CHAPTER - 2

I N D I A N E C O N O M Y A N D ITS R E F O R M S

India's development strategy was launched in 1950s. The

main objectives of development strategy were the establishment

of industrial based economy, especially in basic goods and

heavy machine building. The policy makers further emphasised

for achievement of self reliance. The strategy adopted for

growth and progress in India was heavy reliance on planned

economy with an emphasis on active public sector participation

in economic development.

During 1956-57 to 1977-78, the policy of import

substitution was adopted to protect infant and strategic

industries. Import substitution was an important phase in the

industrialization and development process, but its impact was

gross misallocation of resources to industry and enterprises,

which provided no inherent advantages and could not survive in

competition internationally. Government also gave tremendous

support to small industries, by reserving hundreds of products

for them. Small scale industry also enjoyed subsidies through

excise duty concession preferential import allocations, cheaper

credit and sale tax concessions etc. Thus, small scale industry

48
 preferred to stay small to avail all benefits. It created

continuous burden on already burdened economy. In order to

protect labour or workers from exploitation, wages of workers

were fixed in organized sector which were not related to

productivity. Labour became completely detached from the

market fundamentals due to aggressive union leadership.

Labour legislation also gave full freedom to do trade union

activity. It had adverse effect on economic development. This

prevented the emergence of a stable system of industrial

relations. It led to negative effect on growth rate of productivity.

In agricultural sector subsidies were provided for fertilizer,

power and irrigation. These subsidies hardly reached the

targeted section. As a result optimum allocation of scarce

resources was very less. Policy regarding foreign trade was

very rigid. When international trade was expanding rapidly,

India preferred to adopt inward looking policy of self sufficiency.

As a result India could not maintain pace with world. India did

not avail the opportunities to use foreign capital when the rates

of interest were low. The share of India's trade in world trade

was quite low. It was 2 percent in 1950, and it declined to 0.7

percent in 2004.^^

F.in'igii trade pohcy of Indhi 2004-09" Announce by Shri Kamal N.ilh, Minister ofConmerce and Indi'str)',

49
 Second Five Year Plan was launched with emphasis on

heavy industry largely in public sector but it began to be

realized that India needed export earnings to finance at least

part of maintenance and development imports. The foreign

exchange crises of mid 1957 reinforced the importance of

export growth as a part of planned development. The

pessimistic view about the potential for export earning gave way

to a more positive approach in the third plan (1961-66) with the

introduction of export promotion measures without deflecting

from the thrust of imports substitution and industrialization.'^'*

Renewed emphasis on export was laid in the fourth plan (1967-

74) which envisaged progressive elimination of dependence on

foreign aid, while the Fifth Plan (1974-79) identified certain

sectors, such as engineering goods, garments, leather

manufacture and marine products for achieving increase in

exports.'*^ It brought some relief but at the end of Fifth Plan,

second oil shock in 1979, widened the trade deficit further.

As pre-requisite for export promotion, the Cash

Compensatory Support (CCS) and the Duty Drawback and

Import Enticement Schemes were introduced in the late 1960s.

(jovernment of India, on August 31, 2004.

50
 The objective of CCS was to provide compensation for

unrebated indirect taxes paid by exporters on input, higher

freight rates and market development costs. The rate of CCS

was not uniform, often varied from exporter to exporter. It was

abolished in July 1991. The aim of Duty Drawback system has

been to reimburse exporters for tariff paid on the imported

materials and intermediates and central excise duties paid on

domestically produced inputs which enter into export

production. Import Entitlement Scheme was introduced to help

the exporters in procuring imported raw materials and other

components for export production. Exporters were granted

import licenses. Average premium on these import licenses

varied from 70 to 80 percent. Thus, it was the most important

measure of subsidization."^ These sustained exports growth

through productive efficiency and cost effectiveness to qualify

for international competitiveness. A number of committees were

appointed for import liberalization headed by Dr. P.C. Alexander

(1978), control and subsidies under Mr. Vadilal Dagli (1979)

and export promotions were headed by Mr. Prakash Tondon in

1980. These committees suggested for rationalization in the

'" Jagdisli Bhagwati and T. N. Srini\asan (1976), '^Forei^n Trade Regimes and Economic Development,
Delhi, India, pp 64-75.

