Introduction

1.1  Real GDP growth rate in 2000-01 is estimated at 6 per cent compared with a growth rate of 6.4 per cent achieved in 1999-2000 and 6.6 per cent in 1998-99. Despite deceleration of growth rate for the second consecutive year, India has the distinction of being one of the fastest growing economies in the world. The Indian economy has shown remarkable resilience in the face of substantial increase in the international price of crude oil over the last two years. The behavioural trends of the key macro-economic parameters are summarised in Tables 1.1 and 1.2.

1.5  During 2000-01, the annual rate of inflation in terms of WPI has shown an increasing trend due to pressure from energy prices. The inflation rate hovered around a little over 6 per cent till September 2000 when the hike in administered prices of fuel products pushed up inflation to 7.8 per cent for the week ending September 30, 2000. The inflation rate, as on January 27, 2001, was around 8.2 per cent on point to point basis (compared with 3.6 per cent on the corresponding date of the previous year) and 6.6 per cent on the basis of 52 weeks average (compared with 3.4 per cent on the corresponding date of the previous year). This increase in inflation was caused mainly by the the fuel, power, light and lubricants group, whose point to point annual inflation as on January 27, 2001 was 29.6 per cent compared to 16.2 per cent in the corresponding period of the previous year. But for this sharp rise in the fuel group’s prices, this year’s point to point inflation rate would have been half of the observed rate of 8.2 per cent. Excluding the fuel, power, light and lubricants group, point to point annual inflation as on January 27, 2001 remained subdued at 2.4 per cent (compared with 1.5 per cent as on January 29, 2000). During the financial year the cumulative inflation rate was 4.8 per cent as on January 27, 2001 compared with 3 per cent during the corresponding period of 1999-2000. Given the trend, the year-end average rate of inflation in terms of WPI is expected to be around 6.5-7.0 per cent.

1.6  Inflation rate in terms of the Consumer Price Index for Industrial Workers (CPI) decelerated continuously during the year to reach a low of 2.7 per cent in November 2000 as against zero per cent in November 1999. The Index rose moderately by 3.5 per cent in December 2000. According to the twelve months average basis the inflation works out to 4 per cent for the year 2000 compared with 4.7 per cent for the year 1999.

Demand Factors

1.17  The rates of investment and saving in India are high as judged by its level of economic development. Gross domestic savings as per cent of GDP declined from 23.5 per cent in 1997-98 to 22.0 per cent in 1998-99 due to negative savings in the public sector. Gross domestic savings have improved marginally to 22.3 per cent in 1999-2000 as a result of sustained economic growth, low inflation rates and better performance by the household sector. Private corporate savings remained stagnant at 3.7 per cent of GDP in 1999-2000. However, there was a steep fall in the savings of the public sector due to an increase in the dis-savings of Government administrative departments caused by large revenue deficit. In fact, public sector savings continued to be negative in 1999-2000 as in 1998-99. As a percentage of GDP, public sector savings deteriorated from (-) 0.8 per cent in 1998-99 to (-) 1.2 per cent in 1999-2000 (Table 1.5).

1.18  Gross domestic investment (GDI) as percentage of GDP has shown similar trends. It declined from 25.0 per cent in 1997-98 to 23.0 per cent in 1998-99 due to decline of investment in both public and private sectors. It is estimated that GDI as percentage of GDP has improved to 23.3 per cent in 1999-2000 (at current prices) due to higher investment by both public and private sectors (Table 1.5). While public investment as percentage of GDP improved from 6.4 per cent in 1998-99 to 7.1 per cent in 1999-2000, private investment as percentage of GDP also improved from 14.8 per cent to 15.6 per cent over the same period.

1.19  There was significant improvement in the real gross domestic capital formation (GDCF) in 1999-2000. The growth rate of public sector GDCF accelerated from 5.1 per cent in 1998-99 to 19 per cent in 1999-2000 and that of private sector GDCF accelerated from 1.6 per cent to 15.2 per cent resulting in the acceleration of the overall GDCF growth rate from 2.3 per cent to 9.4 per cent over the same period (Table 1.6). As percentage of GDP at market prices (at 1993-94 prices), real GDCF improved from 25.4 per cent in 1998-99 to 26 per cent in 1999-2000 due to improvement in both public and private sector real capital formation in 1999-2000. However, within private sector, there was marginal deterioration of real capital formation by the private corporate sector although the household sector showed significant improvement.

