India's External Reforms: Modest Globalisation, Significant Gains

Special articles
India’s External Reforms

Modest Globalisation, Significant Gains
The liberalisation of India’s external sector during the past decade was extremely successful in
meeting the BOP crisis of 1990 and putting the BOP on a sustainable path. These reforms
improved the openness of the Indian economy vis-à-vis other emerging economies. Much,
however, remains to be done. India’s economy is still relatively closed compared to its
‘peer competitors’. Further reduction of tariff protection and liberalisation of capital
flows will enhance the efficiency of the economy and along with reform of domestic
policies will stimulate investment and growth.
The main lesson of the nineties is that liberalisation of the current and capital account
increases the flexibility and resilience of the BOP. This applies to trade, invisibles, equity
capital, MLT debt flows, and the exchange market. The author’s analysis confirms that in
India the exchange rate is a powerful instrument of adjustment in the current account deficit.
It also confirms that equity outflows are very unlikely to be a major cause of BOP problems
(unlike short-term debt). The impact of fiscal profligacy on the external account has become
indirect and circuitous with the implementation of external sector reforms. It operates much
more through the general expectations about economic (growth) prospects and the risk
premium demanded by foreign (and domestic) investors and lenders. Thus its negative effects
are likely to be focused on the domestic rather than the external account. In other words, the
negative long-term effects of fiscal profligacy are more likely to be felt in future on the growth
rate of the economy and the health of the domestic financial sector.
ARVIND VIRMANI
I perspective. External reforms were among the most successful

reforms undertaken in India during the nineties. These reforms
Introduction have opened up the economy, strengthened the external account,
F
or most people the story of Indian reforms starts in the and made it much less vulnerable to shocks. India’s trade share
nineties, following the balance of payments (BOP) crisis rose by 0.11 per cent of world trade during the nineties raising
of 1990-91. There was, however, a detectable increase in the India’s world ranking by six positions. India also became more
rate of growth of the Indian economy in the eighties, arising from open in terms of capital flows with its rank in terms of foreign
the liberalisation of the 1980s [Virmani 1989; Ahluwalia 1991]. direct investment (FDI) inflows rising by nine positions. Equity
Nevertheless, our analysis of reforms focuses on the nineties inflows increased even more rapidly to raise India’s rank among
because their scope was much wider and deeper than that seen the emerging markets by eight positions during the nineties. In
in the eighties. This was particularly so in the case of the external 1999 only 13 emerging markets received more FDI than India
sector, which is the focus of the current paper. and only five received more equity inflows. Of these China, South
Section II gives a summary of the broad-based and fairly Korea, Thailand, and Brazil had larger inflows of both FDI and
comprehensive external sector reforms that followed the BOP foreign equity than India during this year.
crisis of 1990-91. It also sheds some light on the decision-making Paradoxically, however, the Indian economy remains relatively
process. closed. As shown in Section III, international trade and FDI are
Section III starts with the macroeconomic adjustment under- still small relative to the size of the economy. There is a 15-
taken in 1991-92. The contribution of fiscal deficit reduction, position difference between India’s trade rank and its GDP rank
exchange rate depreciation, and other factors in the dramatic (both in terms of US $ value). India’s customs tariff rates are
reduction in the current account deficit by 2.8 per cent of gross still among the highest in the world with only two countries
domestic product (GDP) in 1991-92 are quantified. The section known to have a higher weighted average tariffs. The contribution
then goes on to analyse the external sector reforms in the nineties of FDI to gross domestic investment (GDI) is still minuscule with
and their impact and puts them in comparative international India ranking 126th in terms of the ratio of FDI to GDI. Further
Economic and Political Weekly August 9, 2003 3373

reforms that enhance openness will therefore strengthen not only intellectual and administrative preparation. The illegal foreign
the external sector but also the competitiveness of the Indian exchange markets and its link with smuggling and invisibles
economy. transactions were addressed by a comprehensive liberalisation
of gold imports.
I
Comprehensive Reform in the Nineties Macro-Adjustment
One result of the BOP crisis of 1990-91 was to create the The macroeconomic response to the BOP crisis as it existed
conditions under which a retired professional economist with at the start of 1991-92 was the classic textbook one of expenditure
wide experience in government and universally well-regarded compression through a sharp fiscal correction and expenditure
for his sincerity and integrity could become the finance minister switching through devaluation. The fiscal deficit of the centre
of India. The prime minister of the time deserves full credit for was reduced from 7.8 per cent of the GDP in 1990-91 to 5.6
grabbing this opportunity, despite the heartburn that it caused per cent of the GDP in 1991-92. The nominal effective exchange
among the members of his party and despite heading a minority rate (NEER) was depreciated by 18 per cent in 1991 resulting
government. The new Finance Minister, having been the in a real effective depreciation of 12.4 per cent. In terms of our
government’s top economic bureaucrat during the previous decade, estimated equation (1) below, the fiscal squeeze and the real
had been instrumental in raising economic expertise within the depreciation reduced the current account deficit by 1.03 per cent
government, by bringing a number of market-savvy economists of GDP and 0.97 per cent of GDP, respectively.
into the government. He was, therefore, relatively well-posi- The total effect of these two measures was therefore to reduce
tioned to make the move from a socialist-inspired approach to the current account deficit by 2 per cent of the GDP out of the
economic development to a market-oriented approach. total actual decline of 2.8 per cent of the GDP. The decline of
The new government in July 1991 initiated a new approach 1.6 per cent points in the private investment rate contributed about
to economic development policy. It recognised that only correct- 0.5 per cent to the reduction. The remaining decline of 0.3 per
ing the underlying macroeconomic imbalance and replacing the cent of the GDP can perhaps be attributed to the overall increase
oppressive system of controls by the discipline of market com- in private confidence arising from the major economic reforms
petition could overcome the BOP crisis. The new finance minister initiated in 1991-92.
and his chosen team of advisors were aware that in many countries The following reduced form equation is estimated to find the
the textbook macro solution for a BOP crisis had led to a slowing impact of the fiscal deficit on the current account deficit, using
of private investment and growth in the two years (and often data from 1970-71 to 1999-2000.
for longer periods) following the macro adjustment. They were
CAD = f (FDc, REER, Ipvt, t)
also aware of the remarkable growth rates and poverty reduction
achieved by the more open economies of east and south Asia where, CAD is the ratio of the current account deficit to the GDP,
during the previous two decades. Extensive decontrol and de- FDc is the fiscal deficit of the central government as a ratio to
licensing was recognised as necessary to release the productive the GDP, REER is the 36-country trade weighted real effective
potential of Indian entrepreneurs, reduce the period of private exchange rate (1985 = 100), and Ipvt is the ratio of private
investment and growth slowdown and raise the underlying growth investment to the GDP. The time trend ‘t’ represents the upward
rate of the Indian economy. It was also clearly recognised that trend in the private saving rate. The fiscal deficit of the central
the best way to put the BOP on a long-term sustainable path was government is much more exogenous than that of the states given
through comprehensive liberalisation of international trade, fi- constitutional limitations on the latter’s ability to borrow. As a
nance/capital inflows and the exchange regime. The phasing and longer time series is available for the REER in calendar years
timing of liberalisation were, however, determined not only by than for the fiscal years (April to March), the former is used.
the exigencies of the economic situation, but also the problem The estimation is done in first difference form with the rate of
of calming genuine fears, convincing ideological diehards, growth taken for the REER. The results are as follows.
and overcoming vested interests, both within and outside the
government. (1) ∆CAD = 0.001 + 0.466 ∆FD + 0.078 Greer + 0.301 ∆Ipvt
The comprehensive import control (or quantitative restrictions (0.56) (2.80) (2.94) (3.23)
(QRs)) regime was gradually dismantled, starting with capital
and intermediate goods and moving after a period of slowdown R2 = 0.568, R2 (adjusted) = 0.516, F = 10.95
to consumer goods. The slowdown was due to the differing nature
of these two sets of goods. In the case of intermediate and capital where, ∆CAD = [CAD – CAD(-1)], ∆FD = [FDc – FDc(-1)],
goods, the gainers and losers are more evenly balanced, while ∆Ipvt = [Ipvt – Ipvt(-1)], Greer = rate of growth of REER, and
for consumer goods the potential beneficiaries are fragmented the numbers in brackets are t-values.1
and unorganised and no match for concentrated number of easily Thus every per cent point of GDP increase in the fiscal deficit
organised opponents. Tariff rates were brought down over a of the central government resulted in a 0.47 per cent of GDP
decade from a peak rate of about 300 per cent to a peak rate increase in the current account deficit.2 It is also clear that the
of 35 per cent. The problems of overdependence on debt and exchange rate has a powerful impact in countering the effect of
the high proportion of short-term debt were addressed by the fiscal deficit. A 6 per cent depreciation of the real effective
liberalising FDI and foreign equity (foreign institutional invest- exchange rate is sufficient to counter and nullify the impact of
ment, FII) inflows while keeping a very tight lid on short-term a 1 per cent point increase in the fiscal deficit. The effect of private
debt obligations and maintaining the control regime for external investment on the current account is also statistically very signi-
commercial borrowing (ECB). A comprehensive reform of the ficant with a 1 per cent point increase in its ratio to GDP resulting
exchange control regime was undertaken based on thorough in a 0.3 per cent point increase in the current account deficit.
3374 Economic and Political Weekly August 9, 2003

Trade Reform regime for exporters. Export controls were also lifted on 116 items.
The trade policy of April 1, 1992 freed imports of almost all
Export pessimism was not just a belief, but also almost an intermediate and capital goods. Only 71 items remained re-
ideology among the resident economic elite of India for decades. stricted/licensed (3 banned, 7 canalised). These consisted mainly
The two prominent exceptions to this belief in academic circles, of dual-use goods like office equipment and consumer goods.
Jagdish Bhagwati and T N Srinivasan were both non-resident A Special Import Licence (SIL) was given to star exporters for
Indians (NRIs) [Bhagwati and Srinivasan 1975]. Among the importing restricted items. The trade policy of April 1, 1993
domestic exceptions were the new finance minister himself, who removed 146 items from the negative (restricted) list of exports.
as an academic had done work on exports [Singh 1964], and the Kerosene, liquified petroleum gas (LPG), low sulphur heavy
economist who was to later become his finance secretary. The stock (LSHS), waxes, and fertilisers (phosphoric potash) were
conventional wisdom among the domestic Indian experts as de-canalised. In the April 1994 policy, the scope of the SIL was
encapsulated in Nayyar (1976) and Ghosh (1990) was that Indian expanded, and second-hand capital goods (with a residual life
exports were supply-constrained and not very responsive to of five years) allowed to be imported. The import policy of April
relative price changes. The alleged failure of the 1966 devaluation 1995 put 78 consumer goods in the freely importable category.
was cited as one of the proofs of this proposition. The attitude At this point, out of a total of 5021 6-digit items on the Harmonised
of the elites was reflected in the negative reaction that a 1989 Tariff System’s list, 3000 were freely importable while 1487 were
Planning Commission research paper, which showed high rela- importable using the freely tradable SIL. Further progress was
tive price elasticities of demand for manufactured exports and made in 1996-97 by the lifting of QRs on over 100 items and
imports, elicited in the upper reaches of the Planning Commission the movement of about 70 items to the SIL.
[Ghosh 1991].3 The research paper of June 1989 was circulated After the initial major step of removing QRs on a host of
to members of the Planning Commission and economic advisors intermediate and capital goods in April 1992, further liberalisation
in key economic ministries. Unlike earlier research that focused was a painful and slow process requiring infinite patience. Two
either on total exports or individual commodities this paper main problems had to be overcome by those who believed that
constructed three sub-aggregates to show that supply constraints import liberalisation would benefit the economy and the people
were important only for primary exports and that both the supply as a whole. The Commerce Ministry, institutionally charged with
and demand for manufactured exports was highly elastic [Virmani promoting exports was conditioned to thinking in terms of export
1991a]. Imports were also shown to be very responsive to incentives. Thus, they had a strong incentive to preserve the list
devaluation. Fuel imports and exports were not amenable to any of items importable under the SIL so that premiums would remain
rational analysis and could therefore have biased earlier aggregate as high as possible in the belief that this was the best way to
estimates. The paper also showed that that the effect of the 1966 benefit exporters and exports. They had to be slowly and gradu-
devaluation was spread over two years. ally convinced that exchange rate adjustments would provide the
For non-economic participants in the decision-making process same incentives in a much more efficient manner.
the main argument against import bans was that by providing The other set of objections came from producer ministries who
infinite protection to manufactured goods such bans biased the were convinced (without being able to produce any data or hard
economy against agriculture and labour-intensive manufactures. facts), that producers of consumer goods would suffer if QRs
The QRs also favoured large, capital-intensive manufacturing and on consumer goods imports were lifted. Unlike in the case of
mining thus contradicting and undermining the policy of encour- intermediate and capital goods where user groups or ministries
aging small-scale industry. The removal of QRs and the reduction could provide support, consumers were not represented in the
of the high tariffs on manufactured goods would therefore favour discussions and arguments about the benefits to consumers were
agriculture and labour-intensive manufactured exports. seldom heeded. The evidence (of no negative effect) provided
by earlier removal of QRs on intermediate goods spread ex-
Import Controls: QRs tremely slowly. Other arguments relating to the visible availability
of certain smuggled consumer goods, which had little impact on
Though trade reform had begun in the 1980s, the import control domestic producers, were sometimes effective. The fact that tariff
regime was still incredibly complex in 1990-91. This was parti- rates were still quite high did sometimes help to calm the fears
cularly true of the duty-free input import regime for exporters of neutral participants. It was only the loss of the World Trade
(based on the efficiency principle of either not taxing or refunding Organisation (WTO) case against India, however, that finally led
input taxes). A significant effort was made to clean up this to the complete elimination of QRs previously justified on BOP
complex regime in July-August 1991 by introducing the ‘Exim grounds on April 1, 2000. Otherwise the process of removal of
Scrip’ – a freely tradable import licence (30 per cent of export QRs on consumer durable goods could have dragged on for
value as import entitlement from the Limited Permissible List) another half decade or more.
– the premium on which effectively constituted a dual exchange
rate.4 The existing Cash Compensatory System, which varied Customs Tariffs
by product category and perceived domestic value-addition, was
abolished. QRs were eased on 96 items by moving them from The overall objectives of customs tariff reform were clear from
the ‘restricted’ to the ‘limited permissible’ category. The removal the beginning – to reduce overall protection by reducing the
of QRs on 37 items by moving them from the ‘limited permissible’ average rate of tariffs and to reduce the arbitrary distribution of
to the ‘open general licence’ category was, however, overwhelmed protection among industries by reducing the dispersion of tariffs.
by a reverse movement of 110 items. QRs were also lifted on An incredible array of general, specific, and end-use exemptions
six items (de-canalised) and eased on 16 others (moved from the had also been built up over the decades in response to the demands
canalised category to the ‘limited permissible’ category). Proce- of vested interests, backed by little or no economic analysis of
dural improvements were also made in the capital goods import the costs or benefits. Though economists working on India’s customs

