India WT/TPR/S/182/Rev.1 
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I. ECONOMIC ENVIRONMENT 
(1) OVERVIEW  
1. Since the liberalization process began in 1991, India's real GDP has grown at an average 
annual rate of approximately 6% ;  it is expected to rise to over 9% in fiscal year 2006/07 
(April-March).1  Growth has been led by services and manufacturing, the two largest sectors, with 
agriculture growing much more slowly.  This impr essive economic performance  is largely the result 
of unilateral economic reforms, in cluding liberalization of India's tr ade and FDI regimes, which began 
in the early 1990s and have continued during the period under review (2002-07).  For example, the 
average applied MFN tariff has been cut from 32.3%  to 15.8%, facilitated by internal tax reform 
aimed at raising India's relatively low tax/GDP ratio, which is insufficient to finance it's 
developmental needs, including infrastructure.  India has not relied solely on unilateral reforms, 
however;  it has become increasingly involved in bila teral and regional trade agreements (RTAs).   
2. In the longer term, the Government is aiming fo r growth of between 8% and 10% per annum;  
exports are now considered a main engine of  growth alongside domestic consumption and 
investment.2  These higher growth rates will require more appropriate macroeconomic policies, 
especially fiscal policy.  They will also require th e continuation of ongoing st ructural reforms aimed, 
inter alia , at further reducing reliance on tariffs as a source of tax revenue, br oadening the tax base 
and cutting tax rates, addressing the lack of infrastructure (notably power, transportation, and telecommunications), the intrusiveness of industrial policy, capital and labour market rigidities, unnecessarily burdensome regulation and re d tape together with other impediments to competition; all 
of these raise the costs of doing business in Indi a, thereby constituting impediments to improved 
productivity and thus hampering e xports and deterring inward FDI.
3  Private domestic and foreign 
investment is being encouraged through private-publ ic partnerships, especially in the development of 
infrastructure, and relaxation of FDI restrictions.   
3. The benefits to the Indian economy of reforms initiated in 1991 have been considerable.  
High growth has translated into rising per capita incomes.  It has also improved social and poverty 
indicators with infant mortality declining from 68 per 1,000 in the mid 1990s to 58 per 1,000 in 2005, 
and the percentage of the population living below the national poverty line declining from 36% in 
1993/94 to approximately 28% in 2004/05.4  Literacy levels, sanitation conditions, and access to clean 
water have also improved.5  
                                                      
1 According to the 2006/07 Economic Survey GDP growth during 2005/06 and 2006/07 was 9% and 
9.2%, respectively. 
2 In his address to the National Development C ouncil on 9 December 2006 , the Prime Minister 
mentioned that the targeted aver age annual growth during the 11th Five Year Plan was 9%.   
3 Investment Commission (2006). 
4 The poverty level in India is defined on the basis of calorie intake, which is 2,100 kilocalories in 
urban areas and 2,400 kilocalories in rural areas.  The figures for 1995 are from World Bank (2006).  The figures for 2004/05, which are provisional, are provided by the Planning Commission.  
5 In 2004, 33% of people had access to improved wate r sources and 5% to bette r sanitation facilities, an 
improvement from 14% and 4% in 1990.  Furthermore, adult literacy levels over the same period increased from 49% to 61% (World Bank, 2006).   WT/TPR/S/182/Rev.1 Trade Policy Review 
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(2) RECENT ECONOMIC DEVELOPMENTS  
(i) Economic performance 
4. India's economic performance since its previous  Review has remained impressive.  Annual 
real GDP growth averaged over 7% between 2001/02 and 2006/07.  Growth has been particularly 
strong since 2003/04, averaging over 8.5%;  despite the recent increase in international petroleum 
prices, GDP growth for 2006/07 is in excess of 9%  (Table I.1).  Growth has been fuelled by the 
services sector, which grew by an average of 9.8% ove r the past four years, led by the trade, hotel, 
transport, and communications subsectors.  Th e manufacturing sector has also exhibited robust 
growth over the past fiscal year.  By contrast, grow th in the agriculture sector remains sluggish owing 
to, inter alia,  structural inefficiencies, such as ceilings  on land holdings, and the vagaries of the 
weather.  
Table I.1 
Selected macroeconom ic indicators, 2000-07 
  2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07a 
National accounts (Percentage change) 
Real GDP (at 1999/00 factor cost) 4.4 5.8 3.8 8.5 7.5 9.0 9.2  
Consumption 1.8 5.4 1.2 7.0 6.9 .. .. 
Private consumption 2.1 6.2 1.6 7.8 6.5 .. .. 
Government consumption 0.3 1.7 -0.6 2.4 9.2 .. .. 
Gross fixed capital formation 0.0 5.0 9.9 11.3 9.5 .. .. 
Exports of goods and non-factor services 15.9 0.2 20.5 25.0 37.9 29.7  .. 
Imports of goods and non-factor services 8.1 -3.3 16.4 18.6 51.7 32.6  .. 
Unemployment rate (%) 7.3 .. .. .. 8.3 .. .. 
Prices and interest rates (Per cent) 
Inflation (%age change)        
WPI 7.2 3.6 3.4 5.4 6.4 4.4 .. 
CPI - industrial workers 3.7 4.3 4.0 3.9 3.8 4.4 .. 
Deposit rateb 8.5-9.0  7.5-8.5  4.25-6.0 4.0-5.25 5.25-5.5 6-6.5  .. 
Nominal prime lending rate (period average)c 11.50  11.50  10.75  10.25  10.25  10.25  .. 
Money credit (end period) (Percentage change) 
Broad money supply (M3)d 16.8 14.1 14.7 16.7 12.3 21.2 .. 
Credit to private sector  15.8 11.8 18.3 13.0 26.0 32.1 .. 
Exchange rate        
Rupee/US$ (financial year - annual average) 45.68  47.69  48.40  45.95  44.93  44.27  .. 
Real effective exchange ratee (%age change) 5.3  -0.1  -4.9  1.5  2.5  5.2  .. 
Nominal effective exchange ratee (%age change) 0.3  -1.8  -6.3  -1.9  -0.7  3.1  .. 
 (Per cent of GDP, unless otherwise indicated) 
Central government balance        
Current balance -4.1  -4.4  -4.4  -3.6  -2.5  -2.6  -2.0  
Current revenue 9.2  8.8  9.4  9.5  9.8  9.7  10.3  
Tax revenue 6.5  5.9  6.4  6.8  7.2  7.6  8.4  
Current expenditure 13.2  13.2  13.8  13.1  12.3  12.3  12.4  
Capital receipts  6.3  7.1  7.4  7.5  6.1  4.4  3.9  
Capital expenditure 2.3  2.7  3.0  3.9  3.6  1.9  1.8  
Gross fiscal balancef -5.7  -6.2  -5.9  -4.5  -4.0  -4.1  -3.7  
Central government total debt .. 59.9 63.4 62.8 63.8 61.5 62.6  
Domestic debt  52.8  56.8 61.0 61.1 61.8 59.6 60.6  
Table I.1 (cont'd) India WT/TPR/S/182/Rev.1 
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  2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07a 
Saving and investment         
Gross domestic savings 23.4  23.5  26.4  29.7  31.1  32.4  .. 
Public sector -1.9  -2.0  -0.6  1.2  2.4  2.0  .. 
Gross domestic investment 24.0  22.9  25.2  28.0  31.5  33.8  .. 
Public sector 6.9  6.9  6.1  6.3  7.1  7.4  .. 
External sector        
Current account balance  -0.6  0.7  1.2  2.3  -0.4  -1.1 .. 
Net merchandise trade  -2.7  -2.4  -2.1  -2.3  -4.9  -6.4 .. 
Merchandise exports 9.9  9.4  10.6  11.0  12.2  13.1 .. 
Merchandise imports 12.6  11.8  12.7  13.3  17.1  19.5 .. 
Services balance 0.4  0.7  0.7  1.7  2.2  3.0 .. 
Capital account 1.9  1.8  2.1  2.8  4.0  2.9 .. 
Direct investment 0.7  1.0  0.6  0.4  0.5  0.6 .. 
Balance-of-payments  1.3  2.5  3.3  5.2  3.7  1.8 .. 
Terms of trade (1978/79=100) 128.1  125.4  113.6  123.4  124.0  90.0  .. 
Merchandise exports (%age change) 27.7  2.6  21.9  16.9  25.6  22.0  .. 
Merchandise imports (%age change) 10.2  1.4  16.2  17.8  45.3  30.3  .. 
Service exports (%age change) 9.4  9.6  22.9  22.7  57.3  40.5  .. 
Service imports (%age change) 32.1  -1.2  25.7  -7.2  62.6  33.4  .. 
Foreign exchange reservesg (US$ billion, end-
period) 39.6  51.0  71.9  107.4  135.6  145.1  .. 
in months of imports 8.2  10.9  13.4  16.1  13.7  11.1  .. 
Total external debt (US$ billion;  as at end-
March) 101.3  98.8  104.9  111.6  123.2  126.4  .. 
Debt service ratioh 16.2  13.6  16.0  15.9  6.1  10.2  .. 
.. Not available. 
a Provisional.  
b Refers to the deposit rates of five ma jor public sector banks of maturity of one to three years, as at end-March. 
c Relates to States' bank prime lending rate, which is the benchm ark interest rate for the vari ous categories and classes of ad vances 
granted by the bank. 
d Including currency with the public, other deposits with the RBI, demand deposits and time deposits. 
e Six-currency trade based weight (including the EURO, Ja pan, United States, United Ki ngdom, Hong Kong and China). 
f Revenue receipts plus capital receipts (not including borrowing and other liabilities) minus total expenditure. 
g Excluding gold, SDRs (Special Drawing Right s) and Reserve Tranche Position in IMF. 
h Including debt-servicing on non-civilian credits 
Source:  Reserve Bank of India;  Ministry of Finance (2007), Economic Survey 2006/07 and Union Budget 2007/08;  and 
data provided by the authorities.  
5. Services continue to be the largest contributor  to GDP;  the sector's share increased from 50% 
in 2000/01 to over 54% in 2005/06, while the share of  manufacturing has remained relatively stable at 
between 15% and 16% of GDP.  By contrast, the share of agriculture declined from around 24% to 18.3% of GDP during the period (Table I.2).  
6. Growing domestic demand together with incr easing commodity and oil prices have resulted 
in inflation, as measured by the Wholesale Price Index (WPI), rising during the period under review.  However, the Government has contained it within its  stipulated 5.5% target, primarily because higher 
oil prices have not been complete ly passed through to consumers.
6  The IMF estimates that petroleum 
prices are undervalued by 40%;  the bulk of the shor tfall is provided as subsidies, which are borne by 
                                                      
