UNDP Financing International Cooperation

8/6/2019 UNDP Financing International Cooperation

1/50

Unedited Draft

UNITED NATIONS DEVELOPMENT PROGRAMME

INTERNATIONAL COOPERATION BEHIND NATIONAL

BORDERS:COUNTRY CASE STUDY ON INDIA

By Tarun DasICRIER

Prepared for the Book ProjectThe New Public Finance: Responding to Global Challenges

Office of Development StudiesUnited Nations Development Programme

New York- 2005 -

Note: The views expressed in this paper do not necessarily reflect those of UNDP. Theauthor is working as Economic Adviser, Ministry of Finance, Government of India and aConsultant to the Indian Council for Research on International Economic Relations. Thepaper expresses personal views of the author, which may not necessarily imply views ofthe organizations he is associated with. Author is grateful to Inge Kaul, Arvind Virmaniand an anonymous referee for constructive comments on an earlier draft.


2/50

Unedited Draft

Country Case Study on India 1

ABSTRACT

The country case study on India provides a good example of employing public financepolicies and instruments to promote international cooperation. Key thrusts ofinternational participation are to improve India's economic conditions and international

competitiveness and at the same time to contribute towards global prosperity, peace anddevelopment. The country has attached high importance to global issues such ascombating international terrorism, tackling environmental challenges, communicablediseases, drug trafficking and money laundering and supports measures taken bymultilateral organizations. It is actively responding to these problems and allocatingadequate resources for development and strengthening of appropriate institutional andlegal set up. The case depicts a country that has not only been adjusting its policies toglobalization challenges but taking a proactive role in international forums to influenceand shape globalization. Moreover, the study shows how it has balanced profoundeconomic reforms (liberalization, privatization and a revamping of governmentsadministration and role) with human development needs by providing safety nets to

vulnerable groups and following a gradualist approach to reforms.


3/50

Unedited Draft


CONTENTS

INTRODUCTION ........................................................................................................................................4

I. INSTITUTIONAL ASPECTS ...............................................................................................................5

OVERVIEW OF INDIAS PUBLIC FINANCE .......................................................................................5

A. INDIAS FISCAL FEDERALISM .....................................................................................................5

B. FISCAL REFORMS ......................................................................................................................6

C. REVENUES AND EXPENDITURE MANAGEMENT............................................................................8

D. GOVERNMENT DEFICIT AND PUBLIC DEBT ..................................................................................8

INSTITUTIONAL AND LEGAL DIMENSIONS ......................................................................................9

A. TRANSPARENCY AND ACCOUNTABILITY IN BUDGET FORMULATION.............................................9

B. POLITICAL ECONOMY ASPECTS ................................................................................................ 10

C. INTERACTION WITH EXTERNAL ACTORS ...................................................................................11

D. COUNTRY DELEGATIONS TO INTERNATIONAL BODIES ...............................................................11

II. INTERNATIONAL COOPERATION POLICIES ..................................................................................11

KEY THRUSTS OF INTERNATIONAL COOPERATION POLICIES.......................................................12

INCOMING COOPERATION............................................................................................................ 12

A. INTERNATIONAL AGREEMENTS................................................................................................ 12

B. POLICIES ON EXTERNAL ASSISTANCE .......................................................................................13

C. EXTERNAL SECTOR LIBERALIZATION .......................................................................................14

D. MILLENNIUM DEVELOPMENT GOALS (MDG) ..........................................................................16

E. PUBLIC HEALTH ...................................................................................................................... 17

F. ENVIRONMENT, ENERGY AND R&D POLICIES...........................................................................17G. TRANSPORT, COMMUNICATIONS AND TOURISM ........................................................................18

H. MONEY LAUNDERING AND DRUG TRAFFICKING ........................................................................18

I. IMPLEMENTATION OF WTO AGREEMENTS ...............................................................................19

OUTGOING COOPERATION ...........................................................................................................20

J. TECHNICAL ASSISTANCE .........................................................................................................20

K. REGIONAL INTEGRATION ........................................................................................................20

III. BUDGETARY ALLOCATIONS FOR INTERNATIONAL COOPERATION ...............................................21

A. MANDATORY CONTRIBUTIONS TO THE INTERNATIONAL AGENCIES ............................................21

B. EXPENDITURES FOR EXTERNAL AFFAIRS ..................................................................................22C. EXTERNAL DEBT SERVICES AND CONTINGENT LIABILITIES OF THE GOVERNMENT.......................22

D. TRADE AND EXPORT PROMOTION.............................................................................................23

E. SOCIAL SERVICES EXPENDITURE RELATED TO THE MDGS ........................................................23

F. FINANCING ENERGY, ENVIRONMENT AND R&D .......................................................................23

G. TRANSPORT, COMMUNICATIONS AND TOURISM ........................................................................24

H. MONEY LAUNDERING AND DRUG TRAFFICKING ........................................................................24


4/50

Unedited Draft


I. INSTITUTIONAL SET UP FOR WTO ISSUES.................................................................................24

J. FOREIGN EXCHANGE RESERVE................................................................................................. 24

K. MIGRATION............................................................................................................................25

CONCLUSION ..........................................................................................................................................26

REFERENCES ..........................................................................................................................................27

TABLES ..................................................................................................................................................29

TABLE 1:INDIAS FISCAL AND FINANCIAL SECTOR REFORMS SINCE 1991........................................29

TABLE 2:REVENUE RECEIPTS OF THE CENTRAL GOVERNMENT,% OF GDP......................................30

TABLE 3:COMBINED EXPENDITURE OF CENTRE AND STATES,RUPEES BILLION ................................31

TABLE 4:COMBINED EXPENDITURE OF CENTER AND STATES,% OF TOTAL ......................................32

TABLE 5:TOTAL EXPENDITURE OF THE CENTRAL GOVERNMENT,RUPEES BILLION ..........................33

TABLE 6:TOTAL EXPENDITURE OF THE CENTRAL GOVERNMENT,% OF GDP...................................34

TABLE 7:COMBINED FISCAL DEFICITS OF THE CENTRE AND STATES ...............................................35

TABLE 8:OUTSTANDING PUBLIC DEBT BY THE CENTER AND STATES,% OF GDP.............................35TABLE 9:MAJOR REFORMS IN INVESTMENT AND EXTERNAL SECTOR SINCE 1991............................36

TABLE 10:TRENDS IN HEALTH CARE IN INDIA,1951-2000 .............................................................37

TABLE 11:BUDGETARY EXPENDITURE FOR INTERNATIONAL COOPERATION ....................................38

TABLE 12:CONTRIBUTIONS TO INTERNATIONAL BODIES ................................................................ 40

TABLE 13:CONTRIBUTIONS BY THE INDIAN GOVERNMENT TO INTERNATIONAL BODIES...................41

TABLE 14: BUDGET ALLOCATIONS FOR EXTERNAL AFFAIRS ...........................................................42

TABLE 15:BUDGETARY EXPENDITURE FOR TRADE AND EXPORT PROMOTION ...................................43

TABLE 16:DUTY FORGONE UNDER SELECTED EXPORT PROMOTION SCHEMES ...................................44

TABLE 17: BUDGETARY EXPENDITURE FOR SELECTED SOCIAL SERVICES .........................................45TABLE 18:BUDGETARY EXPENDITURE FOR ENERGY, ENVIRONMENT PROTECTION AND R&D............46

TABLE 19:BUDGETARY EXPENDITURE ON TRANSPORT, TELECOM AND TOURISM ..............................47

TABLE 20:BUDGETARY EXPENDITURE FOR DRUG-TRAFFICKING ......................................................48

TABLE 21: BUDGETARY EXPENDITURE FOR WTO INSTITUTIONS .....................................................48

TABLE 22:GLOBAL SUPPLY OF SCIENCE AND ENGINEERING STUDENTS GRADUATING IN 1999,000S.49

TABLE 23:WORKERS REMITTANCES RECEIVED BY DEVELOPING COUNTRIES,2001 .........................49


5/50

Unedited Draft


INTRODUCTION

International cooperation takes place both within national borders (e.g. in terms ofnational policy harmonization) and at the international level (e.g. through the creation anduse of joint, pooled mechanisms such as the World Bank or the Global Environment

Facility). This study addresses basically the former aspect that is, the national level publicpolicy measures and related decision-making processes that facilitate internationalcooperation. More significantly, the study focuses on the financial implications of thenational-level policies, which comprise not only funding and allocation of public andprivate resources for particular purposes but also non-financial tools such as regulation ornorms and standards.