1.20  It is mentionable in this context that although GDCF in current prices seems to have fallen as a proportion of GDP in the late 90s, the trend in constant prices is quite different. Because of changes in relative prices, GDCF in constant prices has remained in the range of 25-26 per cent during this period.

1.21  Real gross fixed capital formation (GFCF) as per cent of GDP also showed some improvement from 23.5 per cent in 1998-99 to 23.8 per cent in 1999-2000 due to improvement in both public and private fixed capital formation. After a decline in 1998-99, inventories as proportion of GDP surged to 1.6 per cent in 1999-2000 with almost equal levels of inventories in public and private sectors (Table 1.6).

1.22  As data on capital formation are not available for the year 2000-01, the trends have to be assessed by looking at various leading indicators of investment and growth. These present a mixed picture. Both domestic production as well as imports of capital goods have shown considerable deceleration in the current year. There was significant improvement in sanctions and disbursements made by the All India Financial Institutions (AIFIs). The inflows of Foreign Direct Investment (FDI) also recorded significant improvement in the current year. Inflows of FII investment have been erratic in the current year with overall inflows of portfolio investment lower than those in the last year. The trends indicate that there may not be any significant recovery of investment in 2000-01. Sustained high economic growth would require significant improvement in investment, which in turn, would depend on steep rise of foreign direct and portfolio investment, structural reduction in inflationary expectations and real interest rates, reduction in the fiscal deficit and further liberalisation of the domestic debt and capital markets.

1.23  While India’s private savings rate is more or less comparable to those achieved by the high performing East Asian economies, its negative public savings is a major constraint on domestic resource mobilisation. The Government is restructuring public expenditure for fostering domestic savings, releasing resources for physical and social infrastructure development and for reducing the crowding out effect on private investment.

1.24  The tempo of economic reforms was sustained successfully in 1999-2000. Major fiscal reforms were undertaken for broadening the income tax base and streamlining the excise and customs duty structures. There were enabling reforms in foreign investment and trade policy spheres also. Reforms in public sector enterprises are underway for reducing pressures on public finances, increasing the efficiency of public sector operations and reducing the incremental capital output ratio (ICOR). Strengthening of legal, institutional and regulatory frameworks in insurance, banking, capital markets, power and telecom are being undertaken for inducing greater private investment in infrastructure. The Union Budget for 2000-01 announced various measures for further deepening of the capital markets and financial sector and allowed private entry in insurance and provident funds. The major reforms undertaken during 1999-2000 are provided in Box 1.1. It is expected that these measures would enhance both the savings and investment rates for the economy.

Agriculture and allied sectors

1.25  The adverse weather conditions affected the crop prospects, particularly foodgrains and oilseeds production in year 2000-01. The foodgrains production in 2000-01 is likely to be 199 million tonnes compared to 208.9 million tonnes in the preceding year. The decline of nearly 10 million tonnes should, however, not pose a serious supply management problem since the country is comfortably perched on nearly 45 million tonnes of foodgrain stocks, which should be an adequate safeguard against speculative uptrend in foodgrain prices.

Industry

1.27  The overall industrial growth path in the 1990s has been marked by cyclical fluctuations with the peak level of industrial growth being 13 per cent in 1995-96. Since 1996-97, industrial growth has remained around 6.5 per cent annually except for a drop to 4.1 per cent in 1998-99. Some of the factors responsible for this cyclical behavior of industrial growth during the last few years are, high interest rate environment, lack of demand for capital goods, business cycle, inherent adjustment lags in industrial restructuring and infrastructural constraints, particularly for power, roads, telecommunications and transport.

