Economic Reforms in India-

Scope, Rationale, Progress and Unfinished Agenda

Dr. Tarun Das*,

Economic Adviser, Ministry of Finance
and Government Nominee Director, Bank of Maharashtra

December 2002
_______________________________________________________________________
_

∗ The authour would like to thank the Bank of Maharashtra for inviting him to
deliver this lecture at their Head Quarter at Pune on the 21st December 2002.
∗ The paper expresses personal views of the authour, which donot necessarily imply
the views of either the Ministry of Finance and Company Affairs, Government of
India or the Bank of Maharashtra.

1
 Contents
Contents Pages
1. Introduction 3
2. Rationale and scope of economic reforms 5
3. Macro stabilisation policies 8
(a) Fiscal reforms since 1991 8
(b) Central government budget for 2002-03 13
(c) Financial sector reforms 14
(d) Monetary and credit policies for 2002-03 15
(e) Exchange rate policies 17
4. Structural reforms 18
(a) reforms in industry and infrastructure 18
(b) social sector policies and reforms 20
(c) agricultural policies and reforms 21
(d) Trade and tariff policies and reforms 22
5. Unfinished agenda on reforms 23
6. Key Policy issues 24
(a) fiscal policy 24
(b) Money and capital markets 25
(c) External sector policies 26
(d) Infrastructure policies and reforms 27
(e) Strategy for social sector development 28
(f) Structural policies 29
7. Role of managers in the post reforms period 30
8. Concluding remarks 31

Tables
1. Paradigms of economic reforms in India since 1991 7
2. Fiscal reforms: progress to date 9
3. Financial sector reforms since 1991 11
4. Trend of excise and customs duties and corporate tax rates 12
5. Tax/GDP ratios since 1990-91 12
6. Progress of structural reforms 19
7. India: Trends of macro-economic indicators since 1990-91 34
8. Basic economic indicators of selected Asian economies in 2000 37
9. Growth of output in selected Asian economies in 1980s and 1990s 38
10. Tax policies in selected Asian economies in 1990 and 2000 39
11. Fiscal incentives in selected Asian economies 40
12. Tariff barrier indicators in selected Asian economies 41
13. Global integration indicators of selected Asian economies 42
14. Private sector development in selected Asian economies 43
15. Financial depth and efficiency in selected Asian economies 44
16. Foreign investment regime in selected Asian economies 45

References 46

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 Economic Reforms in India-
Scope, Rationale, Progress and Unfinished Agenda

Dr. Tarun Das, Economic Adviser, Ministry of Finance

And Government Nominee Director, Bank of Maharashtra

1. Introduction

It is well known that since 1991 India has started a sort of economic revolution to exploit
fully the country’s potentials to achieve higher growth. Credible reforms have been taken
in industry, trade, infrastructure, fiscal, financial and public sectors to improve efficiency,
productivity and international competitiveness of Indian industries and to impart
dynamism to the overall growth process. As the initial reforms take root and second-
generation reforms unfold, India is emerging as one of the favourable destinations for
foreign investment and a land of immense opportunity for all.

India’s reforms program is characterised by the following unique features:

 Gradual, Step by Step, Evolutionary approach not a Big Bang, Shock Therapy or
Revolutionary Approach
 General political consensus
 Strong emphasis on “human face”
 Practically no sacrifice made by people
 No write-off / rescheduling of external debt

India’s reforms programme has emphasized gradualism, step by step approach and
evolutionary transition rather than “shock therapy” or “a big bang approach” as was
done in Latin American countries or the Commonwealth of Independent States (CIS).
Because of slow pace of reforms, some foreign investors compare India with a tortoise.
But, everyone knows the story that ultimately the race was won by the tortoise and not by
the proud hare. In my view, India is an elephant: huge, cautious slow moving; but bold,
strong firm-footed determined, self-willed and always forward-looking.

India has a multi-party democracy and “growth with social justice” has been one of the
basic objectives of our planing since 1951. No reforms program can succeed unless we
are able to take the people along with us. Therefore, all our reforms are based on general
political consensus and have a bias for employment generation and poverty reduction.

More than eleven years have passed since the reforms started. Eleven years is a long
period for an individual, but for a country as complex and large as India and with a multi-
party democracy, eleven years is a short period to expect completion of all reforms,

3
particularly when the global economy is changing at a fast speed. However, it is a matter
of some satisfaction that the results until now had been highly encouraging (see Table-7).

India has moved up on a higher growth path with higher employment and higher real
wages, less inflation and lower level of poverty. It has the distinction of coming out of a
severe crisis in the external sector without recourse to debt rescheduling or debt write-off.
On contrary, India was able to prepay a part of its external debt to the multilateral funding
agencies and bilateral countries.

India is one of the few countries of the world, which have reaped these benefits without
serious economic disruptions and without any sacrifice made by the people. In many
countries with significant reforms, there were high rates of inflation, unemployment and
poverty at the initial stage. There had been no such adverse situation in India. Indian
reform programme emphasised development of appropriate safety nets for the vulnerable
and weaker sections that might be adversely affected by structural reforms.

Despite global recession and hardening of international prices of oil in recent years and the
border conflicts with Pakistan, India has emerged as one of the fasted ten growing
economies of the world. Inflation has come down from more than 16 per cent in June
1991 to around three percent today. Poverty ratio has come down from 36 per cent in
1993-94 to 26 per cent in 1999-2000. There had been no wage freeze, no denial of
dearness allowance and no retrenchment of employees or shutting down of companies.

There has been significant improvement in India’s external sector. Total foreign exchange
reserves which dwindled to US$1 billion, equivalent to only two weeks level of imports,
in June 1991 have increased to more than US$67 billion equivalent to more than one year
of imports. The current account balance, which showed a deficit of 3.1 per cent of GDP in
1990-91, had a surplus amounting to 0.3 per cent of GDP in 2001-02.

Foreign investment inflows improved significantly in 1990s and amounted to $5.1 billion
in 2000-01 and $5.9 billion in 2001-02 compared with only US$1 billion throughout the
whole decade of 1980s. The growth in foreign investment was the result of the stability
of the exchange rate, continual reforms in infrastructure, liberalisation of foreign
investment policies.

External debt indicators also show steady improvement. Among the top ten debtor
developing countries of the world, India ranked third after Brazil and Mexico. In the year
2000, while Brazil still ranks the first in stock of external debt, India’s position has
improved to the ninth rank after Brazil, Russian Federation, Mexico, China, Argentine,
Indonesia, Korean republic and Turkey.

The external debt-to-GDP ratio declined continuously from 38.7 per cent at end March
1992 to 19.7 per cent at end March 2002. The debt-service ratio (i.e. the ratio of total debt
services to gross receipts on the current account of the external sector) also declined
continuously from 35.3 per cent in 1990-91 to 13 per cent in 2001-02. The share of short-

4
term debt in total external debt declined continuously from 10.3 per cent in 1991 to 2.8 per
cent in 2001. Due to these improvements, India is now categorized as “a low indebted
country” compared with its classification as “a moderately indebted country” in 1991.
2. Rationale and Scope of Economic Reforms

During the decade of 1980s India successfully completed the Sixth (1980-1985) and the
Seventh (1985-1990) Five Year plans and moved on a higher growth path with an average
growth rate of 5.7 per cent per annum compared with a trend rate averaging 3.5 per cent
until the end of 1970s. However, sustainability of the growth process came under serious
doubt due to large and persistent macro economic imbalances manifested in rising fiscal
deficits, precarious balance of payments situation and high inflationary pressures.

During 1980s the overall economic philosophy in India was to liberalise imports to some
extent, promote export-oriented industries, reduce physical controls and regulations in
industry, encourage capacity augmentation and technological upgradation and allow
flexible exchange rate and attract foreign investment in selected sectors on the basis of
case by case approvals. However, these liberalisation measures were not carried to full
extent and not supplemented by fiscal prudence, monetary discipline, private
participation, reforms in taxation policies or in monopolistic trade and industrial licenses.

India still adopted a very restrictive policy as regards foreign equity, capacity expansion
for economies of scale and private participation in infrastructure and other strategic
sectors. In the pre-reforms period, Indian economy in general was characterised by:

 Mixed economy, but too closed

 Far behind world wide globalisation
 High level of control, licenses and regulation
 Monopolistic practices in public utilities
 Complex tax regime with high rates
 High tariff walls and Quantitative Restrictions (QRs) on imports
 Rigid factor markets for land, labour and capital
 High levels of fiscal deficits and public debt
 Precarious balance of payments situation

Over control, excessive regulation, high protection, licensing raj and high taxes and
duties resulted in:

 Low efficiency and productivity

 High transactions cost
 High cost economy and rent seeking
 Non-optimal allocation of resources
 Sub-optimal choice of technology and location of industries
 Low quality but high prices of products and services
 Bureaucratic inefficiency and corruption

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Due to these inefficiencies Indian economy entered the decade of the 1990s with large
imbalances on internal and external account, which made the economy highly vulnerable
to internal and external shocks. These problems were exacerbated by the Gulf crisis in
1990-1991 and consequent hardening of international prices of oil.

There was precarious balance of payments situation and our foreign exchange reserves
dwindled to US$1 billion, which was sufficient to finance only two weeks’ level of
imports as compared to prudent level of three months imports. India was on the verge of
external default. International credit rating organisations downgraded Indian scrips and
put them in the no investment grade. Our non-resident Indians started withdrawing their
deposits at a faster speed as they lost confidence in the Indian banking system. The
window of commercial borrowing was closed to the Indian banks, financial institutions
and the corporate bodies. Rate of inflation reached 16 per cent hurting everybody,
particularly the weaker sections of the society whose incomes are not indexed to prices.
There was also widespread unemployment.

Indian government has to lift physically gold from the chest of the Reserve Bank of India
and deposit it with the Bank of England and the Bank of Tokyo to create international
confidence on India. The new government in June 1991 and the then Finance Minister
Manmohan Singh, recognizing that there was no time to lose, immediately adopted a
number of stabilisation measures designed to restore internal and external confidence.
The government also announced comprehensive reforms in industry, trade, financial and
fiscal sectors to improve competitiveness of Indian economy. Fortunately for us, the
reforms program was supported by quick-disbursing finance from the International
Monetary Fund (IMF), World Bank and the Asian Development Bank and also individual
donor countries, particularly Japan.

Paradigms of reforms since 1991 are summarised in Table-1. Basic objectives of these
reforms were thew following:

 To encourage private participation including foreign investment in the development

process. Over the years, government had widened its scope and was participating in
the activities where private initiatives might be more productive and useful.
 In many cases, twin objectives of the government (namely growth and equity) were
intermixed and one objective was taken as an alibi for failure for another. In the
process, both the prospects of higher growth and social justice were impaired.
 It was recognised that as there are imperfections in the markets, there are also
imperfections in the government. It was, therefore, necessary to redefine the role and
scope of the government and to open the economy to both internal and external
market competitions.

Having discussed the rationale and objectives of the economic reforms, the purpose of
this paper is to make a review of the ongoing reforms and to answer a number of
questions, particularly the following:

 How far have we progressed?

6
 Where do we want to go?
 How to prioritize, sequence these reforms with what speed and intensity?
 What are their likely impact on growth, output and employment?

Table-1 Paradigms of Economic Reforms in India since 1991

Pre-Reforms Period Post Reforms Period

1. Quantitative licensing on trade and 1. Abolition of industrial and trade

industry licensing
2. State regulated monopolies of utilities 2. Removal of state monopolies,
and trade privatization & divestment
3. Govt control on finance and capital 3. Liberalisation of financial and capital
markets markets
4. Restrictions on foreign investment and 4. Liberal regime for FDI, portfolio
technology investment, foreign technology

5. Import substitution and export of 5. Export promotion and export

primary goods
6. High duties & taxes with multiple rates
and large dispersion
7. Sector-specific monetary, fiscal and
tariff policies
8. End-use and sector-specific multiple
and controlled interest rates
diversification, no import bias
6. Reduction and rationalization of taxes
and duties
7. Sector-neutral monetary, fiscal and
tariff policies
8. Flexible interest rates without any end-
use or sector specifications

9. Foreign exchange control, no 9. Abolition of exchange control, full

convertibility of rupee convertibility on current A/C
10. Multiple and fixed exchange rates 10. United and market determined
exch.rates
11. Administered prices for minerals, 11. Abolition of all administered prices
utilities, essential goods except for few drugs
12. Tax concessions on exports and savings 12. Rationalised and being phased out

13. Explicit subsidies on food, fertilisers,
and some essential items
14. Hidden subsidies on power, urban
transport, public goods, POL
15. General lack of consumers protection
and other rights
13. No change, budget subsidies on LPG
and kerosene introduced
14. No change, but user charges are being
rationalised, and subsidies targeted
15. Acts governing consumer rights, IPR,
independent regulatory authority

16. Central planning, discretionary process, 16. Decentralisation, sound institutional

high degree of bureaucracy framework, reforming civil services
17. Outdated Companies Act 17. No change
18. No exit policy for land and labour 18. No change in labor policy, slow
progress of reforms in land markets

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19. Outdated legal system 19. No change

Macro adjustment policies can be broadly divided into two groups- stabilisation policies
and structural reforms. While stabilisation policies aim at reducing macro economic
imbalances by attacking demand, structural adjustment policies aim at increasing supply
and improving productivity and growth by imparting competitiveness, efficiency and
dynamism to the system. These policies encompass the following specific measures:

Macro stabilization policies:

(a) Fiscal policies
(b) Monetary and credit policies
(c) Exchange rate adjustment
(d) Tariff policy
(e) Wage-income-price policies

Structural adjustment policies

(a) Reforms in trade and external sector
(b) Reforms in industry and infrastructure
(c) Reforms in agriculture
(d) Public sector reforms
(e) Factor market reforms- land, labour and capital
(f) Administered price policy

3. Macro Stabilisation Policies

(a) Fiscal Reforms Since 1991

The basic objective of fiscal reforms since 1991 had been the reduction of fiscal deficits
to sustainable levels by augmenting resources and containing expenditure, and to simplify
rules and procedures for taxes and duties. The basic objective of tax reforms is to create a
tax system, which is simple, equitable, progressive and stable, and interferes least with
the efficient allocation of resources. Government desires to gradually increase the scope
of direct taxes and to move towards a system of value added tax system.