tariffs had some idea of its complexity in terms of multiplicity about 38 per cent. This surcharge was removed in 2001-02
of rates and end-use exemptions, none initially had a detailed bringing the effective peak rate down to 35 per cent.
knowledge of the system and its incredible array of exemptions. Peak rate reductions, along with a gradual elimination of
In addition to the array of industrial interests and producer exemptions also helped reduce the variance of rates. Rates on
ministries opposed to the lifting of QRs, customs tariff reform capital goods (general and project-linked) were simultaneously
faced two additional difficulties. The revenue department, charged reduced to 35 per cent in 1993-94 and 25 per cent in 1994-95,
with collecting revenues understandably had an inbuilt resistance where they came to rest. The well-known (to economists) issue
to reduction of any tariff. Secondly, the secrecy of the budget of negative protection for the capital goods industry, which
process meant that it was difficult to bring in expertise from surfaced occasionally in public debate, was addressed in the
outside the revenue department. Secrecy could also be used as detailed customs reforms papers papered from 1992 onwards.6
a handle to keep information asymmetric and at critical points Following from these, an attempt was made to rationalise the
dismiss arguments as based on imperfect practical knowledge. metal-capital-good chain. A similar exercise was done for the
The Chelliah committee on tax reform, which outlined a broad chemicals chain. The 1993-94 budget set the rate for ferrous
structure of peak tariff rates for different categories of goods, metals at 75 per cent to 85 per cent and non-ferrous metals at
proved important in overcoming bureaucratic inertia [Ministry 55 per cent. The widely dispersed rates on machine tools were
of Finance 1991, 1993]. Its reports helped reformers to keep the also reduced to three (40 per cent, 60 per cent, and 80 per cent).
focus on peak tariff reductions despite pressures on customs Chemical feed stock rates were integrated at 15 per cent and those
revenue. The other effort was to mount an exercise within the on major intermediates at 40 per cent. Rates on personal (baggage)
Finance Ministry to collect and analyse all available information imports were reduced from 225 per cent to 100 per cent. The
on customs duties and customs revenue collection. It was only 1994-95 budget rationalised machine tool rates to 35 per cent
after this detailed knowledge had been acquired that economists and 45 per cent and rates on medical equipment to 0 per cent
could begin to effectively cut through the jungle of exemptions 15 per cent and 40 per cent depending on social value. It reduced
and reduce the multiplicity of rates and start removing the negative rates on steel and non-ferrous metals to 50 per cent. There was
protection and other anomalies. Due to the budget secrecy issue also an attempt to prune end-use notifications. In the 1995-96
mentioned above, the only route available was to prepare detailed budget, 80 per cent of capital goods rates were unified at 25 per
tariff reform papers that applied economic principles to the cent and metals at 35 per cent and 40 per cent.
detailed structure of tariffs and exemptions. This detailed knowl- As a result of these customs tariff rate reductions, the customs
edge could not, however, be brought to bear at the critical duty collection rate, went from 47 per cent in 1990-91 to 44 per
decision-making budget formulation stage and tariff rationalisation cent in 1991-92, 37 per cent in 1992-93, 30 per cent in 1993-
was often incomplete or internally inconsistent. This was also 94, and 29 per cent in 1994-95. The movement in the collection
partly due to the pressures from public sector units and opposition rate since then has fluctuated with the rate rising to 31 per cent
from their ministries, which expressed themselves through their in 1996-97 before falling to 27 per cent 1997-98 and 23 per cent
ministers at the budget formulation stage. in 1998-99. It rose again to 24 per cent in 1999-2000. The
With the peak customs tariff rate at around 300 per cent in collection rate includes not just the protective duty, but also the
1990-91 it was apparent from the start that there was a lot of ‘additional duty’ which is the counterpart of domestic excise taxes
‘water in the tariff’. The first step was therefore to cut the peak (also referred to as countervailing duty, CVD).
rate to half (150 per cent) in the 1991-92 budget and follow it up
by another cut in the peak rate to 110 per cent in the 1992-93 Exports
budget. The reduction of the import duty on capital goods was
accelerated by reducing the general rate to 55 per cent in 1992- The import control system for exports was primarily directed
93 because of the potential role of capital goods imports in to providing duty free access to imported inputs (intermediate
investment and modernisation. Some categories of capital goods goods) and reduced duty access to capital goods used in export
were set even lower (50 per cent for electronic industry). production. Profits from exports were completely exempt from
The momentum of peak-rate reductions (to 85 per cent in 1993- income tax. 100 per cent Export-Oriented Units (EOUs) and
94, 65 per cent in 1994-95, and 50 per cent in 1995-96) was Export Promotion Zones (EPZs) had the additional incentive of
maintained, often by taking recourse to the recommendations of a 5 to 8 year tax holiday for profits arising from the 25 per cent
the Chelliah committee. The fiscal problem did however constrain Domestic Tariff Area (DTA) sales that were allowed. This incentive
the pace of tariff reduction, as there was always a pressure on those system was pretty much in place by the end of the eighties.
recommending faster peak rate reductions to produce offsetting Paradoxically, concern with misuse of the duty free system
gains in revenue. As the peak rate recommended by this com- sometimes made the system even more cumbersome for honest
mittee was 50 per cent, this recourse was no longer available exporters than the normal system for local producers. The chief
once the peak rate had been reduced to 50 per cent. The next peak objective during the reforms was to simplify the system while
rate reduction (to 40 per cent in 1997-98) was based on internal making it as comprehensive as possible. In the April 1993 trade
recommendations and was part of a bold tax reform plan announced policy, the EOU-EPZ system was expanded to agriculture and
by the Finance Minister.5 The peak rate was raised to 45 per allied exports with 50 per cent DTA sale allowed. Under the
cent in 1998-99 by imposing a surcharge and a special additional Export Promotion Capital Goods (EPCG) scheme for exporters,
duty of 4 per cent was imposed as an analytical counterpart of the concessional duty on capital goods was reduced to 25 per
the state sales taxes on domestically produced goods. The nominal cent (with an obligation to export 3 times the value of the import)
peak rate was reduced to 40 per cent in 1999-2000, but the and 15 per cent (with an obligation to export 4 times the value
surcharge was increased to 10 per cent on items having a duty of the import). In April 1994, an Electronic Hardware Technology
of less than 40 per cent. The peak rate was reduced to 35 per Park scheme was introduced on par with the EPZ. The concept
cent in 2000-01, reducing the effective peak protective duty to of a Free Trade Zone was finally accepted in 1999-2000.

Foreign Equity Opening FDI with up to 51 per cent (up from 40 per cent) foreign equity
was thus freed for a historically defined list of 34 ‘priority’
The long-term considerations arguing for raising the flow of (intermediate and capital good) industries and international trad-
foreign equity capital relative to debt were known even before ing companies. However, the dividend balancing condition
the crisis.7 The BOP crisis reinforced these arguments for remained.8 The 51 per cent level was chosen as this allowed
encouraging external equity vis-à-vis debt financing. The emer- foreign companies to amalgamate profits and losses from such
gency loans taken from multilateral and bilateral sources to meet a company into those of the parent company for tax purposes.
the BOP crisis resulted in a further rise in foreign debt. Foreign Technology import was also put under the automatic route subject
debt, which had risen to 25.1 per cent of the GDP by the end to conditions on royalty (<5 per cent domestic and <8 per cent
of March 1991 (from 22.9 per cent a year earlier) rose further export) and lump-sum payment (<Rs 1 crore). Any FDI or
to 33.8 per cent of the GDP by the end of March 1992 (Table 1). technology import had to be approved by a newly created Foreign
Part of this rise was due to the rise in the rupee value of foreign Investment Promotion Board (FIPB). The principal secretary to
debt because of the July 1991 devaluation (or conversely the fall the prime minister chaired the FIPB, to ensure speedy approval
in the dollar value of the GDP due to the devaluation). The need to of FDI proposals outside the ambit of the automatic route.
dispense with these emergency loans and repay them as soon as Within the next nine months, the dividend balancing condition
possible added to the urgency of opening up equity flows to India. was removed for all except consumer industries. The dividend
balancing condition on consumer goods was finally removed in
Foreign Direct Investment 2000-01. Fifty-one per cent foreign equity was also allowed for
FDI in oil exploration, production, refining, and marketing and
In India’s traditional policy framework, FDI was treated as just captive coal mining. NRIs and overseas corporate bodies (OCBs)
another form of foreign saving to plug the ‘domestic saving gap. were allowed 100 per cent equity in priority industries. This was
In the new reform approach its many other advantages, such as made automatic in 1997-98. Dis-investment by foreign investors
the bundling with knowledge (technology), trade (exports), and no longer required RBI permission. International firms were
investment were fully recognised. Given the need for creating allowed to use their own trademarks and India ratified and joined
confidence among foreign investors, FDI policy reform formed the Multilateral Investment Guarantee Agency (MIGA).
part of the first package of industrial reforms in July 1991. The In 1996-97 the automatic approval list was expanded to 48
attempt at de-control of FDI took the form of an ‘automatic route’ industries, with three mining-related activities allowed 50 per
through the Reserve Bank of India (RBI) (Annual Report, various cent and 9 infrastructure activities allowed 74 per cent foreign
issues; ‘Handbook of Statistics on the Indian Economy’, 2000 equity. The latter was raised to 100 per cent two years later. A
(CD ROM)) that basically constituted a registration procedure. significant step was taken in 1999-2000 with the introduction
Table 1: Balance of Payments
1985- 1986- 1987- 1988- 1989- 1990- 1991- 1992- 1993- 1994- 1995- 1996- 1997- 1998- 1999- 2000-
86 87 88 89 90 91 92 93 94 95 96 97 98 99 2000 2001
External Debt ($ million as on March 31st)