6 RBI (2006).  During the period under review, the WPI breached the targeted inflatio n in 2004/05, 
when it was 6.4%;  it came down to 4.4% in 2005/06 and has averaged 4.9% annually during the period under review.  However, on 27 January 2007, WPI was reco rded at 6.6%, again breaching the official target.  WT/TPR/S/182/Rev.1 Trade Policy Review 
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public sector oil marketing companies (OMC's).7  While international prices have risen, domestic 
prices have not following suit, and the subsidy has increased steadily, from an estimated 0.5% of GDP 
in 2003/04 to over 1% of GDP in 2005/06.8  Inflation is also somewh at suppressed because basic food 
prices and electric power rates are subsidized by the Government. 
Table I.2 
Basic economic and social indicators, 2000-06  
  2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 
Real GDP at factor cost (Rs billion, 1999/00 prices ) 18,647.7  19,729.1  20,477.3  22,225.9  23,896.6  26,045.3  
Real GDP at market prices (Rs billion, 1999/00 pri ces) 20,308.7  21,366.3  22,162.6  24,022.5  26,022.3  28,424.8  
Current GDP at factor cost (Rs billion) 19,254. 2  21,001.9  22,653.0  25, 494.2  28,559.3  32,509.3  
Current GDP at market price (Rs billion) 21,023.8  22,810.6  24,580.8  27,654.9  31,266.0  35,671.8  
Current GDP at factor cost (US$ billi on) 421.5  440.4  468.1  554.8  635.6  734.3  
Current GDP at market price (US$ billion) 460.2  478.3  507.9  601.8  695.9  805.7  
GDP per capita at current market price (Rs) 20,631.7  21,975.5  23,299.4  25,773.4  28,684.4  32,223.8  
GDP per capita at current market price (US$) 451.6  460.8  481.4  560.9  638.4  727.8  
 Annual percentage change 
GDP by economic activity at constant 1999/00 prices       
Agriculture, forestry, and fishing -0.2 6.3 -7.2 10.0 0.0 6.0 
Mining and quarrying 2.4 1.8 8.8 3.1 7.5 3.6 
Manufacturing 7.7 2.5 6.8 6.6 8.7 9.1 
Electricity, gas, and water 2.1 1.7 4.7 4.8 7.5 5.3 
Construction 6.2 4.0 7.9 12.0 14.1 14.2 
Services 5.7 7.2 7.4 8.5 9.6 9.8 
Trade, hotels, transport and communication 7.3 9.1 9.2 12.1 10.9 10.4 
Financing, insurance, real estate, and business services 4.1 7.3 8.0 5.6 8.7 10.9 
Community, social, and personal services 4.8 4.1 3.9 5.4 7.9 7.7 
 Per cent 
Share of main sectors in current GDP       
Agriculture, forestry, and fishing 23.4 23.2 20.9 20.9 18.8 18.3 
Mining and quarrying 2.4 2.3 2.8 2.5 3.0 2.8 
Manufacturing 15.6 15.0 15.3 15.2 15.9 16.0 
Electricity, gas, and water 2.4 2.3 2.4 2.2 2.1 2.0 
Construction 5.8 5.8 6.0 6.2 6.5 6.8 
Services 50.5 51.5 52.7 52.9 53.7 54.1 
Trade, hotels , transport, and communication 22.3 22.8 23.3 23.9 25.0 25.4 
Financing, insurance, real estate, and business services 13.2 14.0 14.7 14.7 14.5 14.3 
Community, social, and personal services 15.0 14.8 14.8 14.3 14.3 14.4 
Share of sector in total employmenta       
Agriculture, hunting, and fishery 5.1 5.2 4.9 5.2 .. .. 
Mining and quarrying 3.6 3.4 3.4 3.4 .. .. 
Manufacturing 23.7 23.2 22.9 22.2 .. .. 
Electricity, gas, and water 3.5 3.6 3.5 3.6 .. .. 
Construction 4.1 4.1 4.0 3.7 .. .. 
Table I.2 (cont'd) 
                                                      
