India WT/TPR/S/33
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I. THE ECONOMIC ENVIRONMENT
1. ThefirstTradePolicyReviewofIndiain1993notedthatthereformsundertakensinceJune1991
initiated arevolutionary turnaround intheeconomy. Since thatReview, thereforms havecontinued,
albeit ataslower pace. Theeconomy, afteraninitial decline ingrowth inresponse tothedevaluation
of1991andcontractionary fiscal andmonetary policies, hasperformed verywell. Important reforms
havebeenundertaken ininvestment, theexchange-rate and,trade regimes, thefinancial sector and
thetaxsystem. Trade liberalization hasconstituted anintegral partofthereform programme, allowing
amore rational choice ofoptions forIndian consumers andcontributing togrowth. However, inother
areas, suchasfiscal policy, adjustment hasnotbeenasforthcoming asexpected atthetimeofthelast
Review. Moreover, limited progress hasbeenachieved intheareas ofagriculture andlabour. This
Chapter reviews theeconomic environment andrecent economic performance, highlighting thelinkages
withexternal trade.
(1) Recent Economic Performance
(i) Macroeconomic developments
2. Following thestructural andstabilization programme initiated inJuly1991, theIndian economy
initially experienced asharp decline ingrowth. Since then, however, helped bygood monsoons and
strong supply-response tothereforms, theeconomy hasshown annual growth ratesrising toabout
7percentinthepastthree years (Table I.1). Theindustrial recovery has,except for1996/97, been
particularly strong, withestimated annual average ratesofabove 10percentformanufacturing value
added in1994/95, 1995/96 and1996/97 (Table I.2).1Industrial growth hasbeenledbydemand for
investment.
3. India'sincreased integration withtheworld economy, asmeasured bytheratios ofexports,
imports andforeign investment toGDP (Chart I.1),hasbeenanimportant factor inexplaining the
growth resurgence. Merchandise exports performed wellbetween 1993/94 and1995/96, growing on
average by20percentincurrent U.S.dollar value, albeit withaslow-down to4percentin1996/97,
particularly intraditional sectors which wereaffected, among other factors, byweaker world demand
andinfrastructure bottlenecks (growth inconstruction, forexample, haslagged thatinmanufacturing).
Overthesame period, imports havealsogrown strongly reflecting bothincreased access totheIndian
market andIndia'sneedformodern capital goods. Throughout thisperiod, thecurrent account remained
inmoderate deficit (annual average of-1.1percentofGDP).
4. Theliberalization oftheforeign investment regime, initiated in1991, hasbeenasignificant
partofthereform programme. Asaresult, foreign direct investment (ofabout US$2.7 billion or
0.7percentofGDP) increased toalevelin1996/97 inlinewithnetinflows ofportfolio investment,
shifting thefinancing ofthebalance ofpayments fromdebt-creating items toforeign inflows. These
buoyant capital inflows permitted ahealthy growth ofinternational reserves, totheequivalent of
6.6months ofmerchandise imports byend-March 1997 (Tables I.1andI.3).
1India'sfiscal yearisfrom 1April to31March.WT/TPR/S/33 Trade Policy Review
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Table I.1
Economic performance ofIndia, 1991-97
1991/92 1992/93 1993/94 1994/95 1995/96 1996/97
GDP share
(1993/94) Percentage change
GDP byexpenditure component
RealGDP atfactor pricesa
RealGDP atmarket pricesa
Private consumption
Government consumption
Gross fixed capital formation
Construction
Machinery &equipment
Change instocksb
Netexp., goods andnon-factor serv.b65.3
10.8
21.0
7.4
13.6
0.0
0.10.9
0.4
1.8
-0.6
-4.0
2.3
-7.7
-1.7
1.34.3
5.4
4.0
3.3
7.0
2.9
9.6
1.2
-0.86.0
4.8
4.7
6.4
5.6
-1.5
9.8
-2.0
0.87.2c7.6c
4.4c
1.8c
13.3c
7.6c
16.5c
1.0c
...7.1d
7.3d
6.0d
5.1d
18.3d
4.6d
25.2d
0.2d
...6.5d
...
...
...
...
...
...
...
...
Saving andinvestment (percentofGDP)
Gross domestic saving
Public sector
Gross domestic investment
Public sector22.8
1.9
23.4
9.222.1
1.5
24.0
8.923.1
0.6
23.6
8.624.9c
1.8c
26.0c
8.8c25.6d
1.9d
27.4d
8.2d25.8d
1.8d
27.5d
8.6d
Prices (percentage change)
Inflatione13.6 7.0 10.8 10.4 5.0 7.3d
Government budget (percentofGDP)
Central Government balance
Revenue andgrants
Import duties
Current expenditure
Interest payments-5.9
11.7
3.6
13.9
4.3-5.7
11.3
3.3
13.6
4.1-7.4
9.8
2.7
13.9
4.3-6.1
10.7
2.8
13.3
4.3-5.5
10.7
3.2
13.4
4.5-5.0d
11.3d
3.5d
13.4d
4.6d
States 'balance
Central public enterprises 'balance
Overall public sector balancef-3.1
-2.8
-9.3-3.0
-2.9
-9.5-2.5
-3.1
-10.7-2.9
-2.6
-9.0-3.1
-2.1d
-9.0d-2.9d
-2.5d
-8.5d
Money andinterest rates(percent, end-of-period)
Money supply (M3, percentage change) 19.3 15.7 18.4 22.3 13.7 15.6
Discount rate 13.0 12.0 10.0 13.0 13.0 ...
Interest rateon91-day treasury bills ... 10.8 7.3 11.8 13.0 8.0
Interest rateon10-year government bonds 12.5 12.8 12.5 12.7 13.9 13.7
External sector (percentofGDP)
Current account
Merchandise trade
Non-factor services
Netinvestment income
Nettransfers-0.5
-1.1
0.5
-1.5
1.7-1.4
-1.8
0.5
-1.4
1.3-0.4
-0.9
0.2
-1.3
1.5-1.1
-2.3
-0.2
-1.1
2.1-1.7
2.7
0.0
-1.4
2.4-1.1d
-3.1d
0.5d
-1.4d
2.9d
Capital account 1.6 1.2 3.8 3.1 1.3 3.1d
Overall balance (US$ million) -2,790 -560 8,677 6,102 -1,209 6,882d
Overall balance (%ofGDP) -1.1 -0.2 3.4 2.0 -0.4 2.0
Interl. res.(months ofmerchandise imports) 3.2 3.3 7.2 7.4 4.9 6.6d
... Notavailable.
a 1980/81 prices.
b Percentcontribution toGDP growth.
c Provisional data.
d Estimated data.
e Wholesale price (end-of-period).
f Theoverall balance islessthanthesumofitscomponents duetointra-sector transfers. Itincludes theoperations oftheCentral
Government, theStateGovernments, theUnion Territories andthecentral public enterprises. Thedivestment receipts aretreated
asarevenue item.
