and trade", thereby ending sanctions that were imposed on the basis of India's refusal to sign the NPT. (Since 1968 it has been a tenet of US foreign policy that only countries that sign the NPT are permitted access to US nuclear technology.)

Since independence, India has fought three wars with Pakistan and one with China. Disputes with Pakistan have been mainly territorial. In 1947 Pakistani tribesmen invaded the mainly Muslim princely state of Jammu and Kashmir, and Indian forces intervened at the request of the state's Hindu maharaja. The resulting war left about one-third of Kashmir with Pakistan and the remainder with India (in 1963 Pakistan ceded some of the territory it controlled to China). Kashmir remains the subject of bitter dispute between the two countries. A short war was fought in 1965 over a Pakistani incursion into disputed territory in Kutch. Another war was fought over the exodus of Hindu refugees from East Pakistan in 1971; it ended with the separation of East and West Pakistan, and the creation of Bangladesh.

The victory of the BJP-led coalition at the general election in 1998 produced a notable cooling in relations with Pakistan, compounded by both countries' nuclear tests in May that year. Talks between the two sides resumed in October 1998, culminating in the so-called bus diplomacy that saw Mr Vajpayee journey across the border for talks with his Pakistani counterpart, Nawaz Sharif, the following year. However, any thaw was quickly undone when Pakistani-backed insurgents crossed the Line of Control (LoC) dividing Indian and Pakistani positions in Kashmir, capturing several high-altitude Indian border posts in the Kargil sector in May 1999. During two months of intense fighting each side lost hundreds of men, and the conflict threatened to escalate into all-out war. The crisis was resolved in July, when the Pakistani government agreed to withdraw the intruders. Three months later the commander-in-chief of the Pakistani army, General Pervez Musharraf, staged a coup and removed Mr Sharif's elected government.

After the September 11th 2001 terrorist attacks in the US, General Musharraf supported US action against the Taliban in Afghanistan and subsequently banned some terrorist organisations operating from Pakistan. After an attack on its parliament in December 2001, India identified the attackers and their handler as Pakistanis. India reduced diplomatic representation in Pakistan, suspended bus, train and air services, and stopped Pakistani overflights. The number of terrorist attacks in Jammu and Kashmir increased in the next six months, and in early 2002 both countries moved troops to the border. In October 2002, however, the People's Democratic Party (PDP) was elected to government in Jammu and Kashmir, forming an administration with the support of Congress. The PDP is committed to reconciliation, and at the invitation of the new chief minister, Mufti Mohammad Sayeed, Mr Vajpayee addressed a public meeting in Srinagar in April 2003, when he "extended the hand of friendship" to Pakistan.

Relations with Pakistan look a little brighter

India 17


In November 2003 India matched Pakistan's unilateral offer of a ceasefire along the LoC in Kashmir. The offer followed measures announced unexpectedly by the Indian government to improve ties with its neighbour a month earlier. A ground-breaking meeting was held between the Indian government and moderate Kashmir separatists in December 2003, marking a new chapter in the 14-year stand-off between the Indian government and Kashmiri separatists. In February 2004 formal peace talks over the disputed region of Kashmir were held in the Pakistani capital, Islamabad.

The rapprochement between the two nuclear neighbours has continued under the new Congress-led government since May 2004. India began a partial troop withdrawal from Kashmir in November 2004. In January 2005 India and Pakistan agreed to the single most important confidence-building measure in the last 50 years�a bus route that links Indian- and Pakistani-controlled Kashmir. In January 2006 General Musharraf called for the demilitarisation of three cities in Indian-controlled Kashmir and the establishment of "self-governance" in both Indian- and Pakistani-controlled Kashmir. He suggested that self-governance should involve bringing both sides of the disputed Kashmir region under the joint control of India, Pakistan and the Kashmiris themselves.

Neither India nor Pakistan will agree to the other country ruling the whole of Kashmir or to full independence for the territory. India rejects the redrawing of the Line of Control, the de facto international border. The latest proposal by General Musharraf of "self-governance"�however vague�would work, at least in principle, without violating either country's conditions. But even if India wanted to explore this path, it would also have to be acceptable to the various Kashmiri groups.

There have been few tangible results in the peace process since the July 2006 bomb attacks on Mumbai�s commuter train network, in which nearly 200 people were killed. India blamed Pakistan�s Inter-Services Intelligence Directorate of planning the blasts. Pakistan vehemently denied any involvement and the allegation was never proved. Talks between the two countries resumed after several months, but a bomb attack on the crossborder �Friendship Express� train in February 2007, in which 68 people, mostly Pakistanis, were killed, threatened to derail the process again. The fact that this most recent terrorist attack did not cause a suspension of talks is a positive sign, but no real resolution to the decades-long dispute is in sight. Moreover, further negotiations could prove difficult given General Musharraf's increasingly tenuous hold on power in Pakistan.

India's relations with China are delicate. In 1957 India discovered that China had built a road across what it regarded as the north-east corner of Kashmir. China rejected India's territorial claims, and a series of violent clashes between border guards took place over the next five years. In 1962, after a particularly bloody clash, Nehru ordered the army to expel the Chinese. The Chinese army dealt India a crushing defeat, but then declared a ceasefire. The defeat has made India circumspect.

Relations with China have improved

18 India


The Sino-Indian border has been quiet for over 40 years. In the 1980s the two countries began talks to demarcate their frontier, but progress has been very slow. In 2005, when the Chinese prime minister, Wen Jiabao, visited New Delhi, China formally abandoned its claim to Sikkim (whose accession to India in 1975 China had previously refused to recognise officially) and pledged to support a larger role for India in the international arena.

Territorial disputes are still at the heart of bilateral difficulties. China still claims India�s most north-easterly state, Arunachal Pradesh, as its own. India, meanwhile, claims Aksai Chin, a region located at the intersection of China, Pakistan and India and administered by China. But in China�s eyes the gravest threat posed by India relates to Tibet, which could drift towards India in the event of internal disarray in China. India harbours the former leader of Tibet, the Dalai Lama, and about 100,000 Tibetans. Although Hu Jintao, China's premier, visited India in November 2006, his visit to Pakistan immediately afterwards served as a reminder that China continues to pursue a balance-of-power approach in the region.

In recent years Sino-Indian relations have increasingly been driven by economics. Bilateral trade between India and China has increased more than tenfold since the early 1990s. In June 2006 India and China agreed to re-open the trade route through the Nathu La that connects Sikkim and Tibet, which had been closed for trade since the 1962 conflict. During Mr Hu's visit to India both countries agreed to build on areas of common interest and avoid confrontation in areas of potential conflict. Thirteen agreements were concluded during the visit, including a pledge to double bilateral trade to US$40bn by 2010.

The 1971 India-Pakistan war ended with the surrender of Pakistan's entire army in the east and the establishment of Bangladesh as an independent state. Relations between India and Bangladesh are nevertheless close, if not particularly friendly. Various issues between the two countries remain unresolved, including Bangladeshi immigration into India, the sale of natural gas to India, water-sharing of the many common rivers, and Bangladesh's alleged role in harbouring Indian insurgents. India has completed the construction of over two-thirds of an iron fence along the 2,500-mile border with Bangladesh. The Bangladeshi political scene is polarised between the heirs of those who fought for independence from Pakistan on one hand, and the pan-Islamists, with whom last democratically elected government had close ties, on the other. Since the suspension of elections and declaration of a state of emergency in Bangladesh in January 2007, India has sought closer co-operation with its eastern neighbour in an effort to stabilise the political situation and facilitate a return to democracy.

India conducted its first atomic test in 1974, after which Pakistan embarked on its own nuclear programme. By 1994 it was widely accepted that Pakistan had acquired both the atom bomb and Chinese-supplied ballistic missiles. India has developed its own intermediate-range ballistic missile capability. In 1998 India tested nuclear devices, and Pakistan followed suit. The US president at the time, Bill Clinton, tried to persuade India to sign the NPT and the Comprehensive Test Ban Treaty (CTBT). However, India's political establishment, which regards

Relations with Bangladesh are strained

India is accepted as a de facto nuclear power

India 19


the two treaties as "nuclear apartheid", refused to sign them as a matter of principle. The US came to accept that it was highly unlikely that India would ever sign the treaties. In 2005, in an effort to upgrade ties with India, the US changed its stance on the entire issue by stating that "as a responsible state with advanced nuclear technology, India should acquire the same benefits and advantages as other such states" and offered India sensitive civil nuclear technology. It thereby accepted India de facto as a nuclear power. The deal had not yet been finalised as of June 2007, however.

India maintains the second-largest army in the world, with total armed forces of 1.3m active servicemen and a further 1.2m reservists. However, its soldiers are poorly equipped, particularly for the demanding conditions in Kashmir. The army has a strictly non-political role, although it is often called upon to help beleaguered police forces in areas facing secessionist movements, such as Kashmir and the north-east. Defence expenditure is budgeted at US$20bn in fiscal year 2007/08 (April-March), or about 2.5% of GDP, and given the historically tense relations with Pakistan, it is likely to remain high.

Military forces, 2006/07 India Pakistan ChinaArmy Personnel 1,100,000 550,000 1,600,000a

Main battle tanks 3,978 2,461 7,580

Navy Personnel 55,000 24,000 255,000a

Frigates 24 6 48Submarines 16 8 58Air force Personnel 161,000 45,000 400,000Combat aircraft 849 352 2,643

a Estimate.

Source: International Institute for Strategic Studies, The Military Balance 2007.

Security risk in India

Armed conflict

India has fought three wars with Pakistan�two over the disputed territory of Kashmir and one during Bangladesh's war of independence�as well as a major skirmish in Kargil in 1999 between Pakistan-backed militants and the Indian army. Shelling along the Line of Control, the de facto border that divides Indian and Pakistani Kashmir, was commonplace at the height of the stand-off in 2002, but has since become infrequent. India accuses Pakistan of giving military backing to Kashmiri separatists and Islamic militants fighting against India in Kashmir, but Pakistan claims to give only moral support to the insurgents and accuses India of repressing Muslims in Kashmir. Tensions between the two nuclear powers were raised after an attack on India's parliament building in December 2001, which India blamed on Pakistani-based militant groups. Both countries mobilised troops and stood on the brink of war. Although tensions have subsequently subsided, hostility between the two countries has remained intractable, owing to the underlying Kashmir dispute: each country faces considerable domestic pressure not to make concessions to the other in relation to Kashmir. In the past, peace talks have floundered over the question of the relative importance of Kashmir. India has argued that the Kashmir dispute is one of several issues that need to be resolved, and has attempted to improve bilateral relations through

The armed forces are the second-largest in the world

20 India


the establishment of commercial links, for example, in the hope that with better relations the Kashmir dispute will diminish in relative importance. In contrast, Pakistan argues that the Kashmir dispute is the central issue and the reason behind the two countries' poor relations, and that without its resolution other confidence-building measures will be impossible. Pakistan fears that, should militancy in Kashmir end, India will feel little compulsion to offer Pakistan any concessions regarding Kashmir. India fought a war with China in 1962. Relations between the two countries are nevertheless generally neighbourly, although part of their common border in north-east India remains disputed. India's relationship with Bangladesh is also reasonable, despite occasional clashes between border guards.

Terrorism

India suffers from many bomb attacks, which often occur on buses or trains or at bus stations. Such attacks are generally blamed on Pakistan's intelligence agency and Pakistani-backed Kashmiri militants. Numerous sub-nationalist groups operate within India, and although their activities are generally confined to specific areas, Kashmiri militants have conducted attacks in Delhi. The most daring of these occurred in December 2001, when a group of militants entered India's parliament building, killing at least seven people. In October 2005 several bombs killed 62 people and injured over 200 in market places in Delhi. A little-known Kashmiri group claimed responsibility for the attack. Bomb blasts in the Hindu pilgrimage city of Varanasi killed 14 people in March 2006. Six months later, 31 people were killed in bomb blasts near a mosque and the town centre in Malegaon in Maharashtra. In the worst terrorist incident since 1993, over 200 people were killed in July 2006 in a series of rush-hour commuter train bombings across Mumbai. The rail network was hit again in February 2007, when a bomb attack on the crossborder �Friendship Express� train killed 68 people, mostly Pakistanis. Apart from Kashmiri militants, several other groups operate in north-east India, campaigning for state status or independence for their regions. Maoist rebels, known as Naxalites, after Naxalbari, a town in West Bengal where a communist rebellion erupted in 1967, operate in the tribal-dominated areas of central India. The Naxalites, whose aim is to overthrow the state, have a toehold in at least 12 of India�s 28 states and are a major political force in poor tribal states such as Chhattisgarh, Jharkand and Orissa. The armed struggle has led to the deaths of more than 1,000 people in the past year. In July 2006 the Maoists attacked a government-run camp in Chhattisgarh�s Dantewada district, killing at least 25 people. At a meeting with the chief ministers of the states most affected by the Naxalites, the prime minister, Manmohan Singh, identified exploitation, low wages, a lack of jobs, a lack of access to resources, geographical isolation and an underdeveloped farm sector as the factors that have contributed to the growth of the Naxalite movement. Some analysts believe that the government�s success or failure to control the Naxalite rebellion will have profound consequences for India�s political stability�and also for its energy security. The rebellion, long-lasting but under-reported outside India, is strongest in states that have reserves of the natural resources, especially coal, that are required to fuel India�s economic boom. The five states in which the movement is strongest account for 85% of India�s coal deposits. Direct attacks by Naxalite rebels on companies in the energy sector have increased.

Civil unrest

Religious clashes between Hindus and Muslims are not infrequent, and as events in Gujarat showed in 2002, can escalate rapidly. In February 2002 a gang of Muslims attacked a train carrying Hindus from Ayodhya, killing 57 people. Hindus responded by attacking Muslims throughout Gujarat, and up to 1,000 are thought to have died. Communal clashes are often sparked or exacerbated by caste divisions or property or commercial disputes, rather than simply by religious intolerance. Such riots usually take place in poor districts of cities in northern India. At least five serious attacks have been staged on religious sites in India since early 2006.

Crime

Petty crime is common in India. According to the National Crime Records Bureau (NCRB), in 2005 there were over 78,000 incidents of theft and over 58,000 of burglary. Such statistics probably understate the prevalence of crime. Many crimes go unreported, owing to a lack of confidence in the police. Bag-snatching and pick-pocketing are fairly common, particularly in crowded tourist areas. According to the NCRB, there were over 32,000 murders in 2005.

