Recent Economic Developments

This paper describes economic developments in India during the 1990s. Since late 1993/94, economic activity has expanded rapidly. Fiscal policy was relaxed substantially in 1993/94, a move that was only partly reversed in 1994/95. Like some other emerging markets, India experienced a surge of capital inflows, which contributed to a loosening of monetary conditions, notwithstanding efforts by the Reserve Bank to tighten monetary policy. With increased confidence and greater access to foreign financing, private investment has increased sharply. On the structural side, the authorities have continued to press ahead with reforms in a number of areas.


This paper describes economic developments in India during the 1990s. Since late 1993/94, economic activity has expanded rapidly. Fiscal policy was relaxed substantially in 1993/94, a move that was only partly reversed in 1994/95. Like some other emerging markets, India experienced a surge of capital inflows, which contributed to a loosening of monetary conditions, notwithstanding efforts by the Reserve Bank to tighten monetary policy. With increased confidence and greater access to foreign financing, private investment has increased sharply. On the structural side, the authorities have continued to press ahead with reforms in a number of areas.

I. Introduction

Facing a severe balance of payments crisis in 1990/91, the Indian authorities launched a wide-ranging adjustment and reform program based on a significant fiscal consolidation, a major devaluation, and the elimination of most industrial licensing requirements. In terms of stabilization, the initial results were broadly favorable: the external position strengthened while inflation was brought down. Moreover, the impact of the stabilization measures on output was fairly modest.

Since late 1993/94, economic activity has expanded rapidly. Three factors contributed to the pickup in growth. First, fiscal policy was relaxed substantially in 1993/94, a move that was only partly reversed in 1994/95. Second, like some other emerging markets, India experienced a surge of capital inflows which contributed to a loosening of monetary conditions, notwithstanding efforts by the Reserve Bank to tighten monetary policy. Third, with increased confidence and greater access to foreign financing, private investment has increased sharply. Against this background, inflationary pressures have re-emerged.

On the structural side, the authorities have continued to press ahead with reforms in a number of areas: tariffs have been lowered; customs and excise taxes have been streamlined; financial markets have been strengthened; progress has been made toward setting up a framework for private participation in infrastructure; and most exchange restrictions have been removed, paving the way for India’s acceptance of Article VIII. However, less has been achieved in a number of important areas, such as restructuring of public enterprises, reform of exit policies, and liberalization of the agricultural sector.

The rest of this paper considers these developments in greater detail. It also provides annexes on Fund relations, relations with the World Bank and Asian Development Bank, and statistical issues, as well as a comprehensive set of statistical tables. Two companion papers, to be issued separately, provide further background information. The first includes a review of India’s experience with capital inflows; an assessment of the medium-term fiscal and external outlook; an analysis of tax reform at the state level; and studies of monetary policy autonomy and the demand for money in India. The second background paper focuses on the growth and investment response to India’s adjustment program and the unfinished agenda for reform.

II. Economic Activity and Price Developments

Following the stabilization measures taken in response to the 1990/91 crisis, economic growth slowed to 0.9 percent in 1991/92, before rebounding to 4.3 percent in both 1992/93 and 1993/94 (Table 1 and Chart 1). However, industrial growth remained sluggish, partly due to continued stagnation of the capital goods sector associated with the compression of public infrastructure spending and the slow recovery of private investment.

Table 1.

India: Growth Rates of GDP by Sector


Source: Government of India. Central Statistical Organization.


Citation: IMF Staff Country Reports 1995, 086; 10.5089/9781451818512.002.A001

Source: Data provided by the Indian authorities; and staff estimates and projections.1/ Data are for April-March fiscal years2/ Period average.3/ Central Government, including the Oil Coordination Committee balance.

In 1994/95, economic activity picked up significantly and real GDP increased by an estimated 5.3 percent. The main factor contributing to the turnaround was the revival of the industrial sector, which grew by about 8 percent (Chart 2). Industrial growth was broad-based, with the capital goods and consumer durable sectors registering particularly strong growth (20 percent and 11 percent, respectively). In the agricultural sector, a seventh successive good monsoon boosted output by 2.4 percent; foodgrain production rose to a record 185 million tons. Export growth has remained buoyant, and the pickup in the capital goods sector and strong imports of machinery and equipment suggest that investment has made a strong recovery.



Citation: IMF Staff Country Reports 1995, 086; 10.5089/9781451818512.002.A001

Sources: Data provided by the Indian authorities; and staff estimates.