Note: Year beginning 1April, unless otherwise indicated.
Source: Government ofIndia (1997c), Economic Survey 1996/97; andInternational Monetary Fund (1996b), India -Recent Economic
Developments, StaffCountry Report No.96/131.India WT/TPR/S/33
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Table I.2
Major features oftheIndian economy, 1990-97
IndiaLow-income-
economiesaLow- andmiddle- income-
economiesa
Population growth rate(percent)b1.8 1.7 1.6
Lifeexpectancy atbirth, 1995 (years) 62 63 65
Adult illiteracy, 1995 (percent) 48 34 30
Infant mortality rate,1995 (percent)c68 69 60
GNP percapita, 1995 (US$) 340 430 1,090
GDP share
(1995/96)1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97
Annual percentage change invalue added
Agriculturef26.9 3.8 -2.3 6.1 3.6 4.6d-0.1e3.7j
Industryf
Mining andquarring
Manufacturing
Electricity, gasandwater
Construction31.1
1.9
22.3
2.6
4.37.2
10.8
6.1
6.4
11.6-1.3
3.6
-3.7
9.6
2.24.2
1.1
4.1
8.4
3.46.8
2.0
8.5
7.0
1.39.4d
8.2d
10.2d
8.7d
6.8d11.6e
7.0e
13.6e
9.0e
5.3e8.7j
1.7j
10.6j
4.2j
4.6j
Servicesf
Trade, hotels andrestaurants
Transport andcommunication
Finance
Community services42.0
14.4
5.7
11.3
10.75.2
5.4
4.7
6.4
4.34.9
0.9
5.6
10.5
4.05.5
6.8
5.5
4.6
5.07.2
8.3
5.1
10.5
3.97.5d
10.8d
8.3d
7.1d
3.8d8.8e
14.6e
10.0e
4.0e
6.2e7.4j
9.4j
...
6.3j
4.9j
1980/81 US$billion
Merchandise exportsg
Merchandise importsg8.5
15.918.1
24.117.9
19.418.5
21.922.2
23.326.3
28.631.8e
36.7e24.2h
27.4h
Twelve-month rates ofgrowth end-of-period (percent)
Exports (GNFS)i
Merchandise exports
Imports (GNFS)i14.0
9.3
33.98.6
9.0
12.71.1
-1.1
-21.01.3
3.3
7.918.4
20.2
11.018.0
18.4
25.320.1
20.9
29.98.4
4.0
7.7
... Notavailable.
a Definition according totheWorld Bank; India isdefined asalow-income economy. Weighted average data.
b 1990-1995.
c Per1,000 livebirths.
d Provisional data.
e Estimated data.
f Realvalue added (atfactor cost, 1980/81 prices).
g Customs clearance basis data; merchandise imports arec.i.f.
h Jan.toSep.1997.
i Goods andnon-factor services; balance ofpayments data; merchandise imports arec.i.f., include interest ontrade finance, and
exclude personal imports ofgoldandsilver.
j Dataprovided byIndian authorities.
Note: Year beginning 1April, unless otherwise indicated.
Source: Government ofIndia (1997c), Economic Survey 1996/97; International Monetary Fund (1996b), India -Recent Economic
Developments, StaffCountry Report No.96/131; World Bank(1996), World Development Report 1996; andWorld Bank(1997b),
World Development Report 1997.WT/TPR/S/33 Trade Policy Review
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5. Themostimportant issueinrecent economic management hasbeentoimprove public savings
andreduce thefiscal deficit. Between 1993/94 and1996/97, theCentral Government reduced itsdeficit
from 7.4toanestimated 5.0percentofGDP. Thedeficit oftheState Governments isestimated to
haveimproved slightly, butwaspartly off-set byahigher thanexpected deficit oftheoilpoolaccount
(OilCoordination Committee deficit of0.8percentofGDP)2,resulting inaconsolidated fiscal deficit
forthewhole public sector of8.5percentofGDP, down from10.7percentin1993/94.3Monetary
policy hasbeendisciplined, andinflation, though fluctuating hasbeenheldtoanaverage ofsome
9percentayearintheperiod 1991/92 to1996/97 (Table I.1).
6. Financing ofthefiscal deficits has,toalarge extent, beenthrough domestic borrowing from
thebanking system at(until recently) below-market interest rates, aswellasthrough external commercial
borrowing. These highfiscal deficits haveledtoanincreased public debt, intandem withincreased
realinterest rates, andadegree ofcrowding outofprivate investment.
2Thehigher international prices foroilwere notfully passed ontotheconsumers.
3Theconsolidated public sector comprises theoperation oftheCentral Government, theState Governments,
theUnion Territories, andthecentral public enterprises. Itshould benoted thattheauthorities treatdivestment
receipts asarevenue itemasopposed toafinancing item.India WT/TPR/S/33
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7. There isaprobable linkage between continued tariffreform programme andfiscal adjustment.
Import duties asashare ofcentral government totalrevenue areestimated at32.0percentin1996/97,
or3.5percentofGDP (Chart I.2). Hence, although policy isclearly toreduce tariffs further, the
prospects intheshort-run ofdoing somaybehampered bythehighreliance oftheCentral Government
oncustoms asasource ofrevenue.
