Economic Reforms and Their Macro-Economic Impact

Author(s): Nagesh Kumar

Source: Economic and Political Weekly, Vol. 35, No. 10 (Mar. 4-10, 2000), pp. 803-812
Published by: Economic and Political Weekly
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 Economic Reforms and Their
Macro-Economic Impact
This paper reviews the performance of the Indian economy during the 1990s in terms
of certain broad macro-economic indicators. It provides a brief sketch of the
economic reforms so far, analyses their impact and makes recommendations for
the second generation of reforms.

NAGESH KUMAR

fter pursuing an inward-looking ments and CCF and by mortgaging gold

tribute to the growth process and benefit
from it". Against that background, to
development strategy with the state this
the Bank of England. This was comple-
mented
paper reviews the performance of the Indian
suming an important role for more by emergency measures to
than four decades, India decided to take
economy in terms of certain broad macro-
restrict imports.
In June 1991, a new government came
economic indicators over the past 7-8 years
a historic step of changing tracks in 1991.
It embarked on a comprehensive reform of the 1990s for which data are now to power following the elections. This
of the economy to widen and deepen available.
its Section I of this papergovernment
will initiated a programme of
integration with the world economy provide
as a a brief contour of the reformmacroeconomic stabilisation and structural
package and Section II will discussadjustment
part of structural adjustment. There seems the with the support of the IMF
macroeconomic performance ofand
to be a general consensus on the desirabil- the
the World Bank. The structural adjust-
ity of reforms to dismantle the bureau- ment programme adopted by India has
economy in the 1990s. Section III offers
cratic regulatory apparatus evolved some been in the mould of orthodox package of
over implications for the second genera-
tion of reforms.
the years that may have outlived its utility. reform that has come to be referred to as
However, there has been considerable the Washington Consensus. The imple-
debate on the contents of the reform mentation of the agenda of the reforms
package, their sequencing and the pace, Background and Nature over the eight years has covered the fol-
their implementation and their impact. The of Reforms lowing, among others.
debate has become a highly polarised one Trade policy reforms: A major reform of
between two camps of scholars. One group After a period of relatively robusttrade
eco- policy regime has been effected since
nomic performance in the late 1980s,
of analysts hail the achievements of reform 1991.
the The import licensing system has
and seek faster implementation of the Indian economy entered into a period been dismantled. All non-tariff barriers
remaining issues on the reform agenda. (NTBs) have been phased out from all
of unprecedented liquidity crisis during
Prominent contributions in this tradition 1990-91. This crisis was a combined effect
tradables except consumer goods. The peak
are Bhagwati (1994), Srinivasan (1998), of a number of events coinciding. tariff Theserates have been brought down to maxi-
Joshi and Little (1996), Ahluwalia and included collapse of the Soviet Unionmum that50 per cent from up to 355 per cent.
Little (1998), Parikh (1999), Mohan (1999), had emerged as India's major trading Table 1 shows the progressive decline in
among others. The other school is more partner. The Gulf War that erupted theinaverage tariff rates applicable to im-
critical of the approach to the reforms. ItJanuary 1991 worsened the balance of confirming a major reform of the
ports
focuses on the adverse effects on the society payments crisis not only with rising trade
oil regime. Besides India has also un-
especially the vulnerable groups, ques-prises but also by causing a virtual dertaken stop- a major commitment to liberalise
tions the sustainability of growth and thepage of remittances from Indian workers its trade regime under WTO Agreement.
reforms themselves. Hence, they seek in the Gulf. These events coupled with India had agreed to bind tariff rates to
rethinking on the coverage, sequencingpolitical uncertainty prevailing inlower the levels than those prevailing at the
and pace of implementation of reforms.country led international credit rating time of signing of the Agreement (viz,
Prominent contributors in this tradition areagencies to lower India's rating both forfor a large number of commodities.
1994)
Nayyar (1996), Ghosh (1997), Nagarajshort- and long-term borrowings.Tariff The rates on most of the commodities
(1997), Patnaik and Chandrasekhar( 1997), erosion of international confidence in have
the been brought well below the bound
among many others. Indian economy not only made borrow- rates by 1998-99 except for 40 commodi-
Reforms are a means to achieve the ties
ings in international markets difficult but[Mehta 1999]. The NTBs on the re-
ultimate goal of economic development also
of led to outflow of deposits of maining
non- items are being phased out by
resident Indians with Indian banks. These
the country and the well-being of its people. March 2001 although the earlier plan was
In the words of the 1998 World Bank developments together brought the coun- for phase out by 2003. Besides this, India
Report on India as cited in Srinivasan
try to the verge of default with respect to
is liberalising her trade with south Asia on
(1999) "Reform is not needed for its external
own payments liability which coulda faster track than all trade. India has
sake but for the sake of India's poorbeand
averted by resorting to borrowings unilaterally removed all quantitative re-
in the interest of having them both from
con- the IMF under the stand-by arrange-
strictions on imports of around 2,300 items

