India: Recent Economic Developments and Selected Issues

India rebounded strongly from its 1991 balance-of-payments crisis, aided by structural reforms and other policy adjustments. The government has sought to reinvigorate the process of structural and fiscal reform. The paper examines trends in interstate differences in rural poverty; reviews India's postal saving system and possible reform issues; describes and evaluates the current system of pensions and provident funds, and discusses reform options. The paper also briefly reviews the structure of and recent developments in the Indian foreign exchange market.


India rebounded strongly from its 1991 balance-of-payments crisis, aided by structural reforms and other policy adjustments. The government has sought to reinvigorate the process of structural and fiscal reform. The paper examines trends in interstate differences in rural poverty; reviews India's postal saving system and possible reform issues; describes and evaluates the current system of pensions and provident funds, and discusses reform options. The paper also briefly reviews the structure of and recent developments in the Indian foreign exchange market.

III. External Sector Developments and Trade Policies1

A. Overall Balance of Payments

1. Despite a sharp rise in oil prices, the overall balance of payments in India strengthened during 1999/2000 (Table III.1). The current account deficit remained largely unchanged at $4¼ billion (just under 1 percent of GDP) as exports of goods and services accelerated and private transfers surged, mostly offsetting the increase in oil and other imports. Net capital inflows increased to $10¼ billion, largely reflecting a rebound in net portfolio investment. Consequently, gross international reserves increased from $32½ billion at end-March 1999 to $38 billion (about six months of goods and services imports) at end-March 2000, and net outstanding forward liabilities, which peaked at $3¼ billion at end-January 1998, declined to $675 million at end-March 2000 (Table III.2 and Chart III.1).


Balance of Payments

(US$ billions)

Citation: IMF Staff Country Reports 2001, 181; 10.5089/9781451818550.002.A003

1/ Negative means an Increase in reserves.
Table III.1.

India: Balance of Payments 1995/96-2000/01 1/

(In billions of U.S. dollars)

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Sources: CEIC and staff estimates.

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

Equal to net foreign direct investment in India less net foreign investment abroad.

For quarterly data, figures shown are the cumulative sum of the last four quarters.

Residual-maturity basis, except for medium and long-term NRI deposits where contracted-maturity basis.

Table III.2.

India: Official Reserves, 1995/96-2000/01

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

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Sources: IMF, International Financial Statistics; except for memorandum items, where the data are 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

Chart III.1.

India: Quarterly External Sector Developments, 1997-2000

Source: Reserve Bank of India1/ Shown as the sum of the preceding four quarters.2/ Reflects proceeds from the Resurgent India Bond issue.

2. The overall external position deteriorated in the middle of 2000. Although the current account deficit weakened only modestly due to higher oil imports, pressures on the capital account mounted. These reflected portfolio and other private capital outflows, including those from foreign institutional investors (FIIs), as market confidence was undermined by the global turnaround in sentiment toward information technology (IT) stocks (which represented over a quarter of India’s market capitalization), concerns about the impact of higher oil prices, and fears that the rupee had lost competitiveness because of the appreciation of the dollar against other currencies (Chart III.2). The Reserve Bank of India (RBI) responded vigorously to shore up the exchange rate by intervening heavily in both the spot and forward markets, raising the Bank rate in July, and introducing several administrative measures to limit access to foreign exchange, including a surcharge on import financing that was in contravention of Article VIII.2 By end-October, gross reserves fell below $35 billion (4¾ months of imports), and net outstanding forward liabilities rose to $2¼ billion.

Chart III.2.

India: Exchange Rate Developments, 1996-2001

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

3. In late 2000 and early 2001, the balance-of-payments position improved considerably. The government’s India Millennium Deposit (IMD) scheme—a five-year instrument marketed to nonresident Indians beginning in October—was highly successful, yielding inflows of $5.5 billion (Box III.1). The boost to reserves, the easing of world oil prices, and several cuts in the U.S. federal funds rate in early 2001 helped restore market confidence. By end-March, the rupee/dollar rate recovered some of its earlier losses, portfolio inflows rebounded, and gross reserves rose to over $42 billion (about six months of imports and four times short-term external debt), while the RBI’s net outstanding forward liabilities fell to $1¼ billion.