51
 structure of subsidies, promotion of export of service and

Investment in export sector \N'\th dynamic comparative

advantage. At the beginning of tine eighties, India embarked on

the Sixth Five Year Plan (1980-85). In this period India

experienced huge current account deficit due to oil price hike in

1979. There was greater recognition of the weakness by inward

looking industrialization of the earlier decades. India had to

seek IMF Extended Fund Facility of over five billion dollars in

1981 in the wake of international oil price increase.

Foreign Trade Policy issues came into force in the early

eighties and the view gained that India must avail the benefits

of international division of labour by greater reliance on tariffs

than import restriction and liberalization of imports of capital

goods and technology. External environment became

increasingly important for India's steady progress. The

government decided to appoint a committee on trade policies

headed by Dr. Abid Hussain in the mid 1980s and other

committee which was headed by Mr. M. Narshimhan to examine

issues related to a possible shift from fiscal to financial

control. 47

Ibid

52
 The Abid Hussain Committee suggested that trade cannot

be separated from the national economy. Exports considered as

a means of transforming domestic resources into foreign

resources, which are necessary to finance the process of

development. It focused exports as an engine of growth, though

it did not recommend an export growth strategy."*^ The crises of

1991 in Indian economy did not develop suddenly. The origin of

crises is directly attributable to the cavalier macro-management

of the economy during the 1980s, which led to large and

persistent macro-economic imbalances. During this period fiscal

deficit was growing due to widening gap between revenue and

expenditure of the government. This deficit was met through

borrowing at home. Further the gradually increasing gap

between income and expenditure of the economy as a whole

resulted in large deficit in balance of payment (BOP) which

were financed by borrowing from abroad."*^ The fiscal crises in

1990 were not an accident or coincidence. The fiscal situation

had deteriorated throughout the 1980s due to the growing

burden of non-development expenditures. The gross fiscal

deficit of the central government was 8.2 percent of GDP during

^^ Baru,Sanja}'a, "TIK' Economic Dimension of India's Foreii^n Policy" World Affair Journal of
International Issues. Delhi . Vol. 2. No.2 Apr.- June 1^)98, p. 89
''' Misra, S.K. and Puri, V.K. (1999), ''Indian Economy Us developmeni experience 17" edition, "Himalaya
publishing House. Mumbai. P. 294

3J
 the late 1980s as compared to 6.3 percent of early 1980s. To

fill the gap, government took excessive borrowing from internal

and external sources, leading to mounting internal debt from 35

percent of GDP in 1980-81 to 53 percent in 1990-91. This made

the burden of servicing the debt onerous. Interest payment,

which increased from 2 percent of GDP and 10 percent of the

centre's expenditure in 1980-81 increased to 4 percent and 19

percent in 1990-91 respectively, had eaten up 37 percent of the

total revenue collection of the centre.^°

Crises in balance of payment were neither sudden nor

unexpected. The policies of 1970s and 1980s were import

incentive industrialization and production, while export

performance was at the best modest. Consequently the current

account deficit doubled from an annual average of $ 2.3 billion

or 1.3 percent of GDP during the early 1980s to an annual

average of $ 5.5 billion or 2.2 percent of GDP during the late

1980s. These persistent deficits were financed by borrowing

from abroad leading to increase in external debt from $23.8

billion or 14.3 percent of GDP in 1980-81 to $ 62.3 billion or

22.8 percent in 1990-91. Consequently debt service burden also

'''. Kalpana Rajaraman (2004) (ed) '-Indian Economy Spectrum' Spectrum Book Pvt. Ltd. New Delhi p.
541

54
 increased from 7.9 percent of current account receipts and 14.9

of exports earnings in 1980-81 to 21.7 percent and 29.8 percent

respectively in 1990-91. As a result foreign exchange revenues

dropped to levels, which were not enough to finance essential

imports even for a fortnight during the Gulf Crises.^^

Instead of taking corrective measures to manage balance

of payment, short-term debt was incurred to finance imports of

petroleum and fertilizers while borrowing from international

markets were used to sustain imports. The rapid growth of

external debts and burden of debt servicing eroded international

confidence in India's capacity for repayment. Thus, the overall

picture of the Indian economy was not comfortable during the

pre-reform period, especially at the time of launching of the

reforms.

