India: Recent Economic Developments

The Indian economy has recovered strongly. The government's poverty alleviation programs have focused on generation of employment in rural areas. The overall deficit of the consolidated public sector has risen sharply in recent years, erasing most of the consolidation that was achieved during the first half of the 1990s. The paper discusses the monetary and financial market developments, reforms and performance, external sector, trade policy, and structural policy developments in India. The new government has taken a number of initiatives committed to structural reform.


The Indian economy has recovered strongly. The government's poverty alleviation programs have focused on generation of employment in rural areas. The overall deficit of the consolidated public sector has risen sharply in recent years, erasing most of the consolidation that was achieved during the first half of the 1990s. The paper discusses the monetary and financial market developments, reforms and performance, external sector, trade policy, and structural policy developments in India. The new government has taken a number of initiatives committed to structural reform.

VI. External Sector Developments1

A. Current Account

1. The current account deficit narrowed to 1 percent of GDP in 1998/99, from 1¼ percent of GDP in 1997/98 (Chart VI.1 and Table VI.1). However, this figure masks differing trends between the first and second halves of the year; the deficit deteriorated markedly to 1¾ percent of GDP in the four quarters to September 1998, but then narrowed to near balance in the second half of the year. In the first three quarters of 1999/00, the deficit remained around 1 percent of GDP. The improvement in the current account deficit since mid-1998/99 is attributable to a 1 percentage point narrowing in the trade deficit to 3 percent of GDP.


INDIA: Current Account Developments, 1991/92 - 1998/99

Citation: IMF Staff Country Reports 2000, 155; 10.5089/9781451818543.002.A006

Source: Data provided by the Indian authorities; and staff estimates.1/ Volume estimates are derived from partner country trade price deflators from the WEO database.
Table VI.1.

India: Balance of Payments 1995/96-1999/00 1/

(In billions of U.S. dollars)

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

Indian authorities’ presentation. Fiscal year runs from April 1 - March 31.

For quarterly data, figures shown are the cumulative sum of the last four quarters as a percent of GDP.

Contracted maturity basis.

2. Exports declined by 4 percent in dollar terms in 1998/99 after growing by 4½ percent in 1997/98. This weakness largely reflected a drop in export volumes which are estimated to have declined by 2½ percent, following growth of 11½ percent the previous year.2 The decline was largely due to the effects of the Asian crisis as exports to that region fell by 16¾ percent, more than offsetting strong export growth to the United States (see Box VI.1 for a discussion of the structure of India’s exports). Agricultural exports declined by 9 percent and manufactured exports by 2¾ percent. Within the manufacturing sector, however, performance was mixed. Some sectors recorded strong growth (gems and jewelry and clothing grew by 11 and 12½ percent, respectively), while others saw substantial declines (textiles by 14¼ percent, engineering goods by 16¼ percent, and chemicals by 8¾ percent).

India: The Structure of India’s Exports

Manufactured goods account for 75 percent of India’s exports, with gems and jewelry, clothing, and textiles being the most important, and agricultural products make up most of the remainder. Major export destinations are fairly evenly spread between Western Europe, Asia, and the United States, with each accounting for around one-quarter of the total. However, the goods exported vary by region: exports to Asia are more concentrated on agricultural products, raw materials, and industrial machinery, whereas to the United States and Europe they are more focused on clothing, textiles, and jewelry. In terms of structure and destination, India’s export basket most closely resembles those of Pakistan and China, with all three countries heavily dependent on clothing and textiles (Table VI.2).

Table VI.2.

India: Principal Exports of Selected Asian Economies, 1997

(Percent of total exports)

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Sources: United Nations Statistical Office, Trade Analysis and Reporting System (TARS) database; data provided by the Indian authorities; IMF, Recent Economic Developments (various issues); and staff estimates.

Correlation between commodity shares of total exports of India and the respective country, based on two-digit SITC classification. Coefficients close to zero indicate the two countries do not compete in the same commodities.

Correlation between the destination of total exports of India and the respective country.

