India - External Sector and Investment Regime Project

The World Bank FOR OMCLAL USE ONLY MICROFICHE COPY Report No. P-6077-IN Report No. :P- 6077-IN Type: (PR) Title: INDIA'S EXTERNAL SECTOR AND IN Author: 2AGHA, R. Ext. :80348 Room:G 3111 Dept. :SA2CI REPORT AN RECOMMATION OF ?HE PRESIDINT OF THE INERNATIONAL BANK FOR RECONSTRUCTION AMD DEVLOPMET TO T1E EXECUTIVE DIRECTORS ON A PROPOSED ADJUSTMENT LOAN IN AN AMOUNT EQUIVALENT TO US$300 MILLION FOR A PROGRAM TO lIBERALIZE INDIA'S EXTERNAL SECTOR AND INVESTMENT REGIMB June 1, 1993 Country Operations, Industry and Finance Division India Department South Asia Region This document has a resticted distribution and may be used by recipients only in the perfonrance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Currency Rs/US$ Official Market Prior to June 1966 4.8 June 6, 1966 to mid-December 1971 7.5 Mid-December 1971 to end-June 1972 7.3 1971-72 7.4 1972-73 7.7 1973-74 7.8 1974-75 8.0 1975-76 8.7 1976-77 8.9 1977-78 8.6 1978-79 8.2 1979-80 8.1 1980-81 7.9 1981-82 8.9 1982-83 9.6 1983-84 10.3 1984-85 11.9 1985-86 12.2 1986-87 12.8 1987-88 13.0 1988-89 14.5 1989-90 16.7 1990-91 18.0 1991-92 24.5 1992-93 26.4 30.3 March 1993 31.5 31.5 Source: IMF, International Financial Statistics (IFS), line "rf. , and Reserve Bank of India. Note: The Indian fiscal yeLr runs from April 1 through March 31. A free market for foreign exchange was created in March 1992 with some transactions taking place at the official rate. The exchange rate was reunified at the beginning of March 1993 at the free market rate with all transactions now taking place at the market rate.  FOR OMCIAL USE ONLY LX9URALZUAON OF NIDW 8 UXTN S3CTOR AmD ZNVN8TxENT RNGISI Boxrower: India, acting by its President xencutgn Aaeav: Ministry of Finance Anuat: IBRD Loan: US$300 million Te=a: Repayment over twenty years. including five years of grace, at the standard interest rate. Deseriution: The proposed External Sector and Investment Regime Liberalization Loan supports the measures recently taken by the Government to further liberalize the external sector and .nvestment regime. These measures are: (i) reduction of tariffs; (ii) delicensing of domestic industries; (iii) liberalization of the foreign exchange market and unification of the exchange rate; (iv) amendment of the Foreign Exchange Regulations Act of 1973; and (v) initiating liberalization of consumer goods imports. Am2ftft: Through the proposed operation the Bank would be supporting the Governmetnt's program to increase external and domestic competition. This program is critical for increasing the competitiveness of India's industrial sector and the export orientation of the economy. The proposed operation is also part of the Bank's country assistance strategy for India discussed and endorsed by the Board in December 1992. The proposed operation would help finance India's balance of payments. Without such financing, the transitional costs of adjustment would be higher--particularly in terms of growth and inflation. Risks: The reforms supported by this operation will produce their full potential benefits only if, over the next few years, the Government continues to take steps to remove remaining import licensing restrictions and export controls, and reduce tariffs. The trade reform process could be interrupted, however, because of: (i) its actual or perceived redistributive consequences; or (ii) political opposition to the whole reform process. However, the Government has thus far managed the politics of reform well, by building consensus and demonstrating the gains stemming from reform. Diobursoenta: The prr,osed loan would be disbursed in one tranche upon effectiveness. This document has a etricted distribution and may be used by recipients only in the performance of their offcl duties. Its contents may not otherie be disclosed without World Bank authorization.  Da EXSASIM SCOR= AIRZD NM INVXEll"CStn ^B;2f|S2L3SUlSb Table of Content PAaae o I~~~~~. . N O CN . . . . . . . . . . . . . . . . . . . . . . . . . II. *SO-CM> 1 II. THE 2I.MQZI.QML .. .. .. .. .. . . 1 A. Introduction 1. B. Progress and Prospects in Stabilizing the Bconomy . . . . . . . 2 IIS. THB LSIERALIZATION OF INDIA' S EXTERNAL SEUXQ= AND INVESTMZNT RGIM . 6 A. sackground . 6 B. The Liberalization of India's a xchange Rate and Bxternal Payments Regime . 9 C. The Liberalization of India's Trade Regime . 10 D. The Liberalization of India's Investment Regime . 17 IV. TH PROPO SDAWDU 8TM. ................. ... 19 A. Loan Objectives and Link with the Bank's Country Assistance Strategy .19 S. External Financing Requirements .20 C. Loan Administration ..................... . 