India 21


Drug smuggling and organised crime

Organised crime is a concern in India, particularly in Mumbai. Protection and extortion rackets have flourished, particularly in the film industry and the media generally, including cable companies. Some gangs are believed to have moved into trade unionism. This problem is likely to have been exacerbated by the number of politicians�particularly in state assemblies�with criminal records. The worst incident connected to India's underworld took place in Mumbai in 1993, when a number of bombs exploded, resulting in 257 deaths. The stock exchange, several hotels and other offices were hit, and hand-grenades were thrown at the international airport. The incidents were blamed on a combination of the underworld and the Pakistani intelligence agency.

Resources and infrastructure

Population

According to the 2001 census, India's population stood at 1.027bn on March 1st of that year. Even under fairly optimistic assumptions about the pace of future fertility decline, India's population is likely to reach 1.4bn by 2025. Around half of the 400m increase in population is likely to occur in the northern states of Bihar, Madhya Pradesh, Rajasthan and Uttar Pradesh. The future fertility declines in these states will determine the country's demographics. In 2006 India's total fertility rate stood at 2.7 births per woman. However, regional differences are vast. Uttar Pradesh's total fertility rate stands at 4.7, whereas that for Kerala is 1.8�below the replacement level of 2.1 births per woman. The ratio of females per 1,000 males was 933 in 2005; the difference is due to female infanticide, the neglect of female children and, lately, the abortion of female foetuses, although sex determination of the foetus is banned. The labour participation rate was 39% (52% for males and 26% for females). "Main" (that is, more or less fully employed) workers accounted for 78% of all workers (87% of males and 57% of females). The rest were "marginal" workers. Population growth averaged 1.5% per year in 2000-05, down from an average of 1.9% in the 1990s, 2.1% in the 1980s, and 2.3% in the 1960s.

Life expectancy at birth increased to 66 years for men and 71 years for women in 2007, from 32 years for both men and women in 1951. This compares un-favourably with figures for China (71 years for men and 75 years for women) or Sri Lanka (73 years for men and 77 years for women). Mortality rates for the under-fives have fallen sharply, from 242 per 1,000 in 1960 to 85 in 2004. How-ever, the life expectancy rate is significantly lower for males than for females.

Population breakdown, 2001 Total (m) % of total Male Female Total Male Female TotalPopulation 531 496 1,027 51.7 48.3 100.0 Rural 381 361 742 37.1 35.1 72.3 Urban 150 135 285 14.6 13.2 27.8Aged 6 or below 82 76 158 8.0 7.4 15.4

Literacy 340 227 567 33.1 22.1 55.2Workers 276 127 402 26.8 12.4 39.2 Main 241 73 313 23.4 7.1 30.5 Marginal 35 54 89 3.4 5.3 8.7

Source: Census of India, 2001.

The population exceeds 1bn in 2001

22 India


The rate of contraceptive use for married women between the ages of 15 and 49 in the period 1996-2004 was 48%. This compares with 84% in the same period in China. Increased use of family planning methods is believed to have reduced the population growth rate to about 1.4%. If the present difference in fertility rates continues, India is expected to overtake China as the world's most populous country by 2030, with the population stabilising at around 1.5bn.

India has a relatively low level of urbanisation compared with most other developing countries in Asia: almost 60% of Indians live in villages with a population of less than 5,000. However, the rate of migration from rural to urban areas is increasing. The urban population constituted 28% of the total in 2001, up from just over 25% in the mid-1990s, and is likely to reach 36% around 2025. In 2001 there were 35 cities with a population above 1m; the number of such cities is likely to rise to 70 by 2025, when they will contain about one-half of the country's urban inhabitants. The urban population is growing fastest in states such as Bihar and Uttar Pradesh, which have comparatively low levels of urbanisation. More developed states such as Maharashtra and Tamil Nadu, whose populations are growing less rapidly, experience lower urban growth. The largest urban agglomerations are Mumbai (16.4m according to the 2001 census), Kolkata (13.2m), Delhi (12.8m), Chennai (6.4m), Bangalore (5.7m) and Hyderabad (5.5m).

India's population is extremely diverse, differentiated by language, religion, caste and class. A significant political divide exists between Hindus (81% of the population) and other religious groups, including Muslims (13%), Sikhs and Christians. However, Hinduism is itself a highly stratified religion, and a large number of Hindus, particularly among the lower castes, do not have a political affinity with Hindu-nationalist movements. Another important distinction exists between the primarily Hindi-speaking north and the south, where a number of vernacular languages are in use, together with English. English is a lingua franca throughout the country, however, and competence in the language is more a function of class than region.

Income and consumption differentials are significant, but not high by develop-ing-country standards: the top one-fifth of India's population accounts for around 46% of income or consumption, whereas the bottom one-fifth accounts for around 8%. About 23% of the population, or 220m people, were below the poverty line in fiscal year 2004/05 (April-March), as measured by an income level of less than one US dollar a day.

Education

Literacy rates among the population aged seven years and over rose considerably during the 1990s. The 2001 census recorded literacy rates of 65.2%, up from 52.2% in 1991�the highest-ever rise in a single decade. The male literacy rate was 75.6% in 2001 (up from 56% in 1981 and 27% in 1951), compared with 54% for women (30% in 1981 and 9% in 1951). The 2001 census indicated a decline in the total number of illiterate people for the first time since

The picture is mixed

Population growth is controlled

The population is diverse

Migration is shifting from rural to urban

India 23


independence, with 21.5m fewer illiterate males and 10.5m fewer illiterate females in 2001 than in 1991. In spite of recent progress, India still lags behind in educational standards, both absolutely and compared with other developing countries: it has 17% of the world's population, but some 40% of the world's illiterates. India also possesses a large pool of highly educated and vocationally qualified people, although they make up a small fraction of the population. There are considerable regional variations in literacy rates: Kerala has a rate of 91%, whereas Bihar has a rate of only 49%.

Literacy and school attendance have improved markedly since the early 1990s, as poverty has declined and educational aspirations have surged. Attendance in primary schools has risen notably, but the rates for girls are significantly lower than for boys. Overall attendance in secondary schools rose from 20% in 1960 to 44% in 1991 (with the female rate rising from 13% to 32%). In higher education (science, math and engineering) the rate was 20% for both males and females in 1998-2003, the highest rate by far for a low-income developing country, and up from single digits in 1960. Nevertheless, tackling India�s educational backwardness is widely seen as a precondition for the country to benefit from its demographics and to enable employment for the 10m people entering the job market every year.

India has more than 225 universities, 6,800 affiliated colleges and 1,128 polytechnics. Higher education is very competitive, and is increasingly so as the economy has opened up and created more well-paid jobs in the private sector. However, subsidies for higher education and a system of positive discrimination have resulted in a skewed education system. A great number of students are accepted on the basis of caste or religion rather than ability, and cheating is a serious problem. India has also become a major international centre for the recruitment of high-quality information technology (IT) staff. The renowned Indian Institute of Technology (IIT) has distinguished and international alumni including Arun Sarin, chief executive of Vodafone (UK).

India's constitution provides for quotas in education and government jobs for "scheduled castes"�the dalits, formerly known as untouchables. In 1990 the government approved a long-neglected report by the Mandal commission, recommending the extension of quotas to "other backward classes" (OBCs). The issue of "reservation", as it is called, is one of the most controversial in Indian politics. In mid-June 2006 the government's plans to "reserve" 27% of the places in India's colleges for the OBCs led to widespread demonstrations. Nevertheless, the OBC reservation bill was passed in December 2006.

Health

Health indicators have improved significantly since independence, but the overall level of healthcare remains poor. Life expectancy has risen from just 29 years at independence to around 69 years, and child mortality rates have come down. According to the UN, India has the largest HIV/AIDS epidemic in the world in absolute numbers�about 5.7m people had acquired the infection by end-2006. Some progress has been made on nutrition, but malnutrition is

Universities dominate

Health indicators improve slowly

The education system has quotas for "backward classes"

24 India


widespread: according to the National Nutrition Monitoring Bureau, fewer than 15% of the population are adequately nourished, although 96% receive adequate calorie intake. The World Bank estimates that malnutrition is associated with about half of all infant deaths in India. The worst-affected areas are in the north: five of India's states and 50% of villages account for about 80% of the malnutrition cases. Although there is one doctor per 1,960 head of population (1990-2003 figures), doctors are concentrated in urban areas, and this is reflected in health indicators.

Public spending on health in India stands at around 1% of GDP�the lowest ratio in South Asia--equivalent to about US$4 per person per year. Access to healthcare is a function of wealth. Private expenditure on healthcare accounts for 4% of GDP, or 81.6% of total healthcare spending. India has a rudimentary public healthcare system of hospitals and clinics, but in general healthcare and medicines must be bought. It is estimated that only 10% of Indians have any form of health insurance, and most policies are inadequate. There are huge differences between states in terms of health spending. In Kerala and Tamil Nadu, for example, public health spending per head is double that in Bihar and Madhya Pradesh.

Natural resources and the environment

India is not well endowed with natural resources. The country accounts for 2.4% of the world's surface, but sustains around 17% of the world's population, so the pressure on resources is intense. India's main mineral reserves are coal, iron ore and bauxite. The vast majority of oil and gas are imported. Geo-graphical and climatic differences are large and partly explain the variation in economic performance across India's regions. Unlike in developed countries such as the US, where about 2% of the labour force feeds the whole population, in India around 60% of the labour force is employed in agriculture. Migration is limited, and the vast majority of Indians remain "bound to the land". Around 40% of cultivated land is irrigated, leaving most farmers entirely dependent on the annual monsoon. A large proportion of the population live in tropical, arid, or highland zones. Unlike in China, where 30% of the population live in temperate zones, in India's case this figure is zero. India's position in terms of coastal access is at a comparative disadvantage, with only 38% of the population living within 100 km of the sea or navigable waterways, compared with 45% in China and 90% in western Europe.

Nuclear power is heavily subsidised, with the objective of raising rural electrification. The government intends to increase its nuclear capacity from 2,720 mw in 2006 to 7,420 mw by 2010. The consumption of traditional fuels such as logs, dung and crop residue is rising in absolute terms, although its share of total energy consumption has fallen from over 70% in 1951 to around 35% in the mid-1990s. The burning of traditional fuels remains one of the leading sources of pollution-related mortality in India.

In recent years India has stepped up its efforts to make its energy needs more secure. India is among the most inefficient users of energy in the world. For an

The pressure on resources is intense

A race to secure energy resources has ensued

Access to healthcare is largely a function of wealth

India 25


increase of US$1,000 in GDP, on average, it consumes 1.5 barrels of oil�about double the amount in developed economies, according to Nicholas Stern, an adviser to the British government on the economics of climate change and development. India imports 70% of its oil, and this dependence is set to rise. Tata Energy Research Institute, a non-profit-making think-tank, estimates that India will need to invest US$766bn in the energy sector to meet the growing demand over the next 25 years. Already the issue is shaping its global diplomacy, with India buying assets in oil and gas in Africa and the Middle East. Its most ambitious plan so far is a US$4bn, 2,600-km pipeline that would carry natural gas from Iran via Pakistan to India. In the quest for energy India is at loggerheads with China. In mid-2006 India decided to liberalise its mining laws in a bid to extract more coal, the country's only abundant natural resource.

Transport, communications and the Internet

The poor condition of India's infrastructure is a major hindrance to growth. India needs at least US$350bn in investment during the 11th five-year plan (2007-12) to mitigate the country�s �infrastructure gap�, according to the prime minister, Manmohan Singh. Although recent government pronouncements have increasingly emphasised the need to secure investment in major infra-structure projects, most of the progress has been limited to the telecom-munications sector, and more recently also in road construction. The govern-ment is mobilising more public resources to tackle the problem, but at US$28bn, or 3.6% of GDP, India's spending on infrastructure trails far behind China's (9% of GDP, or US$201bn in 2005).

India has the world's most extensive rail network, at 63,221 km. Indian Railways employs 1.5m staff and is the world's largest non-military employer, although its staff is likely to fall to 1.2m by 2010. The railways suffer from chronic underinvestment and under-pricing, insufficient progress on regulatory reform, and unsound cross-subsidisation policies. Passenger traffic is heavily subsidised by higher freight charges. Railway safety has also become an issue of considerable concern after frequent accidents, underlining a lack of investment. The railways have become under intense pressure to upgrade their services since the liberalisation of the airline industry has made flying more affordable and the freight sector was liberalised and improved in 2005 and 2006.

India's poor road network has received renewed emphasis in recent years. Roads carry nearly 70% of total freight and 85% of India's passenger traffic. There are 3.3m km of roads, most of which are badly maintained. National highways carry only about 45% of total road transport. However, in 2002 the government introduced a seven-phase National Highways Development Programme, aimed at improving the 65,000 km of national highways.

The project seeks to expand more than 13,000 km of highway to between four and six lanes in two key areas: between India's four metropolitan centres, Delhi, Mumbai, Chennai and Kolkata�the so-called Golden Quadrilateral (GQ) project�and in the north-south and east-west corridors. As of mid-2007 the GQ project was mostly completed, more than two years behind schedule. The road

Standards of infrastructure are low

Railways

Roads

26 India


development programme, under the National Highway Authority of India, has involved the private sector, and despite repeated delays, caused mainly by problems with land acquisition, has been very successful so far.

India has 12 major ports, seven on the west coast and five on the east, which are managed by the Port Trust of India. The major ports, which handle 75% of all cargo, handled 570m tonnes of cargo in 2005/06. India's ports are plagued by inefficiency. They handle 90% of India�s trade in terms of volume, and with foreign trade having grown in excess of 20% per year since 2002, port capacity is in dire need of expansion. Although turnaround time at ports improved from 8.5 days in 1996/97 to about 3.5 days in 2006/07, the overall cost-efficiency at Indian ports is still low compared with world averages. (In Hong Kong the turnaround time is a mere 10 hours.) Poor port governance and inefficient customs clearing translate into high costs. An identical shipment of textiles to the US from India costs on average 20% more than from Thailand, and 35% more than from China.

Government initiatives to increase private-sector participation include granting automatic approval for up to 100% foreign equity in port and harbour construction projects; establishing a Tariff Authority for Major Ports to fix port charges collected by private providers; and setting up a Maritime States Development Council (MSDC) to help frame an integrated port development policy. Gujarat, Maharashtra and Andhra Pradesh have made particularly good progress towards attracting private-sector participation in port development. The government has also drawn up plans to promote joint ventures between major Indian ports and minor foreign ports in a bid to attract new technology and improve management practices.

