India, the world’s largest democracy, possesses tremendous potential for economic growth. Recently, the U.S. government designated India as one of the 10 “Big Emerging Markets” and a priority target for its trade and investment promotion efforts. Private sector interest in India has increased steadily since the nation commenced economic liberalization in 1991.
India is the second most populous country in the world and has the second largest gross domestic product (GDP) among emerging economies based on purchasing power parity. It is the seventh largest country in the world, with a total geographical area of 3.29 million square kilometers. Its estimated population of 1 billion (as of November 1999) is growing at the rate of 1.71 percent each year. One of the often-cited key advantages associated with the Indian market is the country’s growing middle-class population, which has been estimated at between 50 million and 250 million. This population seeks better economic opportunity and environmental conditions as it contributes significantly to the nation’s tax revenues.
The Indian government embarked on an extensive program of fiscal and economic reforms in 1991, which was a turning point in gradually transforming the Indian economy from a highly regulated one to a transparent and market-oriented economy with increasing emphasis on private sector participation. Today, there is a strong political consensus about strengthening and expanding the ongoing process of economic reforms. These wide-ranging reforms include abolition of industrial licensing except for strategic industries; full convertibility of the rupee; moderate to high reductions of external tariffs; streamlining industrial approval procedures; easing of foreign direct investment restrictions in most industries; financial and insurance sector reforms; and improved commitment to upgrade infrastructure. These reforms have contributed significantly to the opportunities for importing environmental technologies and services. The new government’s commitment to launch the second phase of reforms should accelerate economic growth and foreign investments. The following are key indicators of the Indian economy since 1991.
Gross Domestic Product
Economic growth during the eighth Five-Year Plan period (1992–1997) averaged 6.8 percent per year. GDP grew 5.0 percent and 5.8 percent in Indian fiscal years 1997-1998 and 1998-1999, respectively. These GDP growth rates were better than expected given the global recession and Southeast Asian financial crisis. The 1998 World Bank Country Report highlighted the underlying strengths of the Indian economy during Indian fiscal year 1997-98, which included sustained foreign direct investment; low current account deficit (1.6 percent of GDP); an increase in foreign currency reserves to more than $26 billion; and a low inflation rate as measured by the wholesale price index of 4.8 percent. The economy showed continued recovery trends during the first two quarters of Indian fiscal year 1999-2000. The Reserve Bank of India (RBI) projects real GDP growth in the range of 6.0 percent to 6.5 percent in Indian fiscal year 1999-2000. The latter bodes well for good growth in the market for environmental products and services in India.
Annual inflation on the basis of the wholesale price index declined consistently from 13.6 percent in Indian fiscal year 1991-1992 to 6.9 percent in Indian fiscal year 1998-1999. In July 1999, annual inflation fell to 1.2 percent (a 20-year low) against the Reserve Bank of India target of 6.0 percent to 7.0 percent for Indian fiscal year 1999-2000.
A December 1998 government of India status paper places India’s external debt at $95.7 billion. About 45 percent ($43 billion) of the external debt is related to medium- and long-term investments. The World Bank rates India as a moderately indebted country with an external debt-to-GDP ratio of 23 percent (down from 38 percent in 1992) and a debt-service ratio of 19.4 percent (down from 30 percent in 1992). India has never defaulted on external debt payments.
Final and official balance-of-payments data for Indian fiscal year 1998-1999 are not yet available. However, the current account deficit for Indian fiscal year 1998-1999 is 1.0 percent of GDP, versus 1.3 percent of GDP for Indian fiscal year 1997-1998. The Centre for Monitoring the Indian Economy (CMIE) reported the trade deficit for Indian fiscal year 1998-1999 at $13.2 billion and the current account deficit at $4 billion (about 1.0 percent of GDP).
Foreign private sector investment in India has grown steadily since 1991. Foreign direct investment inflows have risen from a meager $0.13 billion in 1991, to $3.56 billion in 1997. Foreign direct investment inflows slowed to $2.4 billion in 1998.
