RESTRICTED
WORLD TRADE WT/BOP/16
8January 1997
ORGANIZATION(97-0029)
Committee onBalance ofPayments Restrictions
1997 CONSULTATIONS WITH INDIA
UNDER ARTICLE XVIII:12(b) OFTHE GATT 1994
AND THE RELATED UNDERSTANDING
Basic Document Supplied byIndia
MACROECONOMIC OVERVIEW
1. Thereforms undertaken overthelastfiveandahalfyears haveledtoarevival ofeconomic
growth, expansion ofproductive employment, areduction ofpoverty, increase inexports andamarked
decline ininflation. Overall economic growth ofGDPatfactor cost,which was0.8percentin1991-92
recovered toreach 5.1percentin1992-93. Itisestimated tohaveaccelerated further to6.6percent
in1995-96. (Annex I).
2. Thegrowthrecoveryhasbeenaccompaniedbymuchlowercurrentaccountdeficitsinthebalance
ofpayments, adropininflation below thehistorical average ofaround 8percent,ariseinthedomestic
saving ratetoalevelof24.4percentofGDP in1995-96, andareduction inthegross primary fiscal
deficit toitslowest levelindecades. These achievements canbetraced directly tothefarreaching
reforms initiated simultaneously withtheintroduction offiscal stabilisation measures since 1991-92.
3. Reforms oftheexternal sector anditseffect onthebalance ofpayments front haveplayed a
keyroleintheturnaround ingrowth ofGDP, employment andsocial indicators. After adecline in
theUSdollar values ofexports in1991-92, theannual export growth averaged 20percentinthethree
yearperiod 1993-94 to1995-96. Imports, inUSdollar terms, havealsoincreased during thisperiod
atarapid paceby6.5percentin1993-94, by22.9percentin1994-95 andby26.8percentin1995-96.
Inspite ofanincreasing trade deficit thefavourable trends oninvisible transactions resulted in
improvements inthecurrent account deficit from 3.2percentofGDP in1990-91 to1.7percent
in1995-96. During 1993-94 and1994-95, theimprovements inthecurrent account werereinforced
byfavourable trends inthecapital account, andforeign exchange reserves grew from alowofUS
dollar onebillion in1991toalmost USdollars 21billion atendMarch 1995. However, during 1995-96,
thoughexportgrowthremainedbuoyant,thebalanceofpaymentscameunderpressurefromthecontinued
surge inimport growth, asubstantial decline inportfolio investment flows intheform ofGross
Depository Receipts (GDRs) andasizeable increase indebtservice payments onliabilities accumulated
inearlier years. Reserves declined toUSdollars 17billion atend-March 1996. During thecurrent
year1996-97, sofarbothexport andimport growth haveslowed down considerably. Exports have
grown byonly7.8percentinUSdollar terms during April-November 1996-97, overthecorresponding
period intheprevious year,while imports havegrown by4.7percent.Infact,compared toNovember
1995 exports declined by5.9percentinNovember 1996. Netinvisible flows havealsobeenlower
duetoadeclineinunrequitedtransfersandhigherinterestpayments.Althoughforeigncurrencyreserves
grew toUSdollars 19.5billion byend-November 1996, andfurther toUSdollars 19.8billion byend
December 1996, thereserve accretion ismainly onaccount ofcapital inflows under foreign investment.
However, uncertainty persists about thecontinuity ofsuchflows because ofthecurrent depressed state
ofthedomestic capital markets. Furthermore, there hasbeenalarge increase intheoilimport bill
byover41percentduring April-November 1996compared tothesame period ayearagoonaccount
ofacontinued shortfall indomestic production ofcrude oilandaccelerating domestic demand forWT/BOP/16
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petroleum products, aswellasahardening oftheinternational price ofoil.Thebalance ofpayments
continues tobevulnerable totheoilimport bill.
4. Ontheprices front, afteratemporary set-back in1994-95, inflation wasonabroad downward
trend untilJune1996. Theannual rateofinflation, asmeasured bytheWholesale Price Index (WPI),
dropped from12percentinJanuary 1995 toalowof4.2percentinJune1996. Thisisattributable
toacombination offactors including thedeceleration inmonetary growth, highlevels ofopenmarket
sales offoodgrains, aliberal import policy, especially foressential commodities, andthesurge in
domestic supply associated withtheacceleration ofeconomic growth to6.6percent. Theincrease
intheadministered prices ofpetroleum products andahighprime lending rateof17percentresulted
inajump inthepoint-to-point rateofannual inflation to7.58percentby21December 1996, and
continued thepressure onthebalance ofpayments.
5. Thefiscal deficit oftheCentral Government asapercentage ofGDPhasdeclined significantly
from 7.5percentin1993-94 to5.9percentin1995-96, through prudent expenditure management
combined withtaxreform encompassing lower rates, wider bases andmoreeffective taxadministration.
The1996-97 Central Government Budget envisages afurther reduction inthefiscal deficit to5.0per
centofGDP.The consolidated fiscal deficit oftheCentral Government aswellastheStateGovernments,
which isaround 10percentofGDP, continues toundermine theeffort atmacro economic stabilisation
ingeneral andaconsolidation ofthebalance ofpayments situation inparticular.