India's aviation industry is among the fastest-growing in the world. Air passenger traffic grew by 33% 90.4m in 2006, according to the Airports Authority of India. The entry of low-cost carriers has led to a sharp drop in prices, and air travel has become increasingly affordable, especially for India's growing middle class. Private operators have steadily increased their market share at the expense of the once dominant state-owned Indian (formerly Indian Airlines); private airlines now account for more than two-thirds of domestic traffic. However, pressure on airports and landing and parking slots limits the growth of the industry.

In March 2007 the government approved the merger of the two state-owned national carriers, Indian and Air India. The merger is likely to be completed by July 2007, but the actual integration of fleet and staff could take at least two years. The move was crucial for the survival of both airlines, since they were too small in their respective markets (Indian was the domestic carrier, Air India the international one) to compete with their privately owned rivals. The merged entity will have a dominant market share of about 55% and both an international and a domestic network. In 2006 the government gave permission to both companies to buy new aircraft to upgrade their fleets.

India's leading private airline, Jet Airways, announced a takeover of the smaller Air Sahara at a cost of Rs14.5bn (US$358m) in April 2007, ending prolonged

Ports

Airlines

India 27


speculation over the deal, which had originally been announced in January 2006. The merger signals a long-overdue trend of consolidation in the booming civil aviation industry. The merged entity is, for the moment, the largest player in the Indian skies, with a market share of about 32%. (It will fall to second place, however, once the Indian-Air India merger is completed.) Prominent low-cost airlines include Kingfisher Airlines and Air Deccan, and smaller players include SpiceJet, IndiGo and GoAir.

In early 2006, following years of political dithering, the government decided to modernise Delhi and Mumbai airports. The construction of two greenfield airports, Hyderabad and Bangalore, has commenced and is likely be completed by mid-2008. The government has also approved plans for in greenfield airport in Goa. Finally, the Airport Authority of India is considering the development of non-metro airports, including Ahmedabad, Amritsar, Goa, Guwahati, Lucknow, Madurai, Jaipur, Mangalore, Trivandrum and Udaipur.

India's telecommunications sector has registered explosive growth in recent years, spurred by reforms to introduce greater competition to the sector. The number of mobile-phone connections exceeded fixed-line connections at end-2004 to reach 45m, up from a mere 3.2m at end-2000. The total number of telephones rose from 22.8m in 1999 to 200m (fixed-line and mobile) by end-2006. Teledensity rose from a mere 2.3% in 1999 to 18.7% by end-April 2007, but this still remains low by international standards. The corresponding figure for China was 57% in 2005. Mobile telecoms services have been liberalised since 1994, but only since 2000 has the number of mobile subscribers registered exceptionally strong growth. The peak price for a call between Delhi and Mumbai has come down from Rs30 (68 US cents) per minute in 2000 to around Rs1 in 2007. International call charges have fallen drastically. For instance, a call from India to the US that cost Rs61 per minute in 2000 cost less than Rs7 in mid-2007. At the end of March 2007, 5.5m out of a total of 6.1m villages had a public telephone, according to the Ministry of Communications and Information Technology.

Despite its rapid growth, the sector still has major obstacles to overcome. Following the government�s decision to raise foreign direct investment (FDI) limits in the telecoms sector from 49% to 74% at end-2005, investment proposals were initially slow to emerge. The problem appears to lie in the security restrict-ions accompanying the FDI guidelines that relate to remote access, transfer of network information outside India and international transit routing of Indian traffic. The National Association of Software and Service Companies (Nasscom) has supported the assertion of large foreign telecoms operators that such restrictions are unprecedented. The issue forms part of a wider domestic debate about the security-related risks associated with a liberalised FDI regime. India�s National Security Council (NSC) says that sensitive sectors for FDI include airports, aviation, defence, gas pipelines, oil-refining, roads, seaports, shipping and telecoms. The NSC is particularly wary of direct investment in these sectors by companies from Afghanistan, Bangladesh, China, Hong Kong, Macau, North Korea, Pakistan and Taiwan, claiming that such FDI could threaten India�s security interests.

Telecommunications

28 India


In the largest foreign takeover in India's history, Vodafone (UK), the world�s largest wireless telecoms operator, bought a controlling stake of 67% in a leading Indian mobile-phone company, Hutchison Essar, in May 2007 for US$11.1bn. Vodafone outbid a number of local rivals, including Reliance Communications, the Hinduja Group and the minority partner in the company, the Essar group.

India has a network of more than 150,000 post offices, of which around 90% are in rural areas. An emphasis on universal provision has meant that the service operates at a loss (India Post incurred a loss of Rs13.7bn (US$334m) in 2006/07). In an attempt to improve performance, a number of services have been introduced to capture the business market, including steps to computerise sorting offices.

India has a free and diverse press, published in Hindi, English and vernacular languages. In 2006 there were 1,900 news publications with a combined circul-ation of 200m. India has more than 40 domestic news agencies, including the leading agencies, Press Trust of India (PTI) and United News of India (UNI). In June 2005 the government liberalised the print media industry further, allowing foreign newspapers to publish in the country. Foreign newspapers were already allowed to own stakes in Indian publications. India also produces the largest number of films in the world. There is rapid growth in demand for satellite and cable television. Foreign ownership of terrestrial channels is banned, and foreign participation in satellite channels is currently limited to 49% of equity.

Energy provision

India is the fifth-largest power producer in the world, with a total power generation of more than 600bn kwh per year. Nevertheless, shortages are substantial and are estimated at around 6% of total demand, rising to over 12% at peak times. Problems in the energy sector are manifold: they include the grossly inefficient State Electricity Boards (SEBs), high levels of power theft, unsound cross-subsidisation policies, and chronic underinvestment. The average cost of power in India exceeds Rs4 (9 US cents) per unit. This compares with less than Rs2 in the US and Rs2.5 in South Korea and Taiwan. Official targets for increased generation capacity have been set below required levels for decades, and even these have not been met. The private sector accounts for just 10% of the total power generation capacity, and the government liberalised licensing requirements in 2003 to attract more private investment. Of the remaining 90%, 36% is generated by the central government and 64% by public power companies owned by state governments.

In 2006 coal-based power plants accounted for 54.8% of total power generation. India has abundant coal reserves�commercially proven reserves are sufficient to cover current demand for over 100 years at current rates of extraction. Fossil fuels will remain India�s predominant source of energy, but the government has pledged to increase efficiency and develop renewable energy sources. Nuclear power accounts for 3% of total electricity supply. Hydroelectric power gener-ation contributes 14.3% to total supply, but hydropower potential is thought to be three to four times the current output.

Post

Media services

Energy capacity shortfall is a major constraint on growth

India 29


Many of India's state governments provide electricity at highly subsidised rates (or even free) to some users. This includes energy for use in agriculture and for consumption by backward classes. Other users, such as industry and private consumers, cover the resulting deficit only partially. In many states, huge losses by the SEBs are the main drag on the public finances. To tackle the problems in the sector, in 2003 the Ministry of Power unveiled a plan, "Mission 2012: Power for All", which aims to provide sufficient power to achieve GDP growth of 8% a year, make power cheaper and more reliable, ensure the commercial viability of the power sector, and provide power to all users by 2012. The government plans to install additional generating capacity of 67,000 mw during the 11th Plan (2007-12) and 60,000 mw in the 12th Plan (2012-17). It is also raising its target for nuclear power generation from 20,000 mw to 40,000 mw by 2020, and is considering amendments to existing regulations to enable private participation in the nuclear power sector.

Despite these plans and developments, India's power sector urgently requires substantial investment. Since the public sector lacks the necessary resources, private-sector participation is crucial, but the private sector is unwilling to fill the gap, deterred by the fact that the main electricity purchasers, the state-owned SEBs, are bankrupt. The fundamental problem is the pricing structure�several classes of consumers pay less than the cost of generation. Despite a great deal of discussion, this skewed pricing structure has remained largely intact, as strong political lobbies have actively undermined any reduction of subsidies despite frequent power outages. Farmers pay little�in some states nothing�for the power they use for irrigation. Only industry is charged at market rates, and over 25% of power generated is lost in transmission and distribution, much of it stolen. The central government has drawn up an agreement with the state administrations, whereby SEBs charge users market rates for electricity, reserving subsidies for those genuinely in need. In return, the central government covers the US$5.6bn owed by SEBs to power generators through the issue of long-term bonds.

In an effort to stimulate further investment in the power sector, proposals for 100% foreign direct investment (FDI) in electricity generation, transmission and distribution projects up to around US$300m receive automatic approval. So-called mega-projects (with a capacity of at least 1,500 mw for thermal projects or of over 500 mw for hydroelectric plants) qualify for exemption from customs and countervailing duties. Power transmission has been opened to the private sector, and funding is available for investors keen to tap India's vast potential for generating hydroelectric power. However, as long as the SEBs have a monopoly on distribution and the pricing and subsidy structure remains opaque, investors will be hesitant.

Coal is India's primary fuel for power generation, but a high ash content makes it a polluting and inefficient energy source. Low levels of mining productivity�around half a tonne per man-shift in deep mines and 2 tonnes per man-shift overall�are a serious problem. In an attempt to promote greater investment, regulation has been reduced and coal and lignite mining no longer requires licences. Although India has abundant coal (reserves are estimated at 200bn

Coal, oil and gas

Private investment is urgently needed

30 India


tonnes), its supply shortfall from domestic output is set to rise from around 30m in 2006/07 owing to rapidly rising demand and restrictive mining laws. In 2006 the government �de-blocked� coal reserves of 20bn tonnes for power projects.

With domestic supplies accounting for just 30% of the country's demand, India is a net importer of oil. In 2006/07 imports of crude oil amounted to 110.9m tonnes. Rapidly rising industrial activity has driven up demand, and the International Energy Agency (IEA) projects that the country's dependence on imports to meet its demand for oil will exceed 90% by 2020. To minimise the effects of future supply disruptions, India is building strategic oil reserve facilities on its southern and eastern coasts covering 15 days of its requirement.

Distribution controls that were introduced at the time of the oil crisis in the 1970s were finally removed in 2002, and a number of Indian and foreign companies received licences to open petrol stations. Most production originates from government refineries; their prices are controlled by the Ministry of Petroleum and Natural Gas. In March 2006 a bill was passed providing for the establishment of a Petroleum Regulatory Board (subsequently changed to a Petroleum and Natural Gas Regulatory Board); the board had not been established as of June 2007, however. State-owned oil companies still require approval for changing prices from the ministry, which has�for political reasons�has been reluctant to let prices rise in line with global oil prices.

Consumption levels of natural gas have risen more rapidly than those of any other energy source in the past decade. Consumption rose from 600bn cu ft per year in 1995 to 1,089bn cu ft per year in 2004. The US Energy Information Administration estimates that consumption will reach 1.4trn cu ft by 2010 and 1.8trn cu ft by 2015. Significantly, Gujarat State Petroleum Corporation (GSPC) in June 2005 made the country's biggest natural gas discovery off the coast of Andhra Pradesh, in the south-east of the country. The find is estimated to hold 20trn cu ft of gas, worth US$50bn, but domestic sources will nevertheless be insufficient to meet the rising demand. India is considering large-scale imports via pipelines and liquefied natural gas terminals to help meet growing demand. The government has been negotiating the construction of a number of pipeline projects, including a pipeline to import gas from Iran via Pakistan.

The economy

Economic structure Main economic indicators, 2006 (Actual unless otherwise indicated)

Real GDP growth (%) 9.4

Consumer price inflation (av; %) 6.2

Current-account balance (US$ bn) -10.0

Exchange rate (av; Rs:US$) 45.3

Population (m) 1,095.4a

External debt (year-end; US$ bn) 129.9a

a Economist Intelligence Unit estimate.

Source: Economist Intelligence Unit, CountryData.

India 31


India is a two-tier economy, with a cutting-edge and globally competitive knowledge-driven service sector that employs the brightest of the middle classes, on the one hand, and a sprawling, largely rain-fed agricultural sector that employs the majority of the vast and poorly educated labour force, on the other. India's manufacturing sector has traditionally been poor (with a reputation for low-quality goods), but this has changed rapidly in recent years. Nevertheless, strong growth of the services sector has pushed its share of GDP up to 54% in 2006/07. Meanwhile, the agricultural sector, with fishing and forestry, accounted for 18% of GDP in 2006/07 and industry for 28%.

Although the economy's dependence on agriculture has declined in recent years, fluctuations in overall GDP growth are still a function of the outcome of the annual monsoon. The majority of landholdings are farmed at subsistence level, and many farming families live below the poverty line. India has some of the poorest human development indicators in the world, particularly in rural areas. However, it also has a large number of highly qualified professionals, as well as several internationally established industrial groups.

Economic development has been spread unevenly across states. Economic growth and progress in human development indicators has been much faster in the southern and western states than in the north. Without a rapid and sustained increase in economic growth and higher investment in primary education and healthcare, reducing poverty will remain a considerable challenge for the authorities.

Agricultural production, mainly of foodgrains, is an important determinant of overall economic growth and a huge employer of the rural population. Total foodgrain production in 2006/07 was 209m tonnes. However, yields remain low by international standards. Other major crops grown include oilseeds, cotton, pulses, sugar, tea, coffee, rubber, jute and potatoes. Some economists argue that for annual GDP growth to sustain rates of 8%, the agricultural economy will have to grow much faster than the rates of 2-3% recorded in recent years. However, in spite of normal monsoon rains and efforts to stimulate the sector, agricultural growth has remained low. After no growth in 2004/05, the sector grew by 6% and 2.7% in 2005/06, 2006/07 respectively.

Comparative economic indicators, 2006 Indiaa Chinab Pakistan b Bangladeshb Sri Lankab

GDP (US$ bn) 922.9 2,719.1 128.8 a 62.0a 27.8

GDP per head (US$) 843a 2,069 807 429 1,328

GDP per head (US$ at PPP) 3,920a 7,532 2,579 2,002 4,032

Consumer price inflation (av; %) 6.2 1.7a 7.9 a 6.8a 13.7a

Current-account balance (US$ bn) -10.0 249.9a -5.5 0.2 -0.7

Current-account balance (% of GDP) -1.1 9.2 -4.3 0.3 -2.7

Exports of goods fob (US$ bn) 121.5 969.7a 17.4 11.3 7.2

Imports of goods fob (US$ bn) -185.3 -751.9a -26.4 -14.0 -9.4

External debt (US$ bn) 129.9a 315.4 35.8 20.4 12.2

Debt-service ratio, paid (%) 7.9a 2.8 11.8 5.9 8.7

a Actual. b Economist Intelligence Unit estimates.

