RESTRICTED
WORLD TRADE WT/BOP/W/11/Add.1
8January 1997
ORGANIZATION(97-0028)
Committee onBalance-of-Payments Restrictions
1997 CONSULTATION WITH INDIA UNDER ARTICLE XVIII:12(b)
OFTHE GATT 1994 AND THE RELATED UNDERSTANDING
Background Paper bytheSecretariat
Addendum
1. This paper hasbeen prepared asasupplement toWT/BOP/W/11, inaccordance with
paragraph 12oftheUnderstanding ontheBalance-of-Payments Provisions oftheGATT 1994.
I. Trading andExchange System
(i) Import Policy
2. Theestablishment ofaTariff Commission, whose terms ofreference arebeing finalized, was
announced bytheFinance Minister inthe1996-97 budget1.
(ii) Tariffs
3. The1996-97 budget introduced aspecial customs dutyof2percenttofinance infrastructural
investment; duty-free imports andthose exempted from dutyforexport production arenotliable to
the"infrastructure fee".While thiseffectively raises themaximum tariffwhich hasdeclined fromover
300percentin1990 to50percentin1995, India'saverage import-weighted tariff hasfallen from
33percentin1994-95 and25percentin1995-96, toanestimated 23percentin1996-97.
4. Thecurrent budget hascutawide range oftariffs onrawmaterials inchemicals, textiles,
metal-related, electronics andother industries. Areduction ofcustoms dutyoncrude oilfrom 35to
25percentandanincrease inexcise dutyfrom 10to15percentonpetroleum products hasshifted
taxation oftheoilsector from theimport totheproduction stage.
1India'sfiscal yearbegins onApril 1.WT/BOP/W/11/Add.1
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(iii) Import Restrictions
5. InDecember 1995, outof11,587 tariff lines atthe8-digit level, 6,463 lines were freely
importable while 1,487 lineswereontheSpecial Import License list,atradeable import license allocated
toexporters2.TheNegativeImportList(seeWT/BOP/W/11)classifiesimportsintoprohibited,restricted
andcanalized items. Items included inthecanalized listarethose imported byState-trading entities
andunder Special Import License. On25March 1996 therestricted listwasreduced from5,124 to
4,798 lines. Since then,105tarifflineshavebeenmade freely importable and67tarifflinestransferred
totheSpecial Import Licence List.
6. InJuly1996,Indiasubmittedanotificationonthequantitativerestrictionsmaintainedonimports
(WT/BOP/N/11). Ofthe3572tariff lines, themajority arejustified onbalance-of-payments grounds
Table 1
India -Tariff structure, 1992-93 -1996-97
(percentage)
1992-93 1993-94 1994-95 1995-96 1996-97
Maximum Tariff 110 85 65 50 52
Average tariff (import weighted) 64 47 33 25 23
Source: IMF; based onMinistry ofFinance andWorld Bank Staffestimates.
II. Macroeconomic Developments
(i) Output andExpenditure
7. India'srealGDP growth increased further from5.3percentin1994-95 toanestimated 7per
centin1995-96. There issome indication thatGDPgrowth isslowing in1996-97; arateof6.6percent
isnowbeing predicted bytheMinistry ofFinance. Growth inthelasttwoyears hasbeenledmainly
bytheindustrial sector while agriculture remains relatively stagnant. Industrial growth was8.3per
centin1994-95 and11.7percentin1995-96. Capital goods played amajor roleinthisgrowth with
manufacturing andconsumer goods alsoshowing strong recovery. Asmany asninesectors recorded
growth ratesof20percentormore in1995-96. These included software (50percent), machine tools
(30percent), vehicles (22percent) andconsumer electronics (20percent).3During 1996, industry
recorded lower growth ratesthanduring thesecond halfoftheprevious fiscal year, partly because
oftighter monetary policy andhigher interest rates. Asnoted below, theRBIeased monetary policy
inearly 1996-97; aneconomic upturn ispredicted forearly nextyear.