India: The India Millennium Deposit Scheme

Patterned after the Resurgent India Bond (RIB) issue of August 1998, the India Millennium Deposit (IMD) scheme was launched by the State Bank of India (SBI) on October 21, 2000 to raise funding from nonresident Indians and overseas corporate bodies. IMD deposits have a maturity period of five years and offered interest rates of 8.5 percent on dollar deposits, 7.85 percent on pound-sterling deposits, and 6.85 percent on euro deposits. Interest will be paid on a semi-annual basis. The main features of the scheme included full repatriability of interest and principal; exemptions from income, gift, and wealth taxes in India; and the scope for joint holding with Indian residents. Although IMD deposits (unlike bonds) are not tradable in the secondary market, authorized dealers are permitted to grant loans to holders of IMDs and premature encashment, without penalty, is possible after six months—but both only in rupees. The IMD was closed on November 6, 2000 after raising $5.5 billion, substantially more than the $4.2 billion raised by the RIB.

IMD funds were to be largely invested in government securities or on lent to infrastructure projects. Deposits were collected both by the SBI and other banks on behalf of the SBI. These other banks were provided a collection fee of 0.25 percent and a commission of 1.5 percent. Moreover, the banks could borrow up to 50 percent of the funds that they mobilized for the scheme at a 10 percent interest rate from the SBI for on lending to infrastructure projects. Most of the remaining funds were invested by the SBI in government securities of five years or longer, while smaller amounts were invested in short-term treasury bills.

Exchange rate risks are shared by the SBI and the government. As with the Resurgent India Bond, the RBI will maintain a “maintenance of value” account to cover any exchange rate losses that might be incurred by the SBI. The account will be funded by contributions from the government and the SBI. The SBI’s contribution will be limited to 1 percent per year, with the government shouldering the balance.

As a result of the IMD, gross reserves, which dipped below $35 billion at end-October 2000, rose to over $42 billion by end-March 2001. A large part of the increase in reserves can be attributed to increased gross commercial borrowing (inflows from the IMD scheme are classified in this category in the balance-of-payments statistics), which surged from $1.1 billion in the first two quarters of 2000/01 to $6.3 billion in the third quarter.

B. Current Account

4. The current account deficit deteriorated only modestly in dollar terms, rising marginally to $4¼ billion in 1999/2000 and $5 billion in the four quarters to December 2000, notwithstanding the sharp increase in oil imports (Charts III.3). With higher world oil prices, the oil import bill rose sharply from $6½ billion in 1998/99 to reach almost $15 billion in the first eleven months of 2000/01. However, the impact on the current account was mostly offset by robust growth in goods and IT-related services exports and a surge in net private transfers, attributable to increased redemption of nonresident Indian (NRI) deposits into rupees. In addition, non-oil import growth weakened sharply in 2000/01, falling on a customs basis in both rupee and dollar terms.3

Chart III.3.

India: Current Account Developments, 1992/93-1999/2000

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.

5. Merchandise exports increased by 11½ percent in dollar terms in 1999/2000, after declining by 4 percent in 1998/99, and in 2000/01, growth accelerated to 20 percent. The rebound reflected buoyant global demand and the revival of trade following the Asian crisis, but also significant share gains by Indian firms in export markets, perhaps reflecting the benefits of earlier structural and trade reforms.4 In 1999/00, exports to Asia and the United States were particularly robust, as were export sales of gems and jewelry and ready-made garments (Chart III.4). Exports to Asia remained strong in 2000/01, growing by over 20 percent through December (the latest available data), while exports to a number of oil-producing countries in the Middle East also picked up. Sales in 2000/01 were led by exports of petroleum products, ready-made garments, and engineering goods.

Chart III.4.

India: Merchandise Exports and Imports, 1996-2000

Sources: Data provided by the Indian authorities; and staff estimates.1/ Customs data; based on U.S. dollar values.2/ In billions of U.S. dollars.