Source: Economist Intelligence Unit, CountryData.

Agriculture

32 India


The size of India's industrial sector compares unfavourably with other countries in Asia. At about 28% of GDP, the sector is about half as large as China's. India's rigid labour laws are the main obstacle to an increased role for manufacturing, which nevertheless has seen unprecedented growth, as an anti-export bias in economic policy has been reduced and more resources have been moved into labour-intensive industries. In an attempt to fast-track industrial development and boost exports, the government legislated for the creation of special economic zones (SEZs)�areas with more liberal economic laws�in 2005; by May 1st 2007 over 234 SEZs had been given formal approval, of which 100 were in operation. Several sectors have now been opened up to foreign participation under India's liberalising reform programme, contributing to a significant expansion in the production of durable consumer goods including cars, scooters, consumer electronics, computer systems and white goods. However, a large proportion of heavy industry is still publicly owned.

The services sector has proved to be the most dynamic in recent years, with telecoms and information technology (IT) registering particularly rapid growth. Services, including airlines, banks, construction and small-scale private traders, as well as the public sector, accounted for 54% of GDP in 2006/07. It is one of the anomalies of India's rapid economic growth since the 1990s that, as in other sectors, growth in the services sector has largely been "jobless". Most of India's 10m people who are entering the labour force every year will nevertheless require jobs. The government has opened the retail sector for single-brand retailers, but more comprehensive liberalisation of the sector faces fierce political opposition. The predominance of inefficient state-owned enterprises, particularly in the banking sector, remains a brake on growth.

Economic policy

Economic growth remains severely constrained by an unsustainably large fiscal deficit. A concerted effort will be required to bring about a substantial reduction in the overall fiscal deficit, which peaked at 9.6% of GDP in 2002/03 (5.9% federal government; 3.7% state governments). Strong economic growth in the past few years pushed the federal deficit down to 3.5% in 2006/07�below the government's target of 3.8%. The underlying fiscal position remains weak, however. Including off-budget items such as oil subsidies and losses of the state electricity boards totalling about 1.9% of GDP, the total fiscal deficit is estimated to have stood at over 6% of GDP in 2006/07. While private savings and public investment in India are comparable with those of East Asia, public savings and private investment are markedly lower.

Despite the strong fiscal performance in 2006/07, the magnitude of the still-pending fiscal adjustment is huge. The policies required to reduce the fiscal deficit are easy to list but politically difficult to implement. Reducing subsidies, raising the tax take (only about 2m people pay income tax), cutting government employment and closing or privatising loss-making public-sector enterprises are all measures opposed by powerful interest groups. The Fiscal Responsibility and Budget Management Act, designed to place a statutory limit on government borrowing, became effective in July 2004. The bill gives the central government

Industry

Services

The fiscal position has improved

India 33


a mandate to eliminate the revenue deficit (the gap between government current spending and revenue) by March 2009 and to reduce the fiscal deficit incrementally each year to reach 3% of GDP by March 2008. Although expenditure requirements remain high, continued strong economic growth and the accompanying increase in tax revenue should help the government meet its deficit target for 2007/08 of 3.3% of GDP.

The objective of the Reserve Bank of India (RBI, the central bank) is to maintain price stability and ensure an adequate flow of credit to the economy. Important changes to the institutional set-up of the RBI have resulted in improved monetary control. But the central bank is not independent, and politicians regularly interfere with policymaking. Consumer price inflation fell to around 4% a year in the early 200os from the double-digit rates seen in the first half of the 1990s. But since 2006 it has accelerated, reaching over 7% in early-2007�and the RBI has been slow to react. In mid-2007 real interest rates were still the lowest among major economies, despite nine increases by the central bank in the benchmark interest rate since October 2004. Concerns remain that monetary policy is too loose after an unprecedented 8.8% average GDP growth in the 2003/04-2006/07 period.

The RBI targets broad money, interest rates, credit availability to the productive sectors, and the exchange rate when formulating policy. In recent years large capital inflows have exerted upward pressure on the exchange rate, which the RBI�until inflation took off in 2006--sought to limit by actively selling rupees/buying US dollars in the foreign-exchange market. The by-product of this policy has been the accumulation of foreign reserves, which stood at around US$208bn in June 2007.

The imposition of economic sanctions in 1998, in the aftermath of India's nuclear tests, was the latest catalyst for reform, although initial reform proposals were often diluted. Significant steps have been taken to reduce bureaucratic restrictions on industry and encourage FDI. In particular, the financial and insurance sectors have been opened up to private and foreign participation, as have the telecoms sector and many sectors of manufacturing industry. The government has also removed the remaining quantitative restrictions on imports, in line with its obligations to the World Trade Organisation (WTO). Plans by the Congress-led United Progressive Alliance (UPA) coalition government to step up the privatisation programme and the pace of economic liberalisation have been severely constrained by the Left Front parties, as well as by opposition within the Congress party. As a result, economic reform in the three years of UPA government has been gradual and often ad hoc�although the general direction has been one of liberalisation.

Main economic reforms

Despite the continued slow pace of reform, cumulative reforms since 1991 have transformed the economy. • Progressively more sectors have been opened to private investment, including

power, steel, oil refining and exploration, road construction, air transport, telecommunications, ports, mining, pharmaceuticals and the financial sector.

The reform process is gradual

India lacks an independent central bank

34 India


• Policymakers have sought to encourage foreign direct investment (FDI), except in a few "strategic" sectors, and portfolio investment. Red tape has been reduced significantly.

• Most industries have been de-licensed (previously the government issued licences to companies that permitted them to produce a fixed number of items) to encourage competition.

• Trade policy has been liberalised. Some import quotas have been converted into tariffs, and the tariff system has been simplified to reduce the number of bands and achieve a reduction in overall rates imposed. In April 2001 all remaining quantitative restrictions on imports were removed, although tariffs remain high.

• Some aspects of business decision-making, such as the location of new enterprises and technology transfer, have been taken out of the state's control. (Labour relations and the shutting down of loss-making enterprises, or "exit policy", remain strictly regulated.)

• The exchange-rate regime has liberalised, with the devaluation of the rupee by 22% against the US dollar in two instalments in July 1991. A market-determined exchange rate was introduced in March 1993, and current-account convertibility began in August 1994. Since July 1995 all official foreign debt-service payments have been channelled through the interbank market. However, the rupee is not yet fully convertible on the capital account.

• Capital markets have reformed. Private mutual funds, foreign institutional investors and country funds are active investors, and the stockmarket is subject to more rigorous regulation, although scandals every few years suggest that there is still some way to go.

As central controls have receded, states have acquired more freedom to manoeuvre. Some states, such as Andhra Pradesh, Karnataka and Maharashtra, have shown considerable initiative in raising additional finance, including issuing bonds and encouraging private investment in irrigation, roads, bridges, software development, and agricultural and horticultural projects.

Economic performance

Between 1981 and 2006 the Indian economy grew by an annual average of 6% (real GDP at factor cost). This performance followed three decades of growth of just 3.5% per year (equivalent to GDP growth per head of only 1.5%)�a pace that became known as the "Hindu rate of growth". GDP growth has been even faster in the last four years (2003/04-2006/07), averaging 8.8%, fuelled by an unprecedented expansion in manufacturing and services. India is now the second-fastest-growing major economy in the world, behind China. Economic performance still varies dramatically between individual states and industrial sectors. However, global investors increasingly sense that India's growth prospects have changed fundamentally in recent years.

India's booming software industry is pushing up the price of skilled labour, and the consequences of the emerging shortage in skilled labour could be serious. Over time, the growth of labour-intensive manufacturing could suffer, which could stall the transition of surplus labour from agriculture to industry. Nevertheless, the opening up of the economy has led to an influx of foreign capital, technology and management skills, making India increasingly attractive as a base for medium and high value-added manufacturing.

From the "Hindu rate of growth" to a star performer

India 35


Increased competition has made private companies more profitable and efficient. Labour productivity in manufacturing has jumped by over 50% since 2000/01, according to official figures. But the low level of productivity in the large state sector remains a major constraint on higher GDP growth. The state employs 70% of the 30m workers in organised employment in India. Most public-sector enterprises are hugely overstaffed, debt-ridden and inefficient. High levels of unionisation and political expediency have restricted labour reforms and technological advances that could threaten jobs, and have thus deterred potential investors.

Three factors should ensure India's competitiveness in world markets in the years and decades ahead. First is the strength of its thriving IT sector. India has emerged as a research and development hub for some of the largest IT companies in the world. Meanwhile, the software industry is on course to reach its export target of US$60bn in 2010. India�s services exports, of which IT exports account for the largest chunk, amount to 60% of the country�s merchandise exports.

Second, India�s favourable demography will boost the country�s economic prospects. India�s labour force, unlike China�s, will grow faster than its dependent population for several decades. Moreover, many of India�s workers speak English, an invaluable asset for international businesses. However, India will not enjoy its �demographic dividend� automatically�it must tackle educational backwardness and raise the supply of high-skilled labour, its main comparative advantage in Asia. The increasing shortage of high-skilled labour has so far been the main factor preventing India�s IT sector from growing even faster than it has been.

Third, India�s vibrant democracy is a long-term asset, providing the stability investors seek. Although there are many instances in which India�s democratic politics�particularly the need to govern by coalition�have interfered with good policymaking, the country�s political system is well-entrenched and does not face the long-term uncertainty associated with, for example, China�s political development.

Between 2001 and 2005 the annual rate of consumer price inflation averaged around 4% per year, largely owing to improved productivity, an appreciating currency and improved monetary management by the central bank. Furthermore, globally lower inflation and low commodity prices (until 2003) contributed to a reduction in the inflation rate. More recently, four years of strong economic growth and loose monetary policy amid rising prices for oil and other commodities have led to an increase in inflation. In early 2007 business surveys suggested that spare production capacity had shrunk to zero. As spare capacity declined throughout 2006, the impact of higher oil prices started to be seen in significantly higher inflation. While consumer price inflation remains in the single-digits, asset-price inflation has surged. Both house and stock prices have been rising at phenomenal rates, with the Sensex stockmarket index rising by over 300% between end-2002 and June 2007.

Rising prices suggest the economy is overheating

India has several competitive advantages

Rising prices prompt fears of an overheating economy

36 India


India�s widening current-account deficit is one of the signs that the economy could overheat. As domestic demand outstrips supply, the difference must be imported. As recently as 2004, India�s current account was in surplus; now it is in deficit to the tune of about 2% of GDP. Critics warn that the true figure is actually closer to 5% of GDP. This discrepancy is because the billions of US dollars that India receives in remittances bolster the current account. However, such remittances are, in effect, capital inflows: their inclusion understates the extent to which the economy has reached its limit in meeting the demand for goods and services domestically.

Policymakers are keen to avoid a sharp slowdown such as the one experienced in the second half of the 1990s, when economic growth decelerated sharply after a sustained industrial boom. However, several factors suggest that a hard landing is less likely today than it was in 1996/97. Most importantly, India�s economic growth is increasingly driven by investment, which was not the case in the 1990s.

The latest national accounts data paint a macroeconomic picture that would have been unthinkable until a few years ago: one of India's main economic weaknesses�stubbornly low investment and savings rates�seems to belong to the past. Gross domestic investment shot up to 32.4% of GDP in 2006/07, from 26% in 1999/2000. The trend is in line with data from companies and business surveys that have long indicated an investment boom. Similarly, gross domestic savings rose from 25% of GDP in 1999/2000 to 32.4% in 2006/07. An even higher savings rate, perhaps 40%, is needed to finance India's rapid growth, but the prospects for this are good. With further rises in GDP per person likely, and with a rapidly expanding labour force, the share of the population with rising discretionary incomes is set to increase over the next two decades.

India's recent economic growth has been impressive, but the same cannot be said of its record of creating employment for its vast and rapidly expanding workforce. India's working-age population will grow by 71m between 2006 and 2010; the country will have to find work for 150m people to reach full employment by 2010. Data from India's Planning Commission show that the rate of unemployment rose from 7.3% (27m) in 2000/01 to 9.1% (36m) in 2005/06. However, this measure excludes underemployed persons, which is why some independent estimates put the actual number of unemployed closer to 80m people�more than twice the official estimate. The government has prioritised the issue: in 2006 the Congress-led government approved the National Employment Guarantee Scheme, which aims to provide 100 days of employment on rural public-works projects at a minimum wage. But India's labour laws remain stubbornly rigid, and this is unlikely to change under the current coalition government.

Regional trends

India's strong national performance masks considerable inter-state variation in terms of economic growth, economic policy, population and human development. Since the start of economic reforms in 1991, the coastal states

Savings and investment rates have risen dramatically

Employment generation is huge challenge

India 37


such as Gujarat and Maharashtra have been the fastest-growing states, enjoying growth rates of around 6-9%, comparable with the East Asian economies. High-growth private-sector industries are concentrated around Mumbai in Maharashtra; in parts of Gujarat; around Delhi, including in Haryana and western Uttar Pradesh; and in the corridor from Bangalore in Karnataka to Chennai in Tamil Nadu. These states account for about 80% of India�s foreign direct investment. As trade was liberalised and industry freed to locate where it wished, industrial development became concentrated in the south and along the west coast. The software export boom has also been largely concentrated in the southern and western cities of Chennai, Bangalore, Mumbai and Hyderabad. The process of economic policy reform that began in 1991 had important implications for state-level growth: the prosperous states with better-performing administrations appear to have benefited the most from the reforms.

The post-1991 period has seen faster improvements in human development indicators, especially in literacy rates and life expectancy. Generally, fertility and mortality are lower in southern and western states than in most of the northern states. The fertility decline has been slowest in Bihar and Uttar Pradesh, where the number of births per woman is still between four and five, far above the all-India average of around three.