This study provides a good example of employing public finance policies and instrumentsto promote international cooperation. India believes in the so-called LPG:liberalization, privatization and globalization. Given its democratic set up with a freepress and independent judiciary, Indias movement towards globalization is based on

general political consensus and has a bias for human development. India allows the freemovement of goods and services and has adopted an open door policy for foreigninvestment and transfer of technology. It attaches high importance to global issues onterrorism, environmental challenges, communicable diseases, drug trafficking and moneylaundering and supports measures taken by multilateral organizations. It is trying tocombat these problems and allocating adequate resources for development andstrengthening of appropriate institutional and legal set up.

India is not only adjusting its policies to globalization: it is also taking proactive parts ininternational fora to influence and shape globalization. For example, India took activepart in the G-20 group of countries and International Monetary Fund (IMF) for shaping a

new international financial architecture with a focus on special interests of developingcountries. India welcomed the establishment and implementation of internationallyaccepted standards and codes to promote financial stability, but urged that there should bea clear prioritization among the proliferating population of standards and that theacceptance by developing countries should remain voluntary and should not form a partof IMF conditionalities. India took leading role in the group of developing countries inthe inter-ministerial meetings of the World Trade Organization (WTO) and emphasizedthat implementation of the past negotiations on services trade and their impact on theproduction, trade and economic growth of the developing countries should be reviewedfirst before making another round of negotiations on trade and tariff (Das 2003b).

The present report is organized in three main sections. Section Ideals with institutionalaspects and the fiscal structure and policies in India having a bearing on the financing ofinternational cooperation. It examines the interplay between national interest groups andexternal actors. Section IIdeals with major international cooperation policies and SectionIII deals with financial allocations for development and strengthening of internationaleconomic, social and political cooperation. Conclusions, references and tables follow.


6/50

Unedited Draft


I. INSTITUTIONAL ASPECTSOVERVIEW OF INDIAS PUBLIC FINANCE

This section deals with the main features of fiscal federalism and recent fiscal reforms in

India. It discusses trends of major fiscal parameters, sources of deficit financing, publicexpenditure and debt management, and salient features of the Fiscal Responsibility andBudget Management Act 2003.

a. Indias fiscal federalismIndia has a federal fiscal structure with three-tiers comprised of a central government,states and local bodies (consisting of municipalities and corporations in the urban areasand village Panchayats and district boards in rural and semi-urban areas). The Indianconstitution specifies fiscal powers at each level and allows the devolution of funds fromthe Centre to the States and from States to the local bodies. The Finance Commission

constituted every five years under the act of Parliament specifies the criteria for verticaltransfer of major taxes and duties from the centre to the states and horizontal sharing ofsuch funds among the States. The Planning Commission deals with the allocation of planresources (for development purpose) among the states. The Finance Ministry deals withnon-plan resources and grants, which are given to the states to meet their needs of currentexpenditure. The Finance Ministry also determines the share in fiscal incentives forreforms and provides natural calamity relief and loans.

Central government can impose taxes on production, income, profits, wealth, externaltrade and financial transactions. States taxes include land revenue, sales tax, road tax, androyalties on minerals and state excise (on alcohol). Major taxes of local bodies (that is,

municipalities and corporations) include property tax, scavenging tax, education cess, firetax, entertainment tax and user charges for public goods and services. Taxation ofservices faces an assignment vacuum in the Constitution. The Central government filledthis vacuum by enacting a Service Tax Act in 1994 under which it imposes service tax,presently at the rate of 8%, on selected services that have now grown to 58 in number.

Under the Indian constitutional provisions, States cannot borrow directly from externalsources and the Central government has to intermediate external borrowings and bearexchange rate risk for the states. Currently, external assistance is passed on to the stateson the same terms and conditions as for normal central assistance for state plans i.e. in90:10 mix of grant and loan to the hilly and backward states (the so-called special

category states) and 30:70 mix of grant and loan to other states. Loans carry an interestrate of 11.5% with maturity of 20 years including moratorium of 5 years. The systeminvolves certain amount of concession provided to the states.

India is a founder member of major international organizations and the Centralgovernment makes mandatory contributions to these organizations. Contributions aremade through the respective Departments and Ministries having the sectoral charge anddealing wit the concerned international organization. In general, the Finance Ministry


7/50

Unedited Draft


deals with the international financial organizations, the External Affairs ministry with theUnited Nations and its agencies, and the Ministry of Commerce and Industry with traderelated organizations.

The Central government makes allocations for expenditure of Indian Missions abroad and

provides external assistance to developing countries under the technical assistanceprogram. Expenditures on foreign delegations are borne by the respective departments inthe Centre, States and local bodies after the specific approvals of the Finance Ministry.The Central government provides various fiscal incentives for exports and investmentincluding foreign investment. Central government provides assistance to the states todevelop infrastructure for trade and export promotion, to deal with WTO issues and forenvironment protection and pollution control. In conformity with the federal structure,States provide various fiscal and other incentives for the development of industry andinfrastructure, which are equally applicable to both domestic and foreign companies.

b. Fiscal reformsIndia is a sovereign democratic republic and strongly believes in liberalization,privatization and globalization (LPG). India acknowledges the benefits of internationalfinancial, economic and diplomatic cooperation. Since 1991 India initiated reforms inindustry, trade, public, fiscal and financial sectors to integrate fully with the globaleconomy and to impart dynamism to the overall growth process. Reforms alsoemphasized development and strengthening of institutional, legal and regulatory set up.As the initial reforms take root and second-generation reforms unfold, India is emergingas one of the fastest growing and dynamic economies of Asia.

Indias reforms program is characterized by the following unique features (Das 2003a): A gradual and step-by-step approach; not a Big Bang or Shock Therapy approach Focusing on general political consensus A strong emphasis on human face Pursuing policies with the least sacrifice made by people No write-off of external debtGiven its democratic set up with a free press and an independent judiciary, Indiasmovement towards globalization is based on a general political consensus. All reformsincluding fiscal reforms have a bias for human development and are calibrated in such away that there is least sacrifice made by the people. The government introduced varioussocial safety nets for the vulnerable sections. The government set up National RenewalFund to re-employ workers who might be adversely affected by industrial restructuring orfree trade. The Fund was partly financed by disinvestment of government equities andpartly by external assistance. The government expanded food and fertilizer subsidies withbetter targeting and strengthened poverty alleviation and employment generationprograms.

In the financial sector, government directed the nationalized banks to provide at least 40per cent of their lending to the priority sectors (comprising agriculture, small scale


8/50

Unedited Draft


industries, retail trade and transport operators) and to provide education and housingloans and export credits at concessional interest rates.

Government attaches a high importance to global issues on terrorism, environmentalchallenges, communicable diseases, drug trafficking and money laundering and is

allocating adequate resources for development and strengthening of institutional and legalset up to tackle these problems. On considering the level of per capita income, Indiancontributions and budget allocations for international cooperation and global issuesappear to be adequate, stable and sustainable over time.

In the context of globalization, contrary to the advice given by multilateral organizations,government is not shifting the tax burden from the external to domestic sectors. Rather, ithas rationalized and reduced taxes and duties for both external and domestic sectors. Thetax / GDP ratio of the general government (i.e. combined Centre and State governments)declined from 16 % in the pre-reform year 1990-91 to 14% in 2003-04. This was partlydue to trade reforms and partly to change in the composition of GDP in favor of services

which now constitute more than 50% of GDP but mostly remain outside the tax net.

The basic objective of fiscal reforms since 1991 (table 1) was to reduce fiscal deficits tosustainable levels by expenditure management and resources mobilization through taxrationalization and widening tax net. The government strengthened tax administration; itimproved Centre-States fiscal relations and focused attention on contingent liabilities andreforms in provident, pension and insurance funds. The Fiscal Responsibility and Budget Management Act2003 aims at reducing government borrowing and fiscal deficit andeliminating revenue deficit by 2008 by higher tax/GDP ratio, higher contribution fromthe state value added tax and reduction of subsidies and interest payments.

As for budget allocations for domestic purposes, government has reduced its scope and iswithdrawing from commercial sectors where private initiatives are more productive andmore efficient. But the level of government expenditure remains large in the developmentof social and physical infrastructure. The government is also encouraging public-privatepartnerships and private participation including foreign investment in infrastructure andsocial sectors, and relying less on direct purchases of public goods and services.Government has restructured public pension, insurance and provident funds and allowedforeign participation in these sectors so that these resources could be utilized forinfrastructure financing with long term maturity. Government has increased allocationsfor poverty alleviation and employment generation programs to fulfill the commitmentsunder the UN Millennium Development Goals.

