India WT/TPR/S/100
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I. ECONOMIC ENVIRONMENT
(1) RECENT ECONOMIC DEVELOPMENTS
(i) Economic performance
1. During the past decade, India's real GDP has grown rapidly, averaging some 6% annually.
There has also been a corresponding decline in poverty, and improvement in the basic indicators of
human development (declining death and infant mortality rates and improved literacy).1  A f t e r
achieving rates of almost 6.7% during the five -year period 1992/93 to 1996/97, however, real GDP
growth fell to 4.8% in 1997/98, partly due to extern al shocks including the Asian financial crisis and
fluctuations in international petroleum prices2, before recovering to average around 5.5% during the
four subsequent years. Although impressive, grow th during this period has been somewhat slower
than in the previous five-year period.  Moreover, with population growing at almost 2% annually and
unemployment ranging officially from 2.2% to 7.3% in 1999/00 (Table I.1)3, depending on the
measure used, the authorities acknowledge that economic growth must be stronger in order to
significantly reduce poverty.4  They also appear to recognize the need to employ international trade as
an engine of growth.5
2. Accordingly, the Planning Commission has been examining the feasibility of doubling India's
per capita income over the next decade.  In its "Approach Paper to the Tenth Five Year Plan
(2002-2007)", the Government appears to have set itself a growth target of some 8.7% for the Tenth
and Eleventh Plan periods in order to attain this target.  The Paper has proposed an indicative target of
GDP growth of 8% over 2002-07 and a reduction of poverty by 5 percentage points by 2007 and by
15% by 2012.  However, the authorities maintain that annual growth of 8% to 9% cannot be achieved
without radical reforms and an increase in India's share of world trade from its present level of only
0.67% to 1% by 2007;  this will require annual export growth of 11.9% (in dollar terms).6  M o r e
generally, as exports and GDP seem to move in tandem and protectionist trade policies contribute to
an anti-export bias, a more open trade and investment regime could hasten India's economic
development and contribute to a further alleviation of poverty.
                                                     
1 According to the Government, poverty in India declined from roughly 34% to 26% between 1993/94
and 1999/2000 (Confederation of Indian Industry (2001)).  The World Bank estimates that India's poverty leveldeclined from over 50% in the 1970s to 35% in 1997 (only slightly lower than 38% in 1993/94);  urban poverty,
at around 30% is lower than rural poverty (World Bank, 2000, pp. 26-27).
2 The earthquake that struck western India in 2001 may also have an impact on growth estimates for
2001/02.  Preliminary estimates put the cost of lost assets and reconstruction at some US$2.3 billion (World
Bank/Asian Development Bank, 2001.
3 The rate of 2.2% for 1999/2000 is based on the measure of usual principle and subsidiary status
(UPSS), whereas if the measure of current daily status (CDS) is used, the unemployment rate rises to 7.3%.
According to a recent repor t published by the Planning Commission, the CDS measure of unemployment is
widely agreed to be the one that most fully captures open unemployment in India (Planning Commission, 2001a,p. 16).
4 The poverty rate is based on per capita consumption expenditure of Rs 49.09 (just over US$1 at
current exchange rates) per month in rural areas and Rs 56.64 per month in urban areas at 1973/74 pricescorresponding to a basket of goods and services anchored on a norm of per capita daily calorie requirements
(2,400 kilocalories in rural and 2,100 kilocalories in urban areas).
5 Directorate General of Foreign Trad e online information.  Available at:
http://dgftcom.nic.in/exim/ 2000/speech.htm [03/04/2002].
6 Directorate General of Foreign Trad e online information.  Available at:
http://dgftcom.nic.in/exim/ 2000/speech.htm [03/04/2002].WT/TPR/S/100 Trade Policy Review
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Table I.1
Basic economic and social indicators, 1995-02
1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02
Current GDP at factor prices (rupees billion) 10,732.7 12,435.5 13,901.5 15,980.8 17,556.4 18,958.4 20,802.5
Constant GDP at factor cost (rupees billion)
(1993/94 prices)8,995.6 9,700.8 10,164.0 10,824.7 11,485.0 11,939.2 12,588.1
Net National Product (NNP) per capita
At current market price (Rupees) 10,149.0 11,564.0 12,707.0 14,395.0 15,562.0 16,487.0 17,789.0
Share of main sectors in GDP, at current
factor cost (%)
Agriculture, forestry, and fishing 28.0 28.5 26.5 26.6 25.2 24.2 ..
Agriculture 25.6 26.2 24.3 24.6 23.7 22.2 ..
Mining and quarrying 2.6 2.4 2.5 2.4 2.3 2.3 ..
Manufacturing 17.9 18.2 17.7 17.0 16.8 17.2 ..
Electricity, gas, and water 2.5 2.4 2.5 2.5 2.5 2.5 ..
Construction 5.1 4.8 5.0 5.0 5.1 5.3 ..
Services 43.6 43.4 44.9 45.5 48.1 48.5 ..
Wholesale and retail trade 13.1 13.1 13.4 13.4 13.7 13.6 ..
Hotels and restaurants 0.9 0.9 0.9 1.0 1.0 1.0 ..
Transport, storage, and communication 6.9 7.0 7.2 7.2 7.4 7.7 ..
Banking and insurance 5.6 5.7 6.4 6.6 7.0 6.6 ..
Real estate, ownership of dwellings, and
business services5.9 5.7 5.7 5.7 5.7 6.0 ..
Community, social, and personal services 11.6 11.4 12.2 12.6 13.3 13.5 ..
Employment (million persons)a..
Agriculture, hunting, etc. 1.5 1.5 1.4 1.4 1.4 .. ..
Mining and quarrying 1.1 1.1 1.0 1.0 1.0 .. ..
Manufacturing 6.8 6.9 6.8 6.7 6.6 .. ..