21 D. Benefits and Risks .... . . . . . . . . . . . . . . . . . . 22 'v'. =M-TIRTxt 2e 1. Key Macroeconomic Indicators, 1990-1994 ... . . . . . . . . . 4 2. Tariffs and Collection Rates - International Comparisons . . . 13 3. Tariff Structure, 1990-94 .... . . . . . . . . . . . . . . . 14 4. Frequency Distribution of Tariffs, 1990-94 ... . . . . . . . 14 s. Number of Items Subject to Export Controls, 1990-93 ..... . 15 6. Foreign Collaboration Approvals--Pre- and Post-July 1991 Reform 19 7. Summary of Reforms Supported by the Proposed operation . . . 20 Annexes 1. Letter of Development Policy ..... .. . . . . . .. . . . 25 2. The Recent Bvolution of India's Trade Regime .37 3. The Evolution of the Tariff Structure .39 4. Mey Macroeconomic Indicators ..... . . . . . . . . . . . . 41 5. Rxtornal Financing Requirements ..... . . . . . . . . . . . 43 6. Status of Bank operations in India ............. . 45  CAB Country Assistance Strategy CEM Country Economic Memorandum EFF Extended Financing Facility nEAF Enbanced Structural Adjustment Facility FERA Foreign Exchange Regulation Act FlAI Foreign Investment Advisory Service FIPS Foreign Investment Promotion Board CDP Gross Domestic Product KS Harmonized System ED international Bank for Reconstruction and Development IDA International Develqpment Association IMP International Monetary Fund LERMS Liberalized Exchange Rate Management System NIP New Industrial Policy ODA Official Development Assistance OECD Organization fcr Economic Cooperation and Development OGL Open General License PR Public Enterprise Rai Reserve Bank of India SAL Structural Adjustment Loan SIA Secretiriat of Industrial Approvals 8IL Special Import License SOB Statement of Expenditures  REPORT AND RBC0IXRD ATZON 01 TRR PRE8XD3IT OF THB 2NTERATZONAL 3AIN FOR RWCON8TRCZXON AND DEVELOPUNT TO TUN NINCUTIVE DIRECTORS ON A PROPOSD AtJ1O8TINT LOaN FOR A PROGRAM TO LIBERALIZE INDIA'8 EXTERNAL SECTOR AND INVE85XBT REIIM PART X. XTODVMON 1. I submit the following report and recomzuendation on a proposed External Sector and Investment Liberalization loan to the Government of India. The proposed operation would be for the equivalent of US$300 million to be disbursed in one tranche upon effectiveness and would have a term of 20 years, including 5 years of grace, at the IBRD' s standard interest rate. The proposed loan would be in support of measures the Government has taken over the last few months to liberalize India's external sector and investment regime, as part of its ongoing reform program in these two policy areas. 2. After the UV$500 million SAL in December 1991, and the US$500 million Social Safety Ne- Adjustment Program in December 1992, this would be the third policy-based loan since the Bank made adjustment lending a central element of its country assistance strategy for India. The rationale for such lending was articulated in the Country Assistance Strategy (CAS) discussed and endorsed by the Board in December 1992. The CAS also indicated that a loan in support of the liberalization of India's external sector would be the next adjustment operation brought to the Board. 3. A Country Economic Memorandum (Report No. 11761-IN; India, Progress and Challenges in Economic Transition) uvas distributed to the Executive Directors on May 26, 1993. PART II. THE MA XROECONOWIC FRaMWORK A. Introduction 4. The Government that came to power in June 1991 inherited an economy in crisis. The central Government fiscal deficit had reached 8.4 percent of GDP in 1990-91 and, if uncorrected, would have exceeded 10 percent of GDP in 1991-92. At double digits since November 1990, India's historically low inflation rate continued to increase and reached 17 percent (on a point-to-point basis) in August 1991. With reserves at about US$1 billion (two weeks of imports) and no external finance available from commercial sources, the country was on the verge of defaulting on its external debt. On the structural front, several liberalization efforts in the 1980s had addressed India's most important structural problems only very partially, and had left basically intact the complex system of controls and interventions built over several decades of planned development. 