7 To stem the losses incurred by these OMCs, petroleum prices were increased in June 2006;  the pass 
through of higher prices to consumers was restricted to 12.5% with the rest of the burden being shared between 
the Government and the OMCs.  However, as international oil prices have come down since then, domestic 
petroleum prices have also been redu ced, most recently in February 2007. 
8 IMF (2006), and Ministry of Petroleum and Natural Gas (2006). India WT/TPR/S/182/Rev.1 
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  2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 
Services 60.0 60.6 61.3 62.0 .. .. 
Wholesale and retail trade 1.8 1.8 1.8 2.0 .. .. 
Transport, storage, and communication 11.3 11.2 11.3 11.2 .. .. 
Financing, insurance, real estate, etc. 5.9 5.9 6.0 6.7 .. .. 
Public administration and defence and other services 41.1 41.6 42.2 42.1 .. .. 
Memorandumb       
Birth rate (per 1,000) 26.1 25.4 25.0 24.8 .. 23.8 
Life expectancy at birth 63.3 63.3 63.7 63.3 .. .. 
Infant mortality rate (per 1,000 live births) 69.0 67.0 67.0 63.0 .. 58.0 
Adult illiteracy rate 42.8 42.0 38.7 39.0 .. .. 
.. Not available. 
a Organized sector employment only. 
b Based on calendar year:  2000/01 should read 2000. 
Source:  Ministry of Finance (2006), Economic Survey 2005/06 ;  Reserve Bank of India;  Human Development Indicators. 
7. Strong domestic demand and rising oil prices have also resulted in a widening trade deficit, 
pushing the current account into deficit in 2004/05 (currently 1.1% of GDP) (Table AI.1).  The 
current account deficit reflects the extent by whic h gross domestic investment exceeds gross domestic 
saving.  During the period under review, public invest ment was consistently greater than public sector 
savings;  however, private sector savings were ab le to finance government investment as private 
investment was weak resul ting in a current account surplus (during 2001/02-2003/04). 
8. Despite the falling fiscal deficit, the curre nt account deficit increased during 2004/05 and 
2005/06 on account of a pick-up in private invest ment, which was in part funded through the 
utilization of reserves.9  However, foreign exchange reserv es, continued to show robust growth, 
increasing from US$55 billion in 2002 to US$185 billi on in February 2007.  The latter figure is 
equivalent to over 60 weeks of imports and over  17 times short-term public and private debt.10 
9. With unemployment rising (official figures show a rise from 7.3% in 2000/01 to 8.3% in 
2004/05) and labour productivity in agriculture, the larg est employer, only one-sixth of the level in the 
rest of the economy (Box I.1 and Table I.3), India faces a dilemma.  An estimated 10 million persons 
are expected to join the labour market each year, a nd as the main driver of recent economic growth is 
services, which is relatively less labour intensive an d possibly more skill intensive than other sectors, 
there is a need both to raise skill levels (through ed ucation and training) and to facilitate employment 
opportunities for the less-skilled in labour-intensive activities.11  The approach paper to the 11th Five 
Year Plan also suggests that appropriate policies mu st be pursued to ensure that growth is broad 
based, especially addressing the problems of ru ral areas as envisaged in the Common Minimum 
Programme of the current Government.  This is esp ecially urgent, given recent estimates of rising 
income inequality.12  
                                                      
9 This is reflected in the decline in the growth rate of reserves. 
10 The import cover is based on 2005/06 balance-of-payments data from the RBI while the short-term 
debt coverage is based on September 2006 numbers in Ministry of Finance (2007). 
11 It was suggested in a speech by the Deputy Chairm an of the Planning Commi ssion that the reduction 
in public sector employment has not been offset to the extent expected by increased job opportunities in the 
private sector.  Viewed at:  http://www.planningc ommission.nic.in/aboutus/sp eech/spemsa/msa048.pdf  
12 The Gini coefficient index measures income ine quality, where an index of zero represents perfect 
equality, and 1 perfect inequality.  According to Planning Commission estimates based on per capita 
consumption, the Gini coefficient rose from 0.26 in 1999/00 to 0.3 in 2004/05 for the rural population and from 0.34 to 0.37 for the urban population. WT/TPR/S/182/Rev.1 Trade Policy Review 
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Box I.1:  Total factor productivity in India  
Total factor productivity (TFP) reflects the efficiency with which factors of production are used, and is thus 
a key determinant of an economy's performance, especi ally its international competitiveness.  TFP should 
be distinguished from labour productivity (that is, the amount of output per employee), which is reflected in wage rates and thus living standards.  Among the main sources of improvement in labour productivity are 
growth in investment, which increases the amount of capital that employees have to work with, and growth 
in TFP.  In the absence of acco mpanying improvement in TFP, however, higher labour productivity can 
only be achieved at the expense of lower capital produ ctivity.  One of the most important sources of TFP 
growth in the long run is technological progress. 
Average annual output growth in India increased from 4.5% during the period preceding the reforms of 
1991 to 6.5% during 1993-04.  Of this 2 percentage po int increase, 1.2 points were  attributable to improved 
TFP, which more than doubled from an average annual of 1.1% during 1978-93 to 2.3% during the period 
1993-04.  The rest of the rise was largely due to increased investment.  Improved TFP contributed to roughly half of the increase in labour productivity, which almost doubled between the two periods;  the rest 
of the increase was due mainly to higher investment.  Improved TFP was also largely responsible for the 
substantial increase in the rate of growth of capital productivity.  
Growth in both output and TFP has been much faster in the services sector than in industry (where 
performance has seemingly been hampered by, inter alia,  rigid labour laws and inadequate infrastructure).  
By contrast, growth in output and TFP in agriculture has slowed (possibly owing to weather and other 
natural factors).  It follows that the shifting of re sources, especially labour , from agriculture, where 
two thirds of the labour force is currently employed, to the more productive services and industry sectors 
would contribute to faster overall growth in output and TFP in the economy as a whole. 
Source: WTO Secretariat  based  on 
Bosworth B. and Collins S. (2007), "Accounting for Growth:  Comparing China 
and India", Economics of Developing Countries Papers,  January.  
 