Services 18.7 18.9 18.8 19.1 18.9 .. ..
Electricity, gas, and water 1.0 1.0 1.0 1.0 1.0 .. ..
Construction 1.2 1.2 1.2 1.2 1.1 .. ..
Wholesale and retail trade 0.5 0.5 0.5 0.5 0.5 .. ..
Transport, storage, and communications 3.2 3.2 3.1 3.2 3.1 .. ..
Finance, insurance, real estate, etc. 1.6 1.6 1.6 1.7 1.7 .. ..
Community, social, and personal services 11.2 11.4 11.4 11.5 11.5 .. ..
Social indicators
Population (million, as of 1 October) 928.0 959.0 964.4 982.7 1,001.0 1,019.0 1,037.0
Unemployment (%)b
Current daily status .. .. .. .. 7.3 .. ..
Usual principal and subsidiary status .. .. .. .. 2.2 .. ..
Birth rate (per 1,000 population) 27.5 27.2 26.5 26.1 .. .. ..
Infant mortality (calendar year) 74 .. 71 70 .. .. ..
Literacy rate (calendar year) 59 .. 62 .. 65.4 .. ..
.. Not available.
a Organized sector employment (this is estimated to be some 7% of total employment in the economy).  Planning Commission
(2001), Report of the Task Force on Employment Opportunities, June, p. 32 [Online].  Available at:
http://planningcommission.nic.in [28 November 2001].
b Planning Commission.
Source: Ministry of Finance (2002a), Economic Survey 1999/2000 ;  IMF (various years), International Financial Statistics ;
Asian Development Bank online information.  Available at:  http/www.adb.org;  Reserve Bank of India (2001),Bulletin , November;  and World Bank (2000), India:  Policies to Reduce Poverty and Accelerate Sustainable
Development,  January.India WT/TPR/S/100
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3. In order to achieve these higher growth targets for GDP and exports, structural problems,
which have become increasingly evident since the previous Review of India, should be addressed.
These problems include infrastructure constraints, especially as regards power, communications, and
transport, as well as regulatory bottlenecks, which continue to hamper trade and deter investment
(including in infrastructure) (section (iii) below).
4. Investment is also deterred by high real interest rates; real prime lending rates (PLRs), for
example, were between 7.3% and 9.2% in 2001/02 (Table I.2).7  High real interest rates are partly due
to the growing fiscal deficit and resulting rise in the combined public debt of Central and State
Governments from 56.4% of GDP in 1996/97 to 85% in 2000/01.8  The fiscal deficit remains high,
despite the Central Government's stated intention of bringing its budget deficit down through reduced
expenditure and improved tax collection.  In 2000/01, the Central Government deficit was 5.1% ofGDP and is expected to rise to 5.7% of GDP in 2001/02 (instead of falling to 4.7% as estimated in the
2001/02 Budget).  The overall public sector deficit (which includes the deficits of the Centre, of
states, central public sector enterprises, and the oil pool account) was 10.6% of GDP in 2001/02.
Table I.2
Economic performance, 1995-02
1995/96 1996/97 1997/98 1998/99 1999/00 2000/01a2001/02
Real GDP (at 1993/94 factor cost)
(annual percentage change)7.3 7.8 4.8 6.6 6.1 4.0 5.4
Agriculture, forestry and fishing -0.9 9.6 -2.4 7.1 1.3 -0.2 5.7
Agriculture -1.1 10.1 -2.8 7.9 1.0 0.4 ..
Mining and quarrying 5.9 0.5 9.8 1.3 2.0 3.3 1.4
Manufacturing 14.9 9.7 1.5 2.5 4.2 6.7 3.3
Electricity, gas and water 6.8 5.4 7.9 6.4 6.1 6.2 5.2
Construction 6.2 2.1 10.2 6.1 8.1 6.8 2.9
Services 10.5 7.2 9.8 8.2 9.6 7.7 ..
Whole sale and retail trade 14.0 7.7 7.6 6.6 7.0 3.6 ..
Hotels and restaurants 20.8 6.6 8.2 12.5 11.2 6.1 ..
Transport, storage and communication 11.0 8.2 7.8 7.3 8.3 8.2 ..
Banking and insurance 10.9 9.7 17.9 10.5 13.4 -2.2 ..
Real estate, ownership of dwellings and
business services5.7 4.3 5.4 6.1 7.4 9.0 ..
Community, social and personal services 7.9 6.3 11.7 9.9 11.6 6.0 6.0
Savings and demandb (% of GDPM)
Gross domestic savings 25.1 23.2 23.1 21.7 23.2 23.4 ..
Gross domestic investment 26.9 24.5 24.6 22.7 24.3 24.0 ..
Inflation and exchange rate
GDP deflator (% increase) 9.0 7.4 6.7 9.1 3.9 3.9 4.1
CPI (1995=100)(calendar year) 100.0 104.5 109.2 115.6 119.6 127.5 ..
Nominal effective exchange rate (1995=100)c97.6 95.7 95.1 84.1 81.4 80.4 74.72d
Real effective exchange rate (1995=100)c98.0 101.1 105.2 101.1 99.7 99.0 102.1d
Table I.2 (cont'd)
                                                     
7 Ministry of Finance (2001a), p. 74.
8 Ministry of Finance (2001a), p. 30.WT/TPR/S/100 Trade Policy Review
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1995/96 1996/97 1997/98 1998/99 1999/00 2000/01a2001/02
Money and credit (rupees billion)
Broad money (M3) 5,991.1 6,960.1 8,213.3 9,809.6 11,241.7 13,115.8 ..
Credit to public sector 2,577.8 2,886.2 3,306.0 3,866.8 4,413.8 5,123.8 ..
Credit to private sector 3,446.5 3,763.1 4,333.1 4,960.0 5,865.6 6,732.2 ..
