India WT/TPR/S/182 
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IV. TRADE POLICIES BY SECTOR 
(1) INTRODUCTION  
1. During the past five years, India's real GDP growth has averaged nearly 7% annually.  
Growth has been driven largely by the services s ector, which accounted for almost 54% of GDP in 
2005/06, up from 50% in 2000/01;  wholesale and retail trade, hotels, transport, and communications 
were the leading subsectors.  Manufacturing has grow n less rapidly, although sufficient to maintain its 
share of GDP relatively stable at between 15% and 16 %.  By contrast, growth in agriculture has been 
very sluggish, and its share of GDP declined from around 24% to 19% during the period.  Notwithstanding India's impressive overa ll growth rate, lack of infrastructure, particularly in transport 
and electricity, constitutes a major obstacle to mainta ining its current growth rate, let alone achieving 
substantially higher growth rates that the Government is aiming for. 
2. Agriculture is characterized by low labour prod uctivity, which is about one-sixth of the level 
in the other sectors of the economy, with obvious implications for living standards and poverty in 
rural areas.  The reasons for this low productiv ity include fragmented landholdings, a low level of 
mechanization and much of the cropped area depend ent on rainfall for irrigation, which has made 
output in the sector rather variable;  crop yields have  also been declining, in part due to poor seed 
quality and overuse of land and inputs.  The sector  also remains subject to  considerable government 
intervention, notably in the form of price support and input subsidies, which have become a fiscal 
burden, and restrictive marketing practices.  Public investment in infrastructure and research has been 
inadequate and crowded out by spending on subsidi es and, while private investment has grown in 
recent years, it has not been sufficient.  Some e fforts have been made in the period under review, 
especially to reduce marketing restrictions, alt hough the government continues to monitor trade in 
certain sensitive commodities closel y to ensure stable domestic supply and prices.  With demand for 
essential commodities, such as cereals, declining in favour of vegetables, milk and meat, a major  
reorientation is required in the Government's agri cultural policy, which until now has encouraged the 
production of cereals.  However, food security remain s a priority area of concern for the Government 
in view of the size of the population and skewed distribution of production . 
3. Manufacturing growth has been rapid, at an av erage of almost 7% since 2000/01, in part due 
to continued structural change and a relaxation in industrial licen sing and FDI restrictions.  Its 
contribution to exports of goods has declined, howev er, from 76.5% to 69.8% of the total, while its 
share of total merchandise imports increased from 42.9% to 48.4% during 200 0/01-2005/06.  In part 
to meet its goal of reaching ASEAN level tariffs  for non-agricultural goods, India has continued to 
reduce its applied MFN tariffs.  As a result, th e overall applied MFN tariff for manufactured goods 
(ISIC) fell from 32.5% in 2001/02 to 14.9% (16.8% including AVEs) in 2006/07.  Despite this, tariff peaks remain, especially in auto mobiles, where the average tariff is 33.6%, and imports of 
second-hand motor vehicles over three-years old are subject to import licensing restrictions.  The 
textiles and clothing sector remains protected by re latively high tariff barriers, a large percentage of 
which are non ad valorem  (inclusion of ad valorem  equivalents raises the average tariff for the sector 
to 22.5%).  While exports of textiles and clothing ha ve increased, partly due to a removal of quotas 
under the Agreement on Textiles and Clothing (ATC),  the share of textiles and clothing exports in 
total merchandise exports has declined, probably due to increased competition in the global market.  
However, India's share in the global market for te xtiles and clothing has increased from 3% in 2001 to 
3.7% in 2006.  Information technology, which is re latively free of domestic and trade restraints, has 
continued to be a major contributor to India's ec onomic growth.  The sector  also receives additional 
assistance through tax holidays provided by the soft ware and hardware technology parks as well as 
the special economic zones and through pr iority sector lending (for software). WT/TPR/S/182 Trade Policy Review 
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4. The services sector grew by 9.8% in 2005/06 and continues to be the key driver of economic 
growth;  between 2002/03 and 2006/07, it contributed  68.6% of the overall average growth in GDP.  
Greater progress has been made in reforming services than in other parts of the economy.  In banking, 
measures have been adopted to raise foreign invest ment limits and to align prudential requirements 
with international practice.  Fore ign banks have been permitted to es tablish wholly owned subsidiaries 
since 2005.  Although banking and insurance continue to be dominated by state-owned companies, 
measures have been adopted to encourage competiti on from the private sector.  Efforts are also being 
made to improve governance of banks and to prepar e the sector for implementation of the Basel II 
capital adequacy framework, although this has b een postponed.  While the performance of the 
banking sector has improved in general, with the ra tio of non-performing loan s (NPLs) continuing to 
fall, NPLs remain high in rural banks and rural c ooperatives.  The performance of rural cooperatives 
is especially problematic as they are closely involv ed in extending credit to the rural sector.  The 
Securities and Exchange Board of India (SEBI), the regulator of India's securities market, is making efforts to create a well functioning capital market.  The securities exchanges are to be corporatized 
and all listed companies must meet corporate go vernance requirements specified in the listing 
agreement by January 2006.   
5. A continued obstacle to maintaining growth is th e lack of infrastructure.  In some areas, 
notably telecommunications, much progress has been made with a significant increase in penetration, especially of mobile telephony.  The result has been a corresponding decline in tariffs of domestic and 
international long-distance calls.  In transporta tion, efforts are ongoing to improve rail and road 
transport.  Although railways is one of the two sectors remaining exclusively in the public sector, 
private-sector participation is being encouraged in some areas, especially for the carriage of freight 
and the development of infrastructure through public-p rivate partnerships (PPPs ).  PPPs are also being 
used to develop India's national highway networ k under an ambitious plan to upgrade the current 
network as well as build 1,000 kilometres of new e xpressways.  In air transport services, greater 
private competition has resulted in a significant d ecline in prices and an increase in the number of 
passengers travelling to, from, and within India.  Restrictions on FDI have been relaxed to 49% of 
total equity (100% for non-resident Indians), alt hough foreign airlines may not invest in the sector.  
Less progress has been made in maritime transport where efforts to attract both private domestic and 
foreign investment have not been successful.  Port services, on the other hand, have been improved, in 
part by augmenting capacity through private-public part nerships.  However, elec tricity continues to be 
a major problem, with little progress being made on reducing transmission and distribution losses and 
addressing the considerable difficulties faced by the public sector electricity providers. 
(2) A
GRICULTURE  
(i) Overview 
6. The contribution of agriculture and allied activ ities to India's GDP has been declining, from 
almost 24% in 2000/01 to 18% in 2005/06 (Table I.2).  In contrast, it accounts for almost 60% of 
employment, suggesting that labour productivity is  a bout one-sixth that of the non-agricultural sector 
and raising concerns about poverty and living standards in the rural areas.1  The key crops are rice, 
wheat, sugarcane, cotton and oilseeds.  As the world' s largest producer and consumer of tea, India has 
been making efforts to improve the productivity of its tea plantations.  Horticultural crops, as well as 
fisheries and animal husbandry, which are estimated by the authorities to account for around 54% of 
the output of the sector, are expected to grow rapi dly.  India was the world's biggest dairy producer 
and second largest producer of fruit and vegetables in 2003/04, and the Tenth Five Year Plan has 
                                                      
1 Official employment figures, which are based on employment in the formal sector, show that 
agriculture employs around 5% of the total workforce.   However, estimates including informal employment, 
show that the figure is closer to 60% (see fo r example, Chadha and Sh arma, 2005, pp. 23-101). India WT/TPR/S/182 
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aimed for horticultural growth of 8-9% per year.  Demand for horticultural products is likely to be 
enhanced further with the opening of the retail s ector to foreign investment in 2006.  India's 
production of milk has also increased substantia lly, with around 91 million tonnes produced in 
2004/05.  A closely linked and rapidly growing ac tivity is food processing, which, until recently, 
received inadequate attention.2  However, it is estimated that the food processing industry is 
generating around 250,000 new jobs a year3, although it is hampered by infrastructural constraints.   
7. Despite increasing in value from US$6.4 billion in 2000/01 to almost US$10.8 billion in 
2005/06, exports of agricultural products as a share of total merchandise exports declined from 14.1% 
in 2000/01 to 10.4% in 2005/06 (Table AI.3).  The value of the main export, rice, increased from 
US$653 million to US$1.4 billion during the period.  Indi a's imports of agricultural products continue 
to be minimal and fell from 7.6% of total mercha ndise imports in 2000/01 to 4.9% in 2005/06;  the 
largest share is accounted for by edible vegetable oil. 
8. As a result of important gains in productivity in the 1960s and 1970s, mainly due to the 
introduction of high-yield wheat and rice varieties as  well as investment in irrigation, India became 
self-sufficient in the production of cereals.  Howeve r, since the 1980s, there has been a slowdown in 
growth in production and labour productivity in Indian agriculture.4  The slowdown is mainly 
attributed to declining public-sector investment and, while private investment in agriculture has 
increased in recent years, it has b een mainly in niche areas such as  food processing.  Since 2003/04, 
the share of public-sector investment in agricultu re has been increasing whereas private sector 
investment has shown a decline.5  With only around 40% of the cropped area irrigated, output remains 
highly dependent on rainfall and therefore varies cons iderably from year to year.  In addition, land 
ownership ceiling laws as well as succession patterns have resulted in increase d fragmentation of land 
holdings, preventing the development of scale economies and mechanization.6  Tenancy laws do not 
give well-defined rights to tenant farmers, who make up a significant  share of agricultural producers, 
and therefore they lack the incentive to develop th e land.  Other factors of low productivity include 
regulation of agricultural markets and the movement of major crops, which has dissuaded the private 
sector in general from investing in the sector, and rela tively low levels of research and development.  
9. Since 2002/03, agriculture has grown at an av erage of less than 2%, although growth was 
rather erratic in part due to a drought in 2002/03 .  There has also been a significant change in 
consumption patterns:  per capita cereal consumption has declined wh ile consumption of milk, eggs, 
horticultural products, and meat has increased.  Within  cereals the pattern has been a move away from 
coarse grains towards consumption of rice and wheat.   The pattern is evident in both urban and rural 
areas.  In recent years, these changing patterns of  consumption, accompanied by growth in production 
of cereals, have resulted in a surplus of grai n production, and growing costs associated with 
maintaining stocks of wheat and rice and providing cer tain essential foods to the poor at low prices.  
The diversification of demand suggests a need for gr eater investment in crops other than cereals and 
livestock and in infrastructure to support more downs tream activities, such as food processing.  In this 
                                                      
2 Food processing now forms part of the priority sector, for which commercial banks are required to set 
aside part of their lending.  Other incentives include zer o excise duty on processed fruit and vegetables and tax 
holiday and other concessions (Ministry of Food Processing, 2005). 
3 Business India , 10 September 2006. 
4 Average growth in crop yields fo r example declined from 2.77% per y ear in the 1980s to 1.72% in the 
1990s (Chadha and Sharma, 2005, pp. 23-101). 
5 Total investment in agriculture increased from Rs 381.8 billion in 2000/01 to Rs 431.2 billion in 
2004/05.  The share of private investment was around 82% until 2003/04;  then declined to around 71% of the 
total (Ministry of Finance, 2006).  
6 Landholdings on average are around 1.06 hectares  (in 2002/03), well below the ceilings set by state 
laws. WT/TPR/S/182 Trade Policy Review 
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regard, the distinct bias in agriculture price support policies in favour of food grains in the past 
probably distorted cropping patterns and would need to be rectified.7 
10. The Government's policy of provi ding key inputs at subsidized prices has also resulted in a 
growing subsidy bill to the detriment of public investment in infrastructure and research and 
development.  Subsidized inputs such as fertilizer, wa ter, and power have also, in some cases, led to 
overuse and problems of water-logging and salinity, as well as degradation of natural resources.8  
There seems to be very little change to the basic policy of supporting produ cers by subsidizing inputs 
through direct subsidies, and output through mini mum support prices, although in recent years more 
emphasis has been placed on infrastructure investment. 
11. Stagnation in the sector has been recognized, mo st recently in the approach paper to the 
11th Five Year Plan, which suggests that in a ddition to efforts to increase productivity on farms 
through better resource use, there is a need for diversification to higher-value-added output including 
horticulture and floriculture, also because of cha nging demand patterns.  Greater emphasis is also 
placed on the fisheries and livestock subsectors.  I ndia's National Agricultural Policy, announced in 
2000, aims to improve the post-harvest and marketing infrastructure so as to reduce the losses in 
agricultural output (estimated at 30-40% especia lly for horticultural products) that result from poor 
storage and processing facilities.  Other plans to addr ess the infrastructural problem include the Bharat 
Nirman programme, which has identified seven areas of rural infrastructure to be addressed by 2009.9 
12. While addressing the problems of agriculture may be  politically difficult, some effort is being 
made to improve processing and marketing.  Since 20 02, foreign direct investment has been permitted 
in tea plantations and, since 2006, in horticulture , animal husbandry, and food processing and retailing 
(Chapter II), and some nine items in the agricultu ral and allied industries are currently reserved for 
production by the small-scale sector.10  In addition, linkages between farmers and processors, for 
example, through contract farming, have been in creasing in certain parts of the country.  In its 
2004/05 Budget, the Government announced a National Horticulture Mission, wh ich aims to increase 
output to 300 million tonnes by 2011/2012 and to enha nce exports of these products.  Investment in a 
tea fund is also expected to be used for re-plant ation of tea gardens in the country.  Increasing support 
from the private sector is also being sought to help set up agricultural markets, marketing 
infrastructure, grading certification, and quality inspection.  The Central Government has also 
circulated a model law to allow for direct marke ting and contract farming arrangements for adoption 
by the states (see (d) below). 
                                                      
7 Ministry of Finance (2006) . 
8 The Planning Commission's approach paper to the 11th Five Year Plan, for example, notes that 
semi-critical, critical, and over-exploite d areas of groundwater use are incr easing and already cover 29% of the 
blocks in the country. 
9 The programme aims to create 10 million hectares of additional irrigation capacity;  to connect all 
66,802 habitations in the rural areas with a populati on above 1,000 with all weather roads;  to construct 
6 million houses for the rural poor;  to provide potable water to 55,067 habitations and to address habitations 
where water quality is not good;  to provide electricity to all un-electrified villages (some 125,000) and to connect 23 million households below the poverty line;  and to connect the remaining 66,822 villages with a 
public telephone.  
10 These are:  pickles and chutneys;  bread;  pastry;  hard boiled sugar candy;  rapeseed, mustard, 
sesame, and groundnut oils (except solvent extracted and except for agri and growers cooperatives for the first 
three oils);  and ground and processed spices, exce pt for spice oil and oleo resin spices (SIDO online 
information.  Viewed at:  http ://www.smallindustryindia.com/publica tions/reserveditems/List%20of%20 
reserved%20Items.pdf [11 December 2006]. India WT/TPR/S/182 
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(ii) Agricultural policies  
(a) General framework 
13. Agricultural policy in India is guided by a number of goals:  food self-sufficiency,  ensuring 
remunerative prices to farmers, and stable prices fo r consumers.  To meet these goals an array of 
measures are in place, including direct subsidies, price controls, and minimum prices for certain crops, input subsidies, as well as restrictions on th e movement of goods (domes tic and international) 
to ensure stable domestic supply and prices.   
14. Agricultural policy is formulated and implemented at the central level by the Ministry of 
Agriculture, with the Five Year Plan providing br oad guidelines on policy and the allocation of funds.  
Under the Constitution, agriculture is a state subj ect, but important decisions like those relating to 
research and development, facilitating infrastructure and investment, credit and trade, are taken by the Central Government.  Some model laws formulated at the central level can be adapted by the state 
governments according to their needs.  The Commi ssion for Agricultural Costs and Prices (CACP) 
was set up in 1965 to advise the Government on setting minimum support prices (MSPs) for different 
commodities (currently 25 essential commodities) a nd the mechanisms for implementing the MSPs.  
In addition to the Ministry of Agriculture and the CACP, a number of public sector agencies are 
responsible for implementing agricultural and food policies.  The most important of these, the Food 
Corporation of India (FCI) was set up in 1964 to implement the food policy, including procuring and maintaining buffer stocks of food grains and for distributing food grains through the public 
distribution system (PDS) and various welfare sche mes for poverty alleviation (see below).  It is 
supported by the Central Warehousing Corporation set  up in 1965.  The FCI purchases foodgrains at 
procurement prices set by the Government and sells them at the Central Issue Price (CIP) also fixed by the Government.  To the extent that the CIP does not include the cost to the FCI of purchasing, 
storage, and transportation, the Central Government subsidizes the FCI.  The cost of the subsidy had 
risen to Rs 233 billion in 2004-05.
11  The FCI and the National Agricultural Cooperative and 
Marketing Federation of India (NAFED), set up in  1958, also implement the Government's price 
support scheme (see below).  Procurement of other cr ops, such as cotton and jute are also carried out 
by state-owned companies:  the Cotton Corporation of  India (CCI), and the Jute Corporation of India 
(JCI). 
15. The first National Agricultural Policy, announced in July 2000, aims, inter alia,  to raise 
annual growth in agriculture over the next two de cades to over 4%, based on an efficient use of 
resources while conserving India's soil, water, and biodiversity, and equity across regions.  The goals 
include:  improving growth to over 4% in a sust ainable manner;  improving food and nutritional 
security;  creating a favourable environment for incr easing capital formation in agriculture;  external 
and domestic market reforms;  improving electri fication and irrigation facilities;  improving the 
marketing infrastructure as well as facilities for pr eservation, storage and transportation to reduce post 
harvest losses;  providing an insurance policy for farmers to cover the whole growing season;  and a 
continuous review of pricing and trade mechan isms to improve the economic environment in 
agriculture and the balance between rural and ur ban incomes.  These objectives are being pursued 
through programmes like Bharat Nirman, the Natio nal Horticultural Mission, initiatives to improve 
agricultural credit, micro irrigation,  and agriculture market reforms. 
(b) Import policy 
16. Although protection from imports of agricultural pr oducts has declined, India continues to use 
trade policy to support its overall goals of food self-s ufficiency and price stability.  Thus, tariffs, the 
                                                      
11 Food Corporation of India online information.  Viewed at:  http://fciweb.nic.in/capital_structure/ 
capital_structure.htm [6  December 2006]. WT/TPR/S/182 Trade Policy Review 
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main instrument of trade policy, continue to be adjusted from time to time to ensure sufficient 
domestic supply of key products.  An example is the exemption (zero duty) granted for imports of 
wheat in 2006 to replenish local grain stocks mainly for the public distribution system;  the standard tariff rate is currently 50%.  Import licences also seem to be issued to support this policy;  for 
example, recently, imports of wheat, normally rest ricted to state trading, were also permitted by 
private importers.
12  India has also recently notified import quotas under its bilateral agreement with 
Sri Lanka on certain products where no quota previous ly existed;  and export restrictions are also 
issued from time to time to ensure sufficient domestic supply (see below).   
Tariffs 
17. The simple average applied MFN tariff for agri culture (WTO definition) increased slightly 
from 40.7% in 2001/02 to 40.8%, compared with a si mple average bound rate of 117.2% (Table III.1).  
Tariffs on agricultural products are all ad valorem  except for two lines (shelled and non-shelled 
almonds), unchanged from the previous Review.  Applied tariff rates range from 0% to 182% 
(effective rates range from 0 to 150%).  The highest rates are in HS Chapters  22 (beverages, spirits 
and vinegar);  21 (miscellaneous edib le preparations);  9 (coffee and tea);  15 (animal or vegetable 
fats);  and 10 (cereals) (Chart IV.1).  Some of th ese rates, notably for cereal s, are currently at their 
bound rates.  However, for the majority of tari ffs, there remains a considerable gap between the 
applied and bound rates, ranging from 10% to 300%.  This has enabled the Government to raise its 
standard rate of tariff on some agricultural products (Table AIII.1).  India also uses "reference prices" 
to calculate customs duty applicable on imports of, inter alia , palm oil (crude and RBD), palmolein 
oil (crude and RBD), and crude soybean oil.  Un der Section 14(2) of the Customs Act, reference 
prices can be fixed by the authority "if satisfied th at it is necessary or expedient to do so";  customs 
duty on these imports are calculated on the basis of the reference prices rather than the price quoted 
by the importer.13   
18. Preferential access to agriculture is provided unde r India's free-trade agreements.  India's offer 
under these agreements ranges from 8.4% of its agricultural tariff lines (WTO definition of 
agriculture) for members of the Asia-Pacific Tr ade Agreement (APTA) to 92.5% under the free-trade 
agreement with Sri Lanka.  The tariff concessions  under most of these agreements are not very 
significant:  the average agricultural tariff ranges from 37.2% for SAFTA to 40.6% for APTA (the 
MFN average is 40.8%);  however, for Sri Lanka, the average is 7.6% while for least developed 
country members of the SAFTA (Bangladesh, Bhutan, Maldives, and Nepal), the agricultural tariff is 
30.0% (Table III.2). 
19. India maintains bound tariff rate quotas on milk pow der, maize, sunflower seed and safflower 
oil, and rape, colza or mustard oil (14 tariff lin es at the HS 8-digit level);  the policy remains 
unchanged from the previous Review, although it seem s that with the exception of sunflower seed and 
safflower oil, quotas are generally not issued because , according to the authorities, there is no demand 
from importers (Chapter III(2)(v)).  Tariff rate quotas are also maintained on imports of tea under the 
free-trade agreement with Sri Lanka (Chapter II).  Moreover, India has recently notified import quotas 
on vegetable fats (vanaspati, including bakery s hortening and margarine), pepper, and desiccated 
coconut from Sri Lanka.  Vanaspat i imports will be limite d to 250,000 tonnes per year, and imports of 
pepper to 2,500 tonnes per year;  imports of desi ccated coconut will be rest ricted to 500 tonnes per 
year at a concessional duty rate of 30%.14  The quotas on vanaspati, pepper, and desiccated coconut 
                                                      