E c o n o m i c Reforms in India

The Challenge of the economic consolidation was based

on the premise that liberalization, stabilization and privatization

and poverty relief are intrinsic to transition. Well known

formulas from reforms were set again; market supporting

institutions, a skilled and adoptable labour, integration into the

global economy, good institutions, including good laws and

" Ibid, p. 541

55
 effective enforcement mechanism and strong financial

institutions. The obsessions with small government which can

support and complement "rather than stifle" private enterprises

was seen as essential. Undoubtedly there is universal

agreement that it is essential to build a strong human capital

base by reforming education and health systems. Finally

openness to trade and foreign investment is seen as a major

force behind strong economic performance across countries.

Therefore, there is need for taking into account the historical

context of declining terms of trade which many developing

countries have faced. Such thrust can not be envisaged without

fundamental reform.^^ During the 1980s, India's economic

performance was fairly good. But at the end of the decade, an

unprecedented liquidity disaster came to haunt India. As a

result India could not raise funds in international markets. India

was on the verge of default on external payment liabilities.

Under these circumstances, it was felt that there was no

alternative but to undertake drastic economic reforms.''^

In the midst of the grave balance of payment (BoP) crises

of 1990-91, the decision was taken in 1991 by the government

^' Roy, Sumit, "Developing Economics in the Age of Globalization''' World Affair Journal of International
Issue, Delhi vol. 2, No. 3 July- Sep. 1998, P. 156
"'• Report on the National Commission of Labour," Ministry of Labour Ch. 4 p 17. 2001

56
 of Narsimha Rao to give up the old economic policies. It

decided to initiate far reaching reforms that would transform

India from controlled & closed economy into a fairly open

economy. Further there would be a gradual opening up of the

economy linked to the world economy.^"^ The economic policy of

1990-91 is constituted of two distinct strands, macro-economic

stabilization and structural reforms. Stabilization measures deal

with demand management whereas structural reforms deal with

sectoral adjustments. It is supply side of the economy.

Macroeconomic stabilization involved returning to low and

stable inflation and a sustainable fiscal and balance of payment

position.

Fiscal Reforms in India

The aims of the fiscal reforms were to correct the fiscal

imbalances so that problems like inflation, Balance of Payment

(BoP) disequilibrium and fiscal deficit in the 1990s could be

controlled. The major themes of the fiscal policy reforms were;

i. A deliberate move to a regime of reasonable direct tax

rate and better administration and enforcement.

ii. Creation of stable and predictable tax policy environment.

^^ Chelliah Raja J.. "' Economic Reform Stnileg}-for the next decade.'" Economic and Political Weekly,
Samiksha Publication, N4unibai, vol. 34, No. 36 Sept. 4, 1999,p. 2582

57
 iii. Reliance on non-discretionary fiscal and financial

instrument in managing the economy,

iv. Efforts to strengthen methods of controlling expenditure.

To achieve these targets, government emphasized on

collection of higher tax and non tax revenues and to control

public expenditure. In this regard, government appointed a

committee under Raja J. Chelliah in 1991 to look into the

taxation reforms. Tax reforms progressed gradually but its

structure still remains very complicated with high rates of

taxation. Personal income tax succeeded in establishing a

regime of moderate tax rates. The rate of personal income tax

has come down from 56 percent at the start of the reform to 30

percent. The rate of corporate tax, which varied from 51.75

percent to 57.5 percent in 1991-92, depending upon the nature

of the company, has been unified and reduced to 30 percent.

Excise duties are a major source of indirect tax revenue in

India. It is switchover from specific to uniform ad-valorem rates.

Rate of excise duties reduced to 10 percent during 2011-1

with 130 items out of 370 consumer goods items currently are

enjoyed exemption from central excise duties. More than 9/10th

of importable goods would be subject to a uniform custom duty.