Interest rate (%, period average)e
Deposit rate 12.0 11.0-12.0 10.5-11.0 9.0-11.8 8.5-9.5 8.5-9.0 8.0-8.5f
Nominal prime lending rate 16.5 14.5 14.0 12.0 12.0 11.5 11.5
Real prime lending rateg8.5 9.9 9.6 6.1 8.7 4.3 7.3
Balance of trade and payments
(US$ million)
Exports, f.o.b. 32,311.0 34,133.0 35,680.0 34,298.0 44,894.0 44,894.0 ..
Imports, c.i.f. 43,670.0 48,948.0 51,187.0 47,544.0 59,264.0 59,264.0 ..
Trade balance -11,359.0 -14,815.0 -15,507.0 -13,246.0 -14,370.0 -14,370.0 ..
Services balance -197.0 726.0 1,319.0 2,165.0 2,478.0 2,478.0 ..
Income, net -3,205.0 -3,307.0 -3,521.0 -3,544.0 -3,821.0 -3,821.0 ..
Current transfers, net 8,851.0 12,777.0 12,209.0 10,587.0 13,134.0 13,134,9 ..
Current account balance -5,910.0 -4,619.0 -5,500.0 -4,038.0 -2,579.0 -2,579.0 ..
Balance of payments -1,221.0 6,793.0 4,511.0 4,222.0 5,856.0 5,856.0 ..
International reserves and debt
Foreign exchange reserves (US$ million)h17,044.0 22,367.0 25,975.0 29,522.0 39,554.0 39,554.0 45,251i
Gross external debt (US$ million)j93,730.0 93,470.0 93,531.0 96,886.0 98,263.0 99,606.0 ..
.. Not available.
a Provisional.
b As per 2001 NAS, and as given in Economic Survey 2000-2001 .
c Five-country REER and NEER.d Average of eight months (April-November 2001).
e On deposits of maturity of one to three years.
f As on 30 November 2001.gB a s e d  o n  W P I .
h Excluding gold and SDRs.
i As at the end of December 2001.
j As at the end of March.
Source: Reserve Bank of India (various issues);  Asian Development Bank;  Ministry of Finance, Economic Survey
1999/2000 and 2001/02.
5. The weak fiscal situation not only tends to crowd out private investment (through higher
interest rates)9, it also hampers the Government's efforts to invest in basic infrastructure and social
sectors, thereby impeding economic growth.  Management of the fiscal deficit remains a problem,
however, in part because of its links with tariff re form.  Along with excise duties, the customs tariff is
one of the main sources of tax revenue for the Central Government. As a result of a policy to fosterefficiency and integration into the world economy by lowering the relatively high customs tariffs,
their share of the Central Government's net tax revenue (and GDP) has declined considerably, from
45.6% in 1996/97 to a little over 30% in 2001/02;  budget estimates suggest that the share will fall
further to 26% in 2002/03.  Given its relatively heavy reliance on customs tariffs for tax revenue, it is
not clear how the Central Government intends to fulfil its target of reducing its customs tariffs, which
                                                     
9 See for example, Acharya (2001a).India WT/TPR/S/100
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are among the highest in the world, to the considerably lower levels in ASEAN countries.10  T h e
authorities have a stated goal of raising direct tax revenue to 10% of GDP (from 3.4% in 2000/01)11,
but it is unclear how this goal is to be attained in the near future.  Redressing the fiscal balance is also
closely linked to expenditure reform.
(ii) Macroeconomic policies
(a) Monetary policy
6. Although the Reserve Bank of India (RBI) targets broad monetary indicators, an important
objective of monetary policy is to manage volatility while allowing the underlying demand and supply
conditions to determine the exchange rate over a period of time, in an orderly manner.  Thus,
increased downward pressure on the Indian rupee ex perienced in late 1997 as a result of various
factors, including the Asian crisis and economic sanctions imposed by international donors followingthe nuclear tests, led to a tighter monetary policy.  Since late 1998, however, with a noticeable
weakening in industrial activity, the RBI has shifte d its policy towards supporting economic recovery
in the sector, including through a gradual reduction in the cash reserve ratio (CRR) from 11% in
August 1998 to 5.5% by December 2001.  Interest rates, while declining, have not fallen sufficiently
to keep pace with slower inflation (which declined  from 7.2% in 2000 to 4.7% in 2001), as a result of
which real interest rates remain high.  Interest rates in India have also traditionally been high, in part
because they were administered until 1994.
12  In October 1994 controls on the lending rate were
removed except for small loans with a value of up to Rs 200,000;  since April 2001 prime lending
rates are treated as a benchmark for banks to follow rather than as a minimum rate.13  The (nominal)
prime lending rate (PLR) of public sector banks declined to a range of 10%-12.5% by December 2001
from 12%-14% in March 1999.  Inflation is curren tly very low, at some 1.3% at end January 2002.14
7. Some monetary tightening was experienced in 2000 as a result of inflationary pressure from
higher oil prices, although lower domestic demand and international prices for oil have again
permitted the RBI to concentrate on boosting industrial activity through an easing of monetary
conditions.  The Bank rate was cut to 7% in April 2000, following which banks cut their PLRs to
11.25%-12.50%.  The looser monetary policy has continued into 2001 with the RBI cutting its bank
rate further to 6.5% and the CRR to 5.5% in October 2001.  The RBI has indicated in its Mid-TermPolicy Review that the overall stance of monetary policy for the rest of the fiscal year is likely to
continue to support industrial growth, while emphasizing the need for price and interest rate stability
with a preference for softening of interest rates to the extent warranted.
15
                                                     
10 According to tariff data reported in recent Trad e Policy Reviews, the simple average applied MFN
tariff in selected ASEAN countries was considerably lower:  Indonesia 8.8% (1999);  Malaysia 10.2% (1997);
Philippines 9.7% (1999);  Singapore 0% (2000);  and Thailand 17.1% (1999).