8. Theprospects forfiscal adjustment through expenditure cutsmaybemore likely inthemedium
thanshort termasexpenditure isdominated bywages, subsidies andinterest payments which willtake
timetoadjust (Chart I.2).Hence, intheshortterm, adjustment mayneedtocome mainly fromrevenue
measures. Acomprehensive reform ofthetaxsystem andimproving thefinances oftheStates and
public enterprises togenerate alternate sources ofrevenue would benecessary forfurther lowering
oftariffs, combined withpriority tospeedy reduction oftariff exemptions andtothephasing outof
import restrictions, which would yield substantial revenues. Finally, meaningful adjustment would
almost certainly require addressing thefiscal positions oftheState Governments (Box I.1).WT/TPR/S/33 Trade Policy Review
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BoxI.1: State-Centre fiscal relationship inIndia
India'spersistent highoverall public sector deficit ofbetween 8and9percentofGDP isachallenge to
macroeconomic stability andmayimpede theimplementation ofsome needed structural reforms. While
thenegative macroeconomic effects ofhighfiscal deficits arewellknown, including inflation (ifdeficits
arefinanced through printing money), draw-down ofreserves (financing through external borrowing)
and/or increased realinterest rates andtheassociated crowding outofprivate investment (financing
through domestic borrowing), thenmay alsointhecase ofIndia, leadtodelays infinancial reforms
(since theliberalization may induce higher interest rates andtherefore higher debt servicing forthe
Government) andinthelowering oftariffs.
Thefiscal adjustment thathastaken place since 1990/91 hasbeen made almost exclusively bytheCentral
Government. Following asubstantial cutintheCentral Government 'sdeficit inthefirstyear ofthe
reform programme (ofmore than2percentage points ofGDP), thedeficit hasvaried, butin1996/97 was
forecast at5percentofGDP (Table I.1). The1997/98 budget envisages areduction ofthefiscal deficit
to4.5percentofGDP, derived primarily from increased divestment receipts. AtState level, there has
been noimprovement; thefiscal deficit hasbeen close to3percentofGDP through theperiod.
Expenditure reforms have lagged behind taxreform atState level. While some structural improvements
have been made intheStates 'taxstructure, revenue hasnotincreased either asashare ofGDP orin
relation todevelopmental expenditure. Ontheexpenditure side, "unproductive" expenditure hasbeen
allowed toaccount foralarge partofavailable resources. Themajor issues are:alarge andincreasing
wage andinterest bill;lowcostrecovery; non-viable enterprises intheareas of,inter alia,electricity
distribution andtransportation; andsqueezed expenditure ongrowth-inducing andsocially productive
investments. With respect tothelatter, itshould benoted thattheStates areconstitutionally responsible
formost expenditure oninfrastructure andsocial programmes.
Fiscal consolidation alsorequires anoverhaul ofthesystem ofintergovernmental transfers. Presently,
theStates derive alarge partoftheir revenues from transfers made bytheCentre through different
modes oftransfer (41percentofrevenue in1996/97). First, theConstitution provides foratransfer of
77.5 percentofpersonal income taxrevenue and47.5 percentofexcise dutycollected bytheCentre.
The1997/98 budget proposes toform asingle pool oftaxes tobeshared between theCentre andthe
States, with29percentofthepoolbeing transferred tothelatter, enhancing theincentives forincreased
income taxcollection attheCentre. TheBillseeking amendments totheConstitution hasnotyetbeen
passed. Second, theStates alsoreceive tiedtransfers (associated withexternally aided projects orcentral
planschemes andcentrally sponsored development projects), anduntied transfers. Finally, concessional
loans tofinance deficits areprovided (States areconstitutionally blocked from borrowing abroad).
Thetransfer system doesnotencourage theStates toaddress problems related tofiscal discipline, suchas
unsustainable indebtness and, asnoted above, weak taxcollection effort. Increased revenue efforts are
notawarded since thetransfer ofgrants toaspecific State isbased on,inter alia,the"gap" between the
State'srevenues andexpenditure. Periodic Central Government loan forgiveness andrefinancing,
without conditionality, have created theexpectation offuture debtrelief. Moreover, theCentre funds the
operating andthecapital costofnewstateprogrammes forthefirstfiveyears (typically 30percentgrant
and70percentloan), encouraging States, onthemargin, toundertake newprojects oflowpriority
and/or forwhich theymaynotbeabletofinance operation andmaintenance costs once theCentre has
withdrawn itsfunding.
Source: Chopra etal.(1995), India -Economic Reform andGrowth; World Bank (1995b), Economic
Developments inIndia -Achievements andChallenges; andWorld Bank (1996b), India -Country
Economic Memorandum, Five Years ofStabilization andReform: TheChallenges Ahead.India WT/TPR/S/33
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9. Monetary policy hasbeencentral tomacroeconomic stabilization inrecent years. TheReserve
Bank ofIndia (RBI), thecentral bank, hasrelied onbroad monetary targets, butintandem withthe
opening upoftheeconomy ithaspaidgreater attention toexchange andinterest ratedevelopments.
Theexchange rateisbased onafreely determined market rate; therealeffective exchange ratehas
shown some tendency toappreciate, reflecting theappreciation oftheU.S.dollar against other major
currenciesandawideningofthepartnercountryinflationdifferential,reversingitsdeclineintheprevious
years (Annex I.1).
(ii) Structural reforms
10. The1993Review noted thatimportant structural reforms hadtaken place since 1990/91. The
reform process hasdeepened since then, although atasomewhat uneven paceacross sectors. The
keyreforms since thelastReview arepresented inBoxI.2.
11. Therecord inthefinancial sector ismixed. Most interest rates havebeenderegulated and
barriers against entryofprivate banks havebeenrelaxed. However, thebanking sector isstilldominated
bypublic banks (almost 76percentofdeposits in1996/97), which aresubject tostrictrulesregarding
theirlending (40percentoftotallending to"priority sectors" and12percentforexports4).Inaddition,
alarge share ofbankdeposits must beinvested ingovernment securities although some reform has
taken place recently. Insurance companies, which areallpublicly owned, areobliged toinvest up
tothree quarters oftheirportfolio ingovernment-designated securities.5
12. Delays inestablishing anappropriate transparent framework withrespect tobidding procedures
anduncertainties incostrecovery andrisksharing, hasslowed theexpansion ofprivate sector
participation ininfrastructure sectors. Inparticular power, roads andports arebecoming severe
bottlenecks totrade andgrowth. Another areawhere progress haslagged expectations untilrecently
ispublic enterprise reform. ADisinvestment Commission wasestablished in1996tohasten theprocess
ofgovernment disinvestment inpublic sector enterprises. Ninewell-performing enterprises havebeen
granted greater autonomy (Chapter III(4)(iii)(d)).