Government is also focusing attention on contingent liabilities and is trying to have

reforms in provident funds, pension funds and insurance funds. The Government desires
to have a Fiscal Responsibility Act indicating limits on government borrowing and
overall fiscal deficit as percentage of GDP.

Table-2 summarises major reforms in fiscal policies and Table-3 summarises major
reforms in money and capital markets since 1991, while Table-4 indicates trends of
income and corporate taxes and excise duties, and Table-4 indicates trends of tax-GDP
ratios since 1990-91.

8
9
 Table- 2 Fiscal Reforms: Progress to Date (As in December 2002) continued

Status in June 1991 Status in December 2002

Fiscal deficit of the Central government at 6.6 Fiscal deficit of the Central Government as per
per cent of GDP, revenue deficit at 3.3 per cent cent to GDP is reduced to:
of GDP and primary deficit at 2.8 per cent of Year Fiscal Revenue Primary
GDP in 1990-91 was unsustainable. Deficit Deficit Deficit
1990-91 6.6 3.3 2.8
1991-92 4.7 2.5 0.7
1992-93 4.8 2.5 0.7
1993-94 6.4 3.8 2.2
1994-95 4.7 3.1 0.4
1995-96 4.1 2.4 0.0
1996.97 4.0 2.3 -0.2
1997-98 4.7 3.0 0.5
1998-99 5.1 3.8 0.7
1999-00 5.4 3.5 0.7
2000-01 5.7 4.1 0.9
2001-02 RE 5.9 4.0 1.1
2002-03 BE 5.3 3.8 0.7
RE= Revised estimate, BE = Budget estimate.

Traditionally fiscal deficit was financed by :

(a) The RBI through ad hoc treasury bills (a) Ad-hocs have been replaced by the Ways
issued at fixed rate of interest of 4.6%; and Means Advances (WMAs);
(b) the banking system which holds dated (b) SLR and CRR reduced significantly to
securities to meet SLR obligations; allow banks more private lending;
(c) direct market borrowings through open (c) Govt. securities are auctioned at market
market operations by sale of govt. rates. Primary dealer system for
bonds/securities; government securities introduced.
(d) public funds such as pension/provident (d) Changes in pension and provident fund
funds and small savings; and system and small savings.
(e) external debt. (e) Govt. emphasises inflows of non-debt
financial flows and raising of equity.
Combined fiscal deficit of the Centre and States Overall fiscal deficit of the Centre and States
was 9.4 per cent of GDP in 1990-91: remained more or less invariant over 1990s.
Central government 6.6 2001-2002 2002-2003
States & UTs 3.3 Central government 5.7 5.3
Centre & States/ UTs 9.4 States and UTs 4.5 3.8
Central & State / STs 9.9 8.7
Public debt as percentage of GDP Public debt as percentage of GDP
(a) Central Govt 66% (a) Central Govt 68%
- Internal 49% - Internal 58%
- External 17% - External 10%
(b) States 19% (b) States 28%
- Internal 19% - Internal 28%
© General Govt 72% © General Govt 81%
- Internal 55% - Internal 71%
- External 17% - External 10%

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 Table- 2 Fiscal Reforms: Progress to Date (As in December 2002) completed

Status in June 1991 Status in December 2002

Direct budgetary support to central public
enterprises amounted to 1.5% of GDP in
addition to a variety of subsidies, and financing
at below market prices.
No hard budget constraints for PSEs.
No disinvestment policy by the government.
Budgetary support curtailed to 0.6% of GDP,
financing from domestic capital market has
increased, preferential access to bank credits /
price preference eliminated.
MOUs with CPSEs strengthened.
Disinvestment of govt. equity to the extent of
an average of 20% of equity has been realised.

High monetisation of government debt. Ad-hocs are replaced by WMAs, which would
also be phased out.

Control on interest rate on government Government securities are auctioned and sold
securities. at market determined rates.

Irrational duty structure and very high rates of Both direct and indirect taxes have been
both direct and indirect taxes. reduced and rationalised.
Maximum Rates Maximum Rates
Excise duties 110% Excise duties 16% CENVAT+ 16% SED
Import duties 400% Import duties 30% + 4% SAD
Income tax 54% Income tax 30% + surcharge of 5%
Corporate taxes: Corporate tax :
Domestic cos. 49% and 54% Domestic cos. 35% + surcharge of 5%
Foreign cos. 65% Foreign cos. 40% + surcharge of 5%

Multiple rates for excise (19 major rates) and End-use specifications are abolished.
customs duties (20 major rates) depending on Specific rates are replaced by ad-valorem rates.
end-uses. Only two major rates for excise, and four major
Many rates were specific. rates for customs duties.

No service taxes. Tax base widened by introducing service

No Minimum Alternate Tax (MAT).
No Value Added Tax (VAT).
No MRP-linked excise duties.
No presumptive income tax.
No estimated income scheme for retail trades.
taxes on 51 services.
MAT introduced except for exporters.
MODVAT introduced for many sectors.
Concept of MRP introduced for consumption
goods and other products.
Estimated income scheme for retail trades is
introduced. Presumptive income tax scheme
introduced for individuals owning houses, motor
vehicles, telephone, or having traveled abroad.

Double dividend tax on both individual incomes
and companies profits.
Existence of gift tax.
Limited cases of tax holidays.
Dividend tax only at the individual level.
Gift tax abolished.
Tax holidays extended to many infrastructure and
eco-friendly sectors, public safety and security
projects, IT industries, backward areas etc.

11
 Table-3: Financial sector Reforms since 1991
Status in June 1991
Highly regulated and controlled banking system
with strict entry and branching rules.
Bank deposit rates fixed according to account
types and maturities. Minimum maturity of
fixed deposit is 30 days. Ceiling rate on deposits
announced by the RBI.
Issuing and pricing of securities, shares and
bonds determined by the Controller of Capital
Issues (CCI) under the Ministry of Finance.
Bank lending rates are fixed according to loan
size and uses, floor rate on loans exceeding
Rupees two lakhs fixed by the RBI at 21%.
Interest rates on CDs are free, but bankwise
limits on issuance of CDs are fixed by RBI.
At least 40 per cent of bank credits channelised
to the priority sectors at concessional rates.
Government pre-empted large portion of bank
reserves through CRR of 25% and SLR of
38.5%.RBI
Bank rate at 12%.
PLR was high at above 21%.
Inadequate norms concerning income
recognition, provisioning and capital adequacy.
Portfolio investment by foreign investors in
Indian companies is not allowed.
Foreigners not allowed to buy government
securities or government equity shares
disinvested from PSUs.
Indian firms not allowed raising funds from
foreign stock exchanges.
Status in December 2002
Guidelines for entry of new private banks
formulated, and new private banks set up.
Restriction on opening or closing branches
relaxed. Government share of equity in public
sector banks are being brought down to 49 per
cent and aim at bringing down to 33 per cent.
Equity participation in new private banks by
FIIs and NRIs is allowed to the extent of 40%.
Bank deposit rates except for savings account
are liberalised and allowed to be determined
by the banks. The minimum maturity of term
deposit is reduced to seven days.
The office of CCI is abolished. Independent
regulatory authority i.e. SEBI is established
for orderly growth of capital markets.
Lending rate is determined by the banks, and
PLR is ranging between 10,75 to 12%. Banks
are also allowed to lend at below PLR rates.
Bankwise limits on issuance are abolished.
Number if directed credit categories
rationalised, and interest rate subsidy is
reduced. No concessional rates except for
small loans up to Rs.25000.
CRR reduced to 4.75%.
SLR reduced to 25%.
Bank rate is reduced to 6.25%.
PLR is free. Present PLR is 10.75%-11.5%.
Regulations, monitoring and norms on
asset classification, provisioning, capital
adequacy tightened as per international
best practices.
FIIs, NRIs and OCBs are allowed to
operate in India’s stock markets subject to
individual ceiling of 10% for FIIs and 5%
for NRIs/OCBs, cumulative ceiling 49%
for FIIs and 10% for NRIs/OCBs and
collective ceiling of 49% of paid up
capital.
FIIs are allowed to buy government securities and
debt issues, NRIs/ FIIs/ foreign companies are
allowed to buy disinvested shares subject to the
limits on foreign equity in the respective sectors.
Indian firms allowed to raise funds abroad
through Global Depository Receipts (GDRs),
Foreign Currency Convertible Bonds and
12
offshore fund.

13
 Table-4: Trend of Excise and Customs duties and Corporate Tax rates since 1991

Year Excise duty (%) Customs tariff rate (%) No. of Corporate tax
services rate
No. Peak basic No.of Peak Basic SAD covered Domes- Foreign
of rate major basic surcharg (Special under tic compani
duty duty rate e or Sp. additiona service compan es
rates rates Cus. duty l duty) tax ies
1991-92 19 110 20 150 0 0 0 45% + 65
15% sur
1992-93 19 110 16 110 0 0 0 45% + 65
15% sur
1993-94 19 110 16 85 0 0 0 45% + 65
15% sur
1994-95 17 110 12 65 0 0 3 40% + 55
15% sur
1995-96 12 50 9 50 0 0 3 40% + 55
15% sur
1996-97 9 40 8 50 2% SCD 4 6 40% + 55
7.5%sur
1997-98 10 40 7 40 5% SCD 4 18 35% + 48
0% sur
1998-99 11 40 7 40 5% SCD 4 26 35% + 48
0% sur
1999-00 6 24 5 40 10% sur- 4 26 35% + 48
+16%SED charge 10% sur
2000-01 5 16% 4 38.5 10% sur- 4 26 35% + 48
CENVAT charge 13% sur
+24%SED
2001-02 2 16% 4 35 0 4 41 35% + 48
CENVAT 2% sur
+16%SED
2002-03 2 16% 4 30 0 4 51 35% + 40% +
CENVAT 5% sur 5% sur
+16%SED

Table-5: Tax to GDP ratio (%)

Year Customs Central Excise Others Total

1991-92 3.6 4.6 0.3 8.5

1992-93 3.4 4.4 0.0 7.8
1993-94 2.7 3.9 0.1 6.7
1994-95 2.6 3.6 0.1 6.3
1995-96 3.0 3.4 0.1 6.5
1996-97 3.1 3.3 0.1 6.5
1997-98 2.6 3.2 0.1 5.9
1998-99 2.3 3.1 0.1 5.5
1999-2000 2.5 3.2 0.1 5.8
2000-2001 2.3 3.3 0.1 5.7
2001-2002 2.3 3.3 0.1 5.7
2002-2003 2.4 3.6 0.1 6.1

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15
 (b) Central government budget for 2002-03

The Central Government Budget for 2002-03, formulated against the background of a
large slippage of fiscal situation, targeted the fiscal deficit at 5.3 per cent of GDP and
attempted to stimulate industrial and infrastructure growth by announcing several fiscal
and other incentives. These include rationalisation of customs and excise duties and
reduction of the maximum tariff rate to 30 per cent. The budget also announced a
commitment to reduce these rates further by 5 percentage points every year until 2004-05
to reach 20 per cent and to move to a two-tier tariff structure in the medium term.

On the revenue side, key initiatives included an increase in the income tax surcharge from
2 per cent to 5 per cent, a rationalisation of excise and customs duties, and an extension
of service tax to 51 services. On the expenditure side, the main initiatives included
modest reduction of fertilizer subsidies and surplus manpower, and expansion of the
scope of conditional fiscal and structural reforms by the states.

During 2002-03 progress was made in some aspects of structural reforms. In particular,
bold steps were taken to accelerate the pace of disinvestment. Another key achievement
was the dismantling of the Administered Price Mechanism (APM) for petroleum
products, and announcing a timetable for phasing out the remaining subsidies on
kerosene and domestic LPG. Related to trade liberalisation, statutory peak tariff rates
were reduced from 35 per cent in 2001-02 to 30 per cent in 2002-03.