After declining steadily for two years, inflation began to rise in mid-1993. The 12-month increase in wholesale prices, which had fallen to 7 percent in 1992/93, rose to almost 11 percent by the end of 1993/94. Wholesale price inflation remained in double digits for most of 1994/95, with price pressures being felt across the board (Chart 3). The strengthening of domestic demand, the loose monetary conditions associated with a surge in capital inflows, and supply bottlenecks all contributed to price pressures. The tightening of financial conditions since October 1994 and selective import liberalization to address particular shortages (e.g., sugar, edible oils, cotton), helped to bring down the inflation rate to about 9 percent at end-May. One factor behind the recent reduction is the fact that grain issue prices and other administered prices have not been adjusted since January 1994. 2/



Citation: IMF Staff Country Reports 1995, 086; 10.5089/9781451818512.002.A001

Source: Indian authorities.

Following a marked contraction associated with the stabilization measures, domestic investment continued to decline in 1993/94; gross private capital formation fell to about 12 1/2 percent of GDP from 14 1/2 percent in 1992/93 (Table 2). Although comprehensive national accounts data are not available, there are signs of a recovery of private investment in 1994/95. Mobilization of funds on domestic and international financial markets has increased substantially and a robust industrial recovery--especially for capital goods--has been underway for the last year. After declining for two consecutive years, private savings rose from 18.5 percent of GDP in 1992/93 to 20 percent in 1993/94.3/ However, with the marked increase in the current deficit of the central government, public savings fell sharply in 1993/94 and total domestic savings increased only marginally. As the external current account balance is estimated to have remained broadly unchanged in 1994/95, the surge in private investment has likely been accompanied by an increase in domestic savings.

Table 2.

India: Saving and Investment

(As percent of GDP at current market prices)

Source: Central Statistical Organization.

III. Fiscal Developments

Reversing the marked improvement of the previous two years, the central government’s fiscal deficit increased by 2 percent of GDP in 1993/94 to 7.7 percent of GDP (Table 3). Both a shortfall in revenue (1.7 percent of GDP) and expenditure overruns (1.3 percent of GDP) contributed to the overshooting of the deficit target of 4.7 percent of GDP. The deterioration in revenues was due to a slump in customs collections (reflecting stagnant imports and the larger-than-anticipated effects of tariff cuts) as well as a shortfall in excise collections owing to the slow recovery in the manufacturing sector. Moreover, divestment occurred late in the year, and receipts were booked in the next financial year. The overrun in expenditures stemmed from a number of factors: delays in adjusting administered prices of food and fertilizers (leading to a higher subsidy bill by 1/2 percentage point of GDP); larger plan outlays; higher defense expenditures as a result of the effect of exchange rate unification on military imports; and increased outlays on various short-term employment-creation schemes.

Table 3.

India: Central Government Operations, 1990/91 - 1995/96

Sources: Data provided by the Indian authorities; and staff estimates.

Overall deficit including Oil Coordination Committee balance.

Includes debt service on military-related debt, but excludes defense pensions.

Adjusted overall deficit excluding interest payments.

The central government budget for 1994/95 called for a reduction in the fiscal deficit to 6 percent of GDP. The budget included important reforms to rationalize and streamline customs and, especially, excise taxation. The number of excise rates was halved, many concessions and end-use exemptions were eliminated, and the scope of the MODVAT was extended to capital goods and petroleum inputs. Also, for the first time, a number of services (telecom, non-life insurance and stock brokers) were brought into the tax net. With the tax package expected to be revenue neutral in the short term, the deficit reduction was to be achieved through a cutback in noninterest current spending, as well as lower budgetary support for states’ plans.

In the event, the fiscal deficit of the central government in 1994/95 was 6.7 percent of GDP. The major overrun was in net lending to the states as a result of automatic onlending of the proceeds of small savings schemes (0.5 percent of GDP). 5/ In addition, there were overruns in fertilizer and food subsidies (0.3 percent of GDP), other current expenditure (0.2 percent of GDP), and central assistance for state plans (0.1 percent of GDP). 6/ However, tax revenues were 0.3 percent of GDP higher than budgeted. Revenues from most direct and indirect taxes were buoyant as a result of the strong industrial recovery, higher imports, rising corporate profits, and improvements in tax collection. The central government kept automatic financing of the deficit from the RBI via ad hoc Treasury bills well below the agreed limit of Rs 60 billion, relying instead on borrowing from the market. 7/

The overall public sector deficit increased to 11.0 percent of GDP in 1993/94, mainly because of the large slippage at the central level (Table 4). In 1994/95, the overall deficit is estimated to have declined to 10.5 percent of GDP. The reduction in the central government deficit was partly offset by an increase in the states’ deficit to an estimated 4 percent of GDP. This marks a significant worsening in the financial situation of the states, whose deficit had remained steady at about 3 percent of GDP since 1991/92. The increase in the states’ deficit was mainly due to higher non-development expenditure, financed in part by the increase in small savings receipts. States’ own tax collections were budgeted to rise from 5.7 percent of GDP to 5.9 percent, but this was more than offset by a 0.5 percentage point of GDP reduction in grants from the center. 8/ The deficit of the central public enterprises was reduced to 2.7 percent of GDP from 3.2 percent in 1993/94, continuing the trend of recent years.