12 Directorate General of Foreign Trade, Notification No. 16 (RE-2006)/2004-2009, 29 June 2006.  
Viewed at:  http://dgftcom.nic.in/exim/2000/not/not06/not1606.htm [11 December 2006]. 
13 According to the authorities the prices are aligned w ith international prices and are revised frequently 
to avoid any discrepancy with international prices. 
14 Directorate General of Foreign Trade, Public Notice No. 17 (RE-2006)/2004-09, 2 June 2006 and 
Public Notice No. 69 (RE-2006)/2004-09, 21 November 2006. India WT/TPR/S/182 
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are not in the original bilateral agreement and ap pear to be the result of an agreement signed on 
14 November 2006;  a copy of this was not available. 
020406080100120140
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24Per cent
HS Chapter
HS Chapter
01
02
03
04 05060708
09
10111213
14
1516171819
20
21222324Description
Live animals
Meat and edible meat offalsFish and crustaceans, molluscs and other aquatic invertebrates
Dairy produce; birds eggs; natural honey; edible products of animal origin n.e.s.
Products of animal origin, n.e.s.Live trees and other plants;  bulbs, roots and the like;  cut flowers and ornamental foliageEdible vegetables and certain roots and tubersEdible fruit and nuts;  peel of citrus fruits or melonsCoffee, tea, mate and spices
Cereals
Products of the milling industry;  malt;  starches;  wheat glutenOil seeds and oleaginous fruits;  miscellaneous grains, seeds and fruit; straw and fodderLacs;  gums, resins and other vegetable saps and extractsVegetable plaiting materials;  vegetable products n.e.s.
Animal or vegetable fats and oils and their cleavage pro ducts;  prepared edible fats; animals or vegetable waxes
Preparations of meat, or fish or of crustaceans, molluscs or other aquatic invertebratesSugars and sugar confectioneryCocoa and cocoa preparationsPreparations of cereals, flour, starch or milk;  pastrycooks' productsPreparations of vegetables, fruit, nuts or other parts of plants
Miscellaneous edible preparations
Beverages, spirits and vinegarResidues and waste from the food industries;  prepared animal fodderTobacco and manufactured tobacco substitutesChart IV.1
Standard rates on agricultural products, 2001/02 and 2006/07
Average standard rate
HS01-24 (2001/02)
 41.7%Average standard rate
HS01-24 (2006/07)
42.7%
Source :  WTO Secretariat calculations, based on data provided by the Indian authorities.Note:     The 2001/02 tariff is based on 6-digit HS96 nomencla ture consisting of 704 lines (H S01-24);  the 2006/07 tariff is ba sed 
               on  8-digit HS02 nomenclature, consisting of 1,466 lines (HS01-24).   Excluding two specific rates for both year s.2001/02
2006/07
 WT/TPR/S/182 Trade Policy Review 
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Import prohibitions and restrictions 
20. Imports of tallow, fat and oils of animal origin , animal rennet, wild animals and their parts, 
beef and its products, natural sponges, fish wast es, domestic and wild birds, and poultry from 
countries reporting outbreaks of avian influenza, are prohibited for reasons of public health and safety 
and on moral/religious grounds.  Impor t restrictions currently cover 7.7%  of agricultural tariff lines.  
In addition, state trading continues to be used for imports of cereals (wheat, rice, maize, rye, oats, and 
coarse grains), and copra and crude coconut oil;  however, data on imports of these products by 
state-trading agencies are not collect ed by the authorities.  The Government also monitors imports of 
a number of agricultural products considered to be sensitive, including milk products, fruit and nuts, 
coffee, tea, spices, cereals, and edible oils.  The au thorities maintain that the only measure that can be 
taken in case of a surge in imports of these products  is an increase in the applied rates of customs 
duties within their respective bound rates. 
(c) Export policy 
Overview 
21. While the vast majority of agricultural expor ts are unrestricted, exports of some items 
regarded as essential and sensitive are closely monitored and subject to ad hoc restrictions as the need 
arises (see below).  As a producer of a wide variety of agricultural products, India is also keen to expand its exports, especially of hor ticultural products.  Sector-speci fic policies are in place for these 
products to improve output and productivity, includ ing through increased investment in research and 
development.  In its 2002-07 Foreign Trade Policy,  India took additional step s to boost exports of 
agricultural products.  Agri-export z ones were established to encourag e exports of certain products.  
The zones receive assistance from central and state governments to improve efficiencies in supply 
chains of the identified product;  assistance may be in the form of extension of services and inputs 
from the Ministry of Agriculture, R&D support from th e Agriculture Universities, or the setting up of 
cold storage facilities through assistance from the Nati onal Horticultural Board.  There are currently 
60 agri-export zones sanctioned by the Central G overnment and monitored by the Agricultural and 
Processed Food Products Export Development Authority (APEDA).  However, of the total investment 
of Rs 17.18 billion envisag ed over 2002-07, just under half has b een realized, and only around 43% of 
expected exports have actually taken place from the zones.
15  The Vishesh Krishi Upaj Yojana 
(special agricultural products scheme), which was introduced in 2004, promotes exports of fruit, 
vegetables, flowers, minor forest produce, da iry, poultry, and their value-added products.16  T h e  
incentive is an import duty credit equivalent to 5% of the f.o.b. value of exports in the previous year 
beginning 1 April 2004 (1 April 2005 for dairy, pou ltry, and related process ed goods), although the 
Government reserves the right to remove  any of the products from this scheme.17  According to data 
provided by the authorities, exports from the 60 z ones were valued at around Rs 21.5 billion during 
April 2005-March 2006.18  No separate data are available on exports from the Vishesh Krishi Upaj 
Yojana. 
                                                      
15 APEDA (2006), Ref No. APEDA/CM/15/2005-06, 30 June 2006. 
16 The full list of products is in the Foreign Trade Procedures, Appendix 37A.  Viewed at:  
http://dgft.delhi.nic.in/ [11 December 2006].  
17 The duty credit is permitted only at a rate of 3.5% of the f.o.b. value of exports in the previous year if 
the exporter has used any benefits under the duty/exemption/remission schemes.  Units in special economic 
zones will not be eligible for the duty credit. 
18 It was stressed during the course of this Review that exports from the agri-export zones were already 
taking place before the zones were set up. India WT/TPR/S/182 
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Export restrictions 
22. Over the years India has gradually removed prohi bitions, licensing, and other restrictions on 
exports.  However, as with its import policy, India also takes into consideration the domestic supply 
of items crucial for its food security.  Thus, notificati ons are made from time to time to restrict exports 
or lift export restrictions in order to maintain dom estic supplies and stability in domestic prices.  For 
example, in 2006, exports of pulses and sugar (ex cept sugar subject to a tariff rate quota in the 
United States and the EC) were prohibited, to main tain domestic supplies of these products in order to 
keep the price at a "reasonable level".19  The export of sheep meat, and goat meat on the bone has also 
been prohibited since 21 August 2006.  Most recently , India has banned exports of wheat, apparently 
to contain the rise in domestic prices.20 
23. India prohibits exports of certain agricultural pr oducts for health, envir onmental, and religious 
reasons (Chapter III(3)(v)).  Export licensing is in  place for live animals and some animal products, 
seeds, seaweed and other algae, residues and wast e from food industries, as well as pure races of silk 
worm and silkworm seeds.  There has been no majo r change in the policy on state trading, which 
includes onion, and gum karaya (Chapter III(3)(ix)).   However, export cesses maintained for several 
products, including coffee, spices, tobacco and othe r agricultural commodities, were removed in 2006 
(Chapter III(3)(iii)). 
(d) Internal policies 
Overview 
24. Internal policies have been driven largely by food nutrition and livelihood security 
considerations.  The Agriculture Produce Market  Committee (APMC) Acts, which are enacted by 
states, restrict private investment in various co mmodities;  the list of notified commodities varies from 
State to State.  Recognizing the need for reform in this area, the Central Government formulated a 
Model Act in September 2003, the State Agri cultural Produce (Development and Regulation ) 
Marketing Act, in consultation with state government s as well as trade and industry.  The Act aims to, 
inter alia,  develop competitive agricultural produce market s in the private and cooperative sectors and 
promote private investment in the de velopment of marketing infrastructure.21  Some 12 states and 
union territories have amended their APMC Acts, a nd 5 have partially amended their Acts.  The 
Essential Commodities Act, 1955 and the various Or ders issued thereunder give the Government 
broad powers to keep prices "at reasonable levels", and to restrict the storage and movement of goods 
across state borders, although the Act has been am ended substantially to reduce some of these 
restrictions. 
25. India's internal measures to support agriculture include direct subsidies for inputs and indirect 
assistance through price support.  Some direct support is also provided in the form of grants for infrastructure and research although this has declined  considerably.  As India does not have reduction 
commitments under the WTO Agreement on Agricultur e aggregate measure of support (AMS), it is 
required to restrict its agricultural support to within the de minimus  level of 10% during the base 
period (1986-88).  India last notified its AMS comm itments and its export subsidies to the WTO in 
                                                     
 
19 DGFT notifications 15 (RE-2006)/2004-2009, 27 June 2006, and 18 (RE-2006)/2004-2009, 
4 July 2006.  Viewed a t:  http://dgft.delhi.nic. in/ [7 December 2006]. 
20 Financial Times , 15 February 2007. 
21 Ministry of Finance (2004) . WT/TPR/S/182 Trade Policy Review 
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March 2002 for the period 1996/97-2000/01.22  According to the authorities, the notification is to be 
updated as soon as more recent data are collected. 
26. Public investment in agriculture and allied activities has been declin ing since the mid 1980s 
but has shown an increase since 2002/03.23  It is estimated that during 2002-04, public investment in 
the sector was around Rs 105 billion (1993/94 prices) , while private investment was Rs 352 billion.24  
The increased private sector investment has not fully compensated for the loss of public sector 
investment up to 2002/03.  In contrast, spending on subsidies has been rising, estimated at over 
Rs 350 billion in 2002/03 or over four  times public spending on agricu lture (Table IV.1), and it has 
been suggested that such spending has crowded out  public sector investment in infrastructure and 
other activities.25  
Table IV.1 
Public sector investment and subsidies in agriculture, 2000-05 
(Rs billion) 
 2000/01 2001/02 2002/03 2003/04 2004/05 
Public investment in agriculture and allied sector 75.8 82.5 76.6 94.4 46.4a 
Total subsidies 345.4 375.2 350.3 .. .. 
-  Fertilizer 138.0 125.9 110.2 .. .. 
-  Electricity 60.6 93.4 73.5 .. .. 
-  Irrigation 137.6 146.0 154.0 .. .. 
-  Otherb 0.9 1.0 1.3 .. .. 
.. Not available. 
a Budget estimate.  Excludes expenditu re by states and union territories 
b Subsidies given to marginal farmers and to Farmers' Cooperative Societies in the fo rm of seeds, development of oilseeds, 
pulses, etc. 
Source:  Ministry of Agriculture (2005), Agricultural Statistics at a Glance 2005 , Directorate of Econom ics and Statistics, 
Department of Agricu lture and Cooperation. 
Support for agricultural crops 
27. In addition to direct subsidies, India has various  mechanisms to safeguard the interests of its 
farmers from rapid market fluctuations, and to provid e stable prices to consumers.  India's price policy 
for agriculture is aimed at ensuring a remunerative and stable price environment in order to increase 
production and productivity, "with  a view to evolving  a balanced and integrated price structure in the 
perspective of the overall needs of the economy and w ith due regard to the interests of the producers 
and the consumers, particularly in the background of inherently unstable character of the market place for agriculture produce, which often inflict undue lo sses on the growers, even when they adopt the 
best available technology package and produce efficiently".
26  Under the Price Support Scheme (PSS), 
minimum support prices (MSPs) are issued for major field crops.27  MSPs are announced by the 
Government following the recommendations of the Commission for Agricultural Costs and Prices 
                                                      
22 WTO documents G/AG/N/IND/2, 11 June 2002;  and G/AG/N/IND/3, 1 March 2002. 
23 India at present appears to invest only about 0. 5% of its agricultural GDP in agricultural research 
compared with 0.7% in developing countries and 2-3% in developed countries (IFPRI, 2005). 
24 Ministry of Agriculture (2005). 
25 Chadha and Sharma (2005), pp. 23-101. 
26 CACP online information.  Viewed  at:  http://dacn et.nic.in/cacp/. 
27 These are:  paddy, maize, coarse cereals, pulses (arhar, moong, urad, gram, and masur), cotton, 
groundnuts, sesamum, niger seed, wheat, barley, rapeseed/mustard, safflower, sunflower seed, soy bean, toria, 
copra, jute, sugarcane, and tobacco (D epartment of Agriculture and Cooperati on online information.  Viewed at:  
http://agricoop.nic.in/farmprices /MSP-E.pdf [6 December 2006]). India WT/TPR/S/182 
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(CACP).28  Intervention takes place when prices of th e relevant commodities fall below the MSP, 
resulting in procurement at the MSP by the Food Co rporation of India (FCI) for cereals, the National 
Agricultural Cooperative and Marke ting Federation of India (NAFED) for pulses and oilseeds, the 
Cotton Corporation of India and NAFED for cotton, a nd the Jute Corporation of India for jute.  MSPs 
have been raised in recent years and recommendati on for MSPs appear to have been relatively higher 
for rice and wheat than for other crops.29 
28. For products not covered by the MSPs, but for which the price may decline significantly as a 
result of a bumper crop and a glut in the market , the Government undertakes "market intervention" on 
specific request from the states, at a mutually agreed price.  Unde r the Market Intervention Scheme 
(MIS), when the price of a particular commodity falls below the cost of production, the procuring 
agencies buy at the fixed Market Intervention Price (MIP) during a fixed period or until the price of 
the commodity stabilizes and exceeds the MIP, whicheve r is earlier.  The MIP or mutually agreed 
price is based on the cost of production, which in turn is finalized following detailed discussions 
between the officials of the concerned governments.   The losses incurred by such procurement are 
shared equally by state and central governments.  Horticultural and other agricultural commodities 
that are perishable and are not covered under th e PSS are procured under the MIS.  Such market 
intervention, which is carried out by NAFED a nd agencies designated by the state governments 
concerned, has, since 2002, involved procurement of products such as onions, potatoes, apples, eggs, 
oil palm, seeds, oranges, garlic, pineapple, spices,  and grapes.  The loss incurred is shared by the  
central and state governments on a 50:50 basis (75:25 in case of north eastern states) and restricted to 
25% of procurement cost or actual loss, whiche ver is less.  Actual losses under the MIS were 
Rs 429 million in 2002/03 and Rs 56 million in 2005/06. 
29. Under the existing policy on procurement of f oodgrains, the Central Government grants price 
support to paddy (rice), coarse grains, and wheat through the Food Corporation of India (FCI) and state government agencies.  The agencies open procurement centres in all Districts producing 
marketable foodgrain surpluses in the marketing se asons, and buy foodgrains at the MSP announced 
for the season.  The farmer has the option to sell to  the government agencies, or in the open market.  
According to the authorities, in this way the procurement policy ensures that farmers receive 
remunerative prices for their produce and enables the Central Government to procure foodgrains for 
distribution under the targeted public distribution sy stem (TPDS), and other welfare schemes.  It also 
enables the building up of buffer stocks of foodgrai ns with the FCI, to ensure food security.  The 
TPDS (originally PDS) was set up to ensure distribution to consumers of essential commodities:  
currently wheat, rice, coarse grains, sugar (only for families below the poverty line, some states in the 
north-east, and in hilly areas and some island territori es), and kerosene.  It is operated under the joint 
responsibility of the central and state governments;   the Central Government is responsible for 
procurement, storage, transportation, and allo cation of stocks, while the state governments are 
responsible for identification of beneficiaries, issu e of ration cards, and distribution of food grains to 
them through 486,000 "fair price shops" set up for this  purpose.  Grains and other items destined for 
the TPDS are purchased by the FCI at MSPs and sold to state governments at a Central Issue Price (CIP) determined by the Government.   
30. As a result of criticism of the PDS, the targeted  system was introduced in 1997 to better serve 
the poorer segments of the population.  There are cu rrently three categories of consumers within the 
                                                     
 
28 The CACP takes into account a number of f actors when calculating MSPs, including cost of 
cultivation/production, trends of input use, procurement and distribution, input/output price parity, trends in domestic and international prices, demand and supply, inter-crop price parity", effect on industrial cost structure 
and general prices, cost of living, and the "terms of tr ade" between agricultural and non-agricultural sector.   
29 It is suggested that, as a result production of wheat and rice rose substantially in the 1980s and 1990s 
(Virmani and Rajeev, 2002). WT/TPR/S/182 Trade Policy Review 
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TPDS:  families estimated to be above the poverty line (APL), families below the poverty line (BPL), 
and a category introduced within the BPL in 2 000 called the antyodaya anna yojana (AAY).  
Beneficiaries in the APL and BPL categories, curre ntly 115.2 million and 65.2 million, respectively, 
are identified by state governments on the basis of caloric requirements laid down by the Planning 
Commission and are currently allocated around 50% of their estimated daily grain requirements 
through the TPDS.30  The AAY category, which makes up some 38% of the BPL category, has some 
25 million families identified by the states and incl udes the unemployed, casual labourers, marginal 
farmers and rural artisans, widows, orphans, etc.31  The CIPs under the TPDS are fixed by the 
Government and involve a s ubsidy, particularly for the BPL and AAY consumers.32  The food subsidy 
budgetary allocation for 2006/07 is Rs 239.86 billi on, or 4.3% of total government expenditure.33  
Procurement of rice and sugar are subject to "levies", which are fixed shares of output that must be sold to the Central Government at fixed prices fo r the TPDS.  The sugar market, which is slowly 
being liberalized, is currently subject to a levy of 10%  (15% at the time of the last Review).  Although 
the remaining sugar can be sold on the open market, it is also subject to monthly sales quotas determined by the Government in order to ensure price stability.
34  As a sign of further intervention, 
the Government amended the Essential Commodities Act in June 2003 to require all trade in sugar to 
take place under the direction of the Government35;  exports of sugar are also currently prohibited.  
Rice procured by the Government through a statutory levy on rice millers and rice dealers is fixed by states in consultation with the Central Government and varies from State to State;  it currently ranges 
from 10% to 75% of paddy procured by rice millers/dealers.
36 
31. In addition to the TPDS, other welfare meas ures have been introduced to increase access to 
food, especially for children, through the mid-day me al scheme, the annapurna scheme for the elderly, 
food for work programmes (sampoorna gramin rozg ar yojana (SGRY)) and the National Food for 
Work Programme (NFWP).  The SGRY, announced on 15 August 2001, is a universal programme 
and offers 5 million tonnes of foodgrai n free of charge to be distributed  by states and union territories.  
The NFWP, launched on 13 October 2004, is designed  to provide 100 days of employment at the 
minimum wage for at least one ab le-bodied person from each household in the country.  According to 
                                                      
30 This is estimated at 35 kg (raised from 25 kg in 2002) of foodgrains per household per month.  
31 Department of Food and Public Distribution online information.  Viewed at:  http://fcamin.nic.in/ 
dfpd/EventDetails.asp?EventId=2 9&Section=PDS&ParentID=0&Paren t=1&check=0 [6 December 2006]. 
32 They are currently 67% of the economic cost to the FCI for APL families, 41% for BPL families, and 
22% for AAY families for rice.  In respect of wheat, they are 50% of the economic cost to the FCI for APL 
families, 34% for BPL families, and 16% for AAY famili es;  losses incurred by the FCI are covered by the 
Central Government through a subsidy. 
33 The cost was around 2.5% of government expenditure in the early 1990s (Virmani and Rajeev, 
2002). 
34 The monthly quotas (release mechanism) were to be discontinued by the Government by 
31 March 2003;  however, following appeals by sugar producers, it was decided to continue issuing the quotas 
up to September 2005 and to review the situation in February 2005.  A Committee set up in March 2004 to suggest ways to revitalize the sugar industry recommende d that the release mechanism be discontinued by the 
end of 2005.  However, as at 28 February 2006, th e recommendation did not appear  to have been accepted by 
the Government (Department of Food and Public Distribution Notification No. 1-2/2006, dated 
28 February 2006 requires producers to sell and dispatch monthly quotas of sugar according to the monthly 
release order.  Viewed at:  http ://www.fcamin.nic.in/dfpd/ EventDetails.asp?EventId=867&Section=Sugar%20 
and%20Edible%20Oil&ParentID= 867&child_continue=1&child_ch eck=0 [8 December 2006]. 
35 Department of Food and Public Distribution online information.  Viewed at:  
http://www.fcamin.nic.in/dfpd/Even tListing.asp?ID_PK=100&Section= Sugar%20and%20Edible%20Oil&Paren
tID=0 [8 December 2006]. 
36 Department of Food and Public Distribution online information.  Viewed at: 
http://www.fcamin.nic.in/dfpd/Even tListing.asp?Section=Levy%20and%2 0Control%20Orders&id_pk=14&Par
entID=0 [8 Dece mber 2006].  India WT/TPR/S/182 
 Page 111 
 
 
the authorities, the tribal areas would mainly bene fit from the latter scheme.  The Government also 
provides an emergency feeding programme, and ther e is a Village Grain Bank Scheme to ensure 
supply of grains to food-scarce villages or areas as notified by state governments.  Between 1996/97 and 2006/07, the Government sanctioned the establis hment of 13,219 such grain banks in different 
states. 
32. In the late 1990s, relatively high M SPs, especially for rice and wheat
37, compared with market 
prices, and the changing composition of demand for agricultural products, led to the build-up of huge 
public stocks of grain (64.7 million tonnes in 2002,  almost three times the buffer stock requirements 
and significantly in excess of the 10 million suggest ed by the Expenditure Reforms Commission), 
requiring the FCI to release major stocks both dom estically and for export,  especially during 2002/03 
and 2003/04.38  In 2005, stocks fell below buffer stock requirements, requiring imports, especially of 
wheat.  The cost of maintaining buffer stocks, and thus the overall food subsidy, rose substantially, to 
Rs 241.8 billion by 2006/07;  there is also concern th at the quality of food stocks and storage facilities 
are not good.  Efforts are being made to decentraliz e procurement to the states (some 11 states have 
adopted the scheme), although questions remain a bout financing of operations, reimbursement of 
expenses, and release of subsidy by the Central Government.39  There is also concern that because the 
FCI's costs are covered by the Central Government, it has little incentive to improve efficiency, while 
the targeting of the TPDS could be improved signifi cantly.  Efforts are also being made to improve 
the operational efficiency of the FCI;  according to the authorities, these resulted in savings of 
Rs 1.83 billion up to August 2006.40  
33. To respond to some of these concerns, in 2000, the Government constituted a High Level 
Committee to formulate a long-term grain policy.  The Committee's report, presented in 2002, suggested, inter alia,  that:  MSP's should be fixed on the basis of costs of production in more efficient 
regions;  all rice levies should be discontinued;  stat e levies should not be more than 4% of the MSPs;  
decentralized procurement must be made attractive to  the Central Government;  the efficiency of the 
FCI should be improved;  and the Government should introduce a major food-based employment 
programme.  The Committee also suggested that th ere should be an immediate shift to the unified 
TPDS, with Central prices being based on acquisitio n cost at a single CIP across the country, because 
the TPDS undermined the viability of the Fair Price S hops and resulted in leakages.  In line with these 
recommendations, the Government made modera te increases in MSPs up to 2005/06 and the 
decentralized procurement scheme more viable by de fraying incidental costs, such as storage and 
interest charges for state agencies.  The Governme nt has also implemented the SGRY and the NFWP 
and is making efforts to improve the efficiency of the FCI.  Where state levies are high the Central Government has requested the state governments to  reduce them.  The Government rejected the 
recommendation on the universal PDS since it was felt that this would result in the TPDS losing its 
focus on meeting the needs of the poor.  
Input subsidies 
34. The three main inputs receiving subsidies are fertilizers, electric power, and water for 
irrigation.  In addition, subsidies are provided for seeds and pesticides, including through price control 
                                                     