5. In less than two years, the new Government has not only overcome the balance of payments crisis and reduced fiscal imbalances, but has also initiated a major change in the country's development strategy aimed at transforming India into an internationally competitive economy. The Government's structural reform program focuses on five priority areas: (i) trade; (ii) investment licensing; (iii) financial sector; (iv) taxation; and (v) public enterprises. Several high level committees (the Narasimham Committee on Financial Sector Reform, the Chelliah Committee on Tax Reforms and the Rangarajan Committee on Public Enterprise Reform) have helped articulate the policies needed in these critical areas and set short and medium-term targets for trade, tax and financial sector reforms. 6. The IMF, the World Bank, the Asian Development Bank, and other multilaterals and bilaterals, particularly Japan, have provided strong support to the Government's economic program and helped India meet its exceptional financing requirements of US$2.5 billion a year in 1991-92 and 1992-93. India will continue to rely on the IMF, the Bank, and other multilaterals and bilaterals to finance the country's exceptional financing needs (para. 65). A  3-year EFF to be complemented by ESAP resources in support of the Government's economic program is currently being discussed with the IMP. 7. The Government's economic program and its medium-term stabilization and reform targets were reviewed in the May 1992 Country Economic Memorandam (Report No. 10489-IN; India, Stabilizing and Reforming the Bconomy), and in tha Country Assistance Strategy (CAS) discussed by the Board in December 1992. The CAS also contains an analysis of the social repercussions of the stabilization and reform program underway. More recent macroeconomic developments, progress in stabilizing the economy, measures taken over the last year to reform the financial sector and the tax system, as well as other reform measures, are analyzed in the May 1993 Country Econoodc Memorandum. The section below briefly reviews India's recent macro-economic performance. Part III analyzes in detail the receat measures the Government has taken to liberalize India's external sector and investment regime in support of which this loan is proposed to be extended. B. Progress and Prospects in StabilizinQ the Sconomv 8. Fiscal and Monetary Policies. In less than two years, the Government has made remarkable progress to overcome the crisis it had inherited and consolidate the macro-economic situation. Demand management has been at the heart of the Government's economic program, through fiscal adjustment as well as contractionary monetary policies. Primarily through non-interest expenditure cuts which have been concentrated on subsidies, defense, and capital spending (see Table 1), the central government fiscal deficit has been reduced from 8.4 percent of GDP in 1990-91 to 6.2 percent of GDP in 1991-92, and 5.7 perciat in 1992-93. The latter exceeded the planned target of 5 percent of GDP. This is mostly due to serious social unrest in December 1992-February 1993 in Bombay and other parts of the country which disrupted economic activities and significantly reduced tax collections. This moderate slow-down in the pace of fiscal adjustment notwithstanding, the primary deficit has been reduced from 4.4 percent of GDP in 1990-91 to 1 percent of GDP in 1992-93. While the focus of the fiscal consolidation effort has been on the Central Government, the states and public enterprises have also been forced to adjust their spending as loans and transfers from the Central Government were curtailed. Including the states and public enterprises, the consolidated public sector deficit is estimated to have declined from 12.2 percent of GDP in 1990-91 to 9 percent of GDP in 1992-93. 9. Fiscal adjustment has been accompanied by monet restraint, except in 1991-92 when the rapid build-up in foreign exchange reserves led base money to expand by 20 percent. Reserve money growth decelerated to 8 percent in 1992- 93, however, while broad money growth declined from 19 percent in 1991-92 to 13 percent in 1992-93. This is well below India's long term trend rate of growth of broad money, which, reflecting the rapid monetization of the economy, has been at a 15-20 percent annually since the early 1970s. As inflation declined (para. 17) and nominal interest rates remained relatively stable, real interest rates have gradually increased in the last two years. Real interest rates on deposits have been at over 5 percent over the last few months, and lending rates at well over 10 percent. 10. The Government has indicated that fiscal adjustment will continue. Mostly through further expenditure reduction, the 1993-94 budget aims at reducing the fiscal deficit to 4.7 percent of GDP, equivalent to a small primary surplus. In addition, the 1993-94 budget has also introduced important structural measures which further consolidate the fiscal situation and accommodate the cost of important structural reforms. First by reunifying the exchange rate, it has eliminated an implicit off-budget subsidy amounting to 0.7 percent of GDP, the cost of which was being borne by exporters (paras. 