6. Though noofficial estimates areasyetavailable onsavings andinvestment performance during
1995-96 andthecurrent year, there aresome early indications oflikely trends. Thecontinued high
growthincapitalgoodsproduction(18.2percentin1995-96and15.5percentinApril-August1996-97),
andthehigher growth ofcapital goods imports in1995-96, suggest thatprivate fixed investment
continued togrow during thisperiod. Onthenetflowofsavings, thereareindications thatwhile there
wascontinued substantial growth ofcommercial bankcredit tothenon-food commercial sector, and
gross disbursements bydevelopment financial institutions alsorecorded asizeable increase of18per
cent,theamount ofcapital raised through primary market issues declined by24percentin1995-96
andinflows through GDRs were low. Theresults ofthepackage ofmeasures announced recently,
toeaseliquidity arebecoming visible, butthehighborrowing needs ofthegovernment continued to
prevent arapid decline inthenominal interest rates during 1995-96 andbeyond despite thedecline
intherateofinflation. Tighter fiscal management isnecessary toeasetheavailability ofinvestible
funds toproducers andinvestors without risking theresurgence ofinflation andpressure ontheexternal
sector.
7. There aresome indications thattheslowpaceofeconomic reform inkeyinfrastructure sectors,
suchaselectric power, andconstraints intheagriculture sector could undermine therecent pattern
ofaccelerating aggregate economic growth. Thefirstseven months ofthecurrent financial year1996-97
(April -October 1996) witnessed asharp dropinthegrowth rateofinfrastructure industries to3.0
percentfrom 10.4percentforthecorresponding period of1995-96. Crude petroleum, electricity
andsaleable steelhavecontributed significantly tothisdecline. Therailandroadtransport system
andportcapacities arealsounder strain. Similarly, evenassuming anormal monsoon, thegrowth
ofagriculture andallied sectors isexpected tobe2.3percentfor1996-97, while sustained acceleration
inoverall GDP growth willrequire anacceleration inagricultural growth toaround 4percentper
year. Therefore, sustaining thegrowth attained inthelasttwoyears willrequire compression ofthe
fiscal deficit, increased investment inphysical andhuman infrastructure, reinvigoration ofagricultural
growth andstability andimproved strength intheexternal sector.WT/BOP/16
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MACROECONOMIC REFORMS
8. Inorder tointroduce much greater domestic andexternal competition intheIndian economy
andtoprovide adequate incentives forraising productivity andreducing costs, awideranging package
ofeconomic reforms wasintroduced in1991-92. Thesubsequent years haveseencontinuing efforts
todeepen andwiden theambit ofeconomic reform andtodealwithemerging newchallenges in
macroeconomic management. Thecontinuing reform process covers alarge number ofareas which
include industrial policy, capital market reforms, financial sector reforms, corporate sector reforms,
exchange raterelated reforms, reforms ininfrastructure sector andtradepolicy reforms. Salient features
ofthisreform process withregard toindustrial policy, exchange raterelated reforms, fiscal reforms
andtrade policy reforms since the1995 December consultations areoutlined below.
(a) Industrial Policy
9. Thenewindustrial policy encompassed asubstantial programme ofderegulation. Industrial
licensing hasbeenabolished inaphased manner forallproducts except forashort listof15industries
related tosecurity, strategic orenvironmental concerns. Aflexible location policy hasbeenintroduced.
TheMonopoliesandRestrictiveTradePracticesAct(MRTPAct)hasbeenamendedinordertoeliminate
theneedtoseekpriorgovernmental approval forexpansion ofpresent industrial unitsandestablishment
ofnewindustries bylargecompanies. Theprovisions relating tomerger, amalgamation andtakeover
havealsobeenrepealed. Thethrust oftheMRTP Actisnowmore oncontrolling unfair andrestrictive
trade practices.
10. Large areas inindustry which havehadapredominant public sector presence inthepastare
nowwideopenforprivate investment, bothforeign anddomestic. TheGovernment hasannounced
thatitwillpermit disinvestment ofequity inpublic sector firms upto49percent. Varying degrees
ofdisinvestment upto20percenthavealready taken place inanumber ofpublic sector enterprises.
Recognizing thecomplexity ofanyexercise inindustrial restructuring andtheneedtoprovide ahuman
facetotheadjustment process, theGovernment hasinitiated aseries ofmeasures toprovide themeans
necessary forsuccessful industrial restructuring thatwillinevitably result fromtheadoption ofthenew
economic policies. These include theestablishment ofaNational Renewal Fund toassist workers who
areaffectedbysuchindustrialrestructuringandamendmentoftheSickIndustriesCompaniesAct(SICA)
tomakeitmandatoryforallbankruptpublicsectorfirmstoberestructuredthroughrevival,rehabilitation
orclosure, iffound tobeunviable.