58
The basic rate of duty on many agricultural goods and on cars

is currently higher than the "peak" rate of 30 percent.^''

Financial Sector Reforms in India

A vibrant, efficient and competitive financial system is

necessary to support the structural reforms in the real economy.

Over the years, the Indian banking and financial system has

made impressive progress in terms of both geographical spread

and functional reach. Inspite of this gain, the Eight Five Year

Plan document points out, "The balance sheet of the

performance of the financial sector is thus mixed, strong in

achieving certain socio-economic, goals and in general

widening the credit coverage but weak in the viability."^^

Therefore, Indian government set up a committee under the

chairmanship of M. Narsimham, to examine the country's

financial system and its various components. On the basis of

recommendations of committee, the major reforms undertaken

during past few years are as follows:

1. The level of the statutory liquidity ratio and the cash

reserve ratio were progressively raised during the

eighties, to reduce inflationary pressure. Consequently

'L'nion Budget for the Year 2011-12'' Union Minister of Finance

59
 this affected adversely the profitability of banks and

pressurized them to charge high interest rates on their

commercial sector advances. As a result, government has

reduced both SLR and CRR in a phased manner from peak

of 38.5 percent to 24 percent and 15 percent to 6 percent

respectively in year 2010.

2. The RBI has introduced new prudential norms for income

recognition, classification of assets, provisioning of bad

debts and capital adequacy. Capital adequacy ratio for

foreign bank, working in India attained 8 percent till March

1993, 8 percent CAR for Indian banks which have

branches abroad till March 1995 and 9 percent for other

Indian banks till 2000. The minimum capital standards

have been prescribed, according to the Basle committee

norms. Under this system, banks are required to maintain

unimpaired capital funds equivalent to 8 percent of the

aggregate of the risk weighted assets. Banks were

expected to touch 4 percent capital risk weighted asset

ratio by March 1993. This became 8 percent for all banks,

by March 1996. Foreign banks which are operating in India

and Indian banks which are functioning in abroad, required

to 8 percent by 1993 and 1994 respectively.

60
3. Commercial banks got freedom to set up new branches

without the approval of the Reserve Bank of India (RBI) by

April 1992.

4. The RBI has announced guidelines for setting up banks in

the private sector.

5. Number of interest rates slabs on bank advances was

reduced from about 20 in 1989-90 to 2 in the financial year

1994-95. This attempt to unify interest rate structure aims

at reducing the degree of cross-subsidy in the banking

system.

6. The supervisory system of the RBI is being strengthened

with the establishment of a new board for Financial

Supervision in Nov. 1994 under the chairmanship of

Governor of the RBI and the Deputy Governors as the ex

officio members. The board was to ensure implementation

of the regulations with respect to credit management,

asset classification and income recognition provisioning,

capital adequacy and treasury operations.

7. An act was passed in 1993, under which Special Recovery

Tribunals have been set up to facilitate quicker recovery

of loan arrears.
 8. Banks have greater freedom in determining the working

capital needs of the borrowers and responding to local

requirement in an appropriate manner.

Foreign Exchange Reforms In India

The wave of liberalization and reforms has brought various

changes in foreign exchange regime. Due to this foreign trade

policy and foreign direct investment were also substantially

liberalized. India follows a market determined floating exchange

rate, calculated on the basis of the basket of the currencies.

The exchange rate reform has been facilitated by the adaptation

of convertibility of rupee for the current account transaction with

acceptance of article of agreement of the international monetary

fund during 1994. In subsequent year, capital account has been

substantially liberalised convertibility with an unprecedented

liberalization of outflows by residents. The Foreign Exchange

Regulation Act 1973 has been replaced by the Foreign

Exchange Management Act (FEMA) 1999 for facilitating cross

border transactions involving foreign exchange and to better

reflect India's growing international engagement. FEMA governs

any transactional relationship between a resident and non-

resident entity. Under the rules, FEMA indicate that all current

account transactions should be enabled and facilitated whereas

62
 specific capital account transactions be enabled. There has

been increase in instrument in the foreign exchange market by

the liberalization, such as development of rupee foreign

currency swap market. Authorized dealers have been permitted

to use innovative products like cross currency option, interest

rate, currency swap and Forward Rate Agreement (FRAs) in the

international forex market. Authorized dealers have also been

permitted to initiate trading position, borrow and invest in

overseas market subject to certain specification and ratification

by respective bank's board. Banks have also been permitted to

fix interest rate on non-resident deposit, subject to ratification

by RBI.^^ Further permission to various participants in the

foreign exchange market, including exporters, Indian investing

abroad, financial investor to avail cover and inter-swap

transaction without any limit subjected to genuine

understanding exposure was also granted.