 
37 It appears that MSPs for paddy rice and wheat have  been fixed at levels higher than recommended by 
the CACP in recent years (V irmani and Rajeev, 2002).  Additional st ates charges and levies inflate prices 
further. 
38 Ministry of Finance (2005) . 
39 Ministry of Finance (2006b) . 
40 The efficiency measures include:  improved financial management, network optimization, renting out 
of excess storage capacity, reuse of gunny bags, reduction of procurement and establishment costs, outsourcing of non-critical activities, and reduction of labour costs. WT/TPR/S/182 Trade Policy Review 
Page 112 
 
 
orders issued from time to time.  Spending on fe rtilizer subsidies increased from Rs 138 billion in 
2000/01 to Rs 182.99 billion in 2005/06 and, with input prices high, it is expected that the cost will rise substantially in 2006/07.
41  To make fertilizers available to farmers at affordable prices and to 
encourage their use, the Government controls the price at which fertilizers are sold to farmers.  As this 
price is lower than the cost of production, the di fference is paid to fertilizer manufacturers as 
compensation.  Currently, urea is subject to price controls under the Fertilizer (Control) Order, 1985, 
although ad hoc price controls are also applie d to phosphatic and potassic fertilizers through a 
"Concession scheme for decontrolled phosphatic and potassic fertilizers".42  The new pricing scheme 
(NPS), also known as the group pricing scheme, has been implemented in two stages (April 2003 and 
April 2004).43  Under the NPS, a flat rate of subsidy is determined for a group of manufacturers.  The 
groups of manufacturers are divided according to production methods and age of manufacturing plants.  The new scheme also provides incen tives for producers to increase efficiency.
44  An additional 
freight subsidy is paid for transportation costs in curred by the manufacturer.  Importers of urea are 
also paid a subsidy to make up fo r the difference between the price of  imports and retail prices.  There 
has been no change in the retail price of fertilizers since 28 February 2002.45 
35. The subsidy provided by the state governments in the form of low or zero tariffs for 
electricity used in agriculture amounted to Rs 73.5 billion in 2002/03 (Table IV.1).46  Electricity is a 
concurrent subject under the Constitution of India.  The Electricity Act, 2003 provides that a state government may decide to give subsidy to a categor y of consumers in the tariff determined by the 
State Electricity Regulatory Commission.  The law al so requires the state government to provide such 
a subsidy from its own budget to the concerned power  utility.  The power subsidy for the agriculture 
sector is also used for irrigation through tube wells , and surface water use is subsidized at rates below 
cost.  The total subsidy for water for irriga tion grew from Rs 137.6 billion in 2000/01 to 
Rs 154 billion in 2002/03.  Additional subsidies are provided for infrastructure, including the 
expansion of the irrigation canal network and its upkeep, and the expansion of drip and sprinkler 
systems, which use less water.   
36. Indirect subsidies for the agriculture sector are provided in a number of ways, including 
facilitating access to credit and insurance policies.  This includes access to credit under the priority 
sector lending requirement for commercial banks (at least  18% of their total lending needs to be to the 
agriculture sector).  It appears, however, that comm ercial banks have consiste ntly failed to meet this 
                                                     
 
41 Ministry of Finance (2006b) . 
42 Phosphatic and potassic fertilizers were decontro lled in 1994.  However, their prices increased 
significantly, resulting in a decline in their use and subsequent overuse of urea forcing the Government to 
announce maximum retail prices for these fertilizers as well (Department of Fertilizer s, online information.  
Viewed at:  http://fert.nic. in/fertilizersubsidy/ background.asp [7  December 2006]). 
43 The NPS replaced the Retention Price Cum Subs idy (RPS) scheme, which was the difference 
between the retail price and the retention price (defined as the cost of production plus a 12% post-tax return on 
net capital assets). 
44 These are:  (i) the urea units had been gi ven preset energy consumption norms, effective 
1 April 2004.  If the units achieve a better energy efficiency, then they are allowed to reta in the benefits thereof;  
(ii) the urea units are encour aged to produce more than 100% of reassessed capacity for which the net gain 
sharing formula on sale of additional production between the Government and the units is in the ratio of 65:35;  
and (iii) the units that use naphtha, FO/LSHS as feed stock for urea are encouraged to convert to cheaper, 
cleaner, and more efficient feed stock, i.e. gas/LNG under NPS. 
45 Ministry of Finance (2006b), Chapter 8. 
46 The Integrated Energy Policy report by an Expe rt Committee notes that, a lthough less than 48% of 
billed energy is sold to industrial and commercial cons umers, this segment yields over 70% of actual revenue 
collected by the state utilities.  Moreover, the cross-subs idization has resulted in industries finding it cheaper to 
set up their own generating plants rather than pay the high rates charged by state electricity distributors (Planning Commission, 2006b, Chapter X). India WT/TPR/S/182 
 Page 113 
 
 
target, and have been permitted to deposit up to 1.5% of the shortfall in net bank credit to agriculture 
with the Rural Infrastructure Development Fund (R IDF) since it was set up in 1995/96.  The RIDF 
was established to assist states in investing in rural infrastructure and is administered by the National 
Bank for Agriculture and Rural Development (NAB ARD).  The interest rates for banks depositing 
their shortfalls with the RIDF until 2001/02 were 0.5%  less than the rates of interest charged on RIDF 
loans to state governments.  However, the rates are now based on the prevailing bank rate with the 
interest rate inversely proportional to the amount of  the shortfall in credit to the agriculture sector.47 
37. The goal of the Tenth Five Year Plan (2002- 07) was a substantial increase in credit to 
agriculture, to Rs 7,367 billion, up from Rs 2,299 b illion under the Ninth Five Year Plan.  However, 
there has been a considerable shortfall, prompti ng the Government to announce a new credit policy in 
June 2004, which aimed to increase credit by requ iring each rural and semi-urban branch of a 
commercial bank to take up on average at least two to three new investment projects in certain areas identified by the Government.
48  As a result, agricultural cred it increased from Rs 869.8 billion in 
2003/04 to Rs 1,253 billion in 2004/05;  almost 84% of the target of Rs 1,410 billion for 2005/06 had 
been met by end 2006.49  An Advisory Committee was also constituted by the Reserve Bank of India 
on the flow of credit to agriculture from the banki ng system.  Several of the recommendations by the 
Committee were implemented by the RBI in May 2004.50  Other forms of credit include the Kisan 
Credit Card scheme with a withdrawal limit base d on the farmers' operational landholding.  The 
Government is also implementing a National Agricu ltural Insurance Scheme (NAIS) covering all the 
major crops, initially with a 50% s ubsidy on the premium for small and marginal farmers to be phased 
out over a period of five years.  At present, a 10%  subsidy on the premium is available to small and 
marginal farmers.  The subsidy is shared equally between state and central governments.  However, it 
seems that only around 14% of farmers on average are currently covered by any crop insurance, 
which does not cover price fluctuations.  In additio n, farmers do not, in general, have any insurance 
cover against other risks such as accidents and illness.51  Agricultural income is exempt from income 
tax;  agricultural products are subject to a 4%  VAT, and states may also levy a state tax on 
agricultural holdings. 
38. However, it appears that small and marginal farmers face considerable difficulty in access to 
credit and their share in total credit to the agricultural sector is falling.52  Moreover, while the share of 
total credit that seems to be non-institutional (i.e . moneylenders who tend to charge high rates of 
interest), while declining, remains significant and is li kely to be especially high for marginal farmers.  
Indebtedness and poor harvests appear also to be  the major causes for the recent cases of suicides 
among small and marginal farmers.  To assist small-scale farmers, in its most recent Budget, the Government has announced a  7% limit on interest rat es charged for loans of up to Rs 300,000.  It was 
also announced in the Budget that a Committee on Fi nancial Inclusion would be appointed to examine 
the reasons for exclusion of marginal farmers fro m access to credit and to suggest solutions.  The 
Committee on Financial Inclusion, set up in June 2 006, will study the pattern of exclusion, identify 
                                                     
 
47 For example, if the bank had a shortfall of less than  2 percentage points of its net credit, the interest 
rate would be the prevailing bank rate, but if its shortfa ll was between 2 and 4.99 percentage points, the interest 
rate would be the prevailing bank rate minus 1% (NABARD online information.  Viewed at:  
http://www.nabard.org/ro les/ridf/genesis.htm [5 December 2006]). 
48 These are:  plantations and horticulture, fisheries, organic farming, agri-processing, livestock, 
micro-irrigation, sprinkler irrigation, watershed manageme nt, village pond development, and others (Ministry of 
Finance, 2005). 
49 Ministry of Finance (2006b). 
50 RBI (2004a).  The r ecommendations that have been accepte d include a waiver on collateral 
requirements loans of up to Rs 50,000 for crops, and Rs 500,000 for loans for agri-business and "agri-clinics".  
51 Planning Commission (2006a). 
52 Mohan (2004). WT/TPR/S/182 Trade Policy Review 
Page 114 
 
 
the barriers confronted by vulnerable groups, and suggest suitable measures and a monitoring 
mechanism. 
(3) ENERGY  
39. Bottlenecks in the energy sector, arising from in adequate and inefficient infrastructure, tend 
to increase transaction costs and prevent the economy from realizing its full potential, regardless of 
progress in other areas.  Recognizing this, the G overnment has been making efforts to reduce 
infrastructure bottlenecks, by encouraging private participation.   
(i) Oil and gas 
40. The Indian oil and gas industry can be broadly divided into three subsectors:  exploration and 
production;  refining;  and marketing.  All three subs ectors are dominated by public sector companies.  
In exploration and production, the two national oil companies (NOCs) accounted for 78% and 9.4% of 
total oil production in 2004/05, while private co mpanies and joint ventures accounted for 12.6%.53  Of 
the 19 refineries, one is privately owned, and accounts for 26% of total refining capacity.54  I n  
addition, foreign investment is restricted to 26% of total investment in public sector refineries. 
41. India is facing increased demand for petroleum products.  The Expert Committee on 
Integrated Energy Policy in the Planning Commission estimated that in order to sustain 8% growth of 
GDP up to 2031/32, India needs, at least, to increas e its primary energy supply three to four fold.55  If 
taking 2003/04 as the base year, India's commercial en ergy supply would need to grow by 5.2-6.1% 
per annum, and its total primary energy supply would need to grow by 4.3-5.1% annually.56 
42. The increased demand requires further reform in the sector.  To encourage investment, 
measures have been adopted to promote private pa rticipation.  Thus, no activity in the sector is 
reserved exclusively for public entities;  apart from refining undertaken by public sector units, up to 
100% foreign investment is allowed in all activities, including exploration, production, and marketing.  
Five private companies have been granted marketi ng rights for the transportation fuel, in addition to 
the four public oil marketing companies.57  In refining, the authorities e xpected that private enterprises 
could account for 29% of the total refining capacity in 2006/07.   
43. Measures have been taken to encourage explora tion and production of oil and gas.  Under the 
New Exploration Licensing Policy (NELP) announced in 1997, 100% foreign investment was allowed 
in all types of exploration, with no minimum e xpenditure commitment.  Various incentives have also 
been provided, such as income tax holidays for sev en years from the start of commercial production, 
and tax deduction of capital e xpenditure on exploration and dr illing operations, including customs 
tariff exemption on imports for petroleum operati ons.  The authorities believe the NELP provides a 
level playing field to private sector companies, by giving them the same fiscal and contractual terms as public companies.  Since the NELP began, in 1999,  production sharing contracts (PSCs) have been 
                                                     
 
53 Ministry of Petroleum and Natural Gas (2006) .  The two NOCs are the Oil and Natural Gas 
Corporation Ltd (ONGC), and the Oil India Ltd (OIL). 
54  T h e  Economic Survey 2006-2007 , issued on 27 February 2007, states that India currently has 
17 public sector refineries and 2 private refineries.  
55 Planning Commission (2005). 
56 IBEF (2006c). 
57 The four public oil marketing companies are the Indian Oil Corporation Ltd (IOC), the Hindustan 
Petroleum Corporation Ltd (HPC), the Bhatat Petroleum Corporation Ltd (B PC), and the Indo Burma Petroleum 
Ltd (IBP) (subsidiary of IOC). India WT/TPR/S/182 
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signed for 110 blocks, and 30 discoveries have been  made by private companies (including joint 
ventures). 
44. Despite being a net exporter of petroleu m products, India imports around 70% of 
consumption.58  Nonetheless, high international prices have not been fully passed through to the 
domestic market;  inaccurate price signals may aff ect the development of oil and gas sector.  The 
Indian Government used to set fuel prices unde r an administered pricing mechanism (APM).  
Although the APM was eliminated in April 2002, co mplete pass-through of international prices does 
not take place.  Although after April 2002 the o il marketing companies (OMCs) were allowed to 
adjust prices based on import parity, after consulting the Ministry of Petroleum and Natural Gas, this 
system was suspended at the end of 2003, when oil prices started to climb.59  In August 2004, the 
Government approved a system under which OMCs c ould adjust gasoline and diesel prices within a 
10% price band of a three-month average of import parity prices;  however, this system has never been applied.   
45. According to the authorities, complete pass-th rough of international oil prices, which rose 
sharply in 2006, could cause severe difficulties for transportation, and have serious  inflationary 
implications.  Accordingly, a Committee was establis hed to look into various aspects of pricing and 
taxation of petroleum products.  The Committee issued  its report in February  2006.  Following its 
recommendations, in June 2006 the Government comme nced a trade-parity-based pricing mechanism, 
comprising 80% of import price parity and 20% of export price parity.
60  Nevertheless, prices of 
kerosene and liquid petroleum gas (LPG) remain subj ect to government control (Chapter III(4)(iii)).  
Applied MFN tariffs on petrol and diesel have been reduced several times during the review period;  
the most recent reduction, from 10% to 7.5% in June  2006, was to mitigate the effects of international 
price rises on domestic prices.61  The Government also continues to monitor the prices of kerosene, 
LPG, motor spirit and diesel;  according to the authoriti es, price monitoring is in the interest of the 
weaker sections of society.   
46. Natural gas supplied by existing pre-NELP oil a nd gas fields and distributed to certain key 
sectors, such as electricity and fertilizers, is allo cated at administered prices.  Gas supplied by 
suppliers other than the two national oil companies (the ONGC and the OIL) is sold at the market 
price. 
47. Kerosene prices in India remain among the lowest  in the world primarily due to subsidies 
provided by the Government.62  In addition, it was estimated that the cost of subsidies to petroleum 
increased from 0.5% of GDP in 2003/04, to 0.7% of GDP in 2004/0563, because of the increase in 
international prices.  Although these subsidies have  shielded some poor households from the impact 
of higher oil prices, there are substantial leakag es.  For example, it was estimated that kerosene 
consumed by households below the poverty line und er the TPDS accounted for less than 38% of all 
kerosene consumption, and almost 49% of kerosen e distributed through the TPDS was diverted for 
non-household use or for sale on the black market.64  The authorities do not consider that there are 
substantial leakages, and state that research conduc ted by the National Council of Applied Economics 
                                                      
58 Planning Commission (2005).  "Currently, the refini ng capacity in the country is more than the 
domestic requirements, making India a net exporter of petroleum products", p. 11.  
59 IMF (2006b). 
60 Ministry of Petroleum and Natural Gas (2006). 
61 Ministry of Finance (2007b), p. 145. 
62 IMF (2006b). 
63 IMF (2006b). 
64 IMF (2006b). WT/TPR/S/182 Trade Policy Review 
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Research (NCAER) shows that at least 62% of PD S kerosene reached the targeted beneficiaries in 
2004.65   
48. Under the Petroleum and Natural Gas Regulatory Board Act 2006, passed on 
31 March 200666, a Regulatory Board is to be set up to re gulate the refining and marketing of petrol, 
petroleum products, and natural gas, but not explorat ion and production of crude oil and natural gas.  
The Act also provides for a legal framework for the downstream gas sector, including the 
development of natural gas pipelines, as well as local  gas distribution networks.  The authorities state 
that a committee is working on identifyi ng suitable members of the Board.   
(ii) Electricity 
(a) Overview 
49. The electricity industry has undergone major changes over the last decade.  Under the Indian 
Constitution, electricity is regulated by both the centr al and state governments.  At the central level, 
the Ministry of Power is responsible for administ ration of the Electricity Act 2003, issues related to 
the Central Electricity Regulatory Commission (CE RC), and rural electricity schemes.  The CERC is 
responsible for regulating the tariff of generati ng companies owned or controlled by the Central 
Government and those that operate in more than one  state;  it is also in charge of inter-state 
transmission.  The State Electricity Regulatory Co mmissions (SERCs) administer electricity firms 
(generation, transmission, and retail) operating in a single state. 
50. It is estimated that in order to support 7% GDP growth per annum, growth of electricity 
supply needs to be over 10% annually.67  Generation capacity in particular, which is currently 
127,673 MW, must double every ten years for the next th ree decades.  Accordingly, structural reforms 
are urgently needed to increase generation, tr ansmission, and distribution capacity, to improve 
efficiency and reduce losses. 
(b) Structural reform 
51. Previously, there was a state electricity board (SEB) in every state;  these were 
government-owned integrated utilities, and genera ting companies could not choose their customers 
unless approved by the Government on a case-by-case basis.  The SEBs have been running at a loss since the late 1980s and, against this backdrop, the electricity industry has been facing challenges 
such as:  inadequate generation;  accumulated losse s in the generation, transmission, and distribution 
of electricity;  unsustainable cross-subsidies;  lo w access to electricity, particularly in rural areas; and 
a lack of investment in infrastructure.  Accord ingly, electricity supply continues to lag behind 
demand;  43% of the total population and 56% of  the rural population does not have access to 
electricity. 
52. Realizing the need for reform, a number of st ates began unbundling the SEBs, and as a result, 
the number of players in each segment of the in dustry has increased.  In particular, there are 
21 companies engaging in electricity trading, 18 of  which are privately owned.  Out of 74 generation 
companies, 9 are controlled by the Central Governme nt, 25 by state governments;  the remainder are 
                                                     
 
65 The authorities indicate that the measures taken or intended to reduce leakages include introducing a 
marker system, and advising the NOCs to install global positioning systems on all the tank trucks carrying 
petrol/diesel to retail outlets by March 2007. 
66 The Petroleum and Natural Gas Regulatory Board Act 2006.  Viewed at:   http://indiacode.nic.in/ 
fullact1.asp?tfnm=200619. 
67 IBEF (2006d). India WT/TPR/S/182 
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privately owned.  State governments, however, conti nue to play a major role in the transmission and 
distribution of electricity.  Out of 13 transmission companies, 11 are controlled by state governments and one by the Central Government, while 31 of th e 48 distribution companies are controlled by state 
governments and one by the Centre.     
53. However, for the SEBs, the cost of producin g and transmitting electricity remains much 
higher than the sales price, and cross-subsidies for agriculture and households, by charging high 
prices to commercial and industrial consumers,  have led to negative rates of return.   Between 2005/06 
and 2006/07, the rate of return of the SEBs deteriorated from -24.8% to -27.4%.
68  A ls o,  as  S E B s 
dominate the transmission and distribution of electri city, their financial difficulties indicate that they 
have not been able to pay fully for the purchase of electricity generated by private power producers.  
Hence, although 100% foreign investment has been pe rmitted in electricity generation, transmission, 
and distribution, the amount attracted is low.  Fu rthermore, the SEBs' losses, and the consequent low 
foreign and private investment have contributed to the lack of investment in infrastructure.  These 
infrastructure bottlenecks, in turn, have constraine d not only the growth of the sector, but also the 
development of the economy.   
54. Transmission and distribution (T&D) losses also remain high, with many states reporting 
losses of over 40% in recent years.69  These losses are mainly attributed to inadequate investment in 
infrastructure, lack of a distribution network in rural areas, low metering efficiency, and theft.  
Accordingly, in March 2003, the Government initiated the Accelerated Power Development and 
Reforms Programme (APDRP) for transmission and di stribution, to reduce the aggregate technical 
and commercial (AT&C) losses.  Initially, the target  was to reduce AT&C losses from 60% to 15% in 
about five years, but it was found later that the b aseline 60% was not correct and the 15% target was 
too ambitious.  Accordingly, a Taskforce set up by the Ministry of Po wer suggested a graded 
reduction in AT&C losses.  Utilities with AT&C lo sses:  above 40% should reduce them by 4% per 
year;  between 30-40% by 3% per year;  between 20- 30% by 2% per year;  and those with less than 
20% losses should reduce them by 1% per year.70  So far, AT&C losses have fallen from an average 
of 39% in 2001/02 to 33.5% in 2005/06.   
55. Under the Electricity Act 2003, which entered into  force in 2003:  generation (other than large 
hydro generation) was delicensed;  open access and electricity trading were allowed in the transmission and distribution of electricity;  distri bution was also delicensed in "notified" rural areas
71;  
and unbundling of the SEBs was promoted.  In partic ular, under the Act, consumers with a load of 
more than 1 MW are allowed open access to transmi ssion and distribution by January 2009.  In 
addition, the Appellate Tribunal for Electricity became operational from 21 July 2005, and started 
hearing appeals against decisions of the electricity regulatory commissions.  Although the implementation of the Act has not been even at the state level, and three states have recently 
reintroduced free access to electricity for farmers, th e authorities consider that most of the states have 
taken significant steps in the direction of deregulation. 
56. The Electricity Act required the Central Govern ment to formulate the National Electricity 
Policy, in consultation with the Central Electricity Authority (CEA)
72 (a statutory agency under the 
                                                      