Table I.3 
Total factor productivity in India, 1978-04 
(Annual change, %) 
 Overall Agriculture Industry Services 
 1978-93 1993-04 1978-93 1993-04 1978-93 1993-04 1978-93 1993-04 
Output 4.5 6.5 2.7 2.2 5.4 6.7 5.9 9.1 
Employment 2.1 1.9 1.4 0.7 3.3 3.6 3.8 3.7 
Capital 1.0 1.8 0.2 0.7 1.4 1.7 0.3 1.1 
Land -0.1 0.0 -0.1 -0.1 n.a. n.a. n.a. n.a. 
Education 0.3 0.4 0.2 0.3 0.4 0.3 0.4 0.4 
TFP 1.1 2.3 1.0 0.5 0.3 1.1 1.4 3.9 
Labour productivity 2.4 4.6 1.3 1.5 2.1 3.1 2.1 5.4 
Capital productivity 1.8 2.4 1.7 0.5 1.4 2.2 3.5 5.5 
n.a. Not applicable. 
Source: Bosworth B. and Collins S. (2007), "Accounting for Growth:  Comparing China and India", Economics of 
Developing Countries Papers,  January. India WT/TPR/S/182/Rev.1 
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(ii) Macroeconomic policies 
(a) Monetary policy 
10. Monetary policy is the responsibility of the Reserve Bank of India (RBI).13  Although there is 
no explicit mandate for price stability, the objectives of monetary policy in India are to maintain price 
stability and ensure adequate flow of credit to the productive sectors of the economy.  The Reserve 
Bank is committed to ensuring a monetary and inte rest rate environment that supports export and 
investment demand in the economy so as to enable  continuation of the growth momentum while 
reinforcing price stability with a view to anchoring in flation expectations.  Of late, considerations of 
financial stability have assumed greater importance in  view of the increasing openness of the Indian 
economy and financial sector reforms. 
11. There has been a shift in emphasis from targeti ng reserves via the cash reserve ratio (CRR) to 
targeting interest rates through open market means.   The principal instrument used by the Central 
Bank is the liquidity adjustment facility (LAF), whic h enables the RBI to adjust short-term liquidity 
through repo and reverse repo auctions.14  To dampen the expansionary impact of net foreign assets 
(NFA) growth, the RBI sterilized foreign inflows through the market stabilization scheme (MSS).  
Under the MSS, the RBI auctions securities on behalf  of the Government and keeps the equivalent 
cash balance in a special account.15  
12. Following a period of supportive monetary policy with an emphasis on maintaining easy 
liquidity conditions in 2002/03 to foster growth, inflationary pressure has risen, driven by rising 
international commodity prices and increased demand,  prompting the RBI to raise interest rates.16  
The RBI has periodically raised the reserve require ment and the reverse re po rate (5.75% and 6%, 
respectively, in February 2007), resulting in th e overnight call money rate rising to 17% in 
December 2006 a nine-year high.17  According to the authorities, the nominal prime lending rate is 
currently at 11.0%-11.5%, which tran slates into a relatively high real (adjusted for WPI) interest rate 
ranging from  6% to 7%.   
13. In July 2006, the Governor of the RBI noted a continued need to maintain tight monetary 
policy conditions given continued strong demand and surplus liquidity.18  The RBI signalled the same 
by raising the repo rate by 25 basis points in  November 2006 and January 2007;  this is seen as a 
move to encourage banks to increase their deposit ra tes, which should result in higher savings and a 
slow down in domestic credit demand.19  In addition, domestic credit growth has raised concerns 
about asset quality and the requisite provisioning; in this regard, the RBI has raised risk weights on 
comparatively high risk areas, such as r eal estate and equities/financial instruments.20  Moreover, 
                                                      
13 The RBI was set up on 1 April 1935 under the Reserve Bank of India Act, 1934. 
14 The LAF was introduced in June 2000.  The repo rate is the rate at which the RBI lends money to 
banks, while the reverse repo rate is the return earned by banks on funds deposited with the RBI. 
15 MSS was initiated in March 2004, and the ceiling on the MSS account is currently Rs 800 billion.   
16 Interest rate increases started in mid 2004. 
17 The Government plans raise the CRR by a further 25 basis points in March 2007. 
18 The easing of liquidity conditions after some ti ghtening in December 2005-M arch 2006 is attributed 
mainly to a reduction in Central Government surplus cas h balances with the RBI and the RBI's purchases of 
foreign exchange (RBI, 2006c). 
19 Money supply growth is 21%, and growth in bank credit is in excess of 30% against respective 
targets of 15.5% and 20%. 
20 IMF online information.  Viewed at:  http:// www.imf.org/external/country/ind/rr/econnews/2007/ 
013007.pdf. WT/TPR/S/182/Rev.1 Trade Policy Review 
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higher prices of primary food products and industri al raw materials have been putting pressure on 
inflation, maintaining the need for tighter monetary policy in the coming period.21 
(b) Exchange rate policy 
14. The rupee has been subject to a managed float since 1993, with the exchange rate determined 
in the interbank market.  The exchange rate po licy in recent years has been guided by the broad 
principles of monitoring and flexible manageme nt of exchange rates, without a fixed or 
pre-announced target or band, coupled with the abili ty to intervene when n ecessary.  The currency of 
intervention is usually the U.S. dollar.  Between 2001/02 and 2003/04, India had a current and capital 
account surplus, which created pressure on the exchange  rate to appreciate.  With the current account 
recording a deficit in 2004/05 and 2005/06, the exchange rate has depreciated.  
15. The nominal effective exchange rate (NEER ) depreciated between 2001/02 and 2004/05 as 
the both the U.S. dollar and the rupee depreciated against other currencies in India's NEER basket, 
before appreciating in 2006.22  On the other hand, the real effective exchange rate (REER),  which is 
inflation adjusted, has been appreciating since 2003/04 as inflation in India has been faster than in 
those countries whose currencies comprise India's REER basket.23  
(c) Fiscal policy  
16. Despite moderate tax rates, the pervasiven ess of incentives is such that the Central 
Government's tax revenues net of states' shares are onl y 8.4% of GDP (Table I.4);  this would appear 
to be insufficient to finance India's developmental ne eds, including physical infrastructure, education, 
health, and social programmes.  (State government s collect additional tax revenues equivalent to 
another 8.8% of GDP.24)  Spending by Central and several state governments is constrained by 
legislation requiring them to cut their fiscal deficits , which together amount to over 6% of GDP.  The 
consequent borrowing has resulted in public debt e quivalent to 76% of GDP, which has contributed to 
high real interest rates to the detriment of private investment.  Fiscal constraints have prompted, inter alia,  measures to improve fiscal transparency in pub lic finances, efforts to achieve greater value 
for money in public expenditure programmes, including government procurement, and have 
contributed to major tax reform over the past few years, which should broaden the internal tax base 
and allow cuts in tariff, if not tax, rates. 
17. For much of the period under review, fiscal po licy has been conducted within the framework 
of the Fiscal Responsibility and Budget Management  Act (FRBMA), passed in 2003.  The Act calls 
for the Central Government to take appropriate me asures to reduce the fiscal and revenue deficits so 
as to eliminate the revenue deficit by 31 March 2009.
25  It also required the Central Government to 
specify the annual targets for these reductions up to 31 March 2009 as well as measures to make the 
process more transparent (Box I.2).26  The Government established a Task Force on Implementation 
                                                      