Several measures were taken since 1991 to strengthen the banking system and to improvemoney and capital markets. Policy package included decontrol of lending and depositrates, reduction of Cash Reserve Ratio and Statutory Liquidity Ratio to augment creditsto private sector, reduction of lending rates to reduce production costs. Other measuresincluded active open market operations, abolition of selective credit controls andtightening of prudential norms for capital adequacy and provisioning for non-performingassets as per international best practices set by the Bank for International Settlements and


9/50

Unedited Draft


the Financial Stability. An array of capital market reforms was introduced for primaryand secondary markets, equity, bond and debt markets, and foreign investment.

c. Revenues and expenditure managementThe tax-GDP ratios of the Centre suffered a steady deterioration in 1990s (table 2) due togradual reduction of tax rates and duties since 1991 and a structural shift in the GDPcomposition towards services. However, there was some increase in the ratios of non-taxrevenues to GDP due to restructuring of public enterprises and rationalization of usercharges for public utilities such as power, water and transport. Expenditure managementinvolved strict monitoring of fiscal deficit and financial allocations under differentheadings (see tables 3 through 6). Government tried to contain expenditure throughrationalization and targeting of subsidies, reduction of interest rates on public savings,optimal use of cash and downsizing civil staff at the rate of 2% per annum.

d. Government deficit and public debtFiscal deficit trends of the general government indicate that the deficit declinedsignificantly by 1995, but increased to pre-reform levels by the end of 1990s (table 7).The share of domestic borrowing in financing public deficit increased in 1990s with acorresponding decline in that of external finance. In fact, there was net outgo in externalfinance in 2002-03 due to pre-payment of a part of external debt by the government.Among domestic sources, market borrowings emerged as the major source of financing.

The combined public debt of the general government as percentage of GDP increased by20% points in 1990-2003 (table 8) leading to burgeoning interest payments, which nowconstitute 50% of revenue expenditure despite declining interest rates over time. Thisessentially reflects the overhang of outstanding liabilities contracted at higher interestrates in the past.

A high level of public debt puts pressure on interest rates, crowds out private investmentand creates problems for debt servicing. In order to avoid the possibility of debt traps,government is concentrating on long term borrowings. Consequently, the averagematurity of loans increased from 7.7 years in 1998 to 13.5 years during 2001-2003.

Until 1990 India adopted a development strategy based on the predominant role of thepublic sector. Unlimited borrowings from the Reserve Bank of India (RBI) at subsidizedrates enabled Government to finance large fiscal deficits. Government initiated reforms in1992 with the auction of government securities at market-determined rates, followed bygradual withdrawal of RBI support and stoppage of automatic magnetization to financegovernment deficit. Government also strengthened institutional infrastructure, legal andregulatory set-up for the Government securities market.

The active public debt management strategy comprised minimizing refinancing risk andcrowding out" effect, and avoidance of issuing floating rate, short-term and foreigncurrency-denominated debt. Government adopted a cautious approach towards capitalaccount convertibility. It initially liberalized non-debt creating financial flows followed


10/50

Unedited Draft


by liberalization of long-term debt. There was a high share of concessional debt with longmaturity, amounting to 80 % of sovereign external debt in 2003.

These policies paid dividends and protected India from the contagion effect of the EastAsian crisis in 1997-2000. There was significant improvement in external debt indicatorswith external debt/GDP ratio declining from 38.7% in March 1992 to 20% in March 2003and debt service ratio declining from 35.3% in 1990 to 14.7% in 2003. As perclassification in the Global Development Finance (World Bank 2002, p.130) India is nowclassified as a low income and low indebted country.

India's outstanding external assistance declined from US$59.5 billion at end-March 1995to US$42.7 billion at end-March 2003, while annual inflows of grants ranged in betweenUS$300 million to US$416 million over the period. The share of bilateral assistance inexternal assistance declined from 47.3% in 1993 to 39.6% in 2003 with correspondingincreasing in the share of multilateral assistance. Outstanding external debt ongovernment account now stands at 9% of GDP.

The careful management of external debt allowed India to retain policy-makingsovereignty and not to be wholly influenced by the conditionalities imposed by themultilateral funding agencies. In fact, in recent years India prepaid a part of moreexpensive debt from the World Bank, the Asian Development Bank and some bilateralcountries, while they insisted for substantial reduction of food and fertilizer subsidies andoverall fiscal deficit, which were not politically feasible for a coalition government in theCentre. Effective public debt management also helped government to adopt a step-by-step approach to liberalization and to adopt effective safety nets for the weaker andvulnerable sections of the society by expanding and strengthening various anti-povertyand poverty alleviation programs.

INSTITUTIONAL AND LEGAL DIMENSIONS

This section addresses institutional and legal issues relating to international cooperation.It deals specifically with transparency, accountability and political economy of budgetformulation, inter-agency coordination, NGOs participation, and composition andfinancing of India's delegations to international bodies.

a. Transparency and accountability in budget formulationUnder Article 112 of the Indian Constitution, an "Annual Financial Statement" onGovernment receipts and expenditure is laid before Parliament for each financial year.Expenditure estimates are required to be voted by the Parliament and are submitted in theform of detailed Demands for Grants for each Ministry. Government proposals on taxesand duties are submitted to Parliament through the Finance Bill.


11/50

Unedited Draft


Although the budget formulation is based on strict secrecy until its presentation to theParliament on the 28th February every year, the Finance Ministry holds pre-budgetdiscussions with the Planning Commission, other Departments and various interestgroups such as industry associations, chambers of commerce, trade unions, agriculturists,science, technology and education specialists, and non-governmental organizations.

The Budget is transparent with fiscal background, objectives and policies indicatedclearly in the Finance Minister's Speech supported by detailed expenditures for eachDepartment and a pre-budget Economic Survey. Finance Ministry publishes annualStatus Reports on External Debt, official external assistance, Public Finance Album andAn Economic and Functional Classification of Budget as per IMF guidelines onGovernment Finance Statistics. India has subscribed to the IMF Special DataDissemination Standards (SDDS) and fulfilled all requirements regarding time lag andfrequency of publication and dissemination of economic data.

b. Political economy aspectsAs India is a sovereign democratic republic with independent executive, legislative andjudiciary systems and a free press, the existing political economy plays an important rolefor determining the scope and funds for international cooperation. If any internationalcommitment has wider economic and social implications and concerns constitutionalprovisions, it requires the ratification by the Parliament. However, once approved by theParliament, policies are irreversible. In fact, Indian foreign exchange crisis after the gulfwar in 1990 induced the then government to undertake wide ranging reforms in externaland domestic sectors to globalize the economy at a faster speed, which was not politicallyfeasible under tranquil conditions.

As mentioned earlier, there is general political consensus regarding the need for ongoingeconomic reforms accompanied by privatization and globalization. However, at thebeginning of reforms, domestic industrialists wanted level playing field as regardstransactions cost and domestic interest rates which were significantly higher thaninternational rates. With gradual reduction of interest rates, substantial reduction of taxesand duties and strengthening of the rupee, there had been substantial reduction oftransactions cost.

Given the sovereign democratic set up in India, there are various checks and balances onthe government. Budget allocations for international cooperation is made by heconcerned government department dealing with the subject as per the Allocations ofBusiness Rules approved by the President of India. However, it requires prior approval of

the Ministry of Finance and the Parliament as a part of annual Budget. Ministries alsoconsult each other on important issues having impact on either internal or externalfinance. Although the concerned Ministry puts up a proposal, it is initially approved by aCommittee of concerned Secretaries. Then it is put up for approval by a Group ofMinisters followed by the Cabinet. If the proposal involves any conflict withConstitutional provision or any existing Act, it needs to be approved by at least two-thirds majority in the parliament.


12/50

Unedited Draft


c. Interaction with external actorsThe Indian government in association with trade, business and industry associations hasbeen sponsoring various activities to facilitate international cooperation. In particular,government and industry associations organize international workshops and trade fairs,

and publication of various manuals and journals for dissemination of information. Thereare bilateral exchange programs on national experiences and development practices.

Asian and Pacific Centre for Transfer of Technology (APCTT), with headquarter in Indiaand in collaboration with other development agencies such as the United NationsDevelopment Progrmame (UNDP) and ESCAP (United Nations Economic and SocialCommission fro Asia and the Pacific), has distinguished itself in a number of activitiessuch as information dissemination, technology fairs, skill training, and promotion ofEnvironmentally Sound Technologies. In India, APCTT formed a consortium with theSmall Industries Development Bank of India, National Small Industries Corporation andthe Council of Scientific and Industrial Research to assist small sized industries for

technology upgrades, strengthening linkages between R&D institutions and localinnovative systems.

d. Country delegations to international bodiesIndia has a very restricted policy and limited budget for foreign travel. The annual IMFand World Bank meetings as well as Asian Development Bank (ADB) annual meetingsare attended by delegations led by the Finance Minister and comprising officers from theFinance Ministry and the Reserve Bank of India. Inter-Ministerial meetings of the UnitedNations and its associated organizations are attended by delegations led by the ExternalAffairs Minister and comprising officers from the External Affairs, Finance andCommerce. Inter-Ministerial meetings of the WTO and ESCAP are attended bydelegations led by the Commerce Minister and comprising officers from the FinanceMinistry and the Reserve Bank of India. Other international delegations are led byofficers having the ranks of Joint Secretary and above depending on the issues andcomprise members from the concerned Ministries.