6. After falling by 7 percent in 1998/99, merchandise imports grew at an annual rate of over 16 percent in dollar terms in 1999/2000 and the first three quarters of 2000/01. The surge mainly reflected the effect of the sharp increase in world oil prices on the value of oil imports, which represented roughly one fifth of India’s merchandise imports in 1999/00. Non-oil imports were relatively subdued, growing by 4 percent in 1999/00 and by 5½ percent in the first three quarters of 2000/01.5 This reflected declines in gold imports in response to a hike in import duties and the introduction of the Gold Deposit Scheme, which was designed to mobilize domestic holdings of gold; in capital goods imports, reflecting weak business investment; and in foodgrain imports in 2000/01 owing to the buildup of large domestic grain stocks. The weakness in non-oil imports occurred despite steady growth of imports from Asia (which represented over a quarter of total imports), particularly from China.

7. The surplus In traded services increased by $1¾ billion in 1999/2000, mostly due to rapidly growing exports of software services. These exports, which appear in the “miscellaneous” services category in the balance-of-payments accounts, surged from $2½ billion to $4 billion. Exports of other miscellaneous services—including communication services—increased by $1¼ billion, while other services exports declined. Services imports increased by $1 billion, attributable to imports of financial services and increased business and tourist travel abroad, while imports of transportation services declined.


Miscellaneous Services Exports

(US$ billions)

Citation: IMF Staff Country Reports 2001, 181; 10.5089/9781451818550.002.A003

8. The services balance improved further in 2000/01. Travel payments and miscellaneous services exports and imports again increased, while other categories of services exports and imports were largely unchanged. Although the composition of miscellaneous services has not yet been released, NASSCOM, the primary source for IT-related export data, estimated that software services grew to $6¼ billion during 2000/01.

9. Net private transfers rebounded to $12½ billion in 1999/2000, and rose further to $13½ billion in the four quarters to December 2000. The increase reflected inward remittances from Indians working abroad, with a shift in the source of these funds from the Middle East to North America, in turn related to increased employment of Indian IT professionals overseas. Remittances were also boosted by the redemption of foreign currency accounts held by nonresident Indians into rupees, which more than offset the decline in transfers in the form of gold and silver.6 These latter transfers fell as imports of bullion, which are recorded as merchandise imports, were liberalized.7

C. Capital Account

10. Improved investor confidence contributed to a strengthening of the overall capital account surplus in 1999/2000. The surplus had fallen in the previous two years, partly owing to the effects on sentiment of the Asian financial crisis, the imposition of sanctions following the India’s testing of nuclear devices in May 1998, and the Russian default in August 1998. However, portfolio inflows strengthened considerably in 1999/00, helping to boost the capital account surplus to $10¼ billion.

11. Despite a weakening of international investor confidence, the capital account surplus remained comfortable during the first three quarters of 2000/01. Portfolio and other capital flows turned negative in the middle of the fiscal year, but the IMD scheme led to a sharp increase in commercial borrowing in the third quarter. Although balance-of-payments data are not yet available, monthly data also suggest that portfolio inflows rebounded strongly in the fourth quarter.8

12. Net foreign direct investment (FDI) weakened further in 1999/2000, and remained weak in the first three quarters of 2000/01. FDI inflows to India, which have averaged about $2½ billion, or less than ¾ of a percent of GDP, over the past five years, are low by the standards of many other countries in Asia. Relative to total FDI flows to developing countries, moreover, India’s share declined by ¾ percentage point between 1997 and 1999 (Table III.3). Encouragingly, A.T. Kearney’s February 2001 FDI Confidence Index and FDI Confidence Audit of India indicated that India’s absolute and relative attractiveness as a destination for FDI increased from its January 2000 survey, with India’s rank improving from eleventh to seventh.9 However, while market size and potential, labor force skills, and competitive wages were seen as positives for investment in India, excessive bureaucracy, a slowdown in reforms, and poor infrastructure were viewed as significant deterrents.

Table III.3.

Selected Countries: Inward Foreign Direct Investment, 1995-1999

(US$ billions)

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Source: World Economic Outlook.

