RESTRICTED
WORLD TRADE WT/BOP/R/11
BOP/R/234
23January 1996
ORGANIZATION(96-0180)
Committee onBalance-of-Payments Restrictions
REPORT ONTHE CONSULTATION WITH INDIA
1. TheWTO andtheGATT 1947 Committees onBalance-of-payments Restrictions consulted
jointly withIndia on6and8December 1995. Theconsultation washeldunder theChairmanship of
Mr.P.Witt(Germany), inaccordance withtheCommittees 'terms ofreference, pursuant toArticle
XVIII:B, paragraph 12(a)ofGATT 1994andtheUnderstanding ontheBalance-of-Payments Provisions
ofGATT 1994. TheInternational Monetary Fund wasinvited toparticipate intheconsultation in
accordance withArticle XV:2 ofGATT 1994.
2. TheCommittees hadthefollowing documents before them:
WT/BOP/9 Basic document supplied byIndia
BOP/328
WT/BOP/W/11 Background paper bytheSecretariat
BOP/W/166
IMF Recent Economic Developments, India, dated 22June1995.
Opening statement bytheRepresentative ofIndia
3. Theopening statement oftherepresentative ofIndia isattached asAnnex I.
Statement bytheRepresentative oftheInternational Monetary Fund
4. Thestatement made bytherepresentative oftheInternational Monetary Fund isattached as
Annex II.
(i) Balance-of-payments position andprospects; alternative measures torestore equilibrium
5. Members commended India forthein-depth economic reforms carried outsince 1991 which
entailed, inrecent years, outstanding macroeconomic turnround, curbing ofinflation, strengthening
oftheexternal accounts andimprovement oftheinvestment climate. Thecontinuation ofthesereforms
wasessential tothestability oftheIndian economy andtofurther improvement oftheexternal position
overthemedium tolongterm. Supporting theIndian Government 'sperseverance inrelying on
market conditions andderegulation, Members encouraged India tocontinue theon-going trade
liberalizationwhich,togetherwiththeimplementationofitsUruguayRoundcommitmentswouldbolster
India'sintegration toglobal trading system.WT/BOP/R/11
BOP/R/234
Page2
6. Many Members remarked thatwhile India'sexternal position appeared tobestable, theoverall
balance ofpayments remained structurally weak. Inthefirsthalfofthepresent fiscal year, beginning
April 1995, thecurrent account deficit hadwidened asaresult ofrapid growth ofimports anddecline
ofexports. Strong domestic demand andtheimpact oftrade liberalization, including thereduction
andrationalization oftariffs andcutsinthenumber ofproducts subject toimport licensing, hadcontinued
toencourage import growth. Theimpressive macroeconomic performance ofrecent years, together
withtheimproved fiscal policy andinstitutional reforms achieved, hadapositive impact onthecapital
account; foreign capital inflows ofwhich portfolio investment constituted ahighproportion wasthe
mainsource ofthepositive balance inthisaccount in1994/95 Fiscal Year. Inaddition, several members
noted thatsuchflows hadproven tobevolatile andreversible asaresult ofadverse developments in
financial flows toemerging markets inthepastyear.
7. Noting thatawidening trade deficit during 1995/96 hadanegative impact onthestability of
India'sreserves, theseMembers shared theviewexpressed bytheIndian delegation thatanassessment
solely ofthelevel ofreserves interms ofmonths ofimports ofgoods andservices wasinadequate
inviewofuncertainties created byfinancial liberalization andthenewconditions incapital markets;
reserves should alsobeassessed inthelightoftheircomposition. They thusconsidered thatIndia
wasjustified inadopting acautious paceintradeliberalization. Structural reforms should becompleted
inamanner thatwassocially andpolitically sustainable inaneconomy ofthesizeofIndia, witha
largepopulation andwideincome disparities. Theysupported theIndian position thattheimport growth
hadtobekeptwithinprudentlimitsinviewoftheuncertaineffectsofdomesticliberalizationandexternal
financial fluctuations onthebalance ofpayments. India should beallowed topursue itsliberalization
andstructural reform policies atapacesuited tothecountry 'sconditions. Thetiming andsequence
ofthephase-out ofquantitative restrictions, andthecoverage ofthenegative import listshould beleft
tothejudgement oftheIndian authorities. They therefore considered thatIndia mustcontinue using
GATT Article XVIII:B incompleting itsagenda ofeconomic reforms. Premature elimination ofthe
remaining restrictive measures might reverse India'sfragile balance-of-payments situation anddisrupt
themomentum oftrade liberalization.