Each Ministry has separate budget for foreign travel, which is approved by theParliament. Foreign travel of an officer having rank up to Director is approved by thesecretary of a Department, that of Joint Secretary by the concerned Minister, and that ofhigher officers (including Ministers and parliamentarians) is approved by the CabinetCommittee chaired by the Prime Minister and these foreign travel proposals are initiallyexamined by a Screening Committee Chaired by the Finance Secretary.

II. INTERNATIONAL COOPERATION POLICIESThis section discusses the key thrusts of cooperation initiatives and international andbilateral agreements. It goes through the domestic policies on energy and environment as


13/50

Unedited Draft


well as tariff, trade, investment and exchange rate policies, which have a bearing oninternational cooperation. It also deals with activities to fulfill Indias commitments to theUnited Nation Millennium development goals and with policies taken in responseconditionalities set by multilateral and bilateral lenders and the advice given by theinternational credit rating organizations. It also examines initiatives aimed at fostering

regional integration. The section specifically addresses fiscal incentives for cross-borderactivities, R&D activities for global concerns, measures to tackle money laundering, drugtrafficking and communicable diseases, and programs for implementation of agreementsunder the WTO.

KEY THRUSTS OF INTERNATIONAL COOPERATION POLICIES

Indias international cooperation is based on principles of non-alignment with superpowers and to attain peaceful and friendly relations with all countries. India hasdiplomatic and economic relations with almost all nations and is a Member of variousmultilateral bodies. Key thrusts of ongoing participation are to improve India's economic

conditions and competitiveness along with contributing towards global prosperity, peaceand development. As all policies are interlinked, it is difficult to judge which policies aredriven by competitive motivations and which ones by cooperative spirits.

Indias role in the international co-operation is directed towards achieving the followingoverarching objectives (GOI MOEA 2000, pp. ii):

To win international support to Indias national interests, priorities and concerns inthe context of wide ranging changes taking place in the world.

To strengthen the global consensus in favor of democracy as the central basis ofpeace and development.

To develop broad-based, mutually beneficial and synergistic structures ofcooperation in trade, industry, investment and technology transfer with all countries.

To work constructively bilaterally and in multilateral institutions such as the UN,NAM etc. to find answers to complex political, social and economic problems. Theseinclude concerns relating to peace, security, nuclear disarmament, informationtechnology, establishment of an equitable international economic order, globalization,environment, public health, terrorism and drug trafficking.

To strengthen economic and commercial links with the rest of the world..Indias consistent activism, bilaterally and in multilateral institutions, paid dividend ingalvanizing international public opinion and support against the menace of terrorism and

made positive contribution for the establishment of new international order.

INCOMING COOPERATION

a. International agreementsIndia is a founder member of most of the multilateral organizations and is guided by theirrules and regulations for international co-operation. To name a few, India is a founder


14/50

Unedited Draft


Member of the United Nations and its various economic and cultural councils, the IMFthe World Bank, the ADB, the International Labor Office (ILO), the United NationsConference on Trade and Development (UNCTAD) and the WTO. India takes activeparticipation in their deliberations.

India has signed bilateral economic, trade, investment and cultural treaties andagreements with major countries. In 2000, India signed 14 such agreements. RecentlyIndia signed bilateral investment treaties with ASEAN, Thailand and Singapore. It hassigned comprehensive Double Tax Avoidance Agreements with 66 countries, whichprovide for reduced rates of withholding tax, avoidance of double taxation of income andexchange of information for prevention of tax evasion. India has agreements for thetaxation of air transport and shipping operations with Afghanistan, Ethiopia, Iran,Kuwait, Lebanon, Pakistan, P.D.R.Y. (Yemen), Saudi Arabia, U.A.E., Yemen ArabRepublic, Czechoslovakia and Russian Federation.

b. Policies on external assistanceThe Indian government does not access external capital markets and borrows only frommultilateral and bilateral sources. External assistance comprises of both loans and grantsto finance large commercial projects or social sector projects. Official developmentassistance (ODA) is the external assistance with a grant element of 25% or more. TheInternational Development Agency (IDA) of the Word Bank is the major source ofconcessional borrowing, carrying a service charge of 0.75% per annum and maturity of35 years (including a grace period of 10 years). The IBRD1 and ADB provide non-concessional funds with usually variable interest rates with a spread of 60-75 basis points.Bilateral borrowings are mainly concessional in nature. While loans from Japan carry afixed interest rate of 1.8% per annum and a tenor of 30 years, borrowings from Germanycomprise a semi-concessional mix of loans with the concessional portion carrying a fixedrate of 0.75% and a tenor of 40 years.

India utilized IBRD loans for power generation and distribution, construction ofhighways, urban development, economic restructuring and fiscal reforms. IDA credits areused to fund projects in physical and human capital, institutions building andenvironment protection. ADB loans are mainly used for transport and communications,energy, financial services and poverty reduction. Of the major bilateral countries, Indiatook loans for infrastructure development and housing from Japan and Germany.

It is argued that multilateral organizations impose various conditionalities regardingstructural reforms and stabilization policies. As the sovereign Indian government does notact under duress, ongoing reforms bear willful agreements of both the parties. In fact,conditions agreed to external donors after the Gulf crisis in 1990 helped India to comeout of a severe balance of payments crisis. Major conditionalities included devaluation ofIndian rupee, full convertibility on current account, partial convertibility on capitalaccount, reduction of fiscal deficit, reduction of customs duties, rationalization of user

1 International Bank for Reconstruction and Development (World Bank).


15/50

Unedited Draft


charges for public goods, downsizing the government, privatization, decentralization,delicensing, deregulation and anti-corruption strategies.

Advice given by various international credit rating organizations such as Standard andPoors (S&P), Moodys, Fritch and Japan Bond Research Organization were also very

helpful for policy planning. In particular, their advice on reduction of interest rates, fiscaldeficits and off-budget liabilities were very useful. However, their criticisms regardingslow progress of reforms in land and labor markets, privatization, subsidies and downsizing the government are based on purely economic reasoning and do not take intoaccount the ground realities posed by democratic traditions and socio-political constrains.

External assistance is often tied with the procurement of goods and services from thedonor countries and the net interest rate works out to be higher than expected.Multilateral organizations do not impose such conditions for India although they insist onglobal tenders. While Germany allows fair competition, some bilateral countries do makesuch stipulations. However, Indian borrowings from such sources constitute a negligible

portion of total external borrowings.

Recently, on considering the high transaction costs of a large number of low valueprojects, tied assistance, and strict conditionalities, the government has taken a policydecision to prune the number of bilateral creditors from over 18 to only six, namelyJapan, United Kingdom, Germany, the U.S., the EU and the Russian Federation. Thegovernment has also decided to pre-pay outstanding bilateral debt except to Japan,Germany, the U.S. and France. The decision was also partly influenced by the substantialbuild up of foreign exchange reserves and low interest rates in the domestic countries.

Those bilateral countries, from which it has been decided not to receive developmentassistance on government account, have been advised to provide their developmentassistance to non-governmental organizations and universities. Accordingly, countrieslike Australia, Belgium, Canada, Denmark, France, Italy, Netherlands, Norway, Sweden,Switzerland and others are now providing assistance directly to the NGOs for primaryeducation, urban water supply and sanitation, HIV/AIDS prevention and care,strengthening environment institutions and poverty alleviation program.

Aid flows to India declined from 3% in 1960s to 0.7% of GNP in 1990s. OverseasDevelopment Assistance to India was very useful for development of social sectors andinfrastructure. However regional distribution of ODA was uneven and generally helpedthe richer states. India has high absorbing capacity as the needs of social sectors are largeand government does not have sufficient resources.

c. External sector liberalizationA priority area under reforms was external trade, investment and exchange rate policies(table 9). Exports and invisible earnings were encouraged to build up foreign exchange.Quantitative restrictions on foreign trade were virtually abolished and maximum customsduties were reduced from 400% in 1990 to 20% in 2004 to improve competitiveness of


16/50

Unedited Draft


Indian industries. There was liberalization of gold and silver imports which considerablyreduced smuggling.