3. Exports began to recover in late 1998/99, and growth accelerated to 23½ percent (y/y) in the December 1999 quarter (Chart VI.2). Exports to the Asian region have been particularly strong, increasing by 21¼ percent (y/y) during April 1999-January 2000, in response to the recovery of these economies and the appreciation of their currencies which improved Indian competitiveness, while those to the United States grew by 16 percent (y/y) (Chart VI.3). Manufactured exports grew by 13½ percent, although agricultural exports weakened somewhat further. Many of the sectors that were depressed in 1998/99 have enjoyed strong recoveries with the largest turnarounds occurring in the textiles and engineering sectors, while exports of gems and jewelry have also strengthened further.


INDIA: Quarterly External Sector Developments, 1997-2000

Citation: IMF Staff Country Reports 2000, 155; 10.5089/9781451818543.002.A006

Source: Reserve Bank of India.1/ Shown as the sum of the preceding four quarters.2/ Reflects proceeds from the Resurgent India Bond issue.

INDIA: Merchandise Exports and Imports, 1998/99 - 1999/00

Citation: IMF Staff Country Reports 2000, 155; 10.5089/9781451818543.002.A006

Source: Centre for Monitoring the Indian Economy.

4. Imports declined by 7 percent in dollar terms and by 4 percent in volume terms in 1998/99. The weakness in international oil prices resulted in a 21½ percent decline in oil imports. In addition, the impact of sanctions on defense related imports, the slowing in activity in the domestic industrial sector, and an easing in the rapid growth of gold imports led to a 4½ percent decline in non-oil imports.

5. Import growth has accelerated during 1999/00, reaching 19¾ percent (y/y) in the December quarter. The rebound in oil prices since early 1999 resulted in a 63¾ percent increase in oil imports, and growth in non-oil imports has recently begun to rebound with the recovery in the industrial sector. In an attempt to reduce gold imports, the government granted permission for the establishment of gold deposit schemes to mobilize domestically held gold in the 1999/00 budget (Box VI.2).

6. The surplus on the services account increased to ½ percent of GDP in 1998/99 from ¼ percent of GDP in 1997/98. This was almost entirely attributable to an improvement in the “miscellaneous” category, which includes exports of computer software. However, during the first three quarters of 1999/00 the surplus on the services balance narrowed somewhat, despite anecdotal evidence that software exports continued to grow strongly. The investment income deficit remained unchanged at ¾ percent of GDP in 1998/99 as interest earnings and payments both increased and dividend payments overseas remained unchanged. Net transfers declined to 2½ percent of GDP in 1998/99, from 3 percent of GDP in 1997/98, although this was largely linked to the liberalization of gold imports.3

India: The Gold Deposit Scheme

India is the world’s largest consumer of gold, but prior to 1991 the import of gold was restricted under the 1963 Gold Control Order. This resulted in excess domestic demand for gold and a widening spread between domestic and international gold prices.

Restrictions on the import of gold were gradually eased during the 1990s. Returning or nonresident Indians are now permitted to import up to 10 kilograms of gold, while imports are also permitted under the Special Import License Scheme. Since October 1997, thirteen authorized agencies and three state-owned agencies have been permitted to import gold for sale to specified categories of jewelers and domestic consumers. These measures have resulted in a narrowing of the spread between domestic and international prices and a substantial increase in gold imports. The present stock of gold in India is estimated at around 13,000 tons.

In view of the sharp rise in official gold imports in recent years, the government proposed a Gold Deposit Scheme in the 1999/00 budget to mobilize idle gold and to try and reduce imports. The RBI published broad guidelines for the implementation of the scheme in October 1999 and the State Bank of India (SB1) launched the first scheme in December. Under the SBI scheme, a deposit of a minimum of 200 grams of gold jewelry or bullion can be made with the bank. The bank issues a interim deposit certificate, has the gold assayed, and then issues a final deposit certificate ranging from three to seven years maturity and bearing an interest rate of 3 to 4 percent. There is a provision for early redemption after an initial one year lock-in period. The interest paid on the deposit is tax free and the deposit is not subject to capital gains or wealth tax. Gold deposits may be used as collateral for rupee loans, while banks may deploy the gold as gold loans to the domestic jewelry industry or jewelry exporters, or may sell the gold domestically. Banks offering the scheme are able to hedge their exposure through international commodity exchanges.

