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> Policies> economic survey 2000-01
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Economic Survey 2000-2001
[Review of Developments]
Balance of Payments
Current account deficit
Trade deficit
Trade policy
Invisible account
Capital account
Foreign exchange reserves
Exchange rate
External debt
Current account deficit
1.78 India’s balance of payments situation remained comfortable in 1999-2000. The deficit on the current account increased only marginally from US $ 4 billion in 1998-99 to US $ 4.2 billion in 1999-2000, despite an unfavourable environment in international trade and finance and almost two-third hike in India’s oil import bill, reflecting the sharp increase in international prices of crude oil. This was made possible because of a strong recovery of exports and a surge in net inflow of invisibles reflecting sharp increases in software exports and private transfers. Net inflow of invisibles at US $ 12.9 billion covered 76 per cent of the deficit on trade account in 1999-2000, leaving a financing gap of US $ 4.2 billion on the current account. As percentage of GDP, the current account deficit recorded a marginal decline from 1 per cent in 1998-99 to 0.9 per cent in 1999-2000.
1.79 With the continued increase in oil prices and further increase of India’s oil import bill, the current account deficit is expected to widen to 1.5-1.7 per cent of GDP in 2000-2001. According to the latest quarterly estimates of BOP made by the Reserve Bank of India (RBI), current account deficit widened to nearly US $ 4 billion in April-September 2000 from US $ 2.9 billion in April-September 1999. While net invisibles increased by only US $ 0.5 billion from US $ 4.7 billion in April-September 1999 to US $ 5.2 billion in April-September 2000, trade deficit on BOP basis increased by US $ 1.7 billion from US $ 7.5 billion to US $ 9.2 billion during the same period
Trade deficit
1.80 The trade deficit on the BOP account widened to US $17.1 billion or 3.8 per cent of GDP in 1999-2000 from US $ 13.2 billion (3.2 per cent of GDP) in 1998-99. Exports made a welcome recovery from a negative growth of (-) 3.9 per cent in 1998-99 to 11.6 per cent in 1999-2000. Total imports, on payment basis,
also rose sharply by 16.5 per cent in 1999-2000 mainly due to a 63 per cent increase in the oil import bill.
1.81 According to the latest quarterly estimates of BOP by RBI, exports increased by 22.1 per cent and imports by 22.2 per cent, resulting in a widening of trade deficit by 22.3 per cent to US $ 9.2 billion in April-September 2000. Imports of crude and petroleum products showed a substantial increase from US $ 4.5 billion in April-September 1999 to US $ 8.3 billion in April-September 2000 due to continued pressure on international prices of oil.
1.82 Export growth has accelerated further in the current financial year. According to DGCI&S data, merchandised exports in US Dollar value in April-December 2000 have witnessed a strong growth of 20.4 per cent, much higher than 10.3 per cent in April-December 1999. Imports grew by 9.0 per cent in April-December 2000 compared to 10.7 per cent in April-December, 1999. The rise in imports was primarily due to the continued surge in oil imports, which increased sharply by 78.2 per cent due to hardening of international oil prices. The spurt in POL imports has, however, been offset by non-POL imports, which have declined by 8.3 per cent, reflecting weak domestic demand and subdued industrial activity. The continued buoyancy in exports and the declining trend in non-POL imports has resulted in a substantial decline in customs trade deficit from US $ 8.2 billion in April-December 1999 to US $ 5.9 billion in April-December 2000.
Trade policy
1.83 Trade policy reforms and changes during 2000-01 included the following :
Peak rate of basic customs duty was reduced from 40 per cent to 35 per cent and the total number of slabs in customs duty rates was rationalised from five to four (i.e. 35, 25, 15 and 5 per cent).
Duty on various items (mostly consumer goods and agriculture products) on which quantitative restrictions have been lifted have been placed at peak rate
(35 per cent plus surcharge) to
accord adequate tariff protection to these items.
Setting up of Special Economic Zones (SEZ) to encourage export production free from the plethora of rules and regulations governing imports and exports.
Evolution of a scheme for granting assistance to States based on their export performance for development of export related infrastructure.
Rationalisation of existing export promotion schemes including abolition of Special Import License (SIL) from April 1, 2001.
Sector specific initiatives to accelerate exports announced for core areas,
Permission to import second hand capital goods which are less than 10 years old without obtaining any license on surrender of SIL.
Deemed export benefits rationalised by extending benefits uniformly to eligible categories and expanding the definition of capital goods.
Dereservation of the garment sector from the purview of SSI reservation in the new textile policy to boost garment exports.
Invisible account
1.84 Net inflow of invisible earnings reached an all time high of US $12.9 billion in 1999-2000 from US $9.2 billion in 1998-99. Gross invisible receipts increased by 17.7 per cent to US $30.3 billion in 1999-2000 as a result of the continued buoyancy in private transfers and software service exports. Private transfer receipts increased by 18.8 per cent to US $12.3 billion in 1999-2000. Software service exports had grown at an annual rate of over 50 per cent during the four years ended 1998-99. The growth momentum was sustained in 1999-2000, when they recorded a growth of 53 per cent and reached US $4.02 billion.
1.85 Gross invisible payments recorded a moderate increase of about 5.0 per cent in 1999-2000 to US $17.4 billion from US $16.6 billion in 1998-99, reflecting reasonable increase in payments on account of interest and dividends, financial services, management services, advertising, royalties and license fees.