11. Inconjunction withindustrial deregulation theGovernment hasalsosubstantially liberalised
theprovisionsrelatedtoforeigninvestment.Automaticapprovalisavailableforforeigndirectinvestment
upto51percentforeign equity ownership inawiderange ofhighpriority industries. Theapproval
process hasbeenstreamlined andaForeign Investment Promotion Council (FIPC) hasbeensetup
tofoster suchinvestment. Thelimitonholdings byindividual foreign institutional investors (FIIs)
inacompany hasbeenraised from 5percentto10percentofthecompany ’sshare andFIIshave
alsobeenallowed toinvest innon-listed companies. With aview toinjecting thedesired level of
technological dynamism inIndian industry, automatic approval isavailable forforeign technology
agreements related tohighpriority industries within specified parameters. Similar facilities areavailable
forother industries aswellifsuchagreements donotrequire theexpenditure offreeforeign exchange.
Government hascorrespondingly amended theexchange control regulations.
(b) Exchange Rate Related Reforms
12. Amajor steptowards current account convertibility wastaken byIndia inMarch 1993 when
theforeign exchange budget wasabolished, theexchange ratewasunified andtransactions onthetrade
account were freed from exchange control. India accepted theobligations under Article VIII oftheWT/BOP/16
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IMFinAugust 1994 whereby there arenoexchange restrictions oncurrent account transactions and
nodiscriminatory currency practices (including multiple exchange rates) arenotprevalent. More
recently, thesystem offoreign currency exposure limits forcommercial banks hasbeenoverhauled
andautomatic approval isavailable foruseofforeign currency hedging instruments.
(c) Fiscal Reforms
13. Thelinkbetween fiscal balance andpublic savings dictates thatanymove toahighgrowth
pathmustnecessarily beaccompanied byariseinthedomestic savings ratesaswellasininternational
flows intheformofforeign investment. Private savings ratesinIndia arecomparable tothose inthe
other highgrowth economies inAsia. Therefore, toraisetherateofnational saving, public savings
mustincrease inaconsistent andpermanent manner. After thefiscal setback of1993-94 when gross
dissaving bytheCentral Government rosesharply, andtotaloutstanding liabilities oftheCentral
Government reached apeakof69.7percentofGDP, consolidation offiscal balance andtaxreform
coupled withsocial equity were thekeyelements ofpolicy.
14. Taxreforms haveencompassed bothdirect andindirect taxes andhavemoved towards atax
structure which issimple, relies onmoderate taxrateswithawider baseandbetter enforcement and
serves theobjectives ofequity andefficiency. Themaximum marginal rateofpersonal income tax
hasbeenreduced from 56percentto40percentandexemption limitraised fromRs.22,000 toRs.
40,000. Theratesofcorporate income taxwhich were 51.75 percentforpublicly heldcompanies
and57.5percentforclosely heldcompanies wereunified andreduced to46percent. Thetaxrate
forforeign companies wasreduced from66percentto55percent. Apresumptive taxwasintroduced
forsmall traders, retailers andsmall roadtransport operators, aswellasforsmall business. The
incentive structure forsavings intheform offinancial assets wasstrengthened.
15. Reduction inthepeaktariff ratesonimports, reduction intheimport dutyoncapital goods,
andparticularly onpower projects andrelated machinery to20percentandforfertilizer projects to
nil,wereaccompanied bylowering ofduties onferrous andnon-ferrous metals to35/40 percentby
1995-96. Theprincipal feature ofthereform oftheexcise taxeswasaswitchover fromasystem where
excise duties werespecific andnumerous andvarying innature withalarge number ofexemptions,
toonelargely based onadvalorem basis withfewer dutyratesandexemptions.
16. Whatissignificantisthatthesechangesareapartofamediumtermprogrammeandaredesigned
toprovide theincentives andsignals consistent withdeveloping aninternationally competitive and
dynamic economy. Corrective measures torevamp fiscal imbalances havealsofacilitated economic
liberalisationandstructuralreformsbyreducingtheGovernment’sbudgetarydependenceondistortionary
taxes andcontrols. Reforms inthisareahave alsoaddressed theneedtoeliminate unproductive
expenditure.
(d) Trade Policy Reforms since the1995 December Consultations
17. Thetradepolicy reforms, which werealmost concurrently announced withtheNewIndustrial
Policy notonlyincorporated asignificant scaling down oftariff barriers, simplification ofprocedures
andliberalised access toforeign exchange, itattempted closer integration oftheeconomy andaligning
ofourtrade related policies intunewithinternational practice andstandards. Thereforms initiated
inJuly1991 wereaimed atrelaxing thelimits onimports ofavastarray ofintermediate inputs and
capital goods. Quantitative controls werereplaced bytariffs, thereby making theimport regime more
transparent, andmore significantly, opening aroleforprice signals inthefunctioning ofmarkets.
Thishasalsohelped exports togrow bymaking theinputs more readily available.WT/BOP/16
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18. These reforms werecontinued intheMarch 1992-93 budget, intheExport- Import Policy of
1April 1992 -31March 1997, andintheannual revisions thereto. These revisions haveincluded
theremoval ofmost ofthequantitative restrictions onmachinery andequipment andmanufactured
intermediate goods, areduction inthemaximum import tariff, theabolition ofdirect export subsidies
intheform ofCash Compensatory Support, andofexport-linked import licences intheform of
Replenishment Licences, theexpansion ofspecial dutyfreeimport licences fortheintermediate inputs
ofexporters, andthecurrent account convertibility which wasrealised inAugust 1994. Peaktariff
rateshasbeenreduced to50percent. Duty onspecified non-metallic minerals havebeenreduced
to30percent. There hasalsobeenageneral reduction indutyonsteel, chemical, drugs andplastics,
electronics, telecommunication equipment andonparts ofcapital goods.