The budget for 1995/96 envisages a reduction in the central government deficit to 5.5 percent of GDP; the primary deficit would fall to 0.5 percent of GDP from 1.9 percent last year. As total revenue is budgeted to remain unchanged as a proportion of GDP, the proposed fiscal correction comes entirely from restraining expenditures.

Table 4.

Consolidated Public Sector Operations 1990/91-1995/96 1/

(In percent of GDP)

Sources: Data provided by the Indian authorities; and staff estimates and projections.

The consolidated public sector comprises the operations of the central government, the state governments and union territories, and the central public enterprises. The overall deficit is less than the sum of its components due to intrasector transfers and loans.

The figures for the deficit of the states’ and union territories shown in the columns for the 1994/95 revised estimate and the 1995/96 budget estimate are staff projections.

Further progress was made in this budget toward lowering and simplifying excise tax rates. Duties were reduced for several important commodities, including cement, plastics, capital goods components and aluminum. The policy of reducing import duty rates was also continued with a cut in the peak customs duty to 50 percent from 65 percent. The structure of direct taxation remains largely unchanged, but the exemption for personal income tax was increased to Rs 40,000 from Rs 35,000, and the exemption for investment income was increased to Rs 13,000 from Rs 10,000. The impact of these measures on revenues is projected to be offset by improved administration and compliance, coupled with an expansion in the tax net (e.g., through tax deduction at source for professionals). Divestment receipts are budgeted at 0.7 percent of GDP in 1995/96, almost double last year’s level after excluding proceeds from 1993/94 that were booked in 1994/95.

With interest payments rising relative to GDP, non-interest expenditure is budgeted to decline significantly. Spending on defense, subsidies, grants to states, the central plan, and central assistance for state plans are to be reduced by nearly 1 percent of GDP. In addition, loans to states are projected to decline by 0.5 percent of GDP as the mobilization of small savings is reduced from last year’s exceptional level. Spending on education, disease control, and family welfare programs are to be given higher priority.

Credit programs for rural infrastructure, small scale and village industries, enterprises in backward regions, and disadvantaged groups are to be expanded. These programs will be financed largely through funds from commercial banks and financial institutions, some under the existing priority lending scheme. A social assistance program for the poorest, including old age pensions, maternity benefits, subsidized life insurance, lump-sum survivor benefits, and mid-day meals for school children was also announced. For many of these schemes, details on costs, funding, and administration have yet to be worked out.

The Tenth Finance Commission, whose report was presented to Parliament in March 1995, has recommended that the states’ share of revenues collected by the central government be set at a uniform rate of 29 percent, and frozen for 15 years. 9/ Customs duties, corporate tax, and services tax would be included in the divisible pool along with excise duties and personal income tax. These changes would require constitutional amendments that could take time for passage through Parliament. Pending such action, the Commission has recommended that for 1995/96 the existing formula for sharing income tax and excise duties be modified, with the states’ share in excise duties raised to 47.5 percent from 45 percent and their share in income tax reduced to 77.5 percent from 85 percent. These changes have been reflected in the 1995/96 budget. To address the problem of the rising debt burden of states, the Commission has recommended that states’ divestment receipts used for retiring debt should be matched by the center’s writing off an equivalent amount of debt owed to it by that state. Additional grant financing has also been recommended for states with high “fiscal stress” (Orissa, Bihar, and Uttar Pradesh), special category states 10/ and those with “debt problems warranting special attention”.

IV. Monetary Developments and Financial Sector Reforms

There was a sharp increase in liquidity in 1993/94 stemming from a surge in foreign private capital inflows. Reserve money rose by 25 percent as the RBI intervened heavily in the market to prevent an appreciation of the rupee (Chart 4). Part of the rise in net foreign assets was offset by open market operations totalling Rs 90 billion; notwithstanding the large fiscal slippage, the increase in net credit to Government from the RBI for the year as a whole was negligible. Broad money nevertheless grew by 18.2 percent (compared with an initial target of 12 percent). M3 growth would have been even higher were it not for a rise in the public’s holdings of cash and the slow expansion of bank credit (Table 5). Nonfood credit growth was dampened by supply factors (low-risk government paper was made more attractive by increased yields and the new provisioning norms) as well as demand influences (high quality borrowers shifted to the commercial paper market as a result of the high cost of intermediation through the banking system).