21 RBI (2006e). 
22 The NEER and REER baskets comprise the U.S. dollar, euro, yen, pound sterling, HK$, and the 
renminbi. 
23 Initially the rupee appreciated against the U.S. do llar, however this did not offset its depreciation 
against other currencies in its NEER basket resulting in the NEER depreciating. 
24 Ministry of Finance (2007), Budget estimates. 
25 The FRBM Bill originally envisaged elimination of  the deficit by 31 March 2006.  The Act passed 
by Parliament changed this to 31 March 2008, and it was further changed to 31 March 2009 through an 
amendment to the Act in 2004. 
26 In order to prevent the further build-up of government liabilities, the Act prohibits the Central 
Government from borrowing from the RBI except to meet temporary cash deficits during the financial year. India WT/TPR/S/182/Rev.1 
 Page 9 
 
 
of the FRBM Act, which recommended, inter alia,  measures to increase govern ment revenue, such as 
through a widening of the tax base and better tax complia nce in order to meet the Act's fiscal targets.  
The Central Government's fiscal and revenue defi cits have declined since the FRBMA was passed 
(Table I.1).27  The fiscal deficit fell to 4.0% of GDP in 2004/05, but then rose to  4.1% the following 
year owing to a "pause" in fiscal adjustment to meet the increased expenditures recommended by the 
Twelfth Finance Commission (Box I.2), and then fell to 3.7% of GDP in 2006/07.  The Government expects further reductions in the fiscal and revenu e deficits to be achieved through better tax 
compliance and improved efficiency of the tax ad ministration.  On the expenditure front, the 
Government plans to improve management as well as limit the growth in non-development 
expenditure. 
Box I.2:  Fiscal Responsibility and Budget Management reforms 
The Fiscal Responsibility and Budget Management Act, 2003, requires the Central Government to gradually 
reduce the fiscal deficit  and eliminate its revenue de ficit by 31 March 2009.  The Government must fix 
annual targets and outline the path it intends to take to meet these targets.  The revenue and fiscal deficits 
must be reduced by at least 0.5% and 0.3% respectively, annually, and the Central Government's fiscal deficit reduced to below 3% by 31 March 2009. 
The Act also made changes to enha nce transparency in the implementa tion of these reforms and in the 
Government's medium-term fiscal policy.  Three statem ents must be submitted to Parliament every year:  
the Macroeconomic Framework Statemen t, a Fiscal Policy Strategy Statem ent, and a Medium Term Fiscal 
Policy Statement.  The Macroeconomic Framework Statement defines the background against which fiscal policy is formulated including details about economic gr owth, and fiscal and extern al balances;  the second 
report specifies policy measures on taxation, expenditure, subsidies, administered prices, and borrowings;  
and the third presents three-year rolling targets for fiscal indicators, including underlying assumptions. 
The Act also requires the Minister of  Finance to review every quarter th e trends in receipts and expenditures 
in relation to the Budget and place these before Parlia ment.  The Minister must explain any shortfall in 
revenue or excess of expenditure over the levels set in the Fiscal Policy Strategy Statement during any period in the financial year and any remedial action to be taken. 
State finances have traditionally been problematic.  Aggregate debt remains over 300% of state revenues 
(33% of GDP), with some states registering debt ratios of up to 100%.  The Twelfth Finance Commission, which submitted its report in 2004 (a Finance Commission must be appointed once every five years to 
determine revenue sharing between the Centre and stat es), recommended a transfer of resources from the 
Centre to the states, and set out a path to be followed by the states on fiscal responsibility and reduction of the combined debt-GDP ratio by 2009/10.  The Central Government has accepted the recommendations, 
which involve a total transfer from the Ce ntre to the states of Rs 7,557.5 billion.  
Source: Fiscal Responsibility and Budget Management Act, 2003.
 
18. Given the limited scope for reducing expenditure, especially in the face of rising 
infrastructure and social expenditures, the aut horities have focused on increasing revenue, especially 
through tax reform, notably a broadening of the tax base.28  As a result, during the period under 
review, tax revenues grew at an annual rate of a pproximately 20%, primarily on the back of direct 
taxes (especially corporate taxes) owing to implem entation of the Task Force recommendations.  As a 
                                                      
27 A revenue deficit arises when current expenditure s are in excess of current revenues.  However, 
when capital/investment receipts and payments are includ ed, the resulting deficit (or surplus) is known as the 
fiscal deficit (surplus). 
28 For example, the Report of the Task Force on Implementation of the Fiscal Responsibility and 
Budget Management Act noted that India's tax-to-GDP ratio was one of the lowest among 51 comparable 
economies (GDP above US$100 billion on a PPP basis), a nd was therefore a central feature of India's fiscal 
problem (Ministry of Finance, 2003). WT/TPR/S/182/Rev.1 Trade Policy Review 
Page 10 
 
 
result, direct taxes now account for a higher percen tage of total tax revenue and GDP than indirect 
taxes.  The share of indirect taxes has also fa llen on account of lower im port tariffs (although higher 
import volumes may have partly offset this).  In addition, the share of ex cise taxes has also come 
down significantly, although they still account for over 25% of tax revenues (Table I.4). 
Table I.4 
Central Government's tax revenue, 2000-07 
(Rupees billion and per cent) 
  2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07a 
Total tax revenueb (Rs billion) 1,886.0  1,870.6  2,162.7  2,543.5  3,049.6  3,661.5  4,678.5  
(per cent of GDP)   (9.0)  (8.2)  (8.8)  (9.2)  (9.8)  (10.3)  (11.4) 
Net of states' share (Rs billi on) 1,366.6  1,335. 3  1,585.4  1,869.8  2, 247.1  2,702.6  3,459.7  
(per cent of GDP) (6.5) (5.9) (6.4) (6.8) (7.2) (7.6) (8.4) 
 (Per cent of total tax revenue)  
Direct taxes 36.2 37.0 38.4 41.3 43.3 43.8 47.6 
Corporation tax 18.9 19.6 21.3 25.0 27.1 27.7 31.3 
Personal income tax 16.8 17.1 17.0 16.3 16.2 16.5 17.6 
Wealth tax 0.1 0.1 0.1 0.1 0.0 0.1 0.1 
Indirect tax 62.9 62.1 60.7 57.9 56.1 54.5 52.1 
Customs 25.2 21.5 20.7 19.1 18.9 17.8 17.5 
Union excise duties 36.3 38.8 38.1 35.7 32.5 30.4 25.1 
Service tax 1.4 1.8 1.9 3.1 4.7 6.3 8.2 
a Provisional. 
b Includes direct and indirect taxes as well as taxes of Union Territories and "other" taxes. 
Source : Ministry of Finance (2006) and (2007), Economic Survey 2005/06 , and 2006/07  and Union Budget 2007/08 . 
19. The Government has managed to keep expenditure growth mos tly within budget targets.  
Consequently, total (current and capital) expenditure as a percentage of GDP fell from over 16% in 
2002/03 to 14.2% in 2005/06 and is estimated to remain the same in 2006/07.  The Government was able to reduce the proportion of debt servicing as a percentage of GDP by retiring some of its more 
expensive debt and as a consequence of lower interest  rates.  However, non-plan expenditure remains 
significant due to defence, wages and pension payments.
29  With regard to plan expenditure, the 
Government consolidated its spending on the eight  flagship schemes (allocations budgeted to rise by 
43% in 2006/07).30  Despite the above, the Government need ed to resort to quasi-fiscal measures to 
meet the revenue deficit target, most notably the o il bonds that financed a portion of the oil subsidy, 
as well as including privatization/disinvestment receipts as current revenue.  Additionally, the 
Government has discontinued loan assistance to st ate governments to finance their annual plans as 
recommended by Twelfth Finance Commission;  these loans are now to be raised directly by the 
states.  As a result, capital expe nditure as a percentage of GDP has declined from 3.0% in 2002/03 to 
1.8% in 2006/07 (Table I.1).  
20. The central and state governments guarantee loans to meet some of their capital expenditures 
as well as to ensure food security.  Contingent liab ilities of the Government and the states came down 
                                                      