68 Ministry of Finance (2007b), p.180. 
69 Ministry of Power online information.  Viewed at:  http://powermin.nic.in/JSP_SERVLETS/ 
internal.jsp [30 November 2006]. 
 70 Ministry of Power (2006).  
71 Electricity Act, Part IV Licensing, Article 14:  "P rovided also that where a person intends to generate 
and distribute electricity in a rural area to be notified by the State Government, such person shall not require any 
licence for such generation and distribution of electricity". 
72 The CEA was first set up in 1951 as a part-tim e body, and became a full-ti me agency in 1975.  
Under the Electricity Act 2003, the CEA's functions include providing advice to the Central Government on WT/TPR/S/182 Trade Policy Review 
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Ministry of Power), and state governments.  The Po licy, issued in 2005, aimed to realize full access to 
electricity by 2009, and increase supply to meet demand by 2012.  An important component of the policy is to promote open access in transmission, which would enable electricity from surplus regions to be supplied to deficit regions. 
57. The Rural Electricity Infrastructure and Hou seholds Electrification (Rajiv Gandhi Grameen 
Vidyutikaran Yojna (RGGVY)) scheme was introduced  in April 2005, to provide full access to 
electricity, particularly in rural areas, by 2009.  The Rural Electrification Corporation (REC) is in 
charge of implementing the scheme.  A capital subsid y of 90% is provided for the provision of rural 
electricity distribution infrastructure, including the Rural Electricity Distribution Backbone (REDB), 
the Village Electrification Infrastructure (VEI), a nd the Decentralized Distributed Generation (DDG) 
and Supply.  A 100% subsidy is provided for elect ricity consumed by households below the poverty 
line.  As at December 2006, 27 states had si gned memoranda of agreement (MoAs), agreeing to 
implement the RGGVY.  Under this scheme, 9,819 villages obtained access to electricity in 2005/06 
(in addition to the 26,543 villag es between 1996/97 and 2004/05).    
58. To increase private participation in the sector, 100% foreign equity participation has been 
allowed since 1991 in all segments of the industry .  Subsequently, FDI in generation, transmission, 
and distribution was brought under the automatic approval route.  Since 2005, 100% FDI has also been permitted in the trading of electricity.  Cert ain fiscal benefits, in the form of duty concessions 
and tax holidays, have also been provided.
73  In addition, all electricity projects have a 100% income 
tax exemption for ten consecutive years, within  15 years of commencement or from undertaking a 
substantial renovation or moderniza tion of existing transmission lines.  The authorities state that as a 
consequence of the restructuring efforts, investor confidence has been improving.  About 40,000 MW of new generation capacity is under construction with investments of more than Rs 1,600 billion.  The 
Government's Ultra Mega Power Project has al so been developed with investment through 
public-private partnership.
74 
(c) Subsidies and pricing  
59. Government subsidies, including cross-subsidi es to the electricity sector, appear to have 
reached unsustainable levels.  In 2006/07, direct transfers from state governments to the SEBs reached 
Rs 138.7 billion, in addition to an "unc overed subsidy" of Rs 212.01 billion.75  Recognizing that 
cross-subsidies hide inefficiencies and losses in operations, the National Electricity Policy 
recognizing the urgency of reducing subsidies.  Howe ver, the policy stipulates that consumers below 
the poverty line and consuming electricity below a sp ecified level may receive cross-subsidies in the 
form of tariff reductions, which should be at l east 50% of the overall average cost of supply.  
According to the authorities, as the complete elimin ation of cross-subsidies would not be feasible in 
the near future, there is a proposal to amend the El ectricity Act by deleting the phrase "elimination of 
                                                                                                                                                                     
issues relating to the national electricity policy;  speci fying the technical standards and safety requirements for 
electrical plants and electric lines;  specifying the grid standards for operation and maintenance of transmission 
lines;  and conditions for installation of meters for transmission and supply of electricity (CEA online 
information.  Viewed at:  h ttp://cea.nic.in/about_us/functions _cea.html [13 December 2006]). 
73 For example, under the Mega Power Policy, larg e generation projects can obtain capital import-duty 
concessions, and/or the waiver of local levies to re duce costs.  All inter-state projects with a capacity of 
1,000 MW and above for thermal, and 500 MW and above for hydro projects, are treated as mega power 
projects.  
74 According to the authorities, two projects, eac h with 4,000 MW generation capacity, have been 
awarded through tariff-based competitive bidding.  It se ems the U.K. based Globeleq is the major consortium 
partner in one of the recently aw arded 4,000 MW ultra mega power projects in Madhya Pradesh. 
75 Ministry of Finance (2007b), p. 180.   India WT/TPR/S/182 
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cross subsidies".  Thus, cross-subsidies w ould be reduced rather than eliminated.76  The authorities 
state that consumption by agricultural consum ers increased by 5.8% in 2004/05, with revenue 
increasing by 8.5%.  During the same period, industrial consumption increased by 11.5% with revenue increasing by 9.99%.  This, according to th e authorities, indicates the beginning of reduction 
in cross-subsidies. 
60. To promote competition, competitive bidding gui delines, issued on 19 January 2005, provide 
for the determination of tariffs for purchasing electri city by distribution comp anies;  the electricity 
regulatory commissions are required to adopt tariffs  determined through the bidding process.  
Currently, the tariff is determined on the basis of the capital cost and the performance of a project.  
Public sector utilities have been given a five-year tr ansition period to move from the cost-performance 
based tariff to a competitive bidding based tariff.
77  Exceptions include the one-time expansion of 
existing projects, i.e., existing generation projects can  expand 50% of their current capacity within the 
present tariff regulation regime, or where a state-controlled company is identified as the developer of the project.
78 
(4) MANUFACTURING  
61. Manufacturing has been growing rapidly since the previous Review (Table I.2) of India, due 
partly to structural reform.  The share of manuf acturing in GDP increased from 15.6% in 2000/01 to 
16% in 2005/06 (Table I.2).  Its share in total merchandise exports fell from 76.5% in 2000/01 to 69.8% in 2005/06, while the share in imports rose from 42.9% to 48.4% (Chart I.1).   
62. There has been a decline in industrial licensing and FDI restrictions.  Border protection for 
manufacturing also fell significantly, as the average MFN rate in manufacturing (ISIC) fell from 
32.5% in 2001/02 to 14.9% in 2006/07 (Chart III.3).
79  However, the reduced average tends to conceal 
some high tariff rates, such as on new and second-hand automobiles, which are at 60% and 100%, respectively.  
(i) Textiles and clothing 
(a) Introduction 
63. Employing around 35 million people, textiles a nd clothing (T&C) remains the largest 
manufacturing industry in India in terms of employment.
80  It accounted for 4% of GDP and 14% of 
industrial production in 2004/05.81  The authorities indicate that the T&C sector accounted for 8.62% 
of total employment, and labour productivity in T&C a ppears to be lower than in the remainder of the 
manufacturing industry.82 
                                                      
76 The proposed amendment also includes provisions relating to control of theft of electricity, as well as 
providing electricity universally to urban and rural areas. 
77 The authorities indicate that, once the tariff is determined through competitive bidding, no further 
regulatory scrutiny is envisaged.  This, as stated by  the authorities, also reduces regulatory uncertainty. 
78 Ministry of Finance (2006b), Chapter 9. 
79 The average MFN rate in manufacturing, excludin g AVEs, is 15.1% for 2006/07, or 17.0% including 
AVEs. 
80 Ministry of Textiles (2006).  The T&C sector is al so the second largest provider of employment after 
agriculture.   
81 Ministry of Textiles (2006). 
82 According to figures provided by the Department of Heavy Industry, labour productivity, if 
measured in terms of gross value added per employee, is 1.48 for weaving and spinning, and 1.61 for other textiles manufacturing, lower than that for machinery (3 .31), iron and steel (7.45), and automobiles (10.6). WT/TPR/S/182 Trade Policy Review 
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64. The textiles and clothing industry is regulated by  the Ministry of Textiles, and comprises the 
"organized" mill sector, with rela tively sophisticated technology and integrated composite spinning, 
weaving, and processing mills, and the "decentralized " sector.  The "decentralized" sector, the largest 
part of the T&C industry, is composed of powerloom units (accounting for 62% of total clothing 
production), and handloom units (which opera te with low levels of technology).83   
(b) Reform measures and assistance 
65. Textiles and clothing products used to be subject to small-scale industries (SSI) reservations, 
and consequently a foreign equity restriction of 24%.  The reservation, however, prevented firms from 
benefiting from economies of scale.  The Govern ment has gradually "de-reserved" textiles and 
clothing products from the SSI list over the p ast few years, and 100% foreign ownership is now 
allowed in the industry. 
66. In addition to the SSI reservation, which c onstrained the competitiveness of India's T&C 
exports, other factors affecting the industry's co mpetitiveness include low value added, lack of 
diversification in terms of export destinations (65. 4% of India's T&C exports were directed towards 
the United States and the EC in 2005, up from 58.7% in 200484), little inward FDI85, and poor 
infrastructure.86  In particular, according to the RBI, tran saction costs were higher in T&C than in 
India's other leading export sectors in 2003.87 
67. Measures have been introduced to increase productivity, by, for example, restructuring certain 
subsectors (e.g. mills).  Although private firms, wh ich are supposed to be more efficient, accounted 
for 92% of yarn production and 94%  of fabric production in the mill sector, the "organized" mill 
sector has apparently accumulated large debts.88  The Government announced a package to restructure 
mills to alleviate the debts.  Facilitated by the Nati onal Textile Corporation (N TC), 65 mills have been 
shut down under the Industrial Disputes (ID) Act.89  It appears that the Ministry of Textiles also 
provides "letters of comfort",90 which seem to be government guara ntees to facilitate mills to obtain 
loans from banks.  Moreover, Rs 500 million has already been invested to improve existing 
machinery, and Rs 4 billion has been used as adjustment assistance to reduce labour surplus. 
                                                      
83 USITC (2001):  "The handloom industry is an integral part of rural life in India.  Although it has high 
production cost and low productivity, it is known for its unique products, which have helped it develop a niche 
in global markets." 
84 UNSD Comtrade database. 
85 Between 1991 and 2004, FDI in the sector was US$35 million (1% of total cumulative FDI flows 
into India during the period) (Tewari, 2005). 
86 Ananthakrishnan and Jain-Chandra (2005). 
87 RBI (2004b).  According to the authorities, international trade is determined by market forces, and 
there has not been any bureau cratic control regulating the T&C sector in India. 
88 The authorities state that, accord ing to studies conducted by th e South India Textile Research 
Association (SITRA) in July 2002, banks and other financial institutions had almost Rs. 600 billion of non-
performing assets accumulated in the textiles sector.  Accordingly, a package based on external commercial 
borrowings (ECBs) was announced to reduce debts.  Under the package, rupee-term loans could be converted 
into foreign currency loans, to bring down the interest  rates.  However, the authorities state that the scheme 
could not commence, but did not provide reasons. 
89 The NTC had 119 mills under its management, of which, 52 are to be restructured, 65 were shut 
down, and two transferred to a state government.  The esti mated cost of the restructuring is Rs 39 billion, which 
is to be financed by selling the land and assets of the closed mills.  Employees of these mills were offered voluntary retirement, which, accord ing to the authorities, had been  accepted by 53,656 employees. 
90 Ministry of Textiles (2005), p. 7.  According to the authorities, the Ministry of Textiles does not 
provide any "letters of comfort" to the financial institutions or banks to provide loans or credit to the textile sector. India WT/TPR/S/182 
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68. The T&C industry has been receiving assistance in  various forms, and for different purposes.  
The Handloom Reservation Order stipulates that 11 te xtile products must be manufactured by the 
handloom industry, and the Hank Yarn Obligation Or der requires that all yarn producers process 40% 
(50% before January 2003) of their deliveries in  hank form to ensure adequate supply for the 
handloom industry at "reasonable" prices.91  Furthermore, the Cotton Corporation of India (CCI), a 
state-owned enterprise established in 1970, engages in  price support operations whenever the price of 
cotton falls to the government-set minimum support price (MSP).  The loss incurred through price support operations is reimbursed to the CCI by th e Government.  More recently, assistance has been 
provided to improve technology;  the Technology Upgradation Fund Scheme (TUFS) was launched in 
1999, and extended to 31 March 2007, to upgrade tec hnology in existing plants and equipment, and to 
promote investment in new plants and equipment.  Funds are provided in the form of reimbursement 
to interest on loans.
92  Under the Tenth Five Year Plan (2002-2007), the Government allocated 
Rs 12.7 billion to TUFS.93 
(c) Border measures 
69. During the period under review, tariffs on te xtile machinery and e quipment have been 
reduced;  currently, there are 387 textile machiner y items with a basic customs duty of 5%.  In 
addition, imports of second-hand machinery have been permitted since April 2003. The authorities 
also indicate that India is keeping a large numbe r of T&C items in positive lists under various RTA 
negotiations, where preferential tariff concessions are given or duty-free imports are allowed. 
70. Nonetheless, the textiles and clothing industry  remains protected by relatively high tariff 
barriers, a large percentage of which are non- ad valorem .94  Excluding AVEs, the current average 
tariff for the sector is 12.3%;  however, inclusion of AVEs raises the average tariff up to 22.5%.  Consequently, imports (mainly textiles) accounted for only 1.3% of total merchandise imports in 
2005/06 (1.2% in 2000/01) (Table AI.2).
95  Preferential tariffs also apply to textiles and clothing 
products under certain regional and b ilateral preferential trade agreements (Table III.2).  In addition, 
tariff rate quotas apply for imports from Sri Lanka:  6 million pieces of clothing may be imported duty 
free, if manufactured in Sri Lanka using fabric sourced from India;  and a 75% tariff rebate is 
applicable to a further 2 million pieces. 
71. Although the T&C industry's share of total merc handise exports fell from 27% in 2000/01 to 
17.1% in 2005/06, it remains one of India's largest exporters (Table AI.3).  Despite this downward 
trend, India's share of the global T&C market increased from 3% in 2001 to 3.7% in 2006. 
72. The New Textile Policy 2000, issued in November 2000, was aimed at further increasing 
India's T&C exports to US$50 billion by 2010 (from  US$12 billion in 2000/01).  In addition, the 
discontinuation of the Agreement on Textiles and Cl othing in 2005 was expected to increase India's 
                                                      
91 Ministry of Textiles online information.  Viewed  at:  http://texmin.nic.in/annualrep/ar00_c05.htm. 
92 Benefits under the scheme include:  5% interest reimbursement on rupee term loans;  5% exchange 
fluctuations on foreign currency loans; 15% or 20% cred it-linked capital subsidy;  5% interest reimbursement 
plus 10% capital subsidy for sp ecified processing machinery. 
93 Ministry of Textiles (2006).   
94 In the 2006/07 tariff, around 34.1% of lines for th e textiles, wearing apparel,  and leather industries 
(ISIC) are non- ad valorem .  According to the authorities, there are no import restrictions.  The non- ad valorem  
duties on T&C products are altern ate duties, and are levied as ad valorem  or specific duty, whichever is higher, 
with a view to discouraging very cheap products of dubious quality from non-market economies.   
95 According to the authorities, the low share of textiles imports to total imports is not due to high tariff 
barriers;  rather, it is because of la rge increases in non-textile imports, in cluding raw materials, crude oil, and 
machinery items. WT/TPR/S/182 Trade Policy Review 
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T&C exports:  exports of T&C produc ts increased by 29.6% in 2005/06.96  However, exports continue 
to be constrained by aging machinery, inadequate  infrastructure (such as power and ports), and rigid 
labour laws.97 
73. Measures to increase exports include the Adva nce Authorization Scheme (AAS) (previously 
advance licensing scheme), and the Duty Exemption Pass Book scheme (DEPS) (Chapter III(3)(vii)).  
Around 300 T&C products have been identified under the AAS.  Recently, to facilitate economies of 
scale, the Government has been trying to promote industrial and textile clusters.  For example, it 
commenced the Integrated Textile Parks Scheme in 2005:  by combining the Apparel Park for Exports 
Scheme, and the Textile Centre Infrastructure Scheme98, the integrated textile parks aim to provide 
infrastructure facilities to the textile industry.99  Exports are also promoted by helping firms to 
participate in international trade fairs and exhibitions. 
(ii) Steel 
74. Deregulation of the steel industry commenced in the early 1990s, when 100% foreign 
investment was allowed, restrictions on import or export of steel were reduced, and price regulations 
were discontinued.  Partly as a result of the deregula tion, and partly due to India's endowments of iron 
ore and non-coking coal, crude steel output rose by ne arly 6% annually, and exports by 15% annually, 
between 1995 and 2005;  global crude steel output grow th was 4% annually during the same period.  
In 2005, India produced 38 million tonnes of steel, becoming the eighth largest steel producer in the world.   
75. The industry is regulated by the Ministry of Steel, and comprises "main producers", "other 
major producers", and "secondary producers".  The "main producers" are:  the Steel Authority of India 
(SAIL) and Rashtriya Ispat Nigam Ltd (RINL), both state-owned enterprises, and Tata Steel Limited, 
a private company.  The "main" and "other ma jor" producers are those that have integrated 
steel-making facilities with production capacity ove r 0.5 million tonnes per year, and utilize iron ore 
and coal or gas for producing steel.  The "secondary" producers, comprise firms with lower production capacity, including aro und 120 sponge iron producers, 650 mini-furnaces, and about 
1,200 re-rollers.
100 
76. Labour productivity in crude steel production varies in  terms of output per person;  in general, 
productivity in companies established in the 1990s (mai nly private enterprises) is much higher than in 
those established earlier (mainly public sector enterprises).101  In addition, nearly 6% of India's crude 
steel is produced using outdate d open hearth processes (compared to 0.3% in the EC).   
                                                      
96 UNSD, Comtrade database. 
97 Ministry of Finance (2007b), p.140. 
98 Under the Apparel Park for Exports Scheme (launched in 2002), the Government approved setting up 
11 apparel manufacturing centres around the country dir ected towards exporting.  Under the Textile Centre 
Infrastructure Scheme (also launched in 2002), the Government was to develop infrastructure facilities at major 
textile production centres in India.   
99 The Government seeks to implemen t the economic cluster model, to take advantage of the economies 
of scale on both demand and supply side.  In this regard, the Government announced in the 2006/07 Budget that the cluster development approach would continue and would be extended to a further 100 clusters.   
100 Ministry of Steel (2005).  The authorities indicate that, by the end of 2006, there were 218 sponge 
iron producers, 787 electric induction and arc furnaces, and 1,361 re-rollers. 
101 For example, in 2005/06, the labour productiv ity in Essar Steel and Jindal Steel, both privately 
owned, was 1,079 tonnes and 617 tonnes, per person per year, respectively, much higher than in SAIL 
(150 tonnes per person per year), and RINL (282 tonnes per person per year).  TISCO, although privately owned, is the oldest steel producer in India and has labour productivity of 277 tonnes per person per year.  India WT/TPR/S/182 
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77. To promote the industry's competitiveness and improve efficiency and productivity, the 
National Steel Policy, issued in 2005 is aimed at increasing steel output to 110 million tonnes per annum by 2019/20 (from 38 m illion tonnes in 2004/05).
102  By 2019/20, exports are envisaged to 
reach 26 million tonnes (based on double-digit grow th until 2019/20), from around 4 million tonnes in 
2004/05;  thus, steel exports would account for 23. 6% of total production, up from 11% in 2004/05.  
However, according to the latest demand and s upply projection, production is likely to be 15-20% 
higher than the 110 million tonnes envisaged in the NSP, suggesting that exports would constitute a 
smaller share of total production than the estimated 23.6%.  
78. The Government intends to help firms to increase output by, inter alia , removing procedural 
and policy bottlenecks in the availability of inputs, such as iron ore and coal, promoting investment in 
R&D103, and providing export credit.104  Also, given the slow progress of multilateral trade 
negotiations, the Government intends to focus on re gional-trade agreements to increase market access 
for steel exports.105  In addition, the Government is co mmitted to conducting reviews to remove 
infrastructural and institutional bottleneck s, so as to reduce transaction costs.106  Furthermore, the 
Government would encourage strategic alliances wi th buy-back arrangements.  Steel exports may 
benefit from the Advance Authorization Scheme  (AAS), and the Duty Entitlement Pass Book 
scheme (DEPS) (Chapter III(3)(vii)).107  According to the authorities, the production goal specified in 
the National Steel Policy is expected to facilitate the development of downstr eam industries that use 
steel as inputs, such as infrastructure construction,  manufacture of transport equipment, machinery, 
and consumer durables.108   
79. During the period under review, MFN tariffs for iron and steel imports have been reduced 
significantly, from an average 33.8% in 2001/02, to 7.1% in 2006/07 (ISIC 3710).  As a result, trade 
in iron and steel has been growing fast, with im port growth at an average annual rate of 55%, and 
export growth at 47%, between 2001/02 and 2005/06.109  Import restrictions, however, remain to 
discourage imports of low-priced "seconds" a nd "defective" materials including through floor 
prices.110  Imports of seconds or defects, which ar e allowed only through three designated ports 
                                                      
