Current Industrial Performance

The performance of the industrial sector during 1998-99 had not been impressive. The industrial growth during 1996-97 and 1997-98 was 5.6 per cent and 6.6 per cent respectively as per the index of industrial Production (Base 1993-94 = 100). The growth during the period April-December 1998 is 3.5 per cent as compared to 6.7 per cent during April-December 1997.

Sectors that recorded a growth of over 10 per cent	Per cent
Metal products and parts except machinery and equipment	22.9
Transport equipments and parts	20. 8
Paper and paper products	16.0
Beverages, tobacco and related products	13.8
Rubber, plastic, petroleum and coal products	10.6

Positive growth has also been recorded in electricity, food products, basic chemicals and chemical products, leather and fur products, non-metallic mineral products and wool, silk and non-made fibre textiles.

Production has been negative in respect of the following items:

Performance of SSI Sector

The Current year witnessed continuous growth in the Small Scale and Khadi and village industries sector. The number of small-scale units increased to 30 lakh. The overall production in the small-sector was continuously maintaining a higher growth rate compared to the overall industrial growth. Employment in this sector has also recorded a continuous increase. In 1997-98, the overall employment reached the level of 16.7 million persons. The contribution of the SSI sector in exports during 1997-98 has also been significant i.e. Rs.43946 crore as compared to Rs.39249 crore during 1996-97. The growth of small-scale industries has been one of the most significant features of planned economic development. The small-scale sector has grown phenomenally during the last three decades and the sector has played and has the potential to play a vital role in the fulfillment of our socio-economic objectives.

Current Industrial Performance

The performance of the industrial sector during the current year 1998-99 has not been impressive. The industrial growth during 1996-97 and 1997-98 was 5.6 per cent and 6.6 per cent respectively as per the Index of Industrial Production (Base 1993-94 = 100). The growth during the period April-December 1998 was 3.5 per cent as compared to 6.7 per cent during April-December 1997. The analysis of the performance shows that during the nine months of the current year 1998-99 (Apr-Dec.), under performance is confined to some sectors.

Positive growth has also been recorded in electricity, food products, basic chemicals & chemical products, leather and Fur products, non-metallic mineral products and wool, silk and man-made fibre textiles.

The slow down in industrial growth can be attributed to both the domestic and external factors. Domestic factors include weak demand on account of inadequate investment in infrastructure sectors such as power, ports and transport, and slow down in general investment mainly due to subdued capital market conditions and partly due to corporate restructuring in some industries in order to become internationally competitive. The demand has been slackening for basic goods like steel, cement, commercial vehicles, capital goods as well as consumer durables. This has resulted in cut back of production by the industries and build-up of inventories. On the external side, the export growth has been negative which has been aggravated by fall in world exports. Export growth declined to 2.88 per cent during April-December 1998, following significant deceleration from 21.4 per cent in 1995-96 to 4 per cent in 1996-97 and just

Index number of wholesale prices The wholesale price index (WPI) numbers are complied and brought out by the Office of the Economic Adviser on weekly basis. The current series of WPI (1981-82=100) has been in vogue since July 1989. Based on the weekly WPI, monthly and annual WPI are also compiled. The Office of the Economic Adviser also publishes the monthly Bulletin of Index Numbers of Wholesale Prices in India (1981- 82=100). In 1998-99, the WPI (provisional) for the week-ending 19 December 98 stood at 355.6 resulting in an annual inflation rate of 6.2 per cent on point to point basis

Investment climate

The investment climate continued to be subdued in 1998-99. The retail investor did not show any inclination for new public issue of equity, forcing corporates to resort to the private placement route. This method of raising resources is gaining importance, because it is both cost and time effective, offers flexibility in structuring, does not require detailed compliance of formalities and need not address retail investors. The aggregate new capital issues floated by Government Companies, Non-Government Public Limited Companies, Public Sector Undertakings and Banks and Financial Institutions through prospectus and rights was Rs.11860 crore in 1997-98 showing a decline of 28.4 per cent compared to 1996-97. The banks and financial institutions also found it difficult to access the capital market through the public and rights issue. The amount raised by the financial intermediaries through this route decreased by 53.7 per cent to Rs.1632 crore in 1997-98 from Rs.3579 crore mobilised in the previous year.