B. Capital Account

7. The capital account in 1998/99 was significantly affected by the turmoil in world financial markets and the imposition of sanctions on India following its testing of nuclear weapons in May 1998. The decline in reserves that followed the drying up of capital inflows and the concurrent widening of the current account deficit led to the authorities’ decision to issue Resurgent India Bonds (RIBs) in August 1998 (Box VI.3). These bonds raised $4.2 billion and accounted for about one-half of the net capital inflows during the year.

8. Net foreign direct investment (FDI) declined to only $2.4 billion in 1998/99 from $3.5 billion in 1997/98. FDI inflows to India, which have averaged less than ¾ of a percent of GDP over the past five years, are low by the standards of many other countries in the Asian region. Investment was concentrated in the engineering, chemicals, services, and electronics sectors. FDI inflows remained weak in the first eleven months of 1999/00, totaling only $1.9 billion. According to A.T. Kearney’s January 2000 FDI Confidence Index, India’s absolute attractiveness as an FDI destination increased compared to the previous survey in June 1999, but it still slipped to eleventh on the list of preferred destinations from sixth previously, as the attractiveness of other markets improved more rapidly. The survey found that while companies are attracted by India’s market potential, poor infrastructure and lack of transparency were viewed as obstacles to investment.4

India: The Resurgent India Bond Issue

The Resurgent India Bonds (RIBs) were launched by the State Bank of India (SBI) in August 1998 to raise financing from nonresident Indians. The bonds, which are of a five-year maturity and are denominated in U.S. dollars, pound sterling, and deutsche marks, raised $4.2 billion. The dollar-denominated bonds, which accounted for over 90 percent of the total funds raised, carry an interest rate of 7.75 percent, the sterling bonds 8 percent, and the deutsche mark bonds 6.25 percent.

Deposits were collected both by the SBI and also by a number of other collecting banks with branches abroad on behalf of SBI. As part of the agreement, these banks were entitled to receive 50 percent of their collections in the form of fixed-rate rupee deposits from the SBI at 9.5 percent for five years. Most of the dollar funds raised were sold by the SBI to the RBI, resulting in a substantial increase in official reserves.

The RBI maintains a “maintenance of value” account to finance any exchange rate losses incurred on the bonds before they mature. This account is funded by the government and the SBI (the SBI’s exchange losses are limited to exchange rate depreciation of 1 percent per annum with the government absorbing any remainder).

9. A small net outflow of portfolio investment occurred during 1998/99 (Chart VI.4). With the onset of the Asian crisis, foreign institutional investors (FIIs) withdrew funds from Indian markets between August 1997 and August 1998, while Indian companies lost access to overseas equity and debt markets. As sentiment to emerging markets improved during the course of 1999 and the outlook for the domestic economy strengthened, FII inflows resumed, averaging $130 million a month during the first ten months of 1999/00, and then accelerating markedly in February to nearly $500 million.5 Portfolio inflows were also bolstered in 1999/00 by a number of ADR issues from Indian companies (Box VI.4).


INDIA: Selected External Indicators, 1991/92-1999/00

Citation: IMF Staff Country Reports 2000, 155; 10.5089/9781451818543.002.A006

Source: Reserve Bank of India1/ In percent of current receipts.

10. External commercial borrowing, excluding the RIB issue, fell sharply in 1998/99 reflecting the deceleration in industrial growth, the widening spreads on Indian (and developing countries in general) debt in international markets, and the high forward premia on the rupee. The new borrowing that did take place was largely concentrated in the power sector. Despite the turmoil in international financial markets, nonresident Indian (NRI) deposit inflows increased to $1.7 billion in 1998/99, from $1.1 billion in 1997/98. Deposits under the foreign currency nonresident (FCNR(B)) scheme actually declined slightly, perhaps due to the diversion of potential inflows into the RIB issue, but inflows into rupee-denominated accounts increased strongly. The importance of external assistance as a financing source for India continued to decline in 1998/99, while the net outflow of short-term debt reflected the decline in import demand and the difficult conditions in international financial markets. Inflows of external commercial borrowing and short-term debt remained negligible in the first three quarters of 1999/00, but NRI deposits continued to increase.