13. Finally, reforms intheagricultural andlabour markets, which arecrucial forachieving
long-lasting andpositive effects oftrade liberalization, havenotyettaken place, although discussions
arecontinuing intripartite bodies foramending theIndustrial Disputes Act. According totheWorld
Bank6,theIndian labour market intheindustrial sector ischaracterized, especially inrelation toEast
Asian countries, byexceptional inflexibility. Although theincidence ofindustrial unrest, asshown
indayslistthrough strikes andlockouts, hasdeclined bynearly 60percentsince 1991. India'slegal
framework ontermination ofemployment orclosing ofanindustrial establishment remain complex
andmakesitdifficulteffectivelytorestrictivefirms.Anyamendmenttoindustrialrelationslawsrequires
extensive tripartite consultation. These labour market rigidities arelikely tobecome more costly, as
India integrates further intheworld economy, byhampering thedesired restructuring ofthedomestic
industry, andmaylimitIndia'sability toreach theGovernment 'sambitious targeted levelofforeign
direct investment.
4Foreign commercial banks aresubject toa20percentallocation to"priority sectors", reflecting theexclusion
oftheagricultural sector (sub-target lending of18percent).
5Seventy-five percentforthelifeinsurance sector and45percentforthegeneral insurance sector.
6World Bank (1996b) andselected dataoninternational comparison ispresented inBrahmbhatt et.al.(1996).WT/TPR/S/33 Trade Policy Review
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BoxI.2: Keystructural reforms since the1993 Trade Policy Review
-Trade reform .Thetrade liberalization initiated inJune 1991 hascontinued. Several stages of
reform have lifted alllicensing restrictions onimports oncapital goods, liberalized partially imports of
consumer goods, andreduced maximum tariffs from over 300percentto45percent(including a
surcharge of5percent) andthesimple average tariff to35percentin1997/98. Anumber ofgoods,
including consumer durables, have been transferred tothelistofproducts eligible forimport under the
special import licence (SIL) scheme while thelistoffreely imported products hasgradually expanded
(Chapter III(2)(vii)(c)).
-Exchange market .InMarch 1993 theexchange rates were unified, andtransactions onthetrade
account were freed from foreign exchange control. Following asubstantial liberalization ofexchange
restrictions oncurrent account transactions, India accepted inAugust 1994 theobligations of
Article VIII, Sections 2,3,and4oftheIMF. Automatic approval isgiven fortheuseofforeign
currency hedging instruments.
-Foreign investment .Theapproval process forforeign direct investment hasbeen streamlined andthe
Foreign Investment Promotion Council hasbeen created withtheobjective tofoster such investment.
Thenumber ofsectors eligible forautomatic approval forforeign equity participation hasincreased
(3industries forautomatic approval upto50percent, 48industries for51percentand9industries
for74percent asperJanuary 1997). Thelimit onholdings byindividual foreign institutional
investors (FIIs) inacompany hasbeen raised from 5percentto10percentofthecompany 'sshares,
while theaggregate limit hasbeen increased from 24percentto30percent. FIIshave alsosince
recently been allowed toinvest innon-listed companies.
-Financial market .Competition hasbeen increased byadmitting newprivate banks. Ceilings on
interest rates onbank deposits ofover oneyearmaturity were liberalized inApril 1996, while loans
byregional banks were liberalized inAugust 1996. Most interest rates arenowderegulated (except
those ondeposit oflessthanoneyear, small commercial bank loans, andexport loans). Automatic
Reserve Bank ofIndia (RBI) financing ofthedeficit through issue ofadhoctreasury billshasbeen
replaced withanewsystem oftemporary ways andmeans advances. Thecashreserve requirement on
bank deposits hasbeen eliminated. Primary dealer system hasbeen established forgovernment
securities. Screen-based trading systems have been introduced onmost stock exchanges. Acentral
share depository system isbeing setup.AnInsurance Regulation Authority hasbeen established.
-Domestic taxreform .Several measures have been taken tofurther broaden thetaxbase, and
improve taxadministration. TheMODVAT system hasbeen extended tothetextiles sector, sothat
thesystem nowcovers allmanufactured products. Theservices sector hasbeen included inthetax
base. Administration ofdirect taxhasbeen strengthened byincreased deduction atsource and
progressive computerization. Thecorporate taxhasprogressively been reduced to35percent
(48percentforforeign companies) in1997/98. Further, aminimum corporation taxtobeapplied to
corporate book profits (base-broadening measure) hasbeen introduced, while eliminating thecorporate
taxsurcharge (introduced at15percent). Regarding personal income tax,themaximum taxhasbeen
reduced from 40percent, which hasbeen theratesince 1991/92, to30percent in1997/98,
narrowing thegapbetween corporate andincome taxrates.
-Infrastructure &private sector participation .Inthetelecommunications sector, theGovernment
hasmade significant progress ininvolving theprivate sector insome ofthevalue-added services
(cellular mobile, andpaging). While thebasic services sub-sector issupported byavery liberal
policy, progress hasbeen slow inawarding licences toprivate operators. InMarch 1997, the
Telecom Regulatory Authority wasestablished. Involvement oftheprivate sector isalsoproceeding
inother infrastructure areas (such aspower generation, roads, airports, andports), although progress
hasbeen lingering andfewprivate investments have been brought toclosure.
14. Forexternal trade liberalization inagriculture toreach itsfullpotential, itisnecessary to
introduce concurrent liberalization ofinternal agricultural markets forinputs andoutputs.India WT/TPR/S/33
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(2) Major Features oftheIndian Economy
15. India, withapopulation of929million (mid-1995), hasoneofthelargest pools oftrained
technical labour intheworld.7Ithasacquired expertise inadvanced technology areas suchasnuclear
energy, satellites, software, deep-sea oildrilling, andoceanography. Theopposing sideofthestory
isthatthemajority ofthepopulation (about 70percent)owes itslivelihood toagriculture, which with
fishery, forestry andlogging contributes overonequarter ofGDP. Since twothirds ofthecultivated
landisstillnon-irrigated, mostagriculture continues todepend ontheannual monsoon. Thepoverty
reduction potential fromagriculture, asector which isheavily regulated, seems farfrom exhausted.
16. Agriculture inIndia accounts foralarge, butdeclining share ofeconomic activity. Itsshare
inGDPin1995/96 was27percent-including fishery, forestry andlogging -compared to33percent
adecade ago(Table I.2). However, mostofthisshiftaway fromapredominant agricultural basetook
place inthepre-adjustment period. India isthesecond largest world producer ofpaddy, accounting
for21percentofworld production overtheperiod 1991/92 to1993/94, aswellassugar cane, where
India accounted for22percentofworld production inthesame period.8
17. Asnoted, theagricultural sector hasnotbeenasignificant beneficiary oftheoverall reform
programme initiated in1991. Thesector has,however benefited indirectly from anumber of
non-agricultural reforms. Theexchange ratemovements since 1990/91, aswellasthereduction of
protection ofthemanufacturing sector, mayhavehelped toreduce thebiasagainst agriculture and
mayspurexport growth.9Theoutstanding reform agenda is,however, extensive andincludes:
(i)switching public expenditure fromnon-targeted subsidies togrowth-enhancing andtargeted safety
netprogrammes; and(ii)increased deregulation ofdomestic markets.