28 and 29). feqqna the 1993- 94 budget accommodates the sizeable fiscal costs (1 percent of GDP) of much needed structural reforms. Reductions in tariffs on intermediates and capital goods imply a revenue loss of about 0.4 percent of GDP, while the rationalization of excises implies a revenue loss of another 0.2 percent of GDP (para. 11). Increases in outlays for programs supported by the December 1992 Social Safety Net Adjustment operation for rural employment, education, health and family welfare, account for another 0.4 percent of GDP. Besides improving the quality  of fiscal adjustment, these reforms will also help improve the disbursement performance of several IDA operations. Accommodating the fiscal cost of these structural reform measures has meant that the fiscal deficit will be reduced at a slower pace than envisaged previously and that the fiscal deficit budgeted for 1993-94 is higher than the 4 percent indicated in the CAS of December 1992. However, the contractionary effect of the 1993-94 budget on aggregate demand is much sharper than suggested by the reduction of the fiscal deficit. Non-interest central government expenditure is budgeted to decline by 5 percent in real terms. In terms of GDP, it is budgeted to decline from 12.8 percent of GDP in 1992-93 to 11.9 percent of GDP. 11. With major expenditure needs for the development of India's human resources and infrastructure, continuous reductions in expenditure would be undesirable and unsustainable, however. In addition, the economic reform program underway will continue to have negative fiscal repercussions because of its effects on tax revenues. India's tax revenues as a share of GDP are slightly higher than Lhose in countries at a similar level of development, however, India's tax system is inefficient -- characterized hy a narrow base and by extremely differentiated and often very high rates. In addition, tax exemptions are numerous and further erode the already narrow base. The problems generated by these tax policies are compounded by an inefficient tax administration and pervasive tax evasion and create a large dependency on indirect taxes, particularly on customs. During 1990-93 direct taxes (corporate and personal income tax) accounted for about 25 percent of total tax collections, excises for about 30 percent, and customs for the remaining 45 percent. Customs revenue account for Rs 310 billion (3.9 percent of GDP) of the Central Government's tax revenues of Rs. 667 billion (8.4 percent of GDP) budgeted for 1993-94. Tariff reductions envisaged for the next two to three years as part of the Government's trade reform program will thus imply major shortfalls in tax revenues. Likewise, reducing further excessively high and distortionary excise rates will imply revenue shortfalls beyond the 0.2 percent that reductions in peak excises have cost in the 1993-94 budget. Thus, tax refonn is t.he key for reconciling the Government's stabilization and structural reform objectives. Through the broadening of the tax base and improved resource mobilization, the Government intends to reduce the fiscal deficit to 4 percent or less in 1994-95, with further declines thereafter (see para. 3 of the Letter of Development Policy in Annex 1). 12. The Tax Reform Committee's final report of January 1993 has recommended major changes in most of India's taxes. These changes aim at transforming India's tax system from one with high (and highly differentiated) tax rates falling on a narrow base, into one with tax rates at moderate levels falling on a broad base. Regarding tariffs, the Tax Reform Committee has recommended a tariff structure with a highest rate of 30 percent (currently at 85 percent) on intermediate goods, and 40-50 percent on consumer goods (para. 44). On excises, the Committee has recommended that they be replaced by a nation-wide value-added tax (other recommendations of the Tax Reform Committee are discussed in the May 1993 Country Economic Memorandum). The Government has accepted the recommendations of the Tax Reform Committee and, to accelerate the process of tax reform, has requested the National Institute of Public Finance and Policy (a well-known Delhi research institution specializing in public finance) to prepare the design of a possible value-added tax;. 