1.28  According to the Index of Industrial Production (IIP), overall industrial growth was 5.7 per cent in April-December 2000 (compared to 6.4 per cent in April-December 1999) contributed by a growth of 4.1 per cent in mining, 5.9 per cent in manufacturing and 4.8 per cent in electricity. The growth rate of manufacturing in April-December 2000 at 5.9 per cent was lower than 7 per cent registered in April-December 1999. The growth rate of electricity generation in April-December 2000 at 4.8 per cent was significantly lower than 7.7 per cent achieved in April-December 1999. Only the mining sector was able to improve its growth rate from 0.5 per cent in April-December 1999 to 4.1 per cent in April-December 2000.

1.29  Mixed trends were noted while analysing industrial production according to use-based classification. While growth rates of both durable and non-durable consumer goods accelerated during the current year, there was deceleration in the growth rate of basic, capital and intermediate goods. The downward trends in the growth rates of capital goods and intermediate goods indicate that there is lack of sufficient investment demand. The high growth in the consumer goods sector continues to be a strength and with greater industrial restructuring and more favorable internal and external investment environment can lead to higher growth momentum in other sectors of the industry.

1.30  As regards the growth rates of broad manufacturing groups, the metal products and parts (except machinery & equipment) group registered a growth rate of 22.9 per cent in April-December 2000. The other groups to register double-digit growth were rubber, plastic, petroleum and coal products (10.4 per cent) and leather and leather & fur products (10.3 per cent). The other better performing groups were food products (9.4 per cent), textile products (8.4 per cent), machinery and equipment other than transport equipment (8.3 per cent) and other manufacturing industries (8.2 per cent). Only two groups viz. paper and paper products and print, publication & allied industries (-11.3 per cent) and non-metallic mineral products (-0.3 per cent) registered negative growth.

1.31  After decelerating to 4.1 per cent in 1998-99, industrial growth improved to 6.5 per cent in 1999-2000. To consolidate the higher growth momentum, the Union Budget for 2000-01 announced a number of policy measures. These included the following:

l Rationalisation of excise duty by introduction of CENVAT and reduction in the number of excise rates.

l Permitting enhancement of the Foreign Institutional Investment (FII) limit to 40 per cent of total equity through a special resolution by the shareholders.

l Raising of the limit for providing collateral to obtain finance for small-scale industries from Rs. 1 lakh to Rs. 5 lakh .

lExtension of existing tax holiday benefits for small-scale industries and industrial units set up in industrially backward states and districts by another two years, i.e. till 31st March 2002.

l Concession to the entertainment industry through reduction of import duty on cinematic camera and other related equipment.

1.32  In pursuance of Government’s commitment to further facilitate investment in Indian industry, foreign direct investment has been permitted through automatic route for all industries except for a few specified items and situations. Non-Banking financial companies have been allowed to hold foreign equity up to 100% if they are the holding companies. Their subsidiaries, which are the operating companies, have also been allowed to hold foreign equity up to 75%. To facilitate the setting up and operation of such subsidiaries, Government has further allowed holding companies with a minimum capital of US$ 50 million to set up 100% downstream subsidiaries undertaking specific non-banking financial activities with a minimum capital of US $ 5 million. Such a subsidiary, however, would be required to disinvest its equity to the minimum extent of 25% through a public offering only, within a period of 3 years.

1.33  An Expert Group constituted by Government to review the Industries Development and Regulation Act 1951, has proposed enactment of a new Industry Act, which would focus on promotion and development of industry instead of regulation. The Government is examining the feasibility of framing a new enactment in this regard.

Service sector

1.34  Liberalisation of the economy in the 1990s and encouragement of private investment in industry and infrastructure have induced sustained high growth in service sectors. A rapid increase in expenditure on public administration, social services, rural extension services and defence also had an impact on the growth of service sector. As a consequence, the share of the service sector in GDP increased from a level of 28 per cent in the early 1950’s to 41 per cent in 1990-91 and further to around 49 per cent in 2000-2001. The service sector is expected to grow at 8.3 per cent in 2000–01 induced by substantial foodgrains procure-
ment by the Government, sustained industrial growth and good performance of transport services, trade related activities and financial services.