11 Confederation of Indian Industry (2001).
12 Between 1975/76 and 1980/81 the Reserve Bank of India (RBI) prescribed both minimum lending
and ceiling rates of interest, followed by only ceiling rates between 1981/82 and 1987/88.  From 1988/89 to1994/95, the RBI administered minimum lending rates.
13 Ministry of Finance (2002a), p. 74.  Real interest rates in India may also be high due to certain
structural characteristics of the financial system such as the practice of offering fixed interest rates on long-term
bank deposits, the high rate of non-performing loans among banks and the large government borrowingrequirement (Chapter IV(4)(iv)).
14 Wholesale price index (Ministry of Finance, 2002a, p. 3).
15 Reserve Bank of India (2001a).WT/TPR/S/100 Trade Policy Review
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(b) Exchange rate and the balance of payments
8. The exchange rate of the Indian rupee is determined in the interbank market, with the Reserve
Bank of India purchasing and selling spot and forward foreign exchange in the interbank market at the
market exchange rate to even out what it considers to be excessive movements in the exchange rate.16
The currency of intervention is usually the U.S. dollar.  According to the authorities, there are nopredetermined targets for the exchange rate.  Other than interventions in the spot and forward markets,the RBI also uses administrative measures such as a 15 percentage point surcharge on interest charged
on import finance in December 1997; surcharges on interest charged on import finance were
reimposed in May 2000 when the rupee came under pressure.  The real effective exchange rate
depreciated between 1997/98 and 2000/01, since when it has experienced upward pressure
(Table I.2).
17
9. Reflecting the decline in the savings investment gap, with gross domestic investment having
declined faster than national savings, India's current account deficit has fallen, from around 1.7% of
GDP in 1995/96 to 0.5% in 2000/01 (Table I.3);  the improvement, despite a sharp increase in
international petroleum prices in 1999/2000, appears to have been largely due to strong export
growth, both by merchandise and services exports, led by information technology (miscellaneousservices) supported by continued buoyancy in private transfers.  The capital balance account has also
remained stable over the last few years as foreign investment inflows (especially portfolio investment)
picked up as the region began its recovery after the regional economic and financial crisis in 1997/98.
Table I.3
Balance of payments, 1995-01
(US$ million and per cent of GDP)
1995/96 1996/97 1997/98 1998/99 1999/00 2000/01
Current account balance -5,910.0 -4,619.0 -5,500.0 -4,038.0 -4,698.0 -2,579.0
(Per cent of GDP)  (-1.7)  (-1.2)  (-1.4)  (-1.0)  (-1.0) (-0.5)
Trade balance -11,359.0 -14,815.0 -15,507.0 -13,246.0 -17,841.0 -14,370.0
Exports f.o.b. 32,311.0 34,133.0 35,680.0 34,298.0 37,542.0 44,894.0
Imports c.i.f. 43,670.0 48,948.0 51,187.0 47,544.0 55,383.0 59,264.0
Petroleum 7,500.0 10,000.0 8,200.0 6,400.0 12,600.0 12,500.0
Invisibles, net 5,449.0 10,196.0 10,007.0 9,208.0 13,143.0 11,791.0
Services -197.0 726.0 1,319.0 2,165.0 4,064.0  2,478.0
Exports 7,346.0 7,474.0 9,429.0 13,186.0 15,709.0 18,870.0
Imports 7,543.0 6,748.0 8,110.0 11,021.0 11,645.0 16,392.0
Income -3,205.0 -3,307.0 -3,521.0 -3,544.0 -3,559.0 -3,821.0
Credit 1,429.0 1,073.0 1,561.0 1,935.0 1,931.0  2,366.0
Debit 4,634.0 4,380.0 5,082.0 5,479.0 5,490.0  6,187.0
Transfers 8,851.0 12,777.0 12,209.0 10,587.0 12,638.0 13,134.0
Credit 8,890.0 12,858.0 12,254.0 10,649.0 12,672.0 13,211.0
Debit 39.0 81.0 45.0 62.0 34.0  77.0
Table I.3 (cont'd)
                                                     
16 The exchange rate was unified and officially floated in 1993.
17 The REER is based on the wholesale price index for India.India WT/TPR/S/100
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1995/96 1996/97 1997/98 1998/99 1999/00 2000/01
Capital account balance 4,089.0 12,006.0 9,844.0 8,435.0 10,444.0  9,023.0
(Per cent of GDP) (1.2) (3.1) (2.4) (2.0) (2.3) (1.7)
Foreign investment, net 4,615.0 5,963.0 5,353.0 2,312.0 5,117.0  4,588.0
In India 4,805.0 6,153.0 5,390.0 2,412.0 5,191.0  5,102.0
Abroad -190.0 -190.0 -37.0 -100.0 -74.0 -514.0
Loans 2,201.0 4,795.0 4,799.0 4,418.0 1,601.0  4,531.0
External Assistance 867.0 1,101.0 885.0 799.0 891.0 410.0
Commercial borrowings, net 1,285.0 2,856.0 4,010.0 4,367.0 333.0  4,016.0
Short-term credit, net 49.0 838.0 -96.0 -748.0 377.0 105.0
Banking Capital 762.0 2,229.0 -893.0 698.0 2,127.0 811.0
Commercial Banks 937.0 2,225.0 -1,260.0 -448.0 2,304.0 885.0
Assets -384.0 -870.0 -2,195.0 -1,397.0 790.0 -1,468.0
Liabilities 218.0 -255.0 -190.0 -11.0 -26.0  36.0
Non-resident deposits 1,103.0 3,350.0 1,125.0 960.0 1,540.0  2,317.0
Other -175.0 4.0 367.0 1,146.0 -177.0 -74.0
Rupee debt service, net -952.0 -727.0 -767.0 -802.0 -711.0 -617.0
Other capital, net -2,537.0 -254.0 1,352.0 1,809.0 2,310.0 -290.0
Errors and omissions 600.0 -594.0 167.0 -175.0 656.0 -588.0
Overall balance-of-payments -1,221.0 6,793.0 4,511.0 4,222.0 6,402.0  5,856.0
(Per cent of GDP) (-0.3) (1.8) (1.1) (1.0) (1.4) (1.3)
Gross reserves (US$ billion) 21.7 26.4 29.4 32.5 38.0  42.3
(In months of imports of goods and services) .. 5.7 5.9 6.7 6.8 6.7
.. Not available.