Economic and Political Weekly March 4, 2000 803

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from SAARC countries in 1998. Nego-
tiations on exchange of trade preferences
have been undertaken with SAARC trade Economic and Social Impact of Reforms:
partners under three rounds of SAPTA. A Tentative Assessment
Industrial policy reforms: Although some
liberalisation and streamlining of the in-
dustrial policy had been effected in the T he adoption of economic reforms The paper by Nagesh Kumar begins
mid-1980s, the New Industrial Policy as a part of stabilisation and struc- by briefly outlining the nature of the
(NIP) announced on July 24, 1991 and tural adjustment programme by reform package to provide a background
subsequent amendments brought far- India in 1991 has been a subject of great to the analysis. It reviews the perfor-
reaching changes in the policy regime debate within the country. While there mance of the Indian economy in terms
seems to be a consensus on the need for of certain broad macro-economic indi-
governing industrial investments. The NIP
dismantled the industrial licensing-(or ap- reforms, there have been diverging views cators. While doing so it also takes into
proval) system that regulated the indus- on the nature, pace and sequencing of account the main findings of the accom-
trial investments in the country by abol- the reforms. Reforms are a means to panying papers by Basant, P R
Panchamukhi and Mahendra Dev. The
achieve the ultimate goal of expediting
ishing the requirement of obtaining an
industrial licence from the government balance sheet that emerges from the
the process of economic development
in all except 14 specified industries. These review is mixed. The paper concludes
of the country and the well-being of its
specified industries need to be regula- people. They are not the end in them- with some remarks on the implications
ted in view of environmental hazards, for the second generation of reforms.
selves. Against the background, the four
national security or social well-being papers presented here review the perfor- Rakesh Basant explores emerging
considerations. mance of the Indian economy following trends in the corporate sector following
NIP has thrown open new industries andthe reforms in 1991 in terms of select the reforms. The reforms have provoked
services to private including foreign pri-broad economic and social parameters significant restructuring and consolida-
vate sector by pruning the list of 'Indus-over the past 7-8 years of the 1990s for tion of the corporate sector. Besides
tries Reserved for the Public Sector'. Onlywhich data are now available. Since increased emphasis on quality up-
six industries which are now reserved for reforms represent a process and not a
gradation, non-price rivalry and product
exclusive development by public sector differentiation
one-stop activity, such stocktaking at are evident. Performance
include those considered sensitive from periodic intervals could be useful in
indicators in terms of export perfor-
national security point of view. Thus a reorienting and fine tuning them. It mance
may and profitability are mixed across
large number of industries and servicesbe an opportune moment for this given sectors. However, the technological
dependence of the enterprises has in-
including infrastructure such as telecom-the fact that after a long gap of three
munication, roads, ports, power genera-years, there is a reasonable prospect creased
of and in-house technology gen-
eration has taken a back seat.
tion, petroleum refining have become political stability which is an important
accessible to the private sector. prerequisite for pushing the agenda PofR Panchamukhi focuses on the
NIP accords a much more liberal attitude impact ofeconomic reforms on the social
reform process further. It must be indi-
to foreign direct investments (FDI) thancated at the outset that this period sector
is in India. He emphasises the
everin post-independence India. The policynot long enough to reflect the full importance of social impact for the whole
allows automatic approval system for impact of the type of reforms that economy have in the long run. He examines
priority industries by the Reserve Bank of been implemented. Some of the effectsthe effects of different components of
economic reforms on social sector. He
India within two weeks subject to their ful-could be subject to lags and interactions
filling specified equity norms. Three slabs with other variables. Hence, the finds that during the period of reform,
present
of foreign ownerships have been defined analysis should be taken essentially the allocations for education and health
for automatic approvals. Up to 50 per centas tentative and indicative rather have been adversely affected. He also
foreign ownership is permitted in six min-than definitive. discusses other more subtle forms of
eral industries listed in the Annexure III The four papers presented heresocial
have impact of reforms including
Part A of NIP. Up to 51 per cent ownership been prepared as a part of the project consumerism and impact on values.
is allowed in 35 priority industries speci- 'Economic and Social Impact of Re- Mahendra Dev in his paper puts to-
fied in Annexure III and in 14 additional forms in India' conducted at the Re- gether evidence on poverty, income
industries specified in Annexure III Part B search and Information System for De- distribution and employment in the pre-
of NIP. Foreign ownership of up to 74 per veloping Countries (RIS), New Delhi, reform and post-reform periods. He
cent is allowed in select high priority infra- in collaboration with the Macau Insti- discusses issues concerning the mea-
structure sectors and other priority indus- tute of European Studies (IEEM), Macau.surement of poverty, brings out the
tries specified in Annexure III-C of NIP. The early versions of these papers weredifferences in these parameters between
Recently, the government has decided to presented at a Panel on India at therural and urban sectors as well as across
permit up to 100 per cent foreign ownership 'International Conference on Economies the states. He examines whether per
on automatic basis to investment proposals in Transition at the Turn of the Century' capita incomes and consumption are con-
in ports and roads. A more favourable treat- held at IEEM in Macau, April 6-9,1999. verging across the states of India. 01
ment is also accorded to non-resident Indian The papers underwent substantial revi-
(NRI) investors who are allowed up to 100 sions and updating after the conference. -NAGESH KUMAR
per cent ownership priority industries.

804 Economic and Political Weekly March 4, 2000

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 A Foreign Investment Promotion Board private sector banks including foreign joint sion that started in the year 1996-97. Hence,
(FIPB) has been set up to consider all ventures. The government has also estab- the sustainability of average growth rates
other proposals that do not qualify for lished a policy regime for functioning of recorded in future has to be evaluated in
automatic clearance. However, to bring private non-banking finance companies terms of the trends with respect to revival
transparency into the working of FIPB, (NBFCs) and agencies for rating theircredit of industrial growth.
elaborate guidelines and time frame of six worthiness. Sectoral performance: The sectoral rates
weeks in normal cases are also specified. The above discussion thus shows that of growth have been summarised in Table 3.
FIPB is authorised to negotiate with for- After excluding 1991-92, the year of
the government since 1991 has undertaken
eign investors in person to expedite the adjustment, the average annual rates of
a comprehensive reform of the economy.
clearances. FIPB is empowered to ap- In addition to the above measures there hasgrowth for the post-reform period exceed
prove up to 100 per cent foreign owner- been an emphasis in the government those of the pre-reform period in the case
ship in cases involving transfer of high budget-making to restricting budget defi-of industry and services. In services in
technology, projects producing pre- cits, on lowering tax rates in tune with particular,
the the average rate in the post-
dominently for exports, energy and infra- tenets of Washington consensus. reform period shows an increase of 1.5
structural projects, consultancy or trading percentage points. The growth rates of the
companies. The restrictions on investments II primary sector are largely governed by
by large industrial houses and foreign external factors because of Indian
Macroeconomic Impact
controlled companies under the MRTP of Reforms agriculture's high dependence on rates
Act were also abolished. rainfall. The average growth rate of indu
A phased programme of disinvestment As indicated earlier, seven to eight years try in the post-reform period at 8.1 per ce
is not a long period to evaluate the impact
of public ownership in public sector cor-
porations has been launched. A Disinvest-
of reforms that involve structural changes Table 1: Tariff Rates of India

of the type summarised above. Therefore,

ment Commission has been set up to make Maximum Average Weighted
recommendations on the phasing of the the following analysis should be taken as Tariff Rate Tariff Rate
disinvestments. indicative and not definitive.
1990-91 355 87
The outward investments by Indian 1993-94 85 47
enterprises were also liberalised and pro- Growth and Its Sustainability 1995-96 50 25
1996-97 52 25
posals fulfilling certain norms could now
1998-99 50.8 20
be granted automatic approval. Table 2 summarises the growth rate of
Exchange rate reforms: The rupee was India's GNP at factor cost at constant prices.Source: WTO (1998)
(WT/TPR/S/33) W
devalued twice in July 1991 leading to a The compound rate of growth for the second
Geneva; and Indian
20 per cent depreciation in its value. The half of 1980s was 5.8 per cent per annum.
partial convertibility of rupee on the trade Compared to that for the post-reform periodTable 2: Annual Growth Rate of Gross
account was announced in the 1992-93 excluding 1991-92 as year of exceptional National Product at Factor Cost
budget that was subsequently broadened crisis, the average for 1992-98 comes to
Year Old Series New Series at
to full convertibility on current account 6.5by
per cent per annum. The average rate at 1980-81 Prices 1993-94 Prices
August 1994. for the 1993-94 to 1998-99 period (based
1980-81 7.3
Capital market: The Capital Issues on the new series of GDP) comes to 6.81981-82 5.8
Control Act was repealed and the Securi- per cent. Similarly, the trend rate for the
1982-83 2.6
1983-84 7.9
ties and Exchange Board of India (SEBI) post-reform period estimated at 6.9 per
1984-85 3.8
was set up as a watchdog for regulating cent is higher than 5.5 per cent applicable1985-86 4.1
the functioning of the capital market. SEBI for the1980s. The post-reform growth, 1986-87 4.0
has focused on regulatory reform of the therefore, has been at least 1.1 percentage1987-88 4.1
1988-89 10.2
capital market as well as on market points higher than the average rate achieved
1989-90 6.9
modernisation. Online trading and during the pre-reform period. The average1990-91 5.2
dematerialised trading have been intro- rates reflect the robust growth performance1991-92 0.5
1992-93 5.2
duced. Companies have been allowed to recorded by the Indian economy during the
1993-94 6.2
buy back their own shares subject to the first five years after the initiation of re-
1994-95 7.8 7.7
regulations laid down by SEBI. forms. The growth rate of the Indian1995-96 7.4 7.8