In 2004, the Committee on Procedures and Performance

Audit on Public Services (CPPAPS) made recommendation

mainly to adopt "procedures, wherein at least for individuals,

foreign exchange transactions would have the same ease of

operations as rupee transactions". The RBI Committee, on

Eight five year plan

that, "there is a need to break out of the "control mindset, and

substantive policy issues should be de-linked from procedural

issues". In this regard, the FCAC Committee recommended,

inter alia, the setting up of an internal RBI Task Force to review

items identified as procedural / operational matters, so as to

examine the efficacy in the functioning of the powers delegated

to Authorized Persons and Regional Offices of the RBI. The

Task Force which was set up, submitted its findings and

recommendations in 2007. Although the Task Force addressed

a number of issues, a large number of anomalies still remain.

As several committees, including the present one, have

dealt with procedural inefficiencies, it is worth highlighting some

of the main areas which have created difficulties in the

functioning of FEMA. The Committee received a multitude of

suggestions from several individuals resident in India and

abroad as also Authorised Dealers (ADs) and various

associations and entities. The issues examined in this Report

emanate from these suggestions. The approach of the

Committee has been towards doing away with transaction by

transaction approval at the AD level so as to leave no scope for

arbitrarmess or rent-seeking and towards bringing more clarity

64
 and transparency, so that law abiding citizens, Resident NRIs

and PIOs can benefit from a liberalized regime. The Committee

is of the considered view that the procedural "knots" in the

system need to be untied to enable the present forex

liberalization to be effective and in the absence of untying of

these knots, any further forex liberalization will not be

meaningful. The Committee is of the view that the

implementation of its recommendations would bring about a

significant improvement in the functioning of the forex regime

as applicable to individuals and these recommendations can be

implemented in the current financial year (2011-12). The rest of

the report addresses specific issues of procedures which need

to be amended or totally scrapped.^^

Privatization in Indian Economy

The need for active participation of private sector has

been felt since the mid 1980s, because the functioning of

various public sector undertakings were not satisfactory. The

public sector generated heavy losses. The aims of economic

reforms have been to activate the forces for competition,

efficiency and bring about dimensional changes in the relative

''''•Report of the committee to review tlie facilities for individual under FEMA, 1999" by Dr. D. Subbarao
Governor RBI, Aug. 5, 2011 pp. 5-9

65
 role of the public and private sector. Now private sector is

assigned larger role in accelerating industrial participation and

is encouraged especially in sophisticated industries like power,

telecommunication, petrochemicals and transport. In the

process of privatization in 1991, only eighteen specified

industries which were related to security and strategic areas

needed licenses. At present there are only four industries that

come under compulsory licensing. The assets limit of

Monopolies and Restrictive Trade Practices Act (MRTP) has

been removed. The MRTP Act is now used only for controlling

and regulating monopolistic, restrictive and unfair trade

practices. To raise resources and ensure wider participation of

private sector, disinvestment was done in PSUs in favour of

mutual funds, financial institutions, workers and general public.

AL present, there are only four industries reserved for public

sector.^^ All these exercises at the government level were

related to the changing economic scenario, where privatization

would certainly create an environment conducive for the

induction of the latest technology and would unleash both

''' Chandra Shekhar Prasad (ed) (2005) "India: Economic policies and performance 1947-48 to 2004-Or
New centuiA' Publication. New Delhi pp. 21-36

66
 entrepreneurship and innovation, which Is expected to have a

multiplier effect on other industries.