18. Theindustrialsector,includingmanufacturing;miningandquarrying;electricity,gasandwater;
andconstruction, hasperformed welloverthepastdecade. Itsshare ofGDP hasincreased from
25percentin1985/86to31percentin1995/96(TableI.2).Themanufacturingsector,whichaccounted
formorethantwothirds ofindustrial value added in1995/96, inparticular, performed wellwithgrowth
insectoral value added rising to13.6percentin1995/96, spurred bytheliberalization reforms. The
industrial production indexes fortransport equipment; machine tools; electric machinery; andbeverages
andtobacco, respectively, indicate increases ofsome 20percentin1995/96 (Table AI.1).
19. Theservices sector accounts foragrowing share ofGDP, rising from about 38percent
in1985/86 to42percentin1995/96 andproviding forabout 25percentoftotalemployment
in1995/96.10Overtheadjustment period since 1990/91, theincrease intheshare ofthesector largely
balanced thedecline intheagricultural sector. Thesector isdominated bywholesale andretail trade,
accounting forabout 30percentofthesector 'sgross value ofoutput (Table AI.2). Thefinancial
institutions sub-sector hasincreased substantially, from ashare of7percentin1980/81 toaround
16percentin1995/96.
7Brahmbhatt etal.(1996) compares thenumbers ofscientists, engineers andtechnicians inIndia withthose
inother countries (Table 2.5).
8Government ofIndia (1996b).
9World Bank (1996b).
10Theservices sector isdefined toinclude: wholesale andretail trade; restaurants andhotels; transport and
storage; communication; financial institutions; insurance; realestate; andcommunity, social andpersonal
services.WT/TPR/S/33 Trade Policy Review
Page 10
20. Transport services -including roads andports -appear tobebecoming severe constraints to
growth. Substantial under-investment, poormaintenance andlowoperating efficiency, incombination
withdelays inestablishing anappropriate transparent framework withrespect tobidding procedures,
anduncertainties incostrecovery andrisksharing, havecontributed tothese constraints. Efforts are
being made toincrease investment byprivate sector participation, through creating more transparent
guidelines andstandardizing biddocuments; theauthorities report an"encouraging" private sector
response. Intheareaoffinancial services aprocess ofliberalization hasbeeninitiated inthebanking
sector, while theinsurance sector isstillmonopolized bytheGovernment.
(3) Trade andForeign Investment Performance
(i) Composition ofmerchandise trade
21. Therapid change inthecomposition ofIndia'smerchandise exports, which tookplace in
the1980s slowed after 1991. Theshare ofagriculture, which fellfrom 33to19percent
between 1980/81 and1991/92, remained between 17and19percentthereafter rising to20percent
in1995/96. Theshare ofmining, bycontrast, fellfrom 8to5percentintheperiod. Exports of
manufactures, which hadrisenfrom59to72percentbetween 1980/81 and1991/92, averaged some
74percentsubsequently. Exports ofchemicals; diamonds; clothing; textile yarnandthread; office
equipment; andsoftware haveallshown consistently goodperformance. In1995/96, themajor export
products were, indescending order, pearls (15percentofmerchandise exports), diamonds etc.,
(15percent), clothing (14percent), textiles (13percent), andchemicals (8percent)(Chart I.3and
Table AI.3).
22. Ontheimport side,theshare ofmanufactures inmerchandise imports grew from39percent
in1980/81 to50percentin1991/92 and54percentin1995/96. Theshare ofmachinery andtransport
equipment hasgrown from14to21percentsince 1991/92. Petroleum anditsproducts remain major
import item(21percentofmerchandise imports in1995/96), buthavevaried withworld market prices
(Table AI.4).
(ii) Geographic pattern ofmerchandise trade
23. Themajor structural change inmerchandise exports thathastaken place inrecent years isthe
collapse ofmarkets ineastern Europe, especially theformer Soviet Union (Chart I.4andTable AI.5).
Merchandise exports toeastern Europe, including theformer Soviet Union, plunged from18percent
in1990/91 to4percentin1995/96. However, India hassuccessfully diversified itsexports tothe
United States andtheEastAsian countries overthesame period. EastAsiaincreased itsshare in
merchandise exports from20percentin1990/91 to25percentin1995/96 (equivalent toa122percent
increase incurrent U.S. dollars) andtheUnited States from 15percentin1990/91 to17percent
in1995/96 (equivalent toa108percentincrease incurrent U.S. dollars). India'ssingle largest
merchandise export market in1995/96 wastheEuropean Union (27percentoftotalmerchandise
exports), followed bytheUnited States (17percent) andJapan (7percent).
24. India'slargest merchandise import sources in1995/96 weretheEuropean Union (28percent
oftotalmerchandise imports) andtheUnited States (11percent) (Chart I.4andTable AI.6). The
share ofEastAsiahasincreased from 17percentin1990/91 to21percentin1995/96, witha
2.3percentage point increase inimports fromChina, equivalent tosome US$650 million growth over
theperiod. Aswithexports, theimports fromeastern European markets, including theformer Soviet
Union, havefallen since1990/91, albeit fromamuch lower levelcompared toexports (from 5percent
oftotalimports in1990/91 to4percentin1995/96). Theshare ofmerchandise imports fromMiddle
Eastern countries (13percentin1995/96) hasvaried withtheworld market price ofoil.India WT/TPR/S/33
Page 11
WT/TPR/S/33 Trade Policy Review
Page 12
India WT/TPR/S/33
Page 13
(iii) Trade inservices
25. India'stradeinservices hasincreased butacomplete analysis isnotpossible because ofshortage
ofdata. Balance-of-payments dataindicate thatreceipts ofnon-factor services increased from
US$4.6 billion (equivalent to1.5percentofGDP) in1990/91 toUS$9.2 billion (2.6percentofGDP)
in1996/97. Tourism accounted forabout 40percentoftotalreceipts in1995/96. During the1990s,
India hasbeen anetexporter ofnon-factor services (annual average of0.3percentofGDP
between 1990/91 and1996/97). Interest payments, amounting tosome US$4.8 billion (equivalent
to1.4percentofGDP) in1996/97, heavily dominate payments offactor services; in1996/97 the
netfactor income recorded adeficit ofabout US$5 billion.