13. Balance of Payments Performance. Since June 1991, there have been two important and pesitive developments in the balance of vayments. First, the instruments for managing the current account have become more price-based. Licensing requirements for imports of capital and intermediate goods have been virtually eliminated, and a foreign exchange. market has been established (para. 28). Thus, discretionary import controls or foreign exchange rationing can no longer be relied upon for managing the current account. Fiscal and monetary policies and the Government's borrowing abroad are now the primary instruments for managing the balance of payments. Second, through improvements in both the current and capital accounts, reserves increased from less than US$1 billion in June 1991 to US$6.7 billion in March 1993 (Table 1).  Table 1: Key Macroecommiclndicators. 1990-1994 ACTUALS PROJECTED 1990-1 19U193 Fiscal Indicatots Central Govenmment Deficit 4.7 Revenues(Tax and non-tax) 11.5 12.3 11.8 12.1 Expenditure" 19.9 18.S 17.5 16.8 of wbich intes 4.1 4.5 4.7 4.9 defense 3.0 2.7 2.5 2.5 subsidies 2.3 2.0 1.8 1.1 capital sen 4.1 3.3 3.0 3.4 Memo Item Primary Deficit 4.4 1.6 1.0 -0.1 Balnce of Payments (US$ bilion) Merchandie Exports 18.5 18.1 18.4 21.3 Mewchndise Impots 25.2 19.7 22.3 24.7 of which fuel imports 6.0 5.4 6.1 6.8 Trade Balance -6.7 -1.6 -3.9 -3.4 Services and trars (net) -1.0 -0.4 -1.1 -0.9 Cunent Account -7.7 50.0 -4.3 in percentofGDP 2.6 0.8 2.1 1.7 Memo hems Resenes (end of perod) excluding gold US$ bilion 2.3 5.7 6.7 6.7 Moths of import 1.1 3.5 3.6 3.3 Extnal debt (US$ billion) 69 71 76 80 Debt Se.-vice Ratio 27.0 25.8 26.6 25.6 Excbange Rate (beginning of period) 17.3 20.0 25.9 31.4 eserve Money Growth 14.9 19.8 8.1 h&ke (pointto point) 11.7 12.9 6.5 6.0 GDP 2 rowth 5.2 1.2 4.0 4.5 I/ Includes balan from the Oi Coordina Committee. 2/ End of period. 14. However, India' a balance of payments situation remains delicate. Export growth has yet to reach the high rates necessary for a lasting solution to India's balance of payments problems; and, even with a significant reduction in the current account deficit, the country's exceptional financing needs will remain substantial over the next few years because of large repayment obligations on the country's external debt (para. 65). 15. After a relatively strong export performance in the second half of the 1980s, exports grew at negative real rates both in 1991-92 and 1992-93. In 1991- 92, this was the result of the collapse of exports to the former Sov.et Union, and temporary emergency import controls. These controls were first imposed in response to the 1990 developments in the Gulf and were made stricter in July 1991. They reduced imports, from US$25 billion in 1990-91 to an artificially and unsustainably low US$20 billion in 1991-92. This import squeeze severely curtailed industrialists' and exporters' access to crucial imported inputs and affected negatively both exports and GDP (para. 17) . In 1992-93, exports to the  former Soviet tTnion continued to decline precipitously (from US$3 billion in 1989-90 to US$1.8 billion in 1991-92 and US$600 million in 1992-93) while social unrest during December 1992-February 1993 disrupted what until then had been a relatively strong recovery of exports (exports to general currency areas grew by 12 percent during March-November 1992). India's export prospects for 1993 -94 are better, however. The reunification of the exchange rate has improved export profitability (para. 29) while continuous reductions in tariffs a:e providing industrialists incentives to reorient their production to external markets. In addition, exports to the former Soviet Union have fallen from 16 percent of India's total merchandise exports to below 4 percent and any further decline, althougls not expected, would not be consequential. In fact, 'e January 1993 agreement with Russia reduced India's debt to Russia and st %.ulated that the servicilAg of this debt would be made .n rupees. This, and bi.ateral agreements with other republics of the former Soviet Union, have laid the basis for the resumption of trade with a group of countries that had once been India's second largest trading partner after the USA. 16. As a result of the import squeeze, the current account deficit declined from about US$8 billion in 1990-91 to US$2 billion in 1991-92. Together with exceptional financing from multilaterals and bilaterals, this helped reserves to increase to US$5.7 billion in March 1992 and enabled the Government in March-April 1992, to eliminate all the emergency import control measures and virtually all licensing requirements on imports of intermediate and capital