In 1997-98, the primary market remained subdued and overall capital raised by new issues is reported to be around Rs.4568 crore. There has been a slight improvement in April-October, 1998 as compared to the corresponding period of lost year. The capital raised from the capitol market by the corporate sector was Rs.2689 crore as compared to Rs.2264 crore in the previous year. The capital private placement has emerged as the preferred mode of raising resources by the corporate sector. It recorded on increase of 176.83 percent in 1997-98 to reach a level of Rs.27602 crore. The resources raised through private placement accounted for 68.11 per cent of total resources raised, as against 31.02 per cent in 1996-97. Contrary to the earlier years, the banks and the financial institutions raised a major portion of their resources through private placements. In 1997-98, the financial intermediaries raised nearly Rs.6603 crore through this mode as compared to only Rs.1925 crore in 1996-97. In fact, nearly 80 per cent of the resources raised by the financial intermediaries was through the private placements.

The number of FIIs registered with the SEBI/Reserve Bank increased to 496 with a cumulative investment of $ 9283.6 million as on 31 March 1998. However, the net investment of the Flls in equity and debt instruments declined during 1997-98 to $ 1649.3 million as compared to $ 2432 million in 1996-97. The subdued conditions have continued in 1998. During January-September, 1998 there was a net outflow of $225.2 million.

Prospects for FDI in India

The advantages of the Indian destination rest on strong fundamentals.

Advantage India A large and growing market World-class scientific, technical and managerial manpower Abundance of labour and natural resources Independent judiciary

This is now recognised by a number of global investors and they have either already established a base in India or are in the process of doing so. Ongoing initiatives such as simplifications of legislation, delicencing, setting up regulatory authorities such as Central/State Electricity Regulatory Commissions, etc. will provide the necessary impetus to accommodate enlarged FDI inflows in future. In the final analysis, large volume of inflows of FDI would depend on domestic economic conditions and the FDI policy, world economic trends, and strategies of global investors. Government, on its part is fully committed to creating strong economic fundamentals and an increasingly proactive FDI policy regime.

Rationale for FDI

Foreign Direct Investment (FDI) is essential for bridging the Investment-Saving gap to achieve sustained growth. The current level of domestic saving, which is around 26 per cent of GDP, can at best support a GDP growth of 6 per cent. Given an incremental capital output ratio (ICOR) of 4.3, sustained growth at 6 to 7 per cent per annum will require an average investment rate of 27 to 32 per cent. Therefore, domestic saving has not only to be augmented but also supplemented with external resources. FDI is the most desirable route for bridging this gap, as it is non-debt creating as also not prone to quick reversal unlike portfolio investment. FDl’s importance also lies in the fact that assistance from multi-lateral and bilateral sources is either stagnant or declining in comparison to private capital flows. Further, besides the long-term additional capital it brings in, FDI also facilitates technology upgradation and introduction of modern production and management practices

FDI Policy

The Government policy on FDI since 1991 has been aimed at encouraging foreign investment, particularly in core and infrastructure sectors. While foreign investment is welcomed in wide-ranging activities, simultaneous measures have also been introduced to ensure a level playing field to the domestic industry and also to protect national interests. These measures, which have been imposed on the basis of sector-specific: sensitivities, inter alia include conditions such as dividend balancing, foreign exchange neutrality, export obligation, cap on foreign equity, etc. Recent policy initiatives taken by the present Government inter alia include simplification of foreign investment procedures; allowing foreign investment in new activities such as Global Mobile Personal Communication Systems. FDI upto 100 per cent in power sector under automatic route; the same facility has now been extended to roads & highways, ports & harbours, vehicular tunnels and vehicular bridges etc.