26. Dataontrade inservices byindividual trading partners arenotavailable.
(iv) Foreign direct investment andportfolio investment11
27. Thefinancing ofthebalance ofpayments hasmoved awayfromdebtcreating features toforeign
direct investment andportfolio investment. Thesurge inforeign inflows since 1990/91 hasbeen
extraordinary. Netforeign direct investment hasincreased from aninsignificant amount in1990/91
toabout US$2.7 billion (or0.7percentofGDP) in1996/97, while portfolio investment hasincreased
from zerotoUS$2.8 billion overthesame period (Table I.3).
28. Thelevelofforeign direct investment bysource hasfluctuated inrecent years. However, over
theperiod 1992/93 to1995/96, theUnited States, United Kingdom, andJapan werethemajor sources
forforeign direct investment, respectively, accounting for18,10and7percentoftotalinflows,
excluding non-resident Indians. Foreign investment inthefinancial sector hasincreased inrecent years
andemerged asthedominant sector in1995/96 (19percentoftotalforeign direct investment). Over
thesameperiod, engineering hasdecreased itsshare to18percentin1995/96. Electronics andelectrical
equipment; chemicals andallied products; andservices havealsoattracted substantial foreign direct
investment (Table I.3).
29. Investments undertaken byforeign institutional investors (FIIs) haveemerged asthemain
component ofportfolio investment (67percentin1996/97). Theother major component ofportfolio
investmentisEuro-issues/GlobalDepositoryReceipts(GDRs).Thebulkofissuesoccurredinearly1994
asthestock market recovered, while 1995/96 showed aslump ininflows onaccount ofGDRs ofthe
Indian corporates inEuromarkets.12
30. Theliberalization measures inparticular, butalsoreasonably welldeveloped stock markets
andthepotential forgrowth inalarge domestic market withinexpensive labour, havecontributed to
theincreased inflows inrecent years. However, inlightofthedifficulties being encountered byprivately
financed infrastructure projects, itmaybeunrealistic toexpect thisgrowth pattern tocontinue.
11Thissection describes therecent trend inforeign direct investment andportfolio. Theactual procedures
oftheforeign investment regime arepresented inChapter II.
12Since September 1992, registered foreign institutional investors (FIIs) havebeenallowed topurchase equity
anddebtsecurities directly onlocal markets. Asingle FIImayholdupto10percentofacompany 'sissued
share capital, while allFIIstogether mayholdupto30percentofacompany 'scapital. Since February 1992,
Indian firms ingood standing have been allowed toraise funds through equity andconvertible bond issues in
Euromarkets (Chapter II).WT/TPR/S/33 Trade Policy Review
Page 14
Table I.3
Foreign investment bysource andactivity, 1990-97
1990/91 1992/93 1993/94 1994/95 1995/96 1996/97a
Foreign direct investment, net(US$ million) 150 341 566 1,314 2,133 2,696
Portfolio, net(US$ million)
ofwhich Foreign institutional investors
Euro-equitiesb
Otherc8
0
0
892
1
86
53,649
1,665
1,602
3823,824
1,503
2,082
2392,748
2,009
683
502,805
1,926
918
20
Total (US$ million) 68 433 4,235 5,138 4,881 5,560
Total aspercentofGDP 0.0 0.2 1.6 1.7 1.5 1.6
Foreign direct investment bycountry
(percentoftotal)d1992/93-1995/96e1992/93 1993/94 1994/95 1995/96 1996/97
United States
Germany
Hong Kong
United Kingdom
France
Japan
Singapore
Netherlands
Switzerland
Others17.5
6.5
4.6
9.6
3.3
7.3
3.3
5.4
3.9
38.47.7
7.6
1.4
2.4
3.3
9.2
1.0
7.5
12.6
47.226.8
9.5
1.6
17.4
2.8
10.0
2.7
12.6
6.1
10.523.3
4.0
2.4
16.5
1.6
10.9
2.8
5.1
3.0
30.413.6
7.0
6.9
4.9
4.4
4.3
4.1
3.5
2.3
48.927.8
4.3
1.4
4.2
4.6
4.1
0.8
2.9
0.4
49.5
Foreign direct investment byactivity (per
centoftotal)d
Finance
Engineering
Electronics &electrical equipments
Chemicals &allied products
Services
Food &dairy products
Pharmaceuticals
Computers
Domestic appliances
Others14.3
16.6
9.4
11.9
7.4
7.3
4.0
2.7
4.2
22.31.3
24.9
11.7
16.8
0.9
10.0
1.1
2.9
5.7
24.711.4
8.9
15.5
10.2
5.5
11.8
13.4
2.1
0.6
20.611.2
15.1
6.5
16.2
10.7
7.0
1.2
1.2
12.4
18.619.0
17.8
9.1
8.9
7.1
6.0
3.9
3.7
0.0
24.5...
...
...
...
...
...
...
...
...
...
... Notavailable.
a Estimated data.
b Represents theamount repatriated toIndia bythecorporates from theirGlobal Depositary Receipts (GDRs).
c Including off-shore andothers.
d Excluding direct investment bynon-resident Indians routed through theReserve Bank ofIndia.
e Average fortheperiod indicated.
Note: Year beginning 1April.
Source: WTO Secretariat, based ondatasupplied bytheGovernment ofIndia; Government ofIndia (1997c), Economic Survey 1996/97;
andReserve Bank ofIndia (1996), Annual Report 1995/96.
31. Worth noting istheincreased discrepancy inactual andapproved foreign direct investment.
From August 1991 toJanuary 1995, about 22percentofapproved proposals weretransformed into
actual flows, while during the1970s andthe1980s theratiowassignificantly higher. Asnoted by
OECD (1996), oneexplanation maybethatalthough many sectors areformally open toforeign
investment, sector policies attheState levelandtheregulatory framework arenotyetinaposition
tosupporttheincreasedapprovalsofforeigndirectinvestment.Theauthoritiessuggestthatanalternative
reason maybethat,incertain sectors withlonggestation periods, inflows maytaketimetomaterialize,
given thatapprovals donotentail anobligation byinvestors.India WT/TPR/S/33
Page 15
(v) Intra-industry trade and"tariff-jumping" foreign direct investment
32. Intra-industry trade (IIT)refers totrade (imports andexports) ofgoods inthesame industrial
category. Thedegree ofIndia'sIITwiththerestoftheworld hasincreased substantially overthe
pastdecade (byalmost 100percentsince 1980/81), although itstagnated inthe1990s (Table I.4).
