MONETARY AND BANKING

DEVELOPMENTS

3
In the context of its monetary and credit policy
for the current financial year, the Reserve Bank
of India (RBI) indicated broad money (M3) growth
for 1999-2000 in the range of 15.5 to 16.0 percent.
As on January 14,2000, the year-on-year M3
growth was 16.6 percent as against 20.5 percent
as on the corresponding date of the previous
financial year. The relatively higher M3 growth in
the last financial year reflected the inclusion of
the proceeds from the Resurgent India Bonds
(RIBs), which became part of the broad money
stock with effect from end-August 1998. The
growth in M3 at 12.0 percent till January 14, 2000
in the current financial year was also well below
that at 13.7 percent in the corresponding period
of the previous financial year. The relatively lower
M3 growth in the current financial year till January
14, 2000 reflected the decline in reserve money
by 0.1 percent as against an increase by
10.7 percent in the corresponding period of
1998-99. The decline in monetary base, in turn,
resulted from the relatively negligible growth in
Governments monetised deficit and the decline
in RBIs claims on banks and commercial sector
during this period.
3.2 The growth in non-food credit from
commercial banks to commercial sector till
January 14, 2000 was higher at 10.6 percent than
that at 7.2 percent in the corresponding period
of the previous financial year. The total flow of
funds from commercial banks to commercial
sector consisting of both non-food credit and
investment in debt/equity instruments of the
corporate sector comprising both public
and private sector units increased by
11.6 percent during this period as against
10.0 percent in the corresponding period of
1998-99.
3.3 During April-December,1999 sanctions by
All-India Financial Institutions (AIFIs) increased
by 15.5 percent as against 26.0 percent in the
corresponding period of 1998. Disbursements
by AIFIs increased by 17.2 percent during the
same period as against 13.6 percent during the

corresponding period of the previous financial

year.
3.4 As part of the efforts to further strengthen
prudential norms, the risk weight of 2.5 percent
for investments in government and other
approved securities has been extended to cover
all investments, including securities outside the
SLR, with effect from the year ending March
31,2001. With a view to facilitating speedier
recovery of debt, the Recovery of Debts Due to
Banks and Financial Institutions (Amendment)
Ordinance, 2000 was promulgated on
January 17, 2000. The process of interest rate
deregulation has been carried further by allowing
banks (a) to operate different PLRs for different
maturities, (b) to offer fixed rate for all terms loans
subject to the Asset-Liability Management
Guidelines, (c) to charge interest rates on loans
to micro-credit organisations as per normal
policy and (d) to charge interest rates without
reference to PLR in respect of loans covered by
refinancing schemes of term-lending institutions,
lending to intermediary agencies, including
housing finance intermediary agencies,
discounting of bills and advances against
domestic/NRE term deposits and FCNR(B)
deposits.
43

3.5 The Reserve Bank introduced an Interim

Liquidity Adjustment Facility (ILAF) in place of the
General Refinance Facility with effect from April
21,1999, as an interim arrangement aimed at
facilitating the transition to a full fledged Liquidity
Adjustment Facility on the lines suggested by the
Narasimham Committee (II). Some measures
were also taken to further deepen the money
market, namely, access to repo markets to select
non-bank institutional participants, and extension
of cheque writing facility to Money Market Mutual
Funds (MMMFs), Gilt Funds, and Liquid Income
Schemes of Mutual Funds with predominant
investment in money market instruments. To
enable the banks, AIFIs and Primary Dealers
(PDs) to hedge interest rate risks, RBI allowed
Interest Rate Swaps (IRS) and Forward Rate
Agreements (FRAs).
3.6 In line with the monetary policy stance of
facilitating adequate availability of credit to
support industrial recovery, the Cash Reserve
Ratio (CRR) was reduced by 0.50 percentage
point to 10 percent with effect from the fortnight