19. There hasbeenamajor policy pruning ofnotifications including theend-use notifications in
customs andexcise tariff ratestoreduce classification problems, misuse andwidespread litigation,
uniform rateofexcise hasbeenmade applicable forsimilar commodity totheextent possible.
20. Ontheeveoftheterminal yearoftheExport-Import Policy 1992-1997, efforts havebeenmade
todealwiththeoperational problems faced during theyear1995-96 tohelpsustain themomentum
ofexport growth. Thehighlights inthisregard aretheinclusion ofmining inthedefinition of
manufacture forthepurpose oftheExport-Import Policy; further enhancement oftheExport Promotion
Capital Goods (EPCG) Scheme andtheDutyExemption Scheme; thelimitofmaintenance spares under
theEPCG Scheme being enhanced from 10to20percentofCIFvalue, theimports being allowed
during thevalidity period forfulfilment ofexport obligation. ForaCIFvalue ofRs.20crore ormore,
zeroimport dutywithhigher corresponding obligation havebeenpermitted. Merchant exporters holding
non-transferable actual userlicences under theDutyExemption Scheme havealsobeenexempted from
thepayment ofadditional customs duty. Under thePassbook Scheme, theoption ofpayment of
additional custom dutyincashhasbeenprovided toenable exporters toclaim MODVAT.
21. Credit under thePassbook Scheme isalsonowpermitted tobeutilised forthepayment ofduty
forimport ofitems permissible forimport against thefreely transferable Special Import Licence (SIL).
Thebenefit offlexibility toimport asensitive iteminexcess ofthequantity indicated, upto20per
cent, isalsoadmissible under anAdvance Intermediate Licence. Thefacility ofdutyfreeimport of
rawmaterial under theSpecial Imprest Licence hasbeenmade available forsupplies toUnited Nations
Organisation.
22. Thepowers delegated toRegional Licensing Authorities have been enhanced toconsider
application forEPCG Scheme uptoRs.1crore inaccordance withthePolicy. Similarly, thepowers
ofZonal Advance Licensing Committee havebeenenhanced fromRs.1crore toRs.3crore toconsider
requests ofdutyfreelicence based onadhocnorms. Where thenorms havebeennotified, thesepowers
havebeen enhanced from Rs10crore toRs.25crore.
23. Import of771restricted items arecurrently permissible under thespecial import licence. These
items represent 1441tariff linesattheeightdigitlevel. Apart fromtheearlier category ofSuper Star
Trading Houses, exporters canalsoclaim thestatus ofSuper StarTrading House ifnetforeign exchange
earned bythem during thepreceding reckoning years isRs.600crore ortheaverage netforeign
exchange earned during thepreceding 3licensing years isRs.400crore ormore.
24. There hasbeenalongfeltneedtoadopt aharmonised system ofclassifying commodities under
acoding system thatisinternationally recognised. Anattempt wasmade inOctober 1995 toalign
India’sexport andimport policy withtheIndian Trade Classification which isbased ontheharmonised
system.Thisalignmenthasnowbeenrationalisedandmadecompatiblewiththecodingsystemsadopted
bycustoms, excise andthemonitoring oftrade bytheDirector General ofCommercial Intelligence
andStatistics. Thisharmonisation oftheExport andImport Policy hasbeenformally notified inMarchWT/BOP/16
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1996bytheMinistry ofCommerce asanaccompanying texttitled “ITC(HS)Classifications ofExport
andImport Items”totheExport andImport Policy 1992-1997.
25. Inaccordance withthedecision oftheCommittee onBalance ofPayments Restrictions atits
consultations withIndia inDecember 1995, India hasnotified totheWTO allremaining restrictions
maintained onimports under the1992-97 Export-Import Policy, incorporating amendments upto25
March 1996. (Refer WTO document number WT/BOP/N/11 dated 23July1996). Thisdocument
provides acomplete listing ofallquantitative restrictions onimports, including thosemaintained through
statetrading, andfortheprotection ofhuman, plant andanimal lifeandhealth, public morals, for
theconservation ofnational resources andprotection oftheenvironment, andfornational security
andpublic safety. Thissignificantly enhances thetransparency ofIndia'simport policy regime .
26. Outofatotalof4,798 tariff lineswhich attract import licensing provisions under theExport
andImport Policy 1992-97, incorporating amendments made upto25March 1996, India has4,433
eightdigitITC(HS)tarifflinesinwhich atleastonecommodity attracts import restrictions maintained
forsafeguardingthebalanceofpayments.Thecompositionoftheproductsonwhichrestrictionscontinue
tobemaintained encompass primarily consumer goods, andsuchintermediates intomanufacture and
accessories which permit useforfinalconsumption aswell. Asmentioned earlier, outofthese 4,433
tarifflines, 1441tarifflinescontain items which enjoy flexibility inimports through thespecial import
licence system. Since theannouncement oftheExport-Import Policy 1992-97 foritsterminal year
inMarch 1996, arealignment ofthecoding anddescription ofproducts hasbeenaccompanied by
liberalisation oftheimport regime. Restrictions havebeenremoved on105eightdigittarifflinesand
anadditional 67lineshavebeenincluded inthespecial import licence scheme. Products which have
beenmade freely importable include anumber ofconsumer goods fromamongst agricultural products,
hydrocarbons, rubber products, apparel andconsumer durables. Products included inthespecial import
licence system havespanned confectionery, paints, tableware andkitchenware, tools andmechanical
appliances. Onesignificant result ofthetrade policy reforms undertaken during thelastfiveandhalf
years isthatalmost alltheinputs intomanufacture, bothrawmaterials andintermediates, andcapital
goods arenowfreely importable subject onlytothepayment ofapplicable duty, which hasalsocome
down substantially during thisperiod.