29 Plan expenditure is incurred on account of the government projects/schemes under the five-year 
plans;  non-plan expenditure includes other budgetary spending, such as defence, subsidies salaries, pensions, 
and debt servicing 
30 The eight flagship programmes are:  Sarva Siksha Abhiyan, Mid Day Meal Scheme, Rajiv Gandhi 
Drinking Water Mission, Total Sanitation Campaign, National Rural Health Mission, Integrated Child 
Development Services, National Rural Employment Guar antee Scheme, and Jawaharlal Nehru National Urban 
Renewal Mission. India WT/TPR/S/182/Rev.1 
 Page 11 
 
 
from 11.5% in 2002 to 9.9% in 2005 due to:  a re duction in the states issuing guarantees, and an 
annual cap of 0.5% of GDP on central government guarantees (stipulated in the FRBM). 
(iii) Structural reform 
(a) Tariff and tax reform 
21. During the period under review, tariffs and other indirect taxes as well as direct taxes have 
undergone significant reform.  The overall average applied MFN tariff fell from over 32% in 2001/02 
to almost 16% in 2006/07.  Nonetheless, India's import tariffs are still rather high and thus a major 
impediment to its exports, although tariff exemptions and drawbacks have been granted for certain 
goods and uses with a view to, inter alia,  mitigating the adverse impact of tariffs on exports.   
22. With regard to indirect taxation,  a value-added tax was implemente d by 30 states at the end of 
December 2006.  The VAT covers most goods (except essential products).  Furthermore , a larger 
number of services are also now subject to a tax rate of 12%.  It is envisaged that the VAT, services tax and central excise duty (CENVAT) will be merg ed into a more general goods and services tax 
(GST).  In addition, the Government intends to re duce and eventually eliminate the large number of 
exemptions that erode the tax base, but has hith erto been hesitant to implement these reforms. 
23. The income tax regime has been made more neutral by reducing/removing some tax 
incentives.  Other measures include an  increase in thresholds in conjunction with a decrease in rates, a 
consolidation of savings-related ex emptions and better enforcement,  all of which have helped to 
increase direct tax collected.  Despite these reforms,  a large number of exemptions and tax holidays 
granted to investors have been maintained and ev en expanded with the establishment of the SEZs, and 
these have the potential to erode the tax base.
31  However, these tax incentives have been somewhat 
offset by the minimum alternate tax (MAT), whic h was raised from 7.5% to 10% in 2006 in an 
attempt to increase the number of taxpayers.  At the same time, the MAT further complicates the tax system, thereby raising administration and compliance costs.    
(b) Infrastructure 
24. At the time of the previous Review, it was noted  that one of the major bottlenecks to faster 
economic growth and productivity was a lack of infr astructure.  This has been recognized by the 
authorities and several steps have been taken to address the problem, including improved transportation (roads, port facilities, and shipping), and continued reform to increase efficiency in 
power and telecommunications.  Recognizing the inade quacy of public funding for infrastructure, the 
Government has also encouraged private-public pa rtnerships to try and increase investment, including 
FDI, in infrastructure-related sectors.  At the same, it has relaxed limits on FDI in these sectors.  
Measures concerning power include the promulgation of the Electricity Act 2003, which allows private ownership in generation, distribution, and trading of electricity, as well as metering of all electricity sold.  However, technical and commerc ial losses remain high and electricity shortages 
widespread.  With regard to telecommunications, ba rriers to entry have been eased:  entry and licence 
fees have declined, "roll-out" obligations abolished,  and the limit on foreign investment increased.  As 
a result, there has been a significant increase in telecommunication penetration, especially mobile 
telephony. 
                                                     
 
31 Tax holidays are incorporated in the SEZ Act 2005.  The direct cost of holid ays (in terms of revenue 
forgone) for regions, exports, and the construction s ector alone has been estimated at some 0.5% of GDP 
(IMF, 2005a).  WT/TPR/S/182/Rev.1 Trade Policy Review 
Page 12 
 
 
25. Improvements in the transport sector have been, inter alia,  in the form of additional trains for 
freight, construction of a dedicated freight corridor, and encouraging private sector companies to operate their own freight trains.  Roads remain a hi gh priority:  the Government is encouraging public 
private partnerships and emphasising road develo pment through the National Highway Development 
Programme (NHDP) (Chapter IV).   
(c) Industrial policy 
26. During the review period, India's industrial policy, which includes reservations for the public 
and small-scale sectors and industrial licensing requirements has, by and large, become less 
restrictive.  Currently, three industries are now confin ed to the public sector and industrial licensing is 
required for five industries (six in  2002).  Products reserved for manufacture by the small-scale sector 
have also declined from 799 to 326.  Subsidies, toge ther with the lack of reform of the public sector, 
which includes a number of loss-making state-owned enterprises (SOEs) remain a major drain on public finances.  In addition, there are implicit subsidies especially through subsidization of key 
services, such as electricity and water.  Certain SOEs identified for closure on the basis of being 
economically non-viable continue to operate, and the privatization programme has been put on hold.  
(d) Financial sector and capital market reforms 
27. Financial services reforms have focused on the banking sector and are aimed at providing 
public banks (which still dominate the sector) with greater autonomy, so as to improve their efficiency.  Furthermore, foreign banks (as of 2005) have been allowed to set up wholly owned 
subsidiaries in India as well as offshore banking un its in SEZs.  Amendments to the Banking Act, 
which are under consideration, would raise the current limit on FDI  in domestic banks (set at 49%) to 
74% before the scheduled date of 2009, and lift the 10% limit on voting rights.  As a result of reforms 
undertaken, non-performing loans continue to declin e, and the aggregate capital adequacy ratio has 
risen during the period under review.  To mitigate risk s, the authorities are curre ntly planning to start 
implementation of Basel II in 2007 (Chapter IV).   Cooperative banks, however, which are not subject 
to direct supervision by the Reserve Bank, rema in poor performers with non-performing assets among 
certain rural cooperative banks reaching 35% of total loans.
32  On the other hand, restrictive 
legislation, such as priority sector lending, con tinues to adversely affect the performance of banks, 
leads to problems in recovering assets, and perpet uates weak accounting pr actices of firms in the 
priority sector (such as SMEs).  
28. Efforts to create a well functioning capital ma rket are being pursued by the Securities and 
Exchange Board of India (SEBI), the securities mark et regulator.  The securities exchanges have been 
corporatized and are in the process of being demu tualized.  Furthermore, all listed companies are 
required to adopt corporate governance requirements specified in the listing agreement by January 
2006.   
(e) Labour market reform 
29. Among the major problems facing India today are unemployment and underemployment 
together with job creation.  It is estimated  that around 100 million new job seekers will enter the 
labour market over the next decade.33  With the labour market appearing to be relatively less flexible 
than in other countries in the region, it is not clear whether the required jobs can be created without 
                                                      