2Specified commodities onthenegative listarefirstallowed tobeimported through Special Import Licenses
(SILs) before shifting these commodities totheOpen General License (OGL) list.
3IMF.WT/BOP/W/11/Add.1
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Table 2-India -Selected Macroeconomic Indicators, 1991-92-1995-96
(Percentage change)
1991-92 1992-93 1993-94 1994-95 1995-96
est.
Output1
GDP atfactor cost 0.8 5.1 5.0 6.3 7.0
Agriculture -2.0 5.8 3.3 4.9 2.7
Industry -1.6 4.4 4.2 8.6 12.0
Services 4.9 5.1 6.8 6.0 7.0
Expenditure2
Consumption 1.4 3.9 4.5 4.2 --
Private 1.8 4.1 4.2 4.3 --
Government -0.5 3.3 6.1 3.0 --
Gross fixed capital formation -4.0 6.9 3.4 14.8 --
Construction 2.3 2.7 -0.3 8.8 --
Machinery andequipment -7.6 9.6 5.6 18.2 --
Prices3
Consumer prices 13.9 6.1 9.9 9.7 8.9
Wholesale prices 13.6 7.0 10.8 10.4 5.0
1Percent change inconstant prices.
2Percent change inconstant prices. Figures for1993-94 areprovisional andestimated for1994-95.
3Endofperiod.
Source: IMF.
(ii)Investment-Savings Balance
8.Thesavings rate,bothpublic andprivate, rosein1994-95, reversing several years ofstagnation.
Public savings remain asmall fraction ofGDP. Theincrease inprivate investment, mostly inmachinery
andequipment, andimports ofcapital goods, stemming from strong growth inindustrial output as
mentioned above, continued in1995-96. Infrastructure presents abottleneck where investment byboth
public andprivate sectors remains inadequate, thelatterpartly duetodelays inestablishing atransparent
framework withrespect tobidding procedures andcostrecovery, forprivate sector participation.
Table 3-India -Savings andInvestment, 1991-92-1994-95
(Inpercent ofGDP atmarket prices)
1991-92 1992-93Prov.
1993-94Est.
1994-95
Gross domestic savings 22.8 21.2 21.4 24.4
Private sector 20.9 19.6 20.8 22.7
Public sector 1.9 1.5 0.5 1.7
Gross capital formation 23.4 23.1 21.6 25.2
Private sector113.5 15.1 12.8 14.3
Public sector 9.2 8.9 8.6 8.8
Savings-investment gap -0.5 -2.0 -0.3 -0.8
Private sector 7.3 4.5 8.1 8.4
Public sector -7.2 -7.4 -8.0 -7.1
1Includes errors andomissions.
Source: IMF.WT/BOP/W/11/Add.1
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(iii) Fiscal Developments
9. Theprevious government aimed toreduce theCentral Government budget deficit to5percent
ofGDP; however, in1994-95, thedeficit fellshort ofthisgoal(Table 4).Thenewgovernment has
reaffirmed thiscommitment andthecurrent budget aimstolower thedeficit to5percentofGDP in
1996-97. Recent figures fromtheMinistry ofFinance show thattherevenue deficit forApril-August
1996was26.9percentcompared toanaverage of44.3percentforthepreceding fiveyears, apromising
indication.
Table 4-India
Consolidated Public Sector Operations, 1991-92-1995-961
1991-92 1992-93 1993-94RevEst.