13. Net portfolio investment has been volatile in recent years, responding to broader international developments, as well as domestic factors. With the onset of the Asian crisis, 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 toward emerging markets improved during the course of 1999 and the outlook for the domestic economy strengthened, FII inflows resumed, averaging almost $180 million a month during 1999/00. During the first half of 2000/01, FII inflows slumped compared to the first half of 1999/00. Then, in late 2000, deteriorating market confidence led to FII outflows. As sentiment stabilized in early 2001, FII inflows resumed reaching over $2 billion through end-April, despite the slowdown in industrial production and a downturn in Indian equity markets related to the stock market scandal that broke during March 2001.

14. Net external borrowing dropped to $1½ billion 1999/2000 from $4¾ billion in the previous two years, and remained weak in the first half of 2000/01.10 The decline, which was masked in 1998/99 by $4¼ billion in proceeds from the Resurgent India Bond (RIB), reflected lower commercial borrowing with disbursements falling from $7½ billion in 1996/97 to $3¼ billion in 1999/00 (Table III.4). In turn, this reflected a number of factors, including a fall off in borrowing for power sector projects and the slowdowns in industrial sector growth and private corporate sector investment (see Chapter II). After remaining weak in the first half of 2000/01, external borrowing surged in the third quarter because of the IMD scheme.11

Table III.4.

India: External Commercial Borrowing, 1993/94-2000/01 1/

(In millions of U.S. dollars)

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Sources: Data provided by the Indian authorities.

Borrowing controlled by “ECB guidelines”, including loans from banks abroad, bonds (except foreign currency convertible bonds), and credit from official export credit agencies.

Through end-December 2000, except for gross disbursement and outstanding debt, where through end-September 2000.

On a balance-of-payments basis.

Includes Resurgent India Bonds, but not the India Millennium Deposit Scheme as data are only through end-September 2000.

15. Indicators of India’s external debt continued to improve during 1999/00 and into 2000/01 (Table III.5 and Chart III.5). Total external debt stood at $98½ billion (22 percent of GDP) in March 2000, of which 38½ percent was on concessional terms. Short-term debt was only $4 billion (1 percent of GDP or 10½ percent of gross reserves) on a contracted-maturity basis and only $10 billion (2¼ percent of GDP or 26½ percent of gross reserves) on a residual-maturity basis.12 Total debt fell further during the first half of 2000/01 to $98 billion, although short-term debt on a contracted-maturity basis rose to $4½ billion.13

Table III.5.

India: External Debt, 1994/95-2000/01 1/

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

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Source: Government of India.

Data at end-March, except for 2000/01 where at end-September 2000. Most components at end-September 2000 are not yet available.

Excludes rupee-denominated debt owed to Russia.

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

Deposits of up to one year’s maturity.

Rupee-denominated debt owed to Russia, converted at current exchange rate, and payable through exports.

Includes mutilateral and bilateral government and nongovernment borrowing.

Except contracted-maturity for NRI deposits.

Chart III.5.

India: Selected External Indicators, 1992/93-1999/00

Source: Reserve Dank of India.1/ In percent of current receipts.2/ On a residual-maturity basis except for NEJ deposits which are on a contractual-maturity basis.

D. Trade Policy14

16. By most measures, India has substantially liberalized trade during the past decade. At the beginning of the 1990s, India’s trade policies exhibited high tariff rates, complicated licensing requirements, and other nontariff barriers (NTBs). Following the 1991 balance-of-payments crisis, significant trade liberalization occurred. Tariff rates, which averaged 87 percent (on a trade-weighted basis) in 1991, fell to 25 percent by 1997, and NTBs—such as licensing requirements on imports of industrial inputs and capital goods—were reduced. Export incentives and concessions remained significant, however, and included tax exemptions for export earnings, preferential access to bank credit, and duty-free access to imported industrial inputs and capital goods, including through duty-free areas such as Special Economic Zones.


Average Tariffs


Citation: IMF Staff Country Reports 2001, 181; 10.5089/9781451818550.002.A003

17. A key element of trade reform in recent years has been the gradual elimination of quantitative import restrictions (QRs). Although India had already begun to dismantle its system of QRs in the mid-1990s, the process was accelerated after the Dispute Settlement Body of the World Trade Organization (WTO) ruled in favor of a 1997 complaint by the United States that India’s QRs were not justified on balance-of-payments grounds. After, the Appellate Body of the WTO subsequently upheld the ruling, an agreement was reached with the United States in December 1999 that India would remove half of the remaining QRs by April 1, 2000 and subsequently all QRs by April 1, 2001.