The Budget attempted to stimulate the economy by leaving direct taxes unchanged and
increasing public expenditure on agriculture, infrastructure and rural development.
Policies were announced to stimulate capital markets, corporate restructuring, capital
provisioning for weak banks, research and development, construction and housing,
information technology and knowledge based industries. Budget had also a strong
commitment to the development of social sectors for achieving distributive justice,
strengthening the public distribution system and poverty alleviation programmes,
improving rural infrastructure and generation of employment.

Major fiscal measures announced in the budget for 2002-03 include the following:
 Corporation tax applicable to foreign company reduced to 40 per cent.
 A surcharge of 5 per cent imposed on all categories of taxpayers.
 Higher depreciation rates allowed for capacity expansion.
 Peak rate of customs duty reduced from 35 to 30 per cent, and a road map is given to
reduce customs duties every year by 5 per cent and to reach 20 per cent by 2005.
 Special Economic Zones (SEZs) entitles to procure duty free equipment, raw
materials, components etc. whether imported or purchased locally.
 Import duty reduced on a number of items used in iron and steel industry, seaports
and airports, agriculture, IT industry etc.
 Service tax extended to inland cargo handling, storage warehousing (except for
agriculture), event management, rail travel agents, and corporate bodies providing
financial service. Services provided by hotels continue to be exempted.

16
 Distribution tax of 10 per cent on companies and mutual funds is abolished, and
dividend tax re-imposed on the recipients.
 Tax rebate on specified savings is made graded with no tax rebate for persons with
taxable income greater than Rupees five lakh.
 Tax exemption is available to certain categories of employees receiving amounts up
to Rs.0.5 million as VRS compensation.

For medium term management of the fiscal deficit, the government introduced a Fiscal
Responsibility Bill in the parliament. The Bill proposes limit on fiscal deficit, limit on
government borrowing, limit on total stock of public debt and complete elimination of
deficit on the current account of the Budget within next five years. The Bill has been
examined by the Standing Parliamentary Committee on the Finance and their suggestions
are under review by the Ministry of Finance.

(c) Financial sector reforms

Several measures were taken since 1991 to strengthen the banking system, to increase
banks’ operational autonomy, and to improve the functioning of money and capital
markets. With this objective in view the policy package for commercial banks included a
reduction of CRR from 25 per cent in 1991 to 4.75 per cent in 2002, a reduction of SLR
from 38.5 to 25 per cent, a reduction of nominal interest rates from over 21 per cent to
10.75 per cent to 12 per cent in 2002, tightening of prudential norms for capital adequacy
and provisioning for non-performing assets, an active open market operations and
abolition of selective credit controls. Other measures included decontrol of the prime
lending rates of the commercial banks and deposit rates for term deposits. An array of
capital market reforms has been introduced encompassing primary and secondary
markets, equity and debt and foreign institutional investment.

These measures resulted in a strong growth in bank deposits due to high real interest
rates, particularly longer-term rates. There was abundant liquidity in the system but slow
growth of commercial credit due to sluggish consumer demand and external trade. The
low offtake of commercial credit also reflected a more cautious approach to credit
appraisal by banks, which sought to avoid the accumulation of non-performing assets
under the Reserve Bank’s new prudential norms. By contrast there was a substantial
increase of investments by commercial banks in government securities and bonds,
debentures, and shares of the corporate sector.

Commercial bank credits traditionally comprised banks loans, cash credits, overdrafts and
inland and foreign bills purchased and discounted. However, with deregulation of the
financial sector, there has been a shift in the banks’ asset portfolio mix with investments
in money and capital market instruments such as commercial paper, shares and
debentures issued by the commercial sector. Banks also held government securities far in
excess of their obligations for the statutory liquidity ratio (SLR).

17
As a part of second generation reforms, several measures were announced in the Budgets
for 2001-2002 and 2002-03 to strengthen the banking system, to increase banks’
operational autonomy, and to improve the functioning of money and capital markets.
These measures include the following:

• Establishment of Clearing Corporation

• Screen based trading in G-securities
• Replacement of Public Debt Act by Government Securities Act
• Reduction of Govt equity in banks
• Voluntary Retirement Scheme for commercial banks
• Legislation on securitisation and foreclosure in banking sector
• FII portfolio investment will not be subject to the sectoral limits for FDI.
• Indian companies are allowed to invest up to US $100 million abroad.
• A pilot Asset Reconstruction Company to be set up to initiate measures for taking
over NPAs in the banking sector and develop a market for securitised loans.
• Foreign banks allowed to operate as branches or to set up subsidiaries.
• Full convertibility is permitted for deposits by non-resident Indians.
• NRIs can also repatriate their current earnings in India in foreign currency.
• Indian mutual funds are allowed to invest in securities in countries with fully
convertible currencies.
• Administered interest rates to be bench marked to the average annual yields of
Government securities of equivalent maturity.
• State governments allowed prepaying their high cost debts from additional sources at
lower interest rates.

Scheduled commercial banks (SCBs) improved their performance in 2001-02. The ratio
of operating profits to total assets improved from 1.53 per cent in 2000-01 to 1.94 per
cent in 2001-02. There was also a decrease of net non-performing assets (NPAs) of the
commercial banks, which amounted to 5.5 per cent of net advances at end March 2002
compared with 6.2 per cent at end March 2001 and 9.2 per cent in 1996.

92 commercial banks out of 97 banks attained the minimum capital adequacy ratio
(CAR) of 9 per cent by end March 2002. The ratio is to be raised to 10 per cent by end
March 2003. 23 banks out of 27 public sector banks and 62 banks out of 70 private sector
banks had already achieved CAR exceeding 10 per cent by end March 2002.

(d) Monetary and credit policies for 2002-03

The basic objective of monetary policies announced by RBI in April 2002 and October
2002 was to contain inflation around 4 per cent alongwith sustaining overall GDP growth
rate in the range of 5 to 5.5 per cent. In the face of a distinct moderation of the inflation

18
rate, the thrust of the monetary policy in 2002 was to ensure adequate flow of credits to
the productive sectors of the economy and to support revival of investment demand.

In the financial sector, loan classification and provisioning regulations were tightened,
and foreign entry to the banking system was further liberalised through the lifting of
limits on FDI and FII investment. Actions were taken to strengthen capital markets
including the restructuring of the Unit Trust of India (UTI), Industrial Development Bank
of India (IDBI) and the Industrial Finance Corporation of India (IFCI).

In pursuit with the monetary and credit policy stance announced in April 2002, the cash
reserve ratio (CRR) was reduced by 0.5 percentage point to 5 per cent with effect from
June 2002. A flexible stance was indicated with respect to bank rate prevailing at 6.5 per
cent since October 2001. A system of variable interest rates and deposit rates was
introduced and banks were directed to disclose maximum spread over and below the
Prime Lending Rate (PLR) for greater transparency.

In order to boost economic activities, the mid-year monetary policy announced by the
RBI on the 29th October 2002 reduced the bank rate from 6.5 per cent to 6.25 per cent and
CRR by 0.25 percentage point to 4.75 per cent and focused on the twin objectives of
consolidating reforms in the long run and providing adequate liquidity in the short run.

Despite significant reduction of RBI bank rate, lending rates of the commercial banks did
not fall commensurately and domestic credit growth continued to decelerate. Bank
lending and deposit rates fell by only 50-150 basis points during 2001-2002. The prime
lending rate (PLR) virtually remained unchanged, reflecting the rigidities arising from
administered rates on small savings. However, banks are lending below PLR and have
also reduced the maximum spread over PLR and so effective lending rates have declined
by 50-100 basis points.

The sanctions and disbursements of the long-term credit by the financial institutions
declined in 2002-03 implying weak investment demand. However, lending by the
commercial banks, which are generally for working capital and trade finances, increased
significantly in 2002-03 due to revival of industrial growth and pick up of exports.

Other major measures announced in the Mid Term policy include the following:

 Regional rural banks, local area banks and co-operative banks advised not to pay
additional interest on savings accounts over what is payable by commercial banks.
 Banks were allowed to determine their PLR and sub-PLR rates for export credits.
 Banks were free to issue Certificates of Deposits (CDs) on floating rate basis.
 In order to improve credit delivery to the priority sectors, scope of credits to
agriculture, small business and weaker sections of people were expanded.
 System of micro credit finance institutions was strengthened.
 Establishment of offshore banking units in the Special Economic Zones as branches
of banks operating in India was allowed.

19
  Residents were permitted to open bank accounts in foreign currency with foreign
exchange earned abroad and remittances received from outside.

(e) Exchange rate policies

In international categorizations by the International Monetary Fund (IMF), India is

regarded as one of the countries having independent floating exchange rate arrangement.
The day to day fluctuations in the exchange rate of Indian rupee are determined by free
market forces for supply and demand for foreign exchange, such fluctuations reflect both
economic fundamentals and short term speculation. The rupee is also fully convertible on
current account and almost fully convertible on capital account for the non-residents.

The broad principles that have guided India after the Asian crisis of 1997 are:

• Careful monitoring and management of exchange rates without a fixed target or a pre-
announced target or a band.
• A policy to build a higher level of foreign exchange reserves which takes into account
not only current account deficits but also ‘liquidity at risk’ arising from unanticipated
capital movements;
• A judicious policy for management of capital account. India has adopted the golden
principle for capital account convertibility i.e. first liberalising inflows of non-debt
creating financial flows and concentrating on concessional loans from the multilateral
funding agencies followed by liberalisation of the long term commercial loans with
strict monitoring on short-term external loans.

In order to further liberalise the movement of cross-border capital flows, especially in the
area of outward foreign direct investment, inward direct and portfolio investment, non-
resident deposits and external commercial borrowings, RBI announced the following
important measures relating to current and capital account during 2002:

• Considerable liberalisation of release of foreign exchange for individual residents for

most purposes like travel, education, medical expenses etc.

• Non-Resident Indians/ Persons of Indian Origin (NRIs/ PIOs) were permitted to

repatriate assets in India acquired by way of inheritance/legacy, and current income
like rent, dividend, pension and interests.

• Units located in Special Economic Zones (SEZs) are permitted to remit premium for
general insurance policies taken from insurance companies outside India.

• Insurance companies registered with IRDA are allowed issuance of general insurance
policies denominated in foreign currency.

• Corporates are permitted to prepay External Commercial Borrowings (ECBs) up to US

$100 million without permission from RBI up to end-March 2003.

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 4 Structural Reforms

(a) Reforms in industry and Infrastructure

Government has abolished licensing for both industrial production and exports except for
a few sectors, which are important on considerations of national security, public health
and environment. Industrial licensing is now required for only 6 industries which account
for less than 7 per cent of output in manufacturing. Only 4 industries (viz. defense
products, atomic energy, railways, and minerals required for atomic energy) are now
reserved for the public sector.

Foreign investment policy has been liberalised significantly since July 1991. Most of the
sectors (except a few such as agriculture, retail trade etc.) are now open for foreign
investment subject to sectoral caps on equity. Majority participation and equity up to 100
per cent are allowed in most of the infrastructure sectors.

Indian firms are allowed to raise funds abroad through Global Depository Receipts
(GDRs), Foreign Currency Convertible Bonds and offshore fund. Foreign Institutional
Investors (FIIs), Non-resident Indians (NRIs) and Overseas Corporate Bodies (OCBs) are
allowed to operate in India’s capital markets subject to an individual FII holding by 10
per cent and collective holding up to 49 per cent of paid up capital for the FIIs, and
individual holding of 5 per cent and cumulative holding of 10 per cent by the
NRIs/OCBS.

Foreign investors are permitted to pick up disinvested shares of public enterprises, dated
government securities and treasury bills and shares of unlisted companies. The Foreign
Exchange Regulation Act have been amended, and FERA companies (i.e. companies with
more than 40% of foreign equity) can operate like any other Indian Company, and can
own real estate, use their trade marks and brand names for internal sale. India has become
a member of the Multilateral Investment Guarantee Agency (MIGA) and signed treaties
for avoidance of double taxation with 42 countries.

Second generation reforms in industry and infrastructure include the following:

• Electricity Bill 2001 introduced in Parliament

• Reforms in SEBs for Energy audit, commercia-lisation of distribution and
restructuring of SEB
• Accelerated Power Development and Reform
• Enactment of Energy Conversation Act 2001
• Larger funds for National Highway Development
• Model BOT schemes for roads/ bridges

21
• Corporatisation of DOT and ports
• Private investment in airports
• Convergence Bill to cover telecommunications, IT and broadcasting

22
 Table-6 Progress of structural reforms since 1991

Status in June 1991 Status in December 2002

1. Industry and infrastructure:

(a) Government licensing required for
most industries, which accounted for
66% of new investment.
(b) Restrictions on expansion under MRTP
(c) Reservation of 836 items for SSI units
(d) 18 major industries reserved for public
sector.
(e) Restricted foreign investment policy.
(f) No Competition Act.
2. Public sector:
(a) Budget support to PSEs: 1.5% of GDP
(b) Price and purchase preference for PSEs
(c) Preferential treatment for bank credits
(d) No hard budget constraints
(e) No disinvestment
(f) SICA does not include sick PSUs
(a) Licensing abolished except for 6
industries, which account for less than
8% of production.
(b) MRTP Act amended.
(c) Many items dereserved.
(d) Only four industries viz. Defense
products, atomic energy, minerals
required by atomic energy, and rail
transport reserved for public sector.
(e) Almost all the sectors are open for
foreign investment except a few which
are strategic on considerations of
national security, public health, and
environment.
(f) Competition Bill approved by the
Cabinet.
(a) Support reduced to 0.6% of GDP
(b) No price preference, but purchase
preference exists
(c) No preferential treat-ment for bank
credits
(d) MOUs with PSEs strengthened
(e) Divestment allowed
(f) SICA amended to refer loss-making
PSUs to BIFR.