8. Many other Members observed thatIndia'scurrent account deficit haddecreased from
3.4percentto0.5percentofGDP inthepastfouryears asaresult oftheremarkable recovery of
exports since1992. Inthepresent fiscal year,rapideconomic expansion hadtriggered growth ofimports
ofcapital andintermediate goods, outpacing therobust export performance andresulting inawider
trade deficit, forecasted toincrease to1.5percentofGDP in1995/96. Thegrowth ofimports of
capital andintermendiate goods should, inturn,generate expansion ofIndia'sexport capacity. They
noted thatIndia hadattracted significant inflows offoreign capital asaresult offinancial reform and
highinterest rates; thus, thecurrent account deficit wasoffset bylarge inflows offoreign direct and
portfolio investment, leading toasubstantial increase ofIndia'sforeign exchange reserves toaround
6months ofimports ofgoods andservices, compared toonemonth in1991. Therecent fallincapital
inflows, rather thanthewidening ofthecurrent account deficit, contributed totheprojected deterioration
intheoverall balance ofpayments for1995/96. Thestability oftheoverall balance ofpayments in
thepasttwoyears showed thatIndia'scurrent levelofreserves wascomfortable andsustainable.
9. Members noted thatfiscal imbalances attheCentral Government andStates 'levelcontinued
toputpressure onmonetary policy andthatinflation hadnotbeenfullychecked. They considered
thatmore prudent macroeconomic policies were thebasis ofasound balance ofpayments.
10. Many other Members stated that,currently, thepublic sector deficit wasthemajor source of
instability intheIndian economy. Thedeterioration oftheCentral Government 'sbudget inrecent
years hadfuelled inflationary pressures across theeconomy, leading tohigher interest rateswhich hadWT/BOP/R/11
BOP/R/234
Page3
crowded outprivate investment. Trade andfinancial liberalization hadbeen fundamental tothe
remarkable growth oftheeconomy andwere essential tothestability ofthebalance ofpayments.
Progress infinancial reforms would alsohelptomaintain momentum inforeign direct investment flows
andinternational confidence inIndia'seconomy, while additional comprehensive structural reforms
would remove thebottlenecks thatlimited theIndian economy 'sgrowth potential.
11. Inreply toaMember, therepresentative oftheIMFstated thatIndia'sbalance-of-payments
prospectslookedsoundinthemedium-term.Nevertheless,curbingofthefiscaldeficitandanappropriate
paceofadjustment werecrucial toprudent macroeconomic management. While theIndian economy
could facesome uncertainty inthecoming sixmonths, aperiod oftwoyears gavetimeinwhich India
could elaborate atime-table forrelaxing import controls.
12. Many Members considered thatthemedium-term prospects forIndia'sbalance-of-payments
situation appeared sound andthereserve position could bekeptatcomfortable levels, provided adequate
macroeconomic policies were continued. India currently faced nothreat ofaserious decline inits
reserves interms ofArticle XVIII:B, noracritical balance-of-payments position interms ofthe
Understanding; therefore therewerenobalance-of-payments grounds forcontinuing import restrictions.
They emphasized thatArticle XVIII:B provisions were designed toallow Members tousetemporary
measuresincaseofspecificbalance-of-paymentsproblems.India'scurrentbalance-ofpaymentssituation
wassustainable andnolonger warranted thecontinued justification ofthemeasures under Article
XVIII:B.
13. Inresponse, therepresentative ofIndiastated thattherehadbeengrowing pressure ontheoverall
balance-of-payments inrecent months, arising fromboththecurrent andcapital accounts. Thesituation
hadbecome more fragile since thesimplified consultations inNovember 1994, notwithstanding the
relative growth ofIndia'sinternational reserves interms ofmonths ofimports. Import growth, 32per
centindollar terms, inthefirsthalfofthe1995/96 fiscal yearhadbeenhigher thanexport growth
of25percent. There hadbeenasignificant widening ofthecurrent account deficit overthepastyear
toUS$5 billion; foreign currency reserves haddropped byalmost US$4billion inthefirsteightmonths
ofthecurrent fiscal year. Theincrease inthecapital account balance during 1993/94, which had
reflected asurge inforeign capital inflows, hadbeenreversed withadecline inportfolio investment.
Debtservice hadreached US$12.5 billion inthepresent year,creating additional pressure onthecapital
account.
14. Indiahadundergone amassive liberalization ofitstradeandpayments régimes andhadreformed
itsinternal market. Hebelieved that,because ofitssizeandcomplexity, India'sneedforreserves
should begreater thanthestandard ofthreetofourmonths ofimports. Themedium-term sustainability
ofthebalance ofpayments waslinked toprudent conduct oftradepolicy andadoption ofanappropriate
paceindismantling existing quantitative restrictions. Thetrade balance being itskeyelement, the
current account could bemanageable totheextent thatthepresent import régime wasmaintained.