The Indian rupee is now fully convertible on current account and fully convertible oncapital account for the non-residents. The IMF regards India as one of the countries

having independent floating exchange rate system. These liberalizations led to a build upof foreign exchange reserves from US$1 billion in June 1991 to US$ 102 billion inJanuary 2004.

To moderate the monetary impact of reserve accumulation, government prepaid part ofmultilateral and bilateral external debt, liberalized external commercial borrowing andoutward foreign investment. Monetary authority phased out Foreign Currency Non-Resident Deposits which benefited from exchange rate guarantee.

India recognizes that Foreign Direct Investment (FDI) acts an engine of growth andembodies a package of vital sources of capital, technology, and managerial, marketing

and technical skills. Since 1991 India adopted an open door policy for FDI. It undertookgeneral policies and strengthened legal and regulatory systems leading to a stablemacroeconomic framework, liberalization of industry, trade and capital markets and non-discriminatory fiscal and monetary policies. Most of the sectors (except agriculture, retailtrade, print media etc.) are now open for foreign investment subject to sectoral caps onequity. Foreign equity up to 100% is allowed in most infrastructure sectors.

Indian firms are allowed to raise funds abroad through Global Depository Receipts,Foreign Currency Convertible Bonds and offshore fund. Foreign Institutional Investors(FIIs) and Non-Resident Indians (NRIs) are allowed to operate in Indias capital markets(subject to an individual holding of 10% and collective holding up to 40% of total paid upcapital of a company) and to pick up disinvested shares of public enterprises.

Indian courts allow adequate safeguards for the enforcement of property and contractualrights. India had signed many bilateral investment protection agreements containing ruleson fair and equitable treatment, repatriation of equity and profits, and internationalarbitration of disputes. Impediments to FDI include some reservation for the small scaleindustries, sectoral ceilings on foreign ownership, approval procedures, restrictions onemployment of foreign staff and inadequate legal system for dispute settlements.

India permits the free repatriation of profits, dividends, interests, rents, royalties,consultancy fees and equity capital. Import controls are virtually abolished except forsome consumer goods. Almost all items of capital goods and raw materials are on opengeneral license. The Foreign Exchange Regulation Act (FERA) was replaced by theForeign Exchange Management Act. The FERA companies (having foreign equityexceeding 40% of total equity) now operate like Indian Companies, can own real estate,and use their trademarks and brand names for domestic sales.

India provides fiscal incentives for the development of industry, infrastructure andtechnology, which are equally applicable to both domestic and foreign companies. Tax


17/50

Unedited Draft


holidays up to 15 years are allowed for establishing industries in backward regions andfor infrastructure projects set up anywhere in India. Incentives are given for exporters,R&D activities and units located in Special Economic Zones (SEZs), Export ProcessingZones (EPZs) and Science and Technology Parks. A number of incentives such as capitalsubsidy, tax breaks, exemption of state duties, and the provinces provide concessional

land and power. Regulatory Authorities for telecom, ports and power determine tariffsand resolve disputes among various operators.

India allows tax exemptions for exports, lower interest rates for export credits and dutydrawbacks on inputs used for exports. Producers are allowed duty free imports of capitalgoods subject to export obligations. Exporters of food grains are given WTO compatiblesubsidies. Exporters are granted Special Import Licenses for restricted consumer goods.Export-Oriented Units (EOUs)/EPZ/SEZ units can sell up to 25% of general goods and50% of agro-based products in the Domestic Tariff Area (DTA). Supplies from DTA tothe EPZ/EOUs/SEZs are regarded as deemed exports and exempted from taxes andduties.

d. Millennium Development Goals (MDG)India is committed to achieve the United Nations MDGs targets, particularly to halve thepoverty ratio and to halve the proportion of people without sustainable access to safedrinking water, by 2015. The Approach Paper to the Tenth Five-Year Plan (2002-2007)stipulates that growth in per capita GDP should be accompanied by significantimprovement in human development and basic services to the people such as basichealth, education, drinking water and sanitation. The Plan indicates the followingmonitorable targets:

Reduction of poverty ratio from 26 percent by 5-percentage point by 2007 and by 15percentage points by 2012.

All children to go to schools by 2003 and all children to complete at least five yearsof schooling by 2007.

Increase in the literacy rate to 75 per cent during the Tenth Five-Year Plan. Reduction in the infant mortality rate per 1000 births to 45 by 2007 and 28 by 2012. All villages to have sustained access to potable drinking water within the plan period.Growth with social justice had been the primary objective of Indian planning since 1951,and several anti-poverty measures had been in operation for decades. These includewelfare programs for the weaker sections, women, children, and a number of specialemployment programs for self- and wage employment. Government relied mainly on twoapproaches for poverty alleviation: the first based on the anticipation that economicgrowth will have a trickle down effect on the levels of living of all groups; and thesecond that direct anti-poverty programs are also required. Ongoing economic reformssince 1991 strengthened these programs to generate more employment, create productiveassets, impart technical skills and raise the income levels of the poor. As a result of thesepolicies, despite high population growth, the poverty ratio declined from 55 percent in


18/50

Unedited Draft


1973 to 26 percent in 1999 for all India i.e. at a rate of 1.1 percentage point per annum.The decline was fairly uniform across rural and urban areas.

e. Public healthIndia has built a vast health infrastructure at primary, secondary and tertiary care ingovernment, voluntary and private sectors resulting in a substantial improvement inhealth over the years (table 10). During the 1990s India entered an era of dual diseaseburden. While communicable diseases became more difficult to combat due to insecticideresistance, emergence of new diseases such as HIV/AIDS and demographic transitionneeded larger investments in health. AIDS is not only a fatal disease but also a majordevelopment issue due to its potential impact on productivity and growth. The Planoutlay for the Central Health Sector Schemes in 2003-04 was Rs.1550 crore, 55% ofwhich was spent for the control of Malaria, Tuberculosis, Leprosy, AIDS, Blindness, etc.Phase-II (2003-04) of the program is in operation with World Bank assistance underGlobal Fund for AIDS, TB and Malaria (GFATM).

f. Environment, energy and R&D policiesEnvironment: Environmental protection is essential to ensure sustainable developmentover time. Vast population and wide spread poverty in India lead to degradation ofenvironment in many ways by putting pressure on scare resources like land, water andenergy. Environmental management was enhanced in the Seventh Plan (1985-1990) byorganizational and legislative changes. A new Ministry of Environment, Forests andwildlife was created in September 1985 and the Environment Protection Act (EPA) wasenacted in November 1986 to give greater impetus to the environment protection. Othermeasures included announcement of National Forest Policy 1988, Amendment of ForestConservation Act in 1988, Water Prevention and Control of Pollution Act in 1988 and theDraft Policy Statement on Abatement of Pollution 1991.

During the Eighth Plan (1992-1997) and Ninth Plan (1997-2002) major progress wasachieved in environment and ecological development. National standards for pollutingeffluents were formulated for major industries and rivers. In urban areas, strict normswere fixed for vehicles to control air pollution. Environment unfriendly industries wereshifted from the urban areas. Under World Bank and UNDP assistance programs, grantswere provided to install environment friendly plant and machinery.

Indian planners reserved energy sector for public investment, as they required hugecapital with high capital intensity, long gestation, high risk and low return. Since 1991government liberalized energy sector and allowed private including foreign investment.Except for coal and electricity distribution, foreign equity is allowed up to 100% in allenergy sectors. The Electricity Regulatory Authority determines electricity tariffs.

Energy: Energy taxation is an important source of government revenues. Depending onpolitical priorities and fiscal objectives, excise and customs duties vary for differentpetroleum products. There is cess on diesel and petrol for financing construction of roads,


19/50

Unedited Draft


flyovers and bridges. There is an environmental cess on selected products including oil.Various fiscal incentives are given to power plants. Power is supplied free to agriculturein many states. Administered pricing mechanism for POL had been dismantled, butsubsidies are provided for household use of kerosene and LPG under a plan to phase outthese subsidies in the medium term.

Research and Development: India has built a wide array of institutions to support thedevelopment and diffusion of industrial technologies over the years so that itsdependence on foreign technology is the least. It has all basic, applied, hardware andsoftware and R&D institutions, some of which have world-class standards. In the sphereof biotechnology, government spent around US$ 1 billion towards R&D in nationallaboratories in 1990s. But, these institutions failed to commercialize R&D activities asthese had little linkages with the private sector. Since 1993 Government encouragedprivate sector funding of research institutions by providing tax relief on R&Dexpenditure. Many pharmaceutical companies introduced products of original researchthrough technology transfer from Indian R&D institutions in the field of vaccines,

diagnostics and reagents.