18. Even though all remaining QRs were removed in April 2001, a number of NTBs have been retained and in some cases enhanced. The 2001/02 Export-Import (EXIM) policy statement, released in March 2001, imposed a number of new NTBs on imports, including some agricultural products, petroleum products, urea, and new and second-hand vehicles (Box III.2). In addition, the policy established an “early warning system” for monitoring imports, particularly of 300 sensitive items, on a monthly basis.15 Consistent with WTO rules, the EXIM policy proposed safeguards to prevent import surges that seriously threaten domestic industry included the imposition of safeguard duties (already imposed in seven cases), of temporary QRs, and of antidumping and countervailing duties. India also retained the option to increase applied tariff rates at any time provided that these rates do not exceed WTO bound rates and to restrict or prohibit imports for the protection of public morals, for the conservation of exhaustible natural resources, or based on health, sanitary, phytosanitary, or national security reasons.

India: 2001/02 EXIM Policy Statement

The key measures in the 2001/02 EXIM Policy Statement included:

  • -Removal of remaining QRs on 715 items.

  • -Imposition of other nontariff barriers on imports, including of agricultural products, petroleum products, urea, and new and secondhand vehicles:

    • - Imports of some sensitive commodities—including wheat, rice, maize, petrol, diesel, ATF, and urea—were permitted only through designated State Trading Enterprises;

    • - All primary product imports of plant and animal origin were subject to import permits based on sanitary and phytosanitary measures and provisions; and imports of liquor, processed food, and tea waste were subject to existing regulations on health and hygiene;

    • - Imports of left-hand drive vehicles and of automobiles older than three years were banned; imports of secondhand automobiles were allowed only through the port of Mumbai; and additional certification requirements were mandated for secondhand automobiles.

  • - Establishment of an “early warning system” for monitoring imports:

    • - A watch list of 300 sensitive items would be tracked on a monthly basis (with one month lag by later in 2001/02) by a special group that would also analyze the import data and publish a monthly statement in the media;

    • - Proposed safeguards included imposition of safeguard duties (already imposed in seven cases), of temporary QRs, and of anti-dumping duties.

  • - Increased tariffs (announced in the 2001/02 Budget), including on:

    • - Duty on secondhand automobiles raised to 180 percent (including excise duties);

    • - Customs duties on tea, coffee, copra, coconut, and desiccated coconut raised from 35 percent to 70 percent;

    • - Increased duties on crude and refined edible oils.

  • - An annual export growth target of 18 percent, with the aim of increasing India’s share of global exports to 1 percent by 2004. Key proposals included:

    • - EXIM Policy schemes (such as the Duty Exemption Scheme and the Export Promotion of Capital Goods Scheme) made applicable to additional sectors, including agriculture in particular;

    • - Simplification of procedures for establishing Special Economic Zones;

    • - A “Market Access Initiative” in which the government would assist industry in research and development, market research, specific market and product studies, warehousing and retail market infrastructure in selected countries, and direct market promotion through media advertising and buyer-seller meets.

19. Despite concerns that the removal of QRs could lead to a dumping and surge of imports into India, only a small number of industries have been adversely affected. These include dry-cell batteries, sport shoes, and some industries that in the past have been reserved for small-scale industries. In a number of instances where complaints about import surges have arisen—such as for import of apples, dust tea, and skimmed milk—total imports represented just a fraction of domestic production. Imports from some countries—China, for example—have increased rapidly in recent years, possibly related to the removal of QRs. However, Indian exports to these same countries have increased at even a faster rate, limiting the overall impact on the domestic economy.

20. Average tariff rates remained high and broadly unchanged during 1997-2000. Nonetheless, significant progress was made toward rationalizing the tariff structure, with the number of bands reduced from seven in 1998/99 to four in 2000/01. The statutory maximum tariff rate was also reduced from 45 percent to 35 percent—although higher duties applied to a number of items.16 At the same time, a special import surcharge of 2 percent was introduced in the 1996/97 budget and subsequently increased to 5 percent in September 1997, and then to 10 percent in the 1999/00 budget.