beginning May 8, 1999,and further down to 9

percent in two phases of half-a-percentage point
each with effect from November 6,1999 and
November 20, 1999 respectively. The
incremental CRR of 10 percent on increase in
liabilities under the FCNR(B) scheme was also
withdrawn with effect from November 6,1999. In
addition, the interest rate surcharge of 30 percent
on import finance was withdrawn so as to reduce
the financing costs of imports for industry.
Keeping in view the urgent national need to speed
up infrastructure development, operational
guidelines on financing of infrastructure projects
have been issued to enable banks and FIs to
sanction term loans for technically feasible,
financially viable and bankable projects taken up
by both the private and public sector
undertakings. In order to encourage the flow of
finance for venture capital, it has been decided
that the overall ceiling of investment by banks in
ordinary shares, convertible debentures, units of
mutual funds, etc. of 5 percent of their incremental
deposits of the previous year would stand
automatically enhanced to the extent of banks
investment in venture capital. With a view to
encouraging credit flow from non-banking
financial companies (NBFCs) the ceiling on bank
credit linked to net owned fund (NOF) was
removed in respect of NBFCs, which are
statutorily registered with RBI and which are
engaged in the principal business of equipment
leasing, hire-purchase and loan and investment
activities. As low level of capitalisation adversely
affects the ability of NBFCs to withstand cyclical
fluctuations in business, NBFCs with NOF below
the prescribed minimum level of Rs. 25 lakh have
been asked to achieve the stipulated level by
January 8, 2000 for the purpose of registration.

Monetary and Credit Policy

3.12 Though M3 growth exceeded projected
levels during each of the previous three years,
the monetary and credit policy for 1999-2000
indicated the desirability of aiming at a lower M3
growth in 1999-2000 than the rate of growth of
15.0 to 15.5 percent projected for the previous
two years. However, keeping in view the likely
adverse impact of an unduly restrictive monetary
and credit policy on Governments market
borrowing requirements as well as on the general

growth prospects, RBI indicated a marginally

higher M3 growth in the range of 15.5 to 16.0
percent for 1999-2000.The broad money growth
of 15.5 16.0 percent indicated for 1999-2000
assumes a GDP growth rate of 6-7 percent and
an inflation rate of about
5 percent per annum. The yearon year growth
in M3 as on January 14, 2000, was
16.6 percent, which was more than the projected
range of M3 growth. Consistent with the projected
M3 growth, RBI has given expansion in aggregate
deposits of scheduled commercial banks (SCBs)
at Rs. 1,18,500 crore or
16.5 percent in 1999-2000 over 1998-99.
However, as on January 14, 2000, the year-onyear
growth in aggregate deposits of SCBs was
marginally lower at 16.2 percent. Non-food bank
credit including investments in commercial
papers, shares/debentures/bonds of PSUs and
private corporate sector has been projected by
RBI at 18 percent in 1999-2000. The observed
year-on-year growth in the total flow of funds
comprising non-food credit and investment in the
debt/equity instruments was 18.1 percent as on
January 14, 2000. Availability of credit of the
projected order is expected to cater to the credit
requirements of the productive sectors of the
economy.
3.13 The financial sector reforms announced
as part of the monetary and credit policy for 19992000 (Box 3.2) include the interim liquidity
adjustment facility (ILAF) through repos and
lending against collateral of Government of India
Securities (Box 3.3), and introduction of rupee
derivatives to enable market players to hedge
interest rate risks. In order to ensure adequate
liquidity for promoting industrial revival, the policy
statement also announced reduction in CRR to
10.0 percent with effect from the fortnight
beginning May 8, 1999.The mid-term review of
monetary and credit policy for 1999-2000
announced further reduction in CRR by
1 percentage point in two phases involving
half-a-percentage point reduction each with effect
from the fortnights beginning November 6 and
November 20, 1999 respectively.
Multiple Indicators and Instruments
3.14 Experience in monetary management
during 1998-99 revealed the need for monitoring
a multiple set of indicators for the conduct of
monetary policy, especially in the context of a