ECONOMIC PERFORMANCE
(a) Production
27. Growth ofagricultural cropproduction, which averaged over4percentperannum during
1992-93 to1994-95, slowed to0.9percentin1995-96. Food grains production which hadrisen to
anewpeakof191.1 million tonnes in1994-95 wasalsomarginally lower ataround 190million tonnes
in1995-96, because ofadecline inwheat output. Public foodstocks which peaked atahighof35.6
million tonnes inJuly1995, declined because ofopenmarket salesbytheFood Corporation ofIndia.
28. Investment inagriculture remains anareaofconcern andcould beasignificant partofthe
explanation fortherecent growth slowdown. Though improved incentives fortheagricultural sector
asawhole haveplayed aroleingenerating anaverage growth incropproduction of3.4percentper
annum during thepastfouryears, theslowdown ofproduction growth to0.9percentin1995-96, despite
anormal monsoon, isacause forconcern.
29. Theindustrial growth remained strong throughout 1995-96. Growth accelerated from 9.3
percentin1994-95 to11.9percentduring 1995-96. However, there hasbeenadeceleration in
industrial growth andduring April-August 1996, thegrowth wasonly 8.6percent over the
corresponding period oftheprevious year. Thecapital goods sector maintained itsposition asanWT/BOP/16
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important contributor toindustrial activity bygrowing at24.9percentin1994-95, by18.2per
centduring 1995-96, andby15.5percentin1996-97 (April-August). Industrial growth hasbeen
broad based; in1994-95, thegrowth of9.4percentinthegeneral index ofindustrial production (IIP)
wasduetoagrowth of9.8percentinmanufacturing, 8.5percentinelectricity generation and7.5
percentinmining andquarrying. During 1995-96, overall growth of11.9percentwasduetoagrowth
of13.3percentinmanufacturing, 8.2percentinelectricity and6.9percentinmining. Asimilar
growth profile ismirrored inthe“use-based classification ”,where thisoverall growth in1995-96 has
come froma18.2percentgrowth incapital goods, 12.6percentgrowth inconsumer goods, 8.8per
centgrowth inbasic goods and10.8percentinintermediate goods.
30. Though theperformance ofthecoresector, which wasquitesatisfactory during 1994-95, has
beensustained in1995-96, afewareas ofpotential concern haveemerged. In1995-96 electricity,
coal,steel, cement, crude oilandpetroleum products withacombined weight of28.8percentinIIP,
showed agrowth rateof7.8percent, compared with8.4percentin1994-95. During 1996-97
(April-October) there hasbeenasteep slowdown to3.0percent, withcrude petroleum registering
adecline of10.2percentoverthecorresponding period oftheprevious year.Similarly, electricity
generation which grew by8.5percentin1994-95 decelerated to8.2percentin1995-96 andfurther
to3.1percentinApril-October 1996-97. Though thedeceleration ofgrowth in1995-96 and1996-97
isprimarily duetoreduced hydro-electric generation, thisagain points totheurgency ofpower sector
reform. Infrastructure sectors notincluded intheIIPshowed satisfactory performance in1995-96,
withnewtelephone connections growing by20.8percent,cargo handled atmajor ports by9percent
andrevenue generating traffic oftherailways by7percent. During 1996-97 (April-May), thegrowth
ratesofthese sectors havebeen16.1percent, 11.1percentand7.4percent, respectively
(b) Money andPrices
31. Monetary management in1995-96 achieved thetwinobjectives ofreducing theannual inflation
rateandproviding credit support forproduction. Money supply (M3) growth wasreduced to13per
centin1995-96 (from 22.3percentin1994-95) taking March 31,1995 asthebase. Theslower
monetary expansion isattributable notonly tothehigher basebutalsototheunusually slowgrowth
inbank deposits andtothedecline inreserve money growth to14.8percent(from 22.1percent
in1994-95). This deceleration occurred despite asharp expansion innetRBIcredit toCentral
Government by25.1percent. Asaresult ofrising private demand forcredit, banks which hadan
excess (over SLRrequirements) holding ofGovernment andother approved securities, contributed
Rs14,766 crore tothemarket borrowing oftheGovernment compared toacontribution ofRs16,323
crorein1994-95. Thisnecessitated sizeable support bytheRBItomarket borrowing oftheGovernment,
which, inturn,increased thegrowth ofnetRBIcredit totheCentre. Theresulting growth inreserve
money would havebeenmuch higher butforthereduction innetforeign assets oftheRBIassociated
withthe$3.8billion decline inforeign currency reserves in1995-96.