Asnoted inthelastreview, thisisduetotheincreased importance ofmanufactured products relative
toagricultureinIndia'stradecomposition.Manufacturedproducts,whichtendtobemoredifferentiated,
generally havehigher levels ofIIT. Moreover, intra-industry trade attheindustry level ingeneral
hasgrown. TheIITvalues for34industries arepresented inTables AI.7, AI.8andAI.9.
Table I.4
Intra-industry trade byIndia 1980/81, 1990/91, and1995/96a
1980/81 1990/91 1995/96
With theworld 13.8 28.0 27.8
With theUnited States 4.8 14.0 18.9
With theEuropean Union 11.8 21.2 24.5
a Intra-industry trade measures theextent towhich trade occurs within, asagainst across industries. Ifalltraded goods inasector
areeither onlyexported oronlyimported, theintra-industry traderatiowould bezero. If,forallcommodities inasector, exports
equal imports, theintra-industry trade ratiois100percent.
Note: Year beginning 1April.
Source: Calculations byWTO Secretariat using 4-digit SITC Rev.1 data.
33. India'sIITwithitsmain sources offoreign direct investment, namely theUnited States and
theEuropean Union, arelower thanwiththerestoftheworld, although thelevels haveincreased
markedly inbothcases. Thisisparticularly truefortheUnited States, withanIITvalue ofonly
68percentoftheIITwiththerestoftheworld in1994/95. These results suggest thatinIndia foreign
direct investment hasactedasasubstitute fortrade, rather thanacomplement. Therelatively liberalized
foreign direct investment climate incombination withawidespread application ofprohibitive licensing
requirements onimports arelikely tobecontributing factors. Thehypothesis issupported by
Brahmbhattetal.(1996),whoconcludethatIndia'srelativehightradeprotectionislikelytohavereduced
thepotential benefits offoreign direct investment bydirecting investment intoglobally uncompetitive
import-substituting markets, aswellasreducing competitive pressures onforeign companies totransfer
theirtechnology toIndian companies.13Trade liberalization could beexpected toreverse thistendency
andincrease India'slevelofintra-industry trade.
13Brahmbhatt etal.(1996) notes thattrade restrictions mayattract certain "tariff-jumping" foreign direct
investments and"thatwithin thesetofinward oriented economies thescale economies offered byalarge domestic
market maywellattract ahigher rateofdomestic market oriented foreign direct investment ....Thiswould
beparticularly relevant forIndia which combines what arestillamong thehighest level ofprotection andthe
second largest GDP among developing countries".WT/TPR/S/33 Trade Policy Review
Page 16
(4) Outlook
34. Anambitious reform agenda wassetoutbytheGovernment initsCommon Minimum Program
(CMP), unveiled inJune1996. Several steps havebeentaken inthisdirection, most recently in
the1997/98 Budget. TheCMP emphasizes:
-fiscal adjustment through revenue enhancing andexpenditure reducing reforms;
-increased fiscal devolution offinancial powers totheStates;
-attracting anannual foreign direct investment inflow ofUS$10 billion through further easing
andgreater transparency oftheregulations onforeign investment;
-increased investment ininfrastructure withheavy reliance onprivate sector participation;
-greater focus onsocial sectors with theobjective ofachieving fullliteracy bythe
year2005; and
-agricultural reforms withfocus onincreasing ruralcredit andinvestment while intandem
reviewing allcontrols andregulations.
35. Thereform agenda, which wastranslated intomedium-term macroeconomic projections in
theNinth FiveYearPlan(1997/98 through 2001/02), implies strong adjustment (Table I.5).Theplan
aimsatanannual realGDP growth of7percent,withaspeedy recovery ininvestment rate(increase
from27.5percentofGDPin1996/97 to28.2percent), increased productivity (reflected byanICOR
assumption of4.114andanambitious annual target offoreign direct investment inflow ofUS$10 billion
(compared withUS$2.7 billion in1996/97). Theprojections hinge inparticular onarecovery in
gross domestic savings (26.2 percentofGDP from 25.8percentofGDP), bothprivate andpublic,
supported bystrong fiscal adjustment (central government deficit of4.5percentofGDP compared
with5.0percentofGDP in1996/97).
36. Thereform programme, withveryambitious targets, suchassustained annual growth rates
averaging 7percent, require some hardpolitical decisions. Inparticular, onthestructural front,
infrastructure hasbecome aconstraint totradeandgrowth. Theneeds areenormous andthedisciplined
fiscal stance implies thatpublic finance would notbelargely available. Thus further liberalization
oftheforeign direct investment regime would benecessary, especially inareassuchasfinancial services
(including insurance), power andtransport. Moreover, toachieve theCentral Government 'sfiscal
deficit target of4.5percentofGDP, acomprehensive reform ofthetaxsystem andimprovement
ofthefinances oftheState andpublic enterprises (including moving forward onthedivestment
programme) would berequired while, overthemedium term, thefiscal relationship between theCentre
andStates would needtobeaddressed.
14TheICORiscalculatedbydividingacountry'sinvestmentratebyitsrealGDPgrowthrate.Muhleisen(1997)
estimates India'sICOR at4.65 fortheperiod 1991-95.India WT/TPR/S/33
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Table I.5
Government 'smacroeconomic projections 2001/02
1996/97a1997/98 -
2001/2002b
Output andprices (percent)
RealGDP growth rate,factor cost
Inflation (wholesale price, end-of-period)6.5
7.37.0
7.0
Investment andsaving (percentofGDP)
Gross domestic saving
Gross domestic investment
Gross private investment25.8
27.5
8.626.2
28.2
18.5
Government budget (percentofGDP)
Central Government balance
Overall public sector balance-5.0
-8.5-4.5
-7.9
Money andcredit sector (percentage change)
Broad money (M3)
Domestic credit15.6
9.915.0
12.5
External sector
Current account/GDP (percent)
Overall balance ofpayments (US$ billion)
International reserves (months ofmerchandise imports)-1.1
6.9
6.6-2.4
9.3
5.5
a Estimated data.
b Annual average.