In September 1992, the government 1996-97

economy has considerably decelerated in 7.7 8.1
1997-98 5.1@
announced guidelines for investments by 1997-98 to 5.1 per cent from 8.1 per cent1998-99 6.0#
foreign institutional investors (FIIs) in therecorded in the previous year. The rate of
Indian capital market. FIIs were now growth in 1998-99 has been estimated at Annual Aver
Growth Rates Rates
welcome to invest in all types of securities 6.0 per cent by CSO. To some extent the
traded on the primary and secondary market recent slow down could be on account of 1980-91 5.8 5.5
1992-98 6.5 6.9
with full repatriation benefits and without the contagion effect of the east Asian crisis1993-99 6.8 6.9
restrictions on either volume of trading or on India indirectly and economic sanc-
Notes-. @ Quick estimates #revised estimates.
lock-in-period. tions imposed on India in May 1998 fol-
Source: Economic Survey 1998-99, Appendix
lowing Pokhran II by major industrial
Financial sector: In January 1993 a pack-
Tables, 1.1; and RBI, Report on Currency
age of financial sector reforms was an- countries. In large part the recent slow and Finance 1998-99, Appendix
nounced that included permission to new down reflects the effect of industrial reces- Table NI.3.

Economic and Political Weekly March 4, 2000 805

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is only marginally higher from 7.94 per
cent averaged during the second half of
the 1980s. Actually, the industrial growth
rate has shown a healthy accelerating trend
over the 1992-93 to 1995-96 period with
growth rates rising steadily from 4.4 per
cent for 1992-93, to 6.9, 9.3 and 12.7 per
cent in the subsequent years. However,
since 1996 growth rates of the secondary
sector have decelerated during the subse-
quent years to 6.0 per cent in 1996-97 and
to 6.2 per cent in 1997-98. The estimated
growth rate for industry in 1998-99 was
even lower at 4.6 per cent. It is clear that bring efficiency and productivity gains in performance of Indian industries in the
the Indian industry entered into a
recessionary phase since 1996 that has
been worsening over the 1996-99 period.
The recovery of the GDP growth rate toYears Forestry and Construction, Communication Insurance, Real Stration, Defence
6.0 per cent in 1998-99 is actually on
account of a healthy 7.6 per cent growth
recorded by the primary sector up from -
0.7 per cent during the previous year.
Industry recorded only 4.6 per cent rate of
growth during 1998-99 compared to
6.2 per cent in the previous year. The
service sectors' growth performance has
also decelerated since 1995-96. The key
reason for a slow down in industrial growth
has been the significant fall in public
investment levels that have occurred
during the 1990s especially since 1995 as
seen later.
Signs of industrial revival: Recent trends
Average Growth Rates
and surveys do indicate that the industry 1980-91
may finally be coming out of the recession
market also started to rise in the second the industry. The accompanying paper by
half of the 1999-2000 with Bombay StockBasant observes that liberalisation has
Exchange sensitive index crossing the levelprovoked a trend of corporate restructur-
of 5,000 points for the first time and stay-
ing and consolidation through mergers and
ing there. All these indicators do suggest acquisitions (M and As). Foreign techno-
that the industry may finally be coming outlogy purchases have also expanded con-
of recession that it has faced in the pastsiderably. Has the restructuring, consoli-
three years. However, one has to wait and dation and technology import contributed
watch if these trends are sustained and to the improvement of efficiency and pro-
the Indian economy is firmly on a higher ductivity of the industry? The evidence
growth trajectory. available so far does not indicate any
Industrial restructuring, productivity and significant productivity improvement. Das
innovation: Liberalisation is expected (1999)
to who examined the productivity
Table 3: Annual Rates of Growth of Real GDP at Factor Cost by Broad Sectors
Agriculture, Manufacturing, Transport, Banking and Public Admini-
Logging, Fishing Electricity, Gas, and Trade Estate, and and Other
and Mining Water Supply Business Services Services
1986-87 -1.0 6.9 6.3 8.2 9.2
1987-88 0.5 6.6 5.8 6.0 6.6
1988-89 16.3 8.7 7.0 9.2 6.1
1989-90 2.0 10.5 8.2 10.8 8.3
1990-91 4.2 7.0 5.2 6.4 4.3
1991-92 -2.0 -1.7 2.3 10.5 4.1
1992-93 5.8 4.4 6.2 4.6 5.0
1993-94 3.6 6.9 12.5 5.6 3.9
1994-95 5.7 9.3 12.8 5.6 3.4
1995-96 0.8 12.7 11.5 8.3 7.8
1996-97 8.7 6.5 8.6 7.9 6.7
1997-98 -0.7 6.2 5.7 8.4 13.3
1998-99 7.6 4.6 6.7 6.2 5.4
Agriculture Industry Services
and Allied
4.5 7.2 6.2
1992-98 3.0 8.1 7.7