goods (para. 33). In response, imports grew to US$22 billion in 1992-93 and the current account deficit more than doubled, to US$5 billion. Unanticipated one- time capital inflows of about US$1 billion (from several foreign banks which had to recapitalize their Indian branches weakened by several years of irregular securities trading practices revealed by the April 1992 Bombay Stock Exchange scandal) helped finance the increase in the current account in 1992-93. In the future, however, it is evident that the current account deficit will have to decline to more sustainable levels and reach the 1 percent of GDP envisioned by the Government in 199S-96. Retching this target is crucial to ensure that India's creditworthiness (India still has a rating a little below investment rating) in international financial markets is restored in the second half of the 1990s--when the scope for exceptional financing from the IMF and the Bank will be limited and large repayment obligations to the IMF will fall due. Continued fiscal adjustment and liberalization of trade policies, together with moderate levels of government borrowing (in line with the amounts indicated in the projections in Annex 5), should help bring about the necessary adjustments in the current account. 17. Inflation and Growth. The sharp reduction in the fiscal deficit, tight monetary policies, and, more recently, a good monsoon have all helped inflation to decline sharply, from a peak of 1' percent in August 1991 to below 7 percent in recent months. However, growth has suffered in the first year of the adjustment program when it declined from 5.2 percent in 1990-91 to 1.2 percent in 1991-92 as a result of poor performance of agriculture and manufacturing. Agricultural output declined by 1.4 percent as an irregular monsoon reduced food grain production and manufacturing output declined by 2.4 percent as a result of major output declines in the capital goods industry (-13 percent) and consumer durables (also -13 percent). Contractionary demand management policies which depressed public and private investment are the main reason for the decline in the production of capital goods. The production of consumer goods declined mostly as a result of the import squeeze, which reduced the availability of imported inputs, and the July 1991 devaluation (para. 27) which increased their cost. Growth has recovered in 1992-93, however, and is forecast to have reached nearly 4 percent. This is mostly the result of a recovery of agricultural production which offset sluggish manufacturing growth of 3.5 percent. Assuming favorable monsoons, a better growth performance is expected for 1993-94.  MAaT IIT. TH IIZ&T2ON OF INDwA'8 S Wa .4RAL EMO Aam nmTmal A. Backcround 18. Since Independence, India has developed all the basic institutions of a modern capitalist society, but has also given a central role to the state in resource allocation. Allowing private firms and markets to operate while pursuing the goals of a planned growth process has been achieved through extensive regulation of the private sector's use of resources. 19. The building blocks of the regulatory system were essentially three. Firstt since the nationalization of banks in the early 1970s, the public sector has dominated the financial system and still accounts for 90 percent of the commercial banksI deposits. This, together with other instruments of financial regulation (see the May 1992 and May 1993 Economic Memoranda for a review of this financial regulation), enabled the Government to exercise substantial control over the allocation of the economy's financial savings. Sacod licensing requirements made any significant private firm's investment decision or acquisition of foreign technology conditional on prior Government approval. Extensive price and distribution controls (which designated to industrial firms prices as well as buyers) enabled the Government to determine returns on private investment. In addition, investment licenses were not granted, or granted sparingly, in a number of important industrial areas reserved for the public sector (such as capital goods, steel, non-ferrous metals, power, chemicals, petrochemicals, coal). Finall , an extremely closed trade regime made virtually any import conditional on gcvernment approvals - - rarely granted for anything the domestic industrial sector could produce, regardless of cost or quality. This three-pronged regulatory system enabled the Government to control private firms' use of resources, and ensured that such use was for the priorities designated in the Plan. 20. This system was successful at