Total Debt 64,075 75,857 83,801 85,285 90,023 92,695 99,008 93,730 93,470 93,531 97,666 98,435 100,255
(Per cent of GDP) 23.7 26.7 28.7 38.7 37.6 33.8 30.9 27.1 24.7 24.4 23.6 21.9 21.6
Concessional 31,814 35,443 38,426 38,187 40,097 41,112 44,845 41,944 39,489 36,944 37,258 38,193 36,032
(Shareoftotal) 49.7 46.7 45.9 44.8 44.5 44.4 45.3 44.7 42.2 39.5 38.1 38.8 35.9
(Per cent of GDP) 11.8 12.4 13.1 17.5 16.7 15.0 14.0 12.2 10.4 9.6 9.0 8.5 7.8
Private share of MLT debt (per cent) 14.5 14.8 13.4
Short term 3,889 7,501 8,544 7,070 6,340 3,627 4,269 5,034 6,726 5,046 4,274 3,933 3,462
(Shareoftotal) 6.1 9.9 10.2 8.3 7.0 3.9 4.3 5.4 7.2 5.4 4.4 4.0 3.5
(Per cent of GDP) 1.4 2.7 2.9 3.2 2.6 1.3 1.3 1.4 1.8 1.3 1.0 0.9 0.7
(Proportion of foreign currency reserves) 0.92 2.23 3.82 1.26 0.99 0.24 0.21 0.30 0.30 0.19 0.14 0.11 0.09
MLT debt maturing within the year (per cent of MLT) 8.0 7.7 7.3
Proportion of GDP at market prices (per cent)
Fiscaldeficit(centre) 7.8 8.4 7.6 7.3 7.3 7.8 5.6 5.4 7.0 5.7 5.1 4.9 4.8 4.5 4.1
Fiscal deficit (centre and states) 8.5 9.8 9.1 8.5 8.7 9.3 6.9 6.8 8.1 6.9 6.6 6.3 7.2 8.3 7.5
Current account deficit 2.1 1.9 1.8 2.7 2.3 3.1 0.3 1.7 0.4 1.0 1.7 1.2 1.4 1.0 1.0 0.5
Tradedeficit 3.4 3.0 2.6 3.2 2.5 3.0 1.0 2.3 1.5 2.8 3.2 3.9 3.8 3.2 4.0 3.0
Invisibles,net 1.3 1.1 0.8 0.5 0.2 -0.1 0.7 0.6 1.1 1.8 1.6 2.7 2.4 2.2 2.9 2.6
Privatetransfers 1.0 0.9 1.0 0.9 0.8 0.7 1.4 1.5 1.9 2.5 2.4 3.2 2.9 2.5 2.7 2.7
Income(interest) -0.3 -0.4 -0.5 -0.9 -1.0 -1.2 -1.4 -1.4 -1.2 -1.1 -0.9 -0.9 -0.9 -0.9 -0.8 -0.8
Capital inflows (adjusted) 1.6 2.0 1.9 2.4 2.2 1.5 1.5 1.4 2.5 2.1 2.1 3.3 2.6 2.1 2.9 2.5
External assistance 0.6 0.6 0.8 0.8 0.6 0.7 1.1 0.8 0.7 0.5 0.3 0.3 0.2 0.2 0.2 0.1
Commercial borrowing 0.4 0.8 0.4 0.6 0.6 0.7 0.6 -0.1 0.2 0.3 0.4 0.7 1.0 1.1 0.1 0.9
NRI deposits, net 0.6 0.5 0.5 0.9 0.8 0.5 0.2 0.8 0.4 0.1 0.3 0.9 0.3 0.4 0.5 0.4
Rupee debt service 0.0 0.0 0.0 0.0 0.0 -0.4 -0.4 -0.3 -0.4 -0.3 -0.3 -0.2 -0.2 -0.2 -0.2 -0.1
Reserves (increase is negative) 0.3 0.2 0.3 0.3 0.3 0.4 -1.4 -0.3 -3.2 -1.4 0.8 -1.5 -0.9 -0.9 -1.4 -1.3
Foreign investment ($ million) 0 195 434 357 410 103 133 557 4,235 4,807 4,805 6,153 5,390 2,412 5,117 2,911
Direct(FDI) 96 129 315 587 1,343 2,151 2,906 3,562 2,480 2,167 2,342
(growth rate) 34 144 86 129 60 35 23 -30 -12.6 8.1
Portfolio 5 4 242 3,649 3,579 2,747 3,418 1,828 -68 3,024 1,083
(cumulative share) 0.3 0.6 11.5 60.7 66.6 63.8 61.5 56.1 51.4 52.5 51.3
Import unit-value index of fuel 295 165 201 193 244 383 407 441 435 447 511 649 540 439
(growth rate) 3.9 -44 22 -4.0 26 57 6.3 8.4 -1.4 2.8 14.3 27 -17 -19
EER change: Financial Year -2.6
REER -8.2 -5.4 -5.8 -2.4 -3.6 -15.1 -11.1 7.9 7.2 -3.7 0.3 5.0 -5.3 -0.2 5.0
REER change: Calendar Year -1.9 -7.8 -7.3 -3.8 -4.6 -2.3 -12.4 -4.0 -6.6 8.7 -0.7 -3.4 6.4 -3.5 -2.3

of a negative list approach with all other sectors open to automatic FDI, it was hoped that the foreign equity investors would come
approval. The foreign equity limit in manufacturing was elimi- in quickly, learn about and disseminate the opportunities available
nated at this time, while some sector-specific limits such as in in India (i e, act as a window to the world) and, thus, help draw
telecom and civil aviation remained. in more FDI. Given residual suspicions and fears, as a safety
A study done by a private international consultancy organisation precaution all such foreign equity had to be channelled through
in 1992 showed that both the FDI policy and its implementation foreign institutional investors registered with the Securities
through the RBI automatic route and the FIPB were comparable Exchange Board of India (SEBI) and the RBI (for the Foreign
to those in south-east Asia and China. By the FDI policy is meant Exchange Regulaton Act, 1973, FERA). The FII category was
any element of policy that discriminates against (or provides however quite wide and included pension funds, mutual funds,
preferential treatment to) foreign nationals and companies wanting asset management companies, investment trusts, and institutional
to invest in a country relative to the country’s nationals and portfolio managers. Both primary and secondary market invest-
companies. Though domestic policies and procedures that are ments up to 24 per cent of the total equity of any company were
formally neutral between foreign and domestic investors may allowed. An equity-debt ratio of 70:30 was allowed for equity
have a differential impact on foreigners, these are conceptually funds. The dividend tax was limited to 20 per cent and the long-
distinct from FDI policy. In practice they are as, if not more, term capital gains tax to 10 per cent. The use of Global Depository
important than FDI policy per se. Receipts (GDRs) to raise foreign equity funds was also allowed
The gradual liberalisation of FDI rules is an example of phasing and encouraged.
being dictated by various pulls and pressures arising from public The process of reform thereafter was incremental and depen-
attitudes (the East India Company syndrome), organised pressure dent on the exigencies of the situation including the perception
groups, and political resistance. Unlike trade policy where the of the BOP situation by the RBI and the fears of equity flow
commerce ministry is formally responsible and tariff policy for reversals in Delhi. Investment in equity of unlisted companies
which the finance ministry is responsible, the responsibility of was allowed in 1996-97 subject to corporate governance type
FDI policy for any sector or sub-sector falls within the purview safeguards. 100 per cent debt funds were also allowed to invest
of the ministry that deals with that particular sector. To the extent in Gilts and listed company securities the same year, with entry
that the industry ministry deals with general industrial policy it into primary treasury options and access to unlisted company
is also responsible for the FDI policy for general industry. The debt securities allowed in 1998-99. The company-specific ag-
finance ministry also comes into the picture, as it is responsible gregate foreign equity limits were subsequently raised to 30 per
for the BOP aspects of FDI. For this reason the FDI policy for cent (1997-98), and then to 40 per cent and 49 per cent (2001-
industry made much faster progress within the government and 02), subject to the company boards’ discretion. At present foreign
significant resistance to speedier liberalisation came only from nationals can directly invest in the Indian equity market through
outside the government (industry and their civic/public support- any SEBI-registered investment intermediary. A special regime
ers). Because of the universal agreement on the need for FDI for venture capital funds has also been put in place.
in infrastructure sectors, liberalisation for these sectors was also
reasonably fast, though in some of these sectors the limit has Indian FDI
got stuck below 50 per cent. The resistance to change came mainly
from public monopolies or public-private bilateral monopolies In the attempt to raise equity inflows, the potential gains from
that could convince the concerned ministers. Reform of domestic Indian investment abroad were not overlooked. Just as in the case
investment policy as well as of FDI policy in other sectors such of inward FDI it was recognised that outward FDI also had the
as real estate has been relatively slow because responsibility is potential to raise the general level of technology and management
widely dispersed. available to Indian industry. The effort to compete globally could
help industry upgrade domestically. The first step was taken in
PortfolioCapital:FII 1992, by putting a time limit of 30 days for approving outward
FDI up to $2 million. This limit was raised progressively in
As shown in a recent review of financial sector issues by the subsequent years and its scope expanded.
World Bank (2001: Figure 4.5, p 172), among the emerging
economies, India was one of the early openers of the equity market Debt
to foreign portfolio investment. According to this study only
Mexico started a Country Fund for foreign equity investment The cautious policy towards debt flows was outlined in 1992-
about 6 years prior to India, while the South Korean fund was 93. This included tight control on short-term borrowing and a
set up only one year before India’s. In 1992-93, direct portfolio cap on total ECB. At this point, ECB was to have a minimum
investment by foreign institutional investors in Indian equity maturity of five years, and could only be used for purchasing
market was allowed. At this time the degree of opening was capital goods abroad. Priority within the cap was given to in-
greater than in almost all east and south-east Asian emerging frastructure, exports, and small and medium enterprises. This
economies, but perhaps less than that in the large Latin American policy was gradually liberalised. The strict short-term debt policy
emerging economies. In addition to the general objective of resulted in the closing of the Foreign Currency (Banks and Others)
raising equity flows there were two other considerations that [FC (B and O)] deposit scheme in July 1992 and the withdrawal
weighed positively in this decision. Though the domestic saving of the Foreign Currency Non-Resident (FCNR) account scheme
rate was relatively high the availability of risk capital in the equity of less than one year in May 1993 and the FCNR account scheme
market was relatively low. It was thought that the flow of foreign of less than two years in October 1993. As a result of this policy
equity would help in developing the domestic equity market, by short-term debt declined from 6.1 per cent of total external debt
bringing in the world’s best practices and stimulating compe- by the end of March 1989 to 3.5 per cent of total debt at the
tition. Secondly, because equity markets respond much faster than end of March 2001. Short-term debt was less than 9 per cent