in the second half of 1999-2000. The 1993-99 4.3 8.2 7.8

growth of industrial production during

Trend Growth Rates
April-September 1999 has been 6.4 1980-91
per 3.1 7.6 6.5
cent compared to 4.1 per cent for 1992-98
the 2.4 9.3 8.4
1993-99 4.0 8.3 7.9
corresponding period in 1998 [RBI 1999].
Similarly, the growth rates of basic, inter-
Note: Average of rates of growt
mediate and capital goods industries pickedprices. Quick estimates for 19
Source: Compiled from the Econo
up in the first 6 months of the year 1999-
and Finance 1998-99, Appendix
2000 which again might be suggestive of
the impending recovery of industrial growth Table 4: Index Numbers of Industrial Production
(Table 4). A survey conducted by CII also
Year General Mining Manu- Electri- Use-Based Classification
finds that 46 out of 84 segments show a Index and facturing city Basic Capital Inter-
10 per cent or higher growth during April- Quar- Industries Goods mediate Consumer Goods Industries
rying Industries Goods All Durables Non-
November 1999 led by strong recovery of
Industries Durables
transport equipment sector (Economic
Times, January 14, 2000). Another 1993-94
indi- 100 100 100 100 100 100 100 100 100 100
1994-95 108.4 107.6 108.5 108.5 108.9 105.7 105.3 111.8 116.2 110.8
cation of future growth of industrial 1995-96
pro- 122.3 117.9 123.5 117.3 120.6 110 125.4 125.6 146.2 121.1
duction can be had from the trends in 1996-97 129.1 115.6 131.8 122 124.3 120.2 135.5 132.1 153 127.5
growth of a composite index of infrastruc- (5.6) (-1.9) (6.7) (4.0) (3.0) (9.3) (8.1) (5.2) (4.6) (5.3)
1997-98 137.6 122.4 140.5 130 132.4 126.4 146.5 139.6 164.9 134.1
ture sectors comprising electricity, coal,
(6.6) (5.9) (6.7) (6.6) (6.5) (5.3) (8.1) (5.7) (7.8) (5.2)
saleable steel, cement, crude, and petro-
1998-99' 143.1 120.3 146.7 138.4 134.4 142.4 155.1 144.0 172.6 136.5
leum refinery products. This index regis- (4.0) (-1.8) (4.4) (6.4) (1.5) (12.7) (5.9) (2.4) (4.7) (1.8)
1999-2000 146.4 115.7 150.4 146.7 na na na na na na
tered a growth rate of 6.7 per cent during
April-September 1999 compared to 3.4 (Apr-Sept)' (6.4) (0.4) (6.8) (7.7) (5.1) (9.2) (9.1) (4.0) (12.8) (1.6)
per cent during the corresponding period
Note: 'provisional. Figures in parentheses indicate rate of change over the previou
Source: RBI, Report on Currency and Finance 1997-98, Bombay.
in the previous year [RBI 1999]. The stock

806 Economic and Political Weekly March 4, 2000

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pre- and post-reform periods finds that were neutralising the internalisation ad-country. These investments could help India
productivity performance of Indian indus- in expanding manufactured exports by
vantages of foreign investors to the coun-
tries worsened in the 1990s as against the try have been removed. Hence, a greater using her as an export platform. The
1980s. Hence, the contribution of total proportion of technology transactions ofmajority of the recent approvals of FDI,
factor productivity growth to output growth Indian enterprises take place through in-however, aim to exploit India's sizeable
is negligible. The result holds good for ternal or FDI mode. The proportion ofand expanding domestic market. The ef-
analysis conducted both at 3-digit and 2- foreign collaborations that are internalisedficiency seeking or export-oriented FDI
digit levels. Furthermore, Mani andBhaskar through FDI in total approved has gone up have yet to start flowing to the country in
(1998), and Goldar and Ranganathan from just over 16 per cent in the 1970sa considerable manner.
(1998) find evidence of declining trend in to nearly 58 per cent during the 1990.
in-house R and D in the corporate sector Therefore, liberalisation has shifted the Fiscal Adjustment and
in 1990s. Basant also reports R and D to balance between FDI and licensing in Stabilisation
sales ratios in the Indian corporate sector favour of FDI. Furthermore, majority
either stagnating or declining. Neglect of
foreign ownership which was restricted to A key aspect of the structural adjustment
R and D is a matter of concern because certain exceptional cases during the 1970sprogrammes is to restrict the fiscal deficits
and 1980s because of regulations is be-of the governments. Table 6 summarises
R and D activity is an important determi-
nant of long-term productivity growth, coming more popular again. Majority of the trends in budget deficit of the central
competitiveness and hence sustainability
approvals over the 1990s have been in the government in the late 1980s and 1990s.
of growth of industry. 50-100 per cent foreign ownership range
with a third accounted for by wholly foreignTable 6: Trends in Central Government
FDI inflows: Liberalisation of FDI policy
Deficit
regime was an important aspect of the owned subsidiaries. A number of MNEs
As percentage of GDP
reforms. The approvals of FDI inflows have taken advantage of new rules to
Year Revenue Deficit Fiscal Deficit
increase their stake in their existing affili-
since the liberalisation of policy in 1991
reveal a dramatic jump. Compared to appro-
ates in the country. The importance of joint
1985-86 2.2 8.3
venture mode of operations has declined
vals of FDI totalling $ 200 million in 1991, 1986-87 2.7 9.0
1987-88 2.7 8.1
US $ 14.6 billion worth of FDI inflows have
with liberalisation [Kumar 1998a]. As Basant
1988-89 2.7 7.8
been approved in the year 1997. In 1998, has also noted in the accompanying paper,
1989-90 2.6 7.8
however, the magnitude of approvals de- acquisition of existing enterprises has 1990-91 3.5 8.4

clined to US $ 7.8 billion, partly on ac- become an increasingly popularentry mode1991-92 2.6 5.9
1992-93 2.6 5.7
count of the east Asian crisis. The appro-for MNEs in India in the recent years.1993-94 3.7 6.9
vals, however, have been slow in material- While the magnitudes of inflows have 1994-95 3.0 5.6
recorded impressive growth, they are still
ising into actual inflows and are still much 1995-96 2.4 4.9
lower than FDI inflows. Actual inflows in 1996-97 2.3 4.7
at a small level compared to the country's
1997-98 3.0 5.7
1997 amounted to $3.2 billion decliningpotential. Furthermore, one of the objec-
1998-99(RE) 3.4 5.9
to $ 2.3 billion in 1998. However, all thetives of the current reforms of policiesAverages
is
expansion in the magnitude of FDI inflows to remove impediments for export-oriented 1985-86 2.6 8.2
1992-99 2.9 5.7
could not be attributed to the reforms alone. manufacture in general and to attract MNEs
Kumar (1998a) has found that policyto locate efficiency-seeking FDI in the
Source: Economic Su
liberalisation has not yet helped India
Table 5: Sectoral Distribution of Stock of FDI in India
improve her share in FDI outflows from
(Million rupees)
majorEuropean countries or the US. Hence,
the recent expansion of FDI inflows in partIndustry Group FDI Stock as in March 1980 FDI Stock as in March 1990 Approvals 1991
Value Per Cent Value Per Cent Value Per Cent
reflects the dramatic expansion in the global
FDI flows to developing countries fromI Plantations and horticulture 385 4.1 2560 9.5 4901 0.33