mobilizing resources for the development of a large and diversified industrial sector which, with a value-added of US$45 billion in the late 1980s, is the developing countries' fifth largest after China, Brazil, Korea and Mexico. But the strategy also had serious shortcomings. High protection led India's manufacturing sector to focus on the domestic market. India accounted for 10 percent of OECD imports of manufactures from developing countries in 1969, but only 4 percent in 1989. In addition, the absence of domestic and external competition, and restrictions on imports of capital goods and foreign technology have meant that India's industrial sector has extended itself into production areas where it is not competitive and has not used the best technology available. This has made industrial growth increasingly costly in terms of resources and a shift in policies increasingly urgent. 21. Throughout the 19808, important policy changes were introduced to liberalize the investment regime ("broad-banding" allowed enterprises to choose their product mix and activity levels within set parameters; price and distribution controls were lifted for important industries such as cement and textiles; licenses were granted more liberally in some sectors such as capital goods, steel and power), as well as the trade regime (the exchange rate was set at more realistic levels; export incentives neutralized some of the anti-export bias of the trade regime; imports licenses were granted somewhat more liberally, and an array of commodities was put on an Open General License list and allowed to be imported without a license). 22. These liberalizing measures hb.d a limited impact, however. In 1390, the import licensing regime was still extremely complex based on twenty-six lists of commodities that classified all importables (Annex 2). Different approval procedures applied for each list and there were 'O different types of licenses depending on the specifics of each case. Imports of virtually any commodity continued to depend on the Government granting a license, unless exempted. The exempted category included imports on the Open General License (OGL) list, relief  supplies, and passenger baggage. Items that could be imported under the personal baggara scheme included limited quantities of household appliances such as air- conditioner units and washing machines, entertainment electronics such as television sets, movie cameras and video cassettes, textile fabrics and other consumer items. OtherwiF3, imports of consumer goods were severely restricted. In addition, as for all imports under OGL, consumer goods imported via the baggage route had to be for the use of the importer (for "actual users") and could not be sold in the domestic market. 23. Xtems on the COL list accounted for less thart 1,000 of the about 5,000 codes of the Harmonized System of classification (HS) used in the Indian tariff schedule. In addition, although items on the OGL list could theoretically be imported free of licenses, in reality many OGL imports required a variety of government clearances which meant that items that could be imported without any form of restriction were actually very few. Licensing restrictions were particularly severe for imports of capital goods. Furthermore, tariffs continued to be high and increased during the 1980s (from a 90 percent import-weighted average for manufacturing products in 1980-81 to 120 percent in 1989-90). 24. Regarding the investment regime, firms' investment continued to depend on government licenses, and resulted in foreign investment levels well below those achieved in other developing economies -- a mere US$200-400 million per year in the recent past, as opposed to US$700, -1, 000 million in Indonesia, US$1-2 billion in Thailand and Brazil, and US$2-3 billion in China. Foreign investors were further discouraged by the restrictions of the Foreign Exchange Regulation Act (FERA) of 1973 which prevented companies with more than 40 percent of foreign equity, the so-called FERA companies, from borrowing funds or -raising deposits in India, from taking over any business interest fror an Indis; resident, from acquiring or disposing of any physical assets (including land) within India, from appointing technicians or managers without RBI clearance, and from using their trade marks without RBI clearance. FERA and non-FERA companies alike could not hire foreigners without RBI's permission. Indicative of the restrictiveness of the foreign investment regime, as recently as early 1993, there were only So firms in India with more than 40 percent of foreign equity. 