of foreign currency reserves at the end of March 2001. Even if (which eliminated the FEC accounts) was prepared in February
we include medium- and long-term debt with residual maturity 1992, which formed the economic background of the decision
of less than a year, it would be less than 30 per cent of foreign to move to partial convertibility.10
currency reserves [i e, excluding gold and Special Drawing Rights The Liberalised Exchange Rate Management System (LERMS)
(SDRs)]. was announced in the Union Budget of 1992-93 and spelled out
Another element of this policy was to eliminate ECB by the by RBI the next day. Exporters and remittances would surrender
government, increase scrutiny of borrowing by public sector 40 per cent of exchange at the official rate (which was left
companies, and increase the share of the private sector in ECB. unchanged at 25.89), while the rest would be converted at the
As a consequence, the government’s share in external debt fell free market rate. This effectively meant that export proceeds were
by about 20 per cent points between March 1989 and March 2001, taxed at 0.4 times the difference between the market and official
while external private debt had risen to 14.8 per cent of total exchange rate. One hundred per cent EOUs and EPZs could sell
debt by March 1999. the entire amount at the market rate and were thus not taxed in
New institutional structures were created to ensure that control this way. All capital account transactions, except those related
and monitoring of ECB was economically rational and consistent to the International Monetary Fund (IMF), multilateral aid, and
with the liberalised approach. A high-level committee on debt repayment of rupee debt, would also be at the market rate.
management and a task force on external debt statistics to provide Exporters could retain up to 15 per cent of earning in a foreign
regular reports were set up. A unit was also set up for aggregate currency account with an authorised bank. The exchange sur-
debt monitoring and management support. The first status report rendered at the official rate was to be used by the government
on external debt was produced in October 1993. This unit evolved for official transactions, thus effectively subsidising these uses
into the External Debt Management Unit (EDMU), which helped by the difference between the market and official rate. Compared
improve debt monitoring and management. to a market exchange rate the system represented a cross tax
The ECB policy was gradually liberalised, though the Asian subsidy scheme in which exporters subsidised certain type of
crisis revived diffuse fears about liberalisation. It was clear to government related imports. This was explicitly designed to
those who studied the Asian crises that the problem was one of minimise the immediate impact on the fiscal situation as well
short-term debt, which remained under strict control. In fact it as to reduce any risk on this account at a time when a reduction
was argued that the missed lesson of the Asian crisis was that of the fiscal deficit was thought to be essential for reducing the
medium- and long-term (MLT) debt above one year (and certainly macroeconomic imbalance.
above three years) was not a problem and could be freed com- The announcement of this system in the Union Budget for 1992-
pletely. Greater attention would have to be paid to monitoring 93 (18 months after the crisis) took the country as well as foreign
and modelling the residual maturity of this MLT debt. observers by surprise. The extent of excitement among common
people, those who may never have the opportunity to undertake
Exchange Control foreign exchange transactions took even those involved in its
preparation by surprise. Even the common person welcomed the
PartialConvertibility:LERMS freedom that it implied and the confidence that it denoted on the
part of the government. Many intellectuals and economists
The exchange market reform was an example of the most predicted that there would be huge capital outflows and the rupee
surprising (to the public and outside observers) yet most would sink to Rs 40 per US $ on the market channel. Some sceptics
thoroughly prepared and carefully executed reform. A number even predicted a free fall to Rs 50 per US $. The market exchange
of development policy research papers done at the Planning rate opened around Rs 31.27 per US $ in March 1992 and rose
Commission between 1989 and 1991 had suggested the possi- to Rs 30.87 per US $ in January 1993.
bility of introducing a ‘dual exchange rate’ system to ease the Under the aegis of the Finance Ministry, the RBI, and the
transition from a heavily controlled trade regime to a free market commerce ministry, joint committees were set up to monitor and
system encompassing both trade and payments. After the intro- manage the system after it was announced and to iron out any
duction of ‘Exim Scrips’ by the commerce ministry in August kinks that emerged. Several difficult issues such as how to deal
1991, the last paper in this series spelt this out more explicitly with rupee trade arrangements and the alleged adverse effect on
in September 1991. This paper envisaged a complete de-licensing exporters were hammered out during the year. By the end of 1992
of intermediate and capital goods imports and inclusion of these it was clear that the scheme was even more successful than was
along with, “all currently permitted service trade, technology and hoped for by its initiator, the finance ministry. It had been thought
labour payments (including remittances)” in the “full fledged earlier that a second year of transition could perhaps be necessary,
market determined dual exchange rate.”9 It was noted that the in which the surrender ratio would be reduced along with a
most important reason for switching over to this system was its reduction of the number of items on the official exchange channel.
self-equilibrating property, which would automatically ensure The performance of the exchange market, however, gave deci-
BOP balancing. This system was however administratively tied sion-makers the confidence to move directly to an integrated,
to what was called a foreign exchange certificate (FEC), a more market-based exchange rate system in 1993-94 by eliminating
comprehensive cousin of the ‘Exim Scrip’ applicable to services the official channel. Thus, the cross tax-subsidy (exporters to
and with proportions of 85 per cent to 90 per cent (instead of government) was in operation for only one year. On integration,
30 per cent). It was suggested that the system could be operated the exchange rate depreciated to Rs 32.43 per US $ in February
through FEC accounts with authorised banks. 1993, but appreciated thereafter. Till August 1995 it remained
Based on these initial thoughts a comprehensive concept paper below the peak reached in February 1993. Only in September
on liberalising the foreign exchange market using a dual exchange 1995 did it depreciate to Rs 33.58 per US $.
rate was prepared in November 1991. After several rounds of As the RBI retains the right to intervene (and does intervene)
comments and discussion, the final version of this internal paper to even out excessive volatility in the exchange rate, in inter-

national terminology this system is classified as a ‘managed commodities. The counter argument, that import of gold has
float.’ monetary implications and thus must be handled differently from
other commodities has, however, prevailed so far. Prima facie,
Gold Imports with all vestiges of the gold standard removed, this argument
is not very convincing.
In October 1991, the Remittance in Foreign Exchange Immu- By comparing the estimates of the World Gold Council, on
nity Scheme was introduced for repatriation of funds. This was import of gold into India, with the official Indian data on imports
followed by longer term structural attempts to decriminalise one can get an idea of the trends in smuggling of gold into India.
transaction that are considered legitimate in a free and open If it is assumed that the difference represents the amount of gold
society and to move them from the ‘hawala’ (unofficial/under- that is smuggled into India, then the supply of gold through the
ground) market to the open market smuggling declined from virtually almost 100 per cent before
Reform of the ban on gold imports also received attention in liberalisation to 48 per cent by 1995-96 and 39 per cent by 1996-
the run up to the 1992-93 budget. Though there were no official 97. Up to 1996-97 most (87 per cent) of imports were through
statistics, knowledgeable people agreed that most gold smuggling the NRI baggage route, which had been opened up in 1992.
was financed by labour and other remittances through the ‘hawala’ Thirteen per cent were through the special import license given
market. The ‘hawala’ operators had a network of agents in the west to exporters, a route that was opened subsequently. After the
Asia and other countries, who bought the remittance earnings of opening of the normal (OGL) route to selected importers the
Indian migrants and sold it to the smugglers. The rupee leg of proportion of imports through the normal route increased rapidly
the transaction was completed in India by collecting the payments to reach 42 per cent in 1997-98, 93 per cent the next year, and
from the smugglers’ agents in India and paying the beneficiaries 99 per cent in 1999-2000. However, even in this year about 36
of the worker remittances. Thus, it was essential to liberalise gold per cent of gold imports were through the smuggling route. A
imports to eliminate smuggling and ensure that labour remittances rise in import duties during 1998-99 (to Rs. 400 per 10 grams
to India were sent through official rather than ‘hawala’ markets. in January 1999) increased the incentive for smuggling, which
This would reduce the size of the ‘hawala’ market and strengthen increased rapidly to 54 per cent of total import the next year (59
the newly liberalised market exchange rate channel. per cent in 2000-01). To eliminate smuggling, gold import needs
The only contentious issue among the experts was on what duty to be treated like any other import, so that anyone can import
rate to set. One side argued for a very low duty rate, close to it (i e, unrestricted OGL). The duty rate can be set (keeping in
zero, with the hope that this could eliminate gold smuggling in mind that gold is a relatively easily smuggled high-value good)
one fell sweep. The other side argued that the duty rate should to maximise customs revenue collection.
be set competitively to the smuggling margin. Based on available
information about normal smuggling costs and risks through the CurrentAccountConvertibility
sea route, a duty rate of about 15 per cent was judged to be optimal
for maximising revenues.11 As there is little domestic production Restrictions relating to the non-trade elements of the current
of gold the customs duty can be viewed as the notional counterpart account were also addressed subsequently. The foreign exchange
(CVD) of a domestic indirect tax on gold.12 It was further argued rules for business travels were the first to be eased. In 1994,
that this could be lowered subsequently if smuggling remained several measures for liberalisation of current account transactions
high. The former argument however prevailed. were announced. These included indicative limits for travel, etc,
As silver or gold is one of the first quasi-financial assets to on the basis of which foreign exchange could be bought by
be acquired by all households including the poor, gold import citizens directly from authorised foreign exchange dealers. In
liberalisation was expected to benefit the common man by making August 1994, India accepted the IMF’s article VIII and thus the
it cheaper and easier to buy gold.13 There was some fear that rupee officially became convertible on the current account. Further
the government would be accused of wasting scarce foreign liberalisation of exchange purchase rules for current account
exchange on inessential consumption. All the experts on the transactions took place in 1995-96 with authorised dealers al-
subject were however convinced that opening of gold imports lowed to sanction funds above indicative limits themselves and
would merely shift the whole market above the line with no in 1997-98 with higher indicative ceilings for travel, studies
adverse effect on the BOP. There would also be a benefit in terms medical and other service purchases from abroad. A new foreign
of additional customs revenue. The compromise solution was to exchange Act was introduced in 1999-2000, based on a concep-
allow gold imports only by returning Indians.14 They were tual approach that current account convertibility must be codified
allowed to import gold up to 5 kg at a duty of Rs 220 per 10 grams in the new law and capital controls minimised and based on a
(3 per cent). Subsequently silver import was also freed at a duty regulatory rather than control approach.16
of Rs 500 per kg.15 These duty rates were made applicable in
1994-95 to gold and silver imported as personal baggage. III
Further liberalisation of gold imports took place through a
transfer of gold to list of commodities importable under the SIL. Impact of Nineties’ Reform
The SIL was an entitlement given to exporters to import specified External sector reforms have been the most successful of all
items such as gold whose import was otherwise on the restricted the reforms that were undertaken in the nineties. They have
or banned list. Subsequently, selected banks were allowed to confounded all the fears of Indian critics and the sceptics that
import and sell gold freely in the domestic market. The case for imports would go through the roof and current account deficits
complete freedom for gold imports rested on the argument that would balloon. They confirmed the faith of the reformers that
this would allow specialist gold import and sale companies to a well-regulated market-based foreign trade and payments system
come in and thus reduce margins through competition. This would would be more efficient and equally stable. Both the trade and
also allow customs tariffs on gold to be closer to those on other invisibles account are now much more resilient than they were

in the eighties. Capital inflows are now much more diversified nineties experience shows that external liberalisation will pay
and therefore much less risky for the country. Both FDI and further dividends probably in the form of higher growth.
portfolio flows increased rapidly through the mid-nineties. The Contrary to the perception of many outside observers the Indian
strength of the external account rests substantially on the flexi- economy has become more open relative to other emerging
bility of the ‘managed float’, in response to changes in demand- economies. India’s ranking with respect to trade, FDI, and portfolio
supply conditions in the exchange market. Difficulties and tem- flows has improved noticeably over the eighties (Table 4). Only
porary weaknesses have emerged and will arise in the future if in the case of tariffs is there is no relative improvement, probably
and only if considerations other than market supply-demand because India was a complete outlier. There is however still a
determine the management of the floating exchange rate. very long way to go to attain a ranking in trade and FDI that
One result of the success of the capital flow liberalisation was is commensurate with the size of the economy. Trade as well
the unprecedented surge in equity capital inflows between October as FDI remain pathetically low when measured as ratio to GDP
1993 and November 1994. Based on analysis by the Economic and ranked accordingly. China’s success in trade and FDI is not
Division and internal discussions, the Department of Economic only a challenge but also a message of hope that India too can
Affairs developed a macro-management strategy for this ‘Dutch make a quantum jump by greater opening of the economy and
Disease’ problem that was quite different from the standard one by ensuring that domestic economic policies are conducive to
proposed by the IMF.17 Though other countries in other time the exploitation of the growth potential of trade and FDI.
periods have undoubtedly used variants of the same policy, our
experience in this regard may also have useful lessons for others. Trade
Even in the case of the successful trade and capital account
liberalisation the country has not in my view moved as far or The opening of the economy to international trade has suc-
as fast as it could have without taking undue risk. The Asian cessfully raised the share of trade in the GDP. Goods and services
crisis and the economic sanctions share some of the blame as trade has increased from an average of 15.1 per cent of the GDP
they the revived the primal fears of the sceptics, which were during the eighties to an average of 24.8 per cent of the GDP
gradually being laid to rest. Too often, however, this has spectre in the nine years (1992-93 to 2000-01) after the crisis. Similarly
been used to avoid or slow down external sector reform. The merchandise trade, which had averaged 12.6 per cent of the GDP
Table 2: Balance of Payments (US $ Million) Growth Rates (Per Cent)
Financial Year Averages
1970-79 1980-89 1992-00 1990-99 1980-84 1985-89 1990-94 1995-99
Seventies Pre-crisis Post-crisis Nineties 1sthalf 2nd half 1sthalf 2nd half
Exchange Rate (ER): 36-Country-Trade weighted

Real effective (REER) -2.1 -2.0 0.0 -1.9 0.8 -4.9 -2.9 -0.8
Standard deviation 5.8 4.6 6.4 7.4 4.6 2.4 10.4 4.0
Nominal effective 0.4 -3.0 -4.6 -6.5 0.4 -6.5 -9.2 -3.8
REER: Calendar year -3.9 -1.7 -0.7 -2.0 1.6 -5.1 -3.3 -0.7
Inflation(WPI) 8.5 7.2 6.7 7.9 6.5 7.8 10.5 4.6
Money supply 17.5 17.2 17.4 17.3 16.8 17.5 17.5 17.1
Bank Credit, net 17.2 18.5 14.0 14.4 19.7 17.3 13.8 15.0
Commercial 18.9 17.2 14.6 14.3 18.3 16.1 13.3 15.4
Government 15.0 20.4 13.4 14.5 21.9 18.9 14.5 14.6
RBI credit to government 14.5 20.0 5.6 7.1 22.2 17.8 6.8 7.5
Payment (BOP)
Exports, fob 17.3 8.3 10.8 8.6 5.2 11.4 9.9 7.2
Imports,cif 20.6 7.8 12.7 9.7 6.3 9.4 9.9 9.5
Foreign investment 114 102 189 14.5
FDI 49 52 98 15.0
Customs Export
Total($) 16.6 8.1 10.9 8.6 4.5 11.6 10.0 7.3
Quantum Index 6.9 5.4 10.2 10.0 2.7 8.0 10.9 8.9
Unit-Value Index 10.2 10.3 7.7 9.5 10.1 10.5 12.6 5.7
Manufacture ($) 18.4 10.4 10.9 9.7 2.2 18.6 11.5 7.8
Primary 14.9 2.4 8.9 6.2 -0.1 4.9 6.7 5.6
Oil 20.3 109.6 -11.9 -14.5 231.1 -11.9 1.5 -30.6
Customs Import
Total($) 21.9 7.2 11.4 9.6 6.3 8.2 7.3 12.0
Quantum Index 7.1 7.5 16.3 12.7 6.9 8.2 12.9 12.5
Unit Value Index 16.3 8.0 4.2 6.9 8.0 8.0 7.6 6.0
Manufacture ($) 18.7 11.1 14.5 8.5 6.4 15.8 5.9 11.1
Machinery and equipment 14.2 13.4 9.4 1.7 9.9 16.8 5.3 -2.0
Primary 15.8 4.6 19.5 12.5 10.4 -1.3 17.1 7.9
Oil 54.1 3.3 5.5 15.8 -0.8 7.5 13.2 18.3
Net Exports (US$ million)
Non-oil 493 -2,136 1,894 1,809 -1,413 -2,858 2,539 1,079
Manufacture -207 -2,686 -1,220 -1,131 -2,258 -3,880 212 -2,473
Primary 684 1,026 2,594 2,477 814 845 2,091 2,864
Oil -1,487 -3,944 -7,211 -6,810 -4,572 -2,811 -5,381 -8,240
World Merchandise Export Growth (per cent)
Value ($) 20.2 6.6 6.1 3.6 9.6 6.7 5.9
Volume 6.0 3.7 6.7 2.1 5.4 5.5 7.0
Unit Value 13.4 2.7 -0.7 1.4 3.9 1.1 -1.0
Sources: Handbook of Statistics on the Indian Economy, RBI; WTO, World Merchandise Trade Data.