32 According to the authorities, the ratio of non- performing loans to outstanding loans for the rural 
cooperative banks as a whole stoo d at 24.4% as of March 2005. 
33 IMF (2005b). India WT/TPR/S/182/Rev.1 
 Page 13 
 
 
reform of India's labour laws.  Some piecemeal changes have been made, such as some states 
allowing greater flexibility in labour policies in the SEZs, but more general reform is needed. 
30. Part of the problem in implementing a more flexible labour market policy is the lack of a 
social safety net.  The National Common Mini mum Programme (NCMP) acknowledges that some 
changes in labour laws may be required, provided they fully protect the in terests of workers and 
families and take place after consultation with trade unions.  
31. The Government has taken certain initiatives, such as upgrading technical institutes so that 
they can produce a multi-skilled workforce, and trai ning so that existing skills can be adapted to 
changes in technology.  A skills de velopment initiative through public-p rivate partnerships is to be 
started;  it is envisaged that this would provide trai ning to a million workers in the first five years and 
a million workers annually thereafter.   
(f) Competition policy reform 
32. In order to promote competition, the Competiti on Act was enacted in 2002.  The Competition 
Commission, formed under the Act, was to work as India's anti-trust body.  However, implementation 
of the Act has been delayed due to legal challeng es to certain provisions.  The Act will replace the 
Monopolies and Restrictive Trade Practices Act.  
(3) DEVELOPMENTS IN TRADE  
(i) Composition of trade in goods and services 
(a) Goods 
33. Merchandise trade as a percentage of GDP increased from roughly 21% in 2001/02 to 
approximately 33% in 2005/06, reflecting the great er openness of India's goods markets.  Imports 
have grown at a faster pace than exports, leading to a widening trade deficit.  The strong growth of the 
manufacturing and services sectors is reflected in  the import bill;  shares of telecommunications 
equipment, office machines, and aircraft have risen appreciably.  Despite the rise in international oil 
prices, the share of fuel imports declined margin ally; nonetheless, they remain a major import item 
accounting for 33.7% of total imports (Table AI.2).  
34. Whereas the share of manufactures in exports has declined, that of petroleum and iron ore 
doubled in response to higher international commodi ty prices as well as increased domestic refining 
capacity (Table AI.3).  Among manufactures, driven by higher commodity prices, the share of iron and steel products has risen.
34  The share of automobile exports has also risen as India strives to 
become a regional hub for the manufacture and export of small cars and motorcycles.  On the other 
hand, the share of textiles and clothing (T&C) exports has fallen (Chart I.1).35   
 
                                                      
 34 Share of iron and steel exports as a percentage of total exports fell in 2005/06 as total exports grew at 
a faster rate than iron and steel exports. 
35 Interestingly, India's merchandise exports have grown at an average annual rate of over 23% since 
2002/03, compared with world merchandise export growth of approximately 14% between 2002 and 2005, and it's share of world T&C exports has risen. WT/TPR/S/182/Rev.1 Trade Policy Review 
Page 14 
 
 
Chart I.1
Product composition of merchandise trade, 2000/01 and 2005/06
2000/01 2005/06
(a)    Exports (f.o.b.)
Other consumer goods
7.2
Manufactures
76.5
Total:   US$45.2 billion Total:  US$103.4 billion  
(b)    Imports (c.i.f.)
Gold
8.3
Chemicals
9.0Transport  equip.  2.4
Manufactures
42.9
Iron & steel
1.5Electrical machines  
                 7.4
Non-electrical 
machinery
5.4
Other mining
4.7Fuels
34.7
Non-electrical
machinery
7.1Other
0.9Iron & steel
4.8
Other semi-manuf.   
8.4Transport equipment  
6.4
Chemicals
9.3Manufactures
48.4
Total:   US$51.4 billion Total:   US$149.8 billion Per cent
Manufactures
69.8Textiles
8.2
Non-electrical machinery
  3.6Clothing
13.7
Other consumer goods  
4.9Other
1.8Fuels
11.5
Non-electrical 
machinery
2.5Electrical machines 
2.6Other
1.0
Other semi-manufactures
17.5Other mining
7.2Agriculture
10.4
Other semi-manufactures
21.1
Source :  UNSD, Comtrade database (SITC Rev.3).Other  consumer goods 
5.1
Iron & steel
3.0Other consumer
 goods  7.9
Transport equip.
4.6Textiles
13.3
Other semi-manuf.
12.1Other mining
2.9Fuels
4.3
Agriculture
4.9Agriculture
7.6
Electrical machines
9.3Gold
7.3Transport equip.
2.8Electrical machines
2.7Chemicals  
10.5
Chemicals  
11.6Other 
2.2
Other mining
4.7Fuels
33.7Iron & steel
2.9Agriculture
14.1
Clothing
8.9
 India WT/TPR/S/182/Rev.1 
 Page 15 
 