1994-95Budget
1995-96
(Inbillions ofrupees)
Total revenue andgrants21,422.3 1,613.3 1,713.9 2,172.9 2,390.6
Taxrevenue 1,031.2 1,145.1 1,223.2 1,475.9 1,654.1
Non-tax revenue2381.7 458.9 498.7 686.6 725.0
Grants 9.5 9.2 9.9 10.4 11.5
Total expenditure andnetlending31,996.3 2,274.7 2,612.7 3,031.3 3,425.2
Overall deficit (-) -574.0 -661.5 -880.9 -858.4 -1,034.5
(Inpercent ofGDP)
Total revenue andgrants223.1 23.0 21.6 23.0 22.8
Total expenditure andnetlending332.4 32.4 32.6 32.1 32.7
Overall deficit -9.3 -9.4 -11.0 -9.1 -9.9
Memorandum items:
Central Government (CG) -5.9 -5.7 -7.5 -6.1 -5.5
States -3.1 -3.0 -2.6 -2.9 -3.2
Central public enterprises -2.8 -2.9 -3.1 -2.6 -2.7
Netloans tostates byCentral Government 1.5 1.2 1.3 1.5 1.1
Budgetary support ofpublic sector enterprises
1.1 0.9 0.9 0.9 0.7
Central Government 'snon-plan loans topublic sector
enterprises 0.1 0.1 0.1 0.1 --
1Theconsolidation covers budgetary transactions atthelevels oftheCentral andState Governments, thedepartmental undertakings of
bothlevels ofGovernment, thebalance oftheOilCoordination Committee andthecentral public enterprises.
2Including internal resources ofpublic enterprises indicated infootnote 1.
3Including investment expenditure bypublic enterprises indicated infootnote 1.
Source: IMF.
10. Successive taxreforms inprevious years havebeenamajor factor inthemodest decline inthe
fiscal deficit. Asimplified andmore broad based customs andexcise taxstructure hasbeenaided by
amore effective taxadministration. The1996-97 budget proposed thatthecentral excise structure beWT/BOP/W/11/Add.1
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further simplified within thenexttwoyears soastomake itsapplication more transparent. Thebudget
alsobrought thetextiles sector under themodified VAT (MODVAT) system, asystem ofrebates of
taxesoninputs under theexcise taxsystem, completing thecoverage ofmanufactured goods. Anumber
ofconsumer goods were alsomade exempt from excise duty.
11. Despite these reforms, concerns remain regarding India'sfiscal deficit. TheGovernment 's
privatization programme, expected toraiseRs50billion (US$ 1.4billion), hasreceived atemporary
setback withitspostponement toearly 1997. Thebudget deficit oftheStates isestimated tohave
increased from 2.9percentofGDP in1994-95 toaround 3.1percentin1995-96, asaresult ofa
dropingrants fromtheCentral Government; thecombined States 'deficit isprojected at2.8percent
ofGDPin1996-97 ontopofaCentral Government deficit of5percent.Including theexpected decline
inoperating surpluses ofpublic enterprises, theoverall public sector deficit isforecast at8.3percent
ofGDP, down from 9.1percent, asestimated for1995-96.
(iv) Monetary Developments
12. Asaresult oftheopening oftheeconomy, monetary policy hasbecome increasingly linked with
exchange ratedevelopments. TheReserve Bank ofIndia (RBI) continues totarget broad money as
itsbasicmonetary policy indicator buthasstarted paying greater attention tointerest rateandexchange
ratedevelopments. Thetightmonetary policy stance of1994-95 continued in1995-96 withsome
relaxation inearly 1996. Strong demand forcredit from boththeGovernment andtheprivate sector
exerted upward pressure onbothnominal andrealinterest rateswhich rosesharply during 1995-96,
helping toslowwholesale priceinflation (Table 2).Prime lending ratesincreased to16.5-20 percent
byFebruary 1996andeffective lending rateswerestillhigher. Thenetresult wasareduction inbroad
money growth toabout 15percentin1995-96, inlinewiththeRBI'starget of15.5percent.
13. Inearly1996-97 monetary policy waseased somewhat inresponse toconcerns thattheeconomy
wasslowing down andthattightliquidity wasdampening economic activity. TheCredit Reserve Ratio
wasreduced from 14percentto13percentinMay1996 andfurther to12percentinJulyofthe
sameyear.RBIcredit totheGovernment increased sharply through toJuly1996although bySeptember
1996 there wasareversal. Asaresult ofthelooser monetary restrictions, broad money growth rose
to16.5percentinSeptember 1996 andshort terminterest ratesdeclined sharply. TheCentral Bank
hastargeted broad money growth for1996-97 at15.5to16percentwhich isexpected toreduce
wholesale price inflation to6-7percentwithout curtailing growth ofrealGDP.