Infrastructure

1.35  The performance of infrastructure in the current year is mixed. There is a significant deceleration of growth rate in electricity generation. Among the other infrastructure sectors, there is deceleration of growth rate for cargo handled at major ports from 9.2 per cent in April-December 1999 to 3.9 per cent in April-December 2000 and for revenue earning goods traffic on railways from 8.0 per cent in last year to 5.2 per cent this year. However, the growth rate of new telephone connections increased significantly from 33.4 per cent last year to 29.8 per cent this year (Table 1.7).

1.36  The average growth rate of six core and infrastructure industries (i.e. electricity, crude oil, refinery, coal, steel, and cement), having a weight of 26.7 per cent in overall IIP, at 7.7 per cent in April-December 2000 is lower than that of 9.1 per cent achieved in April-December 1999. Petro-refinery production has improved its growth rate from 22.0 per cent in April-December 1999 to 25.9 per cent in April-December 2000. While steel and coal have performed well in the current year, performances of electricity and cement are poor.

1.37  Various policy measures were announced for boosting infrastructure growth during the current year. These include :

l Opening of domestic long distance service without any restriction on the number of operators.

l Permitting BSNL and MTNL to enter as third cellular operator in their respective circles.

l Introducing a revenue sharing regime in place of existing fixed licence fee for both basic and cellular service operators.

l Permitting the operation of a fourth cellular operator in all the circles.

l Permitting an additional basic service operator.

l Developing a scheme for securitisation of dues of central sector power and coal utilities for assisting the SEBs in clearing dues. Central Government support is linked to reforms in the operation of SEBs.

l Proposal to divest Government equity in domestic carrier, Indian Airlines and international carrier, Air India.

l Decision to upgrade to international standards the airports at Hyderabad, Ahmedabad, Goa, Kochi and Amritsar.

lReduction of customs duty for boosting infotech, telecom and other knowledge based industries.

lExtension of tax benefits available for infrastructure to urban infrastructure viz. water treatment and solid waste management.

lExtension of tax holiday for housing projects to projects completed before 31.3.2003 (present limit 31.3.2001).

Social sectors

1.38  Plan and non-plan expenditure of the Central Government on various components of social sectors has increased from of Rs. 9608 crore in 1992-93 to Rs. 36,270 crore in 2000-01 (BE), an increase of about four times in a matter of just eight years. As a proportion of total expenditure, the combined plan and non plan expenditure of the Centre rose from 8.1 per cent in 1992-93 to 10.7 per cent in 2000-01. The plan expenditure of the Centre, as a percentage of GDP at current market prices on major schemes of social sectors has been hovering between 1.1-1.2 per cent during the last decade. However, the central plan outlay in 2000-01(BE), as compared to the previous year’s revised estimate increased by 24.3 per cent for the education sector as a whole and 26.5 per cent for elementary education programmes; by 29.8 per cent for health sector programmes; by 16.8 per cent for women and child development; and by 12.8 per cent for family welfare schemes.

1.39  National programmes combatting major public health problems have resulted in steady improvement in basic indicators of human development. While the crude death rate declined from 12.5 per thousand in 1981 to 9.8 in 1991, and further to 8.7 in 1999, the infant mortality rate per thousand declined from 110 in 1981 to 80 in 1991 and further to 70 in 1999. As far as the educational status of population is concerned, the literacy rate had increased from 43.6 per cent in 1981 to 52.2 per cent in 1991 and to 62 per cent in 1997 as a result of intensifying the efforts under the national literacy mission.

1.40  In the seven years of post-reform period, from 1992-93 to 1998-99, the average annual real wage for non-agricultural sector was Rs. 2.64 compared to Rs. 2.29 for the pre-reform period, i.e. 1987-88 to 1991-92, for which all-India estimates are available.

1.41  Alleviation of poverty remains a major challenge before the nation. A comprehensive All India Household Consumer Expenditure Survey is undertaken roughly every 5 years which also forms the basis for estimating the level of poverty in the country. Comparable estimates based on a consistent methodology and data set are available until 1993-94. The estimated magnitude of poverty remained fairly high until the late 1970s. The proportion of people below the poverty line has been declining since the early 1980s along with the achievement of higher economic growth. The 1993-94 estimates placed the all India poverty ratio at 36 per cent (Table 1.8).