about $35 billion per year on average during II Mining 78 0.8 80 0.3 15576 1.06
III Petroleum and power 368 3.9 30 0.1 423905 28.91
1987-92 to $166 billion in 1998.
IV Manufacturing 8116 86.9 22980 84.9 545135 37.18
The bulk of the approved inflows in the Food and beverages 391 4.2 1620 6.0 75748 5.17
1990s have been directed to non-manufac- Textiles 320 3.4 920 3.4 23700 1.62
Machinery and machine tools 710 7.6 3540 13.1 32830 2.24
turing sectors bringing the share of manu-
Transport equipment 515 5.5 2820 10.4 71082 4.84
facturing down from 85 per cent in the Metal and metal products 1187 12.7 1410 5.2 73225 6.00
stock of FDI in 1990 to just 35 per cent Electricals and electronics 975 10.4 2950 10.9 79702 5.44
in cumulative approvals. Infrastructural Chemicals and allied products 3018 32.3 7690 28.4 100759 6.88
Miscellaneous manufacturing 1000 10.7 2030 7.5 88089 6.01
sectors such as energy (29 per cent) and V Services 385 4.1 1400 5.2 459086 31.31
telecommunication services (20 per cent) Telecommunications 0 0 0 0 296271 20.21
account for the bulk of the approvals as Finance and banking na na na na 63012 4.30
is clear from Table 5. These sectors had Hotels and tourism na na na na 29720 2.03
Air and sea transport na na na na 19954 1.36
not been open to FDI inflows before andConsultancy na na na na 10068 0.69
hence, the inflows directed to them couldOther services na na na na 40061 2.73
be attributed to policy liberalisation. Total 9332 100.0 2,7050 100.0 1466218 100.0
Another change brought about byNote: Percentages might not add up to 100 because
liberalisation is the policy barriers thatSources: Kumar (1998a).

Economic and Political Weekly March 4, 2000 807

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In the second half of 1980s, the fiscal Figure: Rate of Inflation
15.00 ..
imbalance worsened with average fiscal
deficit rising to 8.2 per cent of GDP
compared to 6.3 per cent in the early 1980s
10.00 -
(Economic Survey, 1992-93). Compared
to this, the average fiscal deficit in the post-
reform period has been 5.7 per cent of 5.00 -
GDP. This suggests that the government . * ; . . .' ..
has succeeded in managing the fiscal situ-
ation quite well. The extent of fi scal deficits 0.00-
0.00 I I I I I I I I I
tends to mask the method adopted by the 1988-89 1990-91 1992-93 1994-95 1996-97

government to balance the budget and its

-- Rate of Inflation (WP) -"- Rate of
implications. In fact the revenue deficit
which represents the gap between revenue Source: Computed from Economic Survey 1998-99 and R
receipts and revenue expenditure has in-
creased in the post-reform period (at 2.9 at best be a complement toprice
The consumer and indexnot a per
has a 57.0
percent) on average compared to an average substitute for public investment in physi-
cent weight of the food group compared
of 2.6 during the second half of 1980s. cal and social infrastructures. As Mohan to just 27.5 per cent in WPI [RBI 1999].
This implies that the government has been The divergence between the two indices
(1999:7) argues "private sector investment
unable to contain its current expenditure. therefore, reflects substantial increases in
would itself be crowded in by greater and
Therefore, fiscal deficit has been contained more efficient public investment". food prices in the 1990s. Besides, a spurt
either by reducing capital investment or by in prices of housing, medical care and
Finally, it has been shown that the burden
raising capital receipts such as borrowings of adjustment has been unequal in that personal
it care have also contributed to the
or disinvestment of public sector holdings rise in CPI. The rise in food prices and
has led to declining expenditures on social
of the government. A rising level of rev- sectors such as education, health and other goods of mass consumption at a
enue deficit has thus been sustained with poverty alleviation. In the accompanying faster rate than prices of other goods also
government borrowings of the scale of thepapers, Panchamukhi and Mahendra Dev indicates that sharing of burden of adjust-
revenue deficit to finance its consumptionobserve a decline in social sector spending ment by different sections of society has
expenditure rather than producing a rev-especially during the early post-reform been uneven and weaker sections may have
period. Hence, concerns have been raised been affected more.
enue surplus to finance capital expenditure
in social sectors (and defence) which doregarding the levels of human develop-
not yield a future income flow to thement. The analysis of NSSO data by, among External Sector
exchequer. Nayyar( 1996:37), among otherothers, Srinivasan (1999), Datt (1999), as
analysts, has argued that such a fiscal regimeby Mahendra Dev in the accompanying Trade performance: Liberalisation of the
"is not sustainable in medium-term for it paper suggests that the process of decline trade regime since 1991 has led to the
in levels of poverty was arrested during
is bound to fuel inflationary pressures or proportion of trade in GNP going up
strain the balance of payments, and thusthe 1990s. Hence, the decade of 1990s can steadily from 14.1 per cent in 1990-91 to
disrupt the process of growth". be termed as a 'decade of lost opportunity' 18.2 per cent in 1998-99 (Table 9). Indian
Fiscal adjustment has been achieved byas far as poverty alleviation is concerned Economy, therefore, is more deeply inte-
squeezing public investment rather than[Datt 1999]. Mahendra Dev also observes grated with the world economy today than
government consumption. Capital expen-that inequalities between rich and poor it was in 1991 as a result of high rates of
diture as a proportion of total governmentstates have increased during the 1990s. growth of both exports and imports in the
expenditure has declined steadily fromPrices: An important focus of the stabilis- first half of the 1990s.
30.18 per cent in 1990-91 to 21.8 per centation programme is to bring the rate of In the early post-reform period, there
in 1998-99 (Table 7). As a proportion ofinflation under check. The rate of change was a considerable buoyancy in exports
GDP, capital expenditure has come down in wholesale and consumerprices in Table 8 during 1993-94 to 1995-96 period when
from 5.5 per cent to 3.6 per cent duringand the accompanying Figure suggest that the annual growth rate of exports averaged
the same period. The sharp decline in the overall trend in prices has been one of at nearly 20 per cent in US dollar terms.
government capital investment especiallydecline since 1992. One striking trend However, export growth rate has slowed
since 1995 has been held responsible fornoticeable from Table 8 and the Figure is down considerably since 1996-97. Indian
industrial recession. Concerns have been the growing divergence between the rate exports recorded just 5.3 and 4.6 per cent
raised about the decline in budget support of inflation based on wholesale prices and growth in 1996-97 and 1997-98 respec-
that for consumer price index since 1993- tively. In the 1998-99, exports actually
for key infrastructure sectors such as energy,
transport and communications not only 94. in Until 1993-94 the two rates generally declined by 3.9 per cent. Yet the average
terms of proportion of GDP but even converged.
in Since 1995-96, the consumer growth rate of exports in US dollar terms
nominal terms [Nayyar 1996:38-39]. The price index based rate of inflation has during 1992-93 to 1998-99 at 9.8 per cent
relative neglect of infrastructure sectors exceeded that based on wholesale prices is higher compared to 8.2 per cent achieved
has resulted in a widening gap between by a wide margin. The diverging trend in in the 1980s.
demand and supply of infrastructural ser- the wholesale and consumer prices has The average annual growth rate of 20
vices which may adversely affect future been explained in terms of the change in per cent in dollar terms that India's exports
growth prospects. Private investment can the weighting scheme for the two indices. witnessed during the mid-1990s has re-