Table 5-India -Monetary Developments, 1992-93 to1995-96
1992-93 1993-94 1994-95 1995-96
(Percentage change)
Reserve money 11.3 25.2 22.1 14.8
Netforeign assets 3.8 26.0 16.8 -0.4
Netdomestic assets 7.5 -0.8 5.3 15.2
Broad money (M3) 15.7 18.4 22.3113.21
Currency 11.7 20.6 22.3 17.4
Deposits 16.5 17.6 22.2 12.4
Memorandum items:
Flow ofcredit toGovt (Rsbn)2180 277 185 350
Money multiplier 3.31 3.13 3.14 3.10
1Theend-March dataforMarch 1994-95 and1995-96 contain asurge indeposits associated withthereporting date. Thepercent changes
forbroad money in1994-95 and1995-96 using mid-March dataare17.7percent and14.9percent, respectively.
2Cumulative flowfrom startoffiscal year.
Source: IMFWT/BOP/W/11/Add.1
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(v) External Developments
14. India'scurrent account deficit has,overtime, varied considerably between 3.4percentofGDP
in1990-91 and0.5percentin1993-94. Preliminary estimates for1994-1995 and1995-96 show the
deficit growing to1.7percentinthelatter year(Table 6).Estimates for1995-96 show export growth
ofalmost 21percentandimport growth of27percent,resulting inanincrease of79percentinthe
merchandise trade deficit. Foreign trade inthefirstseven months ofthecurrent fiscal yearappears
tohaveslowed considerably: exports grew byanestimated 9.9percent, imports by6.4percent,
placing theforecast current account deficit for1996-97 at1.5percentofGDP.4Significantly, non-oil
imports declined by1.8percentduring thisperiod reflecting aweakness ininvestment demand.
15. Netcapital inflows rosein1993-94 and1994-95 largely duetoincreased foreign direct and
portfolio investment. FDIhasgrown fromanannual flowofaround US$100 million ayearin1990-91
tomore thanUS$2 billion peryearin1995-96. Netcapital inflows in1995-96 areestimated tohave
fallen, resulting inanetbalance ofpayments deficit ofUS$2.9 billion. However, inflows fromForeign
Institutional Investors (FIIs), which hadbegun togrow inin1996, remain strong, predicting anoverall
increase inportfolio investment inthecurrent year.
16. Foreign exchange reserves fellfromUS$20.8 billion toUS$17 billion inthelastyear, although
thisstillcovers 4.9months ofimports. Inthecourse of1996, India'sbalance ofpayments has
strengthened considerably; foreign exchange reserves increased toaround US$19.5 billion byend
November 1996.5External debthasgradually declined; attheendofMarch 1996, theshare ofexternal
debttoGDP stood at28.6percent.
17. India'snominalexchangeratevis-à-visthedollar,whichhadremainedfairlystableduring1993-94
and1994-95, began coming under pressure inearly1995-96 asaresult oftheworsening current account
deficit andreduced inflows ofportfolio investments. Speculation about further depreciations exacerbated
thesituationinmid-1995andtheRBIintervenedbysellingforeignexchangeontheopenmarket;policies
totighten domestic liquidity, including a15percentinterest surcharge onimport finance, were
introduced, stabilizing thecurrency untilanother depreciation inFebruary 1996. Inaddition toother
measures toraiseliquidity, thesurcharge onimport financing wasraised to25percentandsince then
thecurrency hastraded within afairly narrow band. Theimport financing surcharge wasrescinded
inJuly1996. Despite these sudden fluctuations, thenominal effective ratedepreciated onlybyabout
3percentbecause oftheconsiderable appreciation oftheUSdollar against other major currencies.
Therealeffective exchange rate,however, hadappreciated byabout 8percentbyend-November 1996,
relative toitslevelinMarch 1993, when India unified itsexchange ratesystem.
4Government ofIndia.
5Government ofIndia.WT/BOP/W/11/Add.1
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Table 6-India -Balance ofPayments, 1991-92-1995-96
(InUS$million)
1991-92 1992-93 1993-94Prel. Est.