in the decade of the eighties, has increased significantly to an by 2.7 per cent (2.9 per cent) per annum during the eighties and
average of 20.1 per cent of the GDP in the post-crisis period 0 per cent (0.5 per cent) per annum in the nineties.
(Table 3). Contrary to the expectations of reform critics, the Manufactured exports responded well to the trade reform and
change on the import side has been less than on the export side. increased from an average of 60.7 per cent of total exports in the
Exports (imports) increased from 4.7 per cent (7.9 per cent) of eighties to an average of 76.1 per cent of total exports after the
the GDP in the decade before the crisis to 8.5 per cent (11.6 crisis (Table 3). As a result, the ratio of manufactured exports
per cent) in the nine years succeeding it (i e, post crisis period). to the GDP more than doubled from a pre-crisis average of 2.8
As a consequence, the proportion of imports financed by exports per cent to a post-crisis average of 6.3 per cent. Its share of total
has increased from 0.59 in the pre-crisis period to 0.74 in the exports also increased from 60.7 per cent to 76.1 per cent between
post-crisis period (Table 3). the two periods.18 The importance of manufactured exports to
For a disaggregated view one has to go from the payments data domestic manufacturers has correspondingly increased. This is
to the customs data. The growth of customs exports in US $ value best captured by the ratio of manufactured exports to the GDP
accelerated from an average of 8.1 per cent during the pre-crisis from registered manufacturing, which has also more than doubled
years to an average of 10.9 per cent during the post-crisis years from a pre-crisis average of 6.4 per cent to a post-crisis one of
(Table 2). This increase in growth was solely due to the accele- 13.2 per cent. Thus, even with the many domestic controls and
ration in the quantum of exports, whose growth rate almost policy distortions still hampering manufacturing in India this
doubled from 5.4 per cent per annum in the first period to 10.2 sector has demonstrated its comparative advantage vis-à-vis other
per cent per annum in the second period. This compensated for trade sectors.
a deceleration in the growth of unit values from 10.3 per cent On the import side, oil and non-oil imports have followed a
per annum in the pre-crisis period to 7.7 per cent per annum in significantly different path. Oil imports have increased margin-
the post-crisis period. The net terms of trade have actually ally by 0.2 per cent of the GDP after the crisis (Table 3). Non-
improved in the post-crisis period. Despite the slowing down of oil imports have in contrast jumped from a pre-crisis average
unit value growth rates they remain high by world standards. of 5.2 per cent of the GDP to a post-crisis average of 7.6 per
World merchandise (manufacture) export unit values increased cent of the GDP. Given the relatively low price elasticity of
Table 3: Balance Of Payments Ratios
(Per Cent of GDP at Current Market Prices)
Financial Year Averages
1970-79 1980-89 1992-2000 1990-99 1980-84 1985-89 1990-94 1995-99 Max Min
Seventies Pre-crisis Post-crisis Nineties 1sthalf 2nd half 1sthalf 2nd half
Fiscaldeficit(centre) 3.6 6.6 5.2 5.5 5.6 7.7 6.3 4.7 8.4 0.2
Fiscal deficit (centre and states) 8.1 7.2 7.4 7.3 8.9 7.6 7.2 9.8 6.3
Current Account Deficit 0.1 1.8 1.1 1.3 1.5 2.2 1.3 1.2 3.1 -1.7
Goods and services deficit 1.5 3.7 3.1 3.0 4.1 3.2 2.2 3.7 5.2 0.4
Tradedeficit 1.2 3.2 3.1 2.9 3.5 3.0 2.1 3.6 4.3 0.3
Exports, fob 4.4 4.7 8.5 8.0 4.7 4.7 7.3 8.7 9.5 3.1
Imports,cif 5.6 7.9 11.6 10.9 8.2 7.7 9.4 12.3 12.8 4.0
Export-importratio 0.80 0.59 0.74 0.74 0.57 0.61 77.8 70.7 0.94 0.52
Non-customs import 0.3 0.7 1.8 1.6 0.5 1.0 1.3 1.9 2.6 -0.1
Invisibles, net 1.1 1.4 2.0 1.6 2.0 0.8 0.8 2.4 2.9 -0.3
Non-factor services 0.3 0.4 0.4 0.3 0.6 0.3 0.3 0.4 0.9 -0.1
Privatetransfers 0.6 1.1 2.5 2.2 1.3 0.9 1.6 2.7 3.2 0.2
Officialtransfers 0.6 0.2 0.1 0.1 0.3 0.2 0.1 0.1 2.7 0.0
Income (including Interest) -0.3 -0.4 -1.0 -1.1 -0.1 -0.6 -1.3 -0.9 0.2 -1.4
Capital Inflow (adjusted) 0.9 1.6 2.4 2.2 1.1 2.0 1.8 2.6 3.3 -1.7
Foreign investment 0.0 0.0 1.1 0.9 0.0 0.1 0.7 1.2 1.6 0.0
FDI (from quarterly) 0.5 0.4 0.2 0.7 0.9 0.0
Portfolio(fromquarterly) 0.6 0.5 0.5 0.6 1.3 0.0
External assistance 0.7 0.6 0.4 0.5 0.6 0.7 0.8 0.2 1.5 -1.9
Private/market (ECB+NRI) 0.2 0.9 0.9 0.9 0.5 1.2 0.7 1.1 1.6 0.0
Commercial borrowing 0.1 0.4 0.5 0.5 0.3 0.6 0.3 0.6 1.1 -0.1
NRI deposits, net 0.1 0.4 0.4 0.4 0.2 0.7 0.4 0.5 0.9 0.0
Rupee debt service 0.0 0.0 -0.2 -0.3 0.0 0.0 -0.4 -0.2 0.0 -0.4
Reserves (increase is negative and
decrease is positive) -0.5 0.2 -1.1 -1.0 0.1 0.3 -1.2 -0.8 1.0 -3.2
Customs Data (DGCI and S)
Total imports 5.3 7.2 9.8 9.3 7.7 6.7 8.2 10.4 11.0 3.4
Oilimports 1.2 2.0 2.2 2.1 2.8 1.2 2.0 2.1 3.6 0.3
Non-oil imports 4.0 5.2 7.6 7.2 4.9 5.5 6.1 8.3 8.9 3.1
Manufactures imports 2.7 4.1 6.6 6.3 3.7 4.5 5.4 7.2 7.5 2.2
Total export 4.5 4.6 8.4 7.8 4.6 4.5 7.2 8.5 9.3 3.3
Manufactures exports 2.5 2.8 6.3 5.9 2.5 3.1 5.4 6.5 6.7 1.8
Other Ratios
Export/Importratio 0.87 0.64 0.86 0.85 0.61 0.68 0.88 0.82 1.06 0.53
Manufactured exports ratio
tototal 55.7 60.7 76.1 75.4 54.7 66.7 74.7 76.2 80.0 50.9
to registered manufacturing 7.2 6.4 13.2 12.4 5.9 6.8 11.3 13.7 14.1 5.1
Net imports of manufactured goods
ratio to manufacturing GDP 1.8 8.9 2.5 2.3 7.7 10.1 -0.2 4.8 13.7 -6.2
Machinery and equipment import
share in manufacture imports 26.0 29.0 29.6 29.7 26.6 31.4 31.1 28.4 36.3 19.1
Sources: RBI, Handbook of Statistics on the Indian Economy; Directorate General of Commercial Intelligence and Statistics (DGCI and S).

Figure 1: India's Share of World Exports and REER
105
Real Effective Exchange Rate Index
95
85
75
65
Year
55
1975-76
1976-77
1977-78
1978-79
1979-80
1980-81
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
REER Export share
demand for oil, prices determined by the Organisation of Petro- decade because of the gradual lifting of the QRs and reduction
leum Exporting Countries (OPEC) have largely driven the changes in customs tariffs.
in value (US$) of oil imports, with domestic disruptions in Several commentators have, however, raised the issue of a
supply19 playing a small role. slowing and perhaps even some reversal of reforms (tariffs and
Elasticity pessimists in India have generally been very con- exchange rate management) during the second half of the nineties
cerned about the effects of opening the economy on the manu- and its affect on exports and balance of trade. A comparison of
facturing sector (‘de-industrialisation’). That these fears have the performance in the second half of the nineties relative to that
proved unjustified can be seen from the value of net imports of in the first half can shed some light on this issue. The ratio of exports
manufactured products (calculated as the value of imports less to the GDP, which was identical during the two halves of the
the value of exports). This has fallen dramatically from a pre- eighties (4.7 per cent) jumped to 7.3 per cent in the first half of
crisis average of 8.9 per cent of the GDP to a post-crisis average the nineties and thence to 8.3 per cent in the second half of the
of 2.5 per cent of the GDP (Table 3). In fact, exports of manu- nineties. It was 9.5 per cent of the GDP in 2000-01 (Table 1).
factures exceeded imports of manufactures (i e, a net surplus) The trajectory of India’s share in world merchandise exports
during each of the four years from 1991-92 to 1994-95. This shows shows a similar trend. India’s share of world trade increased by
that manufacturing trade was highly responsive to the exchange 0.08 per cent points between 1990 and 1995 and by 0.07 per
rate devaluation of July 1991, as predicted in Virmani (1991b). cent points between 1995 and 2000 (Table 4).
Despite all these changes in the trade account, the trade deficit The share of manufactured exports in India’s total exports also
has not changed significantly in the post-crisis period. It averaged increased during the nineties. It went from an average of 74.7
3.1 per cent of the GDP in the post-crisis period, compared to per cent during the first half of the nineties to an average of 76.2
3.2 per cent in the eighties and 3.0 per cent in the second half per cent in the second half of the nineties (Table 3). This increase
of the eighties. The trade balance was in fact stronger than is was however significantly less than the 8 per cent-point increase
apparent from the bare numbers, as the post-crisis imports include in the share of manufactured exports between the second half
a substantial proportion of gold imports that earlier were not of the eighties and the first half of the nineties. The deceleration
captured in the import numbers (due to smuggling). The break- in the manufactured-export growth rate over the nineties may be
up of the USSR also disrupted established trade patterns and new partly due to the slowing of real effective depreciation to 2.9 per
markets had to be found to replace those lost in the USSR and cent per annum during the first half and to 0.8 per cent per annum
East Europe. Further, despite the Asian crisis in late 1997-98, during the second half of the nineties (Table 2 and Figure 1).
the trade balance improved in 1998-99. The trade deficit after falling sharply during 1990-94 (2.1 per
Paradoxically, these changes in exports and imports have cent of the GDP) has increased even more sharply during
occurred despite the fact that the real effective exchange rate 1995-99 to an average 3.6 per cent of the GDP (Table 3). This
averaged the same in the post-crisis period as in the pre-crisis is higher than in 1980-84 (3.5 per cent). It touched 4 per cent
decade. This is however quite misleading as the real effective of the GDP in 1999-2000 but fell back to 3 per cent in 2000-01.
exchange rate depreciated by an average of 1.9 per cent per annum The increase in the import-GDP ratio over the nineties is driven
in the nineties, because of a depreciation of 15.1 per cent by the increase in manufactured imports (Tables 2 and 3). The
in 1991-92 and 11.1 per cent in 1992-93 (Tables 1 and 2). The net imports of manufactured goods, which become negative (i e,
real depreciation rate was therefore only 0.1 per cent per annum net exports), have risen in the second half of the nineties. They
slower than in the eighties and 0.2 per cent per annum slower still remain well below that in the first half of the eighties. There
than in the seventies. As a result India’s share in world exports are a number of reasons for these developments. The euphoria
continued to increase from 0.52 per cent in 1990 to 0.67 per cent that preceded the Asian crisis created large capacities in many
in 2000 (Table 4). This increase was higher than in the previous (un-differentiated) products in Asia that has put downward pressure