11. India’s external debt indicators remain favorable (Table VI.3). Total external debt stood at $99 billion (22½ percent of GDP) in December 1999, while short-term debt (on a contracted-maturity basis) was only $4.7 billion (1 percent of GDP). The ratio of short-term debt-to-official reserves declined to 13¼ percent in December 1999, and the debt-service ratio declined to 18 percent in 1998/99, from 19 percent in 1997/98. At end-1999, a little over 50 percent of India’s external debt was denominated in U.S. dollars, while concessional debt accounted for around 39 percent of the outstanding stock. The Indian government has provided guarantees on borrowings by public sector enterprises, development finance institutions, and in some instances to private companies. Such contingent liabilities amounted to $7.5 billion in December 1999, down from a peak of $12.3 billion in March 1995.6

Table VI.3.

India: External Debt, 1994/95-1999/00

(In billions of U.S. dollars; end-of-period)

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Source: Government of India.

Deposits above one year’s maturity. Excludes nonrepayable, nonresident rupee deposits.

Deposits of up to one year’s maturity.

C. Exchange Rate and International Reserves

12. The Asian crisis and its aftermath put the exchange rate under downward pressure on a number of occasions. This initially occurred in August 1997, and intensified in November 1997, causing the RBI to intervene in both the spot and forward markets and to tighten monetary policy. The pressure on the rupee resumed in the aftermath of the sanctions imposed on India in May 1998, and intensified in August 1998 at the height of market tensions following the Russian default. In the latter instance the RBI again tightened monetary policy and also introduced a number of administrative measures, including the withdrawal of the facility to rebook cancelled forward contracts for imports. Uncertainty regarding the outcome of the September/October 1999 general elections again put downward pressure on the exchange rate in August 1999. In this case the RBI responded by announcing it would meet oil import and government debt payments directly from reserves and that it stood ready to intervene, either by itself or through the SBI, as needed.

13. The rupee depreciated by 7 percent against the U.S. dollar and in nominal effective terms in 1998/99 (Chart VI.5). The depreciation of the real effective exchange rate was more modest at 3½ percent given the higher inflation rate in India than in its trading partners during the year. However, the depreciation of the real rate was sufficient to offset the appreciation that has taken place in 1997/98. During 1999/00, the rupee depreciated by a further 2¾ percent against the U.S. dollar, but in nominal and real effective terms it has been broadly unchanged.


INDIA: Exchange Rate Developments, 1995-2000

Citation: IMF Staff Country Reports 2000, 155; 10.5089/9781451818543.002.A006

Sources: Data provided by the Indian authorities; IMF, Information Notice System; and WEFA.

India: Depositary Receipts1

Since 1992, Indian companies have been allowed to issue Depositary Receipts (DRs), financial instruments that represent negotiable certificates (in registered form) of an ownership interest in an Indian private issuer’s securities. (DRs) are issued by a foreign market-based commercial bank or trust company (the depositary), and the underlying securities are usually deposited in India with a financial institution known as the custodian. Indian DRs have been issued in various international markets, primarily in the form of Global Depositary Receipts (GDRs) in London or Luxembourg, but also in the form of American Depositary Receipts (ADRs) in the United States. Because ADRs are governed by most of the same regulatory and reporting requirements applicable to U.S.-based companies, and trade and settle on U.S. markets, they are attractive vehicles for U.S. financial agents to diversify their portfolios.