15. Therepresentative ofIndia stated that,since thelastfullconsultations in1992, therehadbeen
greater reliance onalternative instruments. Theexchange system hadbeenunified inMarch 1993
andfullconvertibility hadbeenachieved inAugust 1994. There wasstillroom forimprovement in
theoverallfiscalpositionbecauseofpossibleslippageontheexpendituresideorinrevenueperformance.
Rather thanhalting thesteady trend oftrade liberalization bynewimport restrictions, India hadused
theinstruments ofexchange rateadjustment andtightening ofmonetary policy tomanage balance-of-
payments pressures inthepastyear.
16. Therepresentative ofIndiaindicated thatthe1995/96 Export andImport Policy included further
simplification ofimport andexport procedures andpruning ofproducts subject toimport restrictions.WT/BOP/R/11
BOP/R/234
Page4
India could continue onthepathoftradeliberalization consistently andsteadily provided itproceeded
cautiously andpragmatically. Demand forimported consumer goods hadgrown steadily inthepresent
fiscal yearandifcurrent import restrictions wereremoved, could soartolevels thatwould make the
external account unsustainable. India would thushavetocontinue matching theexpansion ofimports
withexport growth before further relaxing import controls; thelevelofimports andthetradebalance
should becarefully monitored, toavoid thecreation ofserious distortions andimbalance inIndia's
ability tohandle itsexternal obligations.
(ii) System, methods andeffects ofimport restrictions
17. Many Members expressed concerns about theconsistency ofthesystem andmethods ofIndia's
restrictive measures withthebalance-of-payments provisions ofGATT 1994. They noted thatIndia
hadprovided nojustification why price-based measures were notadequate toalleviate
balance-of-payments difficulties interms ofparagraph 3oftheUnderstanding. Furthermore, restrictive
measures should beapplied across theboard, tocontrol thegeneral levelofimports interms ofparagraph
4oftheUnderstanding. They hadconcerns asregards thesectoral scope ofthemeasures inplace,
particularly theselective application ofrestrictions toconsumer products. Taking noteofthestatement
oftherepresentative oftheIMFthatthetransition toatariff-based import régime withnoquantitative
restrictions could reasonably beaccomplished within aperiod oftwoyears theyrequested India to
provide atime-schedule fortheprogressive relaxation andremoval ofremaining restrictions maintained
forbalance-of-payments reasons asrequired byparagraph 1oftheUnderstanding. Theyalsorequested
India toprovide aconsolidated notification oftherestrictions maintained attheHS8-digit level, as
provided inparagraph 9oftheUnderstanding. Toallow aproper assessment ofthescope ofthe
restrictions, itwould beessential toseparate thespecific items intheNegative Listsubject to
balance-of-payments restrictions from those restricted forother purposes.
18. Withregard totheeffect ofthemeasures, many Members stated thatIndia'strade restriction
justified forbalance-of-payments reasons virtually banned theimports ofaround twothousand HSlines
ofconsumer good items. Theprotection oftherelevant domestic industries from international
competition could damage theinterests ofboththeIndian consumers andthetrading partners. Given
India'ssound balance-of-payments position, increase ofimports asaresult oflifting restrictions on
consumer goods should cause noproblems.
19. OneMember noted thatIndia'sbalance-of-payments restrictions should beseeninaperspective
ofthirty years. Aspartofitsprogressive trade liberalization, suchrestrictions were being applied
toanumber ofconsumer goods.
20. Several Members maintained thattheadministration oflicensing wascomplex andlacked
predictability andtransparency. Import licences amounted tovirtual bans; licences weresubject to
thediscretion oftheauthorities. Referring totherequirement inparagraph 4oftheUnderstanding
"tousediscretionary licensing onlywhen unavoidable "andtoprovide appropriate justification "as
tothecriteria usedtodetermine allowable import quantities andvalues", these Members asked India
toprovide anotification explaining theadministration ofspecific restrictions andthecriteria forgranting
import licences.
21. Therepresentative ofIndia stated thatIndia hadnotchosen theproducts subject toimport
restrictions arbitrarily. Imports ofcapital goods were being progressively liberalized inorder to
stimulatethegrowthintheeconomy.GivenIndia'sbalance-of-paymentsproblems,abruptliberalization
ofconsumer goods could runcounter tothetrade interests ofIndia'strading partners. Various
macroeconomic elements would notatpresent allow India toannounce atime-table forthephasingWT/BOP/R/11
BOP/R/234
Page5
outofquantitative restrictions. Healsostated thattheentire Import andExport Policy hadbeenrecently
aligned interms ofHSlines. Price-based measures tocontrol thelevelofimports ofconsumer goods
would beinappropriate atthepresent stagebecause ofthestrong demand forimports. Thequantitative
restrictions maintained onbalance-of-payments grounds overthirty years hadbeenjustified inthe
Committee under Article XVIII:B.