REER change: Calendar Year
Figure 2: Balance of Payments
0.04
0.03
Per cent of GDP at market prices
0.02
0.01
2000-01
1997-98
1994-95
1991-92
1988-89
1985-86
1982-83
1979-80
1976-77
1973-74
1970-71
1979–80
1984–5
1970–1
1971–2
1972–3
1973–4
1975–6
1976–7
1977–8
1978–9
1980–1
1981–2
1982–3
1985–6
1986–7
1987–8
1988–9
1974-5
1983-4
-0.01
Financial Year
Financial Yea
-0.02
——– Capital inflow:
capital adj
inflow:adj CAD
CAD NRI deposits
N
on the global prices of manufactured goods. This combined with to 1996-97, has since fallen. This is a precursor of lower pro-
the slower pace of real depreciation (0.8 per cent per annum) ductivity growth in future. Elimination of the remaining controls
during the second half of the nineties compared to the first half on domestic investment and production [small-scale industry
(2.9 per cent per annum) to eliminate any remaining ‘water under reservation, outsourcing (under the Contract Labour Act), drugs,
the tariff.’ Indian manufacturing is therefore subject to competitive sugar, petroleum, fertiliser, coal, rail transport], regulatory and
pressure for the first time. The solution is to increase competitive other reforms in infrastructure, and elimination of remaining
efficiency further through faster tariff reductions combined with restrictions on FDI (see sub-section on capital flows) can help
greater freedom to exchange markets to depreciate. revive both GDI and FDI.
Another factor is the slow speed of fundamental reform in the
power and railway sectors that has raised the effective cost (direct Current Account
cost, rationing, and quality) of these two vital non-tradable goods.
This means that the real exchange rate as measured by the ratio The invisibles account improved significantly in the post-crisis
of the virtual cost of non-tradable goods to prices of tradable period with inflows rising from the average of 1.4 per cent of
goods has probably risen faster than the tariff-adjusted real the GDP in the eighties to 2.0 per cent of the GDP in the pre-
exchange rate. When the real cost of other domestic distortions crisis period (Table 3). Thus, these invisible flows are back to
such as labour inflexibility is added, this denotes a loss in the the high levels seen in the first half of the eighties. That some
competitiveness of Indian producers of import substitutes that of this improvement is due to the reform of gold policy can be
has not been fully compensated by firm-specific productivity seen from the big jump in remittances through official channels.
improvements. As long as the overall BOP is in equilibrium the Private transfers, which averaged 1.1 per cent of the GDP in the
solution lies in domestic reform rather than in faster exchange pre-crisis period, have more than doubled to 2.5 per cent of the
rate depreciation. This recommendation does not however apply GDP in the post-crisis period (Table 3). The investment and other
when the economy is subjected to external shocks such as the income outflows after rising to a peak of 1.4 per cent of the GDP
Asian crisis or the lagged effect of external economic sanctions. in 1991-92 and 1992-93 declined progressively to 0.8 per cent
In this situation the exchange rate must be allowed to adjust in of the GDP by 2000-10 (Table 1). In the earlier years external
preference to seeking special financing through government- debt was the driving factor, while in the latter years FDI and
owned financial institutions. portfolio flows have also started playing a role.
Imports of capital goods as a per cent of manufactured imports Contrary to popular perception non-factor services, which
have also fallen, after rising to a peak of 33 per cent in the period include software exports, have not played a role in this improve-
from 1993-94 to 1996-97, though they were still in the second ment. This is primarily because software exports have offset
half of the nineties a higher proportion of manufactured imports declines in other non-factor services. The sharp increase in
than in the first half of the eighties. This rise is partly due to software exports is reflected in the increased miscellaneous
the decline in FDI from 1997-98 onwards and partly due to the receipts (not net) from 0.6 per cent of the GDP in the eighties
decline in domestic investment (GDI) over the same period. The and the first half of the nineties to 1.3 per cent of the GDP in
ratio of capital goods imports (US$) to domestic production of the second half of the nineties. The improvement on this account
capital goods [measured by the index of industrial production has, however, been offset by deterioration in the net travel
(IIP)], which rose during the FDI and GDI boom of 1993-94 receipts. This points to the need for addressing the basic problems

that bedevil foreign tourists coming to India, like lack of health government after the 1991 devaluation. There has also been a
and hygiene (at tourist sites and in hotels), information (about conscious effort to reduce exchange and interest guarantees on
tourist sites, places, and cities), common courtesy (from immi- debts incurred by public financial institutions and public sector
gration counters to local transport to tourist sites) and entertain- units. The reduction of the statutory liquidity ratio (SLR) require-
ment at tourist destinations.20 ments on banks to hold government securities coupled with
The most critical area of infrastructure reform from the tourism payment of market interest on these liabilities has eliminated the
perspective is transport. The quality and efficiency of airports and implicit tax on banks while raising government interest payments.
domestic airlines can be improved through increased competition. Customs duty reforms have similarly raised the efficiency of the
Domestic airlines must be allowed to enter into joint ventures tax system, while reducing revenue collections. Capital expen-
with foreign airlines and the foreign equity proportion raised at ditures have been cut much more sharply than salaries and wages,
least to the level in the telecom sector. Airport services can be thus decreasing the share of tradable goods in the government
unbundled so that the government can focus on improvement in expenditure basket. The overall result is that the primary deficit
air traffic control and landing equipment and in security and safety has fallen much faster than the fiscal deficit (by 2.5 per cent points
procedures. The rest can then be left to the private sector. Railway of the GDP), the efficiency of the tax system has increased, while
transport can also play a part in tourism earnings if the metro- the quality of expenditure has declined.
politan railway stations are privatised and turned into clean Prima facie the fiscal picture appears bleaker if one looks at the
commercial hubs and the supply of passenger rail services opened total deficit of the centre and the states (C and S). The total fiscal
up to private entry and competition (with no price control). deficit (C and S) has declined by only 0.9 per cent of the GDP,
There was also a minimal effect of the Asian crisis on invisibles from an average of 8.1 per cent of the GDP in the pre-crisis decade
with a decline of 0.2 per cent of the GDP in the invisible surplus to an average of 7.2 per cent in the post-crisis period (1992-93
in 1998-99 and a strong bounce up the next year (Table 1). The to 1999-2000). The total fiscal deficit (C and S) increased by
improvement in invisibles earning has ensured that there was little 1.6 per cent of the GDP between the first and second half of the
criticism of the current account liberalisation. eighties. It then declined by 1.7 per cent of the GDP in the post-
As a result of the strengthening of the invisibles account, the crisis period. Though the average fiscal deficit in the second half
current account deficit averaged 1.1 per cent of the GDP in the of the nineties (7.2 per cent of the GDP) was marginally lower
post-crisis period (Table 3). There is no evidence of deterioration than in the first half of the eighties (7.3 per cent of the GDP),
in the current account over the decade, with the current account in 1999-2000 it was again up to 7.9 per cent of the GDP (Table
deficit being marginally lower in the second half (1.2 per cent) 1). Such a high fiscal deficit also makes it difficult to respond
of the nineties compared to the second half (1.3 per cent). The to cyclical fluctuations with an active fiscal policy. Further the
current account deficit is lower than the pre-crisis average of 1.8 underlying problem of efficiency and productivity of government
per cent of the GDP and the 1.5 per cent average of the first half expenditures remains to be addressed. Thus, the fiscal problem
of the eighties. The position was even better (0.5 per cent) in remains a potential threat to the economic health of the country.
2000-01. The external reforms have therefore been successful Regressions using a slope dummy for the post-crisis period,
in putting the current account balance on a sustainable path. suggest that the impact of the central fiscal deficit on the current
account is a fraction of what it was till 1991-92.21
FiscalDeficit Similar results are obtained if the central government’s primary
deficit is used in the equations instead of its fiscal deficit. This
The total fiscal deficit during the last five years is comparable is not surprising given the fundamental changes in the external
to the fiscal deficit in the first half of the eighties. This has not sector. One of these has been to reduce the share of the govern-
prevented the current account deficit from declining dramatically. ment in total external debt thus reducing the direct link between
The difference in impact is due to the external sector and other the fiscal deficit and external borrowing. More generally, the
reforms that have improved the flexibility of the economy. The reduction in controls and restrictions has changed the nature of
fiscal adjustment that has taken place during the nineties may the link between government behaviour and private actions. Thus,
however be underestimated because quasi-fiscal elements such the combination of fiscal and external sector reform has mod-
as exchange guarantees have also been absorbed. The high fiscal erated the fiscal influence on the current account and inflation.
deficit may in future act as a drag on economic growth even if The movement to a managed floating exchange rate has reduced
its impact on the external deficit is lower. the external spillover effect of the fiscal deficit on the current
The central government fiscal deficit declined from an average account deficit, while the elimination of import barriers has
6.6 per cent of the GDP, during the pre-crisis decade of the mitigated the effect of the impact of the fiscal deficit on inflation.
eighties, to an average of 5.2 per cent of the GDP in the post-
crisis period (1992-93 to 2000-01). This decline of 1.4 per cent Capital Flows
of the GDP was double the 0.7 per cent of the GDP decline in
the current account deficit between the two periods (Table 3). The capital account of the BOP has also shown corresponding
Using the coefficient of our estimated equation (1), the decline improvement. Capital inflows (adjusted or excluding ‘other
in the fiscal deficit explains about 0.65 per cent of the improve- capital’) increased from an average of 1.6 per cent of the GDP
ment in the current account deficit, while the rest is explained in the pre-crisis decade to an average of 2.2 per cent of the GDP
by the average real effective depreciation of 0.7 per cent per in the post-crisis period (Table 3). Even more significant than
annum in the post-crisis period. the overall increase was the increase in the foreign investment
Underlying this unchanged quantitative picture are a number inflows from negligible levels in the eighties to an average of
of changes that may have affected the links between the fiscal 1.1 per cent of the GDP in the post-crisis period. The contributions
deficit and the external account and other variables. Firstly, of external assistance and rupee debt declined by 0.2 per cent
exchange guarantees on NRI deposits had to be paid by the of the GDP, each. The contribution of ECB increased by 0.1 per