Economic sectors

Agriculture

India's agricultural sector employs about 60% of the country's workforce and accounts for about one-fifth of GDP. Unlike in East Asian countries, the shift of the labour force from agriculture to non-agriculture in India is particularly slow, largely as a result of rigid labour laws in both the agricultural and the industrial sector. The agricultural sector strengthened in the post-reform period from fiscal year 1992/93 (April-March) to 1996/97, with average growth at 4.7%, up from an average of 3.6% in the 1980s. However, growth slowed to around 1% per year between 1997/98 and 2002/03. In 2003/04 the best monsoon rains in a decade generated growth of 10% in the agricultural sector, but in 2004/05-2006/07 growth averaged 3.1%.

The government seeks to raise average annual growth rates in the ailing farm sector to 4%. Its focus on agriculture has two dimensions. First, the current coalition government must be seen to be doing enough to raise the living standards of the poor in order to ensure its future electoral success. Second, the government�s aim of raising annual economic growth to 10% in the final year (2011/12) of the 11th five-year plan period crucially depends on higher growth in the farm sector. As a result, budget allocations in 2007/08 for the government�s flagship programmes were increased substantially. The largest of these, "Bharat Nirman", a massive rural infrastructure programme, saw an increase of 31.6% from the 2006/07 budget, to Rs246bn (US$5.5bn). (Poor transport links are a major obstacle to the development of efficient agricultural markets.)

Agricultural growth has decelerated

38 India


The introduction of high-yield crop varieties and new fertilising and irrigation techniques over several decades�the so-called Green Revolution�dramatically increased productivity in some regions. However, given agriculture's diminishing yet still huge importance for India's overall growth prospects, the generally poor performance of the sector is a cause for concern and calls for a change in the government's agricultural policy.

Food support prices for wheat and rice have given farmers little incentive to diversify and have filled government storage facilities to overflowing, while keeping the market price of foodgrains artificially high. Current agricultural policy, which supports cereal production, is exceedingly expensive and will be unable to deal with the likely scenario of a shift in consumption from cereal food towards non-cereal food. A lack of market infrastructure also hampers the movement of crops, leading to sudden shortages. India has considerable potential as an exporter of rice, cotton, many types of fruit and even flowers, but this has so far not been tapped.

Less than one-third of cropland is irrigated, making agricultural output heavily dependent on the annual monsoon. The main foodgrain crops (the kharif or autumn crop�predominantly rice, harvested in September-October) and some cash crops (oilseeds, cotton, jute and sugar) depend on the south-west monsoon. This brings 80% of India's rain, usually within a three-month period from June to mid-September. A second, north-east monsoon brings lighter rains to the south of the country from mid-October to December. Winter rain in north-western India from October to March waters a crop of wheat and coarse grains (the rabi crop, harvested in April-May).

Monsoon performance (Jun-Sep)

1999 2000 2001 2002 2003 2004 2005 2006Meteorological subdivisions with normal/excess rainfall (no.) 28 28 29 15 31 23 32 26Meteorological subdivisions with deficient/scanty rainfall (no.) 7 7 6 21 5 13 4 10

Districts with normal/excess rainfall for all-India (%) 67 65 68 37 76 57 72 60Deviation from long-term average rainfall for all-India (%) -4 -8 -9 -19 5 -13 -1 -1

Growth in the agricultural sector (%) 0.6 0.1 5.9 -5.6 9.6 0.7 6.0 2.7

Source: India Meteorological Department.

Mining and semi-processing India derives little wealth from its mining sector, which accounts for less than 2% of GDP. Nevertheless, a range of non-hydrocarbon minerals is extracted. India has vast iron ore and bauxite reserves In addition, it produces significant amounts of mica, manganese, dolomite, limestone, chromite, magnesite, apatite and phosphorite. Private-sector participation in the mining sector is on the increase. In 2006 the government liberalised the Mines and Minerals Act of 1957 to meet rising domestic consumption of various mining products. Strict licensing rules had severely limited production.

India has the fifth-largest reserves of iron ore globally, estimated between 15bn and 24bn tonnes, and is one of the world's lowest-cost sources. It is already the world's third-largest iron ore producer. The restrictiveness of the 1957 Mines and

Iron ore

India 39


Minerals Act has stopped India Steel Authority, India's largest steelmaker, from obtaining a single mining licence in the last 15 years, but the National Mineral Policy 2007 has paved the way for an expansion of mining capacity. A housing boom has fuelled domestic demand, and China's demand for iron ore has led to a shortage of steel and a sharp rise in prices. In May 2007 the steel industry lobbied the government to cap iron ore exports at 90m tonnes a year to ensure availability to domestic producers. In 2005/06 India exported 90m tonnes of iron ore (83% of which went to China). The liberalisation of the mining law has benefited investors such as South Korea's POSCO, which in June 2005 signed an agreement with the government in Orissa under which it plans to invest a total of US$12bn to establish a steel plant in the state. It represents the largest foreign direct investment in India to date. Meanwhile, local producers Mittal Steel and Tata Steel have ambitious investment plans to expand their Indian operations.

India also has large reserves of bauxite, at around 2bn tonnes, or 11% of the global total; it is the fifth-largest bauxite producer in the world. Ambitious plans have been drawn up to expand smelting and aluminium production for home consumption and export.

Although India has substantial reserves of copper (estimated at 422m tonnes), it is a net copper importer. Reserves of lead and zinc are estimated at 360m tonnes. A refinery complex in Debari (Udaipur) with a lead-zinc capacity of 70,000 tonnes has cut import demand for both metals.

Foreign investors have shown considerable interest in joint ventures to mine for gold, particularly the state-run mine at Kolar in Karnataka. In addition, more than 20 companies, including two UK-based concerns, De Beers and Cluff, have registered an interest in diamond prospecting in the country.

Manufacturing Industrial production (fiscal years Apr-Mar; 1993/94=100; % change year on year)

Annual average 2006/07 2002/03-2006/07All sectors (index of industrial production) 11.5 7.9

Source: Central Statistical Organisation (CSO).

Industrial growth averaged 7.1% per year in the 1980s. It accelerated slightly to 7.6% per year in the first five years following the introduction of the economic policy reform process in 1991, which led to an investment boom. In the second half of the 1990s industrial growth trended lower, at around 5% per year. However, since 2002/03 industrial output has been growing strongly on the back of strong consumer demand and exports. In 2006/07 industrial production rose by 11.5%, up from 8.2% in the year-earlier period. Manufacturing production, which represents more than 75% of the country�s industrial output, accelerated by 12.5% during the period, up from 9.1% in 2005/06. But the rapid

Non-ferrous metals

Bauxite

Gold and diamonds

40 India


expansion in the sector has pushed up inflation above the central bank�s comfort zone.

This highlights one of the major challenges to the Indian economy: expanding a still small manufacturing sector, which is by the government�s own admission is the only sector capable of providing enough jobs to absorb the estimated 10m people entering the workforce every year. Manufacturing still accounts for less than 20% of India�s GDP; in many other Asian economies that figure is closer to 30%. To achieve the government�s target of 25% of GDP, the sector must grow by 15-17% per year. But at present such growth appears impossible without stoking inflation. Drastic improvements in infrastructure would first be needed to achieve a manufacturing boom of the required magnitude. It is not at all clear, for example, where the electric power needed to fuel a spike in manufacturing output would come from.

Although reforms have reduced licensing and regulation, heavy industry is still dominated by public-sector enterprises. State-owned companies account for the bulk of activity in non-ferrous metals (virtually 100% for copper, lead and zinc, and about 50% for aluminium), shipbuilding, engineering, chemicals and paper. The government had pledged to reduce its holdings in non-strategic public-sector undertakings to a maximum of 26%, and to close down non-viable enterprises, but opposition to this measure from the Left Front has, for all practical purposes, shelved this proposal.

India produced 49m tonnes of crude steel in 2006/07, placing it among the ten largest producers in the world. A variety of grades are produced, and the quality is on a par with producers such as South Korea and the US. Increased demand from China as well as strong domestic demand, particularly from manufacturers of consumer durables and the automotive and construction sectors, are the main drivers of production growth. Around 40% of output is produced in integrated steel plants; the remainder comes from mini-plants (electric arc furnaces), of which over 180 exist, almost all in the private sector. Reforms to the sector have lifted controls on prices, distribution and imports of industrial inputs. However, the government maintains a floor on the price of imports of steel products in order to protect the domestic industry. The government�s annual production target for the steel industry stands at 110m tonnes by 2019-20.

India is the world's largest producer of jute, second-largest producer of silk and third-largest producer of cotton. The industry directly employs more than 35m people. Textiles account for around one-sixth of total export earnings. The industry has a natural competitive advantage in terms of a strong and large multi-fibre base, abundant cheap skilled labour and presence across the entire value chain of the industry ranging from spinning and weaving to the final manufacture of garments. The government�s �Vision 2010� for the textile sector aims to double India�s share in global textile trade from 4% currently to 8% by 2010. This would entail growing the textile economy from US$37bn in 2006 to US$85bn in 2010. The industry has been booming since the removal of global quotas for textiles and clothing exports at the end of 2004. However, as in many other industries, India's labour laws have held back even faster

Textiles

Steel

India 41


expansion, investment and employment generation. In October 2005 the government launched an initiative to set up 25 integrated textile parks by 2008. The target number was raised to 30 in early 2007, by which time the majority had been approved by the government.

The automotive industry accounts for around 5% of industrial production. It has been one of the fastest-growing sectors in recent years. Turnover of automotive manufactures stood at US$34bn in 2006/07. Rising income levels, continuing poor public transport systems, the wider availability of car finance and the increase in the young population are the main drivers of growth. A cut in customs duties on steel and other inputs in recent years has reduced production costs for manufacturers. Total production of vehicles rose from 4.2m units in 1998/99 to 11.1m units in 2006/07. In volume terms, vehicle production is dom-inated by two-wheelers, which accounted for 8.4m units of total production in 2006/07. The production of passenger cars stood at 1.5m units in 2006/07, followed by three-wheelers (556,000) and commercial vehicles (520,000).

Foreign direct investment (FDI) up to 100% is permissible under the automatic route in the automotive sector, and almost all major foreign players have rushed into India to produce cars for the domestic and export markets. Most local production is still sold domestically, but rising quality has contributed to a surge in vehicle exports, which grew at an annual average rate of over 40% in the five-year period 2002/03-2006/07.

The rapid growth of software exports has stimulated demand for computers. Exports of computer hardware, which garnered revenue of US$2.5bn in 2006/07, are still small, but are growing faster than software exports. Sales of personal computers (PCs) rose by 30% in 2006/07, to cross 6.5m units. Import liberalisation and the entry of foreign manufacturers has transformed the industry, which until recently was tiny and dominated by a few Indian manufacturers. The ease of importing components has nurtured hundreds of unbranded assemblers, which now command more than half of the market. Only three major Indian brands remain, but foreign manufacturers are expanding their production. Dell, the world's largest PC seller (it has a 5% market share India), opened a research and development centre in Bangalore in May 2007, and its new production facility in Chennai is scheduled to become operational in July. The growth of the IT hardware sector has traditionally lagged behind the software and services segment and hardware exports remain insignificant, with 90% of revenue sourced from the domestic market.

Construction

Construction accounts for around 7% of GDP and employs an estimated 40m people. The construction industry has been one of the fastest-growing in recent years, with growth of 10.7% in 2006/07. The industry contributes more incremental value added per unit of investment than any other sector. Construction accounts for around 40% of government capital expenditure via a five-year plan. Large-scale public-sector projects, the need to develop urban

Vehicles

Computer hardware

42 India


infrastructure and national highways, and the rapidly rising demand for residential housing have contributed to a boom in the sector in recent years.

India has a serious housing shortage, estimated at 23m units. More than 90% of this shortage is in low-cost housing. The government has pledged to build 2m additional units each year. In June 2007 DLF, a private property developer, announced plans to raise US$2.4bn to build homes and offices through what would be the country's largest-ever initial public offering. Around 50m people live in urban areas that are officially designated as slums. Rural housing conditions are also poor.

Financial services

The financial services sector has long been dominated by state-owned institutions. During the second world war the government introduced controls on public issues and used pricing formulas that underpriced share issues. As a result, although India had a large number of stock exchanges, little money was raised through public issues, the floating stock was small, and the markets were speculative and volatile. In the 1950s the government set up long-term financial institutions that supplied the bulk of industry's debt and equity finance, and in 1970 the banks were nationalised.

Government-controlled commercial and development banks, insurance companies and the Unit Trust of India (UTI, a mutual fund) have traditionally been the leading sources of funds for both local and foreign-invested enterprises. The much smaller private financial sector consists of a number of smaller banks, still young insurers and a host of mutual funds. Public-sector development banks, insurance companies and the UTI specialise in long-term lending and subscribe to corporate shares and debentures. Public-sector insurers, the UTI and other mutual funds are active in the primary and secondary capital markets.

Commercial banking is dominated by the 28 public-sector banks, which control about three-quarters of assets in the sector. Private domestic banks (29) hold 18.2% of assets, and foreign banks (31) have the remaining 6.5%, according to the Indian Banks' Association. The public-sector banks have countrywide networks (around 90% of total bank branches), although each bank has its own geographical stronghold. Foreign banks play a small but increasingly important and innovative role in India's banking sector.

In February 2005 the RBI announced a "road map" for the presence of foreign banks in India, which allows foreign banks unprecedented room to operate, but stops short of introducing the degree of competition required to break the dominance of state-owned banks. A more competitive banking sector environment is expected only in 2009, when the second phase of the road map will allow foreign banks to compete more freely. However, the RBI has taken a number of steps to strengthen the banking sector. It has tightened capital requirement norms for banks, with a capital-adequacy ratio of 9% (compared with the 8% required by Basel II, the capital-adequacy framework for internationally active banks); norms for non-performing loans were

The housing shortage

State-owned financial institutions dominate

India 43


tightened in March 2004; since March 2006 banks have to maintain an investment fluctuation reserve of 5%. Foreign banks in India and Indian banks operating abroad will be required to comply with Basel II norms by March 2008, while all other scheduled commercial banks will have to adhere to the guidelines by March 2009. The overall asset quality has improved since the late 1990s, with the ratio of non-performing loans (NPL) having fallen from 15.7% in March 1997 to 2.9% in March 2007. In spite of many challenges India's banking sector is widely viewed to be much healthier than China's.

Government intervention in the banking system is high, as the authorities try to channel credit to politically important sectors, especially agriculture. Public-sector banks must devote at least 40% of their loan portfolio to designated priority sectors and 12% to export financing.