25. The actual dismantling of this restrictive trade and investment regime only started when the new Government came to power in June 1991 (see Box 1 on the Government's medium-term policy objectives regarding trade and investment regulation). Since then, India's trade and investment regime has been liberalized in a continuous fashion, but a few dates are of particular importance: 1991-92 * July 24, 1991 when a revised austerity budget for 1991-92 was presented to Parliament, tariffs were reduced, several measures to make the import licensing regime more flexible were introduced, ant a New Industrial Policy was announced; * February 29, 1992 when the 1992-93 budget was presented to Parliament, tariffs were reduced further, the emergency controls on imports were abolished, licensing requirements for imports of capital goods and intermediates were reduced, and a Liberalized Exchange Rate Management System was introduced, establishing a foreign exchange market; 1992-93 o April 1, 1992 when the annual Export-Import Policy eliminated virtually all licensing requirements for imports of intermediate and capital goods; * October 10, 1992 when limited measures were taken to liberalize imports of consumer goods; e January 8, 1993 when the Foreign Exchange Regulation Act was amended;  -8- R9L Th e EIh4 Plan p,n, The tLbersratiloan dutilDepaio Further Trade Policy Reforms *Durg the Eighth Plan period. futr trde policy reforms ame needed to be caie out so that the economy is bTr ingrated wh Ihe fst of the world. Th key dbctives of these uforms should be two-fold: (i a fuher pnig of the pnegative itsm of imports and expor and () a gradua tedutionit boththe level and dispersion of taif rates. . . by the end of the iWb Plan the neg ie st of impors hould contain only items which woul be banned for reasons such as environmen and safety. Any prtectidon deemled neesr for dometic fidutysould baialy be given throuh the exchne rat and th taf. 'Along with the refdoms of the impon policy and the exchange rate gime, tde structure of our taiffs requies subsnt rationalition. Bmadly, our objective should be to eliminate the existing distortions in the tariff sruct and ofhect a subsantial dctin tie tariffs by the end of dte Eighth Plan. TMe recent tar dutons though substa. stll leave us with taiff level on nmufaotured items which are far too high. ft should be the objecdve of policy to move to a trade regime in which the average taff level comes down to about 25 percent wthn a period of hee to four yeats. "Rela=aions of forein invesmet policy are in the right diection. Yet, if India were tQ atact foreign -invea nand tam noy in an reasingly iatrdepe%dent word, th Govemmr'ent should onuou*oY iheprgessnis ftot, compare our po les iion foeign Invesm witht doe of the-oter developWigcountries ad ia ke swift dras tm -if. requind.. our strtey during t ighth Plan siould -be one of relying less on exwtnl commercmia borrowings and more on freign dir invesmen for fici the uentaccouttdefict . T.is would require a con ousm watc on ourmfo estepol n ston bitives from-ur side... 'Wit the recent-policy hags,i industrial production subjet to licensin control has been reduced to abut 20peret However, some aspects of the new- industil policy seem to be somewhat resuiive. For exame, e conusthioof- licesg eiremns for bdustrie such as sugar and edible ails has no clear justfaon. Erially impor* trr reasons as to wh the production of coasrner duabs gsch a. motor carsrergatrs ad cosue electrnis shouldbe uj to:Idutia s. Durin te ighthPlan. t re, teii a need tofurtaher shorfn the list of idues trqukin4 iu Most of the consumergoods inusts w reuim ndust iallicnsing shouldbe delle y indusrie ld , - ulsives and hazadus chenlcal shouild be-in ate rsiced lis of industre requitn _nutra licen-g .: *. e,, h pren, the prices of industra products suc:h asnarl gas, petroleum, petroleumpodcts oal ectiiy, ferilizer, sugar and varius non-ferrosmealds are being adinsed by th Governet A thorough reiwohhisfunasfthepriee -conol needs te be carried out Wherever the pnduct conmed is k atinu ytuadeb, te oversmaiwentuld dontothe prices.','' ' ' ' ' ' " - . - flidh Five Year Pn 1992-97. New Delbi, July 1992. - e February 27, 1993 when the l993-94 budget was presented to Parliament, the exchange rate was reunified, tariffs were significantly reduced, and additional measures were taken to liberalize imports of consumer goods; e March 5, 1993 when the Government presented to Parliament a new National Mineral Policy to open the mining sector to the private sector, domestic and foreign, up to then reserved to the public sector; 1993-94