3. External Sector reforms:

(a) Fixed exchange rate determined by RBI (a) Exchange rate is market determined
(b) QRs on 91% of imports (b) Most QRs removed
(c) Imports of 55 goods canalized (c) Most items decanalised
(d) 439 items of exports are subject to (d) Abolished except for minerals &
export licenses. agriculture.
(e) Export taxes on agro products and (e) Abolished
minerals
(f) Rupee not convertible. (f) Fully convertible on current account.
(g) No capital account convertibility. (g) Significant convertibility on capital
account.

23
 Many policies were announced in the 2002-03 Budget to encourage private investment
in industry and infrastructure. These measures include the following:

• Public investment in key infrastructure sectors increased and an infrastructure Equity

Fund set up to help in providing equity investment fund for infrastructure projects.
• One time settlement scheme in regard to State Electricity Board (SEB) over dues to
the Central Public Sector Utilities through securitisation and bonds.
• Corporatisation of major ports in a phased manner.
• Concession package for private sector participation in green-field airports.
• Urban Reform Incentive Fund set up to provide incentive for reforms of Rent Control
Act, rationalisation of high stamp duty regime, streamlining approval process for
construction and development of sites, simplification of legal procedures and realistic
user charges to convert agricultural land into non-agricultural use.
• Dismantling of Administered price mechanism for petroleum products from April
2002. Subsidies on LPG and kerosene to be phased out in the next 3-5 years.
• Dereservation of 50 items relating to agricultural equipment, chemicals and drugs etc.
reserved for the small-scale sector.
• Increase in issue price of urea, DAP and MOP fertiliser by about 5 per cent and
reduction in the subsidy for SSP.

(b) Social sector policies and reforms

Growth with social justice and alleviation of poverty has been primary objectives of
Indian planning since its inception in 1951. Several anti-poverty measures have been in
operation for decades focusing the poor as the target groups. These include programmes
for the welfare of weaker sections, women and children, and a number of special
employment programmes for self- and wage employment in both rural and urban areas.

The government has relied mainly on two approaches for poverty alleviation: the first
based on the anticipation that economic growth will have a “trickle down effect” on the
levels of living of all groups in society; and the second that direct anti-poverty
programmes are also required. More recently, government shifted public expenditure
away from investment in infrastructure and industry towards social sectors, and improved
targeting of subsidies through changes in the public distribution system.

India’s anti-poverty strategy comprises of a wide range of poverty alleviation and

employment generation programmes many of which have been in operation for several
years and have been strengthened to generate more employment, create productive assets,
impart technical and entrepreneurial skills and raise the income level of the poor.

India is committed to achieve the UN MDG targets by 2015. According to the Human
Development Report (UNDP 2001) India is one of the 11 countries in the world that is
on track to meet the UN MDG while 70 other countries are lagging or slipping. The

24
report acknowledges the significant reduction of poverty ratio from 36 per cent in 1993-
1994 to 26 per cent in 1999-2000, and also significant improvement in literacy rate.
There has been continuous increase in the share of expenditure on social services of the
Centre, States and Union Territories taken together in their total expenditure from 14.4
per cent in the Sixth Five Year Plan (1980-1985) to 21.7 per cent in the Ninth Five Year
Plan (1997-2002).

(c) Agricultural policies and reforms

Indian agriculture suffers from a mis-match between food crops and cash crops, lower
yields per hectare than the world average, except for wheat, volatility in production and
wide disparities of productivity over regions and crops. Domestic production of pulses
and oilseeds are still below the domestic requirements and India has to depend on imports
of pulses and edible oils to satisfy domestic demand.

Although the country holds a record buffer stock of foodgrains at 60 million tonnes, food
management is inefficient with unsustainable level of food subsidies. The rural economy
and the private sector lack the basic infrastructure to build up sufficient buffer stocks, and
agriculture remains vulnerable to weather shocks. In recent years, government has
provided various fiscal incentives for improving rural storage facilities. The central
government is also providing financial assistance to the States for procurement and
distribution of foodgrains at subsidised rates particularly to the families below the
poverty line.

The enhanced availability of bank credits through priority lending to agriculture and agro
based industries, favourable terms of trade, liberalised domestic and external trade for
agricultural products have attracted greater private investment in agriculture in recent
years. The Central Government Budgets for 2001-02 and 2002-03 stepped up public
investment significantly for rural electrification, rural roads, rural employment, irrigation,
agriculture research and public distribution system for foodgrains.

Other major measures taken for the development of agriculture and rural sector include
the following:

• Greater thrust on rural infrastructure

• Review of Essential Commodities Act
• Higher credit to agriculture
• Introduction of Kisan credit cards
• Setting up Agricultural Export Zones
• Watershed development
• Amendment of the Milk and Milk Products Control Order 1992 on March 26, 2002 to
remove restrictions on new milk processing capacity.
• Decanalisation of exports of agricultural commodities and phasing out of the
remaining control on agricultural exports.
• Expansion of futures and forward trading to cover all agricultural commodities.

25
• Additional allocations to the states for decontrol and deregulation of agriculture.
• Additional allocation for construction of cold storage and rural warehouses.
• Strengthening the micro credit delivery system through Self-Help Groups.
• One time settlement of bank loans for small and marginal farmers.
• Setting up a new Corporation for Agriculture Insurance.
• To prepare a modern integrated food law affecting food and food processing sector.

With two-thirds of the Indian population still dependent on agriculture and nearly 75 per
cent of the poor living in the rural areas, further increase in rural investment, income and
employment is necessary for accelerating the overall economic growth and reducing the
disparities between rural and urban sectors.

(d) Trade and tariff policies and reforms

The Five Year EXIM policy for the period 2002-2007 announced on March 31, 2002
includes removal of QRs on all exports (except a few sensitive products reserved for
exports through the state trading enterprises), a farm-to-port approach for exports of
agricultural products, special focus on exports of handicrafts and assistance to States for
development of infrastructure for exports.

32 Agri Export Zones (AEZs) have so far been sanctioned in 15 states to promote the
export of agro products and agro-based processed products. Export capabilities of the
small-scale sector, which accounts for about 50 per cent of Indian exports, were
strengthened through a special program for the “Cottage Sector and Handicrafts”.

Several measures including abolition of licensing regime and zero customs duty on
imports of rough diamonds were undertaken to enable India to emerge as a major
international centre for diamonds. Important measures were taken to provide a fillip to
jewellery exports, including reduction in value addition norms for export of plain
jewellery from 10 to 7 per cent and allowing mechanized unstudded jewellery exports at
a value addition of only 3 per cent.

Facilities for special Economic Zones (SEZs) include the following:

• Income tax concessions and 100 per cent deduction of export profits for five years.
• Exemption from Central sales tax and duty drawback for on supplies from the
domestic area (DTA).
• No restrictions on external commercial borrowing and overseas investment.
• Freedom to carry out commodity hedging.
• Overseas Banking Units exempted from the RBI SLR and CRR obligations are
allowed to be set up in the SEZs.
• Supplies from DTA are treated as exports for the purpose of all duties and taxes under
the Income Tax Act and Customs Act.

26
In order to boost the hardware industry, the Electronic Hardware Technology Park
(EHTP) Scheme was modified to enable the sector to avail of the zero duty regimes under
the Information Technology Agreement under the WTO.

Transport subsidy was extended to units located in the hilly regions to offset the
disadvantages of being far away from the seaports. In order to encourage re-location of
industries to India, import of plant and machinery was permitted without any license
where the depreciated value of such relocating plants exceeded Rs.500 million.

5 Unfinished Agenda on Reforms

Since the early 1990s, the Indian authorities have made considerable progress in
addressing the underlying structural distortions in the economy and encouraging private
sector activity. Trade and tariff reforms, financial sector liberalisation, and the opening of
the investment regime prompted strong supply responses. However, the rapid pace of
economic growth witnessed in 1992-2000, which was partly cyclical, could not be
sustained in 2001-2002 due to inherent adjustment lags in industrial restructuring and
lack of both internal and external demand. Although normal business cycles and
contagion from the regional crisis and global recession had contributed partly to the
slowdown, there are a number of fundamental structural constraints affecting growth.

Insufficient fiscal adjustment kept pressure on real interest rates, and infrastructure
bottlenecks and incomplete reforms in public enterprises, small-scale sector and
agriculture constrained output and export growth. These were compounded by
uncertainties created by the September 2001 terrorist attack in the USA and subsequent
US retaliation in Afghanistan and by the severe drought in 2002.

A comprehensive agenda of “second generation reforms” was announced by the then

Finance Minister in the 2001-02 budget and the thrust continued in the 2002-03 budget by
extending these reforms to the state levels. But the reforms in critical areas appear to have
been delayed. Particularly, the privatisation program of the government has slowed and the
reforms in labour markets have not started due to socio-political reasons.

Revival of higher growth in industry and trade, sustaining rapid progress toward poverty
alleviation and maintaining the momentum of reform would require determined
implementation of the government’s policy agenda. In particular, ambitious fiscal
consolidation and broad based structural reforms are needed to allow resources to be
redirected from servicing public debt toward development and social programs and to
create enabling environment for private investment.

Areas where further reforms would promote greater efficiency include the following:

 Privatisation of public enterprises at a faster speed,

27
 Elimination of the practice of restricting entry and foreign investment in certain
sectors reserved for the small-scale industries,
 Liberalisation in land and labour markets,
 Formulation of an effective exit policy for bankrupt firms
 Coordinating state level reforms
 Reforms in municipalities and corporations
 Strengthening regulation in infrastructure
 Development of debt and bond markets
 Setting up an independent public debt office
 Reforms in provident funds and pension fund
 Thrust on state provision of basic needs

Assuming that there would be no major internal or external shocks, which might have
destabilising effects on the Indian economy, no monsoon failures and no political
instability, India would be able to sustain real GDP growth rates in the range of 8 per
cent in the medium term. Industrial production is expected to show upturn largely driven
by cyclical factors and induced by a rise in liquidity, lower interest rates, moderate crude
oil prices, rise in rural income and increased public spending on physical infrastructure.
Services sectors, particularly trade, commerce and financial sectors and others, which had
been quite buoyant in the post-reforms period and now account for more than 50 per cent
of GDP are expected to achieve significant growth rates.

Higher growth would be feasible through a sustained pace of fiscal adjustment combined
with second-generation economic reforms. Increased public and private sector savings
will boost India’s investment rate and provide necessary resources for upgrading critical
areas of infrastructure. While some increased use of foreign capital, particularly of direct
foreign investment and portfolio investment, is consistent with external sector viability,
the bulk of the savings will be generated domestically.

6. Key policy issues

The Tenth five-year Plan (2002-2007) has set a target of 10 per cent for industrial growth
and 8 per cent for overall GDP growth. The Plan has highlighted that the overwhelming
priority is to speed up second-generation reforms to regain the growth momentum and
boost domestic and foreign investment. At present, inflation is low and both food stocks
and foreign exchange reserves are high. But both industrial growth and overall growth
continue to be slow and are likely to be much lower in the first year (i.e. 2002-03) of the
plan than the plan targets. Although the outcome in 2002-03 is partly due to adverse
weather conditions, it highlights the need to implement reforms at a faster speed to
generate broad-based and high quality growth for reduction of poverty.

(a) Fiscal Policy

The fiscal situation has deteriorated, raising concerns regarding sustainability. The
combined fiscal deficit of the central and state governments has increased from 9.1

28
percent of GDP in 2000 to 10 percent of GDP in 2001, causing combined public debt of
the general government to reach 85 percent of GDP, reflecting sluggish revenue growth
and expenditure overruns (including interest payments, pensions, and subsidies).
Although the average interest rate on the existing public debt is around 8.5 percent and
the debt servicing does not cause immediate problem, this reflects the effect of
concessional external borrowing and the practice of automatic monetisation of budget
deficit through low cost borrowing from the Reserve Bank of India in the past. However,
financial sector reforms are reducing the scope to roll over government debt at low real
interest rates, and funding costs are considerably higher for the states.

The government is committed to fiscal consolidation but the results to date are not
encouraging. Large revenue and primary deficits with nearly one third of revenues going
toward interest payments, high and growing amounts of public debt, poor physical and
social infrastructure, and high levels of poverty and inequality are not conducive to
sustained high growth. Moreover, such a situation limits the scope for use of fiscal
policies to support economic activity, complicates the conduct of monetary policy, and
erodes the government's credibility with investors. There is also a risk that high fiscal
deficits might slow down potential growth, by crowing out private investment and by
constraining public investment in much needed infrastructure and social programmes.