significant increase in volatility of the exchange

rate, a spurt in inflation rate for most part of the
year (mainly caused by adverse supply shocks),
and a slow down in industrial growth. Monetary
policy is implemented through a network of
financial intermediaries and markets. In a
complex financial system, the effects of
monetary policy on output and inflation are
transmitted through various segments of the
financial markets, by way of changes in interest
rate, exchange rate and other asset prices as
well as changes in the volume of money and
credit in economy. The precise way in which
policy actions feed through the financial and
economic systems represents the transmission
mechanism while the various effects constitute
the channels of policy. In India, the transmission
mechanism and channels have been influenced
by gradual financial sector liberalisation involving
increasing exposure of the balance sheets of
banks and corporates to market forces, steady
diffusion of financial innovations, growing degree
of openness of the economy and liberalisation
of domestic product and asset markets. These
developments and the need to coordinate
between the short-term objective of market
stabilisation and the long-term objective of
growth and inflation control have warranted an
approach based on a multiple set of indicators.
The projected M3 growth, which provides a broad
indicator of the stance of liquidity conditions, has
been supplemented by other indicators such as
interest rates, exchange rate, fiscal and external
positions and flow of financial resources for
purposes of monetary management. The
multiple indicator approach has the advantages
of broad-basing monetary policy operations on
a large set of information and providing flexibility
in the conduct of monetary management. The
Reserve Bank has been using both direct and
indirect instruments in the conduct of monetary
policy, though the reliance on the former has
been gradually brought down with a growing
importance of the Bank Rate, repo rate and open
market operations in recent years.
High Monetary Growth vis--vis
low inflation
3.15 The inadequacy of exclusive reliance on
broad money growth is also reflected in the
coexistence of high monetary growth and low
inflation. A number of factors explain this

phenomenon. First, preliminary empirical

evidence in the Indian context indicates
considerable lag in the transmission of monetary
policy. Secondly, the recent episode of low
inflation appears to be a new phenomenon
because the average decadal inflation rate in
India moved in a narrow range from 8.0 percent
to 9.0 percent during 1970-71 to 1998-99. Thirdly,
the intra-year movement in inflation rate during
1998-99 involved two distinct phases:
(a) seasonal price rise during April to
September,1998, largely contributed by the price
rise in primary articles accounting for nearly onethird
of the total weight of WPI, and (b) a gradual
fall since October, 1998. Greater competition
from imports and sharp decline in world
manufacturing prices have also contributed to
low inflation.
Interest Rates
3.16 Keeping in view the overall improvement
in market conditions, RBI announced in March
BOX 3.2
Monetary and Credit Policy Measures : 1999-2000
A. April-September, 1999
l CRRreducedfrom10.5%to10.0%w.e.f.May8,
1999;lendableresourcesofbanksincreasedby
Rs.3250crore.
l InterimLiquidityAdjustmentFacility(ILAF)through
reposandlendingagainstcollateralofGovernment
ofIndiaSecuritieshasreplacedthegeneral
refinancefacilityw.e.f.April21,1999.
l UTI,LIC,IDBIandothernonbankparticipants
allowedtoaccessmoneymarketforshortterm
liquiditythroughrepossoastoenablethemtoexit
moneymarketinaplanned/gradualway.
l MMMFsallowedtoofferChequewritingfacilityto
investors.
l Guidelinesforinterestrateswapsandforwardrate
agreementsissued.
l OperationalguidelinesissuedtoSCBsandAIFIsfor
financingofinfrastructureprojects
l BanksallowedtooperatedifferentPLRsfordifferent
maturities.
l Banksallowedtoofferfixedrateforalltermloans
inconformitywithALMguidelines.
l WhereverthedepositrateisinexcessofPLR,
advancestodepositorsagainstfixeddepositsby
banksallowedwithoutreferencetoPLRceiling.
l BoardofDirectorsallowedtodelegatenecessary
powerstoALMCommitteeforfixinginterestrateson
depositsandadvances,subjecttoreportingtothe
Boardimmediatelythereafter.
l WitheffectfromtheyearendingMarch31,2000,
banksadvisedtoclassifyaminimumof75%oftheir
securitiesascurrentinvestments.
l Banks/FIsinvestmentinTierIIBondsissuedby

