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policy environment> external environment
External Environment
A significant aspect of recent economic developments is the increasing influence of economic and financial market conditions in industrial economies on external payment and growth prospects in emerging market economies, including India. During 1999-2000, with the global growth and trade prospects improving significantly, almost all crisis affected South-East Asian economies and economies in other parts of Asia posted higher economic growth and experienced relatively stable financial market conditions.
In respect of India, however, there were three distinct developments that had a bearing on the domestic economic situation and policy evolution during 1999-2000. First, the border conflict in Kargil, which began in the first week of May 1999 and lasted for about two months, placed considerable pressure on government finances and created uncertainty in the financial markets. The additional defence expenditure had to be absorbed in the government budget, resulting in an adverse impact on the fiscal position. Secondly, the economic sanctions imposed by a number of western countries including the US and Japan on India, following the nuclear tests in May 1998, continued to cast their shadow in 1999-2000, notwithstanding some relaxations in November 1998 and October 1999. The Indian economy, however, could cope with the sanctions without much of adverse consequences, mainly because of heightened investor confidence as reflected in the increase in capital flows. Thirdly, the increase in international oil prices inflated the oil import bill.
Major External Sector Policies
The Reserve Bank proceeded with the policy of cautious liberalisation of the external sector. Several measures were undertaken to facilitate capital flows. First, the cutoff date for forward exchange cover to foreign institutional investors (FIIs) in respect of their equity investments was changed from June 11, 1998 to March 31, 1999 and authorised dealers (ADs) were permitted to provide forward exchange cover to FIIs to the extent of 15.0 per cent of their outstanding equity investments as at the close of business on March 31, 1999 and the entire amount of investments undertaken thereafter. Secondly, Indian companies were permitted to issue rights/bonus shares and non-convertible debentures to non-residents subject to certain conditions. Moreover, Indian mutual funds were allowed to issue units and similar instruments under schemes approved by the Securities and Exchange Board of India (SEBI) to FIIs with repatriation benefits. Foreign corporates and high net worth individuals were permitted to invest in Indian markets through SEBI registered FIIs.
Thirdly, policies in respect of external commercial borrowings (ECBs) were substantially liberalised. Fourthly, foreign direct investments in all sectors, except for a small negative list, were placed under the automatic route. Fifthly, Indian companies engaged in knowledge based sectors like information technology, pharmaceuticals, bio-technology and entertainment software were permitted to acquire overseas companies engaged in the same line of activity through stock swap options up to US $ 100 million or 10 times the export earnings during the preceding financial year on an automatic basis. Investments up to US$50 million subject to certain conditions can be made by Indian parties in joint ventures abroad/wholly owned subsidiaries without prior approval of the Reserve Bank/Government of India and those proposals of investment involving amounts in excess of US $ 50 million will be considered for approval by the Special Committee on Overseas Investment. Finally, the minimum maturity of FCNR(B) deposits was raised to one year from six months with a view to elongating the maturity profile of external debt.
1.5 The Export Import (EXIM) Policy for 1997-2002 had attempted to liberalise the trade regime with a view to improving the national export performance.
In continuation of this process, modifications announced on March 31, 2000 introduced a number of important fresh initiatives and also significant changes in some of the existing policies/procedures. These include export promotion measures such as extension of the hitherto sector-specific Export Promotion Capital Goods (EPCG) Scheme to all sectors and to all capital goods without any threshold limit, several sector-specific measures, e.g., for gems and jewellery, silk, leather, handicrafts and garments, drugs, pharmaceuticals, agro-chemicals and bio-technology along with a scheme for granting assistance to States for the development of export related infrastructure on the basis of their export performance.
Reflecting India's international commitments, 714 out of 1,429 restricted items have been shifted from the Special Import Licence (SIL) list to the Open General Licence (OGL) list. The remaining items would be moved to the OGL list by March 31, 2001 by which time the SIL list would be abolished. Pharmaceutical and biotech firms would be able to import R&D equipment and goods duty-free up to 1 per cent of free on board (fob) value of their exports. The EXIM policy proposes to set up special economic zones (SEZs) in different parts of the country, which would be able to access capital goods and raw materials duty-free from abroad and from the domestic tariff area (DTA) without payment of terminal excise duty on the condition of achieving positive net foreign exchange earning as a percentage of exports annually and cumulatively for a period of five years from the commencement of commercial production. Sales to DTA would, however, be permitted on payment of full applicable customs duty. The EXIM policy also places emphasis on e-commerce - electronic data interchange including filing, processing and disposal of application forms.
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