The size and liquidity of the Indian stockmarket has increased notably in recent years, and the Bombay Stock Exchange (BSE) has established itself as one of Asia's largest stock exchanges. In mid-May 2006 the India's stockmarket rally came to temporary end in, when the market crashed and lost 30% of its value in a few weeks, as investors sought less risky assets against a background of accelerating global inflation and rising interest rates. However, the fallout was largely confined to the financial sector. The sell-off was short-lived and the BSE benchmark 30-share index, the SENSEX, closed at an all-time high of more than 14,000 in mid-June 2007, up by 93% from two years earlier. Unprecedented portfolio investment of about US$12.5bn in 2005/06 and US$14.7bn in 2005/06 from overseas is underpinned by the buoyancy of the stockmarket.

In March 2007 the government extended for three years the issue of controversial participatory notes, a financial instrument that allows foreign funds and investors who are not registered with the Securities and Exchange Board of India (SEBI, the financial markets regulator) to invest in the Indian stockmarket. It is considering creating a committee to prepare a report on the impact of participatory notes on the stockmarket. For now investors, especially hedge funds, will still be allowed to participate in India�s equities boom.

Under current financial-sector regulation, foreign entities cannot invest directly in Indian markets; their only available option is participatory notes. The SEBI estimates that more than 50% of foreign institutional investor (FII) inflows come through the so-called P-Notes. The downside, as far as the SEBI is concerned, is that it does not know who the original investor is, as the notes are generally issued by overseas associates of India-based foreign brokerages.

The central bank and the SEBI fear that if FIIs suddenly pulled a significant sum of money out of India, a financial crisis might follow and potentially destabilise the economy. The SEBI is especially worried about inflows of potentially �hot money�, particularly by pro-active hedge funds that borrow cheaply in foreign currency in international markets and invest it India. The double advantage such investments have had for years�booming stocks and an appreciating local currency�might not last, leaving the financial markets exposed.

The stockmarket

44 India


Other services

The contribution of the information technology (IT) industry to GDP is likely to have risen from 4.8% in 2005/06 to 5.4% in 2006/07. In 1999/2000 the sector accounted for a mere 1.2% of GDP. The target of US$60bn worth of software exports by 2009/10 set by the industry�s main body, the National Association of Software and Service Companies (Nasscom), is well within reach. India�s computer software and services exports stood at US$33.7bn in 2006/07.

Out of an estimated 5,000 IT software and service companies in India, about 60% are domestic players and 40% are multinational corporations. The latter account for about 65% of the industry's revenue. The most important market is the US, which absorbs about 70% of India's software exports, followed by Europe, with 25%. Indian firms are especially strong in software for banks, finance houses and insurance companies. The bursting of the dotcom bubble in the US in the early 2000s had a negative effect on the Indian industry. Although the bigger companies largely held their own, smaller exporters suffered. Nevertheless, the Indian IT industry has withstood the shock well. It has also been forced to increase diversification in non-US markets, such as Europe and Asia, and into such areas as the management for clients of IT-related business processes.

The fastest-growing segment of the IT industry is IT-enabled services and business process outsourcing (ITES-BPO, or "offshoring"), which has expanded by an average annual rate of around 50% since 1993. ITES-BPO covers a wide range of technology and back-office services, including call centres, accounting support, administration and content development. The sector uses cheap labour and does not require a knowledge of software engineering. In addition to recent new operations, many existing companies have also expanded business outsourcing in India during the past three years. The fastest-growing subsegment within BPO is customer care and administration�consisting mainly, but not entirely, of call centres.

With more than 12m outlets, India's retail sector is underdeveloped, unorganised and dominated by small, family-owned firms. Modern retail chains, most of which have established themselves in the past five years, account for just 2% of retail sales, compared with 65% in the US, 40% in Thailand and 10% in China. Hence, the potential for growth is enormous. A study in 2005 by AT Kearney, a consultancy, rated India as the most attractive country for international retail expansion in the world. A study by McKinsey, another consultancy, released in May 2007 predicted that that India would overtake Germany as the world�s fifth-biggest consumer market by 2025.

However, inflexible labour laws and high supply-chain costs, as well as a preference for known retailers, have held back the sector's development. More importantly, the entry of foreign retailers is still restricted. In early 2006 the government allowed up to 51% FDI in single-brand retailing (such FDI could previously take place only through the franchisee route), but shied away from a comprehensive opening up of the retail sector to foreign competition. Political considerations will continue to delay the liberalisation process. In March 2007

Information technology

Retailing

India 45


the leader of the Congress party, Sonia Gandhi, asked the prime minister to refrain from loosening restrictions on organised retailers in a bid to protect the myriad small-scale businesses that currently dominate the sector.

Tourist arrivals in India grew by an estimated 13% year on year, to 4.4m, in 2006, driven by strong economic growth in the UK and the US, a vigorous overseas advertising campaign and a thriving domestic economy. However, since travel and tourism have spillover effects on the wider economy, the real impact is even greater. In global terms, India's share of the tourism market is small, at around 0.7%. The tourism industry is hampered by the perception of India as a poor and politically unstable country where a visit requires precautions against disease.

The external sector

Trade in goods

The pace of integration of India�s economy with the rest of the world has increased dramatically in the last five years, although the level of trade integration remains low compared with other large emerging economies. The responsiveness of Indian exports to the GDP growth of its main trading partners has increased. The traditional view that the Indian economy is largely shielded from the international business cycle because of the country's limited trade integration is becoming increasingly untenable. Growing trade integration has important consequences, not only for exports, but also for economic management. Interest rates in the rest of the world will become more important in setting domestic rates. Similarly, swings in economic activity in the region or the world are now likely to have a larger impact, mainly through trade.

Main trading partners, 2006/07 (Apr-Jan; US$ bn)

Exports to: US 15.5UAE 9.9China 6.4Singapore 4.8UK 4.5Hong Kong 3.8Germany 3.2

Imports from: China 14.1Saudi Arabia 11.3US 8.4Switzerland 7.5UAE 7.1Germany 6.1Iran 6.0

Note. Imports do not include crude petroleum and products.

Source: Centre for Monitoring Indian Economy.

Tourism has been booming

46 India


A booming economy and a rapidly rising oil import bill have pushed up the trade deficit. In 2006 the trade deficit rose to US$63.7bn (IMF definition), up from US$46.9bn in 2005. Merchandise trade remained buoyant, with exports growing by 19% to US$121.5bn, and merchandise imports growing by 24% to US$185.3bn. Oil imports, which account for almost one-third of total mer-chandise imports, rose by 30%.

The government aims to raise the country�s exports to US$200bn by 2008/09. In recent years Indian exports have surged not only in the country's traditional major export markets, the US and Europe, but also in Asia and Africa. However, the value of India�s exports is still tiny compared with China's�the latter's merchandise exports are worth nearly ten times those of India.

India's traditional exports of textiles and jewellery, while important, have lost ground to engineering exports. The country has also developed significant exports of chemicals, principally drugs and dyes, and petroleum products. Its largest import is mineral oils. Domestic crude oil meets only about 30% of India's needs. Recently, with import liberalisation, electronic goods imports have also grown. The legalisation of gold imports has meant that gold, which used to be smuggled in, has begun to be imported legally and now constitutes a major import item.

Invisibles and the current account

The current account moved into surplus in 2001/02 for the first time in 24 years, in spite of a sizeable trade deficit. This was largely because of a sharp increase in remittances from overseas Indians on the invisibles side of the current account, and strong services exports. As a percentage of GDP, workers' remittances have risen from 0.7% in 1990/91 to 3.1% in 2005/06, making India one of the largest global recipients of such inflows.

India ran a current-account surplus between 2001/02 and 2003/04, but thereafter the current account came under pressure owing to rapid import growth fuelled by high oil prices and buoyant industrial growth. While remittances rose further in 2006/07, they could only partly offset the pronounced deterioration in the trade account. The concurrent economic boom, which fuelled very rapid growth in non-oil imports, pushed the current-account balance from a surplus of US$14.1bn in 2003/04 to a deficit of US$11.8bn in the first nine months of 2006/07.

Income from software services exports is the main driver of the services surplus of the current account. After a brief decline in 2000/01 to US$2.5bn (from US$4.1bn in the previous year), as the software boom collapsed in the US, the services surplus bounced back to US$4.6bn in 2001/02. Thereafter it grew at a phenomenal rate and reached US$23.8bn in the first three quarters of 2006/07. Rapid future growth in software services is likely to continue to support the current account and increasingly offset the risk of a sudden fall in remittances. India's income balance on the current account has traditionally been in deficit and stood at US$5.5bn in the first nine months of 2006/07.

Workers' remittances exceed 3% of GDP

Engineering goods are the largest export category

India 47


Capital flows and foreign debt

India's position on the capital account has strengthened considerably in recent years. According to the Reserve Bank of India (RBI, the central bank), in 2005/06 the capital account surplus stood at US$23.4bn. Rising international investor confidence in the Indian economy has been reflected in a surge of portfolio investment and the upward revision of international credit ratings. With the current account in deficit since 2004/05, the rising capital account surplus has become increasingly instrumental in earning foreign exchange.

The level of foreign investment flows�comprised of portfolio investment by foreign institutional investors and foreign direct investment (FDI)�has risen dramatically in recent years. In 2003/04 FDI inflows stood at a mere US$2.2bn, or 1% of GDP, leaving India trailing behind almost all large emerging-market economies in this regard. (These typically have FDI equivalent to 2-3% of GDP, and economists tend to view countries with an FDI share equal to or lower than 1% as lacking a comparative advantage.) In fiscal year 2006/07 (March-April) FDI reached US$16bn, almost three times higher than the US$5.5bn registered in 2005/06, according to the RBI. Adjusting the figure to match IMF methodology (which includes retained earnings reinvested), FDI reached US$19bn, or 2.3% of GDP, in 2006/07. The services sector continues to be the biggest recipient of FDI. In 2006 FDI inflows exceeded portfolio inflows for the first time, indicating that foreign companies--rather than merely foreign capital--are finally beginning to play the role one would expect in an economy with a distinct comparative advantage in industries ranging from information technology to labour-intensive manufacturing.

A significant development on the capital account in recent years has been the rapid increase in commercial borrowing by Indian corporates on international capital markets�net medium-term and long-term borrowing increased from US$1bnto US$13bn in 2006.

India's total external debt has risen steadily from US$83.8bn in 1991 to US$142.7bn at end-2006 (government measure). However, the ratio of debt to GDP has fallen from 28.7% to 15.8% over the same period. Commercial finance is increasingly replacing foreign aid. The ratio of government debt to private, non-government debt has more than reversed from 60:40 in the mid-1990s to 33:67 at end-December 2006. India is still the World Bank's biggest borrower, but nearly one-half of the funds are lent on near-commercial terms. India has not needed IMF funds since the 1991 financial crisis, when it borrowed US$4.5bn (which has since been repaid). OECD aid to India is co-ordinated by the World Bank-sponsored India Development Forum.

India's current debt stock and foreign payment obligations are manageable. Restrictions on external commercial borrowings have gradually been lifted, with total annual borrowing permitted up to a ceiling of US$22bn per fiscal year. Foreign banks can guarantee rupee borrowings by Indian companies, and companies with foreign-exchange earnings can raise up to US$500m through external commercial borrowings. Furthermore, the end-use of external

The foreign debt position is improving

Foreign investment inflows show strong increases

48 India


commercial borrowings was enlarged to include overseas direct investment in joint ventures to allow Indian corporates to diversify into international markets.

India has never defaulted on its external debt, and its external risk assessment is now generally positive. Risks to India's debt sustainability are political rather than economic. A derailment of the peace process with Pakistan or outright military conflict�as happened in 1998�would severely restrict India's access to international markets.

Foreign reserves and the exchange rate

India's foreign-exchange reserves have grown significantly since 1991. The reserves, which stood at US$5.8bn in the immediate aftermath of the balance-of-payment crisis in 1991, rose to around US$25bn in 1995. The second half of the 1990s saw a further improvement, with reserves touching a level of US$38bn in 2000. In mid-May 2007 India's foreign-exchange reserves had surged to US$204.9bn, making its stock of reserves the fifth-largest among emerging-market economies and the sixth-largest in the world. The sterilisation of capital inflows by the RBI was the main cause of the rapid accretion of reserves. In fact, the capital account has been the main source of the reserve build-up in the period 1991-2006. It contributed US$186.2bn to the accretion, far outweighing the drag on reserves exerted by the current account of around US$36.2bn. Foreign investment dominated as a source of reserve build-up through the capital account at a net US$99.6bn, or 53% of the total, followed by non-resident Indian (NRI) deposits (15%), external commercial borrowing (14%), and external assistance (7%).

During the 1990s and early 2000s the RBI oversaw a managed decline in the value of the rupee against the US dollar, intervening only to prevent a sharp fall in the currency. After a devaluation in July 1993 the rupee remained constant at around Rs31.37:US$1 for two years, before a nominal depreciation in 1995. It then gradually weakened to reach Rs48.92:US$1 in early June 2002. Thereafter, the rupee appreciated against the US dollar, driven by high capital inflows and general US dollar weakness in international currency markets, until the general election in May 2004, when uncertainty about the new Indian government's economic policy led to temporary capital outflows. Since mid-2006 the rupee has appreciated against the US dollar, reaching Rs40.5:US$1 in mid-June 2007. The sharp appreciation constitutes a major shift in policy and reflects the government's desire to rein in inflation following four years of record economic growth and little action on interest rates.

India has taken a gradualist approach to capital account convertibility. Starting from current-account convertibility in 1994, capital account convertibility was introduced for NRIs in early 2002. NRIs may remit up to US$1m per year, but there are conditions attached. The transfer of capital abroad by resident Indians is still subject to controls. Further reforms in the real sector and the financial system are required to minimise the risk of a loss of macroeconomic stability that could result from full convertibility of the capital account. At present, a weak banking sector and a high fiscal deficit remain the main obstacles to full

Foreign-exchange reserves grow

The rupee has appreciated in recent years

Debate on full capital account convertibility continues

India 49


convertibility. Current restrictions stem mainly from concern over the domestic impact of excessive capital outflows on interest rates and money supply growth, as well as the fear that an open capital account would expose the rupee to speculative attacks.