Export growth remained buoyant until Indian fiscal year 1995-1996, but slowed during Indian fiscal years 1996-1997 and 1997-1998. This decline is attributable to a slowdown in world trade, a fall in agricultural production, and significant movement in cross-currency exchange rates. India’s exports grew to $33.5 billion in Indian fiscal year 1998-1999. Also, India’s imports increased to $42 billion in Indian fiscal year 1998-1999. The United States is India’s largest trade partner.
India has a well-diversified industrial base covering the following sectors: infrastructure, heavy machinery, basic metals, mining, oil and gas, petroleum and petrochemicals, pharmaceuticals, chemicals, automobiles, food processing, processing of agricultural products, fertilizer, pulp and paper, textiles, and computer software. Industry’s share in GDP is about 30.7 percent. The industrial growth rate accelerated to 12.1 percent in Indian fiscal year 1995-1996 from 2.3 percent in Indian fiscal year 1992-1993, and then slowed during Indian fiscal years 1996-1997 and 1997-1998 to 7.1 percent and 4.6 percent, respectively. The slowdown was caused by lower growth rates in electricity production and the mining sector. The Reserve Bank of India predicts 7.0 percent industrial growth in Indian fiscal year 1999-2000.
A distinct feature of India’s industrial base is the presence of numerous (3 million) small and medium-sized enterprises (SMEs). They are estimated to account for about 40 percent of the national income and 60 percent of the total industrial pollution load. These small-scale undertakings can manufacture any product, including those identified as exclusively reserved for manufacturing in the small-scale sector. Small-scale undertakings are not permitted to receive more than 24 percent of their paid-up (equity) capital from foreign or domestic industrial undertakings.
India ranks among the world leaders in the production of iron ore and bauxite, and produces significant amounts of manganese, mica, dolomite, copper, petroleum, chromium, lead, limestone, phosphate rock, zinc, gold, and silver. Annual production figures in 1998 included iron ore (77 million metric tons), coal (302 million tons), natural gas (26 billion cubic meters), and crude petroleum (32 million tons).
About 73 percent of India’s electricity is produced in thermal facilities (those using coal or petroleum products), 25 percent by hydroelectric facilities, and 2 percent by nine nuclear power plants. The total installed capacity at the end of 1998 was 89,100 megawatts. The ninth Five-Year Plan period (1997-2001) proposes to add 40,226 megawatt capacity by the end of 2001. The power sector is open for private sector participation, and the Indian government recently permitted foreign direct investment up to 74 percent on an automatic basis for electric generation, transmission, construction, and maintenance. The expected growth of this sector promises to build considerable future demand in India’s environmental market. Specifically, the demand for clean coal technologies, air-pollution control equipment, fly ash management, and environmental monitoring/analysis equipment and services should increase as the power sector grows.
There is increased recognition that adequate infrastructure facilities in the urban sectors are absolutely necessary to achieve the 7 percent to 8 percent growth rate targeted for India’s economy. The infrastructure sector is gradually being opened to private participation. Central and state governments have taken positive initiatives to promote public-private partnerships in water supply, sanitation, solid waste management, transportation, and township development. Publicly owned corporations are also being given greater operational autonomy. The central government raised $1.54 billion through divestiture of equity in public sector undertakings during Indian fiscal year 1998-1999. The 1996 Indian government expert group on the commercialization of infrastructure projects recommended an increase in total investment in the infrastructure sector from the current level of 5.5 percent of GDP to about 7 percent by Indian fiscal year 2000-2001 and to 8 percent by Indian fiscal year 2005-2006. In absolute terms, this implies that annual investment should increase from the current level of approximately $17 billion to about $30 billion by 2000-2001 and to $50 billion by 2005-2006 to build and upgrade India’s infrastructure.
