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World Bank blames political chaos for economic slowdown

Political uncertainty in India has begun to exact its economic price, the first glaring manifestation of which is the decline in the country's stock market, says a new World Bank report.

The report, 'Global Development Finance 1998,' released in Washington last night, spoke of an identical trend in neighbouring Pakistan.

In November, international equity placements in South Asia fell by half, as issues from India dropped from 1.3 billion dollars in 1996 to 600 million dollars in 1997.

It attributes this phenomenon in India to the sudden collapse of the minority Gujral ministry in New Delhi. What affected Pakistan, the report points out, was the judiciary crisis which pushed the country's major democratic institutions into a confrontation.

The report says that GDP growth in South Asia, where India is a major economy, declined from 6.4 per cent in 1996 to 5.7 per cent in 1997 ''because of stagnation in India's industrial sector and a slowdown in Pakistan's agricultural output.''

It notes the increase in the region's debt external long-term debt of South Asian countries increased to 139 billion dollars in 1997, up slightly from 1996 due "to disbursements from official creditors." India's total external debt touched 89.2 billion dollar mark in 1996, the year for which the figure is given in the report.

Despite recent increase in private flows, particularly to India, official creditors continued to account for most long-term debt (75 per cent in 1997), the share of multilateral debt in total official debt has increased in recent years, from 44 per cent in 1990 to 55 per cent in 1997.

The region accounted for 13 per cent of developing countries official debt last year. It says net private flows to South Asia totalled 9 billion in 1997, about the same as in 1996 but up from five billion dollars average from 1990-95.

It says private non-guaranteed debt flows were the main source of the increase, rising from one billion dollars in 1996 to $82.5 billion in 1997. India received $10 billion dollars in net private flows, up from $6 billion 1996, and Pakistan a little less than two billion dollars, while some of the region's smaller countries had negative private flows. As a result, it has caused only a modest expansion in credit.

The World Bank report says capital controls are being relaxed in India. In particular, authorities have raised ceilings on medium and long-term external commercial burrowing. But restrictions on banks' and corporations' short-term borrowing have been maintained.

As a result, Indian banks' short-term external debt has remained small as has the private sector's uncovered foreign exchange position. In general, South Asia has not experienced the rapid credit expansion and currency and maturity mismatches that contributed to the crisis in East Asia, it adds.

Tracing the progress of privatisation in India, which has focussed on the sale of a minority equity shares in public companies, it says there were two quasi-divestments during 1996.

The first, a $125 million GDR issue by the Steel Authority of India, the largest listed company on the Bombay Stock Exchange, met with a muted response from the investors. It was the first time a state-owned enterprise had been listed on the London Stock Exchange. The government still controls about 85 per cent of the company's equity.

The second, the State Bank of India's $370 million deal through a Rule 144A placement, was the largest equity offering ever from India and the first Indian listing on the New York Stock Exchange.

The divestment of Videsh Sanchar Nigam Limited, the state-owned telecommunication company, has been postponed several times but finally came to the market in the first quarter of 1997. The issue raised 527 million dollars making it India's largest deal to date.

UNI