otherbanks,subjectedtoaceilingof10%ofbanks/
FIstotalcapital.
l BoardofDirectorsallowedtoprescribedetailed
rulesfordeterminingthedateofcommencementof
commercialproduction.
B. Mid-Term Review
l CRRreducedfrom10%to9%intwoinstallments
ofhalfapercentagepointeachwitheffectfrom
November6andNovember20,1999respectively
increasinglendableresourcesbyRs.7000crore;a
lagoftwoweeksinthemaintenanceofstipulated
CRRbybanksintroduced.
l TheminimummaturityofFCNR(B)depositsraised
fromsixmonthstooneyear.
l IncrementalCRRof10%onincreaseinliabilities
underFCNR(B)Scheme(overthelevelasonApril
11,1997)withdrawnw.e.fNovember6,1999
increasinglendableresourcesbyRs.1061crore.
l Interestratesurchargeof30%onimportfinance
withdrawn.
l Theminimumrateof20%interestonoverdueexport
billswithdrawn;banksallowedtodecideappropriate
rateofinterestonoverdueexportbills.
l Permissiongrantedtononbankentitiestolendin
thecall/noticemoneymarketbyroutingtheir
operationthroughPDsextendeduptoJune,2000.
l MMMFsbroughtwithinthepurviewofSEBI
Regulations;banksandFIsrequiredtoseek
clearancefromRBIforsettingupMMMFs;MMMFs
tobesetupasseparateentitiesintheformofTrusts
only.

1999 a package of measures aimed at lowering

interest rates in the economy against the
backdrop of an enabling environment created by
the Union Budget for 1999-2000.The RBI package
consisted of reduction in Bank Rate by one
percentage point from 9 percent to
8 percent, reduction in the fixed rate repo from
8 percent to 6 percent, and CRR reduction from
11 percent to 10.5 percent. These measures in
turn led to a sharp decline in the cut-off yields on
14-day, 91-day and 364-day Treasury Bills.
Interest rates in the credit market reflected the
trends in the government securities and money
markets. The credit market rates moved in line
with the funds position, which was generally easy
owing to sluggish growth in demand for credit.
As regards the short end of the market, repo rate
and the Bank Rate are now perceived by the
markets as signals for movements in interest
rates, particularly the call money rates. The ILAF
has also helped in keeping the money market
interest rates range-bound. The significant
improvement in liquidity conditions during the
current financial year has averted upward

pressure on interest rates. The trends in interest

rates may be seen from Table 3.4.
BOX 3.3
Interim Liquidity Adjustment Facility (ILAF)
In line with the recommendation of Narasimham Committee (II) to provide RBI support to market through
liquidity adjustment facility involving periodic/daily resetting of Repo and Reverse Repo Rates, RBI introduced
ILAF with effect from April 21, 1999 in place of the General Refinance Facility. Pending the upgradation of
technology and legal/procedural changes required to switch over to a system of electronic transfer and settlement,
ILAF through repos and lending against collateral of Government of India securities would serve as an interim
arrangement towards the transition to a full-fledged liquidity adjustment facility. This facility enables RBI to inject
liquidity into the market at various interest rates, and absorb it, whenever necessary, at the fixed repo rate so
as to promote stability in money market interest rates. The fortnightly average utilisation under ILAF, including
export credit refinance, ranged between Rs. 4119 crore and Rs.8,476 crore during April-December 3,1999. The
Primary Dealers (PDs) availed the liquidity facility within their overall limits., and their daily outstanding ranged
between Rs. 86 crore and Rs. 8025 crore during the same period. In practice, ILAF is operated through a
combination of repo, collateralised lending, OMO and export credit refinance. The main features of ILAF are:
l Collateralised lending facility (CLF) upto 0.25 percent of the fortnightly average outstanding aggregate
deposits in 1997-98.
l CLF available for two weeks at the Bank Rate.
l Additional collateralised lending facility (ACLF) for an equivalent amount of CLF available at Bank Rate plus
2 percentage points.
l CLF and ACLF for beyond two weeks subject to an additional rate of 2 percent.
l Cooling period of two weeks after CLF/ACLF at penal rate (since dispensed with based on feedback from
market participants).
l To facilitate systematic adjustment in liquidity, restriction on participation in money market (during the period
of availing liquidity) withdrawn.
l Scheduled commercial banks eligible for export credit refinance facility at the Bank Rate with effect from
April 1, 1999.
l Liquidity support against the collateral of Government securities, based on bidding commitment and other
parameters available to PDs at Bank Rate for a period of 90 days.
l Additional liquidity support against Government securities to PDs for two weeks at the Bank Rate plus
2 percentage points.
l Absorption of liquidity in the market would continue to be in the form of fixed rate repos.
l The above mentioned facilities to be supplemented by OMOs by the RBI.