1.42  Some of the key results of the 55th Round of the Household Consumer Expenditure Survey of the National Sample Survey Organisation (NSSO) covering the period July 1999 to June 2000, have now become available showing a very significant decline in poverty to 26 per cent based on a 30-day recall and 23.3 per cent on a 7-day recall methodology. These two sets of estimates may not be strictly comparable to the earlier estimates of poverty. Nonetheless, they provide clear evidence indicating a substantial decline in the overall poverty ratio in the country during the 1990s.

1.43  Stabilising population is an essential requirement for promoting sustainable development and its equitable distribution. The National Population Policy (NPP-2000) recognises the fact that population stabilisation is as much a function of making reproductive health care affordable, as other life quality improving services such as primary and secondary education, sanitation, drinking water, housing, transport, communication and empowering women and enhancing scope for their employment. In pursuance of the NPP 2000, a national commission on population has been set up. State level commissions on population have also been set up with the objective of ensuring implementation of the policies.

1.44  National health programmes are implemented to control communicable and non-communicable diseases like malaria, tuberculosis, leprosy, blindness, AIDS, cancer etc. Strengthening of disease surveillance and response systems has also been undertaken to prevent outbreak of infectious diseases. HIV/AIDS is now sought to be projected as a socio- economic issue and not merely as a public health matter. The second phase of national AIDS control programme was launched in November 1999 at an estimated cost of Rs.1,425 crore over the next five years. Efforts have been to achieve zero incidence of polio by the end of the year 2001. The incidence of polio has sharply declined with many states reporting not a single case or only one or two cases of wild polio virus. The virus is, however, reported to be still active in U.P. and Bihar.

1.45  The National Housing and Habitat Policy, 1998, has been formulated with the objective of creating 20 lakh dwelling units each year. It also seeks to ensure that housing, along with supporting services, is treated as a priority sector at par with infrastructure. The central theme of this policy is the much expanded role of private sector for tackling housing and infrastructure problems. The Government recognises the urgent need to provide fiscal concessions and carry out legal and regulatory reforms for creating a conducive environment for housing construction.

Union Budget : 2000-2001

1.47  The Budget for 2000-2001 was formulated in the backdrop of a series of exceptional exogenous events such as the 50 day war in Kashmir, long months of political uncertainty before the general election, the super cyclone in Orissa, a somewhat weak monsoon and the continued fragility in world economic recovery. These developments led to an unanticipated expenditure on national defense, elections and the super cyclone during 1999-2000. Furthermore, the residual impact of the Fifth Central Pay Commission, the need for special fiscal assistance to the states combined with shortfalls in receipts from disinvestment and revenue, exacerbated the fiscal deficit during 1999-2000. As a proportion of GDP, the Centre’s gross fiscal deficit (exclusive of states’ & UT’s share of small savings) estimated at 5.6 per cent in the revised estimate for 1999-2000 now stands at 5.5 per cent on the basis of provisional and unaudited figures. The Budget for 2000-2001 envisaged a fiscal deficit target of 5.1 per cent of the GDP. The primary deficit (fiscal deficit net of interest payments), which reflects the current fiscal stance of the Government, is budgeted at 0.5 per cent of GDP in 2000-01 as against 0.8 per cent in 1999-2000 (Table 1.9).

1.48  With a view to put India on a higher growth path, the Union Budget (2000-2001) indicated a seven fold strategy which included the following elements: To strengthen the foundations of growth of the rural economy, nurture knowledge based industries, strengthen and modernize traditional industries, remove infrastructure bottlenecks, accord high priority to human resource development with special emphasis on poorest and weakest sections of society, strengthen the country’s role in the world economy through rapid growth of exports, higher foreign investment and prudent external debt management, and establish a credible framework of fiscal discipline.