808 Economic and Political Weekly March 4, 2000

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ceived a lot of attention in the literature. has been reflected in the increasing privatedevelopment on the capital account has
Most of the analysts have attributed it to transfers by Indians working abroad. Thesebeen the ability of prominent Indian com-
the growth of world trade and sharp de- transfers amounted to 2.5 per cent of GDP panies to raise capital at the western stock
preciation of the exchange rate following during the period 1993-94 to 1998-99 exchange through GDRs and ADRs.
the reforms [Brahmbhatt et al 1996; Marjit compared to just 1 per cent in the late Encouraged by the successes of Indian
and Ray Chaudhuri 1997; Srinivasan 1998, 1980s (Table 10). The invisible receipts issues abroad, the government has recently
among others]. The recent decline in the have also risen on account of booming done away with the need for approvals for
growth rate of exports is on account of a exports of software especially since 1993-issue of GDRs/ADRs. The total surplus on
combination of factors. The decline in the 94 which now account for 0.6 per cent ofthe capital account has been of the order
growth of world trade since 1996 is one GDP. The invisible payments especiallyof about 2.5 per cent of GDP over the
such factor. The east Asian crisis has also investment income have been kept under 1996-97 to 1998-99 period, i e, more than
put a strain on India's exports not only bycheck by the increasing reliance on theadequate to neutralise the current account
shrinking demand in the affected countriesnon-debt capital flows and by reducing the deficit. Hence, the foreign exchange re-
but also by adversely affecting inter-dependence on short-term borrowings. The serves of India have accumulated. On
national competitiveness of India's exports private transfers and software exports have March 31, 1999, the foreign exchange re-
due to sharp depreciation of east Asiankept rising even during the second half ofserves stood at $ 32.5 billion, that is, cover-
currencies [Kumar 1998b]. Furthermore,the 1990s when the merchandise exportsing 8.2 months of imports. By January 1,
India's competitiveness may have beenstagnated. The rising surplus in invisibles2000 the foreign exchange reserves had
affected by the tendency of the rupee totrade has helped to reduce the currentclimbed to a $ 35 billion level (Economic
appreciate in real terms in the mid-1990saccount deficit to manageable levels. Times, January 27, 2000).
following the switchover to a unified marketThe current account deficit came down to The improvement in balance of pay-
determined exchange rate management injust 1 per cent of GDP in 1998-99 com- ments situation is also indicated by the
March 1993. pared to 2.3 per cent on average duringdecline in debt/GDP ratio from 41 per cent
Finally, India's competitiveness has also the late 1980s. to 23.7 per cent from 1991-92 to 1998-
been adversely affected by the failure to On the capital account, the inflows of 99 and in debt service ratio from 30 per
diversify the commodity composition non-debtof resources, viz, FDI and portfoliocent to 18 per cent. The foreign exchange
her exports. Apparently, the commodity investments have steadily increased over reserves at $ 35 billion may appear size-
concentration of India's exports has in- the 1990s thus bringing down the relative able. However, there is as yet no room for
creased with a 9 per cent rise in the share reliance on external commercial borrow- complacency as the bulk (i e, 61 per cent)
of top six commodity groups of exports ings and short-term credit. A healthy of these reserves comprise of short-term
in total exports between 1987-88 and
1998-99 [RBI 1999]. India's inability to Table 7: Receipts and Expenditure of Central Government
diversify her export structure has also been
Years Capital Total Capital Expenditure Capital Expenditure Total
observed by Sinha-Roy (1998) and Ganesh- Expenditure Expenditure as Per Cent as Per Cent Expenditure as
Kumar et al (1999). of Total of GDP Per Cent of GDP

The robust export growth during the first

1985-86 21477 53112 40.4 8.2 21.5
half of 1990s has helped narrow the trade1990-91 31782 105298 30.2 5.5 18.1
1994-95 38627 160739 24.0 3.7 15.5
deficit from 2.7 per cent of GDP on av-
1995-96 38414 178275 21.5 3.2 14.6
erage during the 1980s to just 0.9 per cent
1996-97 42073 201007 20.9 3 14.3
during the 1992-93 to 1995-96 period.1997-98 51718 235245 22.3 3.3 14.8
However, with the recent slackening of
1998-99(RE) 63773 281912 21.8 3.6 16.0
exports growth, the trade deficit has1999-2000(BE) 46895 283882 16.5 2.3 14.2

again widened to .6 per cent during the

Source: Economic Survey 1998-99 and RBI (1999).
1996-97 to 1998-99 period. Hence, the
export growth has to be revived if the trade Table 8: Inflation in India
deficit is not to climb back to the 1980s
Years Index No of WP Annual Change Index No of CP (General) Annual Change
levels. It becomes all the more urgent in
view of the recent announcement that all 1986-87 132.7 137
1987-88 143.6 8.21 149 8.76
the remaining non-tariff barriers will be 1988-89 154.3 7.45 163 9.40c
phased out by April 2000, i e, two years 1989-90 165.7 7.39 173 6.13
1990-91 182.7 10.26 193 11.56
ahead of the original schedule. This may
1991-92 207.8 13.74 219 13.47
lead to rapid expansion of consumer goods 1992-93 228.7 10.06 240 9.59
and cause further widening of trade deficit. 1993-94 247.8 8.35 258 7.50
The indications are that exports growth is 1994-95 274.7 10.86 279 8.14
1995-96 295.8 7.68 313 12.19
picking up in the year 1999-2000 as the
1996-97 314.6 6.36 342 9.27
estimated export growth during the April- 1997-98 329.8 4.83 366 7.02
November period has been 12.7 per cent 1998-99 352-5 6.9 414 13.1
(Economic Times, January 27, 2000). 1999-2000up to Oct 2.9 7.5
Invisibles trade: The surplus on invisiblesNotes: Base: 1981-82 =100.
trade has improved during the 1990s onWP = Wholesale prices, all commodities, average of weeks;
account of growing service exports. This CP = Consumer prices for urban industrial workers general index (average of months).