Source: Reserve Bank of India, Bulletin  (various issues);  and IMF.
10. The overall balance of payments has gradually improved from 1.1% of GDP in 1997/98 to
1.4% in 1999/2000 and to 1.3% in 2000/01.  India continues to maintain reasonably healthy gross
reserves, which in 2000/01 were estimated to be equivalent to 6.7 months of imports of goods and
services.
(c) Fiscal policy
11. India's fiscal position remains weak. The Central Government's fiscal deficit as a percentage
of GDP has risen from 4.1% in 1996/97 to 5.7% in 2001/02 (Chart I.1 and Table AI.1), despite
commitments from successive governments to cont ain it; indeed, Budget estimates for 2001/02
predicted that the Central Government's fiscal deficit would be 4.7%. The overall public sector deficit,
which includes the deficits of state governments18, the central public sector enterprises, and the oil
pool account (Box I.1), is considerably higher, at 10.6% of GDP in 2000/01 (Table AI.1).19  At the
same time, the combined public debt of central and state governments has risen from 56.4% of GDP
in 1996/97 to 85% in 2000/01.20  The high and growing level of public sector debt in combination
with high interest rates have re sulted in a situation where interest payments on this debt now account
                                                     
18 The Central Government shares taxation powers and expenditure responsibilities with state
governments.
19 This does not reflect contingent liabilities in the form of guarantees by the central and state
governments, which at the end of March 2000 were 10.7% of GDP (for only the 17 major states), implicitguarantees of off-budget state enterprises, the arrears of public state utilities or implicit liabilities related to
government pensions.
20 Ministry of Finance (2001a), p. 30.WT/TPR/S/100 Trade Policy Review
Page 8
for over one third of the Central Government's current expenditure.  Other major expenditures are the
increasing level of subsidies (especially for food and fertilizer) and the long-term implications of the
Fifth Pay Commission recommendations, including the surge in pension payments.21   Another matter
contributing to fiscal weakness is the indirect effe ct on the exchequer of inadequate user charges for
most public services, such as power, irrigation, and road transport, at both the central and state
levels.22
12. Efforts to reduce expenditure and to raise revenue, especially through better tax collection,
have not been as successful as expected.  Tax revenue collected by the Central Government as a
percentage of GDP has remained relatively stable, in the range 6-7% (Table AI.1).  The tariff remains
an important source of revenue for the Central Government with an estimated share of 1.9% of GDP
(some 30% of total central government net tax revenue) in 2001/02, considerably lower than the1996/97 figure of 3.1% of GDP (45% of total central government net tax revenue) (Chart I.1).  This
suggests that additional tariff reductions will require far-reaching reform of internal taxes, their
administration, and collection (Chapter III(4)(ii)).
024681012
1995/96 1996/97 1997/98 1998/99 1999/00 2000/01Chart I.1                          
Public accounts, 1995-01
Per cent of GDP
Source :  Ministr y of Finance , Union Bud get (various years).Overall public sector Central Government
States and Union Territories Customs Tariff Revenue
                                                     
21 Ministry of Finance (2001a), p. 18.
22 Ministry of Finance (2001a), p. 31.India WT/TPR/S/100
Page 9
Box I.1:  The oil pool accounts
The Oil Coordination Committee (OCC) Accounts, or oil pool accounts, are maintained to coordinate the
cross-subsidization of petroleum products such as diesel, kerosene, LPG, motor spirit, and aviation turbinefuel, and to maintain price stability for consumers while ensuring reasonable profit margins for India's publicsector oil companies.  Over the year s, petroleum price fluctuations and a time lag before domestic prices of
petroleum products were adjusted accordingly, have re sulted in a steady increase in the "oil pool deficit",
from some 0.2% of GDP in 1995/96 to 1% in 1999/2000.  The deficit is estimated to have increased to some
Rs 236 billion, or around 1.6% of GDP, by 31 March 2001, as a result of a sharp increase in international oilprices in 2000/01.  The OCC's debt stock, which consists mainly of arrears to state-owned oil companies, issome 0.6% of GDP.
The growing deficit of the oil pool account led to refo rms in the administered price mechanism for several
petroleum products in the late 1990s, including a timetable for phasing out administered pricing, and price
increases for petroleum products.  More recently, the phasing in of import parity for petroleum products by
1 April 2002 and the discontinuation of the OCC were announced in the 2001/02 Budget speech.  TheGovernment has also affirmed that subsidies for kero sene and LPG, which are not reflected in budgetary
expenditures, would be moved into the central government budget.  In 1999/2000, it is estimated that thetotal subsidy provided for kerosene (for the PDS), LPG and diesel, was some Rs 180 billion (around 0.8% of
GDP).
In the budget speech for 2002/03, the Minister of Finance announced further changes to the administered
price mechanism for petroleum and the oil pool account.  These include:  the dismantling of the oil pool
account on 1 April 2002 (with outstanding balances liquidated through the issue of oil bonds) with asubsequent decline in diesel and petrol prices;  reduction in the subsidy for LPG and kerosene through anincrease in the price of these products and an eventual phasing out of the subsidy over the next three to
five years;  permitting private sector companies in distribution;  and the establishment of a Petroleum
Regulatory Board to oversee the sector.