Environmental Economic Profile
India’s population growth and pace of economic development have caused serious degradation in the quality of the environment. In 1996, the World Bank estimated the annual cost of environmental degradation to be $9.7 billion when measured in terms of health and productivity impacts. That corresponds to 3.2 percent of India’s 1997-1998 GDP.
India’s population, which was 342 million in 1947, increased to 1 billion by 1999. This population growth (1.71 percent annual growth) has put enormous pressure on the country’s resource base. Substantial growth in the industrial sector has occurred since Indian independence in 1947. Industries that are dependent on natural resources and, in turn, pollute more, have grown rapidly. Three million SMEs form the backbone of India’s economy and contribute about 40 percent of national income. On the pollution front, however, SMEs account for about 60 percent of all industrial pollution.
According to 1997 estimates, forest cover in India is 19.27 percent of the country’s total geographical area as opposed to the desired target of 33 percent as stipulated in the National Forest Policy of 1988. The average annual availability of water per capita has declined from 5,236 cubic meters in 1951 to 2,464 cubic meters at present. It is estimated that by the year 2017, India will be a water-stressed country, because the per capita water availability will be as low as 1,600 cubic meters. Ground water exploitation is increasing rapidly (both for qualitative and quantitative reasons), resulting in declines in the water table in most places. Note that the number of tube wells has increased from 0.3 million in 1967 to 6 million in 1997. Water pollution is India’s worst environmental problem. It is estimated that 70 percent of India’s surface water resources are severely polluted in terms of biochemical oxygen demand (BOD) and total coliform count. According to India’s 1992 Policy Statement on the Abatement of Pollution, municipal sources account for about three-fourths of total wastewater generation in volume and almost one-half of the total pollution load in the country. Although the quantity of wastewater generation from industrial sources is less, its severity is greater because of the discharge of toxic and other harmful pollutants, especially heavy metals. This discharge is also producing increased evidences of ground water pollution in industrial and urban areas.
Ambient air quality data in India’s major cities indicate that ambient levels of suspended particulate matter considerably exceed those prescribed by the World Health Organization (WHO) and by Indian national standards. Although sulfur dioxide and nitrogen oxide levels in the major cities fall below the prescribed standards, they are becoming a matter of increasing concern because they are rising. Urban air pollution is worsening because of the upward trends in power consumption, industrialization, vehicle use, and refuse burning.
The projected suspended particulate matter emission from industrial and thermal power plants (total installed thermal power capacity in 1998 was 64,150 megawatts) in India in the year 2000 are estimated to be approximately 20 million tons and 60 million tons per year, respectively. When vehicular emissions are added, it is understandable why the air quality of Indian cities and industrial clusters has deteriorated dramatically. Note that automobile production reached 4.6 million units in Indian fiscal year 1997-1998.
India is the world’s sixth largest (and second fastest growing) source of greenhouse gas emissions. The per capita carbon dioxide emission in 1996 was estimated at 1.1 metric tons. Fuel combustion accounts for 66 percent of the total carbon dioxide emission, followed by land use change and forestry, cement manufacture, and vehicular emissions.
It is estimated that the annual generation of non-hazardous and hazardous waste by industry amounts to 90 million tons and 9.3 million tons, respectively, as opposed to approximately 22 million tons of municipal solid waste generated by households each year. The uncontrolled dumping of wastes in industrial and urban areas has caused increased health and environmental risks.
The rapid increase in India’s urbanization has placed tremendous pressure on most civic services: water supply, water and wastewater treatment, air quality, and solid waste management. Urban infrastructure is deficient in coverage and quality. India’s 1997 urban population was estimated at 262 million, or 27 percent of the national population.
The growth in the demand for environmental infrastructure (water supply, water and wastewater treatment, and solid waste management) is directly linked to the growth of urbanization in India. The 1991 Census shows that there are 23 metro cities (cities with populations greater than 1 million) that account for 8.4 percent of the country’s total population, and that number is expected to increase to 40 by 2001.