1.86 Invisible flows continued to be buoyant in 2000-01. As per the quarterly BOP estimates by RBI, net invisibles increased from US $ 4.7 billion in April-September 1999 to US $ 5.2 billion in April-September 2000 mainly due to an increase of private transfer from US $ 5.8 billion to US $ 6.7 billion during the same period.
Capital account
1.87 Capital flows improved significantly in 1999-2000. Net inflows of capital on the capital account of BOP increased by US $ 2.4 billion from an aggregate of US $ 7.9 billion in 1998-99 to US $ 10.3 billion in 1999-2000. This improvement was mainly due to a sharp recovery in portfolio investments and continued buoyancy in non-resident deposits. Fresh inflow of funds by the Foreign Institutional Investors (FIIs) increased to US $ 2135 million in 1999-2000 in contrast to an outflow of US $ 390 million in 1998-99. Net inflows of non-resident deposits in 1999-2000 was US $ 2140 million. Gross disbursement of external assistance rose moderately by US $ 3074 million in 1999-2000 compared to US $ 2726 million in 1998-99. Gross borrowing on commercial terms at US $ 3187 million in 1999-2000 was only marginally higher than such borrowings (excluding borrowings through Resurgent India Bonds) at US $ 2995 billion in 1998-99.
1.88 During the first half of 2000-01, net inflows of capital amounted to only US $ 2.5 billion compared with US $ 3.7 billion in April-September 1999. The fall in net capital inflows was due to net outflows on external assistance and external commercial borrowing accounts, although foreign investment and non-resident deposits performed well. The capital flows were augmented by the funds raised by the SBI from NRIs/OCBs through India Millennium Deposits (IMD) amounting to US $5.51 billion in October-November 2000.
Capital account reforms
Foreign Direct Investment (FDI) up to 100 per cent has been permitted in
e-commerce subject to specific conditions.
The dividend balancing condition for FDI in twenty-two consumer goods industries has been removed.
The existing upper limit of Rs.1500 crore for FDI in projects involving electricity generation, transmission and distribution (other than atomic reactor plants) has been dispensed with.
For facilitating greater inflow of foreign funds in the crucial oil-refining sector, ceiling for FDI under the automatic route in oil refining was increased to 100 per cent from the existing 49 per cent.
FDI under the automatic route has been permitted up to 100 per cent for all manufacturing activities in Special Economic zones (SEZs) except certain activities.
Foreign Institutional Investors (FIIs) have been permitted greater leverage in the primary and secondary markets by allowing enhancement of the aggregate FII investment ceiling in the issued and paid up capital of Indian companies from the normal ceiling of 24 per cent to 40 per cent subject to specific conditions.
Foreign equity participation up to 26 per cent in insurance sector is allowed under the automatic route subject to obtaining necessary license from the Insurance Regulatory and Development Authority.
ECB guidelines have been liberalised. A series of policy liberalisations have been effected for facilitating the use of ECB as a window for resource mobilisation.
Policies pertaining to international offerings through ADR/GDR by Indian companies have been further liberalised.
100 per cent FDI has also been allowed (with certain conditions) in telecommunications sector, for Internet service providers not providing gateways, infrastructure providers providing dark fibre, electronic mail and voice mail.
Foreign exchange reserves
1.89 The foreign exchange reserves consist of foreign currency assets held by the RBI, gold holdings of the RBI and SDRs. The moderation in current account deficit and the sharp increase in net capital inflows in 1999-2000 resulted in an increase of foreign exchange reserves by US $6.1 billion on top of an increase of US $3.8 billion in 1998-99.
1.90 During the first half of 2000-2001, foreign currency reserves showed declining trend due to excess demand for foreign currency caused by the huge import bill on oil. As per quarterly BOP estimates, foreign exchange reserves declined by US $1460 million in April-September 2000 compared with an increase of US $ 821 million in April-September 1999. Subsequently, as mentioned earlier, the issues of India Millennium Deposits by SBI helped to raise foreign currency assets amounting to US $ 5.51 billion, which were added to RBI’s foreign currency reserves in November 2000. Total foreign exchange reserves (including gold and SDRs) at the end of January 2001 amounted to over US $ 41 billion, providing cover for 8 months of projected imports in 2000-01.
Exchange rate
1.91 The exchange rate of the Rupee against the US Dollar continues to be broadly market determined. During 1999-2000, the exchange rate market displayed reasonable stability, with the Rupee depreciating by about 2.9 per cent. The year 2000-01 witnessed significant downward pressures on the Rupee-Dollar rate from mid-May 2000. The forex markets were affected by considerable uncertainty with the Rupee depreciating by 6.7 per cent between end-April and end-October 2000. Since November 2000, the situation has shown large improvement and the forex markets have been relatively stable and the exchange rate of Rupee against the US dollar has also recovered partially. At the end of January 2001, the exchange rate of the Rupee was Rs.46.415 per US Dollar, showing a depreciation of 6.1 per cent, compared with the rate of Rs.43.605 at the end of March 2000.
External debt
1.92 The external debt to GDP ratio has been declining continuously over the years. The rates improved from 23.6 per cent at the end of March 1999 to 21.9 per cent at end-March 2000 and further to 20.7 per cent at end-September 2000. The absolute value of external debt rose marginally from US $ 97.68 billion at end-March 1999 to US $ 98.44 billion at end-March 2000 before decreasing to US $ 97.86 billion at the end of September 2000. The share of short-term debt to total debt was 4.6 per cent at end-September 2000 compared to 4.1 per cent at end-March 2000. The debt service ratio fell from 18 per cent in 1998-99 to 16.0 per cent in 1999-2000.
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