22. Therepresentative ofIndia further stated thatthebalance ofpayments appeared comfortable
atpresent onaccount ofcertain restrictions being maintained. Liberalization would havestrong
multiplier effect onimports given thestrong import demand. TheGovernment hadtheresponsibility
toensure thatavailable foreign exchange resources wereallocated forthepriority needs ofthecountry.
More than50percentofIndia'simports wereofkeyproducts, including petroleum andpetroleum
products, non-ferrous metals andfertilizers, essential toagricultural orindustrial production. India
hadmade substantial strides towards liberalization ofitsimport régime inthepastfouryears. However,
theviability oftheexternal account could notbemade dependent onspecial facilities from external
sources. India would havetheability toearntherequired foreign exchange forimports ofconsumer
goods totheextent ofitssound management ofitstrade andcurrent accounts. Atthecurrent level
ofexport earnings, India could notafford toopen upimports ofconsumer goods. Theauthorities
would consider theelimination ofthecurrent restrictions assoonas,intheirjudgement, theoverall
economic, political andsocial situation wasviable.
23. TheCommittees commended India forthewide-scale economic reforms andcomprehensive
stabilization programme overthepastfouryears, which hadresulted inrobust economic recovery.
Thereforms, which included aconsiderable measure oftrade andfinancial liberalization, exchange
rateunification andamove tocurrent account convertibility, hadcontributed toalarge increase in
theshare oftrade inIndia'sGDP.
24. TheCommittees noted that,since 1992, rapid export growth andcapital inflows hadbeenthe
source oftheturnaround inIndia'sexternal sector andthesteady increase inthelevelofforeign exchange
reserves. However, theytooknotethat,inrecent months, there hadbeenadeterioration inthetrade
balance, investment inflows hadslowed andtheforeign exchange reserves haddeclined. Inaddition,
thefiscal deficit andthelevelofindebtedness remained high.
25. TheCommittees recalled India'sstated aimtomove, by1996-97, toatraderégime under which
quantitative restrictions areretained onlyforenvironmental, social, health andsafety reasons, provided
sustained improvement wasshown initsbalance ofpayments. They alsotooknoteofthestatement
bytheIMFthat,withcontinued prudent macro-economic management, thetransition toatariff-based
import régime withnoquantitative restrictions could reasonably beaccomplished within aperiod of
twoyears. TheCommittees noted that,since thelastfullconsultation, there hadbeenconsiderable
liberalization ofIndia'simport régime, including agradual increase inthenumber ofconsumer items
which were freely importable; yetalmost one-third oftariff lines at8digit level under theHS
Classification remained subject toquantitative restrictions.
26. TheCommitteesnotedtheviewexpressedbyIndiathat,inthecontextofadeterioratingbalance-
of-payments situation, itwould beneither prudent norfeasible toconsider thegeneral lifting of
quantitative restrictions onimports atthisstage. Many Members supported India'scontinued useof
import restrictions under Article XVIII:B forbalance-of-payments reasons inviewoftheuncertainty
andfragility theyperceived inIndia'sbalance-of-payments position, andtheyfeltthatliberalization
andstructural reform policies should continue atapaceandsequence suited toIndian conditions. Many
other Members stated thatIndia'sbalance-of-payments position wascomfortable, thatIndia didnot
currently facethethreat ofaserious decline inforeign exchange reserves assetoutinArticle XVIII,
paragraph 9,andthattherefore India wasnotjustified initscontinued recourse toimport restrictionsWT/BOP/R/11
BOP/R/234
Page6
forbalance-of-paymentsreasons.ManyMembersstatedthatthecontinueduseofquantitativerestrictions
wasinconsistent withparagraphs 1,2,3,4and9oftheUnderstanding andasked India topresent a
firmtime-table forthephasing outoftherestrictions, andfurther information required, before the
resumption oftheconsultations. Others, inthelightoftheongoing liberalization, didnotshare these
views.
27. Inthelightofalltheaboveconsiderations,theCommitteeswelcomedIndia'sreadinesstoresume
theconsultations inOctober 1996, andtonotify totheWTO allremaining restrictions maintained for
balance-of-payments purposes soonaftertheannouncement ofthe1996/97 Export-Import Policy.WT/BOP/R/11
BOP/R/234
Page7
ANNEX I
Statement bytheRepresentative ofIndia
Mr.Chairman, distinguished Members oftheCommittee, distinguished representative ofthe
IMF, andfriends from theSecretariat.
Iamhappy tobehereforthisimportant meeting oftheCommittee onBalance ofPayments
Restrictions tomake thisOpening Statement onbehalf oftheGovernment ofIndia. Thebasicdocument
provided byIndia forthe1995 consultations under Article XVIII:B ofGATT 1994 isbefore the
Committee. Thecountry noteprepared bytheIMFandthebackground paper oftheSecretariat give
details ofthegeneral trend ofeconomic andtrade developments fromthetimeweheldoursimplified
consultations lastNovember. TheIMFandtheSecretariat deserve tobecomplimented fortheirdetailed
andprofessional documents. These documents clearly bring outthevarious liberalization measures
undertaken byIndiasinceJuly1991ingeneral, andsincethetimeofthelastconsultations inparticular.