Change in Foreign Investment Regime in India

Foreign Investment comprises Foreign Direct Investment

(FDI) and Portfolio flows consisting of Foreign Institutional

Investors (Flls). Now a days, FDI is considered as an important

factor for industrial development especially in developing

countries because it flows as a bundle of capital, technology,

skills and sometimes even market access. Thus most of the

developing countries welcome the multinational enterprises

(MNEs) that are usually associated with FDI. Since 1991, India

has been liberalizing her FDI policy regime. The liberalization

has been accompanied by changes in the sectoral composition,

sources and entry modes of FDI. The new FDI policy has

allowed an increase in the stake of foreign investors in Indian

companies. In 2000, government allowed up to 100 percent on

the automatic route for most activities, a small negative list was

notified where either the automatic route was not available or

limit on FDI. It reached to $ 25.89 billion in 2009-10 from 2.23

billion in 2003-04. Thus, FDI inflows accelerated by nearly

thirteen-fold during 2003-04 to 2009-10. The estimates of World

Investment Report (WIR) 2010 shows that India will be most

67
 attractive location for FDI in 2010-12 with second rank.^° By the

amendment in Foreign Exchange Regulation Act (FERA) 1973,

the new policy removed the 40 percent ceiling for foreign equity

participation that was in pre-reform period. It rose to 51 percent

in normal cases and even up to 100 percent in special cases.

The new sectors have been thrown open for foreign equity

participation such as mining, banking, insurance,

telecommunication, construction and management of ports,

harbors, roads and highways, air lines and defence equipment.

Foreign ownership upto 100 percent is permitted in most

manufacturing sectors, in some sectors even on automatic

basis, except for defence equipment and small scale industries

where it is limited to 26 percent and 24 percent respectively.

The dividend balancing and the related export obligation

conditions on foreign investors, which applied to 22 consumer

goods industries was withdrawn in the year 2000.^^

External Sector Reform in India

Prior to 1991, foreign trade of India suffered from strict

bureaucratic and discretionary controls. After 1991, trade policy

has been liberalized substantially. Some liberalization

Mohan GurusAvaniy (el-al ) " Foreign Direct Inveslmenl in India's retail sector more bad than good^
EFW Vol. 40 No. 7 Feb. 12-18, 2005. pp. 619-623.
"' Kumar Nagesh, "Liberalisation , Foreign direct investment flows and development Indian experience in
the %s" Economic & Political weekly, vol. 40, no. 14. Apr. 2-8. 2005, pp. 1459-1469.

68
 measures were taken to make export competitive in the

international market. While some other liberalization policies

were taken due to pressure of international agencies like WTO.

After joining WTO in 1995, India came under an obligation to

strike down all quantitative restrictions on imports and reduce

import tariffs in a phased manner so as to open up the economy

to world trade.

Trade policy reforms in the recent past, with their focus on

liberalization, openness, transparency and globalization have

provided an export friendly environment with simplified

procedures for trade facilitation. The main features of the new

trade policy evolved over the years since 1991 are as follov>/s;

Import Controls: QRs.

Though trade reforms began in 1980s, the import control

regime was still complex in 1990-91. A significant effort was

made to clean up this complex regime in July-August 1991, by

introducing the Exim Scip. Under this, a free tradable import

license was permitted (30 percent of export value as import

entitlement from the limited permissible list) the premium on

which effectively constituted a dual exchange rate.^^ The

''' Arvind Virmaiii (2003). " hidia 's External Reforms; modest globalization, signijicani Gains'', EPW vol.
38. No. 32, Samiksha Trust publication, Mumbai, India p. 3375

69
 existing casii compensatory system was abolished. QRs were

eased on 96 items by moving them from the 'restricted to the

limited permissible' category. The removal of QRs on 37 items

by moving them from the limited permissible to the 'Open

General License' category was, however, overwhelmed by a

reverse movement of 110 items. QRs were also lifted on six

items (de- canalized) and eased on 16 others (moved from the

canalized category to the limited permissible category). The

trade policy of April 1, 1992 made almost all intermediate and

capital goods free from quantitative restrictions. Only 71 items

remained restricted/ licensed (3 banned/ 7 canalized). These

items are mainly double use goods. A special import licenses

(SIL) was given to star exporter for importing restricted items.