32. Slower monetary growth wasaccompanied byadeceleration inthegrowth ofbankcredit to
thecommercial sector to15.7percentin1995-96, compared to23.1percentin1994-95. There was
asimilar deceleration inthegrowth ofscheduled commercial banks ’non-food credit to21.6percent
in1995-96 ascompared to29.8percentinthepreceding year. Though non-food credit growth slowed
down in1995-96, itstillgrewmuch faster thannominal GDPandatleastasfastasindustrial production
inrupee value. Theslowdown innon-food bankcredit growth in1995-96 wascompounded byadecline
inother sources offinance toindustry suchasprimary issues inthedomestic equity market andGDR
issues inEuromarkets. Furthermore, thecontinued highlevels ofGovernment borrowing associated
withalarge budget fiscal deficit keptcredit markets tightandinterest rateshighthroughout theyear.
33. Thecredit policy for1996-97 hastargeted amonetary growth of15.5percentto16percent,
based onatarget inflation ofaround 6percentandaprojected GDP growth of6percent. MonetaryWT/BOP/16
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growth during thecurrent financial yearhasrisengradually, toreach anannual rateof16.8percent
byJune7,1996. Thishashappened despite ahalving oftheannual rateofreserve money growth
from14.8percentattheendof1995-96 to7percentbyJune7,1996. Thereasons forhigher monetary
growth include apickupinthegrowth ofbankdeposits andcumulative easing ofreserve requirements,
including areduction inCRR from14percentlastyearto13percentonMay11,1996(partly offset
byrationalisation ofexport refinance), andfurther to12percentonJuly6,1996. Non-resident External
(Rupee) Deposits havebeenexempted from CRR obligations since April, 1996.
34. Theannual rateofinflation (based ontheWPI) declined from10.4percentattheendof1994-95
toalowof4.4percentattheendof1995-96. Theannual rateofinflation hadremained lowat4.2
percentuntilJune22,1996, butthereafter rosetoreach 7.58percentby21December 1996. The
success inreducing inflation from anannual rateof12percentinJanuary 1995 tobelow 5percent
inJanuary 1996isattributable toacombination offactors including thedeceleration inmonetary growth,
highlevels ofopen market sales offoodgrains, aliberal import policy, especially foressential
commodities, andthesurge indomestic supply associated withtheacceleration ofeconomic growth
to7percent. Thedelay inadjustment ofadministered prices hadalsoplayed arole,asissignificantly
brought outbytheincrease intheinflation rateaftertheJune-July changes inadministered prices of
certain petroleum products.
(c) Fiscal Developments
35. Over thepastfiveregular budgets oftheCentral Government thefiscal deficit hasdeclined
asaproportion ofGDP from8.3percentin1990-91 to5.9percentin1995-96. Much ofthisdecline
occurred, however, inthefirstyear. Since thenthefiscal deficit hashovered around sixpercentof
GDP, except for1993-94 when thefiscal deficit was7.5percent. Thisdeficit represents the
pre-emption ofloanable funds bytheCentral Government. The2.4percentage points reduction in
thefiscal deficit hasbeenbrought-about byasharp reduction of3.2percentage points intheprimary
deficit (equal tofiscal deficit minus interest payments). Theprimary deficit represents theeffort made
bytheGovernment tocontrol thedeficit, asinterest payments arelargely predetermined bypast
borrowing. Unfortunately, thisreduction intheprimary deficit hasbeenpartly offset bya0.8percentage
point increase ininterest payments asaproportion ofGDP. This, inturn, islargely alegacy of
preceding primary deficits accumulated asdebt. Therevenue deficit, ontheother hand, hasfallen
onlymarginally overthesefivebudgets, from3.5percentofGDPto3.1percentofGDPandremains
toohighforcomfort. In1995-96, thebudget deficit oftheCentre wasRs.9,934 crore while the
netReserve Bank ofIndia (RBI) credit totheCentral Government wasRs.19,855 crore. Thetotal
netmarket borrowing oftheCentre, States andguaranteed bodies wasRs.33,525 crore.
(d) Financial Developments
36. Themonetary andfinancial developments during 1995-96 were dominated bytwofeatures;
one,theinterface between strong realeconomic activity andtheavailability ofbankcredit, andthe
other, theinterface between theexternal sector developments, especially theforeign exchange market
andthebehaviour oftherelated domestic financial markets. Boththeprimary andsecondary segments
ofthecapital market exhibited generally subdued conditions during 1995-96, though towards theend
oftheyear, thesecondary market showed signs ofbuoyancy aided byanupsurge innetinvestments
byFIIs. Even in1996theBSESensitive Index andtheNSEIndex fellfrom3128and908on1January
1996 to3087 and884on24December 1996, respectively.
(e) Exchange Market Developments
37. Thesecond halfof1995-96 witnessed periodic speculative pressures ontheexchange rateof
therupee, andtheexchange rateoftherupee vis-a-vis theUSdollar depreciated fromamonthly averageWT/BOP/16
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ofRs.31.58 inAugust 1995toRs.36.63 inFebruary 1996. While some easing ofthenominal exchange
rateoftherupee inthesecond halfof1995-96 wasconsistent witheconomic fundamentals and
maintaining India'scompetitiveness abroad, speculative pressure hadledtoanovershooting. TheRBI's
policy responses inearly-February 1996tocounter speculative pressures against therupee wereeffective
inrapidly restoring stability intheforeign exchange market, correct thedemand-supply imbalance,
andtherateperUSdollar recovered toRs.34.39 inMarch 1996andfurther toRs.34.24 inApril 1996.