These documents alsobearample testimony totheGovernment ofIndia'sdemonstrated commitment
toeconomic liberalization.
Fouryears ago,theIndian economy wasinthemidst ofserious crisis withstagnant production,
highinflation, declining exports andasevere balance ofpayments problem. Todealwiththisdifficult
situation andtolaythebasis forsustained growth ofoutput andemployment, Government initiated
widerangingeconomicreformsinindustrial,fiscal,financial,trade,exchangerateandforeigninvestment
policies. TheGovernment 'sprogramme ofstabilization andreform wasbothcomprehensive inscope
andcarefully sequenced. Asdetails ofthereform measure arewellknown, Iwillnottakethis
Committee 'stimeindescribing them.
Theresults ofthereform programme overthepastfouryears hasbeenveryheartening. Overall
economic growth ofrealGDP hasincreased from lessthan1percentin1991-92 toover6percent
in1994-95 andexpected torecord asimilar order ofgrowth inthecurrent year. Industrial production,
which wasvirtually stagnant in1991-92, increased by6percentin1993-94 andafurther 8.2percent
in1994-95 andisgrowing atover11percentinthefirstfourmonths of1995-96. Food grains
productionhaddeclinedin1991-92,whereasin1994-95,productionattainedanewrecordof192million
tonnes. Theannual rateofinflation which hadtouched nearly 17percentin1991, isnowdown to
around 8percent.
Theturnaround intheexternal sector hasbeenequally heartening. Exports, which haddeclined
indollar terms in1991-92, grew by20percentin1993-94 andafurther 18percentin1994-95.
However, during 1994-95, imports alsoincreased by21.5percentleading toadoubling ofthetrade
deficit relative totheprevious year. During thefirstseven months ofthecurrent fiscal year(April-
October 1995) while exports havegrown by24.5percent,imports haverisenbynearly 31percent,
leading tosharp increase inthetrade deficit. Since thestartofthereforms, theshare offoreign trade
inGDP hasrisen from 14percentto19percentin1994-95 andisexpected toriseto21percent
inthecurrent year. Thistestifies tothesubstantial increase intheopenness ofoureconomy. The
current account deficit onthebalance ofpayments shrank from over3percentofGDP in1990-91
tobarely 0.1percentofGDP in1993-94, before rising again to0.7percentofGDP in1994-95.
Thecurrent account deficit isexpected tobeintheorder of1.5percentoftheGDP during 1995-96.
During 1995-96, apart fromdoubling ofthevisible trade deficit, onthecapital account, debt
service payments areexpected torisefurther in1995-96 tooverUS$12 billion. Atthesame time,
thestrongsurgeinforeignportfolioinvestments,witnessedduringmuchof1993and1994,hasslackened
during 1995 inthewake ofthecrisis witnessed insome other emerging markets. Because oftheseWT/BOP/R/11
BOP/R/234
Page8
andother factors, there hasbeenasignificant draw down offoreign currency reserves from alevel
of20.8billion dollars atthebeginning ofthisfinancial yeartoabout 17.2billion dollars attheend
ofNovember 1995. Intheperiod since August, pressures onthebalance ofpayments havealsobeen
reflected inasignificant, nominal depreciation oftheRupee inrelation totheUSdollar following a
period ofmore than2years ofstability.
Notwithstanding some renewed pressure onthebalance ofpayments, theGovernment has
refrained fromanytightening oftheimport régime Instead, theauthorities haverelied onthemarket-
determined exchange rateandmonetary restraint tomanage thebalance ofpayments.
Inthiscontext ofwidening tradeandcurrent account deficits, deceleration inflows ofportfolio
investment, rising debtservice, falling reserves andheightened volatility ofcapital flows andforeign
exchange markets, itwould, inourview, beneither prudent norfeasible toconsider thegeneral lifting
ofquantitative restrictions onimports atthisstage.
Assustainable improvement isrecorded inthebalance ofpayments, Government 'sendeavour
willbetomove towards atrade régime under which quantitative restrictions areretained onlyfor
environmental, social ,health andsafety reasons. Thesequencing ofthenecessary policy changes
should, inourview, belefttothejudgement oftheGovernment ofthecountry concerned. Foracountry
likeIndia withalargepopulation baseandwidedisparities inincome, growth anddevelopment which
characterize oureconomy, premature andabrupt changes intheimport policy intheareaofconsumer
goods canhaveadisruptive impact onthebalance ofpayments situation. Furthermore, theavailability
ofadequate andefficient infrastructure interms ofports, airports, highways etc.isalsoanimportant
pre-requisite forsupporting growing volumes ofinternational trade. Hence theneed forcareful
calibration oftrade policy changes cannotbeoverlooked.