FDI Performance

The cumulative approval of FDI since 1991 adds upto approximately US $ 46 billion (excluding GDRs) and the total inflows upto December 1998 are nearly US $ 13.30 billion (excluding GDRs) giving a success rate of around 29 per cent. To bridge the investment-saving gap (of 3 to 4 percent) in order to achieve a sustained growth of 6 to 7 percent, FDI of the order of US $ 10 billion or more per annum is required. It is in this light that FDI is invited as a measure to supplement domestic efforts, especially because assistance from multi-lateral and bilateral sources is either stagnant or declining in comparison to private capital flows. Even in the private capital flows, the short-term foreign capital flows are prone to quick reversal in terms of investors' perception on how the domestic economy is shaping. Since exports constitute 30.7 per cent of total manufacturing output in the country, the decline in exports has adversely affected industrial production.

The cumulative approval of FDI since 1991 adds up to approximately US$48 billion (excluding GDRs) and the total inflows up to December, 1998 are nearly US$ 13.58 billion (excluding GDRs) giving a success rate of around 28.29 per cent, which, if adjusted to contingency and mutually exclusive approvals in the power, telecom and LNG sectors takes the success rate to nearly 36 per cent. Essentially, low gestation projects such as electrical and electronic equipment, computer software, services and processed foods have registered speedy inflows whereas in the case of capital intensive long gestation projects the inflows have been slower rate to nearly 36 per cent. During 1998, FDI inflow (excluding GDRs] has been of the order of Rs.132692.1 million against Rs.129892.7 million during 1997. Thus, FDI inflows have not shown any negative trend notwithstanding economic sanctions.

In terms of origin of investment approvals, since 1991, USA accounts for the highest share followed by Mauritius, UK, Japan and Germany. During the current year, major approvals in terms of investment pertain to USA followed by Belgium, UK, Mauritius and Australia. In terms of number of approvals this year, the ranking is USA followed by Germany, U.K., Japan and Mauritius. In terms of sectoral distribution of approvals, since 1991, power sector accounts for 21 per cent Followed by telecommunications (17 per cent) oil refinery (13 per cent), transportation (6 per cent), chemicals other than fertilizers (6 per cent) and services sector (5 per cent].

Major share of investment approved

(upto December 1998)

Sector	Percent
Oil refineries	28
Power	14
Metallurgy	8
Telecommunications	8
Chemicals	7

FDI Inflows (country-wise) – Since inception

Country	Percent
Mauritius	l9.9
USA	12.3
Japan	4.4
Germany	4.1
UK	3.5

During the current year also Mauritius ranks first in inflows accounting for 22 per cent of total inflows followed by USA (10.2 per cent), Japan (5.9 per cent), Germany (4.7 per cent) and South Korea (3.3 per cent). During 1998, telecommunications (14 per cent) accounted for major inflows followed by transportation (11 per cent), chemicals other than fertilizers (8 per cent) and services (6 percent).

NRI Investment

The general policy and facilities for foreign direct investment as available to foreign companies are fully applicable to NRIs as well. In addition, Government has extended some concessions specially for NRIs and OCBs, which include investment in the real estate sector up to 100 per cent. Proposals envisaging NRI investment of Rs.74,610 million (excluding approvals granted under RBI Schemes) have been approved by the Government from 1991 to December, 1998. NRI inflows have been of the order of Rs.80036 million, including NRI schemes approved by RBI, which gives a fairly high success rate and shows the confidence of NRIs in our strong economic fundamentals.

State-wise FDI approvals

Maharashtra, Tamil Nadu, Karnataka, Delhi, Andhra Pradesh, Gujarat, Haryana, Uttar Pradesh and West Bengal account for major portion of FDI investments approved so far.

FDI inflows in India have shown a continuous upward trend (53 per cent growth in 1997 as compared to 1996) whereas FDI inflows have more or less remained stagnant or have marginally fallen during the last 2 - 3 years in countries such as Malaysia, Republic of Korea and Indonesia. In Vietnam FDI inflows have registered a steep decline in 1997(46 per cent). FDI inflows in Singapore have increased only marginally in 1997(6 per cent). Though, there has been a perceptible increase in FDI inflows in Thailand in 1997, it is probably on account of the steep currency leading to lower acquisition costs. China is the only country, apart from India, where the FDI inflows have grown continuously.