102 Ministry of Steel (2005).   
103 According to the authorities, a tax rebate of 12 5% of the total expenditure incurred on R&D is 
allowed.   
104 Ministry of Steel (2005).  According to the author ities, the measures specified in the NSP are aimed 
at removing the constraints that are beyond the control of individual steel producers and that impede efficient 
growth of the steel industry.  These include lack of infrastructure, scarcity and high cost of capital resources, as well as other rigidities that prevent steel producers' access to different inputs.   
105 Ministry of Steel (2005).  India is the largest steel producer in South Asia.  According to the 
authorities, compared with its nearby countries in Asia, the Middle East, and Africa, India has considerable comparative advantage in terms of availability of raw ma terials, a large pool of skilled manpower, as well as 
technological capability.  RTAs with these coun tries can provide better market access for India. 
106 The NSP emphasizes the need to expand infrastructure for roads, railways, ports, and power by, 
inter alia , promoting investments through business models such as PPP (Public Private Partnership), better 
coordination among various agencies supplying infrastructure and services to the steel producers, and improving 
logistics. 
107 The authorities state that these schemes are more re levant when the tariff rates are high.  However, 
in the last decade the tariff rates on steel have been reduced significantly. 
108 The authorities indicate that the production goal becomes particularly important as domestic 
consumption of steel has been increasing at double-digit rates in the last two financial years, and for the past 
15 years the Indian steel industry has been driven principally by the growth in domestic markets, instead of being export driven. 
109 UNSD Comtrade database. 
110 Floor prices are applied to hot-rolled coils and sheets, cold-rolled coils and sheets, tinplate waste 
and waste/tinplate misprints, and el ectrical sheets (CRNO) and plates. WT/TPR/S/182 Trade Policy Review 
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(Mumbai, Calcutta, and Chennai), are also simila r to mandatory pre-inspection certificates (by a 
"reputed" international agency).  The tariff on these imports, at 20%, is much higher than the average 
tariff for steel products.111   
80. Furthermore, the Government has a scheme to distribute iron and steel produced by the main 
producers (SAIL, RINL, and TISCO) to small-scale industries112, and to other Government 
departments (up to 30% of the total allocation).  Th e distribution is through the Small Scale Industries 
Corporations (SSICs) at the state level, or the National Small Industries Corporation (NSIC).113  To 
ensure that SSIs obtain these raw materials at "re asonable" prices, the Government provides nominal 
handling charges of around Rs 500 per tonne to the SSI Cs to cover their handli ng, transportation, and 
stockyard maintenance charges.114  The distribution scheme, however, may reduce enterprises' 
incentive to achieve economies of scale, and henc e adversely affect the competitiveness of the 
industry.  The National Steel Policy, stated that the distribution system would remain.  
(iii) Automobiles 
81. Following structural reform measures in the 1990s, the new Auto Policy was announced in 
March 2002 by the Department of Heavy Industry, under which 100% foreign ownership was allowed 
and minimum investment conditions were disconti nued.  Partly as a result of these measures, the 
automotive industry has been developing fast;  to tal output increased by 17% in 2004/05, and exports 
of automobiles increased even faster, by 31.3%.115  The industry accounts for 5% of GDP and 
employs, directly and indirectly, around 13.1 milli on people.  The authorities state that in terms of 
gross value added per employee, labour productivity in the automotive industry was 10.6 in 2003/04, 
much higher than in iron and steel (7.45), machiner y (3.31), or structural metal products (2.3).  
Currently, there are 13 manufacturers of passenger vehicles, 9 manufacturers of commercial vehicles, and 17 manufacturers of two/three wheelers. 
82. There are around 500 automotive component firms in the organized sector and some 
10,000 firms in the unorganized sector.  The i ndustry has been growing at around 20% annually 
since 2000.  Total value added reached US$10 b illion in 2005, and is envisaged to grow to 
US$40 billion in 2014.
116  In May 2006, all auto component s (around 35 items) were removed from 
the SSI reservation list, giving a further boost to the sector's development. 
83. Part of the objective of the new Auto Policy is  for India to become a global source of auto 
components and an international hub for the manufact ure of small passenger cars.  The authorities 
indicate that, between 2000/01 and 2005/06, export s of automobiles as a proportion of total 
production increased from 3.5% to 8.9%.  Exports of auto components increased from 
                                                      
111 Ministry of Steel online information.  Viewed at:  http://steel.nic.in/policy.htm [29 November 2006].  
According to the authorities, the import restrictions ar e actions permitted under the WTO Agreement, and are 
applicable only to the imports of "low-priced" "seconds" and defective materials, whic h are products not sold in 
the developed western country markets.  The authorities state that these imports pose potential threats to the 
health and safety of users in India. 
112 SSIs are industries with total investment of Rs 10 million or less. 
113 Ministry of Steel online information.  Viewed at:  http://steel.nic.in/distribution.htm 
[29 November 2006]. 
114 According to the authorities, the nominal handling charges do not affect the supply price to the SSI 
units, as the price of raw materials supplied is determined by the producer. 
115 Other reasons for the rapid development of th e automotive industry are the increased demand 
resulting from the burge oning economy and the emerging middle cl ass, and the relatively easier access to 
consumer finance. 
116 IBEF online information.  Viewed at:  h ttp://www.ibef.org/industr y/autocomponents.aspx  
[12 December 2006]. India WT/TPR/S/182 
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US$578 million in 2001/02 to US$2.1 billion in 2005/06.   Export growth, particularly of automobiles, 
will be affected by India's regional trade agreem ents.  In particular, under the agreement with 
Thailand, India eliminated tariffs on some auto components from September 2006.117   
84. Despite deregulation, the automotive industry is still protected by relatively high import 
duties and non-tariff restrictions.  Although the average applied MFN  tariff for motor vehicles 
(ISIC 3843) fell from 44.2% in 2001/02, to 33.6% in 2006/07, it remains considerably higher than the average for manufacturing (15.1% in 2006/07).  The average applied MFN tariff for motor vehicles 
(HS 8703) fell slightly from 105% in 2001, to 100% in 2006.
118  Given such high tariffs, it is likely 
that much of the FDI in the industry is for "tariff jumping" purposes.  Although there are no licensing 
requirements for imports of new vehicles, licences n eed to be obtained for imports of automobiles 
more than three-years old, once safety and environmen tal requirements are met.  In addition to a tariff 
of 100%, imports of used vehicles may enter only through Mumbai port. 
(iv) Information technology (IT)  
85. Information technology (IT) has been one of the fastest growing industries in the economy.  
The industry comprises software development, IT enabled services (ITES), business process 
outsourcing (BPO), and hardware manufacture.  IT  services and software account for more than 60% 
of the industry's total value added.  
86. Deregulation of the industry includes reducing import barriers, relaxing foreign investment 
restrictions, and encouraging private sector partic ipation.  For example, tariffs on specified capital 
goods and IT hardware were eliminated in 1997 .  As India is a member of the Information 
Technology Agreement (ITA), since 1 March 2005, tari ffs have been eliminated on all the specified 
217 tariff lines.  The peak rate for other electronics products is 12.5%.  Although the excise duty on computers is 12.5%, exemptions are in place for microprocessors for computers, hard disc drives, 
floppy disc drives, CD ROM, DVD drives, USB flash memory and combo drives, as well as parts, components, and accessories of mobile handsets incl uding cellular phones.  In addition, FDI of up to 
100% through the automatic route is permitted in electronics and in formation technology hardware 
manufacturing, software development, and ITES sector, except business-to-consumer (B2C) 
e-commerce.  
87. The Government has adopted various measures to  facilitate further development of the IT 
industry.  Software technology parks (STPs) and electronic hardware technology parks (EHTPs) are 
single-window operations providing export services and incubation infrastructure to small and 
medium-sized enterprises (SMEs), to promote exports  of IT products and services.  The incentives to 
the firms operating under the STP and EHTP schemes include:  duty-free access to imports of capital 
goods, raw materials, components and other relate d inputs;  100% exemption from excise tax on the 
purchase of domestic goods;  and 100% exemption from payment of income tax on export profits up 
to 2009/10.
119  Both schemes are implemented by the So ftware Technology Parks of India (STPI), a 
                                                      
117 According to the authorities, apart from the agr eement with Thailand, India has signed no other 
RTAs that include automobiles and auto components. 
118 According to the authorities, tariffs on automotive  products were also reduced significantly except 
on CBUs of cars and two-wheelers.  From 2001/02 to  2006/07, the average applied MFN tariff for motor 
vehicles (Chapter 87 apart from 8703 and 8711) fell from 40% to 12.5%.  The MFN tariff for new cars and 
two-wheelers is 60%, and the tariff for used vehicles is 100%, both of which are unbound.  In addition, major international manufacturers are setting up manufacturin g facilities to access the large and growing domestic 
market. 
119 Software Technology Parks of India online inform ation.  Viewed at:   http://www.stpp.soft.net/ 
ehtpscheme.html. WT/TPR/S/182 Trade Policy Review 
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not-for-profit organization under the Department of In formation Technology.  The authorities indicate 
that STPI has set up 47 centres all over the country, and there are currently over 5,000 firms exporting 
under the STP scheme and over 70 firms under the EHTP scheme.  The share of exports through STPs 
to total exports of IT software and services, including ITES and BPO, went up from 81% in 2001/02, 
to 98% in 2005/06.  Special Economic Zone s (SEZs) are also being promoted as export 
manufacturing centres.  Tax incentives provided in SEZs include duty drawbacks and tax holidays.  
To encourage exports, the Export Promotion Capital Goods scheme (EPCG) allows for a tariff of 5% 
on imports of capital goods, provided certain export performance requirements can be met 
(Table AIII.4).  In addition, the software industry benefits from priority sector lending 
(section (5)(iii)(a)).   
88. As a consequence of these measures, together with India's comparative advantage in the IT 
industry (India has a large pool of skilled labour earni ng relatively low wages), foreign investment has 
been growing rapidly in the IT sector, accounting for 25.1% of total FDI in 2005/06, up from 17.2% in 2003/04.  The Indian software and ITES industry has grown at an annual rate of 28% during the 
last five years, and the industry's contribution to GDP grew from 1.2% in 1999/00 to 4.8% in 2005/06.  
The BPO sector grew by 48% in 2004/05, and was es timated to grow by 37% in 2005/06.  Currently, 
India accounts for 65% of the global offshore market for IT services, and 46% of the global share of BPO industries.
120  The IT industry is also one of the largest export sectors in the economy, 
accounting for 25% of India’s total expo rts (of goods and services) in 2005/06. 
89. Further development of the IT industry in India ma y be constrained by lack of infrastructure.  
In addition, according to Nasscom studies, only 25 % of technology graduate s and 10-15% of general 
graduates are suitable for employment in the IT and BPO industries.  Accordingly, reforms are 
required to improve infrastructure, including IT faci lities, as well as power, roads, and airports, and to 
increase the supply of skilled labour.  In this rega rd, the Indian Government set up a Task Force on 
Human Resource Development for the IT sector, wh ose main objective was to prepare a long-term 
strategy to increase the number of trained IT professionals.  In addition, initiatives by the All India 
Council of Technical Education (AICTE) include indus try-institute interactions  through collaboration 
with industry associations, and revision of curriculu m to ensure quality and industry relevance.  The 
initiatives taken by the University Grants Commis sion (UGC) include establishing digital repository 
of research and training material, information communication and computer education, teaching 
innovations and career-oriented edu cation programmes.  Indian Institutes of Information Technology 
(IIITs) have also been set up by the Central and st ate governments together with the private sector to 
provide qualified IT professionals to the industry.121 
(5) SERVICES  
(i) Overview 
90. The services sector is the key driver of economic growth;  between 2002/03 and 2006/07, it 
contributed 68.6% of the overall average growth in GDP.122  Greater progress has been made in 
reforming services than in other sectors of the econo my.  Trade, hotels, transport, and communication 
services grew at double digit rates for the three consecutive years (from 2003/04 to 2005/06).  As a 
result of the continuing growth, services share of GDP increased from 50.5% in 2000/01 to 54.1% in 2005/06 (Table I.2).  During the same period, exports of services increased by 27.4%, mainly due to 
                                                     
 
120 NASSCOM (2005). 
121 Integrated townships have also been set up with pa rticular focus on ITES and BPO industries, with a 
view to further improving infrastructure facilities, su ch as communication, power, roads, and airports. 
122 Ministry of Finance (2007b), p.1. India WT/TPR/S/182 
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increased software services exports;  imports of servi ces increased by 24.2% (T able I.1).  The services 
trade surplus increased to US$23.9 billion in 2005/06, from US$15.4 billion in 2004/05 (Table AI.1).   
(ii) Commitments under the General Ag reement on Trade in Services 
91. India's Schedule of Specific Commitments under the GATS has remained unchanged since 
2002.  Its commitments cover business services, co mmunication services, construction and related 
engineering services, financial services, health rela ted and social services, tourism and travel related 
services.  MFN exemptions were scheduled fo r:  communication services (audiovisual and 
telecommunication services); recreational services;  and transport services.  In the Doha Round, India has submitted both initial and revised offers.
123  In its revised offer, India has included commitments 
in a number of new sectors or subsectors124, and improvements to existing commitments in a number 
of sectors.125  The revised offer also contains improvement s to its mode 4 initial offer with respect to 
the sectoral coverage of contractual servi ce suppliers and independent professionals. 
(iii) Financial services 
92. Although financial services, particularly banking and insurance, continue to be dominated by 
state-owned companies, measures have been a dopted to encourage competition from the private 
sector.  For example, restrictions on foreign banks have  been relaxed.  Efforts have also been made to 
improve corporate governance in financial services.   For example, the RBI introduced prudential 
requirements to align the banking sector with in ternational practices, a lthough implementation was 
postponed.  Also, all stock exchanges must be corporatized, and from January 2006, all listed 
companies are required to adopt the corporate governance requirements specified in the listing 
agreement.   
(a) Banking 
Introduction 
93. As at 31 March 2006, there were 89 scheduled  commercial banks (exc luding regional rural 
banks (RRBs)), 1,864 urban coopera tive banks (UCBs), 8 developmen t finance institutions (DFIs), 
13,049 non-banking financial companies (NBFCs), and 17 primary dealers (PDs).126  All these are 
supervised by the Reserve Bank of India (RBI), th rough the Board for Financial Supervision.  There 
are also 102 RRBs supervised by the National Bank for Agriculture and Rural Development 
(NABARD).127 
                                                      
123 WTO documents TN/S/O/IND, 12 January 2004;  TN/S/O/IND/Rev.1, 24 August 2005;  and 
TN/S/O/IND/Rev.1/Corr.1, 2 September 2005. 
124 New commitments include, inter alia,  air transport services;  archit ectural, integrated engineering 
and urban planning and landscape services;  construction and related engineering services;  distribution services;  
educational services;  environmental services;  life insu rance services and services auxiliary to insurance;  
recreational, cultural and sporting services;  tourism services;   and veterinary services.   
125 Improvements to existing commitments include a sset management services and other non-banking 
financial services;  banking services;  computer and related services;  construction and related engineering 
services;  engineering services;  research and developm ent services;  basic telecommunications and value-added 
telecommunications services.  
126 RBI (2006b). 
127 RBI (2006e). WT/TPR/S/182 Trade Policy Review 
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94. India's banking sector continues to be dominated by public sector banks (PSBs), which 
account for approximately 72% of the sector's total assets.128  As at end March 2006, of the 
89 scheduled commercial banks, there were 28 pub lic sector banks, 28 private banks, 29 foreign 
banks, and 4 local area banks.  All commercial banks  (domestic and foreign) are still required to 
allocate a certain percentage of net lending (40% for domestic banks and 32% for foreign banks) to 
priority sectors (including agriculture and small-scale industries).129  These requirements, however, 
tend to restrict banks' performance and may lead to  problems in recovering assets.  According to the 
authorities, the priority sector lending requirements w ould not lead to difficulties in asset recovering, 
as lending is on commercial terms;  moreover, the leve l of non-performing assets (NPAs) in priority 
sector lending has declined in recent years. 
95. Against the backdrop of fast economic growth, ba nk credit has also been growing fast.  For 
example, bank credit increased by 31% in 2005/06;  in contrast, total deposits of the scheduled 
commercial banks grew by 18%.  The rapid credit growth may be a sign of financial deepening.130  
Although the ratio of private sector credit to GDP grew from 33% at end-March 2002 to 48% at 
end-March 2006, and the NPL ratio fell from 7.2% at end-March 2004 to 5% at end-March 2005, the 
rapid expansion of credit also raises questions about credit quality, and subsequently affects banks' 
capital adequacy ratios (CAR).131  The minimum CAR requirement for banks regulated by the RBI is 
9%.  At end-March 2006, the average CAR for commercial banks was 12.4%, down from 12.8% in March 2005.  In addition, the most recent decline in  the NPL ratio may be partly due to credit growth 
(and subsequently new loans to the market).  As de terioration of loan quality typically occurs with a 
1-2 year lag, the NPL ratio may increase in the future.
132  Furthermore, as banks hold more than 30% 
of their deposits in government securities (much hi gher than the required 25%), the RBI encouraged 
banks to build investment fluctuation reserves (IFR) to reduce risks due to over-dependence on 
government securities.133 
96. The difference between deposit and lending rates indicates the level of competition in the 
sector.  A reduction in deposit rates in 2002/03 in creased the interest spread, although since 2003/04, 
                                                      
 128 On 31 March 2006, public sect or banks accounted for 72.3% of total assets of the scheduled 
commercial banks, down from 75.3% a year earlier (RBI, 2006f). 
129 Priority sectors include agriculture, small-scale industries, and other activities/borrowers such as 
retail trade, and software industry.  Domestic banks ar e required to allocate 40% of their net bank credit to 
priority sectors.  Of the 40%, 18% is to agriculture , 10% to weaker sections, and the rest to small-scale 
industries.  Within the part to agriculture, the Governme nt announced a farm credit policy in June 2004, which, 
apart from eased terms and condition on existing and future  loans, envisaged a 30% a nnual increase in credit to 
the agriculture sector, so that total lending to agriculture would be doubled by 2007.  For foreign banks, 32% of net lending must be to priority sectors (at least 10% for small-scale industries, and 12% for exports).  
130 The authorities state that the rapid credit growth represents increased banking penetration.  
According to the authorities, credit growth has been br oad-based, including priority sectors, retail segment, 
particularly residential mortgages, and commercial real estate. 
131 According to the authorities, the sharp rise in cr edit growth has been accompanied by a significant 
improvement in asset quality.  The gross NPAs of SCBs declined by Rs.73.1 billion in 2005/06, after a decline of Rs 65.6 billion in 2004/05, and the ratio of gross NPAs to gross advances fell to 3.3% at end-March 2006 
from 5.2% at end-March 2005.   
132 According to the authorities, despite the rapid expa nsion of credit, if bank s are able to generate 
resources internally and acce ss capital from the market commensurate with  the increase in bank credit, the CAR 
may not decline. 
 133 The authorities indicate that, commercial banks' holdings of government and other approved 
securities declined from 38.2% at end-March 2005 to 31.3% at end-March 2006.  As suggested by the Basel 
Committee on Banking Supervision (BCBS), in January 2002 banks were advised to build investment 
fluctuation reserves (IFRs) within five years, so that a minimum of 5% of their investments should be in the categories of "available for sale (AFS) " and "held for trading (HFT)".   India WT/TPR/S/182 
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the spread has fallen as deposit rates increased (Table  IV.2).  Lending rates, on the other hand, have 
been quite stable.    
Table IV.2 
Deposit rates and lending rates, 2000-07 
(Per cent per annum) 
Year Deposit rates Lending rates 
2000/01 8.50-9.00 11.00-12.00 
2001/02 7.50-8.50 11.00-12.00 
2002/03 4.25-6.00 10.75-11.50 
2003/04 4.00-5.25 10.25-11.00 
2004/05 5.25-5.50 10.25-10.75 
2005/06 6.00-6.50 10.25-10.75 
2006/07a 7.00-7.50 11.00-11.50 
a. Data for 2006/07 provided by the au thorities, as at 22 December 2006. 
Source: RBI (2006), Handbook of Statistics on Indian Economy, Table 74:  Structure of Interest Ra tes, Columns 3 and 8.  
Viewed at:  http://rbidocs.rbi.org.in/rdocs/ Publications/PDFs/72704.pdf [8 December 2006].  
Structural reforms 
97. Structural reforms have been continued to  increase the competitiveness of the banking sector 
and reduce risks (including risks associated with ra pid credit growth).  The RBI has been introducing 
prudential requirements to align the banking sector with  international practices.  In particular, banks 
are required to implement the Basel II capital adequacy framework initially by March 2007.  
However, this requirement was postponed to 31 Ma rch 2008 for foreign banks operating in India and 
Indian banks operating abroad, and encouraged by  31 March 2009 for all other scheduled commercial 
banks.  The RBI has adopted measures to facilitate cap acity building of banks by training supervisors, 
monitoring bank risk management, and improving bank information disclosure.  The RBI also plans 
to extend the pilot project on risk-based superv ision, which currently applies to 23 banks.  
98. In February 2005, the RBI formulated the Road map for Presence of Foreign Banks in India 
and the Guidelines on Ownership and Governance in Private Banks.  The Guidelines cover minimum 
capital requirements, provisions on ownership struct ure, procedures for acquisition and transfer of 
shares, and conditions for senior officials and large shareholders.134  Private-sector banks must 
maintain minimum capital, initially of Rs 2 billion, to be increased to Rs  3 billion in three years, while 
net worth must be Rs 3 billion at all times.135  To ensure diversified ownership, no entity can own or 
control more than 10% of the paid-up capital of a private sector bank.136  In addition, currently the 
voting rights of any individual, irrespective of their shareholding, are capped at 10%.  It seems a Bill to amend the Banking Regulation Act will abolish this  restriction.  Currently in Parliament, the 
amendment also includes provisions for prior approval by the RBI for acquisition of 5% or more of 
shares or voting rights in a bank. 
99. Measures have also been adopted to gradually lif t restrictions on foreign banks, while certain 
limits on foreign competition will remain until 2009.  For example, although in 2003/04 the aggregate 
foreign investment limit was increased from 49% to  74% in domestic private banks identified by the 
RBI for restructuring, the RBI has not laid down an y criteria for identifying weak private-sector banks 
                                                     
 
134 The authorities indicate that ownership and governance of banks specified in the Banking 
Regulation Act 1949 are supplemented by regulatory prescription issued by the RBI from time to time. 
 135 Ministry of Finance (2006b), pp. 56-57. 
 136 Exceptions are allowed for the consolidation or restructuring of weak banks;  RBI approval is 
required.  WT/TPR/S/182 Trade Policy Review 
Page 130 
 
 
in need of restructuring, nor has it identified any bank for restructuring.  In addition, the 49% limit 
remains for other private-sector banks until 2009.137  Furthermore, under India's GATS commitments, 
foreign banks were allowed to access the Indian ma rket only through branches (i.e  wholly owned 
subsidiaries or joint ventures were not allowed).138  The Roadmap issued by the RBI in February 2005 
divided foreign participation in the banking sector into two phases.  In the first phase, foreign banks 
are allowed to establish wholly owned subsidiaries (WOS), in addition to branches.  The authorities 
indicate that, at present all 29 foreign banks in Indi a are branches;  so far, no foreign bank has set up a 
wholly owned subsidiary in India.  In the sec ond phase, to commence in April 2009, foreign banks 
may be permitted to enter into mergers and acquisitio ns with any private bank in India, subject to the 
overall investment limit of 74%.   
100. Banks operating in India (inc luding public-sector banks, privately owned banks, and 
foreign-invested banks) authorized to deal with foreign exchange, are eligible to set up offshore 
banking units (OBUs) in special economic zones (SEZs ).  Each of the eligible banks is allowed to 
establish only one OBU per SEZ, essentially for wholesale banking operations.  As a start-up 
contribution, the parent bank should provide a mi nimum of US$10 million to its OBU.  OBUs are 
exempt from maintaining the cash reserve ratio (CRR);  statutory liquidity ratio (SLR) exemption may be considered for a specified period on request from individual banks.
139  OBUs are expected to 
provide loans at international rates to companies located in SEZs;  nonetheless, OBUs in SEZs are not 
allowed to accept or solicit deposits or investments fr om Indian residents, or open accounts for them.  
101. Other measures to promote the competitiveness of the banking sector include the RBI's efforts 
to improve corporate governance, in transparency, o ffsite surveillance, and prompt corrective action.  
A consultative group of directors of banks and fi nancial institutions was established in November 
2001.  The group's report submitted to the RBI in April 2002, provided various recommendations on 
corporate governance issues.140  So far, accounting standards have been brought into line with 
international practices;  however, further effort s are needed to align information disclosure. 
102. Regional rural banks (RRBs) a nd rural cooperative banks (RCBs ) have performed poorly in 
recent years, with high NPL ratios.  The performance  of RCBs is especially problematic as they are 
closely involved in extending credit to the rural sec tor.  The authorities indicate that, on the whole, 
RCB profits were marginal in 2004/05, while the ma jority were loss making;  hence, reforms are 
required to improve their competitiveness.  The Ta sk Force on Revival of Rural Cooperative Credit 
Institutions submitted a revival package in February 2005;  the Government, in consultation with state 
governments, has approved the revival pack age.  The package includes measures to, inter alia , 
provide financial assistance, introduce legal and institutional reforms, and improve the quality of 
management.  So far, it has been accepted by 11 states and one union territory141;  eight states have 
                                                      