India acquired advanced technologies from the U.S., UK, U.S.S.R., Germany, France andJapan, either by outright purchase, FDI, joint ventures or on the basis of royaltypayments. For this Indian companies received support and assistance from internationalorganizations like APCTT, UN, UNIDO, and IDRC, Canada.

g. Transport, communications and tourismDevelopment of international airports, seaports, international posts andtelecommunications play a major role in facilitating tourism and cross-border movementof goods and services. As public resources are limited, government has allowed privateparticipation including foreign investment in these areas. Government is upgradingexisting international airports to international standards with public-private partnershipand has allowed private sector to build up new international airports at the emerginginformation technology centers at Bangalore and Hyderabad and the major tourist resortat Goa. Private investment in sea-ports has increased significantly in recent years with thestrengthening of the Ports Regulatory Authorities.

Foreign investment up to 100% is allowed in the development of sea-ports, airports andshipping, and up to 49% in civil aviation. In telecoms, foreign investment up to 49% isallowed in basic and mobile services and broadcasting, 74% for Independent ServiceProviders (ISPs) with gateways, radio-paging and end-to-end bandwidth, 100% for ISPsproviding electronic mail and voice mail, courier services and information technology.

h. Money laundering and drug traffickingThere is specific budgetary allocation for the Department of Revenue, which isresponsible to control financial abuse through illegal flows of precious metals andfinancial transactions. While the Central Economic Intelligence Bureau, set up in July


20/50

Unedited Draft


1985, oversees the implementation of the Conservation of Foreign Exchange andPrevention of Smuggling Act 1974 (COPEPOSA) against smugglers and foreignexchange racketeers, the Directorate of Enforcement is concerned with the enforcementof the Foreign Exchange Management Act 1999 (FEMA) after the expiry of the ForeignExchange Regulation Act (FERA) 1973.

The Department of Revenue is also responsible for the administration of the NarcoticDrugs and Psychotropic Substances Act 1985 (NDPS Act 1985), which sets out thestatutory framework for drug administration in India. Three authorities - the CentralBureau of Narcotics (CBN), Government Opium & Alkaloid Works (GOAW) andNarcotics Control Bureau (NCB) - have been established for the purposes ofsuperintendence of cultivation of opium, manufacture of opiates and combating drugtrafficking.

i. Implementation of WTO agreementsIndia strongly favors the multilateral approach to trade relations and grants most favorednation treatment to all its trading partners, including non-members of WTO. Within theWTO, India is committed to ensuring that sectors in which developing countries enjoycomparative advantages are adequately opened up, and the special and differentialtreatment provisions for developing countries under WTO agreements are translated intospecific enforceable dispensations. The Ministry of Industry and Commerce inassociation with the Ministries of Finance and other concerned Ministries has takenvarious measures to implement India's commitments to the WTO.

The WTO agreement on Trade Related Intellectual Property Rights (TRIPS) sets outminimum standards of protection in respect of copy rights, trade marks, trade secrets,Geographical Indications, Patents and Industrial Designs. To fulfill these commitments,Parliament amended the Copyright Act 1957 in 1994 and 1999, Trade and MerchandiseMarks Act 1958 in 1999, and passed Patents Act 1999, Geographical Indication of Goods(Registration and Protection) Act 1999, Designs Act 2000 and Semiconductor IntegratedCircuits Lay-Out-Design Act 2000.

Under the Trade Related Investment Measures (TRIMS) Agreement, developing countrieshad a transition period of 5 years up to 31-12-1999. India notified two TRIMS relating tolocal content requirements in production of certain pharmaceutical products anddividend-balancing requirement in the case of foreign investment in 22 consumer items.These requirements had since been eliminated.

India made considerable progress in rationalization and reduction of customs tariffs. Peakcustoms tariff has been reduced to 20% and would be reduced to average ASEAN levelin the medium term. India has set up special units to deal with anti-dumping cases andimposition of anti-dumping duties. India completed the process of phased removal ofQuantitative Restrictions (QRs) as per the agreed time schedule. Presently, out of 11,671items, only 52 items are prohibited, 484 restricted 32 subject to software exports and rest11,103 items are free.


21/50

Unedited Draft


OUTGOING COOPERATION

j. Technical assistanceIndia provides technical assistance under the Technical and Economic Cooperation(ITEC) Program and the Special Commonwealth African Assistance plan (SCAAP) to141 developing countries in Asia, Africa, Latin America, Eastern Europe and the Pacific.India is also participating actively in the international initiative for economicdevelopment of HIPC (Heavily Indebted Poor Countries) and other developing countries.Under HIPC, India is providing credit lines to seven eligible HIPC countries viz.Mozambique, Tanzania, Zambia, Ghana, Guyana, Nicaragua and Uganda. Thegovernment has waived the outstanding dues from these countries. In addition, Indiaprovides credit lines to a number of developing countries (table 14).

k. Regional integrationIndia believes that regional cooperation is a first step towards multilateral cooperation.Regional economic cooperation facilitates the free flow of goods, services, capital andlabor across countries and helps for efficient use of resources and improvement of growthof member countries. South Asian Association for Regional Cooperation (SAARC) wasestablished in 1985 comprising India, Bangladesh, Bhutan, Maldives, Nepal, Pakistanand Sri Lanka. SAARC countries signed South Asian Free Trade Agreement (SAFTA)and recently included investment as a part of its regional cooperation.

India signed bilateral trade agreements with Nepal in 1996 and Sri Lanka in 1998. Indiaallows automatic approval of outward investment by Indian companies up to $50 million.

India allows imports of goods manufactured in Nepal free of customs duties andquantitative restrictions (except for alcohol, tobacco and cosmetics). This system ofinvestment and tariff jumping facilitated some Indian companies to shift productionbases to Nepal for serving Indian and other markets. Indian companies run 72 of 214foreign ventures in Nepal accounting for 53 % of capital of all foreign ventures (Kumar2001). Sri Lanka hosts about 90 Indian ventures in light engineering goods, automobilesand hotels which are basically domestic market seeking.

The share of intra-SAARC exports in total SAARC exports increased from 3.2% in 1990to 4.7% in 1999. The intra SSARC imports as a proportion of total SSARC importsincreased from 1.91% in 1990 to 4.12% in 1999 (Das 2002).

In the region there are some sub-regional economic zones (SREZs) focusing on themovement of capital, labor, technology and information rather than trade in goods andservices. A SREZ called the Bangladesh, India, Sri Lanka, Thailand EconomicCooperation (BIST-EC) was formed on June 6, 1997. Subsequently, Bhutan, Nepal andMyanmar had joined the group. Trade between these countries currently totals $1.3billion and is expected to improve due to economic boom in South and South East Asia.


22/50

Unedited Draft


These countries signed a Free Trade Agreement on February 8, 2004 and agreed toremove all trade and tariff barriers by 2015.

India is a founder member of the Economic and Social Council for Asia and Pacific(ESCAP). ESCAP promoted regional cooperation in industry, power, shipping, ports and

technology transfer. Asian developmental institutions like the Asian Development Bank,Asian Clearing House, the Asian Reinsurance Corporation and the Asian and PacificCentre for the Transfer of Technology were established at the initiative of ESCAP.

Increasing levels of intraregional trade and investment are gradually shaping aninterdependent regional economy in the ESCAP based on linkages of production,technology and division of labor. ESCAP members succeeded significantly in utilizingthe technological revolution to enhance national comparative advantages. Firstly Japanand then the advanced countries of the region became critical growth centers supplyingforeign investment and technology to other economies of the region.

ESCAP and its regional institutions such as APCTT, the Regional Network forAgricultural Machinery, and the Regional Coordination Centre for Research andDevelopment of Coarse Grains, Pulses, Roots and Tuber Crops undertook activities topromote exchange of national experiences, skill training, endogenous capability-building,research on industrial restructuring, dissemination of information on specific technologyand Environmental Sound Technologies (ESTs) through seminars, workshops andtechnology fairs.

III. BUDGETARY ALLOCATIONS FOR INTERNATIONAL COOPERATIONThis section presents the budgetary allocations made by the Central government foractivities facilitating international cooperation (as identified in section II). Subsequentsections indicate the broad groups of activities under each heading and governmentagency to which the expenditure for each type of activity is issued. Budget allocationsunder these headings in 2002-03 and 2003-04, summarized in table 11, are further sub-divided into two groups: those spent within national boundaries and those spent abroad tomeet international obligations or to improve external relations. It may be observed fromtable 11 that total expenditure for international cooperation as percentage of total centralgovernment expenditure declined from 8.74% in 2002-03 to 6.78% in 2003-04. Socialservices expenditures constitute major portion of government expenditure, whileexpenditure on institutional set up for WTO, drug trafficking and smuggling was the

least. The higher ratio in2002-03 was due to larger interest payments for external debtand higher expenditure on food for works program (under social services) to tacklesevere droughts in 2002-03.

a. Mandatory contributions to the international agenciesMandatory contributions of the Indian government to international organizations in 1990-91 to 2003-04 summarized in table 12 indicate that the ratio of total contributions to the


23/50

Unedited Draft


central government expenditure declined from 1.8% in 1991-92 to 0.2% in 2003-04, thatto total revenue and grants from 2.6% to 0.3%, that to total tax revenue from 3.9% to0.5% and that to overall deficit from 6.3% to 0.8% over the same period. Contributionsamounted to as high as 40.8% of net external assistance received by the Indiangovernment in 1995-96, although the ratio declined to 28.1% in 2003-04.