The public debt of the government may need to be viewed from the perspective of
developments in government's quasi fiscal activities, unfunded liabilities (viz. Liabilities
arising from unfunded public pension, provident fund, small savings or insurance
schemes) and contingent liabilities (viz. Loan guarantees, exchange rate guarantee,
deposit insurance etc.). From the viewpoint of prudent long term fiscal management, the
pension, provident funds, small savings and insurance schemes need to be fully funded
and managed on the basis of international best practices, instead of the present "pay as
you go approach" adopted by the government.

A significant increase in the revenue/ expenditure ratio would be an essential prerequisite

to successful fiscal consolidation. Given commitment to lowering customs duties,
significant offsetting measures would be required to achieve the needed increase in the
revenue ratio. Revenues need to be raised through broadening of tax base, rationalisation
of tax rates and exemptions, continued improvement in tax administration, introduction
of a comprehensive Value Added Tax (VAT) and further widening the service tax base.
Disinvestment of government equity in public enterprises needs to be expedited and a
part of the privatisation receipts may be earmarked for high priority social expenditures
and pre-payment of more expensive public debt. It is equally important to put limits on
fiscal subsidies, to improve the public delivery system, to target poverty reduction
programs, to downsize government, and to increase efficiency of public spending.

The government desires to formulate a medium-term strategy to put the fiscal balances on
a sustainable path. Fiscal consolidation and debt reduction programs have to be made an
integral part of a more comprehensive, coherent and multi pronged strategy consisting of
tax and expenditure reforms. The passage of the Fiscal Responsibility and Budget
Management Act would be important as a signal for fiscal reforms.

29
The deteriorating fiscal situation of the states needs to be tackled urgently. Although
encouraging steps are being taken in some states (e.g., the passage of fiscal responsibility
legislation and measures to curb borrowing and contingent liabilities), much more needs
to be done for reversing the sharp deterioration in states' finances. Key steps include
accelerating power sector reforms, rationalising user charges for public utilities, closely
monitoring irrigation projects, restructuring state financial companies, disinvestment of
state level PSUs, implementing the VAT as scheduled in April 2003, and introducing
more stringent ways to prevent the build up of state debt and contingent liabilities.

(b) Money and capital markets

Monetary policy has been well managed in the face of a difficult domestic and external
environment. In this respect, the gradual reduction of the Statutory Liquidity ratio (SLR),
Cash Reserve Ratio (CRR), Bank Rate and the Prime Lending Rates (PLR) of the
commercial banks and financial institutions is welcome. However, the scope for further
reduction of lending rates is constrained by the commercial banks’ ability to lower
deposit rates. Efforts are needed to impart greater flexibility to deposit rates through
innovative measures.

Progress has been made in some areas, but many reforms, particularly those requiring
new legislation or amendments of existing legislation, remain to be implemented. The
enactment of the securities act, the restructuring of the UTI, IDBI and IFCI, and steps to
strengthen SEBI's enforcement ability are steps in the right direction. The work underway
on the Prompt Corrective Action Framework and preparations to move to forward
looking and risk based supervision are also promising. But, the emerging new
international financial architecture will impose fresh disciplines and challenges for
developing countries like India, especially in fiscal and financial systems.

(c) External sector policies

Despite the substantial progress that was achieved in the 1990s, there is considerable
room for more ambitious trade and tariff liberalisation. Following the balance of
payments crisis in 1991, the peak tariff rate was reduced from 400 percent in 1990 to 30
percent in 2002, and the number of major tariff bands was reduced significantly from 20
in 1991-92 to 4 in 2002-2003. All the quantitative import restrictions (QRs) had also been
removed with effect from March 2001 as per commitments with the WTO. However,
India’s average tariff rate is still one of the highest in the world, and the trade system
remains exceptionally complex with widespread concessions and exemptions.

First, India still has a fair distance to travel on the path of trade liberalisation and tariff
reduction (see Tables 10-12). This will require a pro-active stance towards multilateral
trade negotiations and a workable commitment to “open regionalism” in the context of
SAPTA, ASEAN and APEC. It will also require fulfillment of commitments given by the

30
successive Finance Ministers to bring down India’s customs duties to 20 per cent by April
2004.

Second, given the favourable foreign exchange and balance of payments situation,
progress towards greater capital account convertibility is both desirable and inevitable,
but such progress will have to be carefully calibrated to reduce the down side risks that
had been brought home so vividly by the recent East Asian crisis.

Third, although the exchange rates of Indian rupee per major currencies are broadly in
line with macro-economic fundamentals, the exchange rate might need to adjust to the
effects of capital account and trade liberalisation, domestic deregulation in industry and
infrastructure, fiscal consolidation and more difficult external environment. While RBI’s
policy of occasional market intervention to maintain orderly exchange market conditions
had helped broader macro-economic stability, market forces need to be given more
freedom in times ahead to provide adequate incentives to risk management and smoother
adjustments in exchange rates to changing circumstances.

Fourth, the strong foreign exchange reserves position provides a good opportunity to
gradually allow greater flexibility in the exchange rate in both directions, which in turn
would help to develop a deeper market for foreign exchange transactions. Such flexibility
would also encourage greater hedging of currency risk by corporates, which will
increasingly be needed with India's continued integration with the global economy.

(d) Infrastructure policies and reforms

Infrastructure constraints in a number of key sectors of the economy, particularly power,

telecommunications, roads and ports have come to the fore, since reforms and investment
in these sectors have failed to keep pace with increase in demand, and have limited
further improvement in growth potential of the economy.

The poor performance of power is largely a reflection of the deteriorating financial health
of the State Electricity Boards, which, in turn, is due to high transmission and distribution
losses including power theft, very low tariffs for agriculture and operational
inefficiencies.

Transportation is another problem area. Road transportation, which currently accounts for
about 80 per cent of both passenger and freight traffic, is hindered by the large proportion
of unsurfaced roads (50 percent of total road network) and over-dependence on national
highways, which account for less than 2 percent of the road network, but carry as much
as 40 percent of total traffic.

Rail transport suffer from over aged assets, over crowded corridors, lack of desired
connectivity in many parts of the country, irrational fright rates for goods traffic and lack
of resources for capacity expansion.

31
Port capacity is also insufficient to meet existing demand by external trade, and the ports
are characterised by outdated technology, restrictive labor practices, and slow custom
clearance procedures. These results in pre-berthing delays, longer ship turnaround time,
and higher costs compared to other ports in the Asian region.

Government policy has focused on improving the efficiency of public sector

infrastructure provision and encouraging a greater role for the private sector. In general,
while many contracts have been awarded to the private sector, relatively few deals have
reached financial closure.

There is an urgent need to formulate a comprehensive inter-modal transport plan and to

rationalise tariff charges for all service sectors to generate internal resources and to
encourage investment for capacity expansion and to improve quality of services.

(e) Strategy for social sector development

The development and proper utilisation of vast human resources is the essence of the
social sector development strategy followed by the government. Significant progress has
been made over the years in human resource development which is reflected in improved
demographic indicators such as expectation of life, infant, child and maternal mortality
rates, health care services, progress in the field of education and adult literacy rates.

The Approach Paper to the Tenth Five-Year Plan (2002-2007), which outlines a strategy
to achieve a GDP growth rate of 8 per cent, has a specific focus on human development.
The Approach Paper stipulates that growth in per capita GDP should be accompanied by
significant improvement in human development indicators and basic services to the
people such as basic health, education, drinking water and sanitation. It also includes the
expansion of economic and social opportunities for all individuals and groups, reduction
in disparities and a greater participation of people in the decision making process.

The Plan indicates the following monitorable targets:

 Reduction of poverty ratio by 5% points by 2007 and by 15% points by 2012.
 Providing gainful employment to the additional labour force over the Tenth Plan.
 All children to go to schools by 2003.
 All children to complete at least five years of schooling by 2007.
 Reduction of gender gaps in literacy and wage rates by at least 50 per cent by 2007.
 Reduction in the decadal rate of population growth to 16.2 per cent in 2011.
 Increase in the literacy rate to 75 per cent during the Tenth Five-Year Plan.
 Reduction in the infant mortality rate to 45 by 2007 and to 28 by 2012.
 All villages to have access to potable drinking water within the plan period.
 Cleaning of major polluted rivers by 2007 and other notified stretches by 2012.
 Increase in the forest and tree cover to 25 per cent by 2007 and 33 per cent by 2012.

The attainment of these targets not only necessities a substantial allocation of resources
for the social sectors but also involves an enhanced role for the government in the
provision of social services and development of urban and rural infrastructure.

32
 (f) Structural Policies

The following structural reforms need to be given priority:

 Although major reforms have been done at the macro level and in production sectors,
credible reforms need to be taken at the municipal and corporation levels particularly
with regard to sale, acquisition and transfer of land.

 Indian labour is highly protected. Reforms are necessary in labour markets for
enhancing employment.

 Regaining the momentum of the disinvestment program is critical. The privatisation

process has already yielded sizable gains to the government. A long delay in
implementation of the rest of the disinvestment program in the year will have
negative consequences on the Centre’s budget and could derail the process of
disinvestment at the states. It will also have adverse effects on the stock markets.

 Notwithstanding the recovery in FDI recorded so far in the year and measurement
issues, that suggest that such flows are understated, India is clearly not fulfilling its
potential for FDI.

 Further liberalisation of the non-debt creating financial flows including FDI is

required for petroleum, real estate, telecommunications, civil aviation, banking and
financial sectors. There are synergies between the disinvestment program and the FDI
strategy, and serious consideration may be given to use disinvestment as a magnet for
foreign investment.

 Global integration indicators for India are very low as compared to many Asian
economies (see Table-13). There is significant scope for India to increase its exports
by encouraging both labour-intensive and high technology products.

 India will have to face and surmount the challenges posed by new technologies and
market places, such as Internet and e-commerce.

 It will be important to lock in recent gains on the inflation front. Although inflation
eased considerably during 2001-2002, continuous increase in oil prices and large
public sector deficit have again put pressure on inflation. Management of inflation
and protecting the interest of the vulnerable and weaker sections of the society remain
a priority area for the government.

 Another priority of the government is to reduce wide spread poverty ratios, inter-state
disparities and interregional inequality, although substantial gains have been achieved
in these areas during reforms period since 1991.

33
 7. Role of managers in post reforms period

In the post reforms period, there is a change of the role of the government:

 From a controller to an enabler,

 From a supplier to a facilitator,
 From an operator to a policy maker, and
 From a regulator to a trustee of social equity and environmental sustainability.

In the post reforms period, there is re-orientation of public policies. The basic job of the
government is now:

 To create enabling environment for public-private partnership,

 To link fiscal, monetary and other incentives to productivity,
 To streamline public investment and social welfare programs,
 To put emphasis on consultations, flexibility, decentralisation, selectivity, monitoring
and co-ordination of policies and operations,
 To repair market failures, and
 To strengthen institutional structures and legal system.

In the post reforms period, the managers in the government or in the public sector
enterprises have to change their mind set to fulfill these objectives. At the same time,
there is need for greater co-ordination, co-operation and partnership between private and
public sectors. We must realise that:

 Both well-governed state and well functioning markets are essential for high growth
and sustainability.
 Government and free markets should supplement and complement each other.
 Government should withdraw from sectors where private participation is more
productive and more efficient.
 Scope of government to remain large in social sectors and infrastructure.

Responsibility of a manager in a public sector enterprise has also increased in the post
reforms period. In the pre-reforms period, a public sector enterprise was under the strict
control of a government department. As the economy was relatively closed and free
market operations were limited, there was less risk; and whatever risk was there was
shared by an enterprise and the government department. But today there is less
interference by the government department; PSUs have been given more autonomy and
more freedom and are run by independent board of directors. PSUs have to bear full
responsibility for their performance.

A manager has now greater risk and greater responsibility for the following reasons:

 World is now a global village.

34
 Knowledge and technology are the most valuable assets.
 There is wider choice of resources- domestic/ foreign, debt/ equity/ portfolio etc.
 There is greater competition among the operators.
 There is greater risk due to fluctuations of exchange rate, interest rate, commodity
prices, and composition of currency and markets.
 Emphasis on decentralisation, consultation and risk sharing.

PSUs therefore need to strengthen systems for:

 Management information
 Asset-Liability Management
 Measurement and management of risk
 Project appraisal and post evaluation
 Quality control
 Inventory management
 Performance evaluation
 Prediction of sickness

8. Concluding Remarks

Indian economy has many positive factors to achieve higher growth in future.