Citation: IMF Staff Country Reports 1995, 086; 10.5089/9781451818512.002.A001

Source: Data provided by the Indian authorities.1/ 5-10 year government, bond yield (except 3-year bond auctioned in December 1994).2/ Automatic component of Reserve Bank of India credit to Government.
Table 5.

India: Monetary Developments, 1991/92 - 1994/95

Sources: Data provided by the Indian authorities; and staff projections.

Broad money minus NRI deposits and India development bonds.

Ratio of broad money to four-week average reserve money (at end-year).

On loans in excess of Rs 200,000 (about 60 percent of the total). The minimum lending rate was abolished on October 18, 1994.

As of June 15, 1995.

In 1994/95 the Reserve Bank took a number of steps to slow the growth of monetary aggregates and thereby to restrain inflation, which had returned to double digits. These included an increase in the cash reserve requirement from 14 percent to 15 percent, as well as restrictions on the use of GDR proceeds and tighter conditions on nonresident deposits to slow the growth of capital flows. In addition, the expansion of net RBI credit to government was just Rs 19 billion, well below the limit on ad hoc borrowing of Rs 60 billion set in the budget. 11/ The maximum interest rate on bank deposits was raised in stages, reaching 12 percent by April 1995. These measures helped contain the expansion in reserve money at 22.6 percent by mid-March 1995; broad money growth fell to 17.5 percent. 12/

Bank credit to the private sector recovered strongly in 1994/95, reflecting the robust recovery of private investment and weaker conditions in domestic and foreign equity markets beginning in the fall of 1994. Term lending by the all-India financial institutions also registered a sharp rise, with disbursements increasing by about 40 percent in the first ten months of 1994/95.

The combination of tighter liquidity and increased demand for credit contributed to a significant rise in interest rates during the second half of 1994/95 and early 1995/96. Call money rates and yields on shorter-term government paper increased by 3-6 percentage points, contributing to a flattening of the yield curve. Yields on longer-term securities also rose to a record high of 14 percent in May 1995. After an initial decline following the deregulation of lending rates, banks’ prime rate increased to 16 percent in May 1995, and commercial paper rates firmed up.

For 1995/96 the RBI is targeting broad money growth of 15 1/2 percent from the artificially high base at the end of 1994/95. This would imply a 19 percent increase in broad money over the adjusted base for March 1995. 13/ The tensions inherent in the current mix of fiscal and monetary policy are becoming evident. Increasingly, the Government has relied on RBI financing out of concern that heavy market borrowing could contribute to a sharp increase in interest rates. Already, the increase in ad hoc Treasury bills is more than double the annual limit of Rs 50 billion.

Further progress in financial sector reform was made during 1993/94-94/95. The most significant development was the deregulation of interest rates on loans greater than Rs 200,000 (about US$6,400) in October 1994. However, interest rates on smaller, priority sector loans continue to be administered, while the ceiling on deposit rates remains in place. The statutory liquidity ratio (SLR) on aggregate deposits was further reduced--in stages--to an average of 30 percent at end-1994/95.

The authorities remain committed to the priority credit scheme, but have broadened the eligibility criteria and further reduced the subsidy element so as to alleviate the burden on banks. Under the 1995/96 budget proposals, banks will be required to contribute a portion of the shortfall in meeting the agricultural credit targets to a special fund for rural infrastructure development.

Further progress has been made in strengthening banks’ balance sheets. All of the public sector banks declared a profit before provisioning in 1993/94; the State Bank of India group and the private and foreign banks also earned profits after provisioning. Write-offs, together with the economic recovery and strengthened collection procedures, contributed to a decline in nonperforming assets to 20 percent of loans and advances at end-March 1995, from 23.6 percent in 1993/94. The strengthening of banks’ balance sheets enabled several of them to tap the equity markets during 1994/95, and was a factor behind the Government’s decision to deregulate lending rates.

Since 1992, India has initiated capital market reforms aimed at improving market efficiency, making market transactions more transparent, curbing unfair trade practices, and establishing an effective regulatory framework. Since May 1992, when the Capital Issues (Control) Act of 1947 was repealed, firms have been able to raise capital without prior approval. Restrictions on rights and bonus issues also have been removed. Regulation of the capital market was consolidated under the Securities and Exchange Board of India (SEBI), which was established in 1992. Important developments over the past year have included:

  • Screen-based trading on the National Stock Exchange (NSE) was initiated in June 1994. Initially, the market was restricted to bonds, but

  • In January 1995, SEBI’s regulatory powers were expanded to include the imposition of monetary penalties on capital market intermediaries and other participants for a range of violations.