137 Individual foreign institutional investment (FII) is restricted to 10%, and the aggregate limit for all 
FIIs is capped at 24%;  this limit, however, can be  raised to 49% once approv ed by the board and the 
shareholders.  Investment by non-resident Indians (NRIs) is limited to 5%, and aggregate NRI investment is 
limited to 10%;  the limit can be raised to 24% upon approval by the shareholders.  
138 Restrictions were also imposed on the number of banking licences (12 per year both for new 
entrants and existing banks), and on the value of the banking system's assets in the hands of foreign banks (15% 
of total assets).   
139 For all banks (except OBUs), the CRR is 5% and the SLR is 25%. 
140 These recommendations include criteria for appointing bank directors, maintaining independent 
directors for checks and balances, clarif ying the roles of boards, including on  issues related to risk exposure and 
NPL ratio, and tightening risk management.  The criteria for appointing bank directors were included in a 
circular issued by the RBI in June 2004. 
141 The 11 states are Andhra Pradesh, Gujarat, Madhya Pradesh, Maharashtra, Orissa, Punjab, 
Rajasthan,  Sikkim, Tamil Nadu, UP, and Uttaranchal;  the union territory is Dadra and Nagar Haveli. India WT/TPR/S/182 
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already signed MoUs with the Central Government.142  The implementation of the revival package is 
monitored by the National Implementing and Monitoring Committee (NIMC), established by the Central Government in April 2006. 
103. RRB mergers have been encouraged:  accordi ng to the authorities, the number of RRBs 
declined to 102 in October 2006, from 196 in March 2005.  The ratios of gross and net NPLs of RRBs 
fell from 8.5% to 7.3% and from 5.1% to 4%, respectively, between 2004/05 and 2005/06.  The Reserve Bank also set up a "Task Force on Em powering Boards of Regional Rural Banks for 
Improving Their Operational Efficiency" in September 2006. 
(b) Insurance 
Overview 
104. The Insurance Regulatory and Development Au thority (IRDA), established in 2000, is the 
insurance sector regulator.  Its functions include supervising the development of the sector, granting 
licences to insurance intermediaries, and specifyin g the percentage of insurance business to be 
undertaken in rural areas and the social sector.
143   
105. Structural reforms include reducing governme nt interference in the state-owned Life 
Insurance Corporation (LIC), and General Insuranc e Corporation (GIC), both of which have dominant 
positions in the industry.144  Competition from private domestic and foreign enterprises has also been 
promoted.  Currently, there are 16 life insurance companies (15 private and 1 public), 15 general 
insurance companies (9 private and 6 public), and one reinsurance company.  Increased competition 
has resulted in rapid growth in the industry;   between 2001/02 and 2005/06, the average annual 
growth rate of total life insurance premiums was 27.8%, and the corresponding figure for general 
insurance was 16.5%.  The market share of privat e insurers increased from 12.6% in 2003/04 to 
26.5% in 2005/06 for life insurers, and from 14.5% to 26.3% for general insurers.   
106. The insurance industry continues to be dominat ed by SOEs.  The market shares of LIC and 
GIC, in life and general insurance, although lower than in 2003/04 (87.4% and 85.5%, respectively), were still 73.5% and 73.7%, respectiv ely, in 2005/06. Competition in the industry is constrained by 
the relatively high entry barriers:  the minimum cap ital required to set up an insurance company is 
Rs 1 billion, and that for a reinsurance company is Rs  2 billion.  Foreign investment is restricted to 
26% of total investment;  an amendment to increase the restriction to 49% is under consideration by 
the Government.  Restrictions also remain with regard to raising funds from NRIs, where only cash 
injections from shareholders are permitted.   
107. All insurance companies are required to maintain a solvency margin at a ratio of 1.5 (ratio of 
actual to the required solvency margin).
145  In 2004/05, 11 life insurance firms complied with the 
                                                      
142 These are Andhra Pradesh, Gujara t, Madhya Pradesh, Maharashtr a, Orissa, Rajasthan, UP, and 
Uttaranchal. 
143 The "social sector" includes the "unorganized" sector, informal s ector, economically vulnerable or 
backward classes, and other categories of persons both in rural and urban areas. 
144 The Government has signed "statements of intent" (SOIs) with companies, containing quantitative 
and qualitative parameters, with which the performance of these companies would be monitored. 
145 IRDA (2005).  The solvency margin required for life insurers is Rs 500 million and a sum based on 
a formula given in the IRDA (Assets, Liabilities and Solvency Margin of Insurers) Regulations 2000.  The 
required solvency margin for general insurers is the hi ghest of:  Rs 500 million (Rs 1 billion for reinsurers);  
20% of net premium income;  or 30% net incurred claims. WT/TPR/S/182 Trade Policy Review 
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requirement (including the LIC);  in general insura nce, two public-sector firms, and one private-sector 
firm, did not comply.146  
Further reform 
108. The Tariff Advisory Committee under the IRDA  determines premiums for fire, motor vehicle, 
engineering, and workmen's compensation insurance;   the insurance companies set premiums for all 
other general insurance categories.  The authoriti es consider that the current tariff regime is 
inconsistent with increasing competition; hence, the Government notified plans to replace the system 
with a risk-based rating system by 2007.  Cont rols on tariff rates were to be removed on 
1 January 2007;  and from 31 March 2008, te rms and conditions can be negotiated between 
companies and their clients.   
109. In 2005, the penetration rate as a percentage of  GDP was low, at 2.53% for life insurance and 
0.62% for general insurance.  Penetration in rura l areas is particularly low;  thus, in 2003, the 
Government set up a working group on micro-insura nce to increase the penetration of insurance in 
rural areas, by, for example, allowing cross-selli ng of insurance products between life and general 
insurance companies.  Other m easures to increase rural insurance coverage include a National 
Agriculture Insurance Scheme (NAIS), operated by the Agriculture Insurance Company of India.  
Subsidized by the Government, the NAIS requir es insurance companies to provide a certain 
percentage of their business to rural and socially backward sections of society.147  
110. Increased penetration is also pursued in hea lth insurance, which covers only 1% of the 
population.  Currently, the health insurance indus try is dominated by charitable institutions and 
government agencies, which  provide insurance services free of charge, as well as family-run 
businesses.  To increase the coverage of health in surance, the IRDA launched a Universal Health 
Insurance Scheme (UHIS), with s ubsidies provided by the Government.  The UHIS was modified in 
July 2004, and was restricted to families below the poverty line (BPL).148  A health insurance working 
group was also established to examine the prom otion and development of health insurance. 
Furthermore, a committee estab lished under the IRDA made sever al recommendations on issues 
related to, inter alia , minimum capital requirements, risk-based price setting, and restrictions on 
foreign investment.149  
(c) Securities  
111. Since the Securities and Exchange Board of  India (SEBI) was established in 1992, the 
securities sector has been developing fast, due larg ely to a series of structural reform measures.150  
Currently, there are 22 "recognized" stock exchanges in India, all regulated by the SEBI under the 
Securities Contract (Regulation) Act 1956, and the SEBI Act 1992.151  The two largest are the 
National Stock Exchange (NSE), and the Bomb ay/Mumbai Stock Exchange (BSE), both listing 
                                                      
146 IRDA (2005). 
147 The requirement is based on the IRDA Obligations  of Insurers to Rural Social Sector Regulation 
2002.  The authorities state that the regulation is currently under review. 
148 Under the revised UHIS, Rs 200 per year is provided for an individual, Rs 300 for a family of five, 
and Rs 400 for a family of seven.  By end-November 2006, public-sector companies had issued 46,464 policies, 
covering 63,935 families and 201,090 individuals. 
149 The Committee recommendation to re duce the capital requirement for exclusive health insurers to 
Rs 0.50 billion is under consideration by the Government. 
150 For example, the Depositories Ac t 1996 came into force to increase trading efficiency and improve 
transparency.  To diversify products, and enable market  participants to manage risks better, the Securities 
Contract (Regulation) Act 1956 was amended to allow for derivative trading, which commenced in 2000, and is 
limited to the NSE and the BSE. 
151 It seems that some stock exchanges in India are not recognized by the SEBI.   India WT/TPR/S/182 
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essentially the same stocks.  As at 31 October 2006, there were 1,125 and 4, 790 companies listed in 
the NSE and the BSE, respectively. 152 
112. Foreign investment is allowed, either in the fo rm of foreign institutional investment (FII), or 
their sub-accounts153.  FIIs are permitted to invest in all types of securities, but are generally restricted 
to a maximum of 24% of a company's paid-up capital;  this restriction can be increased to the sectoral 
limit.154  Furthermore, FII investment is limited to US$2 billion in government securities, 
US$1.5 billion in corporate securities155, and US$9 billion for external commercial borrowings.156  
Accordingly, the number of FIIs registered w ith SEBI increased from 685 in 2004/05, to 882 in 
2005/06, and to 1,030 by mid-January 2007.157   
113. The Securities Law (Amendment) Act 2004 was enact ed to increase the s ector's efficiency,  
Under the Act, all stock exchanges must be corporatized;  hence, the ownership and management will 
be separated from the trading rights of the memb ers of a recognized stock exchange, and the stock 
exchanges will change from not-for-profit entities to pr ofit-driven corporations.  In addition, 51% of 
the equity of the corporatized stock exchange shoul d be owned by the public (other than shareholders 
having trading rights), within 12 months of publication of the corporatization scheme.  The authorities state that the corporatization of stock excha nges will ensure greater accountability and improve 
transparency, apart from addressing the issue of conflict of interest.    
114. In addition, from January 2006, all listed co mpanies are required to adopt the corporate 
governance requirements specified in the listing ag reement;  all new listings must meet these 
requirements at the time of listing.
158  Furthermore, the Government announced in the Budget 2004/05 
the intention to establish a separate trading platform  for small and medium-sized enterprises (SMEs).  
In this regard, the BSE has set up IndoNext, un der the present BSE Online Trading (BOLT) System, 
to help SMEs to raise capital.  Tax incentives have also been provided since 2004/05:  from 2004 taxes were removed on long-term capital gains, and reduced to 10% on short-term capital gains.  In 
the 2005/06 Budget, a one-time exemption from stamp duty was granted to facilitate the 
corporatization of stock exchanges.  The secu rities transaction tax (0.15%) remains in place. 
(iv) Telecommunications  
(a) Introduction 
115. Since the previous Review of India, the regulatory framework for telecommunications 
services has changed little.  The telecom industry is  administered under the Indian Telegraph Act 
                                                     
 
152 The authorities indicate that, as at October 2006, the value of shares traded on the NSE and BSE 
was US$343.33 billion and US$56.5 billion, respectively. 
153 Sub-accounts are those opened by FIIs operating in India for other foreign companies, foreign 
individuals, or foreign institutions. 
154 The sectoral limit is the aggregate amount of fo reign investment (includi ng FDI and FII) permitted 
in a particular sector, as specified in India's  foreign investment policy. 
155 These limits were increased from US$1.75 billion an d US$500 million, respectively, in April 2006.  
156 The RBI announced increases in the limit for FII investment in Government Securities to 
US$2.6 billion by 31 December 2006, and to US$3.2 billion by 31 March 20 07.  Further, in July 2006, the RBI 
allowed banks to increase capital funds to meet the BASEL II requirements by issuing certain financial instruments, such as "innovative perpetual debt instruments" and "debt capital instruments".   
157 According to the IBEF, by 17 January 2007, the nu mber of FIIs registered with SEBI increased to 
1,030.  Viewed at:  http://www.ibef.org/economy/foreigninvestors.aspx [22 February 2007]. 
158 Companies are required to file a quarterly compliance report with the stock exchanges, which in 
turn have to submit a consolidated report to SEBI within 60 days from the end of each quarter.  For the quarter 
ending June 2006, in the NSE, 1,001 out of 1,085 companies required (around 92%) submitted the report.  In the BSE, 2,546 out of 4,127 companies requ ired (around 62%), submitted the report. WT/TPR/S/182 Trade Policy Review 
Page 134 
 
 
1885, the Indian Wireless Telegraphy Act 1933, and the Telecom Regulatory Authority of India Act 
1997.  The Telecom Regulatory Authority of India (TRAI), established in 1997, continues to be the 
regulator;  its objectives are, inter alia , to regulate telecommunications services, protect the interests 
of service providers and consumers, and ensure the development of the telecom sector.  The 
Department of Telecommunications (DOT) is respon sible for policy formulation and issuing licences 
for telecom services.159  The DOT also administers the two public-sector companies, the Bharat 
Sanchar Nigam Limited (BSNL), and the Ma hanagar Telephone Nigam Limited (MTNL).160  I n  
addition, dispute settlement is the responsibility of  the Telecom Disputes Settlement and Appellate 
Tribunal (TDSAT).161  Since 2001, TDSAT has dealt with 1, 491 cases;  as at 22 December 2006, 
1,156 had been settled and the remainder were pending.  Most disputes handled by the TDSAT 
involve non-payment/withholding of duties, or different interpretations of regulations. 
116. The telecom industry has grown rapidly since 2002:   the number of subscribers (for fixed line 
and cellular phone) increased from 44.97 million in Ma rch 2002 to 183.5 million in November 2006;  
the average annual growth rate was 35%.  The driver  of growth has changed from fixed line to mobile 
telephony, which grew from 13 million subscribers in 2003 to 143.1 million in 2006.  Private service 
providers have also increased significantly, accoun ting for 64.1% of total phones in November 2006, 
up from 15.1% in March 2002.  The private service providers have concentrated on providing mobile 
phone services, as fixed line telephony services remain  dominated by the public sector providers, 
although their market share fell from 98.6% in 2001/02 to 92.6% in November 2006. 
(b) Structural reforms  
117. To simplify the licence regime, a Unified Acc ess Service (UAS) licence regime for fixed line 
and cellular services was introduced in November 2003.162  The UAS regime allows an operator to 
provide any or all types of services permitted in the licence;  thus, operators are no longer required to 
have separate licences for each type of service provide d.  Furthermore, in April 2004, licence fees 
were reduced by 2%;  current fees range from 6% to 10% of adjusted gross revenue (AGR) for UASs 
in the designated service area.  
118. Restrictions to foreign investment have been relaxed since 2000, when 100% foreign 
ownership was allowed for internet service provi ders (ISPs) without gateways, infrastructure 
providers providing dark fibre, and electronic a nd voice mail services;  companies providing these 
services must, nonetheless, divest 26% of equity in favour of the Indian public in five years, if they 
                                                      
159 India is divided into 23 telecom service areas (con sisting of 19 circle service areas and four metro 
service areas).  Licences are issued fo r a specific service area;  however, an operator can apply for a licence in 
more than one service area as long as it fulfils all th e eligibility requirements set by the DOT.  The eligibility 
requirements include restrictions on fo reign investment, and that the majority of directors on the Board must be 
resident Indian citizens (DOT online informa tion.  Viewed at:  http://www.dotindia.com). 
160 In October 2000 when the Department of Telecom Services (DTS) and the Department of Telecom 
Operations (DTO) were corp oratized, the business of providing tel ecom services was transferred to BSNL, a 
newly established company under the Company's Act 1956.  The MTNL is majority government owned 
(56.25% of total equity), and provides basic landline, m obile, long distance, and trunk call services in Mumbai 
and Delhi. 
161 TRAI was formed under the Telecom Regulatory Authority of India Act 1997, amended in 2000.  
The amendment provided for the establishment of TDSA T, which deals with disputes between licensors and 
licensees, service providers, and between service providers and consumers, with regard to any TRAI order or 
decision.  TDSAT has both appellate and original jurisdiction. 
162 The TRAI issued guidelines on the UAS, effec tive on 11 November 2003.  UAS operators are free 
to provide, within their area of operation, services co vering collection, carriage, transmission, and delivery of 
voice and/or non-voice messages over  the licensee's network.  DOT on line information.  Viewed at:  
http://www.dot.gov.in/basic/basicindex.htm. India WT/TPR/S/182 
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are listed outside India.  From 2001, 74% forei gn ownership was permitted for ISP with gateways, 
radio paging, and end-to-end bandwidth services.163  In November 2005, foreign investment equity 
restrictions were increased from 49% to 74% in cer tain areas, such as fixed line, cellular, unified 
access services, national and international long-distance calls services.164  
119. At the sub-sectoral level, unrestricted entr y was permitted for national long-distance (NLD) 
calls in August 2000, with no limit on the numbe r of service providers.  Currently, there are 
two publicly owned and 14 private NLD operators.  The NLD licence is issued for 20 years, and can 
be extended once for ten years.  From 2006, en try requirements have been reduced for NLD 
operators;  entry fees were reduced from Rs 1 billion to Rs 25 million, and licence fees from 15% to 
6% of AGR.  In addition, the mandatory roll- out obligations for NLD licences were removed on 
14 December 2005.165    
120. Deregulation of international long-distance (ILD)  calls has continued since the privatization 
of the Videsh Sanchar Nigam Limi ted (VSNL) in February 2002.166  Licences for ILD services are 
issued initially for 20 years, with an automatic extens ion for five years.  Like  the NLD sector, there is 
no limit on the number of service providers.  There are nine private and one public ILD service 
providers;  private operators account  for more than 90% of market share.  In January 2006, a new ILD 
licence agreement reduced entry fees from Rs 250 million to Rs 25 million, and licence fees from 
15% to 6% of AGR.  Furthermore, there are no mandatory roll-out obligations for ILD service licensees except to have at least one switch in India.
167 
121. The broadband policy announced by the DOT on 14 October 2004 allows service providers to 
access mutually agreed commercial arrangements, so as to use the available copper-loop for the 
expansion of broadband services.  The authorities e xpect that there will be 20 million subscribers to 
broadband services, along with 40 million internet subscribers, by 2010.168   
(c) Tariff policies 
122. In September 2002, the requirement for cellular service providers to obtain approval from the 
TRAI on tariff changes was removed.  Currently, TR AI regulates tariffs for services where markets 
are not competitive;  according to the authorities, these are rural fixed line telephone calls, national 
roaming in mobile phone calls, and leased circuits.  Tariffs for all other telecom services have been 
liberalized.  Increased competition as a result of de regulation, together with tariff rationalization 
measures, have resulted in significant tariff reducti ons:  the peak national long distance tariff (above 
                                                      
163 Foreign investment in these services is also subj ect to licensing and security requirements notified 
by the Department of Telecommunications. 
164 FDI up to 49% may take place through the automatic r oute.  Proposals need to  be approved by the 
Foreign Investment Promotion Board if foreign investment is over 49% (Department of Industrial Policy and 
Promotion, 2006b). 
165 DOT online information, "ILD and NLD Licences Simplified".  Viewed at:  http://www.dot.gov.in/ 
ild/ILDNLD10NOV05.doc.   
166 The Government used to be the majority shareholder (53% of equity) of the VSNL until 
February 2002, when it sold 25% stake to the TATA group.  VSNL employees hold 2% of shares, and the 
Government currently holds a 26% stake.  
167 DOT online information, "ILD and NL D Licences Simplified".  Viewed at:  
http://www.dot.gov.in/ild/ILDNLD10NOV05.doc.  Under th e previous mandatory roll-out obligations, within 
three years of obtaining a licence, an ILD operator had to  set up four international gateways/switches in each 
part of the country (north, south, east and west), and be able to connect  calls to an international destination via 
regional hubs in, for example, North America, Europe, and Middle East.   
168 By the end of September 2006, there were 8 million subscribers, including 2 million broadband 
subscribers. WT/TPR/S/182 Trade Policy Review 
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1,000 km) fell from US$0.67 per minute in 2000 to US$0.02 per minute in 2006, the international 
long-distance tariff for the United States fell from US$1.36 to US$0.16 per minute, and the mobile phone tariff for local calls fell from US$0.36 to US$0.009-0.04 per minute.  
123. In 2006, the public sector operators, BSNL a nd MTNL launched a "One India" plan;  from 
1 March 2006, customers pay Rs 1 per minute for domestic long-distance calls (their fixed line and 
cellular).
169  Also from 1 March 2006, the authorities deci ded to change the access deficit charge 
(ADC) regime.170  The ADC charges were recovered by :  a per minute charge on incoming and 
outgoing international calls;  and a 1.5% revenue share on the adjust ed gross revenue (AGR) of all 
telecom service providers, apart from revenue generate d from the rural subscribers.  According to the 
authorities, the ADC is to be replaced by the USO regime (see below). 
(d) Reform in rural areas 
124. From March 2002 to November 2006, telephone de nsity in India increased from 4.3% to 
16.3%.  However, density was much higher in urban areas (51.5%) than in rural areas (1.85%).  In 
order to improve telephone access in  rural areas, a universal servi ce obligation (USO) commenced in 
April 2002.171  Supported by a levy of 5% of the AGR of  all telecom service providers (except value 
added service providers like Internet, voice mail, e- mail services), the USO fund is distributed through 
a bidding process to, inter alia , village public telephones (VPTs) and rural community phones 
(RCPs).  The Government has set a target of one phone per three rural households by 2007 (about 50 
million rural connections), and one phone per two rural households by 2010 (about 80 million rural 
connections).  In addition, the Government  intends to subsidize the construction of 
7,871 infrastructure sites for the provision of mobile phone services in rural and remote areas.  So far, 
90% of villages in India have VPTs. 
(v) Transport 
(a) Road and rail transport 
Road transport 
125. Nearly 65% of freight and 85% of passenger tra ffic is carried by road in India.  National 
highways (NHs) form the economic backbone of the network;  those connecting all the major cities 
and state capitals constitute around 2% of the total road network172, but carry nearly 40% of the total 
road traffic.  Under the Indian Constitution, national highways are maintained by the Central 
Government;  they form the main long-distance highways in the country.  The varied climatic, 
demographic, and traffic situation prevents uniformit y of national highways:  they six-laned in some 
parts, to even "non-metalled" stretches in remote areas;  many NHs are being upgraded/refurbished. 
126. The policy focusing on improving road connectivity across the country has brought about 
significant investment in road development.  The scale and quality of highways are considered to be 
critical for sustaining India's growth momentum.  Road maintenance and upkeep are underfunded;  
                                                      