Economic and Political Weekly March 4, 2000 809

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debt and portfolio investments (such as a setback. It would appear, therefore, thatsocial and physical infrastructure to sus-
FII's investments on the stock market). As the sharing of burden of adjustment be-tain high rates of economic and social
the recent east Asian crisis shows these tween different sections of society hasdevelopment. Efficiently organised public
resources are highly volatile in nature. been unequal and weaker sections haveinvestment in these sectors will crowd in
been affected more adversely. more private sector investment to comple-
Ill Robust export growth during the mid-ment it. In particular, education and health
Thoughts for Second 1990s has helped to narrow the trade deficit. deserve to receive their due place in public
Generation of Reforms The growing surplus on invisibles tradespending. While the goal of provision of
has been made possible by rising remit-universal primary education is important
The balance sheet of the adoption of tances by Indian workers abroad andand should be achieved, it should not be
economic reforms in India in the 1990s booming software exports. The composi- at the cost of higher education. The em-
tion of capital flows has changed in favourphasis on quality of higher education in
that emerges from the analysis of this and
the accompanying papers is mixed. The of non-debt creating flows such as FDI andthe past decades has been responsible for
foreign portfolio investments thus helpingenabling India to participate in the ongoing
overall post-reform growth rate of output
has been robust at an average of 6.8 perto contain external debt to more manage-knowledge and information revolution. The
cent. The observed growth rate for the able levels. The increasing balance of21st century will be even more intensively
payments surplus has augmented the for-driven by knowledge and availability of
1990s is not only significantly higher than
eign exchange reserve to healthier levels.highly trained and skilled manpower will
that recorded during the 1980s but it is also
However, there is no room for compla-be a key factor in determining India's place
more sustainable in terms of parameters
cency on the balance of payments frontin international division of labour. The
of fiscal and current account. Although
industry has faced a recession since the
especially in view of further liberalisationquality of higher education seems to have
1996, there are signs that it is coming out of trade regime contemplated with thesuffered from the budgetary squeeze in the
of it. Deregulation and liberalisation phasing
of out of the remaining non-tariffpast decade. Universities and institutions
trade and investmentregimes has provoked barriers in the year 2000-01. Rising oilof higher education should be allowed
widespread restructuring and consolida- prices are also likely to strain India's tradetime to become financially more indepen-
tion of Indian industry. Indian industry hasbalance. India's exports profile needs todent through raising endowments from
also relied more on technology imports be broadened to cover more products andtheir alumni, and adopting more rational
and affiliations with outside multinational increase value addition and take advantagefee structures. Adopting a fee structure
companies and less on in-house R and D of the liberalising world economy. based on the ability to pay is one option.
activity. Increased dependence on imported In the light of the above observationsThere should be incentives for faculty
technology and industrial consolidation, and experience gathered during the pastmembers, institutions and universities to
however, have not yet resulted in any decade, one may now draw implicationspursue excellence. There is a general feel-
measurable productivity improvement. for the second generation of reforms. ing that standards of academic excellence
The neglect of in-house R and D is a matter Social and physical infrastructure: It has in Indian institutions, barring a few excep-
of concern for sustaining industrial become clear that government will havetions, have declined. Indeed lack of funds
growth and competitiveness as the access to continue to play a key role in providingis not the only reason for that. There is also
to technology is becoming increasingly
crucial to industrial success in the knowl-
Table 9: Major Indicators of India's Foreign Trade
edge economy.
The fiscal imbalance that had widened Year Exports Imports Trade Growth Rate Exports Import Export Import
Balance of Exports GDP Ratio GDP Ratio Ratio
during the 1980s has been contained and
inflationary tendency has been curbed. 1980-81 8485 15867 -7382 7.0 4.9 9.2 53.5
1981-82 8704 15173 -6468 2.6 4.9 8.5 57.4
However, the fiscal adjustment has been 1982-83 9108 14787 -5679 4.6 4.9 8.0 61.6
achieved by pruning capital expenditure 1983-84 9449 15311 -5862 3.8 4.7 7.6 61.7
1984-85 9878 14412 -4534 4.5 5.1 7.4 68.5
rather than by containing current expen-
1985-86 8905 16067 -7162 -9.9 4.2 7.5 55.4
diture of the government. The decline in 1986-87 9745 15727 -5982 9.4 4.3 6.9 62.0
public investment in physical and social 1987-88 12089 17156 -5067 24.1 4.7 6.7 70.0
1988-89 13970 19497 -5527 15.6 5.1 7.1 71.7
infrastructure raises a question about the 1989-90 16613 21219 -4607 18.9 6.1 7.7 78.3
sustainability of growth. Concerns have 1990-91 18145 24073 -5927 9.2 6.1 8.1 75.4
been raised on the impact of declining 1991-92 17865 19411 -1545 -1.5 7.1 7.8 92.0
1992-93 18537 21882 -3344 3.8 7.6 9.0 84.7
social sector outlays on levels of human 1993-94 22238 23306 -1068 20.0 8.0 8.3 95.4
development and hence on long-term 1994-95 26331 28654 -2324 18.4 8.0 8.7 91.9
sustainability of growth. 1995-96 31795 36675 -4880 20.8 8.7 10.1 86.7
1996-97 33470 39132 -5663 5.3 8.4 9.9 85.5
The prices of goods of consumption of 1997-98 35006 41485 -6478 4.6 8.3 9.9 84.4
the masses such as food have risen faster 1998-99P 33659 41858 -8199 -3.9 8.1 10.0 80.4

than those of other goods. Inequalities Average

1980-81 to 1990-91 8.2 5.0 7.7 65.1
between rich and poor states, as between 1992-93to 1995-96 15.7 8.1 9.0 89.7
rural and urban populations and between 1996-97 to 1998-99 2.0 8.3 9.9 83.4

affluent and poor households seem to have 1992-93 to 1998-99 9.8 8.2 9.4 87.0

widened. The process of poverty allevia-Note: P: Provisional.

tion particularly in rural India has sufferedSource: RBI Report on Currency and Finance, 1998-99, Appendix Table TR1.

810 Economic and Political Weekly March 4, 2000

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an immediate need to reform and re-en- in the informal sector in the industry. could be sold to a strategic partner bidding
gineer the educational system in the coun-Regional disparities: After dismantling of highest in a public auction.
try, to bring it in line with the changed the industrial licensing system, there is noFDI policy: In a developing country such
requirements to avoid skills mismatch. On mechanism left with the government toas India that seeks FDI as a development
the one hand colleges and universities arechannel industrial investment to relativelyresource, the focus of the FDI policy should
producing conventional science and socialless developed regions. This might explain be on maximisation of its contribution to
science graduates who cannot find ad-the increase in interstate disparities thatIndia's development rather than on
equatejob opportunities. On the other handhas been observed during the post-reform maximisation of the magnitude of inflows
there is a serious scarcity of computer- period. The government might create by a itself. One respect where substantial
trained manpower. Computer education regional development fund which is built up potential remains to be exploited in terms
should be integrated in school and college with a cess imposed on the units set up in of MNEs' contribution to India's develop-
curricula and other traditional disciplines,more developed states and subsidises the ment is expansion of her exports. MNEs
e g, fine arts which could feed the growing investments in poorer states, among other have so far come to India primarily for
needs of CAD personnel [see Kumar 2000 measures, to bring about regional balance. exploiting her large domestic market and
for more details]. Privatisation: The privatisation of public their contribution to India's exports is
Similarly, investments in physical infra-enterprises is an important aspect of thenegligible. In contrast, MNEs account for
structure have lagged behind in the pastreform process. However, privatisation, nearly 40 per cent of China's manufac-
few years. Major projects involving pri- like the reform process itself, is a means tured exports. The evidence also suggests
vate participation (including foreign in- that export-oriented FDIs bring to the host
ratherthan an end by itself. The privatisation
volvement) have been sanctioned in power,process should be driven by the aim of country best practice technology and also
expressways, bridges, ports, etc. They haveachieving efficiency and securing long- cause beneficial information spillovers on
been slow in getting off the ground. While the export opportunities and hence could
term interests of the enterprises rather than
such projects should be promoted andas a means to reduce budget deficits. Thefacilitate exporting activity of domestic
encouraged, they should not be at the cost proceeds of privatisation could be exclu- enterprises as well [Kumarand Siddharthan
of public investments in infrastructure and sively used to retire public debt or to fund1997 for evidence].
maintenance of existing infrastructure. infrastructure investments. Furthermore, Furthermore, the FDI policy needs to
Social safety nets and social security the method of privatisation could be dif- have a strategic perspective particularly in
schemes: The industrial restructuring pro-ferent according to the objective and the relation to the strategic sectors identified
voked by liberalisation has led tojob lossesstrategic element involved. For instance,as a part of the industrial competitiveness
and increasing casualisation of employ-in the case of enterprises which represent policy for building local capability. It
ment in the corporate sector [Panchamukhi nation's technological capability in stra- should be pursued in such a manner that
and Das 1999]. There is therefore, need to tegic industries, viz, 'national champions',foreign entry does not threaten the exist-
provide social safety nets to guard vulner-privatisation could take the form of saleence of national champions in an unfair
able workers from the threat of job losses of non-controlling stake through initial manner [Kumar 1999 for details].
and the need for a framework for social public offerings (IPOs) to the public at Competition policy: The recent consoli-
security cover to contract workers and thoselarge. In other cases controlling stakedation and restructuring of industry has