In early 2006 the debate over whether India should liberalise its capital account gained momentum, when the government said it wished to revisit the issue. One of the attractions of liberalising the capital account is that it would create access to cheaper credit for Indian businesses without asking permission of the RBI. Capital costs in India are still high by international standards. In September 2006 a government-appointed panel examining progress towards full capital account convertibility presented a five-year plan. The committee proposed a three-phase implementation of measures towards fuller capital account convertibility in 2006-07 (phase I), 2007-09 (phase II) and 2009-11 (phase III). The proposed phased implementation of full convertibility has disappointed those who had hoped for quicker liberalisation.

Two recommendations have drawn particularly heavy criticism. The first is of a 5% monitoring band around the rupee�s real effective exchange rate (REER); the RBI would defend the rupee when the REER moved outside the band by intervening in the currency market. This recommendation goes against the economic theory that a country cannot have an open capital account, an independent monetary policy and a fixed exchange rate�the so-called impossible trinity. The panel appears to be suggesting that the "trinity" need not apply in practice if prudent policies are in place. The second controversial recommendation is the proposed ban on participatory notes (PNs), which are derivative instruments through which foreign investors trade in Indian shares. PNs account for nearly one-half of the foreign investment in the stockmarket, mainly through hedge funds. The recommendation appeases regulators, who are suspicious of these investments because the original investor remains anonymous. But the concern is that cutting off this source of funds could lead to a stockmarket crash.

The IMF and others have argued that the more important benefits of capital account convertibility for countries such as India and China are the indirect or collateral benefits, such as the discipline imposed on economies by unfettered capital flows. However, as long as India�s fiscal situation remains as weak as it is at present, a move towards fewer capital controls seems premature. Dismantling India�s strict capital controls is attractive and probably inevitable in the long run, but, as in other areas of Indian politics, gradualism will remain the order of the day.

50 India


Regional overview

Membership of organisations

The South Asian Association for Regional Co-operation (SAARC), which comprises India, Pakistan, Sri Lanka, Bangladesh, Nepal, the Maldives, Bhutan and Afghanistan, was established in 1985. Afghanistan, the newest member, joined formally in April 2007. SAARC's aims include promoting welfare, accelerating economic growth, eradicating poverty, and improving relations between member states. Summit meetings are meant to be held annually and are complemented by technical committees, meetings of foreign ministers, and a standing committee of the foreign secretaries (senior foreign ministry civil servants) of each country. An under-resourced secretariat based in the Nepalese capital, Kathmandu, co-ordinates SAARC's activities.

In the early years agreements were made to establish a food security reserve, set up a meteorological centre, combat terrorism and encourage cultural exchanges between member states. Along with micro-level issues, SAARC has launched a South Asian Free-Trade Area (SAFTA). SAFTA, seen as a replacement for the South Asian Preferential Trading Arrangement (which was agreed in 1995 and had by 1996 identified more than 2,000 products as eligible for preferential treatment), was initially to be put in place by the ambitious target date of 2001, but eventually came into existence in January 2006. After the 1997 SAARC conference an eminent persons' group was formed to plot the way forward for the association. The group argued that closer economic ties were the key to the future, and proposed that a free-trade area be put in place by 2008 (2010 for the least developed member states), a customs union by 2015 and an economic union by 2020. Political factors weigh against even this extended timetable.

Tensions between the organisation's two largest members, India and Pakistan, have hampered SAARC's progress on wider issues, although it has been effective in providing a forum for meetings of non-governmental organisations and professional groupings. Indian objections to Pakistan's participation in SAARC summits after its military coup in 1999 led to the cancellation of summits in 1999 and 2000. India has also accused Pakistan of refusing to extend SAFTA benefits to it. The difficulty of making multilateral progress against a background of Indo-Pakistani tensions has led to a growing emphasis on bilateral trade links. India has signed bilateral free-trade agreements (FTAs), in effect by-passing SAARC, with Nepal (in 1996) and Sri Lanka (in 2000), and also has an FTA with Bhutan, while Pakistan and Sri Lanka signed an FTA in 2005. Moreover, much of SAARC's work is likely to be superseded by World Trade Organisation regulations.

SAARC's ability to reposition itself as the preferred conduit for bilateral relationships within South Asia is likely to determine the success or otherwise of the association. Its achievements in promoting civil-society links within South Asia contrast strongly with its failure to boost government-level ties�a reflection of the volatile relationship between India and Pakistan.

The South Asian Association for Regional Co-operation

India 51


The East Asia Community (EAC), which consists of the ten members of the Association of South-East Asian Nations (ASEAN) plus China, Japan, South Korea, India, Australia and New Zealand, was inaugurated at the East Asian Summit in mid-December 2005 in the Malaysian capital, Kuala Lumpur. The EAC has been a controversial idea from the time when it was first proposed, in 1991, by the Malaysian prime minister, Mahathir Mohamad. Initial opposition came from the US, which resented the fact that it was to be excluded from membership. However, the concept was revisited at a meeting in 2004 between ASEAN and China, Japan and South Korea (the so-called ASEAN + 3 grouping), when it received the enthusiastic backing of the Chinese premier, Wen Jiabao. Perhaps wary of Chinese ambitions, the other members of ASEAN + 3 supported a wider membership, and the group now also includes India, Australia and New Zealand. The December 2005 meeting marked a shaky start to the EAC, as it was dominated by the ongoing Sino-Japanese feud, Sino-Indian rivalry and a general wariness regarding China�s growing power. Chinese and Korean leaders refused to hold bilateral talks with their Japanese counterparts (owing to continuing animosity over what they see as Japan's failure to atone sufficiently for atrocities committed in those countries before and during the second world war). China also suggested that EAS members be divided into "core" (ASEAN + 3) and "secondary" (India, New Zealand and Australia) categories.

The EAC did reach agreement that ASEAN + 3 would be the core of the new grouping, but it was also decided that EAC meetings would always be hosted by an ASEAN country (China having previously made a bid to hold the second EAC meeting in 2006). India and Australia objected to their secondary status, and were supported in this by Japan. Given the prevailing discord at the December summit, it appears unlikely that the EAC will prove to be the precursor to an Asian version of the EU, and it is thus unlikely to facilitate mutually beneficial economic co-operation. From a political standpoint, the EAC is also unlikely to cause the US concern about a possible loss of its influence in the Asia region, at least for the foreseeable future.

East Asia Community (EAC)

52 India


Appendices

Sources of information

A great number of detailed statistics are available, of variable but often high quality. Three sources stand out: the annual Economic Survey of the Ministry of Finance is an excellent summary of most key economic data; the Reserve Bank of India produces a steady stream of data in its weekly, monthly and annual publications; and the Mumbai-based Centre for Monitoring the Indian Economy (CMIE) produces monthly and annual data in great detail and variety.

For economic data, the daily Business Line is the most comprehensive newspaper, although Business Standard and The Economic Times can be quicker off the mark.

For primary data, the following sources are the most important

Census of India, 2001

Central Statistical Office (CSO), Annual National Accounts Statistics, New Delhi

CSO, Estimates of National Product, Savings and Capital Formation (annual), New Delhi

CSO, Monthly Abstract of Statistics, New Delhi

Directorate General of Commercial Intelligence and Statistics (DGCIS), Trade Statistics of the DGCIS (monthly and annual), Kolkata. The DGCIS also publishes a shorter summary entitled Foreign Trade Statistics of India (Principal Commodities and Countries), which is reasonably detailed

Ministry of Finance, Budget of the Central Government (annual), New Delhi

NSSO, National Sample Survey Organisation, produces regular socio-economic surveys, including household surveys, the primary source for employment data

Reserve Bank of India (RBI, the central bank), Bulletin (monthly), Mumbai

RBI, Report on Currency and Finance (annual), Mumbai

Bank for International Settlements, International Banking and Financial Market Developments (quarterly)

IMF, International Financial Statistics (monthly)

International Institute for Strategic Studies, The Military Balance (annual)

OECD, Geographical Distribution of Financial Flows to Developing Countries (annual)

UN, Monthly Bulletin of Statistics

UN, World Investment Report (annual)

World Bank, World Development Report (annual)

National statistical sources

International statistical sources

India 53


Business World (weekly), Business India and Business Today (both fortnightly) are the chief business magazines

Economic and Political Weekly is a left-wing academic journal with high-quality analysis

India Today and Outlook are weekly magazines that concentrate on politics

M J Akbar, Nehru: The Making of India, Roli Books, New Delhi, 2005

Bimal Jalan, The Future of India, Viking, New Delhi, 2005

Edward Luce, In Spite of the Gods: The Strange Rise of Modern India, Little Brown, London, 2006

Pankaj Mishra (ed), India in Mind, Vintage, New York, 2005

Amartya Sen, The Argumentative Indian: Writings on Indian History, Culture and Identity, Penguin, New Delhi, 2005

David Smith, The Dragon and the Elephant: China and India and the new World Order, Profile, London, 2007

Pavan K Varma, Being Indian, Penguin, New Delhi, 2004

Election Commission of India: www.eci.gov.in/

Ministry of Finance: www.nic.in/finmin/

Reserve Bank of India (central bank): www.rbi.in

The best all-encompassing news site is www.samachar.com

Reference tables Population statistics 2001 2002 2003 2004 2005

Total (m; mid-year) 1,037.8 1,054.3 1,070.8 1,087.1 1,103.4

% change, year on year 1.63 1.58 1.56 1.52 1.50

Source: IMF, International Financial Statistics.

Transport statistics (fiscal years Apr-Mar)

2001/02 2002/03 2003/04 2004/05 2005/06Railways Total length (�000 km) 63.1 63.1 63.2 63.5 63.3 Electrified (�000 km) 15.8 16.3 17.5 17.5 17.9Goods traffic (m tonnes) 492.5 518.7 557.4 602.1 666.4Passengers (m) 5,093 4,971 5,112 5,378 5,725Road Registered vehicles (�000) 58,863 67,007 72,718 n/a n/a Goods vehicles (�000) 3,045 3,492 3,748 n/a n/aSurfaced roads (�000 km) n/a n/a n/a n/a n/a

Select bibliography and websites

54 India


Transport statistics (fiscal years Apr-Mar)

2001/02 2002/03 2003/04 2004/05 2005/06Air Passengers handled at

domestic airports (m) 40.00 43.72 48.78 59.28 73.35Cargo (�000 tonnes) 854 979 1,069 1,280 1,404

Ports Goods traffic (m tonnes) 287.6 313.6 344.8 383.8 n/a

Source: Ministry of Finance, Economic Survey.

Energy statistics (fiscal years Apr-Mar; m tonnes production unless otherwise indicated)

2001/02 2002/03 2003/04 2004/05 2005/06

Coal 327.8 341.3 361.2 382.6 407.0

Lignite 24.8 26.0 28.0 30.3 30.0

Electricity

Installed capacity (�000 mw) 122.1 126.2 131.4 137.5 143.8

Generation (bn kwh) 579.1 596.5 633.3 665.8 697.3

Crude petroleum 32.0 33.0 33.4 34.0 32.2

Petroleum products 100.0 104.1 113.5 116.6 119.8

Natural gas 29.7 31.4 n/a n/a n/a


Government finances (fiscal years Apr-Mar; Rs bn unless otherwise indicated)

2002/03 2003/04 2004/05 2005/06 2006/07

Total revenue 4,142 4,714 4,977 5,061 5,816

Current 2,317 2,639 3,060 3,475 4,233c

Taxa 1,594 1,870 2,248 2,703 3,460c

Non-tax 723 769 812 772 774c

Capital 1,824 2,075 1,917 1,587 1,583c

Recovered loans 342 673 620 106 54c

Borrowings & other liabilities 1,-451 1,233 1,252 1,464 1,523c

Other 32 170 44 16 5c

Total expenditure 4,142 4,714 4,977 5,061 5,816c

Current 3,396 3,621 3,844 4,398 5,068

Interest payments 1,178 1,241 1,269 1,326 1,462c

Subsidies 435 443 420 460 n/ac

Capital 745 1,092 1,133 663 749c

Fiscal deficitb 1,451 1,233 1,252 1,464 1,523c

% of GDP 5.9 4.5 4.0 4.1 3.7

Memorandum items

Revenue deficitd 1,079 983 783 923 834c

Primary deficite 273 8 17 138 61c

a Net of states' share of income tax and union excise duties. b Total expenditure minus total receipts less borrowings and other liabilities. c Based on provisional figures. d Current spending minus revenue. e Fiscal deficit minus interest payments.

Source: Ministry of Finance, Budget at a Glance.

India 55


Gross domestic product (market prices)

2002/03 2003/04 2004/05 2005/06 2006/07

Total (US$ bn) At current prices 507.8 596.1 692.7 805.6 922.9

Total (Rs bn) At current prices 24,580.8 27,654.9 31,266.0 35,671.8 41,257.3

At constant (1999) prices 22,162.6 24,022.5 26,022.4 28,424.8 31,083.6


Per head (Rs) At current prices 23,769 26,346 29,356 33,021 37,666

At constant (1999) prices 21,430 22,885 24,433 26,313 28,378


Source: Central Statistical Office.

Nominal gross domestic product by expenditure (Rs bn at current prices where series are indicated; otherwise % of total)

2002/03 2003/04 2004/05 2005/06 2006/07

Private consumption 15,438.7 17,093.9 18,656.5 20,646.4 23,273.3

62.8 61.8 59.7 57.9 56.4

Government consumption 2,913.2 3,106.4 3,425.4 4,045.1 4,677.0

11.9 11.2 11.0 11.3 11.3

Gross fixed investment 5,843.7 6,871.5 8,227.9 10,007.6 12,165.5

23.8 24.8 26.3 28.1 29.5

Stockbuilding 163.6 228.6 637.9 1,040.4 1,206.2

0.7 0.8 2.0 2.9 2.9

Exports of goods & services 3,555.6 4,078.0 5,690.5 7,251.2 9,478.7

14.5 14.7 18.2 20.3 23.0

Imports of goods & services 3,799.8 4,434.0 6,259.5 8,306.8 10,646.1

15.5 16.0 20.0 23.3 25.8

GDP 24,580.8 27,654.9 31,266.0 35,671.8 41,257.3


Real gross domestic product by expenditure (Rs bn at constant 1999 prices where series are indicated; otherwise % change year on year)

2002/03 2003/04 2004/05 2005/06 2006/07

Private consumption 13,934.4 14,890.4 15,691.3 16,750.3 17,787.0

2.2 6.9 5.4 6.7 6.2

Government consumption 2,580.3 2,644.6 2,787.6 3,060.9 3,337.1

-0.4 2.5 5.4 9.8 9.0

Gross fixed investment 5,201.6 5,880.9 6,573.2 7,578.1 8,686.2

8.7 13.1 11.8 15.3 14.6

Stockbuilding 154.6 150.5 466.3 788.2 868.4

0.6a 0.0a 1.3 a 1.2a 0.3a

Exports of goods & services 3,465.5 3,667.3 4,699.0 4,976.8 5,407.2

21.8 5.8 28.1 5.9 8.6

Imports of goods & services 3,137.8 3,664.5 4,115.4 4,539.2 5,058.7

10.4 16.8 12.3 10.3 11.4

GDP 22,162.6 24,022.5 26,022.4 28,424.8 31,083.6

3.7 8.4 8.3 9.2 9.4

a Change as a percentage of GDP in the previous year.