169 Ministry of Finance (2006b), p. 185. 
170 The ADC had been an amount paid by telecom se rvice providers at the callers end, to telecom 
service providers at the receivers end on cellular to fi xed line calls, and domestic long-distance calls.  The ADC 
was charged to subsidize the cost incurred by service provid ers in providing services in  rural areas and for local 
facilities.   
171 The Universal Service Support Policy came into effect on 1 April 2002. 
172 Out of a total of about 66,590 km, 32% are singl e lane/intermediate lane, 56% are two-laned, and 
the rest are four lanes or more.  India WT/TPR/S/182 
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however, this is being addressed in the Tenth Five Year Plan (2002-2007), which assigned high 
priority to the seven-phase National Highway De velopment Programme (NHDP) being implemented 
by the National Highways Authority of India (NHAI).173  The Government realizes the importance of 
the road network and its maintenance, which is ev idenced by the increase in the budgetary allocation 
for NHDP.  The NHDP envisages investment of Rs 2,200 billio n (US$50 billion) on 
concessions/contracts to be awarded by 2012.  NHDP sub-projects under phases III-VII are to be 
funded on a build, operate, and transfer (BOT) basis,  where private investment is to be recovered 
through tolls.  The private component in phase II has also been increased.  The Government has 
already approved projects for upgrading approximately 11,000 km of roads and highways as well as 
the construction of 1,000 km of new expressways, under phases III, V and VI of the NHDP, at an 
estimate cost of Rs 800 billion.174  The entire NHDP is scheduled to be completed by December 2015.  
127. The National Highways (Amendment) Bill, 1995, provides for private investment in the 
building and maintenance of these arteries.  The Go vernment carries out and bears the cost of all 
preparatory work including the project feasibility study, land acquisition, environmental clearance, 
etc.175  Rights of way (ROW) are then made availabl e to concessionaires free of all encumbrances.  
Projects are assigned on a BOT basis, and real estate development can be made an integral part of 
these projects to enhance their financial viability.  The Government retains ownership of the land for 
highway construction and roadside facilities.  The NHAI may provide capital grants of up to 40% of 
the cost of the project to enhance viability, on a cas e to case basis.  A 100% income tax exemption is 
given for any consecutive ten-year period out of 20  years of operation, (including the construction 
period).  Duty-free imports are permitted for specified, modern high capacity equipment for highway 
construction.  The concession may be granted for up to 30 years;  the road is then transferred back to 
the NHAI by the concessionaire.  
128. Up to 100% FDI has been perm itted in roads since 1997.  The NHAI can participate with up 
to 30% of the total equity in BOT projects.176 
129. International competitive bidding is used for projects financed by international lending 
agencies and for larger projects for which sufficient numbers of domestic 
consultants/contractors/consortium are not available.  Local (national) bidding is used for projects 
financed by the NHAI.  At present there are 46 foreign contractors from 27 countries working on 85 different projects sanctioned by the NHAI.  Nationa l treatment is provided to foreign investors;  
however, for registration purposes, proof of residence is needed.  
130. The Government plans to replace the Carriers Ac t 1865 with the Carriage by Road Bill 2005.  
The new Bill would require all freight booking compani es to be registered and have a record of the 
movement and type of cargo, and to declare ta xed and untaxed cargo.  Furthermore, under the 
provisions of the Bill transport/booking companies would be liable for the safe delivery of goods 
based on their invoice value. 
Railway transport 
131. India's rail network, one of the largest and busiest in the world, is considered as the lifeline of 
its transport infrastructure.  According to th e authorities, during 2005 Indian Railways (IR) 
                                                     
 
173 For more information on road policy matters, see NHAI online information.  Viewed at:  
http://www.nhai.org/index.asp. 
174 Ministry of Finance (2006b). 
175 In the Budget for 2007/08, the Government has increased allocations for the preparatory fund for 
road projects. 
176 National Highway Authority of India.   Viewed at:  http://www.nhai.org/page10.htm. WT/TPR/S/182 Trade Policy Review 
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transported approximately 6 billion passengers and 667 million tonnes of freight.  Most of the freight 
is loaded and unloaded at IR's dedicated freight sidings.  Utilization of different segments of the 
network is uneven;  the trunk routes connecting th e four metropolitan cities of Delhi, Kolkata, 
Chennai, and Mumbai account for 16% of the total ne twork, but are responsible for more than 50% of 
the traffic. 
132. Rail transport is reserved for the state and is a state-owned monopoly.  However private 
participation and foreign investme nt is permitted in many non-core  areas and activities, including 
hospitality (tourism and catering), construction and management of freight terminals, and freight 
operations.  Furthermore, public-private partnershi ps (PPPs) are being encouraged in infrastructure 
construction projects. 
133. IR is one of the world's largest employers, with more than 1.4 million employees.  It is 
controlled by the Central Government via the Mi nistry of Railways.  A seven-member Railway 
Board, reporting to the Union Minister for Railways,  is responsible for polic y formulation and overall 
control of the railways.  Significant changes to the railway network have taken place, such as 
strengthening and modernizing th rough doubling, multiplication, electrification, and new line 
extensions.  However, a sizeable area of the country remains inaccessible by rail, which offer 
immense opportunities for rail infrastructure and terminal development.177  
134. IR manufactures its own rolling stock and heavy engineering components.178  This is largely 
for historical reasons, mainly related to impor t substitution of expensiv e technology-intensive 
products.  According to the authorities, the import content in the production of rolling stock is under 
4%.  Several other public entities under the admini strative control of the IR ensure railway and 
railway-related operations.179 
135. IR significantly improved its performance duri ng 2004/05-2005/06;  freight and passenger 
traffic grew by 9.4% and 7.4%, respectively – much higher than the historical rate of 4% and 2% over 
the 13 preceding years.  IR earns around 67% of its revenue and most of its surplus from the freight 
sector, and uses this surplus to cross-s ubsidize the loss-making passenger segment.180  According to 
the authorities, in 2003/04, subsidies for passenge r services, operation of uneconomic branch lines, 
essential commodities carried below cost, and new lin es opened for traffic were estimated to be 
Rs 57.38 billion (US$1.25 billion).  However, comp etition from trucks and low-cost airlines, which 
offer cheaper rates, has led to a d ecrease in rail tariff in real terms.  Other IR problems include its high 
                                                      
177 Financial Times,  24 April 2006, "Railways:  The shift fro m socialism has 'passed us by'".  Viewed 
at:  http://www.ft.com/cms/s/6fd78b5e-d149-11da-a38b-0000779e2340,dwp_uuid=894d591e-d9c4-11da-b7de-
0000779e2340.html [20 November 2006]. 
178 The seven state-owned IR manufacturing plants are managed directly by the Ministry of Railways, 
and their general managers report to the Railway Board.   The production units are:   Diesel Locomotive Works 
(Varanasi);  Chittaranjan Locomotive Works (Chittaranjan );  Diesel-Loco Modernisation Works (Patiala);  
Integral Coach Factory (Chennai);  Ra il Coach Factory (Kapurth ala); Wheel & Axle Plant (Bangalore);  and, 
Rail Spring Karkhana (Gwalior).  Since 2000, some locomotives have been produced in collaboration with 
General Motors, USA.  
179 They include the Central Organisation for Railway  Electrification (CORE), the Centre for Railway 
Information Systems and a number of public-sector undertakings such as: the Indian Railways Catering and Tourism Corporation;  Konkan Railw ay Corporation;  Indian Railway Finance Corporation;  Mumbai Rail 
Vikas Corporation;  Railtel Corporation of India – Telecommunication Networks;  RITES Ltd. – Consulting 
Division of Indian Railways;  IRCON International Ltd. – Construction Division;  and Rail Vikas Nigam Limited. 
180 Most of IR's freight earnings co me from carrying bulk goods such as coal, cement, food grains, and 
iron ore;  an estimated 90% of freight comes from nine  items benefiting from freight concessions.  Some types 
of freight, for example, fruit, vegetables, and salt are subsidized.  India WT/TPR/S/182 
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accident rate (although the authorities indicate that this has improved), overcrowding, and ticketless 
travel, as well as antiquated communication, safety, and signalling equipment. 
136. A 2001 report (the Mohan report) by an expert group appointed by the Ministry of Railways 
argued for radical structural change.  The repor t stressed that the railways should be run on 
commercial lines and that subsidies should be tran sparent;  IR should start divesting "non-core" 
activities, such as catering and manufacturing, and should reduce staff numbers;  the Railway Board should shed its conflicting responsibilities as regulat or and policymaker, and should start producing 
intelligible accounts.  Other recommendations were  that IR should establish standard commercial 
criteria for its investments and should stop using its  freight customers to subsidize passenger fares.
181 
137. A reform strategy to recapture the predominan t position of railways in the transport sector has 
been built around generating capacity by improving the existing infrastructure and assets.  On the supply side, an increase in axle load from 20.3 to  22.9 tonnes as well as reduction in turn-around time 
from seven to five days have generated th e necessary incremental freight-loading capacity.
182  
Similarly, increasing popular passenger trains by us ing the spare stocks of coaches and mopping up 
the slack has led to increased carrying capacity per train.  These operational innovations have led to 
lower unit costs of operation in the face of rising input costs.  On the demand side, a dynamic and 
market-driven tariff policy linked to seasonality and pr ice elasticity has been put in place.  Across-the-
board increases in freight rates have been replaced by selective changes in respon se to market forces;  
however, the general trend has been a reduction of tariff in real terms.183  This transformation has 
delivered efficiency gains, operating ma rgins, and healthy financial surpluses.184  It is envisaged that 
by 2012, IR is likely to handle about 70% more traffic. 
138. To accelerate the expansion of infrastructure fo r growth, public-private  partnerships (PPPs) 
have been given a larger role in  attaining strategic goals, such as increasing private capital in areas 
where PPPs can improve efficiency and to control costs.185  IR is looking seriously at all options to 
remove and prevent any bottlenecks to growth.  Th e gap between the increasing need for rolling stock 
and the combined capacity of state-owned producti on units is to be bridged by increasing capacity 
through a new public-private manufacturing unit. 
139. Under a PPP scheme introduced in 2006/07, the operator will run freight trains in a 
non-discriminatory manner, and IR will collect haulag e charges.  Furthermor e, the operator will be 
free to set tariffs.  The introduction of this scheme ended the monopoly enjoyed by the IR-owned Container Corporation of India (CCI) in the move ment of containers.  Nevertheless, CCI shifted 
20 million tonnes last year, accounting for approximate ly one third of total international container 
traffic in India, which is growing at  an annual rate of approximately 15%. 
                                                     
 
181 According to the railways' own figures:  moving one passenger one kilometre made a loss of 
Rs 0.15 (US$0.003) in 2006;  and shifting a tonne of freight one kilometre made a profit of Rs 0.16.  Passenger 
trains account for nearly two thirds of  railway services, but pro duce just one third of revenue.  According to a 
rough calculation by the World Bank, freight tariffs could be reduced by more than 40% if the social burdens 
(non-recovery of costs from passenger service) were paid directly by the user or the Government. 
182 Speeding up the turn-around times is claimed to have added some 24% to freight revenue.   
183 The Ministry of Railways has been rationalizing its ta riff structure since 2002/0 3.  The objective of 
the tariff revision is to reduce existing cross-subsidies and to ensure a more transparent and cost-based rating 
regime. 
184 The generation of revenues by railways was at Rs 136.12 billion (roughly US$3 billion) in 2005/06, 
up from Rs 23.50 billion (slightly more than US$0.5 billion) in 2000/01. 
185 The following projects and/or areas are being implemented:  construction of a new dedicated freight 
corridor;  world class railway stations, passenger amenities and commercial utilization of land;  operation of 
container trains and construction of private sidings, inland container depots and rail-side warehouses;  the wagon investment scheme;  port connectivity works and other infrastructure projects;  and parcel services. WT/TPR/S/182 Trade Policy Review 
Page 140 
 
 
(b) Maritime transport 
Shipping 
140. Around 95% of India's trade in goods is seaborne;  13.7% was on Indian-flag vessels in 
2004/05, down from 22.4% in 2001/02.  Thus, although India's total trade has grown rapidly during 
the review period, its maritime transportation has grown at a much slower pace.186  This could be 
attributed to increased competition from forei gn-flag vessels and reduced competitiveness of 
Indian-flag vessels.187 
141. India currently has 774 commercial vessels, with  a gross tonnage of 8.4 million tonnes;  the 
three largest companies own more than 60% of gross tonnage.188  The maritime sector contributes 
around 0.3% to GDP.  It is regulated under the Merc hant Shipping Act 1958, by the Department of 
Shipping in the Ministry of Shipping, Road Tran sport and Highways, which is responsible for the 
Government's interests in the sector, such as the ma jor ports and the Shipping Corporation of India.189  
Maritime transportation is administered by the Directorate General of Shipping (DGS), under the 
Department of Shipping.  The DGS is also in charge of the registration and safety-related issues of ships.
190   
142. Competitiveness in India's maritime transport h as been affected by infrastructure bottlenecks, 
together with certain measures adopted by the G overnment.  For example, carriage of government 
cargo remains reserved first for the Shipping Corpora tion of India (SCI), then for vessels chartered by 
the SCI.  Accordingly, the Government issued  a Draft Policy for the Maritime Sector in 
February 2005, aimed at improving cost-effective m ovement of cargo, promoting transparency in the 
decision-making process, and increasing the efficiency of operations in infrastructure.  The policy is 
to guide maritime transportation to  2025, and is financed through a cess levied for ten years, at 
Rs 0.05 per kg of foreign-bound cargo passing throu gh Indian ports, and Rs 0.02 per kg for coastal 
and low value cargo.191 
143. Reform measures have been adopted to  increase the competitiveness of maritime 
transportation services.  For example, 100% foreign investment is allowed in the shipping sector, 
                                                      
186 From 1990/91 to 2005/06, the Indian fleet's total gross tonnage grew at around 1.8% per annum, 
compared with average trade growth  of about 14% (KPMG, 2006).  The authorities state that, the number of 
vessels increased from 560 in 2002 to 739 in 2006, and the growth in tonnage was -9.41% in 2003, 12.4% in 
2004, 15.4% in 2005, and 5.64% in 2006.  
187 The average age of Indian ships is 16.5 years,  compared to the world average of 12.2 years 
(KPMG, 2006).   
188 The market shares of the three largest shippi ng companies are:  ar ound 33% for Shipping 
Corporation India, 22% for Great Eastern Shipping Co., and 11% for Essar Shipping Co. 
189 The Ministry of Shipping is responsible for administering maritime transport (including shipping, 
ports, and related industries), ship building and ship repair, shipping arrangements for the Government and its 
entities, formulating policy for privatization and in frastructure arrangements, and shipping-related 
environmental issues.  The Shipping Corporation of India is India's largest shipping company, with more than 
80 ships and around one third of the gross tonnage of the sector.  The Corporation also manages ships belonging to other Government agencies;  currently, 52 ships are managed this way. 
190 Under the Merchant Shipping Act 1958 and related rules, for a ship to be registered as an 
Indian-flag vessel, it must be owned by a citizen, or a company, or body established by or under any Central or State Act, with its principal place of business in Indi a, or a cooperative societ y registered under any law 
effective in India. 
191 Department of Shipping online information.  Viewed at:  http://shipping.gov.in/writereaddata/ 
linkimages/Draft%20Maritime% 20Policy%20_Modified_193943681 5.pdf [4 December 2006]. India WT/TPR/S/182 
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including for coastal shipping (Table AII.3).192  Cabotage is reserved for Indian-flag vessels, but 
foreign-flag vessels are permitted to carry coastal  cargo when no Indian-flag vessel is available.193  
Moreover, the Government introduced a tonnage tax in 2004/05, with a view to encouraging 
investment.  Instead of the corporate tax, compan ies may choose to pay the tonnage tax, which is 
levied on the registered tonnage of a compan y assuming a certain income from that tonnage.194  The 
Government considers the introduction of the tonnage tax contributed to the increase in gross tonnage 
from 6.94  million tonnes on 1 April 2004, to 8.41  million tonnes on 31 December 2006.195   
144. In its GATS schedule India has listed an MFN exemption on cargo sharing (apart from with 
its bilateral partners:  Bulgaria, Pakistan, and th e UAE), and cargo reservations under the UN Code of 
Conduct for Liner Conferences.196 
Ports 
145. There are 12 "major" ports and 187 "non-major" por ts in India;  the major ports account for 
around 75% of total cargo handled.  Cargo handled  between 1999/00 and 2005/06 increased from 
271.9 million tonnes to 423.4 million tonnes for major ports, and from 63.4 million tonnes to 151 million tonnes for other  ports.  
146. Ports in India are regulated under the Indian Ports Act 1908, which provides guidelines for 
shipping safety, conservation of ports, and other issues such as charges, penalties, and other services.   Eleven of the major ports are managed by Port Trusts, under the Major Port Trust Act 1963, while Ennore Port Limited is the first corporatized majo r port under the Companies Act.  Major ports are 
administered by the Ministry of Shipping, Road Tr ansport and Highways.  In 1997, a Tariff Authority 
of Major Ports (TAMP) was established to regulate tariffs for all major ports
197;  non-major ports are 
administered by respective state governments.  
147. Problems in the ports subsector include over-regulation, lack of investment in infrastructure, 
and the consequent cust oms clearance delays.198  The Government has introduced a number of policy 
initiatives to deregulate and to encourage public-private  participation in ports.  Foreign investment 
restrictions have been relaxed;  there is no approva l requirement for up to 51% foreign investment in 
projects providing supporting services to water transp ort;  automatic approval is granted for proposals 
with up to 100% foreign equity in construction and maintenance of ports and harbours;  and the 
private sector is invited to participate in open te nders on a build-operate-transfer (BOT) basis.  In 
addition, a "landlord" port model, which separat es port ownership from port operations, has been 
                                                      
192 However, it seems there has not been any FDI in coastal shipping. 
193 DGS online information.  Viewed at:  h ttp://www.dgshipping.com/dgship/final/tcsrep/ 
Chapter_2_2.htm. 
194 For details of tonnage tax, see Income Tax Department online information.  
Viewed  at:  http://www.taxmann.com/TaxmannDit/D isplaypage/dpage1.aspx?md=2&typ=cn&yr=2006&chp= 
3570 [8 December 2006]. 
195 According to the authorities, other reform measures include:  simplifying the procedure for 
purchasing and registering new ships;  abolishing the technical clearance requirement for acquiring second-hand 
vessels (below 25 years of age);  and increasing the depreciation rate of vessels from 20% to 25%. 
196 In its revised offer, India has offered to remove the MFN exemption on cargo reservations.   
197 The TAMP fixes tariffs for major ports, but has no jurisdiction over non-major ports 
(KPMG, 2006).  
198 Problems of the ports subsector also include overstaffing, which tends to reduce labour productivity.  
Labour employed on vessels, and those working on shore, are subject to different management systems.  The 
Dock Labour Boards are in charge of wo rkers on board, and the port trusts ar e in charge of workers on shore.  
The authorities state that, apart from three major ports, th e system has been integrated in all major ports.  The 
Government has also initiated measures to rationalize the staffing levels at these ports. WT/TPR/S/182 Trade Policy Review 
Page 142 
 
 
adopted for  Ennore Port Limited.  Furthermore, the National Maritime Development Programme 
(NMDP), formulated by the Department of Shippi ng, envisages investment of over US$13.3 billion to 
increase the capacity of ports and to promote their co mpetitiveness.  As a result, port efficiency has 
been improved, as the average turnaround time fell from 5.1 days in 1999/00, to 3.5 days in 
2005/06.199 
(c) Air transport 
Introduction 
148. Air transport, like other transport services, is im portant for growth and development.  First, 
efficient air transport services are a key intermedia te input to trade in both goods and services sectors 
(such as tourism).200  Second, air transport services can be tr aded as a service in their own right.  A 
2005 study highlighted the importanc e of an efficient, effective, and reliable air transport sector, 
especially in developing countries, in promoting de velopment and facilitating r ealization of the gains 
from trade.201 
149. Air transport services have blossomed since the termination of the state monopoly over 
scheduled air transport services in 1994 and sub sequent reforms to the domestic regulatory 
environment.  Currently, domestic passengers ar e served by 13 scheduled domestic operators in 
addition to 51 companies that provide charter servic es.  New entry and greater flexibility in providing 
services has benefited consumers through lowe r fares and substantially expanded services.202 
150. Indian air transport services nonetheless face a major challenge in responding to sustained 
growth in the demand for passenger and cargo trans port services (domestic and international) as a 
result of India's continuing high growth.  The demand for air transport services is income-elastic.  In an expanding developing country market, it typically in creases at as much as twice the rate of GDP.  
In this context, a failure to provide the level of  service demanded at competitive fare-levels can act as 
a brake on overall growth and development.
203 
151. Important steps have already been taken to stimulate service expansion and competition in 
domestic and international air transport services, notably through significant liberalization of entry 
and pricing in domestic passenger and cargo transpor t services, and a relatively open environment for 
international service providers.  Nonetheless, further ch ange is needed.  First, the scope for continuing 
(and even more) rapid development of air transport services, as will be needed, is constrained by 
inadequate infrastructure, notably airports.204  Second, although foreign investment in domestic air 
services has been substantially liberalized, invest ment by foreign carriers is prohibited. This 
represents a barrier to investment flows.  Thir d, a more sweeping approach to international 
                                                      