38. Theforeign exchange market hasbehaved inanorderly fashion in1996-97 sofar.Theexchange
rateoftherupee vis-a-vis theUSdollar moved inanarrow range ofRs.35.0 toRs.35.7 between May
1996 andNovember 1996. However, therateofinflation inIndia, which issignificantly higher than
theinflation ratesinIndia'spartner countries, hastended tooffset thecompetitive advantage gained
bythenominal depreciation oftherupee. In1996-97, theeffect oftheadverse inflation differential
wasreinforced bythenominal appreciation oftherupee against theJapanese Yen, Deutsche Mark
andtheFrench Franc, following thestrengthening oftheUSdollar against these currencies inthe
international currency markets. Asaresult, according totheexport-weighted realeffective exchange
rate(REER) oftherupee, which takesintoaccount theexchange rateoftherupee against thecurrencies
offivemajor trading partners ofIndiaandtheinflation differentials between Indiaandthese countries,
inNovember 1996, therupee stood appreciated byabout 8.1percentrelative toitsvalue inMarch
1993, andbyabout 3.7percentrelative toitsaverage value in1993-94. While some realappreciation
istobeexpected withrapid productivity gains inthetradables sector, itisdifficult toquantify the
extent ofsuchproductivity gains.
39. Thestability intheforeign exchange market andtherevival ofmarket confidence about the
shorttermmovements intheexchange rateoftherupee havebrought down theforward premia steadily
since March 1996. The3-month and6-month forward premia (annualized) declined from27.06 per
centand23.43 percentrespectively ,inMarch 1996 to6.98percentand7.88percentrespectively,
inNovember 1996.
BALANCE OFPAYMENTS
40. Asshown inAnnex IIIndia’sexternal balance ofpayments haveimproved since thecrisis in
1991. After registering adecline inthedollar value ofexports in1991-92, thecountry haswitnessed
anannual export growth ofabout 20percentindollar terms during 1993-96. Imports, indollar terms,
havealsoincreased atarapid paceby22.9percentin1994-95 andby26.8percentin1995-96.
Inspiteofanincreasing trade deficit, buoyant invisible receipts andcapital inflows allowed foreign
exchange reserves togrow fromalowofonebillion dollar toalmost $21billion atendMarch, 1995.
Reserves declined to$17billion atendMarch 1996 andrecovered partially byincreasing toalevel
of$19.5billion byend-November, 1996.
41. Itisnowwidely acknowledged thatmajor reforms intrade policy andprocedures since the
announcement inMarch 1992 fortheEXIM Policy for1992-97, haveaccelerated India’stransition
towards aglobally oriented economy bystimulating exports andopening upimports. Furthermore,
thecurrent account convertibility oftherupee andtheacceptance ofobligations under Article VIII
oftheIMFinAugust, 1994, hasadded totheopenness oftheIndian economy. Therapid growth
inimports inthelastthree years since theonset ofreforms isadequate testimony totheprocess of
opening upoftheIndian economy. Theratiooftrade (imports andexports) toGDP increased from
14.1percentin1990-91 toabout 21percentin1995-96.
42. External trade liberalization together withastrong resurgence ineconomic activity hasled
toawidening ofthetradedeficit since1993-94. India’sexternal debtafterincreasing fromUSdollars
92.7billion atend-March 1994 toUSdollars 99billion atend-March 1995, declined toUSdollars
92.6billion atend-March 1996. Alarge partofthefluctuations inIndia'sexternal debtreflects theWT/BOP/16
Page10
valuation impact ofmovements intheexchange ratebetween theUSdollar andother major currencies
oftheworld.
43. While theprospects forforeign investment flows aswellasinvisible receipts canbeassumed
tobegood, suchflows cannot ,however, beexpected tobesmooth, some volatility isinevitable.
Forexample, in1995-96 capital inflows were notstrong enough toprevent adecline inreserves of
about USdollars 3billion. Oneofthemajor challenges inbalance ofpayments management inIndia
ishowtocontend withvolatility ofcapital inflows. Furthermore, given thedependence onimports
ofhydrocarbons, thebalance ofpayments continue tobevulnerable tooilprice shocks, forexample,
theincrease intheprice ofcrude aftertheUS-Iraq confrontation inearly 1996.
44. Insummary, India’sbalance ofpayments prospects arereasonably comfortable, butneedclose
monitoring. External sector viability inthemedium termwillcrucially depend onsustaining thegrowth
momentum inexports. Dataforthefirsteightmonths of1996-97 indicate thatthere hasbeenaslow
down inthegrowth rateofexports to7.81percentduring April-November 1996. While import growth
hasalsoslowed down somewhat inrecent months withthegradual absorption oftheinitial effect of
tradeliberalization, export growth infuture mustensure financing ofimports without excessive reliance
onforeign borrowing. There isaneed forfurther trade liberalization butthephasing ofsuch
liberalization should beworked outwiththebalance ofpayments prospects inview. Furthermore
anincreasingly openeconomy ispotentially vulnerable toanumber ofshocks arising outofexternal
factors andtherefore thepaceofopening uptheIndian economy willneedtobecalibrated tothepace
offiscal consolidation.