  • Size and performance of the Indian DR market. India has been one of the most prolific DR issuers in the world. Between April 1992 and February 2000, around 65 Indian companies raised a total of $7.4 billion through DRs. This compares with $9.5 billion in foreign investment that was raised over the same period through the Foreign Institutional Investors channel (i.e., portfolio investments by authorized investment and mutual funds). Although Indian DRs have been available in the United States since 1992, when Reliance Industries made a private placement of ADRs, the first public listings of Indian ADRs occurred in 1999, when two information technology companies, Infosys and Satyam Infoway, were listed on the NASDAQ, and ICICI, a financial conglomerate, was listed on the NYSE. In late March, ICICI Bank, a subsidiary of ICICI, also listed on the NYSE.

  • Rules governing DRs. Until recently Indian companies faced strict constraints governing which companies could issue DRs, as well as where proceeds from any such issues could be kept, to which uses they could be put, and to what extent they could be converted into rupees. During 1998/99, all end-use restrictions on DR issue proceeds were removed, except the prevailing restrictions on investment in stock markets or real estate. Recently, it was decided that Indian companies would be able to access DR markets through an automatic route without prior approval of the Ministry of Finance, subject to specified norms and post-issue reporting requirement. However, DRs issues are still limited by the same sectoral restrictions that apply to FDI.

  • Do DRs have implications for systemic vulnerability? Proceeds from DR issues are registered in the Indian balance of payments as portfolio inflows. Once issued, the physical DRs remain abroad (as there is only a one-way fungibility of shares), so sales of DRs, as transactions between nonresidents, do not enter the balance of payments. To this extent, DRs help insulate India from adverse shifts in market sentiment (naturally, a turn in market sentiment could affect future DR issues, and hence the level of portfolio inflows). Dividends to DR holders are the same as those paid on domestically held shares, so that Indian firms do not bear an exchange rate risk.

  • Spillovers of DRs on domestic capital market and accounting standards development. One concern raised by the availability of the DR channel for raising finance is that it may stymie the development of local capital markets, as stronger firms (for example, those with internationally accepted accounting principles) choose to tap foreign markets rather than raise capital domestically. However, the availability of DRs as a financing vehicle can also encourage the adoption of international accounting standards in local markets, which can help to improve accountability and transparency in the corporate sector of emerging markets, and thereby increase the access of emerging markets to finance from industrial countries.

1 This box was prepared by Andrea Richter.

14. Uncertainty about the investment intentions of foreign investors following the recent decline in the stock market (which is down by 30 percent from its high in mid-February) has contributed to some weakness in the rupee in recent weeks. Although the decline has been small (about 2 percent), it has drawn considerable attention from financial market participants and the press given the period of stability that preceded it. In response to these developments, the RBI issued a statement on May 25, 2000 in which it emphasized that it is not targeting any particular level of the rupee and that it is inappropriate to focus only on the U.S. dollar rate (the rupee has been stronger against other currencies). Nonetheless, as a temporary measure, it imposed an interest rate surcharge of 50 percent on the lending rate for import finance, and a penal (25 percent) rate for overdue export bills. It also stated that, if necessary, it would meet government debt-service and oil import payments directly from reserves and that it stood ready to intervene in the market as needed.

15. The overall balance of payments position improved during 1998/99 and foreign exchange reserves increased to $32½ billion (6 months of imports of goods and services) in March 1999, compared to $29¼ billion in March 1998 (Table VI.4). Reserves continued to rise in 1999/00, reaching $38 billion (6½ months of imports of goods and services) in March 2000. The RBI has unwound a substantial proportion of the forward position it built up in defense of the rupee in late 1997/early 1998—net forward liabilities peaked at $3.2 billion in January 1998—and net forward liabilities of the RBI stood at $675 million in March 2000.

Table VI.4.

India: Official Reserves, 1994/95-1999/00

(In millions of U.S. dollars; end-of-period)

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Sources: IMF, International Financial Statistics; and data provided by the Indian authorities.

Gold valued at SDR 35 per troy ounce.

Excluding Reserve position in the Fund.

Defined as gross reserves (with gold valued at market prices) minus use of Fund credit and outstanding forward liabilities.

