India: the reform movement hits some snags, but is producing a more hospitable environment for business relationships - Business Outlook Abroad: Current Reports From the Foreign Service

Business America, Feb 8, 1993

While a good monsoon and strong industrial output have pushed economic growth up to an annual rate of about 4 percent, the pace of economic reform in the second year of India's structural adjustment program appears to have slowed. Sustaining the pace of economic stabilization and reform over the next several years may prove difficult as fiscal austerity and labor-productivity measures begin to hit influential interest groups. Nonetheless, India is evolving into a substantially more hospitable environment for bilateral business relationships. The U.S. Embassy in New Delhi filed this report on economic trends in India.

Despite a largely successful macroeconomic stabilization program and vastly improved balance of payments, there is widespread concern over the pace of reform in the second year of India's structural adjustment. The billion-dollar securities trading scam is cited for ongoing delays, and the Dec. 6 destruction of a mosque in Ayodhya by Hindu nationalists raises additional concerns. Nevertheless, India's trade and industrial reform since July 1991, which substantially improve its investment climate, remain intact. The Rao government has reiterated its commitment to continuing reforms, and is expected to codify foreign investment regulations issued earlier by decree. The FY 1993-94 budget (the Indian fiscal year is April 1-March 31) is expected to include significant further reductions in tariff rates as well as in personal and corporate tax rates. Further reductions in trade controls are expected, as long as export growth improves. Proponents (and opponents) of a convertible rupee for the trade account continue a vigorous debate, though the government remains cautious.

A major result of the new industrial policy has been a shift toward financing new investments through capital markets instead of traditional banking channels. In September, the government opened the Indian capital market to portfolio investment from well-established foreign institutional investors.

The generally good 1992 monsoon will help propel real GDP growth during FY 1992-93 to about 4 percent, compared to less than 2 percent the previous year. The government is confident it will reduce its fiscal deficit to 5 percent of GDP, though large operating-budget deficits and widespread tax evasion persist. Money supply expansion, high inflation, and sluggish industrial/export growth are major concerns for policy planners as well as a focus of criticism from opposition political parties. There is also concern that increasing debt-service obligations could outstrip growth in exports and invisibles receipts, posing a serious threat to the balance of payments over the medium term. Non-gold foreign exchange reserves stand at $5.0 billion, equivalent to about 2 1/2 months' imports, though a substantial further inflow under international agreement should return them to the $6 billion level. In addition to an International Monetary Fund standby credit of $2.2 billion, India began discussions in October 1992 for access to about $7.0 billion in long-term IMF credits.

What This Means for U.S.

India's trade and industrial reforms are making it a substantially more hospitable environment for bilateral business relationships. There is now a single window for approval of foreign investment of up to 51 percent equity in 34 broadly defined industries. Greater foreign ownership and/or projects in other industries are reviewed by the Foreign Investment Promotion Board and its specially-empowered committee, which are overseen by a Cabinet Committee on foreign investment.

Limits on expansion and other activities of large firms, under the Monopolies and Restrictive Trade Practices Act, have been eased. Local-content and export-performance requirements have been dropped for most foreign investments and technology transfer rules have been simplified. The energy industry has been opened to foreign investment; U.S. firms are looking into power production as well as petroleum exploration, refining, and distribution. In May 1992, India also opened its coal industry to foreign investment in some limited areas such as methane extraction. Imports of most consumer goods remain banned or restricted, though earlier restrictions on personal computer imports have been relaxed. Further reductions in trade controls, including tariff level of up to 110 percent, are expected, as long as export growth remains steady.

The U.S. Export-Import Bank has doubled its lending in India to over $500 million and expects this country to be its fastest-growing portfolio.

Bilateral trade disputes remain, however; for the second straight year, the United States listed India as a priority country under Special 301 for investigation of inadequate intellectual property rights protection. The United States also withdrew GSP duty benefits for $60 million worth of Indian pharmaceutical products. The main issues are strengthening Indian copyright enforcement and the lack of product patent protection for chemicals, drugs, and food products.