45. Onesignificant result oftheimport policy made effective since April 1992within theoverall
framework oftheExport-Import Policy of1April 1992 -31March 1997 andtheannual revisions
thereto isthatalmost alltheinputs intomanufacture, bothrawmaterials andintermediates, andcapital
goods arenowfreely importable subject onlytothepayment ofapplicable duty, which hasalsocome
down substantially during thisperiod. Asregards consumer goods, thebroad approach hasbeen
tofirstallow relaxations inaphased manner through themechanism offreely tradeable SILs and
subsequently totransfer themtoapurely tariffbased regime. Canalization ofimports ofinputs which
hasalready beensignificantly reduced isproposed tobereduced further inaprogressive manner.
However, inviewoftheuncertainty intheBalance ofPayments prospects, containment ofimport growth
within prudent limits willbenecessary. Theelimination oftheremaining quantitative restrictions
onimports willhavetobedoneinacarefully phased manner tocontain anyunanticipated fallouton
balance ofpayments aswellasthesocio-political repercussions.WT/BOP/16
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ANNEX I
Estimates ofGross Domestic Product atFactor Cost bykindofEconomic Activity for1994-95 and1995-96 at1980-81 prices.
Industry Absolute Values
(Rs.Crore)
1994-951995-96Percentage change overthe
previous year
1994-951995-96
1 Agriculture, forestry andfishing 73,688 74,357 4.9 0.9
2 Mining andquarrying 4,791 5,031 4.3 5.0
3 Manufacturing 51,148 58,053 9.0 13.5
4 Electricity, gasandwater supply 6,599 7,149 8.0 8.3
5 Construction 11,364 11,896 7.1 4.7
6 Trade, hotels, transport and
communication47,712 52,543 8.0 10.1
7 Financing, insurance, realestate and
business services27,937 29,514 4.3 5.6
8 Community, social andpersonal
services27,771 28,918 4.3 4.1
9 Total GDP atfactor cost 251,010 267,461 6.3 6.6WT/BOP/16
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ANNEX II
BALANCE OFPAYMENTS
(InUS$million)
1990-91
(P)1991-92
(P)1992-93
(P)1993-94
(Q.E.)1994-95
(Q.E.)1995-96
(Q.E.)
1 2 3 4 5 6 7
1 Exports 18477 18266 18869 22700 26857 32467
2 Imports 27914 21064 23237 23985 31672 41412
Ofwhich :POL 6028 5364 6100 5650 5928 7547
3 Trade balance -9437 -2798 -4368 -1285 -4815 -8945
4 Invisibles (net)
Non-factor services
Investment income
Private transfers
Official grants-243
979
-3752
2069
4611620
1207
-3830
3783
460842
1128
-3422
2773
363970
777
-4002
3825
3702191
-494
-3905
6200
3903511
93
-4478
7480
416
5 Current Account Balance -9680 -1178 -3526 -315 -2624 -5434
6 External assistance (net) 2210 3037 1859 1700 1250 783
7. Commercial borrowings (net)
@2249 1456 -358 1252 1029 700
8 IMF(net) 1214 786 1288 191 -1146 -1710
9 NRIdeposits (net) 1536 290 2001 940 847 945
10 Rupee debtservice -1193 -1240 -878 -745 -1050 -1015
11 Foreign investment (net)
ofwhich:
(I)DFI(net)
(ii)FIIs
(iii)Euro equities &others68
68
0
0154
154
0
0585
344
1
2404110
620
1665
14604895
1314
1503
20784143
1929
2009
205
12 Other flows (net)+ 2318 271 -243 1735 1556 -1331
13 Capital account total(net) 8402 4754 4254 9183 7381 2515
14 Reserve movement
(-increase)1278 -3576 -728 -8868 -4757 2919
MEMO ITEMS:
Export Growth (%) 9.0 -1.1 3.3 20.3 18.3 20.9
Import Growth (%) 14.4 -24.5 10.3 3.2 32.1 30.1
Export-GDP ratio(%) 6.2 7.3 7.8 8.9 8.9 9.9
Import-GDP ratio(%) 9.4 8.3 9.8 9.4 10.4 12.7
Current account-GDP ratio(%) -3.2 -0.4 -1.8 -0.1 -0.8 -1.7
Foreign Currency Assets
($million, endofperiod)2236 5631 6434 15068 20809 17044
Total Debt Service Payments
($million)8982 8250 7658 8347 10955 12530
Debt Service ratio(%) 35.3 30.2 28.6 25.2 26.6 26.0
(P): Preliminary Actuals; Q.E. Quick estimates
@ Figures include receipt onaccount ofIndia Development Bonds in1991-92 andrelated repayments, ifany,inthesubsequent
years.
+ Include, among others, delayed exports receipts anderrors andommissions. Fortheyear1992-93, italsoincludes errors and
ommissions arising outofdualexchange ratesapplicable under theLiberalised Exchange RateManagement System (LERMS).