21. The 2001/02 budget took further steps toward tariff reduction. The 10 percent customs duty surcharge was abolished from March 1, 2001, and the government also committed itself to lowering the statutory maximum tariff rate from 35 percent to 20 percent by 2004/05. However, in response to the withdrawal of QRs, customs duties were increased for a number of products—including tea, coffee, copra, coconut, and various edible oils and second-hand vehicles—to rates well above the statutory maximum tariff rate.

22. Although tariff exemptions were reduced during the 1990s, their scope remains significant. Exemptions apply to imports for export processing, certain megapower projects, and specific end uses such as fertilizer, leather, foodgrain, precious stones, and sports goods industries. In addition, preferential rates also apply to imports from selected countries.



Citation: IMF Staff Country Reports 2001, 181; 10.5089/9781451818550.002.A003

Source: WTO.

23. As tariff and nontariff barriers have been reduced during the 1990s, India has generally increased the use of antidumping measures and is considered to be one of the most active users of these measures. India had 103 antidumping measures in force as of end-2000 up from 49 at end-1998 and 64 at end-1999, and initiated 37 new actions in 2000. During 2000, imports from China were most frequently targeted with 10 initiations, followed by the European Union (6 initiations) and Taiwan POC (4 initiations)


Prepared by Ranil Salgado and Alexander Hammer. Data presented in this chapter reflect official data releases through mid-May 2001.


The surcharge was removed in January 2001.


Aggregate quarterly trade data on a balance-of-payments basis are available from the RBI with a lag of one quarter. Aggregate monthly trade data on a customs basis, which excludes military and other noncustoms imports, are available from the Directorate General of Commercial Intelligence and Statistics with about a lag of one month. Composition of trade and the direction of trade are available with longer lags.


Staff estimates, calculated based on the import growth of partner countries weighted by India’s exports to those countries, indicate that partner country nominal imports grew 6½ percent and 13 percent, respectively, in 1999/00 and 2000/01.


On a customs basis, non-oil imports fell in 2000/01.


The local currency redemption of NRI accounts was included as private transfer receipts in the balance-of-payments statistics for data starting in 1996/97.


Prior to October 1997, gold and silver were imported into India through the “baggage route” (where nonresident or returning Indians were allowed to bring up to 10 kilograms 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 since the foreign exchange used to purchase the gold was earned outside India. Since their liberalization, these imports have increasingly taken place through the normal customs route, resulting in an increase in customs imports, and because of the accounting methodology, a decrease in both noncustoms imports and private transfers.


Data on FII inflows are available from the RBI on a monthly basis with a lag of about three months and from the SEBI on a daily basis.


See A.T. Kearney, FDI Confidence Index, February 2001, Vol.4 and A.T. Kearney, FDI Confidence Audit: India. The index was based on a survey of the world’s 1,000 largest companies, while the audit was based on private interviews with senior executives in these companies.


Net external borrowing includes external assistance, commercial borrowing, and short-term credits.


Increased external borrowing was partly offset in the capital account by outflows of NRI deposits in the third quarter, possibly reflecting shifts in these deposits to the IMD scheme.


Short-term debt on a residual-maturity basis in India may be underestimated as NRI deposits are calculated on a contracted-maturity basis.


While external debt statistics are now generally available on a quarterly basis, short-term external debt on a residual-maturity basis is estimated only on an annual basis.


For a more detailed description of trade policy reforms through 2000, see India—Recent Economic Developments, (IMF Staff Country Report No. 00/155, November 2000).


In early May 2001, the Indian government announced that the import of 300 consumer goods—including edible oils, toys, and liquor—would be restricted to only 11 entry points from over 200 previously. This restriction, however, was removed by the end of May.


These items accounted for less than 1 percent of tariff lines, but included goods such as sugar, edible oils, rice, and wheat.

India: Recent Economic Developments and Selected Issues
Author: International Monetary Fund