D. External Sector Reforms

16. Trade reform has continued over the past two years. In the April 1999 EXIM policy statement, 894 items were moved from the restricted list to the list of freely importable items and 414 additional items were moved from the restricted list to the special import license (SIL) list. Following these changes, 700 items remained on the restricted list, 685 items are on the SIL list, and 44 on the canalized list. All of these items, except 36 on the canalized list, have been freely importable from SAARC countries since August 1998.

17. In November 1997, the Dispute Settlement Body (DSB) of the World Trade Organization (WTO) established a panel to review India’s application of quantitative restrictions on imports of agricultural, textile and industrial products following a complaint by the United States. The panel found in favor of the United States and the ruling was subsequently upheld by the Appelate Body following an appeal by the Indian authorities. Bilateral negotiations to implement the ruling of the DSB followed, and in December 1999 it was agreed that India would eliminate all remaining QRs by April 1, 2001, with one-half to these eliminated on April 1, 2000 (see Chapter VII for more details on trade policy).

18. The authorities have continued to make progress toward capital account convertibility. Measures have been taken to liberalize restrictions on FDI and portfolio investment, to broaden the access of Indian companies to foreign equity markets, and to ease restrictions on external commercial borrowing (Box VI.5).

India: Capital Account Liberalization

  • In February 2000, the government announced that FDI investment under Rs 6 billion would be available through the RBI automatic route except for thirteen sectors that have been placed on a negative list, areas reserved for the small scale sector where foreign investment already exceeds 24 percent, and seven sectors where sectoral investment caps apply. To invest in these sectors, or above the investment caps, permission is required from the Foreign Investment Promotion Board.

  • In January 2000, the government permitted Indian companies to issue American Depository Receipts (ADRs) and Global Depository Receipts (GDRs) without prior approval and also to privately place ADRs and GDRs with overseas investors.

  • The 24 percent of equity ceiling for FII investment can be raised to 40 percent (previously 30 percent) by the Indian company’s board (February 2000).

  • External commercial borrowing (ECB) guidelines were relaxed in August 1998. The average minimum maturity of ECBs was reduced to 5 years for loans above $20 million (three years for loans smaller than $20 million) and ECB was allowed to be used for project-related rupee expenditure (except for investment in the stock market or real estate). The average maturity requirement outside the ECB cap was reduced from 10 and 20 years to 8 and 16 years, respectively, for loans, up to $100 million and $200 million, respectively. Exporters are now permitted to raise three times their average export earnings up to a maximum of $200 million, double the previous level. New norms also allow prepayment of outstanding loans with a residual maturity of up to one year. The government delegated power to the RBI to sanction ECBs up to $10 million (January 1999), and simplified other clearance procedures (February 2000).

  • In October 1999, the minimum maturity on FCNR(B) deposits was raised from six months to one year.

  • Authorized dealers (ADs) were allowed to offer forward cover facilities to FIIs to cover a specified portion of the market value of their equity investments in India. Indian entities with an underlying commodity price exposure were permitted to use futures/options contracts on international commodity exchanges to hedge their exposure (not available for oil and petroleum products).


Prepared by Tim Callen.


Export volume figures are derived from partner country import price deflators from the IMF’s World Economic Outlook (WEO).


Prior to their liberalization in October 1997, gold imports took place either through the “baggage route” (where nonresident or returning Indians were allowed to bring up to 10 kilograms of gold into the country) or through special import licenses. Imports through the baggage route were recorded in the balance of payments statistics both as a noncustoms import and as a private transfer (so they had no overall impact on the balance of payments as the foreign exchange used to purchase the gold was earned outside India). Since the liberalization, imports have increasing taken place through the normal customs route, resulting in an increase in customs imports, and a decline in noncustoms imports and private transfers.


See A.T. Kearney, FDI Confidence Index, January 2000, Vol.3., Issue 1. The index is based on a survey of the world’s 1,000 largest companies.


RBI data on FII inflows is only available until February. SEBI data, which is available on a daily basis, shows continued strong inflows until mid-May, but then some outflows in recent weeks.


See India’s External Debt: A Status Report, Government of India, June 2000.

India: Recent Economic Developments
Author: International Monetary Fund