• India is the fourth largest economy in the world after USA, Japan and China in terms
of purchasing power parity adjusted GDP.
• India possesses the eighth largest industrial estate in terms of stock of capital.
• It possesses huge domestic market with the second largest population after China and
a middle class in the range of 150-200 million.
• India has the third largest pool of scientific and technical manpower.
• India is the largest democracy with multi-party system, free press, independent
judiciary, efficient administration, a long history of private enterprise and a strong
institutional base for development.
• India has vast natural resources. It ranks sixth in coal and iron ore reserves, fifth in
bauxite, 17th in crude petroleum, and 23rd in natural gas reserves,
• India ranks first in production of milk, millet, ground nut, tea, jute, mangoes and
bananas, stocks of cattle and buffaloes, second in arable land and irrigated area,
production of rice, wheat, rapeseed, sugarcane and tobacco, and third in production of
cotton, natural rubber.
• India ranks 19th in terms of value added in industry (first in production of sugar,
fourth in nitrogenous fertilisers and coal, fifth in cement and iron ore, ninth in
electricity generation, tenth in steel, 13th in commercial vehicles, and 20th in crude
petroleum production.
• India has cheap but reasonably skilled and dedicated labour force and peaceful
industrial relations.

35
• Language does not pose any problem as English is an accepted language in
educational institutions, government offices and corporate houses.
• India has a strategic location to cater the markets in the South, East and West Asia and
can even be gateway to the markets in Europe and Africa.
• India has a mature banking and financial system with several large commercial banks,
financial institutions and insurance companies.
• India has a vibrant capital market with around 10,000 listed companies (second
highest in the world) and a market capitalisation of over US$250 billion.
• India has a diversified and well-spread infrastructure. It ranks one of the 20 largest
telecom networks in the world. It possesses largest network of post offices in the
world, ranks first in the rail network and third in the road network.

Economic reforms since 1991 helped India to utilise some of its potentials. However,
there is significant scope for improvement in all sectors of the economy.

 Among the democratic countries, India achieved the highest average growth rate of
5.8 per cent over a 20-year period of 1980-2000. Among the major economies, India’s
growth rate was exceeded by only by China in 1980s and 1990s.

 Growing cross-border tradability of services supported by the growth of Internet and

e-commerce helped India to increase exports of services where India has a
comparative advantage. Invisible exports in fact increased four and half times from
US$7.5 billion in 1990-91 to US$34.5 billion in 2000-01.

 Services made significant contributions to GDP growth with an average growth rate
of 8 per cent in 1990s. Share of services in GDP increased from 39 per cent in 1990-
91 to 50 per cent in 2001-02.

 However, India is a price-taker in all services with a very low share in global service
exports as is the case with India’s share in global merchandise exports. Services
exports should therefore grow rapidly in the next decade or so.

 Exports of goods and services have tripled in terms of US$ in the past decade. The
share of merchandise exports in GDP have increased from 5.5% in 1990-91 to 9% in
2001-01 and that of services from 3% to 8.5% over the same period. Export potential
in agricultural products, textiles, garments, gems and jewellery, and engineering
goods remains far from being fully exploited.

 Higher export earnings and remittances from abroad enabled India to service its
obligations on current account with less dependence on capital flows. Although the
share of imports increased from 8% of GDP in 1990-91 to 13% of GDP in 2001-02,
India was able to build up its foreign exchange reserves from US$1 billion in June
1991 to about US$67 billion in December 2002.

 The present foreign exchange reserves are equivalent to about 13 months of imports.
Only China has a higher level of import cover.

36
 External sector liberalisations, tariff reductions, industrial delicensing and financial
sector liberalisations contributed to more efficient allocation of capital and resources.
But the gains were limited to a few sectors like aluminium, steel, automobiles, drugs
and pharmaceuticals, telecommunications and information technology.

 India has comparative advantages in services, knowledge-based, resource-intensive,

and agro-based industries. But vast potentials of labour-intensive and agro-based
industries remain untapped. Reforms in agricultural production and trade and labour
markets are essential to reap these benefits.

 Government is still pre-empting a large portion of capital through market borrowings

and SLR held by commercial banks. Fiscal reforms and disinvestment at faster speed
are required to encourage further private investment in infrastructure and services.

 The new development strategy must attach a high priority to the development and
maintenance of efficient infrastructure so that existing bottlenecks in power, transport
and telecommunications may not inhibit economic growth. As the infrastructure
needs are large and public resources are limited, the private sector and foreign
investors will have to play a more active and critical role in developing and
modernising infrastructure.

 Low wages, rich natural resources and fiscal incentives are no longer regarded as
principal determinants for international competitiveness. The new sources of
competitive advantage will be knowledge, modern technology and the human skill.
In view of pivotal role of human resources in industrial and technological
upgradation, there is a need for more rigorous attention to the development of human
capital at various levels of government, in business houses and industrial enterprises.

Although we can take some comfort in the favourable impact of the reforms program, we
must recognise that much more needs to be done if we want to reap the full benefits of
reforms. Eleven years are not enough to complete the kind of reforms, which are essential
to break the age-old bonds of poverty and unemployment. We have to continue boldly
with our reforms agenda to achieve our goals of sustained growth, modernisation and
equity. We have no alternatives but to persevere with our reforms program. Carried to
their logical ends, reforms would enable India to emerge as one of the most dynamic
economies in Asia by the end of this decade. India is “an economic miracle” waiting to
happen. All of us have to contribute to that process of exciting development.

37
 Table-7: INDIA- Macro-economic Trends: 1990-2001: continued

I T E MS 1990-91 1991-92 1997-98 1998-99 1999-00 2000-01 2001-02

Actual Actual Actual Actual Actual Actual Actual

Per Capita GNP ( Rupees ): 6688 6760 15657 17558 19123 20320 21844

GDP growth rate at constant fc 5.6 1.3 4.8 6.5 6.1 4.0 5.4
GR agriculture 4.1 -1.5 -2.4 6.2 1.3 -0.2 5.7
GR industry 7.7 -0.6 4.3 3.7 4.9 6.3 3.1
GR manufacturing 6.1 -3.6 1.5 2.7 4.2 6.7 2.8
GR non-manufacturing 10.0 5.4 9.5 5.6 6.1 5.8 3.5
GR services 5.3 4.8 9.8 8.3 9.5 4.8 6.5

GDP (const. fc) sectoral shares 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Agriculture 31.6 30.8 26.5 26.4 25.2 24.2 24.3
Industry 29.7 29.3 27.7 27.0 26.7 27.3 26.7
Services 38.7 39.9 45.8 46.6 48.1 48.5 49.0

Average Exchange Rate (Rs/US$) 17.9 24.7 37.2 42.1 43.3 45.7 47.7
Inflation rate in terms of CPI 13.6 13.9 6.8 13.1 3.4 3.8 4.3
Inflation rate in terms of WPI 12.1 13.6 4.4 5.9 3.3 7.2 3.6
Growth rate of broad money supply (%) 15.1 19.4 18.0 19.4 14.6 16.8 14.2

Gross Domestic Investment as % of 26.3 22.6 24.6 22.7 24.3 24.0 25.3
GDP
-- Private sector 11.6 9.5 17.4 15.7 16.8 16.6 17.5
-- Public sector 14.7 13.1 7.2 7.0 7.5 7.4 7.8
Gross Domestic Savings as % of GDP 23.1 22.0 23.1 21.7 23.2 23.4 25.5
-- Household sector 19.3 17.0 17.6 18.9 20.3 20.9 21.0
-- Private corporate sector 2.7 3.1 4.2 3.7 3.7 4.2 4.5
-- Public sector 1.1 2.0 1.3 -1.0 -0.9 -1.7 0.0
BALANCE OF PAYMENTS (US$ million)
Merchandise exports, fob 18477 18266 35680 34298 37542 44894 44915
Merchandise imports, cif 27915 21064 51187 47544 55383 59264 57618
Trade balance -9438 -2798 -15507 -13246 -17841 -14370 -12703
Other goods, services and income -2771 -2623 -2202 -1379 505 -1343 1545
Non factor services 982 1207 1319 2165 4064 2478 4199
Investment income -3753 -3830 -3521 -3544 -3559 -3821 -2654
Unrequited income 2529 4243 12209 10587 12638 13134 12509
Private transfers 2068 3783 11830 10280 12256 12798 12125
Official transfers 461 460 379 307 382 336 384
Net invisibles -242 1620 10007 9208 13143 11791 14054
Current account balance -9680 -1178 -5500 -4038 -4698 -2579 1351

38
 Table-7: INDIA- Macro-economic Trends: 1990-2001: continued

I T E MS 1990-91 1991-92 1997-98 1998-99 1999-00 2000-01 2001-02

Actual Actual Actual Actual Actual Actual Actual
Capital inflows (US$ million; fy) 8505 4696 9393 7867 10840 8409 10406
External assistance,net 2210 3037 907 820 901 427 1204
External commercial borrowings 2248 1456 3999 4362 313 4011 -1147
Foreign investment 103 133 5390 2412 5181 5102 5925
Direct foreign investment 97 123 3562 2480 2157 2342 3905
Portfolio investment 6 10 1828 -68 3024 2760 2020
IMF, net 1214 786 -618 -393 -260 -26 0
NRI deposits,net 1536 290 1125 960 1540 2317 2754
Other capital,net 1091 -1139 -1410 -294 3165 -3422 1670
Change of reserves [increase (-) ] 1175 -3518 -3893 -3829 -6142 -5830 -11757
Foreign exch. reserves (US$mn,end fy) 5834 9220 29367 32490 38036 42281 54106
Foreign Exch.Res. (months of imports) 2.5 5.3 6.9 8.2 8.2 8.6 11.3
Growth rates : Fiscal Year
Merchandise exports 9.0 -1.1 4.5 -3.9 9.5 19.6 0.0
Merchandise imports 14.4 -24.5 4.6 -7.1 16.5 7.0 -2.8

EXTERNAL DEBT (US$ Mn. end fy)

Total outstanding and disbursed 83801 85285 93531 96886 98263 99704 98138
Debt-service ratio (to XGS in per cent) 35.3 30.2 19.5 18.9 15.7 15.4 13.7
Debt/GDP ratio (in per cent) 28.7 38.7 22.8 23.4 22.1 21.8 20.5
Debt/exports ratio (in per cent) 453.5 466.9 262.1 282.5 261.7 222.1 218.5
Short term debt/ Total Debt ratio (%) 10.2 8.3 5.4 4.4 4.0 3.5 2.8
Short term debt/Foreign exch. ratio (%) 382.0 125.6 19.4 14.5 11.2 8.8 6.1
Public ext.debt/ Total Debt ratio (%) 59.6 59.8 49.7 47.6 47.7 44.2 43.9
Concessional to total debt ratio (%) 45.9 44.8 39.5 38.5 38.9 36.0 35.9
Indebtedness classification Severe Severe Moderate Moderate Less Less Less
Memo Items:
As per cent of GDP at current mp:
Merchandise exports, fob 5.8 6.9 8.7 8.3 8.4 9.8 9.4
Merchandise imports, cif 8.8 7.9 12.5 11.5 12.4 13.0 12.1
Trade balance -3.0 -1.1 -3.8 -3.2 -4.0 -3.1 -2.7
Other goods, services and income -0.9 -1.0 -0.5 -0.3 0.1 -0.3 0.3
Non factor services 0.3 0.5 0.3 0.5 0.9 0.5 0.9
Investment income -1.2 -1.4 -0.9 -0.9 -0.8 -0.8 -0.6
Unrequited income 0.8 1.6 3.0 2.6 2.8 2.9 2.6
Private transfers 0.7 1.4 2.9 2.5 2.8 2.8 2.5
Official transfers 0.1 0.2 0.1 0.1 0.1 0.1 0.1
Net invisibles -0.1 0.6 2.4 2.2 3.0 2.6 2.9
Current account balance -3.1 -0.4 -1.3 -1.0 -1.1 -0.6 0.3

39
 Table-7: INDIA- Macro-economic Trends: 1990-2001: Completed

I T E MS 1990-91 1991-92 1997-98 1998-99 1999-00 2000-01 2001-02

Actual Actual Actual Actual Actual Actual Actual
Capital flows (as % of GDP) 2.7 1.8 3.6 2.5 3.6 3.0 3.4
External assistance,net 0.7 1.1 0.2 0.2 0.2 0.1 0.3
External commercial borrowings 0.7 0.5 1.0 1.1 0.1 0.9 -0.2
Foreign investment 0.0 0.1 1.3 0.6 1.2 1.1 1.2
Direct foreign investment 0.0 0.0 0.9 0.6 0.5 0.5 0.8
Portfolio investment 0.0 0.0 0.4 0.0 0.7 0.6 0.4
IMF, net 0.4 0.3 -0.2 -0.1 -0.1 0.0 0.0
NRI deposits,net 0.5 0.1 0.3 0.2 0.3 0.5 0.6
Other capital,net 0.3 -0.4 -0.3 -0.1 0.7 -0.7 0.3
Change in reserves [increase (-)] 0.4 -1.3 -1.0 -0.9 -1.4 -1.3 -2.5
Foreign exch. reserves at end year 1.8 3.5 7.2 7.9 8.5 9.3 11.3

CENTRAL GOVT. FINANCE (As % of GDP):