Inthesphere oftrade policy, Government 'sobjective istoputinplace arégime under which
thedomestic production basecanbestrengthened andexpanded bothtocatertodomestic demand and
toglobal export opportunities. Ithasbeenrecognized thatifIndian producers ofgoods andservices
whether intheprimary, secondary ortertiary sectors arenotallowed easyaccess tothebestproduction
inputs andtechnology, theywillnotbeabletooptimally upgrade theirproduction capacity andcompete
effectively intheinternational market. Atthesame time, Government alsorecognizes theusefulness
ofgradually expanding access toimported consumer goods soastoimprove theavailability ofessential
items ofmassconsumption andtocreate amore competitive environment which willprovide greater
choice andbetter value formoney toIndian consumers. Thelimitations ofaninward-oriented and
import substituting trade régime arenowfairly wellacknowledged. Such atrade régime notonly
hampers theefficiency ofresource useandconsequential growth butisalsounsuccessful inensuring
aviable balance ofpayments. Animportant objective ofGovernment 'spolicy therefore istomove
thetradepolicy régime towards openness andtoreapthefullbenefits oftheexpansion ofinternational
trade.
Forfulfilling theabove objectives, theGovernment hasimplemented aseries oftrade policy
changes since June1991 withaviewtotheconstructive integration oftheIndian economy withthe
restoftheworld. Wehavenowbeenabletoputinplace amarket determined unified exchange rate
régime andconvertibility oftherupee firstonthetradeaccount inApril 1993andonthecurrent account
inApril 1994. Themostsignificant aspect ofthese policy changes isthattheyhavebeenimplemented
inagradual andsequential manner toensure thatthere isnodisruptive impact ontheeconomy and
thechangeover issmooth. Itwaspossible toachieve thisbecause theGovernment wasabletochoose
thesequence andtiming ofthechanges based onitsperceptions oftheeconomy 'sneeds aswellas
itsability tobuild ademocratic consensus.WT/BOP/R/11
BOP/R/234
Page9
Together withtheabove-mentioned macro leveltradepolicy reforms, Government 'sobjective
hasalsobeento:(a)impart stability, predictability andtransparency inthetrade régime, (b)reduce
oreliminate discretionary controls, (c)prune thenegative listofimports andmove steadily towards
arégime ofreplacing licensing controls byfiscal controls and(d)gradual reduction inboththelevel
anddispersion oftariffs.
Inpursuance ofthese objectives, Government hadannounced a5yearimport-export policy
fortheperiod 1992-97 sothatastable régime ofpolicies isavailable totheindustry andtradetoenable
them toplantheireconomic activities inalonger perspective.
Forimparting transparency, anumber ofchanges havebeenintroduced inthepolicy. The
most significant stephasbeentherecent listing, inOctober 1995, oftheimport policy treatment of
various items ontariff linebasis inaccordance withtheHSN Classification. Linking oftheimport
control classification withtheHSN Custom Tariff Classification willreduce ambiguities andprovide
atransparentframeworktoexportersandimporters.Stepshavealsobeentakentointroduceautomaticity
intheissue oflicences, progressive removal ofactual userconditions andincreasing thetradability
oflicences. These measures willhelpinfurther easing taxrestrictions andinimparting greater import
competition. During theyear1994-95, therehasbeensignificant increase inthenumber ofitems which
arefreely importable. Inaddition, alargenumber ofconsumer items covering 1,487 tarifflineswhose
import isotherwise restricted, arenowallowed tobeimported under freely tradable Special Import
Licences.
Outof11,587 tariff linesatthe8digitlevelunder theHSClassification, 6,463 linesarein
thefreely importable listwhile 1,487 linesareinthefreely tradeable Special Import Licence list.Today
virtually allitems ofcapital goods, rawmaterials, intermediaries, components, consumable, spare parts,
accessories, instruments andother goods arefreely importable. Asalready mentioned, theimport
ofconsumer items hasalsobeeneased inagradual manner anditisGovernment intention tosteadily
carry thisprocess forward.
Along withtheeasing ofquantitative restrictions, simultaneous measures forreducing tariffs
havealsobeentaken. Members oftheCommittee maybeaware thatprior totheUruguay Round,
only3percentofIndia'starifflineswereGATT bound. Thisfigure inthepost-Uruguay Round period
hasgoneupto62percent. Thepeakrateoftariffhasbeenprogressively reduced from400to50per
cent. Theaverage incidence ofimport duties hasbeenbrought down from60.26 percentin1987-88
to27percentin1994-95.