The Fiscal Responsibility and Budget Management Bill

1.49  The Fiscal Responsibility and Budget Management Bill, 2000, was introduced in the Lok Sabha in December 2000. The Bill provides for a legal and institutional framework to eliminate revenue deficit, bring down the fiscal deficit, contain the growth of public debt and stabilise debt as a proportion of GDP within a time frame. The proposed law casts an obligation on the Government itself for strengthening the institutional framework for conduct of prudent and accountable fiscal policy and pave the way for promoting greater macro-economic stability. This covers only the finances of the Central Government. The principles of fiscal responsibility have been defined in relation to deficit, borrowing and debt.

1.50  The Bill focuses on two deficit indicators, viz., revenue deficit and fiscal deficit, and provides normative ceilings within a time frame for chosen fiscal indicators. The Bill proposes elimination of revenue deficit and progressive reduction of the fiscal deficit to not more than 2 per cent of Gross Domestic Product within a period of five financial years following the promulgation of the law. Besides, the proposed Bill contains provisions, which will ensure flexibility in fiscal management under extraordinary circumstances like natural calamities and war. Under borrowing related principles, it is proposed to prohibit certain types of borrowing from the Reserve Bank of India and under the debt related principles, it is proposed to prescribe a limit on the debt stock. Accordingly, the Bill envisages that within a period of ten financial years, the total liabilities (including external debt at current exchange rate) would not exceed fifty per cent of the estimated GDP.

Fiscal and budgetary developments in 2000-2001

1.51  The fiscal parameters for the nine months of the current fiscal year (April-December 2000) reveals a decline in gross fiscal deficit from Rs. 67082 crore in April-December 1999 to Rs. 64628 crore in April-December 2000 due to better revenue receipts and lower growth in expenditure in the current year. Revenue receipts (net to Centre) increased by 15.3 per cent; other receipts (mainly disinvestment receipts) were only a miniscule Rs.236 crore against a budgeted target of Rs.10000 crore. Total expenditure at Rs. 204821 crore had an increase of only 7.7 per cent over the same period of last year. Borrowings and other liabilities at Rs. 64628 crore indicates a decline of 3.7 per cent over last year.

1.52  The data available for gross collections from major direct and indirect taxes for the first nine months (April-December, 2000) of the current year show strong recovery in direct tax collections. Collections from personal income tax and corporation tax increased by 30.5 per cent in April-December 2000 compared with an increase by 15.3 per cent in April-December 1999. Collections from excise and custom duties posted a growth of 7.1 per cent compared with an increase of 19 per cent in April-December 1999.

Expenditure management

1.53  Over the years the composition of central Government expenditure has acquired rigidity on account of growing number of precommitted items of expenditure. With a view to curb built-in expenditure growth and bring about structural changes in the composition of expenditure, the Union Budget (2000-01) proposed a number of initiatives which inter alia, included the following: all ongoing schemes will be subjected to rigorous zero-base budgeting scrutiny; the manpower requirements of Government departments will be reassessed by reviewing the norms for creation of posts and fresh recruitment in Government departments and institutions will be limited to minimum essential needs; the scheme for redeployment of surplus staff will be made more effective and a voluntary retirement scheme (VRS) will also be introduced for staff in the surplus pool; all subsidies would be reviewed with a view to bring in cost-based user charges wherever feasible; budgetary support to autonomous institutions would be reviewed and they will be encouraged to maximise generation of internal resources; the interest rate on general provident funds has reduced by 1 per cent to 11 per cent effective from April 1, 2000, for aligning it with the overall interest rate structure; and the Budget earmarked Rs.1,000 crore out of disinvestment proceeds for retiring Government debt.

1.54  During the course of the year, the Government took a series of measures for controling growth in non-plan, non-developmental expenditure which include, a mandatory 10 per cent cut in the budgetary allocation for non-plan non-salary expenditure of all ministries/departments and autonomous institutions; a complete ban on purchase of new vehicles for one year; ten per cent cut in the consumption and allocation of funds for expenditure on POL for staff cars; ban on creation of new posts for one year; and ban on foreign travel for study tours, seminars etc.