  • For the first time since 1969, market participants have been allowed to write and trade in options.

  • To reduce delay in settling transactions and to increase transparency, steps are being taken to set up a centralized depository system and introduce scripless trading.

  • In March 1995, the RBI announced guidelines for a primary dealer network. Dealers will be subject to a number of requirements, including: (i) a minimum net worth of Rs 1/2 billion; (ii) a commitment to bid for a minimum amount in government dated securities and Treasury Bill auctions, and to maintain success ratios of 33 1/3 and 40 percent, respectively; (iii) a commitment to underwrite a portion of the gap between subscriptions, accepted bids and notified amounts; (iv) an annual turnover of not less than five times their portfolio holdings in government securities and ten times their holdings of Treasury Bills; and (v) minimum capital standards based on appropriate risk weights.

V. External Developments

The turnaround in the external position since 1990/91 has been dramatic. The current account deficit was reduced from 3.4 percent of GDP in 1990/91 to 0.5 percent in 1994/95 (Table 6). Foreign exchange reserves increased from US$2.2 billion (one month of import cover) at end-March 1991 to US$20.8 billion (over eight months of import cover) by end-March 1995. A major factor behind the reserve buildup has been the surge in direct and portfolio investment.

The external current account deficit fell to 0.3 percent of GDP in 1993/94, about one-fifth of the preceding year’s level. This decline mainly reflected buoyant exports (an increase of 20.3 percent) and sluggish imports (an increase of 3.2 percent). The contributing factors included: improved competitiveness brought about by the earlier real exchange rate depreciation and ongoing trade liberalization; the completion of the collapse in India’s exports to the former Soviet Union; recovery of export shipments from delays related to civil disturbances in the previous year; a slow industrial recovery resulting in lower demand for imports of investment goods and manufacturing inputs; soft international oil prices combined with higher domestic production; and a reflow of private capital (reflected in an underinvoicing of exports in previous years).

Table 6.

India: Balance of Payments, 1990/91-1994/95

(In millions of U.S. dollars)

Sources: Data provided by the Indian authorities; and staff estimates and projections.

Includes interest on trade finance. Excludes personal imports of gold and silver.

Includes interest on NRI deposits. Excludes interest on NR (NR) deposits.

Includes Foreign Currency Convertible Bonds (FCCBs) and other Euro bond issues.

Medium- and long-term.

Including interest payments under Russian debt agreement.

Also includes valuation adjustment on non-U.S. dollar reserves.

Includes AsDB.

Includes military debt. Excludes NR (NR) deposits which totalled US$1.8 billion at end-1993/94.

The current account deficit increased marginally to 0.5 percent of GDP in 1994/95. After a slow start, exports rose by 17 percent while imports increased by about 23 percent. 14/ The sharp increase in imports reflected the pickup in industrial growth, which boosted demand for investment goods and manufacturing inputs. On the export side, rapid growth was mainly due to the strong performance of traditional exports such as textiles (especially cotton, yarn, and fabrics), chemicals, and related products. In addition, exports of most food products posted robust growth. However, exports of engineering products were adversely affected by the removal of the international price reimbursement scheme (IPRS).

The capital account in 1993/94-1994/95 was dominated by a surge in foreign direct and portfolio investment, which increased by $10 billion in the period November 1993-October 1994. A large part of the inflow consisted of portfolio investment--international equity and convertible bond issues, as well as direct purchases on local stock exchanges following the liberalization measures introduced in 1992/93. 15/ Inflows have slowed sharply since November 1994, reflecting rising international interest rates, a general reassessment of investment in emerging markets following the Mexican crisis, and the decline in domestic stock market prices. Foreign direct investment has increased gradually, reaching an estimated $1 billion in 1994/95. There have also been continued net inflows under the various nonresident deposit schemes. Although the FCNR(A) and FC(B&0)D schemes were phased out, withdrawals under these schemes were more than offset by inflows under other deposit schemes.

