Economy

Until 1991, the Indian economy was characterised by a highly regulated business environment, a pervasive licence system and high tariff barriers. Sweeping reforms, introduced in 1991 and continued by successive governments, have radically changed the course of the economy. Today the Government's policies are relatively simple, transparent and geared towards promoting domestic and foreign private investment. External trade has been liberalised through lowering of tariffs and progressive reduction of import controls. Tax rates, both corporate and personal, have been rationalised and compare favourably with other major world economies. There exists a strong political consensus on the economic liberalisation policies at the central and state government levels. This augurs well for the continuation and progressive strengthening of investor friendly policies.

Benefits of the reform process are visible in the form of better growth rates, higher investment and trade flows in the post liberalisation era. The inherent strength of the economy is borne out by the fact that it has achieved a growth of 6.8 per cent per annum over the Eighth Plan period (1992-97). Foreign trade as a percentage of GDP increased from 14 per cent in 1990-91 to 20 per cent in 1997-98. Cumulative foreign investment inflows have exceeded US$ 11 billion so far, while foreign currency assets in March 1998 stood at USS 26 billion, up from US$ 2.2 billion on March 1991.

The recent developments in East and South East Asia as well as a reduction in agricultural growth and a slowdown in industry in 1997-98 resulted in a decline in the growth rate to 5.1 per cent. However, the fundamentals of the economy remain strong and a growth of 6 per cent is expected in 1998-99. The current account deficit, at 1.7 per cent of GDP in 1997-98, is within manageable limits, foreign exchange reserves are comfortable and extend to 6-7 months of import requirements. Short term debt amounts to only 6 per cent of overall debt, while overall debt itself has declined to 23.8 per cent of GDP in 1998 (see box - 'India's External Debt')

India presents immense market and development opportunities. It is envisaged that these opportunities would be harnessed through a successful collaboration of economic policies, private investment and focused government participation.

India's external debt declined from a peak of US$ 99 billion in March 1995 to US$ 92.9 billion by September 1997. The ratio of external debt to GDP declined from 28.2 per cent of the GDP in 1995-96 to 23.8 per cent by September 1997. India's debt service ratio, which stood at 35.3 per cent in 1990-91, has been declining consistently and stood at 24.1 per cent by end 1996. Further, India is comfortably placed with its short term to total debt ratio at 7.5 per cent, amongst the lowest vis-a-vis other major debtor countries.

Since 1991, the industrial sector has witnessed positive structural changes, improvements in productivity, modernisation and infusion of new technology. Companies have consolidated around their areas of core competence, while several have tied up with foreign companies to acquire new technologies, management expertise and access to foreign markets. Consequently, the industrial sector witnessed an average annual growth rate of 7.3 per cent over the Eighth Plan period (1992-97). In 1997-98, however, the growth rate fell to 4.2 per cent. This fall was largely on account of monetary/credit tightening and a high level of uncertainty in the international environment. The Government has taken remedial steps to put the industrial sector back on an accelerated growth path. Steps taken include a cut in personal and corporate income tax rates, modification of the excise and customs duties to revive the manufacturing sector and further deregulation of interest rates with greater freedom to banks to assess credit requirements. The corporate sector was also allowed free access to GDR/ECB windows to obtain finance at globally competitive rates. Furthermore, the Government has decided to increase spending on infrastructure to kick-start the economy and has announced several measures to increase investment in the sector. The Government is also keen to promote investments in high growth sectors such as software, electronics, food processing, engineering, etc. The software industry in particular has shown great promise and is amongst the fastest growing sectors with an average growth of well over 50 per cent over the last 5 years.

In consonance with the move towards liberalisation and encouraging private sector investment, the Government set up a Disinvestment Commission in August 1996, for making recommendations regarding the disinvestment of equity of select Public Sector Enterprises (PSEs). In this context, 50 PSEs were referred to the Commission for its advice. The Commission had submitted 7 reports covering 41 enterprises till March 1998. Of the 41 enterprises, divestment has been recommended at varying levels for 12 PSEs, strategic sale of various proportions for 21 enterprises and a temporary status quo policy for the remaining 8 enterprises. To further expedite the disinvestment process, the Government in its budget statement for 1998-99 indicated its resolve to disinvest specified portions of equity of Indian Oil Corporation, Gas Authority of India Ltd., Videsh Sanchar Nigam Ltd., Container Corporation of India and subsequently Indian Airlines. Further, the Government is to divest minority stakes in PSEs of strategic interest, while its equity in non-strategic PSEs shall be reduced to 26 per cent.

The external sector has received greater impetus in recent years. While the current year witnessed a slowdown, exports as a percentage of GDP have grown from 7.6 per cent in 1992-93 to 9 per cent in 1997-98. Imports too have grown from 9 per cent to 10.8 per cent over the same period. Rationalisation of import barriers and tariffs - down from a peak rate of 350 per cent to 40 per cent in 1997-98 and various incentives offered by the government have contributed in this regard.

India's largest trading partners are the United States and the EC countries, but trade with Asia-Pacific countries is surging. Nearly 75 per cent of exports comprise manufactured products. Computer software, electronic goods and machinery constitute the most rapidly growing export segments, while traditional exports include cotton yarn and textiles, ready-made garments, leather goods, gems and jewellery and agricultural products.

A strong and vibrant financial and banking sector supports the growing Indian economy. There exists an extensive commercial banking network of over 63,000 branches, including over 150 branches of foreign banks. The sector also has a number of national and state level financial institutions, a large number of domestic and foreign institutional investors, investment funds, equipment leasing companies, venture capital companies, etc.

Further, the country has a well established stock market comprising 22 stock exchanges, with over 9,000 listed companies.