cent of the GDP while that of NRI deposits remained unchanged. lated distribution and transmission sub-sectors. In the meanwhile,
Thus, the objective of raising the equity-debt ratio of external greater transparency in the implicit tax-subsidy arrangements and
liabilities has been achieved (Figure 2). their replacement by an explicit tax-subsidy regime will make
FDI responded extremely quickly to the new policy announce- it possible for private generators to operate outside the strangle-
ment in July 1991, recovering to $129 million in 1991-92 itself hold of the state electricity boards (SEBs).
and then more than doubling to $ 315 million the next year In non-infrastructure services, particularly in some service
(Table 1). It continued to grow fairly rapidly to reach $ 3.56 sectors that have attracted large investments in other countries,
billion by 1997-98. Between 1990-91 and 1997-98, FDI grew domestic reforms as well as liberalisation of FDI has been
at a compound annual rate of 67 per cent (with a simple average painfully slow. The entire policy framework for private entry
of 73 per cent for the 1991-92 to 1997-98 period). This rapid into provision of urban infrastructure, real estate, housing, and
growth was followed by the Asian crisis and economic sanctions, retail trade (particularly grocery super markets) needs to be
resulting in a decline of about 30 per cent in 1998-99 and 13 reformed to attract both domestic and foreign investment.22
per cent in 1999-2000. Though much of the decline in 1998-99 Equity flows also responded quickly to the policy change, rising
was part of the overall decline in FDI flows to emerging markets from almost nil in 1991-92 to $ 244 million in 1992-93 and then
because of changed risk perceptions, India did not share in the to an incredible $ 3.57 billion in 1993-94 followed by another
recovery of flows in 1999-2000. Despite positive growth in $ 3.8 billion in 1994-95 (Table 1). The quarterly build-up of
2000-01 India’s share in FDI to emerging markets remains below equity flows was even starker and created issues for monetary
the peak reached in 1997-98. and exchange range management. Equity flows increased from
During 1990-91 to 2000-01 about half of the foreign investment $ 307 million in July-September 1993 to $ 935 million in October-
inflow was FDI and the other half portfolio (FII and GDR). This December 1993 and to $ 2,283 millon in January-March 1994,
suggests that the opening of the equity market has been relatively before stabilising at a lower rate of about $1 billion a quarter
more successful than the opening of FDI. This is not due to FDI in the next three quarters. Thus, the four quarters of (calendar
policy alone. In the manufacturing sector where 100 per cent year) 1994 saw a portfolio inflow of $ 5.5 billion with an
automatic FDI is allowed in all areas open to large domestic unprecedented $ 6 billion flowing in over a 12-month period
industry, there is only one specific restriction that applies to FDI starting in mid-October 1993.
but not domestic investment. This is the requirement that an In analysing the reasons, it was found that this was partly due
existing foreign direct investor must obtain a no objection from to the push provided by the reduction of US interest rates, but
the Indian joint-venture partner before starting a new independent mainly due to the opening of the equity market and the favourable
unit. This restriction has no relevance to green-field investors environment created by the broad based economic reforms.23
and those without a domestic joint-venture partner, but may have Given the accelerated build-up, part of this incredible flow was
slowed the growth of the existing FDI. The more important therefore viewed as a portfolio stock adjustment. In the absence
problems in the case of FDI in the manufacturing sector are of any historical data it was, however, difficult to determine how
domestic policy constraints such as small-scale industry reser- much of the increased flow was temporary and how much
vation and labour policy and rules and procedures that make permanent. In dealing with the monetary and exchange rate
China a more attractive destination than India. This discourages implications of the flow the following three-fold strategy was
both foreign and Indian companies from investing in a slew of suggested.
labour-intensive exportable sectors. (a) To absorb the temporary part of the upsurge in reserves
In the case of infrastructure, foreign equity limits exist in two and to partially sterilise the reserves build up. The inflation rate
major sectors, aviation and telecom. The 49 per cent limit in would be carefully watched so that the sterilised proportion could
telecom has clearly had a negative affect on FDI inflows into be stepped up if pressure is built up on the inflation front.
this sector and should be removed. The ban on foreign airlines (b) To not sterilise the permanent increase in the inflow so
in domestic aviation has been a more important factor in aviation that it could increase the capital available in the economy, reduce
and needs to be removed forthwith. A generic problem affecting real interest rates and stimulate investment.
many infrastructure sectors has been one of regulatory capture (c) To accelerate the opening of the current and capital ac-
(and potential capture-creating regulatory risk) by public sector counts, to improve the efficiency of the economy, so that these
monopolies abetted by their supervisory ministries. This problem permanent inflows would be productively utilised.
has taken an excruciatingly long time to sort out thus slowing The build-up of reserves meant that the nominal exchange rate
investment in infrastructure. A modern independent regulatory would not appreciate. It was the Economic Division’s argument
system in all infrastructure sectors would help to accelerate both that partial (incomplete) sterilisation was essential to allow this
foreign (FDI) and domestic investment. newly available source of saving to be translated into lower
In the case of the power sector the most fundamental problem interest rates that would stimulate investment. In the implicit
is the ‘T and D (transmission and distribution) Mafia,’ that has model it was understood that there would be some pressure on
a vested interest in maximising power theft by consumers. This prices, but it was believed that the real appreciation would be
problem has to be addressed through a special police task force lower through this channel than if the capital flow was translated
that arrests the corrupt employees and sequesters their ill-gotten instantaneously into a nominal appreciation (i e, no purchases
gains. Some amendments may also be required in the Prevention by the RBI to build reserves).24 Given the thinness of the foreign
of Corruption Act to make it possible to freeze the financial exchange market, nominal appreciation to equilibrate an inflow
returns from investment of stolen power by employees. A break of $6 billion over 12 months would have been in double digits.
up of the ‘T and D Mafia’ will also make it easier to solve the Inflation as measured by the wholesale price index in fact in-
secondary problem of raising user costs to economic levels. It creased by about 4.3 per cent in 1994-95 (relative to the average
will also make it possible to attract private entry into the power inflation in 1993-94 and 1995-96).
sector within a competitive generation industry and well- regu- There was an alternative monetarist view that this equity flow

was due to the high Indian interest rates produced by the higher exchange rate depreciate when the adverse shock hits and then
fiscal deficit in 1993-94. Responding to the fears of the monetarists, appreciate after the shock has reversed itself. Medium-term
part of the inflow could be sterilised. Our preferred alternative borrowing is, however, inappropriate to meet a short-term shock.
to the monetarist approach was, however, to accelerate the pace If the external fluctuation is of uncertain duration, the policy
of external liberalisation, including on capital account, and thus choice between external borrowing and allowing the currency
absorb the permanent component of the inflow to increase ef- to depreciate is much starker. In the case of a shock that could
ficiency of resource use and stimulate investment and growth. last more than a year, the exchange rate should be allowed to
India’s debt statistics reflect the reduction in the dependence depreciate sufficiently to improve the trade balance and make
on debt. The ratio of total external debt to the GDP has declined the financing unnecessary. The lesson of the 1990-91 BOP crisis
from a peak of 33.8 per cent at the of end March 1992 to 19.8 is that external borrowing through government-owned financial
per cent of the GDP at the end of March 2000 (Table 1). The institutions is a palliative, which ultimately weakens (rather than
share of short-term debt in total debt has been reduced from a strengthening) the external balance.
peak of 10.2 per cent on March 31, 1991 to 4.1 per cent on March
31, 2000. The ratio of short-term debt was only one-tenth of Comparative Perspective
foreign currency reserves (excluding SDRs and gold) at the latter
date. At the end of March 1999, the MLT debt of residual maturity The comment has often been made that though India may have
less that one year was less than 1.5 times the short-term debt, stepped up the pace of reforms during the nineties, it has not
which was about 4.5 per cent of total debt and one-tenth of improved its position vis-à-vis other countries as they have all
reserves. Thus, even if the residual short-term debt element of been reforming at the same or faster pace. This paper addresses
the MLT repayments coming due within the year 1999-2000 is this issue for the external sector using a number of parameters
added to the short-term debt, this constituted only a quarter of for which international comparative data is available.
foreign exchange reserves at the beginning of the year. India’s merchandise export growth increased from 7.7 per cent
The effectiveness of the external sector reforms was demon- per annum during the 1980s to 8.7 per cent per annum during
strated by the ease with which the BOP weathered the double the 1990s (Table 4). This was faster than the rate of growth of
whammy of the Asian crisis in late 1997-98 and the nuclear- world exports at 5.4 per cent and 6.3 per cent for the two periods
related economic sanctions imposed in early 1998-99. The current respectively. As a result the share of India in world exports
account deficit declined as a per cent of the GDP in the subsequent improved from 0.42 per cent in 1980 to 0.52 per cent in 1990
years. As anticipated, the most clear and significant effect of this and further to 0.67 per cent in 2000. India’s growth was however
shock was on equity inflows, which declined from 1.3 per cent slower than the average for Asia during the eighties, but rose
of the GDP in 1997-98 to 0.6 per cent of the GDP in 1998-99 above it in the nineties. India’s growth ranking consequently
(Table 3). It had been anticipated that FDI may slow down improved from 52 during the eighties to 46 during the nineties.
temporarily and equity inflows may stop for a while.25 FDI flows Most of the economies whose GDP growth was faster than India’s
did in fact decline by 31 per cent in 1998-99 and by 12.6 per during these decades, like China, Korea, Singapore, Thailand,
cent in 1999-2000 before recovering the next year (Table 1). Our Malaysia, Ireland, and Vietnam, also had a faster growth of
forecast of portfolio flows turned out to be marginally over- exports. Other countries like Hong Kong, Bangladesh, Sri Lanka,
optimistic. There was an outflow in each of the first three quarters and Mexico had a faster growth of exports than India, but their
of 1998-99, of $ 423 million, $ 117 million, and $ 149 million, per capita GDP growth was slower than India’s.
respectively (Table 2A).26 Almost the entire outflow was, however The improvement in the trade share was from 0.57 per cent
made up in the last quarter of 1998-99 with an inflow of $621 in 1980 to 0.60 per cent in 1990 and further to 0.71 per cent
million, leaving a net outflow of $ 68 million for the year as in 2000 (Table 4). This improvement was reflected in the country
a whole. As a result, total foreign investment declined from 1.3 ranking (total trade in US $ or share of trade). This ranking
per cent of the GDP in 1997-98 to 0.6 per cent of the GDP in improved from 43 to 33 to 27 (Table 4). Thus, the improvement
1998-99. They recovered quickly to 1.1 per cent of the GDP the in rank was less than commensurate with the improvement in
next year (Table 1).27 share, suggesting that a number of competitor countries improved
even more. The import rank was slightly better and the export
BOP and REER rank slightly lower than the trade rank.
Given that India’s GDP in US $ was the 12th highest in the
The strengthening of the BOP as a result of the external sector world, India’s trade rank (in terms of US $ value of trade) of
reforms was (also) reflected in the overall balance and the real 27 clearly shows that India is still a very closed economy.
exchange rate. There was an annual average reserve accumulation Economies that are smaller than India’s in US $ GDP, but are
of 1.1 per cent of the GDP in the post-crisis period compared relatively large like Korea, Australia, Russia, Netherlands,
to the annual draw down of 0.2 per cent of the GDP during the Switzerland, Belgium, and Sweden have a higher value of trade
pre-crisis decade. The real effective exchange rate showed no than India. The reasons are not far to seek. At the end of the
depreciation on average during the post-crisis period after depre- decade India still had the highest tariffs in the world with only
ciating by an average of 2 per cent per annum during the eighties. a few exceptions. Of the 70 countries for which (weighted)
The issue of temporary fluctuations and anticipated temporary average tariff rates are available in the World Development
shocks and how to deal with them has arisen in the context of Indicators (WDI) database, India had the third highest rates
the borrowing through the India Millennium Deposits in 2000- (Table 4).28 Only Pakistan and Cameroon had higher rates.
01. Consumption-smoothing arguments suggest that short-term Despite the fact that the India had reduced its tariff rates by 40
borrowing or a temporary draw-down of reserves would be per cent over a five-year period (the 22nd highest reduction), its
justified if an adverse shock to imports, exports, or an item of overall rank improved by only one position. In fact, this happened
the capital account were temporary. The alternative is to let the only because Cameroon raised its tariff rates sharply.

Among the countries having a lower weighted-average tariff (Table 4). India’s overall rank however worsened during the
than India (29.5 per cent) are its neighbours, Sri Lanka (22.5 per eighties to reach 42nd in 1990. Since then it has improved
cent), Bangladesh (22 per cent), Nepal (18 per cent), and China significantly to 33rd in 1999, but is now worse than its trade
(15.7 per cent). This creates additional problems of import diversion rank. If the rich countries are excluded, as is often done, and
and smuggling. The fact that India has some form of free-trade we consider only the emerging markets and developing countries,
arrangement with several of its neighbours means that it becomes then India was ranked 14th in 1999 up from 22nd in both 1980
profitable to import many items into these countries and then and 1990. Even Russia and Angola, however, had more FDI
export them to India. Any objective assessment would suggest inflow than India in 1999.
that Indian industry can surely compete with industry in these Domestic resistance to further opening of FDI has focused on
countries and there can be no rationale for an average rate higher the fear of foreigners taking over Indian industry/economy. A
than that of Nepal. Thus, the commitment made in the Union good way to quantify this fear in a comparative perspective is
Budget of 2001-02, to reduce peak rates to 20 per cent must be to look at the share of FDI in GDI. In 1999 the ratio was only
implemented as soon as possible. In fact, it should be our endeavour 2.1 per cent for India compared to 5.3 per cent for Russia, 8.5
to bring the weighted average rate subsequently down to that per cent for S Korea, 10.5 per cent for China and Mexico, 21.3
of Thailand (15 per cent) and then to that of Chile (9.9 per cent). per cent for Brazil 23.8 per cent for Thailand, and 25.1 per cent
Customs duty collection rates are available for a larger set of for Singapore (Table 8A). What is most telling is that both China
countries (about 114 in 1999). According to these India ranked and Singapore have among the highest domestic saving rates in
103rd in 1999 (Table 4).29 Only 11 out of the 114 countries had the world. They recognise that the knowledge, initiative, and
a higher customs duty collection rate than India. Among the 11 international marketing links that comes with FDI is much more
countries are Malawi, Myanmar, and Syria. Even though the important than the fact that it also constitutes use of foreign saving
collection rates for India (and possibly other countries) include in the domestic economy. In terms of the comparative rank this
the counterpart of domestic taxes, this is offset by exemptions puts India at 126 out of 201 countries, with only about 25 countries
such as for inputs and capital goods used by exporters. having a lower role for FDI in the domestic economy. Thus fears
The comparative picture with respect to FDI contrasts some- about the role of foreign investment in the Indian economy are
what with that for trade. India’s position at 39th with respect quite unjustified given the very low proportion of FDI in Indian
FDI inflows (US $ value) was better than its trade rank in 1980 GDI.
Table 4: Global Share, Comparative Rates, and Rank of India
Item/Country Share/Ratio/Growth International Rank Set/
1980 1985 1990 1995 1999 1980 1985 1990 1995 1999 Numbers
Share of India in World (per cent)
Exports 0.42 0.47 0.52 0.60 0.67 45 45 33 31 32 All
Imports 0.72 0.79 0.67 0.67 0.75 33 24 29 28 26 All
Trade 0.57 0.63 0.60 0.63 0.71 43 33 33 31 27 All
Export Growth (decadal average)
1980s 1990s 1980s 1990s
India 7.7 8.9 52 46
Asia 9.4 8.7
World 5.4 6.3
Customs Tariff Rate (weighted average)
India 32.2 29.5 69 68 70
(Change) -41 22
Sri Lanka 20.1 22.5 66
Bangladesh 22.0 22.0 65
Nepal 17.7 18.0 60
China 16.8 15.7 51
Thailand 21.0 15.0 49
Chile 10.0 9.9 34
Import Duty Collection/Import
India 26.4 44.1 42.2 24.8 21.1 97 115 107 104 103
(Total number) 100 115 108 111 114
FDI Inflow, net ($)
India 40 39 43 28 33 All
Share in Low-Middle Income Countries Total (Emerging Markets) (per cent) 1.2 22 22 14 Emerging Markets
Ratio to GDI
India 0.2 0.2 0.2 2.3 2.1 78 89 99 108 126 All
South Korea 0.0 0.8 0.8 1.0 8.5 83 81 92 124 85 All
China 0.0 1.4 2.8 12.5 10.5 68 71 44 75 All
Portfolio Investment, Equity (US$ million)
South Korea 94 518 3559 12426 1 8 4 1 52
South Africa 4571 3855 1 2 2 52
China 0 0 2807 3732 17 5 3 52
Thailand 44 449 2154 2527 2 9 7 4 52
Brazil 0 0 4411 1961 17 3 5 52
India 0 105 1517 1302 14 10 6 52
Interest Rate Spread (lending rate is the London Inter-Bank Offer Rate)
1980-84 1985-89 1990-94 1995-99 1985-89 1990-94 1995-99
India 3.5 8.6 11.6 8.6 55 45 37 97
Thailand 3.5 4.9 7.6 7.1 30 28 33 97
Korea, S 0.4 2.3 4.2 5.2 18 11 26 97
Malaysia -3.5 1.0 3.0 3.1 13 8 19 97
China -6.7 0.9 4.5 2.9 10 15 17 97
Sources: WTO, Merchandise Trade Data Set; World Bank, World Development Indicators 2001.