The trade policy of April 1, 1993 removed 146 items from the

negative list of exports.'^^ Kerosene, liquified petroleum gas

(LPG), low sulphur heavy stock, waxes and fertilizer

(phosphoric & potash) were de-canalized. In April 1994, the

scope of SIL was expanded and second hand capital goods

(with a residual life of five years) were allowed for import. The

import policy of April 1995 put 78 consumer goods in five the

freely importable category. At this point out of total of 50216

"'' ibid

70
digit items on the harmonized tariff system's list, 3000 were

freely importable while 1487 were importable using the freely

tradable SIL. Further progress was made in 1996-97 by the

movement of about 70 items to the SIL.

Exports

To promote export various incentive measures were taken.

Profits from exports were completely exempted from income

tax, 100 percent Export Oriented Units (EOUs) and Exports

Promotion Zones (EPZs) had the additional incentive of 5 to 8

years tax holidays for profits arising from the 25 percent

Domestic Tariff Area (DTA) sales were allowed. In April 1993,

trade policy, the EOU-EPZ system was expanded to agriculture

and allied exports with 50 percent DTA sale allowed. Under the

Export Promotion Capital Goods (EPCG) schemes for exporters,

the concessional duty on capital goods was reduced to 25

percent. In April 1994, an electronic hardware technology park

scheme was introduced on par with the EPZ. The concept of a

Free Trade Zone was finally accepted in 1999-2000.

India's Foreign Trade Policy 2 0 0 9 - 1 4

Announcing a foreign trade policy in the most severe

global recession period in the year 2009 has been indeed a

daunting task. The foreign trade policy announced by the UPA

71
government in 2004 had set two objectives, namely, (i) to

double our percentage share of global merchandize trade within

5 years and (ii) use trade expansion as an effective instrument

of economic growth and employment generation. In the last 5

years our exports witnessed robust growth to reach a level of

US $ 168 billion in 2008-09 from US $ 63 billion in 2003-04. Its

share in global merchandize trade was 0.83 percent in 2003

which increased to 1.45 percent in 2008 as per WTO estimates.

India's share of global commercial services export was 1.4

percent in 2003, which increased to 2.8 percent in 2008. India's

total share in goods and services was 0.92 percent in 2003. It

became 1.64 percent in 2008. The short term objective of policy

was to prevent the declining trend of exports and to provide

additional support especially to those sectors which has been

affected badly by recession in developed world. The objective

of policy was to achieve an annual export growth of 15 percent

with an annual export target of US $ 200 billion by March 2011.

In the remaining three years, annual rate of export growth

target is 25 percent. By 2014, expected aim of FTP is to double

India's exports of goods and services. The long run objective of

policy was to double India's share in global trade by 2020. In

order to meet these objectives, they would follow a mix of policy

procedural rationalization, enhanced markets across the world

and diversification of export markets. At this juncture, it is our

endeavor to provide adequate confidence to our exporters to

maintain their market presence even in the period of stress. A

special thrust needs to be provided to employment intensive

sectors, especially in the field of textile, leather, handicraft etc.

To provide a stable policy environment for foreign trade,

government decided to continue with the DEPB scheme up to

Dec. 2010 and income tax benefits under section 10 (A) for IT

industry and under section 10(B) for 100 percent export

oriented units for one additional 9 year till 31^* March 2011.

Government has taken important steps to diversify our export

market and offset the inherent disadvantage for our exporters in

emerging markets. The diversification of product and markets

through rationalization of incentive rate which have been based

on the perceived long term competitive advantage of India in

particular product group and market. As part of policy of market

expansion, India has signed a comprehensive Economic

Partnership Agreement with South Korea which will give

enhanced market access to Indian exports. We have also

signed a Trade in Goods Agreement with ASEAN which came in

access to several items of Indian exports. In the era of global

competitiveness, there is need to upgrade the technology and

reduce the costs. For technological upgradation in our export

sector, government has introduced EPCG scheme at zero duty.