Note: Year beginning 1April.
Source: Government ofIndia.WT/TPR/S/33 Trade Policy Review
Page 18
Annex I.1:Exchange ratearrangements
(1) Foreign exchange system
37. TheGovernment ofIndia isresponsible forexchange ratepolicy under theReserve Bank of
India Act,1934. TheReserve Bank ofIndia (RBI) implements thepolicy inconsultation withthe
Government. Theexchange rateoftherupee isdetermined bysupply anddemand intheinterbank
market; however, tolevelexcessive anderratic movements aswellastooffset seasonal fluctuations
intheexchange rate,theRBImayintervene withtheU.S.dollar asthechosen currency. TheRBI
allows theexchange ratetomove within target bands. Thebands, which arenotmade public, are
adjusted from timetotimereflecting inflation differentials withtrading partners.
38. Theexchangeratesystemfortherupee,hasundergonethreemajorchangessincethemid-1970's.
InMarch 1992 thefixed official rate,which wassetbytheRBIonthebasis ofaweighted basket of
currencies ofIndia'smajor trading partners, wasabolished infavour oftheLiberalized Exchange Rate
Management System (LERMS). Thiswasanexplicit dualexchange ratesystem consisting ofa"free"
market rateandanofficial ratesetbytheRBIinU.S.dollars. Import transactions undertaken through
theofficial rateincluded crude anddiesel oil,kerosene, certain fertilizers, fertilizer rawmaterials,
life-saving drugs, andimports bygovernment departments, while allother imports wereundertaken
atthefreemarket rate. Forty percentofcurrent account receipts, fromexports andinvisibles, were
required tobeconverted torupees attheofficial rate. Allcapital account transactions, except IMF
transactions, were undertaken atthefree-market rate.
39. Theexchange rateswereunified inMarch 1993. Atthattimetherupee'svalue wassetclose
totheprevious freemarket rateofabout Rs31perU.S.dollar. Therealeffective exchange ratehas
recently shown some tendency toappreciate, reflecting theappreciation oftheU.S.dollar against major
currencies andawidening ofthepartner country inflation differential.
(2) Foreign exchange controls
40. Foreign exchange controls areadministered bytheRBI,inconsultation withtheMinistry of
Finance, inaccordance withtheForeign Exchange Regulation Act,1973, asamended periodically.
Current account transactions
41. When exchange rateswereunified inMarch 1993, transactions onthetradeaccount werefreed
from foreign exchange control. InMarch 1994, India tookadditional measures toliberalize onthe
current account. Limits oninvisible transactions suchasforeign travel, payments forservices, and
donations, wereindicative, andforeign exchange wasmade available without limitforallbonafide
current transactions. Thelimitonrepatriation ofinterest ononeofthethree types ofnon-residents
deposits (NRNR) wasremoved. Development ofaninterbank foreign exchange market wasallowed,
including forward trading toprovide exporters andimporters withthepossibility tohedge foreign
currency exposures.
42. Following theliberalization ofthesecurrent account transactions, Indiaaccepted inAugust 1994
theobligations ofArticle VIII, Sections 2,3and4oftheIMFArticles ofAgreement. Although some
additional steps toward fullcurrent account convertibility have been taken since then, exchange
restrictions aremaintained inthefollowing areas: (i)theIndo-Russian debtagreement (which was
signed prior totheacceptance ofArticle VIIIobligations); (ii)existing balances under bilateral
agreements relating totrade transactions alsosigned withsome eastern European countries prior toIndia WT/TPR/S/33
Page 19
theacceptance ofArticle VIIIobligations, and(iii)repatriation ofdividend income onforeign investment
relating totrade transactions in22industries intheconsumer goods sector.
Capital account transactions
43. Several measures havebeentaken toliberalize thecapital account. Asdiscussed indetail in
Chapter II,theRBIgrants, onanautomatic approval basis, foreign direct investment (FDI) upto
51percentequity in48priority sectors, andupto74percentinnineadditional sectors. Moreover,
non-resident Indians (NRIs) oroverseas corporate bodies predominantly owned byNRIs caninvest
upto100percentofequity inthese industries. Foreign institutional investors (FIIs) areallowed to
invest inlisted securities inprimary andsecondary markets, andmore recently innon-listed companies.
Indian companies withagood standing areallowed toraise funds through equity issues (Global
Depository Receipts, GDRs) andforeign currency convertible bonds (FCCBs) issued inEuromarkets.
Finally, short-term credits withamaturity ofuptooneyearareallowed fortrade, while financing
foruptothree years maturity maybeapproved bytheRBIonacase-by-case basis.
44. Thecapital account remains somewhat restricted withlimitations applying toFDI,commercial
borrowing, andcapital outflows byresidents. Thekeyremaining restrictions oncapital account
transactions areasfollows:15
-FDIinexcess of51percentequity inindustries notontheautomatic approval list
(or74percentequityinthecaseofnineotherindustries)requiresclearancefromtheForeign
Investment Promotion Board (FIPB) onacase-by-case basis;
-dividend remittance onincome from FDIin22consumer-goods industries isrequired to
bebalanced byexport proceeds overaperiod ofseven years from thecommencement of
production;
-outward FDIbyresidents isrestricted;
-FIIsarenotpermitted toinvest intreasury billsorlonger termgovernment dated securities;
-FIIsarenotpermitted access totheforward foreign exchange market;
-individual investments undertaken byanFIIislimited to10percentwhile theaggregate
limitbyallFIIsinanycompany maynotexceed 30percent;
-residents arenotpermitted toundertake portfolio investments abroad fromdomestic income;
-nomore than25percentofGDRs canbeusedforgeneral corporate restructuring;
-issue ofmoney market instruments abroad isnotpermitted;
-non-residents arenotpermitted toissue securities inthelocalmarket; and
-approval fromtheMinistry ofFinance isrequired forallexternal commercial borrowing,
subject toanindicative annual ceiling (US$7.9 billion in1996/97), withpriority given to
infrastructure andexport-oriented sectors. Nosuchceiling has,however, beenindicated
for1997/98.
45. InJune1997, theCommittee onCapital Account Convertibility, setupbytheRBI,presented
areport ontheroadmap, including theeconomic conditions thatneedtobefulfilled ateachmilestone,
forachieving fullcapital account convertibility. Theproposed three-year timetable emphasizes the
needtocarefully sequence theliberalization measures withfiscal andfinancial reforms.
15IMF (1996b).