Tax reforms

1.55  The thrust of the direct tax proposals in the Budget was to retain stability in tax rates and widen the tax base. A new regime for venture capital funds (VCFs), which allows complete pass through status, was put in place for stimulating the growth of knowledge based industries. Provisions relating to amalgamations, demergers and slump sales have been further rationalised to provide tax-neutrality of corporate restructuring. Minimum Alternate Tax (MAT) is to be charged at 7.5 per cent of the "book profits" by all companies as determined under the Companies Act.

1.56  All tax concessions relating to earnings in foreign exchange are being phased out in a five-year period. With a view to expand the tax base, the "one-by-six" criteria introduced for identifying potential tax payers was extended to 79 more cities (from 54 cities) having a population of 2 lakh or more, as per the 1991 Census.

1.57  On the indirect tax front, the process of reduction in the dispersal, rationalisation and simplification of duty rates was carried forward to reduce the transaction and compliance costs. The system of central excise was overhauled with the introduction of a uniform Central Value Added Tax (CENVAT) of 16 per cent ad valorem on all manufactured goods with few exceptions. This will also encourage the States/Union Territories to implement their agreed programme for converting their sales taxes into VAT by April 1, 2002. In addition to CENVAT, three rates of special excise of 8 per cent, 16 per cent and 24 per cent respectively have been prescribed. These apply to certain specified goods like aerated water, tobacco products, motor vehicles, cosmetics etc. Rules and procedures for availing of CENVAT credit have been made short, simple and transparent. All inputs (except high-speed diesel and motor spirit) and all capital goods are eligible for input tax credit. Also, all finished goods (except matches) have been brought under the CENVAT credit scheme. The basis for payment of excise was changed to "transaction value" instead of "deemed wholesale price".

1.58  In the area of customs duty, the objective has been to reduce the high levels of tariffs gradually, so as to reduce the cost of production and improve the competitiveness of the user industry while allowing reasonable time to the domestic industry to adjust against competition from imports.

1.59  The move towards Asian levels of tariffs was reassured with peak protective customs tariff rate scaled down from 40 per cent to 35 per cent ad valorem and reducing the existing five major ad valorem rates of basic customs duty to 4 ad valorem rates viz. 5 per cent, 15 per cent, 25 per cent and 35 per cent. Several consumer goods and a large number of agricultural products were placed on the free list for imports effective from April 1, 2000. These goods are subject to the peak customs tariff rate of 35 per cent plus surcharge. The basic customs duties on crude petroleum and petroleum products were reduced in the Budget and were further scaled down to 10 per cent and 20 per cent respectively during the course of the year consequent to the rise in international oil prices.

Inflation

1.60  The year 1999-2000 witnessed a gradual fall in the rate of inflation due to bumper production of foodgrains and an efficient supply-demand management for essential commodities by the Government. The annual average rate of inflation in terms of the Consumer Price Index (CPI) declined sharply from 13.1 per cent in 1998-99 to 3.4 per cent in 1999-2000 despite an increase in fiscal deficit and sharp increase in energy prices. There was also a fall in the annual average rate of inflation in terms of the Wholesale Price Index (WPI) from 5.9 per cent in 1998-99 to 3.3 per cent in 1999-2000.

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.

l 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).

l 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.

l Setting up of Special Economic Zones (SEZ) to encourage export production free from the plethora of rules and regulations governing imports and exports.

l Evolution of a scheme for granting assistance to States based on their export performance for development of export related infrastructure.

l Rationalisation of existing export promotion schemes including abolition of Special Import License (SIL) from April 1, 2001.

l Sector specific initiatives to accelerate exports announced for core areas,

l Permission to import second hand capital goods which are less than 10 years old without obtaining any license on surrender of SIL.

l Deemed export benefits rationalised by extending benefits uniformly to eligible categories and expanding the definition of capital goods.

l 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.

l Foreign Direct Investment (FDI) up to 100 per cent has been permitted in
e-commerce subject to specific conditions.

l The dividend balancing condition for FDI in twenty-two consumer goods industries has been removed.

l 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.

l 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.

l 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.

l 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.

l 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.

l 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.

l Policies pertaining to international offerings through ADR/GDR by Indian companies have been further liberalised.

l 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.

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