The exchange value of the rupee has remained broadly stable vis-á-vis the U.S. dollar since unification of the exchange market in March 1993. The authorities have effectively set a ceiling on the rupee’s value by offering to purchase foreign exchange on an open-window basis at a rate of Rs 31.37 per dollar. However, there has been minimal intervention in the market when there has been downward pressure on the value of the rupee. 16/ The steep nominal depreciation in 1991, exchange rate unification in 1993, and the slowing of inflation contributed to a sharp, depreciation in the real effective exchange rate during 1990/91-1992/93 (Chart 5). In 1993/94, the rupee appreciated in real terms by about 4 percent, mainly due to the impact of relatively high Indian inflation. However, this appreciation was reversed in 1994 as a result of the weakening of the U.S. dollar against third currencies. 17/



Citation: IMF Staff Country Reports 1995, 086; 10.5089/9781451818512.002.A001

Sources: Data provided by the Indian authorities; and IMF. Information Notice System.1/ For 1992/93. computed on the basis of the weighted average of the official and free market exchange rates receviced by exporters

In March 1994, India took further steps to liberalize exchange restrictions on current account transactions. Henceforth, limits on invisibles transactions such as foreign travel, payments for services, and donations are only indicative, and foreign exchange will be made available without limit for all bona fide current transactions. Moreover, exchange guarantees are being phased out as the FCNR(A) scheme was discontinued and the limit on repatriation of interest on nonrepatriable rupee (NRNR) deposits was removed. In August 1994, India adopted Article VIII of the Fund’s Articles of Agreement. However, some exchange restrictions pertaining to (i) the Indo-Russian debt agreement; (ii) existing balances under bilateral agreements; 18/ (iii) repatriation of dividend income on foreign investment in the consumer goods sector; 19/ and (iv) the remittance of nonresident investment income, remain in place. The authorities have formulated a three-year timetable to phase out the restriction on remittances of investment income. In 1994/95, nonresidents were allowed to repatriate $1,000 plus one third of current income (net of tax) in excess of $1,000. For 1995/96, the amount would be raised to $1,000 plus two thirds of current income in excess of $1,000; and in 1996/97 all current income net of tax would be repatriable.

The improvement in the balance of payments since 1990/91 has enabled the Government to reduce substantially the growth of external debt, especially during 1993/94-1994/95 (Table 7). External debt as a share of GDP has declined from about 37 percent at the end of 1992/93 to an estimated 31 percent at end-March 1995. Moreover, the stock of short-term debt (including non-resident deposits of less than one year maturity) has come down significantly since 1991.

Table 7.

India: External Debt, 1990-94

(In billions of U.S. dollars: end of period)

Source: Government of India, Ministry of Finance, India’s External Debt. 1993, and Economic Survey. 1994-95.

Deposits of one or more years’ maturity. Excludes nonrepatriable, nonresident rupee deposits, which totalled US$0.6 billion at end-1992/93 and US$ 1.8 billion at end-1993/94.

Deposits of up to one year’s maturity.

Trade liberalization has been an integral part of the reform effort initiated in 1991. A series of tariff reductions were introduced in successive budgets. The maximum tariff rate was lowered from 400 percent in 1990/91 to 65 percent in 1994/95. These changes reduced import-weighted tariffs from an average of 87 percent in 1990/91 to 27 percent in 1994/95, and significantly reduced the dispersion of tariff rates and eliminated virtually all specific duties. The 1995/96 budget carried these changes forward. The dispersion of import duties has been narrowed further, with the peak rate lowered to 50 percent and a reduction in duties on a broad range of industrial inputs and raw materials. 20/ Duties on most capital goods and their parts have been unified at 25 percent. Tariffs on consumer goods imported as baggage have been lowered to 80 percent from 100 percent.

Imports of most consumer goods continue to be subject to quantitative restrictions. However, the 1995/96 export-import policy statement pruned the negative list by an additional 32 items, mainly consumer goods. In addition, the special import license (SIL) scheme was expanded to cover 33 more items, 21/

VI. Sectoral Policies

Over the last four years, the Government has taken a number of steps to open most areas of the economy to the private sector. Recently the emphasis has been on encouraging private investment in areas such as infrastructure and natural resources that were formerly reserved for the public sector.

In May 1994, the Government announced the National Telecom policy (NTP). Under the policy, licenses to provide basic telecom services will be issued to private operators for a period of 15 years. Foreign companies in joint ventures will be permitted up to 49 percent equity participation. However, long-distance and international services will continue to be provided by the public sector (this decision will be reviewed after five years). Private sector participation in value-added services, including cellular phones, radio paging and electronic mail has been allowed since 1992. Consortia comprised of international and local companies must submit bids by the end of June 1995 to provide basic and cellular telephone services in 20 regional “circles” covering the country. Only one license, in addition to the Department of Telecommunications (DOT), would be issued in each circle. The Government has also decided to set up an autonomous regulatory body, the Telecom Regulatory Authority of India (TRAI).