This scheme shall be in operation till 31.3.2011. For

technological upgradation of the export sector, stake holders

will be permitted to import capital goods duty free of specified

product groups. Some cities of India are recognized as Towns

of E:xport Excellence for technological upgradation. To expand

in project exports, a high level coordination committee is being

established in Department of Commerce to facilitate the export

of manufactured goods/ project exports through EXIM Bank for

new and emerging markets. To encourage production and

export of 'green products' through measures such as phased

manufacturing programme for green vehicles, Zero duty EPCG

scheme and incentives for exports. To enable support to Indian

industry and exporters especially the MSMEs, in availing their

rights through trade remedy instruments under the WTO

framework. In order to reduce the transaction cost and

institutional bottlenecks, the e-trade project would be

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 implemented in a time bound manner to bring all stake holders

on a common platform.

Economic Reforms and P e r f o r m a n c e of Indian

Economy

Since beginning of economic reforms in 1991, Indian

economy made significant achievements in economic growth,

sustained improvement in balance of payments, foreign

exchange reserves and overall development of the economy.

However, reforms have not achieved the desired results on

many fronts such as reduction of poverty and unemployment,

expansion of public services, infrastructurai development, rural

development, increase in income and employment of farmers

and improving the conditions of the marginalized sections of the

society.

Economic Growth

The growth rate of Indian Economy from the First Five

Year Plan till the Tenth Five Plan showed that growth rate was

low up to the Fourth Five Year Plan. Since then the economy

achieved a growth rate of more than 5 percent (except the

annual plan period 1979-80). Annual average growth rate of

GDP at factor cost was 5.81 percent during the 1980s slightly

75
declined to 5.77 percent the 1990s, whereas during current

decades, it has improved to 7.32 percent. This indicates that

the economy achieved a more steady and sustained growth rate

during the post reform period.

Sector wise growth rate decade-wise shows that annual

average growth rate of agriculture and allied sectors was 4.67

percent in 1980s, 3.19 percent in 1990s and 2.53 percent in

2000s. It shows that performance of agriculture and allied

sectors was better before the reforms. The annual average

growth rate of the secondary sectors viz. manufacturing,

construction, electricity, gas, and water supply was 6.64

percent during the 1980s and 5.91 percent in the 1990s and it

reached to 16.42 percent in current decades. Annual average

growth rate of trade, hotels, transport and communication was

5.89 percent during 1980s and 7.56 percent during 1990s,

which touched to 10.04 percent in present decades. Annual

average growth rate of banking, insurance, real estate and

business services was 9.30 percent, 8.94 percent and 9.41

percent in 1980s, 1990s and 2000s respectively. Thus, figures

of sector wise growth rate in GDP at factor cost price show that

the contribution of all sectors except agriculture and allied

products have increased since economic reforms.

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 J f
External Sector
"^•'•'i.,.

Major achievements of economic reforms have been

sustainable improvement in balance of payment. After economic

reforms, commercial borrowing to finance the current account

deficit has declined. The debt service ratio had also shown a

declining trend during the decade. Due to this Indian economy

has moved to more stable and sustainable balance of payment

during the post reform period. At the end of 2003-04, India

achieved surplus with $ 31421 million. After the global financial

crisis, position of BOP again became adverse with deficit of $

20,080 million during 2008-09. During 2008-09, current account

deficit was 2.3 percent of GDP which reached to 2.8 percent in

2009-10, whereas net capital flows were $ 6.8 billion (0.5% of

GDP) in 2008-09 which increased to $ 53.4 billion (3.8% of

GDP) in 2009-10.

Future R e f o r m s

To raise economic growth further reforms are needed to

improve infrastructure, education and basic services. The next

round of reforms needs to focus on a number of key areas that

have the potential to further boost economic growth. In recent

reforms, there are a number of barriers to growth in product,

labour and financial markets and the provision of infrastructure.

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Further, more taxation policies need to be reformed in order to

create a truly national market and improve incentives and

release resources for reducing bottlenecks in infrastructure. In

addition education needs to deliver more efficiently so as to

improve human capital formation. Economic growth could be

more inclusive by achieving faster growth in regular

employment. The level of employment protection needs to be

reformed in order to increase employment, particularly in large

companies. There are a number of areas where barriers to

competition need to be reduced. In industry and the financial

sector, the public ownership in the economy dominated, which

needs to be liberalized further. Despite progressive

deregulation, only 41 percent of bank assets have been

completely liberalised.

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