Source: Ministry of Finance (2001a), Economic Survey 2000/01 ;  and Ministry of Finance (2002b), Budget
Speech 2002/03, Part A , paragraph 55.
13. In order to redress the fiscal imbalance at the central level, the authorities have proposed the
Fiscal Responsibility and Budget Management (FRBM) bill, which was introduced in Parliament in
December 2000 and referred to the Parliamentary Standing Committee on Finance; the latter'srecommendations are currently being considered by the Government.  The bill would, inter alia,
require that the central fiscal deficit be reduced annually by at least 0.5% of GDP with a view to
achieving a deficit of not more than 2% of GDP by 31 March 2006, and that central government debt,
which was 62% of GDP in 2000/01
23, not exceed 50% of GDP in March 2011.24  The Central
Government would be prohibited from borrowing di rectly from the RBI (except by way of advances
to meet temporary need in certain circumstances) after 2004, and new central government guarantees
would be capped at 0.5% of GDP each year.25  The legislation would also improve fiscal discipline by
enhancing transparency and requiring automatic expenditure cuts in the event of budget shortfalls.
The Central Government has also taken steps to reduce expenditure, notably through the Expenditure
Reform Commission;  reform of the Public Distribution System;  and abolition of the AdministrativePricing Mechanism (APM) in the petroleum sector.
14. The challenge of fiscal management is equally acute at the state level.
26  Accordingly, the
Central Government has been working jointly with the states through the Fiscal Reforms Incentive
                                                     
23 Ministry of Finance (2001a), p. 46.
24 Ministry of Finance (2001a).
25 Most states have also apparently agreed to limit their guarantees.
26 Minister of Finance (2002b).WT/TPR/S/100 Trade Policy Review
Page 10
Fund, established on the recommendation of the Eleventh Finance Commission. 27  For their part, the
States have undertaken corrective measures to ensure greater financial stability.  Measures taken
include limits on extending guarantees for borrowing through public sector companies and financial
corporations28, and the creation of guarantee redemption funds.29
15. Furthermore, in January 2001, the Prime Minister's Economic Advisory Council (EAC), as
part of it comprehensive programme of "second-generation" reforms, stressed that a sharp reduction inthe fiscal deficit and public sector debt together with broad-based structural reforms were essential for
India to benefit fully from globalization and achieve its full growth potential.  Although the
programme was not formally endorsed by the Government, many of its policy recommendations were
reflected in the 2001/02 budget speech.  The latter targeted the overall central government deficit for
2001/02 at 4.7% of GDP (although the actual deficit was 1 percentage point higher).  The main fiscaland structural measures contained in this Budget included various measures recommended by the
Expenditure Reform Commission (ERC):  namely a reduction and rationalization of the civil service
and cuts in food and fertilizer subsidies (wages and salaries accounted for almost 12% of the Central
Government's current expenditures in 2000/01, while major subsidies accounted for a further 9.2%.
30)
16. Moreover, in line with a recommendation by the EAC, the Eleventh Finance Commission
(EFC) has apparently set the objective of raising the tax-to-GDP ratio by 2 percentage points with a
view to reducing the combined fiscal deficit of the central and state governments to 5% of GDP by
2006/07.  With this objective in mind, efforts are being made to reform the tax system;  thus the
2001/02 and 2002/03 Budgets include broadening th e tax base, by gradually reducing various
exemptions and bringing additional services into the tax net31, and strengthening tax administration.
Achievement of this objective poses a major challenge, given the Central Government's intention of
reducing its reliance on border taxes for revenues.  Other reforms recommended by the EAC relate tolabour markets, education and health, social policy, trade policy, industrial policy, privatization,
corporate governance, agriculture, and infrastructure.
(iii) Structural measures
17. Measures to liberalize and reduce over-regulation in the economy have been pursued since the
previous Review of India.  However, the pace of liberalization has slowed.  Trade-related  reformshave been pursued mainly in the area of import licensing, where India was bound by an agreement
with the United States to remove all restrictions maintained for balance-of-payment reasons by
1 April 2001;  and some attempts to rationalize the tariff, although the overall average has fallen very
slightly (Chapter III(2)).  The Budget for 2002/03, if approved, will reduce tariff rates, rationalize the
structure of excise rates, and further reduce licensing requirements, for example, for the small-scalesector.
32  In addition, the current Export Import Policy (2002-2007) has  reduced the number of
exports subject to restrictions.  Foreign investment liberalization has also been pursued and most
sectors, including those previously reserved for the small-scale sector are now open to FDI of up to
100% (with some exceptions);  in some sectors FDI restrictions apply mainly due to considerations of
a strategic or security-based nature.  In addition, in some service sectors, such as financial services
                                                     
27 The EFC was set up to give recommendations on central-state fiscal relations.
28 In Gujarat, Rajasthna, Karnataka, and Tamil Nadu.
29 In Rajasthan and Tripura.
30 Major subsidies amounted to around 1.2% of GDP in 2000/01.  However, total implicit and explicit
subsidies provided by both central and state governments are believed to be far higher (14.5% of GDP in
1994/95).
31 Despite the growing share of services in GDP, only a small percentage of them are subject to indirect
taxes.
32 Ministry of Finance (2002b).India WT/TPR/S/100
Page 11
(banking and insurance) and telecommunications, efforts have been made to develop or strengthen
regulatory frameworks and introduce competition (Box I.2).