1994-95Prel. Est.1995-
96
Trade balance -2,798 -4,368 -2,386 -4,983 -8,938
Exports, f.o.b. 18,266 18,869 22,683 26,857 32,467
Imports, c.i.f.1-21,064 -23,237 -25,069 -31,840 -41,405
Non-factor services 1,207 1,128 535 -407 -34
Netinvestment income -3,830 -3,422 -3,270 -3,983 -4,479
Private transfers 3,783 2,773 3,595 6,200 7,480
Current account balance -1,178 -3,526 -1,158 -2,701 -5,487
Capital account 3,968 2,966 9,835 8,806 4,278
Direct investment 139 341 586 1,314 2,008
Portfolio investment -- 214 3,649 3,581 2,214
FIIs -- 1 1,665 1,503 2,008
External Assistance 3,037 1,859 1,901 1,434 780
Commercial borrowing21,456 -358 607 1,029 527
Disbursements 3,133 1,167 2,913 3,841 3,876
Amortization 1,677 1,525 2,306 2,812 3,349
Short termcredit, net -515 -1,079 -769 330 160
Non-resident deposits, net 290 2,001 1,205 847 1,365
Rupee Debt -1,240 -878 -1,053 -1,050 -963
Other capital 801 866 3,708 1,321 1,813
Overall balance 2,790 -560 8,677 6,105 -1,209
Increase ingross reserves
(-=increase)-3,576 -728 -8,864 -4,959 2,919
Memorandum items:
Current account /GDP (inpercent) -0.5 -1.8 -0.5 -1.0 -1.7
External debt/GDP (inpercent)
33.9 33.7 36.3 32.9 27.9
Debt service ratio(inpercent)
30.2 28.6 26.5 26.4 26.2
Foreign exchange reserves
(inUS$billions) 5.6 6.4 15.1 20.8 17.04
(inmonths ofimports) 3.2 3.3 7.2 7.8 4.9
1Includes interest ontrade finance. Excludes personal imports ofgoldandsilver.
2Includes Foreign Currency Convertible Bonds (FCCBs) andother Euro bond issues.
Source: IMF.
(vi) Sectoral Policies
18. India'sexternal tradepolicy hasbeenliberalised considerably ashasitspolicy onforeign direct
investment. Theapproval process forFDIhasbeenstreamlined andtheForeign Investment Promotion
Council (FIPC) hasbeenestablished topromote investment. Thenumber ofindustries which areeligible
forautomatic approval offoreign investment upto51percentofequity ispresently 35andisexpected
tobeexpanded shortly. Foreign institutional investors arenowallowed toinvest upto10percent
ofacompany 'sshares andtheyhavealsobeenallowed toinvest innon-listed countries. Financial
sector reform isanother areawhere considerable progress hasbeenmade oflate.
19. Since theearly 1990s when India embarked onanewpolicy ofliberalisation, Government
policies haveconcentrated onstructural changes toopentheIndian economy. Along withreform of
thecountry 'sexternal trading system, theGovernment hasattempted toincrease private sector
participation intheeconomy andrecent policy statements haveemphasized reforms ininfrastructure
where thecountry experiences major bottlenecks.WT/BOP/W/11/Add.1
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20. Infrastructure remains aproblem inIndia andreform herehasbeenrelatively slower. Private
sector investment hasbeenencouraged inanumber ofsectors including power generation, airports,
portsandroads. Restructuring ofthestatepower sectors hasbeeninitiated which isexpected toimprove
thefinancial condition ofStateElectricity Boards. Private sector participation inpower generation is
being encouraged andaneffort hasbeenmade tostreamline theapproval process fornewprojects
uptoRs10billion. Inthecaseofroads, theNational Highways Actwasamended in1995 toallow
private sector participation. Intelecommunications, licenses havebeenallocated forprivate sector
provision oftelephone services ineightmajor delivery areasandabilltosetuptheTelecom Regulatory
Authority ofIndia wasintroduced inParliament inJuly1996.