Current revenue 9.7 10.1 8.8 8.6 9.4 9.2 9.3
Taxes 7.6 7.7 6.3 6.0 6.6 6.6 6.2
Non-taxes including external grants 2.1 2.4 2.5 2.6 2.8 2.7 3.1
Current expenditure 12.9 12.6 11.8 12.4 12.9 13.3 13.4
Capital receipts 5.6 5.1 5.5 6.1 6.0 6.4 6.7
Recovery of loans 1.0 0.9 0.5 0.6 0.5 0.6 0.7
Disinvestment of govt.equity 0.0 0.5 0.1 0.3 0.1 0.1 0.2
Govt. borrowings & other liabilities 4.6 3.7 4.9 5.2 5.4 5.7 5.8
Capital expenditure 4.4 3.6 2.4 2.2 2.5 2.3 2.6
Total expenditure 17.3 16.2 14.2 14.7 15.4 15.6 16.0
Central government (% of GDP)
Fiscal deficit (+) 6.6 4.7 -4.8 -5.1 -5.4 -5.7 -5.8
Primary deficit (+) 2.8 0.7 -0.5 -0.7 -0.7 -0.9 -1.1
Budget deficit (+) 2.0 1.0 0.1 0.0 0.0 0.0 0.0
Revenue deficit (+) 3.3 2.5 -3.1 -3.8 -3.5 -4.1 -4.0
States governments (% of GDP)
Fiscal deficit (+) 3.3 2.9 2.9 4.3 4.7 4.2 4.6
Primary deficit (+) 1.8 1.2 0.9 2.2 2.4 1.7 1.8
Budget deficit (+) 0.0 0.0 -0.1 0.2 0.2 -0.2 0.3
Revenue deficit (+) 0.9 0.9 1.1 2.5 2.8 2.5 2.6
Centre & States combined (% of GDP)
Fiscal deficit (+) 9.4 7.0 7.3 9.0 9.6 9.4 9.9
Primary deficit (+) 5.0 2.3 2.1 3.7 3.9 3.7 3.6
Budget deficit (+) 2.0 1.0 0.0 0.2 0.2 -0.2 0.3
Revenue deficit (+) 4.2 3.4 4.1 6.4 6.3 6.5 6.6

40
 Table-8 Basic Economic Indicators of selected Asian countries in 2000

Country Population Area GNP GNP PPP GNP PPP GNP Adult Life
million '000 US$ billion per capita US$ billion Per capita Literacy Expectancy
sq.km. (US $) (US $) (%) (years)
2000 2000 2000 2000 2000 2000 2000 2000
Newly Industrializing Economies (NIEs)

Hong Kong 7 1 176 25920 174 25590 79 80

Korea,Republic 47 99 421 8910 818 17300 72 73
Singapore 4 1 99 24740 100 24910 76 78
Taiwan,China 22 36 280 12670 .. .. 75 76
China & Mongolia
China 1262 9598 1063 840 4951 3920 69 70
Mongolia 2 1567 0.9 390 4 1760 64 67
South-East Asia
Cambodia 12 181 3 260 17 1440 53 54
Indonesia 210 1905 120 570 596 2830 64 66
Lao, PDR 5 237 1.5 290 8 1540 52 54
Malaysia 23 330 79 3380 194 8330 71 72
Myanmar 48 677 .. .. .. .. 59 60
Philippines 76 300 79 1040 319 4220 66 69
Thailand 61 513 122 2000 384 6320 69 69
Vietnam 79 332 30 390 157 2000 68 69
South Asia
Bangladesh 131 144 48 370 209 1590 58 61
Bhutan 0.8 47 0.5 590 1.2 1440 48 61
India 1016 3287 455 450 2375 2340 62 63
Maldives 0.3 0.3 0.5 1960 1.2 4240 63 68
Nepal 23 147 6 240 32 1370 55 58
Pakistan 138 796 61 440 257 1860 60 63
Sri Lanka 19 66 16 850 67 3460 72 73
East Asia
Japan 127 378 4519 35620 3436 27080 80 81
World
Low & middle income 5154 101491 6315 1230 19980 3910 65 64
East Asia & Pacific 1855 16385 1962 1060 7609 4130 68 69
Europe & Central Asia 474 24217 953 2010 3140 6670 68 69
Latin America & Carib. 516 20459 1895 3670 3624 7080 69 70
Mid. East & N.Africa 295 11023 618 2090 1545 5270 66 68
South Asia 1355 5140 595 440 2984 2240 61 63
Sub-Saharan Africa 659 24297 310 470 1044 1600 52 47
High Income 903 32315 24994 27680 24793 27770 77 78
World 6057 133806 31309 5170 44459 7410 67 66

Note: (a) Two dots (..) stand for "Data not available"
Sources :
(1) World Development Indicators 2002, World Bank.
(2) World Development Report 2002, World Bank.
(3) Asian Development Outlook 2002, Asian Development Bank, Manila.

41
 Table-9 Growth of output in selected Asian countries in 1980-1990 and 1990-2000

Country GDP growth GDP growth Agriculture Industry Manufacture Services

per annum per annum Growth pa Growth pa Growth pa growth pa
1980-1990 1990-2000 1990-2000 1990-2000 1990-2000 1990-2000
Newly Industrializing Economies (NIEs)

Hong Kong 6.9 4.0 .. .. .. ..

Korea,Republic 8.9 5.7 2.0 6.3 7.5 5.7
Singapore 6.7 7.8 -1.6 7.9 7.1 7.8
Taiwan,China 8.8 6.1 0.5 5.3 5.5 7.0
China & Mongolia

China 10.1 10.3 4.1 13.7 13.4 9.0

Mongolia 5.4 1.0 3.2 -0.5 .. 0.1
South-East Asia

Cambodia n.a. 4.8 1.9 8.3 8.2 6.9

Indonesia 6.1 4.2 2.1 5.2 6.7 4.0
Lao, PDR 3.7 6.5 4.9 11.0 11.7 6.5
Malaysia 5.3 7.0 0.3 8.6 9.8 7.2
Myanmar 0.6 6.6 5.3 10.1 7.0 6.8
Philippines 1.0 3.3 1.6 3.3 3.0 4.0
Thailand 7.6 4.2 2.1 5.3 6.4 3.7
Vietnam 4.6 7.9 4.8 12.1 .. 7.7
South Asia
Bangladesh 4.3 4.8 2.9 7.3 7.2 4.5
Bhutan 7.5 6.2 10.2 10.5 2.5 5.7
India 5.8 6.0 3.0 6.4 7.0 8.0
Maldives 12.1 6.6 10.3 10.5 2.4 7.2
Nepal 4.6 4.9 2.5 7.2 9.2 6.2
Pakistan 6.3 3.7 4.4 3.9 3.5 4.4
Sri Lanka 4.0 5.3 1.9 7.0 8.1 6.0
East Asia
Japan 4.1 1.3 -3.2 -0.4 0.5 2.5
World
Low & middle income 3.5 3.5 2.2 3.7 5.7 4.1
East Asia & Pacific 7.9 7.2 3.1 9.3 9.9 6.4
Europe & Central Asia .. -1.5 -2.3 -3.8 .. 1.6
Latin America & Carib. 1.7 3.3 2.3 3.3 2.6 3.4
Mid. East & N.Africa 2.0 3.0 2.6 0.9 3.8 4.5
South Asia 5.6 5.6 3.1 6.2 6.6 7.1
Sub-Saharan Africa 1.6 2.5 2.8 1.6 1.6 2.6
High Income 3.3 2.5 0.0 0.7 .. ..
World 3.3 2.7 1.4 1.5 .. 2.9

Note: (a) Two dots (..) stand for "Data not available"
Sources :
(1) World Development Indicators 2002, World Bank.
(2) World Development Report 2002, World Bank.

42
 Table-10 Tax Policies in selected Asian economies in 1990 and 2000
Country Tax Taxes on Domestic taxes Export duties as Import duties as Highest marginal
revenue income, profits on goods and % of % of Income Tax rate
as and capital gains services as tax revenue tax revenue Individual income Corpo-
% of as % of rate Lower limit rate
GDP % of total taxes corresponding above which income
value added highest tax rate
is applicable
(US $) Times
PC GNP
2000 1990 2000 1990 2000 1990 2000 1990 2000 2000 2000 2000 2000

Newly industrializing Economies (NIEs)

Hong Kong .. .. .. .. .. .. .. .. .. 17 13,462 0.5 16
Korea,Rep .. 38 .. 7 .. 0 .. 13 .. 40 63,507 7.1 28
Singapore 16 45 50 4 5 0 0 4 3 28 400,000 16.2 26
Taiwan,China .. .. .. .. .. .. .. .. .. .. .. .. ..
China and Mongolia
China 7 50 7 1.5 6.5 0 0 22 7 45 12,089 14.4 30
Mangolia 22 28 16 9 16 0 2.3 20 8 .. .. .. ..
South-East Asia
Cambodia .. .. .. .. .. .. .. .. .. 20 38,412 147.7 20
Indonesia 17 65 65 6 6 0.1 0.5 7 2 35 20,949 36.8 30
Lao, PDR .. .. .. .. .. .. .. .. .. 40 658 2.3 ..
Malaysia .. 43 .. 6 .. 10 .. 15 .. 29 39,474 11.7 28
Myanmar 3 30 35 7 4 0 0 23 9 30 .. .. 30
Philippines 14 33 44 6 5 0 0 28 21 32 10,000 9.6 32
Thailand 14 26 34 9 8 0.2 0.3 24 12 37 92,829 46.4 30
Vietnam 15 .. 32 .. 8 .. 0 .. 21 50 5,695 14.6 32
South Asia
Bangladesh 7 .. 15 .. 5 .. 0 .. 30 .. .. .. ..
Bhutan .. .. .. .. .. .. .. .. .. .. .. .. ..
India 10 19 36 7 5 0.1 0.1 36 27 30 3,222 7.2 40
Maldives .. .. .. .. .. .. .. .. .. .. .. .. ..
Nepal 9 13 21 7 7 0.4 1 37 31 .. .. .. ..
Pakistan 12 13 28 9 8 0 0 44 16 35 17,271 39.3 ..
Sri Lanka 15 12 15 15 14 4 0 27 13 35 3,630 4.3 35
East Asia
Japan .. 73 .. 2.4 .. 0 .. 1.4 .. 37 156,863 4.4 30

Note: Two dots (..) stand for "Data not available"

Sources :
(1) World Development Indicators 2002, World Bank.
(2) World Development Report 2002, World Bank.

43
 Table-11 Comparative statement on fiscal concessions in selected Asian countries

Country Corporate tax Tax holidays Import duty Other fiscal Remi-
rate exemptions concessions ttances
1. India Local cos.35%, 5-10 years for R&D, For exports, Incentives for Free
Foreign cos.42% infrastructure, EOU, fertilisers, utility tariffs,
EPZ, SEZ, Tech.Parks, EPZ, SEZ, capital
backward areas Tech.Parks subsidy
2. Bangladesh 5-12 years for backward For EOUs Lower import Free
areas duty for back-
ward areas
3.Myanmer 3 years Lower land Res-
leasing rate tricted
4.Nepal No tax on exports, 5-7 years except for For EOUs Tax rebate for ..
cottage industries cigarette, bidi, saw mill and capital backward
and alcohol goods areas
5.Pakistan 3 years for all, 4 yrs for For power, Lower Free
rural/ backward areas engineering indirect taxes
6. Sri Lanka For EOUs, tourism, For tourism, Accelerated Res-
backward areas, infra. EOUs, infra. depreciation tricted
7.South 30-45% Tax holiday for high For exports Lower duty Free
Korea technology for high tech
8.Singapore 27% 5-10 years for pioneer Capital Free
status subsidy
9.Indonesia 10-30% Abolished in 1984 For EOUs Vat exemp- Res-
tion for EOUs tricted
10.Malaysia 28% 85% exemption for 5 For Capital Free
20% for SMEs years for pioneer status EOU/EPZ subsidy
11.Philippines 10-45% 8 years for pioneer For capital Lower rates Free
status goods on wages, inf.
Reinvestment
12.Thailand 30% 3-8 years for IPZs, For EOU/ Lower duties Free
targeted industries EPZ on capital
goods
13.Vietnam 30% 2-4 years For EOU/ Incentives for Res-
EPZ reinvestment tricted
14. China Local cos.55%, 2 years general, 5 years For EOU/ Tax rebate for Free
Foreign cos.33% for ports SEZ R&D, infra
15.Hong 15-16.5% none Free port, No No excise Free
Kong import duty except on
POL, tobacco
16.Taiwan 20% 5 years for high tech. On capital Cap subsidy Free
industries goods, R&D
17.Japan 52% None Low import Local govt. Free
duties (0-5%) incentives
18.Lao, PDR 4-6 years For few items …. Free

44
 Table-12 Tariff Barriers Indicators in selected Asian economies in 2000

Country Latest All products Primary products Manufactured

Year Products
Simple Standard Weighted Share of Share of Simple Weighted Simple Weighted
mean deviation mean lines lines mean mean mean mean
tariff rate of tariff tariff with with rate rate rate rate
rates rate world specific
peaks tariffs
% % % % % % % % %

Newly industrializing Economies (NIEs)

Hong Kong 1998 0 0 0 0 0 0 0 0 0
Korea,Rep 1999 9 6 6 5 1 12 5 8 6
Singapore 1995 0 0 0 0 0 0 0 0 0
Taiwan,China .. .. .. .. .. .. .. .. .. ..
China and Mongolia
China 2000 16 11 15 43 0 17 19 16 14
Mangolia .. .. .. .. .. .. .. .. .. ..
South-East Asia
Cambodia .. .. .. .. .. .. .. .. .. ..
Indonesia 2000 8 11 5 11 0 6 3 9 7
Lao, PDR 2000 10 8 15 12 4 19 25 9 9
Malaysia 1997 9 33 6 25 0.4 7 10 10 5
Myanmar .. .. .. .. .. .. .. .. .. ..
Philippines 2000 8 8 4 9 0 12 8 7 3
Thailand 2000 17 14 10 46 2 22 10 16 10
Vietnam 1999 15 18 19 37 0.5 22 35 14 15
South Asia
Bangladesh 2000 21 14 21 52 0 24 19 21 22
Bhutan 1996 19 15 20 54 4 24 20 18 20
India 1999 33 12 29 93 1 31 23 33 33
Maldives .. .. .. .. .. .. .. .. .. ..
Nepal 2000 18 21 18 19 8 14 14 19 20
Pakistan 1998 47 21 42 86 4 44 30 47 44
Sri Lanka 2000 10 9 7 22 1 15 15 9 5
East Asia
Japan 2000 4 7 2 7 3 8 3 3 1

Note: (a) Two dots (..) stand for "Data not available"
Sources :
(1) World Development Indicators 2002, World Bank.
(2) World Development Report 2002, World Bank.