Before concluding, Mr.Chairman, Iwould liketorecall thatthisCommittee hasinthepast
encouraged Indiatocontinue withitspolicy ofeconomic reforms. TheCommittee hadalsoexpressed
itshopethatwiththecompletion oftheUruguay Round, India'sexports ingeneral would gaingreater
market access, particularly forproducts inwhich weenjoy acomparative advantage. Inthiscontext,
itneeds tobereiterated thatcontinued andimproved market access inthemarkets ofourmajor trading
partners willbeanimportant factor inouron-going effort ateconomic liberalization ingeneral and
trade liberalization inparticular.
Finally, Mr.Chairman, wedohopethattheCommittee willappreciate thesubstantial trade
liberalization measures already implemented byIndia since thelastfullconsultations inMarch 1992.
WealsohopethattheCommittee willsignal itssupport andunderstanding forIndia'sdesire toproceed
onthetradeliberalization course inanautonomous andsustainable manner, keeping inviewthemany
complexities involved inmanaging acontinental sizedeveloping economy likeours.WT/BOP/R/11
BOP/R/234
Page10
ANNEX II
Statement bytheIMFRepresentative
India hasmade substantial progress overthepastfouryears towards reforming itseconomy,
andthebenefits arebeing seenintheformofarobust economic expansion, thecontainment ofinflation,
andastrengthened external position. Moreover, major strides havebeenmade toward transforming
theIndian economy fromaninward-looking, heavily regulated economy toanincreasingly dynamic,
outward-oriented one. Nonetheless, thepublic sector deficit remains toohighandmuch remains to
beaccomplished intheareaofstructural reform ifIndia istoreach itsfullgrowth potential.
Theeconomic recovery isnowfirmly established, withrealGDPexpected toincrease 51/2-6
percent in1995/96 (thefiscal yearrunsApril 1through March 31). Thestrength oftheeconomic
expansion stems fromstrong export andinvestment growth driven byarobust supply response tothe
Government 'sreform program, inparticular thesweeping away oftheinvestment andimport licensing
regimes. Agricultural production hasbenefitted fromastring ofgoodmonsoons, andfoodstocks have
risen torecord levels.
While inflation wasreduced toaround 7percent in1993/94, inflationary pressures re-emerged
in1994/95 asaresult ofaloosening ofmonetary conditions related tothebuild-up ininternational
reserves. Monetary policy hasbeentightened considerably overthepastyear, however, andthishas
beenfollowed byareduction ofinflation toabout 9percent. Foraperiod inearly1995/96, thisprogress
wasthreatened byasurge incentral banklending totheGovernment towellinexcess oftheagreed
limitonsuchfinancing. However, more recently thislending hasbeenreined inasinterest rateson
government securities havebeenraised, allowing anincrease intheGovernment 'smarket borrowing.
Atightgripwillneedtoberetained onmonetary policy inorder toavoid aresurgence ofinflationary
pressures.
India'sfiscal situation remains amajor concern. While theinitial stabilization response to
the1990/91 crisis involved measures tocurtail expenditures, progress toward deficit reduction inrecent
years hasbeenslow. Although thedeficit ofthecentral government waslowered to
6.7percent ofGDPin1994/95, thestates'deficit hasbeenrising, andtheoverall consolidated deficit
remained around 101/2percent ofGDP in1994/95. Partoftheexplanation fortheslowprogress
isthatsomereforms--suchascuttingimporttariffsandmovingtowardmarket-relatedinterestrates--have
hadfiscal costs. Nonetheless, thehighdeficit putsaheavy burden onmonetary policy incurbing
inflation, raises interest rates, andcrowds outprivate investment.
For1995/96, theauthorities areaiming tobring down thecentral government 'sfiscal deficit
further to51/2percent ofGDP, relying mainly onbuoyant revenue growth andcontrolling budgetary
transfers tothestates. Sofar,taxrevenues haverisen faster thanbudgeted, sothattheoverall fiscal
performance hasbeenbroadly ontrack despite some expenditure overruns. However, newsocial
spending initiatives andapublic sector wage increase thathavealready beenannounced, other pre-
election spending pressures, andashortfall indivestment proceeds willmake itdifficult tostickto
thedeficit target. Firm management willberequired toensure budgetary objectives areachieved.
Looking beyond thepresent year, sustained fiscal consolidation requires fundamental reforms
ofgovernment. Thiswillneedtoinvolve determined efforts atalllevels, inparticularly thestates.
Anoverhaul ofpublic expenditure management would helptoimprove efficiency andcutcosts, while
meeting more effectively critical needs inareassuchashealth, education andinfrastructure. Inevitably,
asubstantial partoftheadjustment willneedtobeaccomplished through higher revenues. TothisWT/BOP/R/11
BOP/R/234
Page11
end,efforts mustcontinue tobroaden thetaxbase, overhaul thesystem ofsalestaxes, andimprove
taxadministration.