Table 10: Some Indicators of India's Balance of Payments

(As per cent of GDP)

Item 1985-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99
(Average)
Current Account
Exports 5.1 6.2 7.3 7.8 8.1 8.1 8.9 8.6 8.5 8.2
Imports 8.2 9.4 8.3 10.2 9.6 10.9 12.0 12.3 12.2 11.4
Invisible receipts 2.8 2.5 3.8 3.8 4.0 4.7 4.9 5.4 5.5 6.2
of which Private Transfers 1.0 0.7 1.5 1.6 1.9 2.5 2.4 3.1 2.8 2.5
Invisible Payments 2.0 2.6 3.1 3.2 3.0 3.0 3.4 2.8 3.2 4.0
of which Investment Income 0.8 1.4 1.6 1.6 1.3 1.3 1.3 1.1 1.2 1.3
Invisible net 0.8 -0.1 0.7 0.6 1.0 1.7 1.5 2.6 2.4 2.2
Current account deficit 2.3 3.2 0.4 1.8 0.4 1.0 1.6 1.2 1.3 1.0
Capital Account
Foreign investment 0.1 0.03 0.1 0.2 1.5 1.5 1.3 1.5 1.3 0.6
of which
Direct 0.1 0.03 0.1 0.1 0.2 0.4 0.6 0.7 0.9 0.6
Portfolio 0.0 0.0 0.0 0.1 1.3 1.1 0.7 0.8 0.4 0.0
Debt flows 2.0 2.0 1.3 0.7 0.7 0.6 0.7 1.9 1.2 1.3
of which Commercial borrowings 0.6 0.8 0.6 -0.2 0.2 0.3 0.4 0.7 0.9 1.1
Total capital account surplus 2.3 2.4 1.5 1.7 3.5 2.8 1.3 2.9 2.4 2.0
Overall Balance Reserves and External Debt (end-period)
Foreign exchange reserves (US$ million)5616 5834 9220 9832 19254 25186 21687 26423 29367 32490
Import cover of foreign exchange reserves
(No of months) 3.4 2.5 5.3 4.9 8.6 8.4 6.0 6.5 6.9 8.2
Total external debt (US $ million) - 83801 85285 90023 92695 99008 93730 93470 94320 98231
Short-term debt (as per cent of reserves) - 146.5 76.7 64.5 18.8 16.9 23.2 25.5 17.2 13.3
Debt/GDP ratio (per cent) - 30.4 41.0 39.8 33.1 30.0 26.3 23.8 23.8 23.7
Debt Service Ratio (per cent) - 35.3 30.2 27.5 25.6 26.2 24.3 21.2 19.1 18.0
Note: - not available.
Source: RBI Report on Currency and Finance, 1998-99, Appendix Table IF1.

Economic and Political Weekly March 4, 2000 811

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raised the importance of competition through levies imposed on technological - (1998a): 'Liberalisation and Changing Patterns
of Foreign Direct Investments: Has India's
policy to ensure the delicate balance payments [Kumar 1990]. These levies could Relative Attractiveness as a Host of FDI
between competitiveness and market be returned to the domestic enterprises Improved'?, Economic and Political Weekly,
competition. While corporate consolida- conducting R and D. Further incentives in Vol XXXIII, No 22, May 30.
tion is important for strengthening the the form of subsidies for approved R and D - (1998b): 'East Asian Economic Crisis and South
Asian Growth Prospects: A Note', RIS Digest,
international competitiveness of enter- projects of domestic enterprises could be
Vol 14, September.
prises, some competitive pressure is also provided. Furthermore, products based on - (1999): 'Host Country Policies, WTO Regim
necessary for them to sharpen their effi- indigenously developed technology could and the Global Patterns of FDI Inflows:
ciency and to prompt them to pursue be extended excise concessions (such as Implications of Recent Quantitative Studies
innovation based rivalry. Another aspect those extended to products of small scale for India', paper presented at National Seminar
on Economy, Society and Polity in South Asia,
of competition policies is to provide a industry) and income tax concessions (such
Delhi, November 16-17, organised by Institute
level playing field for local enterprises
asthoseenjoyedbyexporttumover).R and D of Economic Growth.
vis-a-vis subsidiaries of MNEs which subsidies up to 50 per cent do not contra- - (2000): 'New technology based small service
enjoy access to their parent's brand veneand WTO obligations and are widely used enterprises and employment: The case of soft-
trade names besides a number of other ware and related services industry', paper for the
by most of the industrialised countries.
National Workshop on Strategic Approach to
These are some of the issues that could
intangible assets especially in the context Job Creation, ILO, Surajkund, February 17-19.
be considered while drawing up an Kumar, Nagesh and N S Siddharthan (1997):
of liberalisation of national economies to
MNEs. An affiliation with established
agenda for the second generation or phase Technology, Market Structure and Inter-
of reforms, among many other initiatives nationalisation: Issues and Policies for
global chains of companies having a wide
Developing Countries, Routledge, London
range of products and services lends
that
a are needed to keep the economy and New York.
moving upwards. Bi
formidable edge to MNE affiliates over Mani, Sunil and M Vijaya Bhaskar (1998): 'A
the national firms in the host markets. A [An earlier version of this paper was presented Curmudgeon's Guide to Economic Reforms
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812 Economic and Political Weekly March 4, 2000

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