TABLE 3.4
Interest Rate Trends
(Per cent per annum)
As on
Interest Rate 22-1-99 3-4-99 21-1-2000
1. Bank Rate 9.00 8.00 8.00
2. MTLR 14.00 13.50 13.50
3. PLR 12.75-13.00 12.00 - 12.50 12.00 - 12.50
4. Deposit Rate 9.00-11.50 8.00 - 10.50 8.00 - 10.50
5. Call Money 8.50 - 35.00 7.75 - 8.60 7.90 - 8.50
(low/high)
6. CDs 8.50-17.501 8.00 - 12.502 8.50 - 11.004
7. CPs 9.80-13.001 9.10 - 13.253 9.05 - 11.655
MTLR : Medium Term Lending Rate (IDBI's rate)
PLR : Prime Lending Rate (5 major public sector banks)
1. As on 15-1-1999 2. As on 26-3-1999 3. As on 31-3-1999
4. As on 17-12-1999 5. As on 15-1-2000

Non-banking Financial Companies

(NBFCs)
3.31 NBFCs have registered significant growth
in recent years both in terms of number and
volume of business transactions. NBFCs are
purveyors of credit to the sectors where credit
gap exists. The equipment leasing and hire
purchase finance companies finance productive
assets. Their role in financing consumer durables

and automobiles by aggressive lending is wellknown.

Their growth has been fuelled by policy
changes in the auto and consumer durable
sectors. However, the rapid growth in the
business of NBFCs also brought in its wake the
need for effective regulatory action to protect the
interests of investors.
3.32 The Reserve Bank has started regulating
the activities of NBFCs with the twin objectives
of ensuring that they subserve the financial
system efficiently and do not jeopardise the
interest of depositors. In the backdrop of general
sickness in the real estate market and some of
the industrial activities coupled with steep decline
in the value of some of the unquoted shares, the
NPAs of NBFCs have registered an upward
trend. The profitability of NBFCs has generally
come under strain due to mandatory provisioning
requirements against NPAs. The provisions in
the RBI Act which, till recently were considered
inadequate to deal with the growing number of
weak and unscrupulous players, were expanded
in January, 1997, vesting considerable powers
with the Reserve Bank. RBI has put in place a
comprehensive regulatory and supervisory
framework in order to discharge the heavy
statutory responsibilities cast on it with a view to
providing indirect protection to the depositors
interest and strengthening the NBFC sector.
Registration is being granted to NBFCs on
assessment and evaluation of various factors
and as per the criteria laid down in the RBI Act.
The applications for registration are subjected
to thorough scrutiny. RBI has issued upto
November 30, 1999, approvals for registration
of 641 NBFCs which are permitted to accept
public deposits and to 7322 NBFCs which are
non-public deposits taking companies. RBI has
rejected the applications of 1370 NBFCs for the
grant of such registration. The applications of
26,744 NBFCs are, however, pending because
these companies do not have the prescribed
minimum net owned fund of Rs. 25 lakh. These
applications were, however, subjected to
thorough scrutiny. The aggregate public deposits
as reported by 1724 NBFCs stood at Rs. 20,237
crore as on March 31, 1998, which constituted
3.4 percent of the aggregate deposits of
commercial banks. The requirement of minimum
Net Owned Fund (NOF) for any company seeking
a Certificate of Registration to commence the