 
(b) Services 
35. The services trade surplus as a percentage of GDP  increased from 0.7% in 2001/02 to 2.8% in 
2005/06 as software and IT exports surged.36  Transportation, travel and other services 
(telecommunications, financial, construction, lega l, and accounting) also grew considerably.  
However, these were matched by corresponding impor ts.  Hence, software-related services were 
largely responsible fo r the services surplus. 
(ii) Direction of trade 
36. Major export destinations are the EC-25 (22.5% of total exports), the United States (16.9%), 
the United Arab Emirates (8.3%), and China (6.6%) (T able AI.4).  In recent years, there has been a 
shift away from Europe and the United States, while the share of the U.A.E. and  Asia has increased.  
The same trend is witnessed with regard to the or igin of imports;  although the EC-25 (17.2%) and the 
United States (6.3%) are major exporters to India,  the share of Asia (27.4%) and the Middle East 
(6.7%) have been increasing (Chart I.2 and Table AI .5).  The diversification reflects the changing 
composition of India's trade. 
(4) DEVELOPMENTS IN FOREIGN INVESTMENT  
37. The liberalization process that started in the early 1990s has continued during the period 
under review;  the Government initiated reforms and raised the limit on fore ign direct investment 
(FDI) in certain sectors, resulting in continued growth  in annual FDI flows.  Annual FDI inflows grew 
from US$3.13 billion in 2002/03, to US$5.6 billion in 2005/06.37   
38. Inward FDI has been particularly robust in  the electronics and electrical equipment sector, 
mainly due to information technology enable d services (ITES) and business process outsourcing 
(BPO) growth (Table AI.6).  This is manifested  in services sector growth, as is telecommunications 
sector growth, which has also been a large recipi ent of FDI.  The increased investment in the 
telecommunications sector could also be attributed to an increase in the FDI limit from 49% to 74% in 
2005.  The financial services and automobile sectors have also been liberalized, thereby attracting 
increased FDI flows.   
39. Mauritius remains the largest source of FDI,  accounting for approximately 46% of inward 
FDI flows (Table AI.7).  This may be the result of  the tax treaty between Mauritius and India, which 
may induce investors to route their investment thr ough Mauritius to take advantage of the preferential 
provisions.38  Other major sources are the United States, the United Kingdom, and the Netherlands. 
40. The sharp rise in inward portfolio investment, from approximately US$944 million in 
2002/03 to approximately US$12.5 billion in 2005/06 (more than double inward FDI), is due to both 
global and domestic factors.39  Emerging markets as a whole have benefited from low long-term 
interest rates in the advanced economies.  In a ddition, robust corporate performance in India and the 
resulting strong GDP growth, coupled with increased  foreign institutional investor (FII) limits may 
have fuelled portfolio investment. 
                                                      
36 RBI balance-of-payments data. 
37 There is a discrepancy in FDI numbers in certa in cases.  The RBI calculates FDI inclusive of 
reinvested earnings.  However, the numbers used here, which were provided by the Department of Industrial 
Policy and Promotion, look only at investment made through the automatic or approval route.  
38 The main benefit is that investments are exempt from capital gains tax. 
39 Balance of payments numbers from RBI. WT/TPR/S/182/Rev.1 Trade Policy Review 
Page 16 
 
 
Chart I.2
Direction of merchandise trade, 2000/01 and 2005/06
2000/01 2005/06
(a)    Exports (f.o.b.)
Asia
26.2
Total:   US$45.2 billion Total:  US$103.4 billion
(b)    Imports (c.i.f.)
Other Europe
0.3Switzerland
6.3EC25
21.1United States
6.0
EC25
17.2China 
7.3 Other
0.2
Singapore  2.2
United States
6.3
Total:   US$51.4 billion Total:   US$149.8 billionPer cent
Asia
32.2United Arab Emirates
8.3Other Middle East
6.4Japan
4.0
Middle East
6.7Korea, Rep. of  3.1Other
4.1
United States
20.9Singapore
5.3
Switzerland
4.4United States
16.9
Source :  UNSD, Comtrade database (SITC Rev.3).Japan  2.7EC25
22.5Other Middle East
5.5
Africa
3.3Africa  
 4.1Japan  3.6Other
31.1EC25
24.0Hong Kong, 
China  5.9Japan
2.4
Other America
3.9Hong Kong,
China  4.3
Singapore   2.9China
1.9
Sri Lanka
2.0United Arab Emirates
5.8
Other Europe
0.5Middle East
5.2Indonesia  2.0Other Asia
11.6
Other America
3.8Africa
5.3China
6.6
Africa 
6.8
Other America
2.2 Other America
2.4China  3.0Malaysia  2.3Other Europe
2.0Bangladesh 
2.1
Other Europe
1.7CISa    2.4Other Asia
10.3
America
24.7America
20.8
America
8.2America
8.8Europe
25.9Europe
24.2
Europe
27.6Europe
22.2CISa    1.2
Asia27.4Singapore
2.0
Other
29.7Other Asia
6.8Other Asia
8.7
Australia  3.3Australia  2.1
a        Countries included in Commonwealth of Independent States (CIS) are listed in Tables AI.3 and AI.4.Asia
22.6
CISa 
2.0CISa 
1.3
 India WT/TPR/S/182/Rev.1 
 Page 17 
 
 
(5) O UTLOOK  
41. Reforms in India have been significant and broad-based allowing it to realize the highest 
growth rates in its recent history.  However, rising inflation will need to be tackled if present growth 
rates are to be sustained.  As India strives to achie ve even higher sustainable levels of growth, and to 
halve poverty by 2010, the reform process will need to be continued and deepened.40   
42. Considerable progress has been made in rein ing in the fiscal deficit and increasing tax 
revenue through tax reform;  convers ion of the recently implemented VAT into a GST, inclusive of 
services, would ensure a more broad-based tax system that would yield government revenues commensurate with India's public expenditure needs.   At the same time, measures are necessary to 
ensure that central and state governments obtain the best value for money in their spending.  
43. While most structural reforms have tended to  be concentrated in manufacturing and some 
services (financial services, telecommunications, and some transport services), remaining bottlenecks in infrastructure (especially electricity and transpor t) as well as in agriculture need to be addressed.  
Reform in electricity, in particular, will go so me way to addressing productivity constraints in 
manufacturing and services.  In agriculture, although  steps are being taken to reduce barriers to the 
marketing of agricultural products, subsidies continue  to crowd out public investment in infrastructure 
and research, and the sector remains relativel y unproductive.  There is also substantial 
underemployment in agriculture, and efforts need to be  stepped up to develop related industries, such 
as food processing, that could absorb excess agricultural labour. 
44. Greater private and public investment in both physical and human capital (as well as in new 
technology, the main source of growth in the long-run)  is essential if higher sustained growth is to be 
achieved.  According to the Planning Commission, th e main source of additional physical investment 
would be gross domestic investment, which would ha ve to rise from around 30% of GDP currently to 
35% and would need to come from both the privat e and public sectors.  Private sector investment 
would need to be facilitated through a reduc tion of policy-related constraints and excessive 
transaction costs, which would support measures to improve the climate for investors (including the 
recently enacted competition law and measures to e nhance corporate governance).  Efforts could also 
be made to mobilize resources through increased inflow s of FDI, which, despite significant reforms to 
the FDI regime, have remained at around 1% of GDP, suggesting that other barriers, including 
infrastructure and administrative constraints, continue  to dissuade foreign investors.  Increased public 
investment would also be desirable in critical ar eas such as agriculture, infrastructure, and other 
essential public services, notably education and health , to ensure that India's recent high rates of 
economic growth become more inclusive, a major goal  of government policy.  Public investment in 
education/training and health, inter alia , would contribute to growth by helping to improve human 
capital.  
45. Continuing structural reforms together with gr eater investment in physical and human capital 
would help to generate productive employment opport unities for new entrants to the labour force, 
thereby enabling India to reap the "demographic divi dend" associated with one third of its 1.1 billion 
population now being under the age of 18. 
                                                     
 
 40 India's Prime Minister recently st ated that "there are no bindin g external constraints on India's 
economic growth.  Most constraints ... are inherently internal" (The Prime Mi nister's Office online information.  
Viewed at:  http://pmindia.nic.in/s peeches.htm [29 November 2006]).