Table 13 classifies the contributions under standard industrial classifications in thenational account framework on the basis of the classification of the subject dealt by theconcerned department (having one-to-one correspondence with the concernedinternational organization). It is observed that services sectors, particularly internationalorganizations dealing with finance, account for major share in total contributions. Insome years, international organizations dealing with public administration, communityand social services also received major share of Indian contributions, while agricultureand industry taken together had marginal shares in total contribution.

b. Expenditures for external affairsExpenditures for external affairs can be grouped under four sub-headings: (a) cost of 161embassies abroad, (b) costs for diplomatic relations, (c) expenditure for granting visas,and (d) grants and external assistance given by the Ministry of Finance and the Ministryof External affairs under the Technical and Economic Cooperation. These expendituresfor the years 2002-03 and 2003-04 are summarized in table 14 indicate that their share intotal central government expenditure ranged between 0.8 to 0.9 per cent.

c. External debt services and contingent liabilities of the governmentInterest on external debt: Interest on external debt on government account amounted toRs.4511 crore and Rs.3288 crore respectively in 2002-03 and 2003-04 which accounted

for 1.13% and 0.69% of total central government expenditures in the respective years.

Contingent liabilities: In addition to direct liabilities for external debt, the government ofIndia has various contingent liabilities in terms of government guarantees for the loanstaken by the public enterprises, exchange rate risk and guarantees given to the first tracklarge power projects by the independent power producers. During 1990s, as percentage ofGDP, there was a steady decline of the contingent liabilities of the central government(from 7.8% to 4.2%), but an increase in the liabilities of the states (5.7% to 7%) (Das,Bisen, Nair and Kumar 2001). Many states initiated measures to contain the growth ofguarantees. These include selectivity in providing guarantees, disclosing comprehensiveinformation in budgets, setting up guarantee redemption funds, fixing statutory limits on

guarantees and charging guarantee commissions on outstanding amounts.

In the external sector, the government provided guarantees to external loans taken bypublic sector enterprises, fast track private power projects and oil and gas explorationcompanies. There was a steady decline in Government guarantees from US$10.7 billionat end-March 1995 to US$6.4 billion at end-March 2003. Sectoral distribution ofGovernment guarantees indicates a growing share of guarantees extended to power (from21.7% in 1994 to 52.7% in 2000) and housing (3.0% to 10.7%), but declining shares of


24/50

Unedited Draft


petroleum (31.6% to 18.2%), civil aviation (17.2% to 4.3%) and aluminium (8.2% to0.3%).

In addition to loan guarantees by the government, until 1993 RBI provided exchange rateguarantees for attracting deposits from the non-resident Indians (NRIs). Other instances

of exchange guarantee were the Resurgent India Bonds (RIBs) launched by the StateBank of India (SBI) in August 1998 and the India Millennium Deposits (IMD) floated bythe SBI in October-November 2000 for raising resources from the NRIs. Funds mobilizedthrough RIBs were US$ 4.23 billion and those by IMDs were US$ 5.51 billion. As perthe agreement, in the event of rupee depreciation, the loss up to 1% per annum would beborne by the SBI and the balance by the Government.

In addition to the above, contingent external liabilities arise in normal operations by thecommercial and development banks, corporate bodies and the Export Import (EXIM)Bank of India for providing performance and loan guarantees, bonds, letters of credit,forward exchange contracts, underwriting commitments, deferred payment guarantees,bill discounting and exchange risk for Foreign Institutional Investment and NRI deposits.

d. Trade and export promotionBudgetary allocations for trade development and export promotions summarized in table15 indicate that these expenditures amounted to 0.27% of the total central governmentexpenditure in 2002-03 and 2003-04. In addition to explicit budget allocations, there arevarious implicit subsidies in terms of fiscal and other incentives for trade and exportpromotion (discussed previously). Revenue losses for most of these fiscal incentives arenot estimated in the budget. Table 16 on duty foregone for selected export promotionschemes indicates that there was an increasing and substantial loss of customs duties in2000-2003. Total duty foregone amounted to as high as 80% of net customs collections in2002-03.

e. Social services expenditure related to the MDGsBudgetary allocations on selected social sectors related to the commitment under theMDGs are summarized in table17. It is observed from the table that these social servicesexpenditures as percentage to the total central government expenditure amounted to 5.4%in 2002-03 and 4% in 2003-04. The higher expenditure in 2002-03 was due to specialemployment generation and food-for-work programs introduced by the centralgovernment to tackle the severe drought in the year.

f. Financing energy, environment and R&DBudgetary allocations for energy conservation, pollution control, environment protection,capacity building for environment management, climatic change project and selectedscientific and industrial research and development activities for the years are presented intable 18. It is observed that these expenditures accounted for 0.5% of total centralgovernment expenditures in 2002-2004. India lags far behind in its R&D activities whencompared to advanced countries. As per the information given in the World Development


25/50

Unedited Draft


Indicators 2003 (World Bank 2003, pp.302-304), Indias R&D expenditure at 1.23 % ofGDP is higher than Malaysias 0.4%, Thailands 0.1% and Chinas 1%, but isconsiderably lower than that in the U.S. (2.7%), Japan (3%), Germany (2.5%) and theRepublic of Korea (2.7%).

g.

Transport, communications and tourism

Budgetary allocations for selected activities in seaports, air transport, telecom andtourism to facilitate international cooperation provided in table 19 indicate that theseexpenditures accounted for only 0.2% of central government expenditure in 2002-2004.

h. Money laundering and drug traffickingThere is specific budgetary allocation for the Department of Revenue and the Ministry ofHome Affairs, which are responsible to control drug trafficking and financial abusethrough illegal flows of precious metals and financial transactions. Table 20 indicates that

only a small proportion of central government budget is spent on these activities.

i. Institutional set up for WTO issuesThe Ministry of Commerce and Industry is the nodal ministry to deal with WTO issues.Only a small proportion of central government budget is spent on the institutional andadministrative matter (table 21).

j. Foreign exchange reserveAfter the Gulf crisis in 1990, Indias foreign exchange reserves dwindled to US$1 billion,equivalent to only two weeks level of essential imports. External sector liberalizationalong with Indias cautious approach towards capital account convertibility helped tobuild up significant foreign exchange reserves over the years. Foreign exchange reservesincreased by more than $30 billion in 2003 as a result of improvement in both currentaccount balance and net capital inflows. The stock of foreign exchange (including goldand SDR) stood at $108 billion in March 2004 and is equivalent to 18 months of imports.

The policy for reserve management is judiciously built upon a host of factors such as thesize of the current account balance and short-term liabilities, variability in portfolioinvestment and other types of capital flows; unanticipated external shocks; andrepatriable foreign currency deposits of Non-Resident Indians. Taking these factors intoaccount, Indias foreign exchange reserves are consistent with the rate of growth, theshare of the external sector in the economy and the size of risk-adjusted capital flows.

The substantial growth in reserves in recent years has generated a welcomed debateregarding the costs and benefits of holding reserves. In such cost-benefit analysis, it isessential to analyze the objectives of holding reserves which include (a) maintainingconfidence in money and exchange markets; (b) enhancing the capacity to intervene inforex markets; (c) limiting external vulnerability; and (d) adding to the comfort of the


26/50

Unedited Draft


market participants. Sharp exchange rate movements can be highly unsettling and costlyfor the economy during periods of uncertainty. These economic costs are likely to besubstantially higher than the net financial cost, if any, of holding reserves.

In this context, it is important to note that in the last few years, reserves have been made

without increasing the overall level of external debt. The increase in reserves largelyreflects higher remittances, quicker repatriation of export proceeds and non-debt inflows.Even after taking into account foreign currency denominated NRI flows (where interestrates are linked to LIBOR), the financial cost of additional reserves in India is quite low,and is likely to be more than offset by the return on additional reserves.