45
 Table-13 Global Integration Indicators for selected Asian economies in 1990 and 2000

Country Trade in goods Trade in goods Changes in Growth in real Gross private Gross Foreign
trade as shares trade less growth capital flows Direct
Of GDP: in real GDP % of GDP Investment
% of GDP % of goods GDP (% change) (% points) % of GDP
1990 2000 1990 2000 1980-1999 1990-2000 1990 2000 1990 2000
Newly industrializing Economies (NIEs)
Hong Kong 224 256 785 1143 210 4 .. 189 .. 89
Korea,Rep 53 73 103 154 122 8 6.2 11.5 0.7 3.2
Singapore 310 295 892 858 .. .. 54.6 48.5 20.7 11.6
Taiwan,China .. .. .. .. .. .. .. .. .. ..
China and Mongolia
China 33 44 47 66 .. -3 2.5 12.7 1.2 4.3
Mangolia .. 93 .. 180 .. .. .. 10.1 .. 3.4
South-East Asia
Cambodia 22 40 34 46 .. 8 3.2 6,8 1.7 3.9
Indonesia 42 62 64 97 -17 1 4.1 8.5 1.0 4.2
Lao, PDR 32 53 43 .. .. .. 3.7 8.7 0.7 5.4
Malaysia 133 201 232 357 125 4 10.3 16.8 5.3 2.0
Myanmar .. .. .. .. 17 .. .. .. .. ..
Philippines 48 99 85 193 142 4 4.4 48.4 1.2 2.8
Thailand 66 107 133 211 100 3 13.5 11.3 3.0 2.8
Vietnam 80 96 133 .. .. 19 .. 10.8 .. 4.1
South Asia
Bangladesh 18 32 .. .. 131 6 0.9 3.6 0 0.6
Bhutan .. .. .. .. .. .. .. .. .. ..
India 13 20 .. .. 62 4 0.8 3.0 0 0.6
Maldives .. .. .. .. .. .. .. .. .. ..
Nepal 25 43 .. .. 127 6 3.5 4.8 0 0
Pakistan 33 33 .. .. -13 -2 4.2 2.5 0.6 0.5
Sri Lanka 58 73 .. .. 40 3 13.1 7.6 0.5 1.1
East Asia
Japan 17 18 44 55 39 3 5.4 10.3 1.7 0.9
World
Low & middle income 35 52 76 113 6.7 10.9 0.9 3.5
East Asia & Pacific 49 66 85 113 5.3 13.3 1.5 3.9
Europe & Central Asia 29 66 53 110 .. 13.6 .. 3.8
Latin America & Carib. 23 38 69 115 7.9 10.5 0.9 4.5
Mid. East & N.Africa 45 52 81 90 11.5 7.5 0.9 1.0
South Asia 17 24 .. .. 1.4 3.1 0.1 0.6
Sub-Saharan Africa 41 57 76 96 5.1 11.0 1.0 1.8
High Income 32 37 101 124 11.0 33.6 3.0 10.1
World 32 40 96 119 10.3 29.1 2.7 8.8

Note: (a) Two dots (..) stand for "Data not available"
Sources :
(1) World Development Indicators 2002, World Bank.
(2) World Development Report 2002, World Bank.

46
 Table-14 Private Sector Development and Investment Climate
in selected Asian economies in 1990 and 2000
Country Private fixed Domestic credit to Foreign Direct Entry and Exit Regulation in 2000
investment as % of private sector Investment
domestic fixed As % of GDP As % of GDP Entry Repatriation of:
investment
1990 2000 1990 2000 1990 2000 Income Capital

Newly Industrializing Economies (NIEs)

Hong Kong .. .. 165 159 .. 89.0 F F F
Korea,Rep 87 79 66 102 0.7 3.2 RF F F
Singapore .. .. 97 110 20.7 11.6 F F F
Taiwan,China .. .. .. .. .. .. F F F
China and Mongolia
China 34 47 88 125 1.2 4.3 SS F F
Mangolia .. .. 19 8 .. 3.4 .. .. ..
South-East Asia
Cambodia 90 61 n.a. 7 1.7 3.9 .. .. ..
Indonesia 70 61 47 21 1.0 4.2 R R R
Lao, PDR .. .. 1 9 0.7 5.4 .. .. ..
Malaysia 65 51 69 136 5.3 2.0 RF F D
Myanmar .. .. 5 9 .. .. .. R R
Philippines 82 69 22 45 1.2 2.8 SS F F
Thailand 85 68 83 109 3.0 2.8 RF F F
Vietnam .. .. 3 35 0.6 4.1 .. R R
South Asia
Bangladesh 58 70 17 25 0 0.6 F F F
Bhutan .. .. .. .. .. .. .. .. ..
India 61 70 25 29 0 0.6 AI F F
Maldives .. .. .. .. .. .. .. .. ..
Nepal .. .. 13 31 0 0 R R R
Pakistan 52 62 28 29 0.6 0.5 R F F
Sri Lanka .. .. 20 29 0.5 1.1 RF R F
East Asia
Japan 84 79 195 188 1.7 0.9 F F F
World
Low & middle income 65 67 42 55 0.9 3.5
East Asia & Pacific 63 50 71 106 15 3.9
Europe & Central Asia .. .. .. 21 0 3.8
Latin America & Carib. 74 80 28 28 0.9 4.5
Mid. East & N.Africa .. .. 42 47 0.9 1.0
South Asia 56 72 25 29 0.1 0.6
Sub-Saharan Africa .. .. 43 66 1.0 1.8
High Income 82 .. 108 136 3.0 10.1
World 78 .. 97 120 2.7 8.8
Notes:
(a) Two dots (..) stand for "Data not available"
(b) Entry and exit regulations are classified as Free (F), Relatively Free (RF), Delayed (D), Selected Sectors (SS), Authorised
Investors only (AI), Restricted (R).
Sources :
(1) World Development Indicators 2002, World Bank.
(2) World Development Report 2002, World Bank.

47
 Table-15 Financial Depth and Efficiency in selected Asian economies in 1990 and 2000
Country Domestic credit Liquid liabilities Quasi-liquid Ratio of bank Interest rate Spread over
provided by as % of GDP assets liquid reserves spread LIBOR
banking sector as % of GDP to bank assets percentage percentage
as % of GDP as % of GDP points points
1990 2000 1990 2000 1990 2000 1990 2000 1990 2000 1990 2000

Newly industrializing Economies (NIEs)

Hong Kong, China 156 141 182 237 167 222 0.1 0.3 3.3 4.7 1.7 3.0
Korea,Rep 66 104 55 98 46 89 6 2 0 0.6 1.7 2.0
Singapore 76 90 123 108 101 87 4 2.5 2.7 4.1 -1.0 -0.7
Taiwan,China .. .. .. .. .. .. .. .. .. .. .. ..
China and Mongolia
China 90 133 79 152 41 91 16 13 0.7 3.6 1.0 -0.7
Mangolia 73 11 56 25 15 12 2 18 .. 16.5 .. 23.7
South-East Asia
Cambodia .. 7 .. 15 .. 11 .. 47 .. 10.5 .. 10.9
Indonesia 46 66 40 58 29 45 5 8 3.3 6.0 12.5 11.9
Lao, PDR 5 11 7 17 3 14 3 28 .. 20.0 .. 25.5
Malaysia 76 143 64 130 43 106 6 14 1.3 3.4 -1.1 0.2
Myanmar 33 27 28 26 8 10 272 23 2.1 5.5 -0.3 8.7
Philippines 27 68 37 67 28 55 21 7 4.6 2.6 15.8 4.4
Thailand 91 122 75 115 66 101 3 2 2.2 4.5 6.1 1.3
Vietnam 5 35 23 44 9 24 13 9 .. 6.9 .. 4.0
South Asia
Bangladesh 24 35 23 35 17 26 13 8 4.0 6.9 7.7 9.0
Bhutan .. .. .. .. .. .. .. .. .. .. .. ..
India 52 53 43 56 28 39 15 8 9.0 4.0 8.2 5.8
Maldives .. .. .. .. .. .. .. .. .. .. .. ..
Nepal 29 43 32 52 19 35 13 11 2.5 3.5 6.1 2.9
Pakistan 51 49 40 48 10 20 9 6 .. .. .. ..
Sri Lanka 43 44 35 47 23 37 10 8 -6.4 7.0 4.7 9.6
East Asia
Japan 260 311 182 190 155 142 1.5 1.4 3.4 2.0 -1.4 -4.5
World
Low & middle income 61 69 43 66 27 45 13 11
East Asia & Pacific 73 116 64 124 43 86 6 11
Europe & Central Asia .. 36 .. 36 .. 25 .. 11
Latin America & Carib. 59 38 25 30 18 21 22 15
Mid. East & N.Africa 69 70 62 62 30 37 14 10
South Asia 49 51 41 53 25 36 13 8
Sub-Saharan Africa 57 77 33 34 17 14 12 10
High Income 132 174 93 102 .. 77 2 1
World 121 152 83 92 .. 68 10 8.5

Note: Two dots (..) stand for "Data not available"

Sources :
(1) World Development Indicators 2002, World Bank.
(2) World Development Report 2002, World Bank.

48
 Table-16 Comparative statement on Foreign Investment regime in selected Asian countries

Country Sectors allowed Areas of 100% foreign Duration Local Export

for Foreign equity of FDR content obligations
Direct Investment obligation
1. India All except defense, 100% EOUs, FTZ, Unlimited Abolished None
agriculture, Planta- EPZ, power, technology since 1991 except for
tion, atomic energy, parks, hospitals, 100%
rail transport shipping, priority areas EOUs
2. Bangladesh All except arms, All allowed sectors Unlimited Value None
drugs, forestry, addition for except for
nuclear power, rail EOUs EOUs
3.Myanmer Selected areas All allowed sectors, Unlimited No No
minimum of 35%
4.Nepal All sectors Projects with FDI above Unlimited No No
Rs.20 million
5.Pakistan All except defense, In any business Unlimited No No
alcoholic beverage
6. Sri Lanka All areas except All allowed sectors Unlimited No No
broking, retail and
personal services
7.South All sectors except All allowed sectors Unlimited No No
Korea banned/ restricted
8.Singapore All sectors All areas except public Unlimited No No
utilities, media, telecom
and transport
9.Indonesia All sectors except FDI of at least $50 mln, 30 years 51% in 20 No
retail trade and EOUs, designated years
advertising sectors and locations
10.Malaysia All sectors Designated sectors Unlimited No No
11.Philippines All sectors except 100% EOUs and Unlimited No No
media, retail trade, designated sectors
engineering and
accountancy
12.Thailand All sectors except Over 80% exports, Unlimited 51% in 5 yrs No
negative list designated sectors and in allied and
locations agriculture
13.Vietnam All sectors except All allowed sectors, 20 years No No
minerals, telecom, Minimum of 30%
aviation, shipping
14. China All except public All allowed sectors, 10-30 No No
utilities, leasing, Minimum of 25% years
real estate, trust,
transport
15.Hong All sectors except All sectors except Unlimited No No
Kong broadcasting banking
16.Taiwan All sectors except All sectors except Unlimited No No
prohibited list restricted list
17.Japan All sectors except All sectors except Unlimited No No
arms,environment, prohibited list
related industries
18.Lao, PDR Selected sectors All allowed sectors 15 years No No

49
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