In view of the rapidly growing demand for electricity and the limited resources in the public sector, private investments in the power sector have been permitted since 1991. However, lack of access to the final market for electricity and the poor finances of the State Electricity Boards (SEBs) have discouraged foreign investment in the power sector. As an incentive, the Union Government agreed to provide counter guarantees for state obligations in respect of eight power projects with total generating capacity of 5,000 MW. 22/ So far, only two of these projects have been initiated.

The Government also announced a National Highway policy in 1994, permitting private participation in the construction, maintenance, and operation of roads on a build-operate-transfer basis. The budget for 1995/96 introduced a five-year tax holiday for any enterprise expanding highways, expressways, bridges, ports, and mass transport systems. 23/ To encourage financial institutions to extend long-term loans for the development of such projects, a deduction of 40 percent of taxable income derived from financing these investments will be allowed. The development and maintenance of airport infrastructure and materials handling have also been opened to private participation. Under the new Air Corporation Act of 1994, private air taxi companies can now operate as regular domestic airlines. Nine air taxi operators have been granted “scheduled airline” status.

The National Mineral policy has been revised to allow private and foreign investment in the exploitation of 13 minerals that were previously in the preserve of the public sector. Automatic approval is given by the RBI for foreign investment in mining (subject to a limit of 50 percent, and except for atomic minerals and mineral fuels).

In September 1994, a new pharmaceuticals policy was introduced which abolished industrial licensing for most bulk drugs. Most drugs and formulations were brought under automatic approval for up to 51 percent foreign equity. The number of drugs under price control was halved to 73 and specific criteria were adopted to identify drugs whose prices would still be controlled.


INDIA: Fund Relations

(As of April 30, 1995)

I. Membership Status: Joined 12/27/45: Article VIII

II. General Resources Account:

III. SDR Department:

IV. Outstanding purchases and loans:

V. Financial Arrangements:

VI. Projected Obligations to Fund (SDR Million: based on existing use of resources and present holdings of SDRs):

VII. Exchange rate arrangement:

Since March 1, 1993, the Indian rupee has floated against other currencies, although the Reserve Bank of India intervenes in the market periodically. OnAugust 20, 1994, India accepted the obligations of Article VIII, Sections 2, 3, and 4 of the IMF Articles of Agreement. Currently, India still maintains some restrictions on the making of payments and transfers for current account transactions which are subject to approval under Article

VIII, Section 2: They arise from (a) restrictions on dividend transfers abroad by nonresident investors in consumer goods industries in excess of export earnings; (b) restrictions under bilateral payments agreements; and (c) restrictions on the transfer abroad of investment income earned by nonresident Indians. India also maintains a multiple currency practice arising from exchange rate guarantees on interest payments on existing foreign currency non-resident accounts, which is subject to approval under Article VIII, Section 3.

VIII. Article IV and XIV consultations:

The last Article IV consultation discussions were held in October 1993 and in January 1994. The staff report (EBS/94/16, 2/7/94) was discussed by the Executive Board on April 1, 1994, and the following decision (Decision No. 10638-(94/29)) was adopted:

1. The Fund takes this decision relating to India’s exchange measures subject to Article VIII, Sections 2(a) and 3, and in concluding the 1994 Article XIV consultation with India, in the light of the 1994 Article IV consultation with India conducted under Decision No. 5392-(77/63), adopted April 29, 1977, as amended (Surveillance over Exchange Rate Policies).

2. The restrictions on the making of payments and transfers for current international transactions described in EBS/94/16 are maintained by India in accordance with Article XIV, Section 2, except (i) restrictions arising under bilateral payments agreements with four Fund members, under the debt rescheduling agreement with the Russian Federation, and from the nonremittance of interest on nonresident nonrepatriable rupee deposit accounts, which are subject to approval under Article VIII, Section 2(a); and (ii) the multiple currency practice arising from exchange guarantees on interest payments on foreign currency nonresident accounts, which is subject to approval under Article VIII, Sections 2(a) and 3. The Fund encourages India to remove the remaining restrictions maintained under Article XIV and urges elimination of the measures that are subject to Article VIII.

IX. Technical Assistance

X. Resident representative

A resident representative’s office was opened in November 1991. Mr. Richard Hemming is currently Resident Representative and Mr. Michio Ishihara is Deputy Resident Representative.

ANNEX II: India Statistical Issues

Timely data for many key financial variables are available on a weekly or monthly basis. Most of these statistics (e.g., inflation, industrial production, external trade, money and credit aggregates, international reserves, interest rates, etc.) are published in official documents or disseminated through press releases. The major exception is monthly data on fiscal operations, which the authorities treat as highly confidential and are hence not published. Although Fund staff have been given access to monthly data on central government operations, this is typically done with a considerable lag.