56 India


Gross domestic product by sector (fiscal years Apr-Mar; Rs bn)

2002/03 2003/04 2004/05 2005/06 2006/07Agriculture 4,726.8 5,336.4 5,366.3 5,950.6 6,560.5Mining & quarrying 627.4 638.8 844.6 904.8 1,021.5

Manufacturing 3,460.3 3,885.5 4,536.0 5,197.5 6,096.0Electricity, gas & water supply 545.3 566.8 606.1 659.8 731.4

Construction 1,351.7 1,568.1 1,856.7 2,221.1 2,592.2Trade, hotels & restaurants 3,472.6 3,989.8 4,643.3 5,404.2 6,322.0Transport, storage & communications 1,803.1 2,112.6 2,502.1 2,845.2 3,364.8

Financial, insurance, real estate & business services 3,321.2 3,756.1 4,131.3 4,644.9 5,401.6Community, social & personal services 3,344.7 3,640.2 4,072.9 4,681.3 5,344.8

GDP at factor cost 22,653.0 25,494.2 28,559.3 32,509.3 37,434.7


Real gross domestic product growth by sector (fiscal years Apr-Mar; % change)

2002/03 2003/04 2004/05 2005/06 2006/07Agriculture -7.2 10.0 0.0 6.0 2.7

Mining & quarrying 8.8 3.1 7.5 3.6 5.1Manufacturing 6.8 6.6 8.7 9.1 12.3Electricity, gas & water supply 4.7 4.8 7.5 5.3 7.4

Construction 7.9 12.0 14.1 14.2 10.7Trade, hotels & restaurants 6.9 10.3 8.4 10.4 13.0

Transport, storage & communications 13.6 15.1 15.2 10.4 13.0Financial, insurance, real estate & business

services 8.0 5.6 8.7 10.9 10.6Community, social & personal services 3.9 5.4 7.9 7.7 7.8

GDP at factor cost 3.8 8.5 7.5 9.0 9.4


Gross domestic savings (fiscal years Apr-Mar; % of GDP)

2001/02 2002/03 2003/04 2004/05 2005/06Household sector 21.8 22.7 23.8 21.6 22.3

Private corporate 3.7 4.2 4.7 7.1 7.8Public sector -2.0 -0.6 1.2 2.4 2.0


Money supply (Rs bn unless otherwise indicated; end-period)

2002 2003 2004 2005 2006

Money (M1) incl others 4,324.9 5,026.0 6,067.7 7,212.9 8,516.2


Quasi-money 11,283.7 12,617.0 14,527.4 16,595.0 20,378.3

Money (M2) 15,608.6 17,643.0 20,595.1 23,807.9 28,894.5



India 57


Interest rates (%; period averages unless otherwise indicated)

2002 2003 2004 2005 2006

Lending interest rate (%) 11.9 11.5 10.9 10.8 11.2

Deposit interest rate (%) 6.9 5.2 5.3 6.0 7.0

Money-market interest rate (%) 5.5 4.5 4.8 5.3 6.0

Sources: IMF, International Financial Statistics; Reserve Bank of India; Economist Intelligence Unit.

Prices and earnings (% change, year on year)

2002 2003 2004 2005 2006

Consumer prices (av) 4.3 3.8 3.8 4.2 6.2

Average nominal wages 6.5 7.0 7.4 7.5 9.0

Average real wages 2.1 3.1 3.5 3.1 2.7

Unit labour costs 2.4 5.9 4.3 4.0 0.2


Agricultural productiona (m tonnes unless otherwise indicated)

2001/02 2002/03 2003/04 2004/05 2005/06

Foodgrains & pulses 226.3 185.9 228.1 211.4 222.0

Rice 93.3 71.8 88.5 83.1 91.8

Wheat 72.8 65.8 72.2 68.6 69.4

Coarse grains (millet, sorghum & maize) 33.4 26.1 37.6 33.5 34.1

Pulses 13.3 11.1 14.9 13.1 13.1

Oilseedsb 20.6 14.8 25.2 24.4 27.7

Groundnut 7.0 4.1 8.1 6.8 7.9

Beverages

Teac 847.4 846.0 850.5 830.7 930.9

Coffeed 3.0 2.8 2.7 2.8 2.7

Fibres

Cotton (lint; m 170-kg bales)d 10.0 8.6 13.7 16.4 19.6

Jute & mesta (m 180-kg bales) 11.7 11.3 11.2 10.3 10.7

Other products

Sugarcane 297.2 287.4 233.9 237.1 278.4

Rubber ('000 tonnes)d 631 649 711 749

Potatoes 23.9 23.3 23.1 23.6 n/a

a Crop years (July-June) unless otherwise indicated. b October-September. c Calendar years; m kg. d Fiscal years (April-March).

Sources: Ministry of Agriculture, Statistics at a Glance; Ministry of Finance, Economic Survey.

58 India


Mineral production (fiscal years Apr-Mar; m tonnes)

2001/02 2002/03 2003/04 2004/05 2005/06

Coal & lignite 352.6 367.2 389.3 413.0 437.1

Crude oil

Domestic production 32.0 33.0 33.4 33.9 32.2

Imports 78.7 82.0 90.4 95.9 99.4

Refinery throughput 107.3 112.6 121.8 127.1 130.1

Petroleum productsa

Domestic production 100.0 104.1 113.5 118.2 119.8

Imports (net) -3.1 -3.6 -6.7 -9.4 -9.8

a Some disparity is likely owing to refinery consumption and stock changes.


Industrial production (fiscal years Apr-Mar)

2001/02 2002/03 2003/04 2004/05 2005/06

Finished steel (m tonnes) 31.1 34.5 36.9 39.3 44.5

Aluminium (virgin metal; �000 tonnes) 552.1 467.0 601.2 516.4 560.5

Copper (blister; �000 tonnes) n/a n/a n/a n/a n/a

Motor vehicles (�000 units)a 765 935 1,283 1,565 1,702

Motorcycles & mopeds (�000 units) 3,932 5,088 5,625 6,455 7,602

Bicycles (�000 units) 11,899 11,595 12,341 n/a 8,868

Power-driven pumps (�000 units) 472 584 663 648 718

a All types; includes buses, trucks and tempos, and three- and four-wheelers.


Stockmarket indicators (Bombay Stock Exchange; end-period)

2002 2003 2004 2005 2006BSE SENSEXa (1978/79=100) 3,377 5,838 6,602 9,398 13,787Change in value of stockmarket index (%) 3.5 72.8 13.1 42.3 46.7

No. of listed companies 5,650 5,644 4,730 4,763 4,796Market capitalisation (US$ bn) 131 279 383 545 812

a Leading index of the Bombay Stock Exchange.

Sources: Standard & Poor's, Emerging Stock Market Review; Bombay Stock Exchange.

India 59


Main composition of trade (US$ m; fob-cif)

2001/02 2002/03 2003/04 2004/05 2005/06

Exports Engineering goods 6,958 9,033 12,405 17,348 21,547

Textiles & clothing 9,665 11,617 12,791 13,555 16,039

Gems & jewellery 7,306 9,030 10,537 13,762 15,547

Petroleum products 2,119 2,577 3,586 6,989 11,515

Agricultural & allied products 5,901 6,710 7,533 8,475 10,199

Total exports incl others 43,827 52,719 63,843 83,535 102,725

Imports Petroleum products 14,000 17,640 50,569 29,844 43,963

Electronic goods (incl software) 3,999 6,093 7,889 10,659 14,087

Gold & silver 4,582 4,288 6,856 11,150 11,189

Precious & semi-precious stones 4,623 6,063 7,129 9,423 9,141

Machinery (non-electrical/electronic) 2,971 3,566 4,744 6,818 9,894

Total imports incl others 51,413 61,412 78,149 111,517 142,416

Source: Reserve Bank of India, Annual Report.

Main trading partners (% of total)

2001 2002 2003 2004 2005

Exports fob to: US 21.3 19.6 17.8 15.4 17.6

China 3.5 3.3 4.2 5.0 8.7

UAE 3.8 5.9 7.3 7.9 7.7

UK 5.6 4.6 4.5 4.1 4.5

Imports cif from: China 4.1 4.2 4.8 5.4 6.9

US 8.1 6.7 6.3 5.4 6.1

Belgium 5.8 5.7 5.0 4.0 4.9

Singapore 5.9 2.3 2.5 2.2 4.6

Source: IMF, Direction of Trade Statistics.

60 India


Balance of payments, IMF series (US$ m)

2002 2003 2004 2005 2006

Goods: exports fob 51,153 60,895 77,939 102,328 121,504

Goods: imports fob -60,723 -75,537 -105,975 -149,200 -185,287

Trade balance -9,570 -14,642 -28,036 -46,872 -63,783

Services: credit 19,483 23,903 38,282 55,610 75,200

Services: debit -15,036 -17,425 -25,206 -33,352 -43,814

Income: credit 3,189 3,491 4,690 5,071 7,742

Income: debit -7,099 -8,386 -8,742 -11,501 -11,641

Current transfers: credit 16,792 22,402 20,615 24,112 27,630

Current transfers: debit -698 -570 -822 -878 -1,340

Current-account balance 7,061 8,773 781 -7,810 -10,006

Direct investment in India 5,627 4,323 5,771 6,663 16,888

Direct investment abroad -1,679 -1,879 -2,179 -2,487 -9,029

Inward portfolio investment (incl bonds) 1,064 8,216 9,054 12,151 9,511

Outward portfolio investment 0 0 0 0 0

Other investment assets 3,699 -3,258 � � �

Other investment liabilities 3,213 6,574 � � �

Financial balance 11,924 13,976 12,646 16,327 17,370

Net errors & omissions -190 470 591 738 1,180

Overall balance 18,859 25,664 23,601 14,460 29,372

Financing (� indicates inflow) Movement of reserves -22,178 -31,883 -28,140 -5,625 -40,079

Use of IMF credit & loans 0 0 0 0 0


Balance of payments, national series (US$ m)

2001/02 2002/03 2003/04 2004/05 2005/06Merchandise exports fob 44,703 53,774 66,285 85,206 105,152Merchandise imports cif -56,277 -64,464 -80,003 -118,908 -156,993

Trade balance -11,574 -10,690 -13,718 -31,232 -51,841Invisible inflows 36,737 41,925 53,462 69,533 92,294Invisible outflows -21,763 -24,890 -25,661 -38,301 -49,639

Invisibles balance 14,974 17,035 27,801 31,232 42,665Current�account balance 3,400 6,345 14,083 -2,470 -9,186Foreign investment 6,789 8,151 13,744 13,0000 17,224Net foreign aid 1,117 -3,128 -2,858 1,923 1,682

Commercial borrowing -1,585 -1,692 -2,925 5,194 2,723Short-term borrowing -793 970 1,419 3,792 1,708Banking 2,864 10,425 6,033 3,874 1,373

Rupee debt service -519 -474 -376 -417 -572Other capital 781 578 1,699 656 -738

Capital account balance 8,551 10,840 16,736 28,022 23,400Net errors & omissions -194 -200 602 607 838Overall balance 11,757 16,985 31,421 26,159 15,052Change in reserves (� indicates increase) -11,757 -16,985 -31,421 -26,159 -15,052

Source: Reserve Bank of India.

India 61


External debt, World Bank series (US$ m unless otherwise indicated; debt stocks as at year-end)

2001 2002 2003 2004 2005

Public medium- & long-term 78,818 82,257 84,640 89,004 80,281

Private medium- & long-term 16,924 18,670 23,175 27,847 34,054

Total medium- & long-term debt 95,743 100,927 107,815 116,852 114,335

Official creditors 49,796 49,804 50,691 51,605 50,980

Bilateral 18,742 20,307 20,972 19,979 18,583

Multilateral 31,054 29,497 29,719 31,625 32,397

Private creditors 45,947 51,123 57,124 65,247 63,356

Short-term debt 2,742 4,093 5,040 7,524 8,788

Interest arrears 0 0 0 0 0

Use of IMF credit 0 0 0 0 0

Total external debt 98,485 105,020 112,855 124,376 123,123

Principal repayments 7,312 11,258 14,653 15,874 17,809

Interest payments 4,408 4,236 5,997 3,376 6,526

Short-term debt 112 146 57 189 326

Total debt service 11,721 15,494 20,650 19,250 24,335

Ratios (%) Total external debt/GDP 20.6 20.7 18.9 18.0 15.3

Debt-service ratio, paida 14.7 17.3 18.8 13.7 13.0

Note. Long-term debt is defined as having original maturity of more than one year.

a Debt service as a percentage of earnings from exports of goods and services.

Source: World Bank, Global Development Finance.

Foreign reserves (US$ m; end-period)

2002 2003 2004 2005 2006

Total reserves incl gold 70,378 102,261 130,401 136,026 176,105

Total international reserves excl gold 67,666 98,938 126,593 131,924 170,738

Gold, national valuation 2,712 3,323 3,808 4,102 5,367


Exchange rates (Rs per unit of currency unless otherwise indicated; annual averages)

2002 2003 2004 2005 2006

US$ 48.6 46.6 43.1 44.1 45.3

£ 72.9 76.1 78.8 80.2 83.4

� 45.9 52.7 53.5 54.9 56.9

Bt 1.13 1.12 1.07 1.10 1.20

Rmb 5.87 5.63 5.20 5.38 5.68

¥ 0.388 0.402 0.398 0.400 0.390


Editors: Anjalika Bardalai (editor); Gerard Walsh (consulting editor) Editorial closing date: June 18th 2007 All queries: Tel: (44.20) 7576 8000 E-mail: [email protected]

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