business of an NBFC on and from April 21, 1999

has been raised from Rs. 25 lakh to Rs. 200
lakh.
3.33 RBI closely supervises those NBFCs,
which accept public deposits, through a
comprehensive mechanism comprising on-site
examination, off-site surveillance, a sensitive
market intelligence system and initiation of
necessary supervisory action whenever
necessary. The statutory auditors of NBFCs have
been directed to report exceptions to compliance
with RBI regulations to the Reserve Bank directly
for punitive action. RBI has undertaken publicity
compaign through print media all over the country
to create awareness among the public about
dos and donts in regard to making deposits with
NBFCs. RBI has also been coordinating its
efforts with State Government authorities and
other enforcement bodies for checking
unscrupulous activities of NBFCs and
unincorporated bodies accessing public deposits
illegally. At the same time, the well-run and
managerially sound NBFCs are being
encouraged to continue their genuine business
operations. Bank credit to the NBFCs for their
advances against commercial vehicles has
recently been brought under the ambit of priority
sector advances. The earlier ceilings on bank
credit to NBFCs as a multiple of their NOF
have been abolished for NBFCs registered with
RBI.
42

All India Financial Institutions (AIFIs)

3.34 Recent years have witnessed a blurring
of the barriers between banks and AIFIs. While
banks have entered the domain of project
financing, AIFIs have entered the area of working
capital financing. Until the long term debt market
in India registers significant improvement in
terms of both depth and liquidity, AIFIs would,
however, continue to play a leading role in giving
long term credit. During April-December
1999-2000, the sanctions by AIFIs increased by
15.5 percent as against 26.0 percent in the
corresponding period of the previous financial
year. During this period, the disbursements by
AIFIs increased by 17.2 percent in contrast to
13.6 percent in the corresponding period of the
previous financial year. Both sanctions and
disbursements by Investment Institutions
registered significant increase during

April-December, 1999-2000 (Table 3.9).

TABLE 3.9
Assistance by AIFIs
(Rs. crore)
Institution 1998-99 April-December
1998-99 1999-2000
A. Sanctions
(a) DFIs 79726 56822 62358
(20.3) (27.5) (9.7)
(b) Investment 10151 5623 9760
Institutions (8.9) (12.7) (73.6)
AIFIs (a+b) 89877 62445 72119
(18.9) (26.0) (15.5)
B. Disbursements
(a) DFIs 46483 30519 34134
(7.5) (14.0) (11.8)
(b) Investment 9721 5907 8552
Institutions (12.9) (11.5) (44.8)
AIFIs (a+b) 56204 36426 42686
(8.4) (13.6) (17.2)
Note : Figures are provisional; those in brackets denote
percentage increase over the corresponding previous
period.

Credit Delivery System

3.25 Efforts to streamline the credit delivery
system gathered further momentum in the
current financial year. The coverage of Priority
sector has been widened further by including
incremental credit given by banks to NBFCs for
on-lending to small road and water transport
operators and to units in the tiny sector of industry.
Investment in venture capital has also been
included in the priority sector. Keeping in view
the national importance of infrastructure
development, guidelines for financing
infrastructure projects have been issued to banks
to enable them to sanction term loans for
technically feasible, financially viable and
bankable projects taken up by both the private
and the public sector undertakings. Four broad
modes of financing have been identified in this
context, namely, (i) financing through funds raised
by way of subordinated debt, (ii) take-out
financing, (iii) direct financing through rupee term
loans, deferred payment guarantees, foreign
currency loans, etc. and (iv) investments in
infrastructure bonds issued by project promoters/
financial institutions. In order to enhance the
capacity of the Small Industries Development
Bank of India (SIDBI) to cater to the financial
needs of the small sector, the SIDBI Bill raising
SIDBIs authorised capital to Rs. 1000 crore with
an enabling provision to further increase it up to
Rs. 2000 crore was passed by the Lok Sabha in
the current financial year.