199 However, this is still much longer than the ten- hour average turnaround ti me in Hong Kong, China,  
(Ministry of Finance 2007b, p. 194). 
200 The contribution of air transport to trade in goods is not limited to the movement of air cargo per se .  
The transport of natural persons (i.e. business persons) is  itself an important input to trade in both goods and 
other services, as well as to foreign investment in diverse industries. 
201 WTO (2005), pp. 213-264. 
202 Ministry of Civil Aviation (2006);  and Chattopadhyay (2006).  See, for related background, 
Mukherjee and Sachdeva (2003). 
203 See Bisignani (2005). 
 204 Mukherjee and Sachdeva (2003).  See also Bisignani (2005).  But note that this challenge is being 
addressed by various initiatives, discussed below. India WT/TPR/S/182 
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liberalization may be needed.205  Competition in the sector would benefit from the application of 
effective competition rules, notably with respect to possible mergers. 
Implications of projected demand growth in the coming years 
152. Air transport in India faces a major challenge in expanding its services to meet the expected 
increase in demand generated by the country's ra pid economic growth over the past decade and 
projected to continue in the coming years.  There ar e indications that, already, the rate of expansion 
may not be optimal.  In 2005, the International Ai r Travel Association (IATA) forecast an average 
rate of growth in international passenger servi ce of 8.4% annually un til 2009.  When domestic 
services are factored in, the expected average a nnual growth rate for the same period is 12%.206  While 
high by comparison with growth in mature markets, this rate is substantially lower than what would 
be implied by India's actual and expected annual growth in GDP.207  This lends credence to the 
concern that lower than optimal expansion in ai r transport services could become a brake on overall 
growth in India. 
153. International experience suggests that the main  factors preventing an adequate supply-side 
response to demand growth are typically:  regulatory r estrictions on entry and/or pricing that deter the 
entry/expansion of new and existing carriers;  a nd limitations on the availability of infrastructure 
(especially take-off/landing slots and related services) , which have the same effects.  Another factor 
can be the nature of arrangements governing in ternational competition in transnational routes, 
i.e. whether they represent a genuine commitment to  "open skies" or are more in the nature of 
market-sharing arrangements governed by  regulations that limit competition. 208  The application of 
formal competition rules (i.e. anti-trust legislation) may also be a factor. 
Liberalization of the domestic regulatory framework 
154. Indications are that India has effectively addressed the first type of potential impediment to 
competition and growth in service capacity.  Sinc e the 1990s, regulatory restrictions on entry and 
pricing in domestic air transport services (both passenger and cargo services) have been progressively 
removed.  The Directorate-General of Civil Aviation has explicitly adopted a philosophy of 
facilitating entry by responsible carriers.  Regulat ory approval of new entrants is now based on 
criteria such as mechanical fitness, safety, and fina ncial responsibility.  This has facilitated significant 
new entry, including by low-cost carriers providing domestic services.209  Similar liberalization has 
taken place with respect to pricing:  in 2004, the Government abolished the requirement for domestic 
and international carriers to file th eir tariffs with the Government.  
155. Evidence suggests that these changes have facilit ated entry and strengthened competition:  in 
the past three years, seven airlines have entered the Indian aviation ma rket, of which five are low cost 
carriers.210 
                                                      
205 Bisignani (2005).  See also WTO (2005). 
206 According to official estimates provided by India, the rate of growth may be even higher.  The 
official projected growth for the period 2006-2015 is 20% growth from 2006-07, 15% growth 2008-10 and 
thereafter 7.2% till 2015 in domestic sectors.  In the intern ational sector, the growth rate has been estimated as 
11.6% from 2006-08 and 7.2% thereafter till 2015. 
207 Bisignani (2005). 
208 WTO (2005).  In addition to the availability of infrastructure services, the quality of such services is 
an important consideration. 
209 Ministry of Civil Aviation (2006). 
210 Kingfisher (2005) and Paramount Airways (2005);  the low cost ca rriers are:  Air Deccan (2003);  
Spice Jet (2005);  Go Air (2005);  Indigo (2006);  and Indus Airways (2006). WT/TPR/S/182 Trade Policy Review 
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156. There are two potentially significant caveats to  this positive overall assessment.  Although 
foreign investment by individuals has now been s ubstantially liberalized (up to 49% foreign equity 
participation is permitted in the domestic sector a nd up to 100% in the case of non-resident Indians), 
foreign airlines are not allowed to invest in the domestic sector.211  This constitutes a barrier both to 
foreign investment and to the technology transfer that it can bring. 
157. In addition, domestic air services in India have been subject to an elaborate system of 
cross-subsidization:  carriers providing services in high-value routes linking India's major commercial 
centres (Category I) have had to provide, as a social  obligation, minimum levels of service on routes 
to the north-eastern regions (Category II) and ot her low-volume routes (Category III).  This has 
affected the efficiency of services, since aircraft suitable for one set of routes were not necessarily 
optimal for the others.212  The policy has nonetheless been considered necessary for regional 
development, in particular the developm ent of backward regions of the country. 
Challenges in air transport  infrastructure 
158. Infrastructure facilities at airport terminals are provided principally by the Airports Authority 
of India, under the Ministry of Civil Aviation.  The availability of take-off and landing slots and other 
infrastructure is a critical factor in overall air tr ansport capacity and there is wide acknowledgement 
that this is a critical problem for the future of air transport in India.213 
159. The Ministry of Civil Aviation and other rele vant authorities are aware of these challenges.214  
Efforts are under way to upgrade airports and re lated infrastructure, such as baggage handling 
services.  The Government is modernizing airports th rough joint ventures and private participation:  at 
least 35 airports will be covered in addition to  Delhi and Mumbai, and Greenfield airports in 
Bangalore and Hyderabad .  Nonetheless, upgrading India's airports  and related infrastructure will be a 
major challenge:  past efforts have apparently faltered due to a lack of resolve and follow-through.215  
International liberalization and b ilateral air service agreements 
160. India has signed bilateral aviation trans portation agreements with approximately 
100 countries.  This reflects an explicit commitment  to the principles of "open skies" beginning in the 
winter season of 1999-00.  The agreements have been  a major factor in enhancing the frequency and 
quality of passenger services to and from India (Table AIV.1).   
161. In India, as in other countries, a policy of open skies does not imply that the market is 
completely open and competitive.  Landing rights ar e often awarded to the designated carriers of each 
partner on a reciprocal basis, with limited or no scope for competition from third-country carriers.  
Cabotage rights are not provided.  Nonetheless, India has adopted a progressively more liberal stance 
toward the designation of multiple carriers and the granting of new points of call to foreign airlines.216  
                                                      
211 For airports in Greenfield areas,  FDI up to 100% is allowed. 
212 See Mukherjee and Sachdeva (2003), pp. 43-44. 
213 In late 2005, the Director-General of IATA made the following observation on the state of India's 
airports and related infrastructure:  "Without massive chan ge, infrastructure will not be able to handle growth.  
Airports in Delhi, Mumbai, Chennai, Kolkata, and Ba ngalore are not adequate.  Among them, Mumbai is the 
worst:  service levels are not acceptable;  delays are common and future growth cannot be accommodated" 
(Bisignani, 2005). 
214 Ministry of Civil Aviation (2006), Chapter 7;  see also Chattopadhyay (2006). 
215 Mukherjee and Sachdeva conclude that "Overall, the government's airport privatization policy [has 
been] marked by indecisiveness, inconsistency and lack of transparency" (Mukherjee and Sachdeva, 2003, 
p. 45). 
216 Ministry of Civil Aviation (2006);  and Chattopadhyay (2006). India WT/TPR/S/182 
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A question for the future is whether India (and ot her countries) might be better served by broader 
regional or multilateral liberalization in the sector.217 
Mergers and competition in the sector 
162. There is currently, the possibility of one or  more major mergers among the existing air 
carriers in India.  The Government is thought to favour a merger between Air India and Indian 
Airlines, the two national (state-owned) carriers.  It is considered that this may lead to scale 
economies and other efficiencies in services provision (i .e. more efficient coverage of routes, etc.).  
However, much evidence suggests that the benefits of  mergers in the airline sector (e.g. cost savings 
and efficiencies) are often less extensive than anticipated.218  Mergers can also result in a reduction of 
competition and the choices available to consumers.  This highlights the need for effective application 
of national competition rules (i.e. the ne w Competition Act, 2002) in this sector. 
(vi) Professional services 
(a) Engineering services219 
163. The performance of India's engineering subsector is linked to that of industries, power 
utilities, and petroleum refining, and has been driven by growth in key end-user industries, as well as 
a preference by global manufacturing companies as an outsourcing destination.220  It employs over 
4 million skilled and semiskilled workers (directly an d indirectly), and accounts for over 7% of total 
(formal) employment;  this share is increasing. 
164. Indian engineering goods and services are gaining acceptance in overseas markets; 
engineering exports, 40% of which are generate d by SMEs, crossed the US$10 billion mark in 
2003/04 and are expected to be worth US$23 billion in  2006/07.  Engineering companies have a huge 
potential for exports and outsourcing;  according to the National Association of Software and Service 
Companies (NASSCOM), engineering services outsourced to India have a market potential of US$7-12 billion.
221  Furthermore, the authorities envisage th at the rapid development of Engineering 
Process Outsourcing (EPO) services from India wi ll have a far-reaching impact on the domestic 
engineering industry.222   
165. The industry comprises multinational companies,  joint ventures, large domestic players, 
regional players in the organized sector, and a la rge number of small players in the unorganized 
sector.  Public-sector enterprises play an important  role in heavy engineering with 34 companies. 
                                                      
217 WTO (2005). 
218 WTO (2005), and refere nces cited therein. 
219 Engineering services (e.g. planning, design, natural resources, civil, building engineering) are found, 
inter alia,  under UN Common Coding System item 512000 and Central Product Classification (CPC) 8672.  
This section, which is intended to focus on engineering se rvices only, is largely based on online information by:  
IBEF (2006a);  Engineering Export Promotion Council (2005);  and Ministry of Commerce and Industry 
(2006a). 
220 Around 36% of total FDI is di rected towards the engineering in dustry.  Recently, the authorities 
permitted 100% FDI in construction and development project s.  India has opened up infrastructure projects for 
power, roads, ports, the mining industry, and pharmaceuticals to privat e-sector participation and FDI. 
221 The five main countries where major services are being outsourced are Canada, India, Ireland, the 
Philippines, and the Russian Federation.  While Canada and Ireland are on the high-cost side, the Philippines, 
the Russian Federation, and India are the low-cost end. 
222 Engineering Export Promotion Council Pre ss release, 10 August 2006.  Viewed at:  
http://www.eepcindia.org/pressrelease/PR -100806.pdf [28 November 2006]. WT/TPR/S/182 Trade Policy Review 
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166. Fiscal and other investment incentives have had a positive impact on the engineering 
subsector  and helped it to become competitive.  Engineering services are a significant input in various 
activities that are open to foreign investment, such as infrastructure projects for power, roads, ports, 
mining sector (except coal), and construction and development projects.  India's GATS commitments 
for market access in this subsector indicate that co mmercial presence must be through incorporation, 
with a foreign equity ceiling of 51%. 
167. There is currently no legislation governing engin eering but such legislation is being drafted.  
Regulation is under the ambit of legislation that governs the other industrial sectors.   Since 1955, the 
Engineering Export Promotion Council (EEPC), under the sponsorship of the Department of 
Commerce, has promoted exports of engineering goods, projects, and services.  The EEPC also 
operates the Indian Engineering Centre, which sends  product-specific delegations abroad, participates 
in specialized trade fairs including engineering e xhibitions, and hosts product-specific seminars and 
conferences.  Since 1984, the Project Exports Promotion Council of India (PEPC) has undertaken export promotion initiatives, to support Indian e ngineering contractors and consultants to set up 
overseas projects in, inter alia , civil construction projects, a nd related process and engineering 
consultancy. 
(b) Legal services
223 
168. India has the world's second largest legal profession, with more than a million lawyers.   
Indian commercial law practice is estimated at approximately Rs 6-6.5 billion a year 
(US$135.5-146.8 million).  Service providers to the domestic market are individual lawyers, and 
small or family-based firms. 
169. According to a recent report, increasing levels of interest in offshor e-outsourcing of legal 
services to India have been aided by steady growth in demand for legal services worldwide;  access to its relatively low wage but high skilled human resources;  time-zone advantage, enabling 
round-the-clock, seven-days-a-week operations;  and English language expertise.  Law firms are the 
largest service buyers from the Indian legal offshor ing industry, contributing about 49% of the total 
US$61.6 million revenue;  others are corporations and legal publishers.
224  The market potential for 
legal services outsourceable from the United St ates alone is estimated at US$3-4 billion.225  Offshore 
legal services providers include in -house legal departments of large multinationals that have moved 
some parts of their in-house legal departments to their India-based units, and units of large multinational law firms.  Indian lawyers wishi ng to expand into the international market face 
competitive challenges from existing global player s, principally internationally focussed legal 
practices operating from the United States, Cana da, the United Kingdom, France, Germany, and 
Spain. 
                                                     
 
223 Legal services refer to legal advisory and representation services, legal or juridical procedures, and 
the drawing up of legal instruments or documentation.  They correspond to the United Nations Central Product 
Classification (CPC) 861 at the three-digit level.  This section is largely based on online information by Ministry 
of Commerce (2006d);  and Bar Council of India online information.  Viewed at:  http://barcouncilofindia.nic.in/disk1/functions.htm [20 November 2006]. 
224 The Hindu,  "Legal services offshoring may earn $600 m revenue by 2010", 1 January 2006.  
Viewed at:  http://www.hinduonnet.com/thehindu /thscrip/print.pl?file=2006010102100500.htm&date= 
2006/01/01/&prd=bl& [20 November 2006]. 
225 The Hindu , "Playing on a new court", 12 September 2005.  Viewed at:  
http://www.hinduonnet.com/thehindu/thscrip/print. pl?file=2005091200020100.htm&date=2005/09/12/&prd= 
ew& [20 November 2006]. India WT/TPR/S/182 
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170. The Advocates Act, 1961 and the Bar Council of India Rules, 1975 regulate the legal services 
sector.226  The sectoral legislation is administered by the Ministry of Law and Justice.  The legal 
profession is regulated by the Bar Council of India (BCI) (the final regulating body), and state bar 
councils.  The bar councils set the standards for lega l qualifications, validate foreign degrees, and set 
standards for professional conduct and etiquette.  Th ey also admit advocates on their rolls (thus 
allowing them to appear in court).  
171. FDI is not permitted in the lega l services sector.  Foreign la w firms are not permitted to open 
offices in India and are prohibited from giving any le gal advice that could constitute practicing of 
Indian law.  India has not undertaken any specifi c GATS commitment in lega l services.  However, 
discussion on liberalization has been initiated via a Department of Commerce consultation paper as 
well as in different bilateral fora such as the India-UK Joint Economic and Trade Committee 
(JETCO), the Joint India Australia Consultative Committee on Legal Services (JAICCOLS), and the 
India-U.S. Legal Services Working Group. 
172. Legal services can be provided only by natural persons who are citizens of India, and who are 
on the advocates roll in the state where the service is being provided.  The service provider can either 
be a sole proprietorship or a partne rship firm consisting of persons si milarly qualified to practice law.  
To be eligible for enrolment as an advocate, a candida te has to be a citizen of India or a country that 
allows Indian nationals to practice on a reci procal basis;  hold a degree in law from an 
institution/university recognized by the BCI;  and be at least 21 years of age. 
173. Further development of the legal profession is restricted by the current regulatory system, 
which hinders Indian firms from competing effectiv ely against foreign firms in several ways.  For 
example:  law firms may only practice through part nerships and the number of partners may not 
exceed 20.227  In addition, as the sector is defined as a profession rather than an industry by the Bar 
Council, there are other restrictions:  advertising or listing in a legal directory is not permitted, nor is 
providing multidisciplinary services;  and law firms do  not have access to financ e in the same way as 
industrial concerns.   
174. There is a strong sentiment amongst various members of the profession that permitting even 
limited access to foreign law firms would lessen oppor tunities for domestic lawyers;  in this respect 
the BCI has expressed its concerns on various occasions.  Given this resistance, the Department of Commerce has published a discussion paper on the state of play in various countries and their expectations from India with regard to liberalization of legal services.
228  The stated purpose of this 
document is "to increase awareness on the main issues , challenges, and, most important, opportunities 
relevant to the legal services sector".   
(c) Healthcare and medical services229 
175. According to the authorities,  healthcare services in India contribute around 5% of GDP.  In 
addition, the authorities indicate that public spending on health is currently around 1.25% of GDP, up 
                                                      
226 Advocates Act 1961.  Viewed at:  http://barcouncilofindia.nic.in/disk1/196125.pdf 
[27 November 2006]. 
227 The Companies (Amendment) Bill 2003 proposes that  the limit on the number of partners be raised 
to 50. 
228 Ministry of Commerce (2006d). 
229 Health and medical services are wide-ranging and found, inter alia,  under UN Common Coding 
System item 936000 and Central Product Classification (CPC) 9312 and 9312.  This section is largely based on 
online information by:  IBEF (2006b);  Healthcare Market Review (2003);  and Ministry of Health and Family 
Welfare (2006). WT/TPR/S/182 Trade Policy Review 
Page 148 
 
 
from 0.9% in 1999.  The Government plans to increase public spending progressively (by central as 
well as state governments) on health to 2-3% of GDP by 2012  with a focus on primary healthcare.  
Public spending is not utilized effectively and access to healthcare services is not uniform due to, 
inter alia , inefficiencies of the public health system, and poor maintenance of public health 
infrastructure. 
176. Despite India's impressive public health infrast ructure, only about 25% of healthcare services 
are provided by the public health sector, the rest are provided by the private sector.  Private-sector 
participation in health care has been growing si gnificantly over the past few years;  it comprises 
corporations and large hospital groups as well as individuals setting up private practice.  Medical 
services on offer vary from the complex and sophisticat ed to basic primary healthcare;  the latter are 
provided principally by the Government.  Over 70% of medical practitioners are based in urban 
centres, while approximately 70% of the population live in rural areas.  Curative services largely 
favour the rich over the poor.  Only one tenth of the population is covered by any form of health 
insurance.230  It is estimated that health-related expenditu re is one of the causes for rural indebtedness, 
and out-of-pocket expenditure on hospital care causes almost 25% of hospitalized Indians to fall 
below the poverty line. 
177. The sector has vast potential on account of India's large population, its burgeoning middle 
class, and medical tourism, which has gained momentum over the past few years.  In 2004, 
180,000 foreign patients sought treatment in India, a gr owth rate of 25% over the previous year;  the 
medical tourism industry is worth US$333 million, and is expected to be worth US$2 billion by 
2012.231  This trend is underpinned by India's lo w-cost advantage and the emergence of new 
high-quality healthcare service providers, as well as  long waits for treatment in certain developed 
countries, lack of adequate medical facilities in de veloping countries, and agreements signed by health 
insurance companies with hospitals and hotels in India.232  Many hospitals in India have created 
specialized international patient departments a nd offer special packages for patients from abroad, 
including visa facilitation, and excursions and boa rd and lodging for people accompanying the patient. 
178. The National Health Policy 2002 encourages fore ign patients via the introduction of paid 
treatment packages.  Treatment of foreigners paid in foreign exchange is treated as exports and thus 
eligible for all tax incentives extended to export ear nings.  Indian hospitals are seeking accreditation 
from international organizations so as to be  on an equal footing with hospitals abroad.233  T h e  
Government, in collaboration with the Confedera tion of Indian Industry (CII), is working on 
accreditation of hospitals;  the CII is also formul ating minimum quality standards for hospitals.  It 
plans to set up a National Accreditation Board of Hospitals and Healthcare Providers, which is to 
issue accreditation to public and private hospitals .  Furthermore, the Government is planning a 
Clinical Establishment Act, which would ensure the quality of healthcare provided.   Other policy aims 
include increasing the use of public health facilities from the present 20% to 75% by 2010.  This is to 
be achieved, inter alia,  through injecting more funds, allowing and training nurses and paramedics to 
                                                      
230 According to some estimates, only 3% of India's population is covered under some form of 
voluntary health insurance (Watson Wya tt online information.  Viewed at:  
http://www.watsonwyatt.com/Europe/pubs/healthcare/render2.asp?ID=11384 [13 March 2007]. 
231 The bulk of patients come from the United States, the United Kingdom, south and west Asia, and 
Africa.  Tanzania and Mauritius have signed agreements  with hospitals in India whereby treatment of their 
citizens is paid for by their respective governments. 
232 These companies are BUPA from the United Ki ngdom, and Blue Cross Blue Shield from the 
United States.  
233 The accrediting agencies are the Joint Commission International,  and the Joint Commission of 
Accreditation of Hospital Organisations.  India WT/TPR/S/182 
 Page 149 
 
 
perform basic public health functions, increasing the prevalence of doctors in rural areas, and 
encouraging the use of non-traditional medical techniques in rural and remote areas.    
179. As indicated earlier, spending on health has not been a priority for successive governments, 
and they have subsidized the private sector by, inter alia , allowing tax and tariff  exemptions for 
imported drugs and high-tech medical equipment, an d selling land at lower-than- market prices as long 
as a quarter of patients are treated free of charge, a condition that is  rarely met.  The Government 
undertook to institutionalize a public-p rivate partnerships (PPP) mech anism in healthcare, from the 
district level up.234  It is in the process of developing guidelines for PPPs.   
180. Allowing 100% ownership for FDI, subject to a pproval by the Foreign Investment Promotion 
Board has assisted in opening up the Indian healthcar e market to international investors.  Indian 
private-sector operators have been setting up hospita ls as joint ventures in collaboration with foreign 
investors (e.g. from Singapore and Malaysia).  So far India has not undertaken any GATS 
commitments in medical and dental services.  Fore ign doctors and nurses are not allowed to practice 
in India except for charitable purposes.  Indian doc tors trained abroad can practice in India after 
seeking necessary registration from the regulatory body c oncerned.  There appear to be no plans to lift 
these restrictions.  The authorities believe that, despite  a lack of doctors in rural areas, there is no 
shortage of qualified medical professionals. 
181. The Medical Council of India (MCI), an autonomous body under the Ministry of Health and 
Family Welfare, is entrusted with establishing uniform  standards of higher qualifications in medicine 
and recognition of medical qualifications in India and abroad.235  In 2005, under a Medical Council of 
India (Amendment) Bill, the Government proposed to change the composition of the MCI and bring 
in more of its own appointees, reducing elected members to a minority.236  The Government claimed 
this would increase the MCI's accountability.  It is not clear what progress has been made in this area. 
  
                                                     
 
234 The health policy of 1983 stressed the need to encourage private initiatives in health services. 
235 Medical Council of India online information.  Viewed at:  http://www.mciindia.org/ 
index.htm [30 November 2006]. 
236 India Together online information.  Viewed  at:  http://www.indiatogether.org/2006/mar/law-
imcamend.htm [30 November 2006]. WT/TPR/S/182 Trade Policy Review 
Page 150 
 
 
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