It may also be mentioned that most of the increase in reserves in recent years is throughnet purchases by RBI in the domestic forex market, for which an equivalent amount ofdomestic currency has been released to the concerned domestic entities, including publicsector units, corporate bodies and individuals. The decision on the use of this counterpartdomestic currency released by RBI (i.e., for investment, deposits or as liquid assets, etc.)

is the responsibility of the entities. Needless to add that to the extent this counterpart localcurrency is used by recipient entities for further investment in the economy, the impacton industrial demand and growth would be favorable.

k. MigrationIndias stock of human capital in terms of qualified people is one of the highest in theworld (table 22). Every year India adds about 2.3 million English-speaking graduatescompared with 1.2 million graduates in the U.S. (Ahya and Agarwal 2004, p. 2). Withlimited opportunities in the domestic market, Indian educated labor continues to look foroutsourcing opportunities and job offshore. In the past, India participated in the globallabor arbitrage through migration. The acceleration in the outsourcing of services andmanufacturing in recent years has created alternative ways to participate in the globallabor market. India has achieved success in sectors with higher labor intensity but lowerinfrastructure and capital intensity, such as software and IT enabled services,pharmaceuticals, gems and jewelry and garments. Presently India has a share of 1.3% inglobal trade of commercial services (excluding remittances from Indians working abroad)compared to its share of only 0.8% in global trade of goods.

There is heated debate on substantial brain drain from India. Currently there are about 20million non-resident Indians (NRIs) of which 1.7 million are settled in the U.S. Otherfavored destinations are the UK, Africa, the Middle East and Malaysia. However, onconsidering substantial remittances, investment and deposits by the NRIs, free movement

of technical people had been beneficial to India. In 2001, India received the highestamount of remittances from workers amongst developing countries (table 23). Highremittances helped India to have surplus on current accounts since 2002-03. NRIs have ashare of about 20% in stock of Foreign Direct Investment (FDI) in India. NRI deposits offoreign exchange with the domestic banks are major sources of foreign exchange reserveswith the RBI and helped India to tackle the economic sanctions imposed by developedcountries after the nuclear test of 1998.


27/50

Unedited Draft


CONCLUSION

India acknowledges the benefits of international economic and diplomatic relations. Overthe years, the country has liberalized trade and investment policies, and protectedinterests of the weaker sections through development of appropriate safety nets. Ongoing

reforms have a human face with increased outlays on social sectors and povertyalleviation programs. Reforms in India not only generated high growth but also reducedpoverty ratios.

India is a founder member of the major international organizations and makes annualcontributions to these organizations. On considering the level of per capita income,Indian contributions and budget allocations appear to be adequate and stable over time.

Indian budget making is transparent and all expenditures are debated and approved by theParliament. Economic policies and budget allocations are based on general politicalconsensus. Given the fundamentals of the economy and better economic prospects in

future, government resources and expenditures are sustainable. However, there areconcerns regarding increasing government deficit and contingent liabilities. Governmentpassed the Fiscal Responsibility and Budget Management Act 2003 which aims ateliminating the revenue deficit and reducing the fiscal deficit in the medium term. India'sfiscal deficit and public debt cannot be sustained over a longer period unless resourcesare augmented and subsidies reduced significantly. The tight fiscal situation may put aconstraint on contributions to international organizations.

It is necessary to maintain a high degree of fiscal discipline and transparency, a welldesigned fiscal policy, short-run contingency measures and a multi-year macro-budgetaryprocess for both Centre and States. There is also need for strengthening institutional

framework for preparation, sequencing, the phase-in and implementation of neededstructural reforms and phasing out of quasi-fiscal and contingent liabilities. As in othercountries, India should estimate the tax expenditure to raise public awareness about thehidden tax subsidies. In this respect, it is necessary to move towards accrual accountingas recommended in the IMF Revised Government Finance Statistics 2000 along with theexisting system of preparing budget on cash basis.

India recognizes global concerns regarding international terrorism, money laundering,drug-trafficking and spread of HIV/AIDS and supports measures taken by multilateralorganizations. The country is actively combating these problems through appropriateinstitutions and laws. Multilateral organizations could provide more technical assistancein these areas to member countries for strengthening their financial and legal systems.


28/50


29/50

Unedited Draft


Virmani, Arvind. 2001. "India's 1990-91 Crisis: Reforms, Myths and Paradoxes." NewDelhi, Planning Commission, Government of India.

World Bank. 2003. Global Development Finance- Financing the Poorest Countries:Analysis and Summary Tables. Washington DC.

_________. 2003.World Development Indicators 2003.Washington DC.


30/50

Unedited Draft


TABLES

TABLE 1:INDIAS FISCAL AND FINANCIAL SECTOR REFORMS SINCE 1991Area Status in June 1991 Status in February 2004

Budget Policy Budgetary support to central public enterprisesamounted to 1.5% of GDP besides various subsidies,

concessional credits, price and purchase preferences.No hard budget constraints. No privatization policy.

Budgetary support curtailed to 0.6% of GDP.Concessional credits / price preference eliminated.

Hard budget constraint introduced. Disinvestment up to49% of government equity allowed.

Year Fiscal Revenue PrimaryDeficit Deficit Deficit

1990-91 6.6 3.3 2.8

Year Fiscal Revenue PrimaryDeficit Deficit Deficit

2003-04 4.8 3.6 0.3

Fiscal deficit

Combined fiscal deficit of the Centre and States in 1990-91:

Central government 6.6States /Union Territories 3.3Centre & States /Union Territories 9.4

Overall fiscal deficit of the Centre and States in 2003-04:

Central government 4.8States /Union Territories 4.5Central & States /Union Territories 8.8

Govt. securities Fixed and low interest rates. Government securities are sold at market prices.

Capitalmarkets

Issuing and pricing of securities, shares and bondsdetermined by the Controller of Capital Issues (CCI) in

the Finance Ministry.

Office of Controller of Capital Issues is abolished.Independent regulatory authority - Securities and

Exchange Board of India - is established for orderlygrowth of capital markets.

Maximum RatesExcise duties 110%Import duties 400%Income tax 54%Corporate tax:

Domestic cos. 49% and 54%Foreign cos. 65%

Maximum RatesExcise duties 24%Import duties 20%Income tax 30% + surcharge of 10%Corporate tax:

Domestic cos. 35% + surcharge of 2.5%Foreign cos. 40% + surcharge of 2.5%

Tax structure

Dividend tax on both individuals and companies.Existence of gift tax.Limited cases of tax holidays.

Dividend tax on distributed profits.Gift tax abolished.Tax holidays extended to all infrastructures.

Highly controlled banking system with strict rules fornew branches and entry of new banks.

New private banks set up. Government equity in publicbanks reduced to 49%. Foreign equity in private banksallowed up to 40%.

Bank deposit rates fixed according to account types andmaturities. Minimum maturity of time deposit was 30days.

Bank deposit rates except for savings a/c liberalized.The min. maturity of term deposit reduced to 7 days.

Bank lending rates are fixed according to loan size andend uses. Floor rate on large loans fixed by the ReserveBank of India (RBI) at 21%. RBI Bank rate at 12%.

Lending rates liberalised. Prime Lending Rate rangesbetween 10.5% to 12% with spread on both directions.Bank rate reduced to 6%.

Priority sectors lending amounted at least 40 % of bankcredits at concessional rates.

Priority sectors redefined. No concessional rates exceptfor small loans, housing, small scale industries,agriculture and education.

Government pre-empted large portion of bank reservesthrough Cash Reserve Ratio of 25% and StatutoryLiquidity Ratio of 38.5%.

Higher bank funds are available for private sector, theCash Reserve Ratio is reduced to 4.5% and theStatutory Liquidity Ratio is reduced to 25%.

Banking system

Inadequate norms concerning capital adequacy, incomerecognition, and provisioning for non-performing assets

Regulations, monitoring, norms on asset classification,provisioning, capital adequacy tightened as per

international best practices.FDI treatment Foreign portfolio investment in Indian companies notallowed. Foreigners not allowed buying governmentsecurities or shares in public sector enterprises.

Foreign Institutional Investors (FIIs), Non-ResidentIndians (NRIs) and Overseas Corporate Bodies (OCBs)allowed operating in Indias stock markets subject toindividual and cumulative ceilings. NRIs/ FIIs allowedbuying govt securities & debt issues.

Domesticcompanies

Indian firms not allowed raising funds from foreignstock exchanges.

Indian firms allowed raising funds abroad throughGlobal Depository Receipts, Foreign CurrencyConvertible Bonds and offshore fund.

Source: Updated on the basis of Das 2003a (pp. 14-19).


31/50

Unedited Draft

Date post:	07-Apr-2018
Category:	Documents
Upload:	professor-tarun-das
View:	225 times
Download:	0 times

UNDP Financing International Cooperation

Documents