Box I.2:  Regulatory and structural changes
Tariffs
Tariff reduction and rationalization the tariff structure continues, notably by reducing the number of tariff
bands and by removing the special duty and surcharg e, of 5% and 10%, respectively.  The "peak" rate of
tariff was reduced from 45% at the time of the last Review to 30%.  However, a special additional duty
(SAD) of 4% was introduced apparently in place of st ate taxes, which are applied only to domestically
produced goods.  The tariff also continues to have a number of "exemptions", which are targeted atparticular industries or end users, making its administra tion difficult.  The Government aims to reduce tariffs
to "Asian levels" by 2005;  for this purpose, tax reforms have been undertaken to broaden the tax base,modernize tax administration, and bring a larger number of services under the tax system, which could offset
the likely loss of revenue from lower customs tariffs.
Non-tariff measures
India removed all import licensing restrictions maintained for balance-of-payment reasons (some 32% of the
tariff was restricted at the time of India's last Review ).  The remaining restrictions appear to be maintained
for health, safety, and moral conduct reasons;  in addition, certain goods are subject to state-trading.
Foreign investment
Liberalization has continued and most sectors are currently open for FDI (with differing degrees of foreign
equity participation);  foreigners may not invest in a few sectors, including agriculture, print media, andrailways.  The number of sectors in which foreign investment may take place automatically (by registeringwith the Reserve Bank of India) has increased.
Industrial licensing policies
There has been a decline in the number of industries requiring compulsory industrial licensing (sugar, coal
and lignite, and non-crude petroleum have been liberali zed), and those reserved for the public sector (from
six at the time of the last Review to three currently) and for the small-scale sector (from 821 at the time ofthe last Review to 799).  Progress has been slow, however, in other areas of industrial policy such as therestructuring of public-sector companies, and disinvestment of government shares in public-sectorcompanies.
Taxation
India's total tax-to-GDP ratio fell to 14% in 1999/00 from 16% in the late 1980s.  India has high tax rates
although revenue yields are low because tax bases tend to be narrow owing to numerous incentives andexemptions.  The states were supposed to convert their sales taxes to a value-added tax by 1 April 2001; thishas been postponed to 1 April 2003.
Financial services
Reforms in banking continue to improve the efficiency and health of the banking sector, with the
strengthening of prudential measures and efforts to restructure weak banks.  Additional disclosurerequirements were prescribed to enhance transpar ency and improve governance.  The level of non-
performing assets, especially in the state-owned banks, has declined as a result of some of these efforts,although it remains relatively high.  The insurance sector, previously a state monopoly was de-regulated andprivate sector investment was permitted;  a regulatory agency (the Insurance Regulatory and Development
Authority) was established.
Box I.2 (cont'd)WT/TPR/S/100 Trade Policy Review
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Infrastructure
Considerable progress was made in opening the telecommunications sector to international competition,
including through the establishment of a regulator, and a separation of the main public-sector serviceprovider from the licensing body.  Domestic long-distance fixed-line services have also been liberalized,with no limit set on the number of operators, and the main public-sector fixed-line service providers havebeen allowed to provide cellular services.  Problems a ssociated with high tariffs and licence fees have been
addressed to some extent.
In road transport, a cess of Re 1 per litre of petrol and diesel purchased was imposed in December 2000 to
raise money for improving the road network;  increased use is also being made of tolls to finance, operate
and maintain national highways.  Efforts have been made to rationalize the tariff structure in railways and toaddress the cross-subsidy between passenger and freight transport.  In air transport, a decision was made to
reduce government equity in the national carriers Air India (international serv ices) and Indian Airlines
(national services), although this has not taken place to date.
In the power sector, an Electricity Regulatory Commission Act was passed in 1998, establishing a central
regulatory authority;  several states have also passed similar legislation and set up state regulatory bodies.  Inaddition, the Central Government has offered financial assistance for State Electricity Boards that restructuretheir operations.
Source: WTO Secretariat.
(2) DEVELOPMENTS IN TRADE
18. India's total trade as a share of GDP has remained relatively unchanged since its previous
Review, at some 21% in 1999/00, and around 22% in  1996/97.  Exports and imports of goods and
services as a share of GDP appear also to be relatively unchanged from the previous Review:  exportsgrew from 11.1% of GDP in 1997/98 to 11.8% in 1999/00, and imports were 14.8%  and 14.6% of
GDP in these two years.  In contrast, growth in  services exports has been particularly rapid,
accounting for almost 30% of exports of goods and services in 2000/01, compared with 21% in
1997/98 (Table I.3).
(i) Composition of trade in goods and services
19. A notable aspect of India's composition of trade is the continuing decline in agriculture's share
in merchandise exports, from 20% in 1997/98 to 14% in 2000/01 (Table AI.2).  The share of
manufactures rose from 74% to 76% during this period;  textiles and clothing continues to form the
largest share of manufactures at 27% (27.5% in 1997/98).  India imports mainly manufactures,
including machinery and transport equipment and other semi-manufactures; the share of fuels,however, has risen significantly (Table AI.3).
20. India's exports of services have been expanding rapidly.  The largest share of its services
receipts is accounted for by "miscellaneous" services (some 47% in 2000/01);  miscellaneous services
include software services (US$4 billion in 1999/00), communication services (US$1.1 billion in
1999/00), and management services (US$0.6 billion) (Table AI.4).  Other important service receipts
are travel (some 17% of the total in 2000/01) and transport (10% in 2000/01).  Imports of services are
similarly dominated by miscellaneous services (financial services and management services worth
some US$1.3 billion and US$0.8 billion, respectively, in 1999/00), which accounted for 60% of
services payments in 2000/01;  this is followed by transport (19.3%) and travel (17.5%).India WT/TPR/S/100
Page 13
(ii) Direction of trade in goods and services
21. The main regional destinations for India's exports are the European Union (23.4%) and
East Asia (20.7%);  the United States accounts fo r 20.9% of exports (Table AI.5).  For imports, India
has tended in recent years to diversify its sources to East Asian countries, with shares rising from
20.4% in 1997/98 to  23% in 1999/00 (Table AI.6);  data are not available on the breakdown of shares