The position with respect to portfolio flow is better than for that in India the exchange rate is a powerful instrument of
FDI. In the WDI database, only emerging market data is available. adjustment in the current account deficit. It also confirms that
According to this India’s rank has improved from 14th in 1990 equity outflows are very unlikely to be a major cause of BOP
to 6th in 1999 (Table 4). Only South Korea, South Africa, China, problems (unlike short-term debt). The impact of fiscal profligacy
Thailand, and Brazil received more portfolio flows in 1999. on the external account has become indirect and circuitous with
Except for South Africa the other four countries also received implementation of external sector reforms. It operates much more
more FDI than India in 1999. Because of foreign equity holding through the general expectations about economic (growth) pros-
limits, the weight of Indian equity in emerging market equity pects and the risk premium demanded by foreign (and domestic)
indices has been reduced in 2000-01. investors and lenders. Thus its negative effects are likely to be
The improved access to external capital markets during the focussed on the domestic rather than the external account. In other
nineties has reduced the relative interest cost to the Indian economy. words, the negative long-term effects of fiscal profligacy are more
The lending rate spread over the London Inter-Bank Offer Rate likely to be felt in future on the growth rate of the economy and
(LIBOR) gives some indication of this convergence. Because of the (health of the) domestic financial sector. EPW
fluctuations we use five-year averages over the last 15 years. India
was ranked 55th over 1985-89, 45th over 1990-94, and 37th over Address for correspondence
1995-99 (Table 4). Thus, the opening of the capital account has director@icrier.org
also helped lower the relative cost of capital, but India still has
a long way to go.30
The comparative picture presented above confirms, for those
Notes
who still need such confirmation, that foreign direct investors [Any views expressed in this paper are those of the author and should not
are not knocking at our gates to enter the Indian markets. The be attributed to the organisation for which he works. I would like to thank
Surjit Bhalla, Roberto Zagha, Suman Bery, Homi Kharas, James Gordon,
least we can do is to remove unnecessary barriers created by FDI Sudhir Mulji and Willima Wadhwa for their comments on earlier versions
policy. One of these is to put all FDI into India on the 100 per of the paper. I would also like to thank Jayant Ganguly for his help in editing
cent automatic route (as manufacturing and much of infrastruc- this version of the paper.]
ture already are). A fair and transparent safeguard would be to 1 Monetary and credit variables are found to be statistically insignificant
apply this unlimited automatic route only on a reciprocal basis. when included in equation (1). The estimates are virtually unchanged if
Thus a foreigner from a country that does not allow Indians to the primary deficit is substituted for the fiscal deficit in (1).
2 If private investment is crowded out (reduced) by government borrowing
own TV stations would have to go through the FIPB route for to finance the fiscal deficit the total (direct plus indirect) impact of the
investment in Indian TV stations. In a few sectors in which fiscal deficit is less than indicated by this coefficient.
national security conditions may be relevant, a security clearance 3 It did, however, help subsequently in persuading some sceptics and
can be prescribed for foreign nationals and companies from dispelling some fears.
4 The commerce secretary responsible for introducing ‘Exim Scrips’ moved
sensitive countries (for instance those harbouring terrorists). All to the Finance Ministry soon afterwards as the Secretary, Department
laws that apply to Indians would assuredly continue to apply to of Economic Affairs (DEA).
foreigners (for instance, land ceiling laws in agriculture). Rules 5 Internal research papers of the Economic Division, DEA, Ministry of
and regulations applicable to professional practice by foreigners Finance, see the references in Virmani (2000).
6 Internal research paper of the Economic Division, DEA, Ministry of
would have to be made more explicit (a reciprocity rule would Finance, see the references in Virmani (2000)
also be applicable here). 7 As analysed in the report of the Working Group on BOP for the Eighth
To retain and strengthen our equity ranking, foreign equity Five-Year Plan, 1989. A change in the government, however, meant that
inflows should be freed from the remaining controls. Further the Working Group was reconstituted and this report was not published.
8 Cumulative dividends remitted out of the country could not exceed the
liberalisation of equity inflows has to go hand in with domestic total FDI in that company.
liberalisation of financial markets and strengthening of the regu- 9 See Virmani (September 1991b)
latory system for these markets. Restrictions on foreign equity 10 The understanding and belief of the Secretary, DEA and the Minister of
investment in the Indian capital market can be removed immediately Finance, as well as the political judgment and authority of the latter were
critical to the actual decision. Without these, the paper titled ‘Toward
by allowing 100 per cent foreign equity in all listed companies. Rupee Convertibility: A Free Market Exchange Rate Channel’, would
undoubtedly have met the same fate as so many other papers and suggestions
did before June 1991.
IV 11 Internal research paper of the Economic Division, DEA, Ministry of
Conclusion Finance, see the references in Virmani (2000).
12 Formally a sales tax of 15 per cent would have to be imposed on gold
The liberalisation of India’s external sector during the past produced in India.
decade was extremely successful in meeting the BOP crisis of 13 India was well recognised in the nineteenth century as a sink for world
1990 and putting the BOP on a sustainable path. These reforms precious metal production and remained so to some extent till independence.
Though the spread of modern banking has increased the ratio of financial
improved the openness of the Indian economy vis-à-vis other instruments in India’s stock of saving, virtually every household in India,
emerging economies. Much, however, remains to be done. India’s even the poorest, own some gold or silver jewellery. These are often
economy is still relatively closed compared to its ‘peer competi- purchased for weddings.
tors.’ Further reduction of tariff protection and liberalisation of 14 This restriction on free import ensured that smuggling would not be
eliminated.
capital flows will enhance the efficiency of the Indian economy 15 In contrast to gold India was a net exporter of silver till recent times and
and along with reform of domestic policies will stimulate invest- was in near balance at the beginning of the nineties.
ment and growth. 16 Internal paper of the Economic Division, DEA, Ministry of Finance, see
The main lesson of the nineties is that liberalisation of the the references in Virmani (2000).
17 See for instance Virmani (1998). I should add that the IMF’s India division/
current and capital account increases the flexibility and resilience Asia department staff endorsed the strategy after it was implemented.
of the BOP. This applies to trade, invisibles, equity capital, MLT They also helped us collect the literature on the capital inflow experience
debt flows, and the exchange market. Our analysis confirmed of other countries that we needed urgently.

18 This is also consistent with the elasticity measured in Virmani (1991a). Bhagwati, Jagdesh and T N Srinivasan (1975): Foreign Trade Regimes and
The paper will be updated using data from the nineties to see the Economic Development: India, National Bureau of Economic Research,
quantitative significance. New York, Columbia University Press.
19 Virmani (1991a) showed that neither oil export nor oil import functions Ghosh, Arun (1991): ‘Eighth Plan: Challenges and Possibilities IV –
could be estimated because these were not market-determined in the period Balance of Payments’, Economic and Political Weekly, Vol XXVI, No 6,
of estimation. February 9.
20 The average duration of stay at Agra is less than one day because there Ghosh, Jayati (1990): ‘Exchange Rates and Trade Balance: Some Aspects
is no tourist-oriented entertainment in Agra. of Recent Indian Experience’, Economic and Political Weekly, Vol XXV,
21 The estimated equation (2) is No 9, March 3.
CAD = 0.001 + 0.685 FDc – 0.766 FDc(92+) + 0.072 Greer + 0.247 DIpvt, Ministry of Finance, Department of Revenue, Government of India (1991):
where FDc(92+) is the dummy variable. All slope coefficients remain ‘Tax Reform Committee: Interim Report’, New Delhi.
highly significant while adjusted R2 increases to 0.58. – (1993): ‘Tax Reform Committee: Final Report Part II’, New Delhi.
22 See, for instance, Virmani (1999). Nayyar, Deepak (1976): ‘India’s Exports and Export Policies in the Sixties’,
23 Internal research paper of the Economic Division, DEA, Ministry of Cambridge Universtiy Press, Cambridge.
Finance, see the references in Virmani (2000) Singh, Manmohan (1964): India’s Export Trends and the Prospects for Self-
24 This paper was later presented at a seminar organised by the Asian sustained Growth, Oxford, Clarendon Press.
Development Bank (ADB) and the World Bank in March 1998 (Virmani Virmani, Arvind (1989): ‘Growth, Capital and Employment: Performance
1998). in Perspective’, Economic Research Paper No 3, February, Planning
25 Internal research paper of the Economic Division, DEA, Ministry of Commission (processed).
Finance, see the references in Virmani (2000) – (1991a): ‘Demand and Supply Factors in India’s Trade’, Economic and
26 Appendix tables, suffixed by A or B, are not included here but are available Political Weekly, Vol XXVI, No 6, February 9.
with the author. – (1991b): ‘Trade Policy Reform: De-Licensing, Tariff Reform and Exchange
27 ECB has, however, declined because of demand factors. Total private Rates’, Development Policy Research, Planning Commission, New Delhi,
demand for credit has fallen because of weak industrial demand, while September.
demand for external credit has fallen even more because of the rise in – (1998): ‘Macro-Management of Economic Growth with Underemployed
world interest rates relative to domestic rates. Labour and Technological Inertia’, ADB-World Bank Senior Policy
28 Appendix table 7A. Seminar on Managing Global Financial Integration in Asia, Manila,
29 Appendix table 7A. Philippines, March 10-12.
30 China, South Korea, and Thailand, which have both higher FDI and – (1999): ‘From Poverty to Middle Income: Reforms for Accelerating
equity flows than India, had lower spreads than India during the Growth in the 21st Century’, Chintan, April; ‘Urban Infrastructure, Real
nineties. Estate and Housing Policy: Eliminating Slums and Generating
Employment’, Chintan Policy Paper No 8, May. Expanded version
References reissued in December 1999.
– (2000): ‘India’s 1990-91 Crisis: Myths, Reforms and Paradoxes’, Working
Ahluwalia, Isher Judge (1991): ‘Productivity and Growth in Indian Paper No 4, Planning Commission (processed).
Manufacturing’, Oxford University Press, Oxford and New York. World Bank (2000): Finance for Growth, Oxford University Press.

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India’s External Reforms

I perspective. External reforms were among the most successful

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External Debt ($ million as on March 31st)

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Exchange Rate (ER): 36-Country-Trade weighted

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Figure 2: Balance of Payments

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