India'sexternal position hasrecovered fromthecrisis of1990/91. Foreign exchange reserves
were around $19billion atend-September 1995, around sixandahalfmonths ofimports. Factors
behind thebuildup inreserves were asurge inprivate capital inflows following theliberalization of
restrictions oninward foreign investment andtheresumption ofrapid export growth. While thescale
ofportfolio inflows hassubsided since late1994, consistent withageneral reappraisal ofemerging
markets byinvestors inthewake oftheMexico crisis, itisencouraging thatforeign direct investment
hascontinued toincrease.
Onthetradefront, export performance hasbeenquitestrong across theboard forthelastthree
years, spurred bythesustained realexchange ratedepreciation since 1991. Since 1994/95, imports
havealsobegun togrow rapidly, andthecurrent account deficit isexpected towiden toaround
11/2percent ofGDP thisyearcompared with1/2percent in1994/95. Thefastgrowth ofimports
isinlargepartduetoheavy imports ofcapital goods andintermediate inputs spurred bytheindustrial
recovery aswellasaprogressive reduction inimport dutyrates. Specifically, theaverage (import-
weighted) tariff ratewaslowered from 87percent in1990/91 to27percent in1994/95, while the
maximum tariff ratehasbeenbrought down from 400percent to50percent.
Forabout twoyears sincetheunification oftheexchange rateinMarch 1993, therupee'svalue
remained stable vis-à-vis theU.S. dollar, asupward pressure ontheexchange ratewasneutralized
bycentral bankreserve accumulation. During 1995, bycontrast, withtheslowing ofcapital inflows
andawidening ofthecurrent account deficit, there havebeendownward pressures onthevalue of
therupee. Therupee hasdeclined byabout 11percent against theU.S.dollar since July, implying
adepreciation ofabout 4percent inrealeffective terms.
Indiahasmade substantial progress toward theelimination ofexchange restrictions oncurrent
internationaltransactionsinrecentyears,notablyliberalizingthetreatmentofmostinvisiblestransactions.
InAugust 1994, India accepted theobligations under theFund'sArticle VIII. Nevertheless, anumber
ofrestrictions stillremain inplace, inparticular related tothetreatment ofnonresident deposits, income
transfers bynon-resident Indians, theIndo-Russian debtagreement, bilateral payments agreements,
andthetransfer abroad ofdividends byforeign investors intheconsumer goods industries.
Withcontinuedprudentmacroeconomicmanagement,India'smedium-termbalanceofpayments
prospects looksound. Bothimports andexports should continue togrow rapidly asIndia becomes
increasingly integrated intotheglobal economy. Inviewoftheheavy investment needs, thecurrent
account deficit isexpected towiden further totherange of2-3percent ofGDP, butsuchapathshould
besustainable inviewoftheimproved prospects forprivate capital inflows, including direct investment.
Thedebt-service ratiowould belowered from 27percent in1994/95 tounder 20percent bytheend
ofthedecade, while international reserves would bemaintained atcomfortable levels.
Notwithstanding therecent achievements, realizing India'slonger termgrowth potential still
requires asecond round ofstructural reforms toremove persistent obstacles thatconstrain thegrowth
response. Main areas forattention include reform ofthepublic enterprises, establishing aneffective
frameworkforprivateinvolvementininfrastructuraldevelopment,agriculturalreform,andliberalization
oflandandlabor laws.
Ontheexternal front, theprocess oftrade liberalization needs tobecompleted. Tariff levels
arestillhighandneedtobebrought down further. Even more important, thequantitative restrictions
onimports ofconsumer goods need tobeeliminated, andreplaced bytariffs atmoderate levels.WT/BOP/R/11
BOP/R/234
Page12
Excessive protection hashindered thedevelopment ofthisimportant sector oftheeconomy. Some
phasing ofthisprocess maybeappropriate inviewofrecent exchange market pressures, thepotential
volatility ofprivate capital inflows, andtheneedtoprovide adequate timeforadjustment ofcertain
domestic industries. Nevertheless, thetransition toatariff-based import regime withnoquantitative
restrictions could reasonably beaccomplished within aperiod oftwoyears.
There should alsobescope forcontinued capital account liberalization. Here theprogress
willneedtobeintandem withsuccess instrengthening India'sdomestic financial markets andcontinuing
progress toward alow-inflation macroeconomic environment. Finally, theremaining exchange
restrictions oncurrent international transactions should beeliminated assoonaspossible.
Inconclusion, while India'srecent economic development hasbeenencouraging, thereform
andadjustment efforts needtobesustained. Achieving thesustained highrateofgrowth necessary
formore rapid progress inpoverty alleviation willrequire continued fiscal consolidation andfurther
boldreform initiatives. These willbethemajor economic challenges forIndia inthepost-election
period.