by origin of some 31% of India's imports for 2000/01.33
22. No equivalent data on the direction of trade are available for services.
(3) TRENDS IN FOREIGN DIRECT INVESTMENT
23. The liberalization policies pursued in the early 1990s initially led to a surge in inflows of
foreign direct investment (FDI).  Thus, as the last  Trade Policy Review of India noted, FDI inflows
increased from an insignificant amount in 1990/91 to some US$2.8 billion (just under 1% of GDP) in1996/97.  Since peaking in 1997/98 at US$3.6 billi on, however, FDI inflows have been falling (to
some US$2.3 billion in 2000/01, with an additional US$2.8 billion entering as portfolio investment),
despite liberalization of foreign investment, including allowing FDI in a larger number of sectors and
raising foreign equity limits in several sectors (Table I.4).  Estimates for the period
April-October 2001 indicate a slight improvem ent in FDI inflows (US$2 billion) over the
corresponding period in the previous year (US$1.4 billion).  There has also been an improvement in
the discrepancy between FDI approved and actual inflow s.  At the time of the last Review of India, it
was estimated that some 22% of approved FDI was actually invested
34;  more recent data show a
gradual improvement in this share with some 52% of approved FDI entering the country.35
24. Evidence suggests that domestic firms in India tend to export more when foreign ownership is
51% or more;  this level of ownership enables foreign investors to exercise operational and strategic
control over the firm, thereby ensuring that intellectual and other property rights devolveunambiguously to the foreign shareholder.
36  Further liberalization might enhance FDI flows and
contribute to export growth.
25. The largest foreign investors are Mauritius (some 44% in 2000/01), followed by the
United States (16.8%);  the sectors targeted by foreign investors appear to be mainly those that are
growing rapidly, such as computers, whose share of the total increased from 3.7% to 16% between
1995/96 and 2000/01.
26. The fact that FDI has not increased, and indeed has declined slightly since the mid-1990s
despite further liberalization of foreign investment policies, may indicate the need for further
regulatory reform.  It has also been suggested that  India has failed to attract as much FDI in export-
oriented industries as many other developing countries.  The reasons for this, other than the remainingFDI restrictions, include the anti-export bias of foreign trade policies, the unusual rigidity of labour
                                                     
33 The data for which origin of imports are not indicated relate mainly to petroleum imports.
34 At the time of the last Trade Policy Review of India, it was suggested by the OECD that this may be
due to the fact that although many sectors were formally open to foreign investment, state-level policies and
regulatory frameworks may not have been sufficiently developed to cope with the increased FDI approvals.  The
authorities also suggested that in certain sectors with long gestation periods, inflows may take time tomaterialize given that approvals did not oblige investment (WTO, 1998, p. 14).
35 In 2001 (January-September) this share was higher (72%).
36 Chhibber and Majumdar (1999).WT/TPR/S/100 Trade Policy Review
Page 14
laws, the policy of reservations for the small-scale sector, the weakness of infrastructure (especially
power, ports, roads, and railways), and slow  and cumbersome administrative procedures.37
Table I.4
Foreign investment by source and activity, 1995-01
(US$ million and per cent)
1995/96 1996/97 1997/98 1998/99 1999/00 2000/01
Foreign direct investment, net (US$ million) 2,144 2,821 3,557 2,462 2,155 2,339a
Portfolio, net (US$ million) 2,748 3,312 1,828 -61 3,026 2,760
of which
Foreign institutional investorsb2,009 1,926  979 -390 2,135 1,847
Euro-equititiesc 683 1,366  645  270  768  831
Otherd56 20  204 59  123 82
Total (US$ million) 4,892 6,133 5,385 2,401 5,181 5,099
Total as per cent of GDP 1.4 1.6 1.3 0.6 1.1 1.1
Foreign investment by countrye (% of total)
Germany 7.1 8.1 5.1 5.7 2.0 5.9
Italy 0.8 1.4 1.5 5.8 7.9 1.5
Japan 4.3 4.7 5.6 11.8 9.0 8.2
Mauritius 35.8 41.1 30.5 29.5 31.7 44.1
Netherlands 3.5 6.0 5.4 2.7 5.2 4.0
Korea, Rep. of 1.7 0.3 11.3 4.3 0.5 1.3
United States 13.8 11.8 23.2 22.7 22.5 16.8
Others 33.2 26.6 17.5 17.7 21.3 18.3
Total (US$ million) 1,418 2,057 2,956 2,000 1,581 1,910a
Foreign investment by activitye (% of total)
Chemical and allied products 9.0 14.8 8.9 18.8 7.6 7.2
Engineering products 17.8 35.5 19.6 21.4 20.6 14.3
Electronics and electrical equipment 9.2 7.5 21.8 11.4 10.9 11.2
Services 7.1 0.7 10.9 18.4 7.3 11.8
Food and dairy products 6.0 11.6 3.8 1.0 7.7 3.9
Computers 3.7 2.9 4.7 5.3 6.3 16.0
Pharmaceuticals 3.9 2.3 1.2 1.4 3.4 3.3
Finance 19.0 10.6 5.0 9.3 1.3 2.1
Others 24.5 14.2 24.4 13.1 35.0 30.3
Total (US$ million) 1,418 2,057 2,956 2,000 1,581 1,910
a The data on total foreign investment by country and by activity are different from total FDI figures reported on a balance-of-
payments basis.  The reason for this substantial difference was not clear to the Secretariat.
b Represents fresh inflow/outflow of funds by FIIs.c Figures include GDRs/ADRs amounts raised abroad by the Indian corporates.
d Including off-shore and others.
e Excludes inflows under the NRI direct investment route through Reserve Bank and inflows due to acquisition of shares under
Section 29 of FERA.
Source: Ministry of Finance (2001a), Economic Survey 2000-2001  (Table 6.8);  and data provided by the authorities.
                                                     
37 Acharya (2001).