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the substantf%l impact of high investment cost4 policies on the l1vel cf protection required to ensure the profitability of industrial investmew;ts. Furthermore, in countries or cases where investsuerc costs are nor distorted upwards but where other policies (protection, competition) permit the financial viability of plants below Minimum Economic Scales (MES), the unit investment costs will be substantially higher than those of the internationally efficient reference comparator (cf. footnote 5). In such cases, a similar analysis with the price factor NPCk replaced by the quantity factor "x" (cf. Annex 1) would permit to separate the effect of uneconomic capacity choices and underutilization (CEPR) from that of other operational x-inefficiencies (NEPR). Also, distorted investment costs can erect barriers on new entry and competition against incumbents. In all these cases, the interpretations and policy conclusions to be derived from EPR analyses should establish first whether the concept of Corrected Protection is significantly relevant to the case, and if so separate CEPR protection from NEPR protection.

# A case study: India

17. Some 60 industrial projects (mostly in the engineering and chemical industries) financed in 1988 and 1989 by India's Development Finance Institutions were analyzed in preparation for the World Bank's review of the trade regime of India ([1] and [6j). The available data were extracted from project appraisal reports prepared by Indian DFIs which reported systematically the international price equivalents of output, input and investment domestic prices for the standard computation of Economic Internal Rates of Return (ERRs). Notwithstanding the limitations of the available data, the analysis provided valuable indications of the incentives and disincentives resulting from the protection structure as they are perceived ex-ant by project promoters and financiers in India. The following section summarizes the quantitative results of the analysis and underlines the significance of corrected protection under the set of values taken in India by the principal parameters of the protection structure.

18. In India, the factor representing the ratio of investment costs (per unit of output) in domestic to world prices is substantially above 1 for several reasons. First, collected teriff duties on imported capital goods are high, averaging some 70% over the sample (cf. [6]). Only electronics industry machinery enioys a lower tariff duty of 35%, while other industries in the sample pay an average tariff duty of 80% on their imported equipment. Secondly, locally procured capital goods, generally representing a large share of total equipment, carry purchase prices which average 40% above international prices. Thirdly, other goods and materials used in investment projects, cement especially, are charged substantial excise and other taxes which increase further the financial costs of investment above international costs.9 19. As per its objectives, the India review focussed exclusively on the effect of protection and pricing policies, especially for capital goods, on the competitiveness and the structure of production costs in industry. For this reason, the analysis considered only the price factor NPCk in the assessment and determination of effective protection and of the associated CEPRs, leaving aside the quantity factors due to x-inefficiencies in the selection and operations of project capacities. The estimate of NPCk is the 9 Another reason, relevant essentially to the quantity factor "x", is that the overall level of protection has encouraged the entry of many projects with uneconomic plant sizes below **MES** and **low** utilization. Cf. para. 29.