Although India compiles a vast quantity of economic statistics, their quality and timeliness is variable. Some aspects of the reporting system have not changed to keep pace with the shift in the structure of the economy following the elimination of industrial licensing. Areas of weakness include the national accounts, price and production statistics, states’ public finances, and detailed balance of payments information.

Real sector

Wholesale price statistics are timely and current, while consumer price statistics are available with a longer lag. A monthly index of industrial production is available with a lag of 3-4 months, but its coverage does not capture the substantial changes in India’s industrial structure over the last few years. Preliminary estimates for the national accounts are available with a lag of 10 months, while “advance estimates” for the current fiscal year are available about two months before the end of the year. Quarterly GDP statistics are not available. Earnings and employment data with broad coverage, as well as data on trade prices and volumes, are available only with a long lag.

Government sector

Current data on central government operations (annual basis) are released to the public only at the time of the budget speech, while past data (again, annual basis) are published in various official documents. As noted above, Fund staff have been given access to monthly data on central government operations, but often with a considerable lag. Monthly data on central government tax collections have on occasion been released to the public. The staff has not been provided with data on the balance of the Oil Coordination Committee since 1992/93, and hence has not been able to compute an “adjusted” overall balance for the central government which takes into account the quasi-fiscal operations of this committee. 34/

Data on the states’ budget proposals and outturns are available only with a considerable lag and are published in various official documents. Data on the operations of local governments are not available.

Financial sector

Comprehensive monetary and financial data are made available to the Fund and to the general public on a timely basis. Since the beginning of 1992, the Reserve Bank has published a Weekly Statistical Supplement that contains weekly data on the central bank’s balance sheet and official foreign exchange reserves, and fortnightly data on deposit money banks. However, data reported to STA for publication in IFS for “other banking institutions” (including the all-India financial institutions) are incomplete and not current. For deposit money banks and, therefore, the monetary survey, ther is a lag of several months, and data have ceased to be reported for other banking institutions.

Balance of payments

Comprehensive balance of payment statistics are compiled with a three year delay, although more aggregated estimates are made available with a shorter lag. Weaknesses in the accounts are related mainly to a variety of transactions that the authorities find difficult to classify between the current and capital accounts. Movements in the net errors and omissions are also relatively large. Efforts are being made to address these problems, but improved computerization and sampling techniques are probably needed.

ANNEX III: India: Relations with the World Bank Group

India is one of the largest borrowers from the World Bank Group. The Bank’s program includes large ongoing economic and sector work (ESW), and a diversified lending program. Besides the annual Country Economic Memoranda (CEMs), the ESW includes recently completed or planned reports on reform issues (trade, financial sector, intergovernmental transfers); on sector-level reforms (agriculture, power, transport, education, health, nutrition); and on poverty. The 1995 CEM paid particular attention to state-level finances and reforms. Lending from IBRD, IDA, and IFC seeks to support the ongoing process of reform, with particular emphasis on reforms at the state level, and acceleration of human resource development. No adjustment operations are envisaged at this time.

Financial operations since 1988/89 are summarized below:

(In millions of U.S. dollars)

Source: Data provided by the World Bank.

The Indian financial year ends on March 31.

ANNEX IV: India Relations with the Asian Development Bank

The Asian Development Bank (AsDB) operations in India began in 1986. Cumulative commitments totaled $5.2 billion (net of cancellation) as of December 31, 1994 for 28 public sector loans and 9 private sector loans (the latter without government guarantee). These funds have been provided from the Bank’s ordinary capital resources (OCR). 25/ Also, AsDB has approved 11 equity investments and a line of equity. The AsDB’s lending and equity activities are summarized below.

Table 1.

India: AsDB Financial Operations

(In millions of U.S. dollars. as of December 31. 1994)

Source: Data provided by the Asian Development Bank.

The AsDB operational strategy focuses on promoting economic growth through efficient industrialization of the economy. The Bank has supported policy reforms to promote the private sector as veil as infrastructure (physical, social and financial) development through private and public sector investments. At the sectoral level, priority is given to energy, transport, and communications.

Appendix I

Table 1.

India: GDP at Factor Cost by Sector of Origin, 1989/90-1993/94

Sources: Data provided by the Indian authorities; and staff estimates.

Includes transport and communication.

Includes mining and quarrying.

Includes manufacturing, electricity, gas and water supply, and construction.

Table 2.

India: GDP at Market Prices by Expenditure Components, 1989/90-1993/94

Sources: Data provided by the Indian authorities; and staff estimates.

Includes statistical discrepancy.