Sectoral Deployment of Bank Credit

3.26. The details of sectoral deployment of bank
credit may be seen from Table 3.8. During
1998-99, out of the total increase in non-food
gross bank credit amounting to Rs.37398 crore,
40.4 percent flowed to priority sectors comprising
agriculture, small scale industries and other
priority sectors while 34.7 percent flowed to
industry (medium and large). The sectoral breakup
of credit for the period
April-October, 1999-2000 shows an increase of
5.0 percent in priority sector credit compared with
3.9 percent in the corresponding period of the
previous year. Credit to large and medium
industries increased at a lower rate by 1.5 percent
during this period than that by 2.0 per cent in the
corresponding period of 1998-99. Credit to
wholesale trade increased by 8.9 percent during
this period as against a decline of 0.5 percent in
the corresponding previous period. However,
export credit declined by 5 percent during
April-October 1999-2000 as against a smaller
decline of 3.1 percent in the corresponding
previous period of 1998-99.
Export Credit
3.27 Banks are required to lend 12 percent of
their net bank credit to the export sector.
The outstanding export credit of SCBs at
Rs. 36,827 crore as on March 26, 1999
represented an increase of Rs. 2397 crore or
7.0 percent over the outstanding credit of
Rs. 34,430 crore as on March 27, 1998. As on
December 3, 1999, the outstanding export credit
amounted to Rs. 38,136 crore, indicating an
increase of Rs. 3263 crore or 9.4 percent over
the same period of the previous financial year.
During the current financial year, the export credit
refinance limit of SCBs increased vis--vis last
year and stood at Rs. 8,651 crore as on
December 3, 1999. The average utilisation of
export credit refinance ranged from 46.9 percent
to 82.5 percent of the refinance limit during
April-November, 1999. With effect from
April 1, 1999, export credit refinance is provided
to SCBs at the Bank Rate (8%).
Priority Sector Credit
3.28 Priority sector advances of SCBs (as per
provisional data) increased by Rs.5678 crore or
5.0 percent during April-October 1999 compared
with Rs. 3924 crore or 3.9 percent during the
corresponding period of the previous financial

year. About 70 percent of the incremental

advances to the priority sector during AprilOctober 1999 flowed to the category Other
priority sectors in contrast to 40 percent in the
corresponding period of 1998-99.
Separate data on priority sector advances for
banks in public and private sectors are not
available for April-October, 1999. Analysis of data
for 1998-99 showed that priority sector advances
by public sector banks registered improvement
to 43.5 percent of Net Bank Credit (NBC) as on
the last reporting Friday of March 1999 from
41.8 percent of NBC as on the last reporting
Friday of March 1998. Advances to the agriculture
sector from public sector banks in 1998-99
constituted 16.3 percent of NBC while the
corresponding proportion in respect of the SSI
sector was 17.3 percent. The priority sector
advances of private sector banks increased from
40.9 percent of NBC as on the last reporting
Friday of March 1998 to 41.4 percent of NBC as
at end-March 1999. In their case, advances to
agriculture constituted 9.5 percent of NBC , while
advances to SSI sector accounted for
18.9 percent as on the same date. Foreign
banks, for whom the priority sector lending target
is 32 percent of NBC, also registered significant
improvement in their priority sector advances
from 34.3 percent as at end-March 1998 to
37.0 percent as at end-March,1999. Advances
to export sector accounted for 25.0 percent of
NBC as at end-March 1999 while advances to
the SSI sector formed 11.0 percent as on the
same date.
Rural Credit
3.29. Though rural financial institutions have
played a leading role in the provision of rural credit,
the rural sector, especially the agricultural sector,
is still in need of more credit. The National Bank
for Agriculture and Rural Development
(NABARD), which is the apex organisation in the
field of rural credit, has taken several initiatives
in this regard. Notable developments in recent
years are the introduction of Kisan Credit Card
(KCC) and the linkage of Self Help Groups
TABLE 3.8
Sectoral Deployment of Gross Bank Credit
Variations during1
April-October April-October
Items 1997-98 1998-99 1998-99 1999-2000 1997-98 1998-99 1998-99 1999-2000
(Rs.crore) (Per cent)
I. Gross bank credit 41292 41729 12638 18589 15.9 13.9 4.2 5.4
1. Public food procurement 4888 4331 4243 4588 64.3 34.7 34.0 27.3

2. Gross non-food credit 36404 37398 8395 14001 14.5 13.0 2.9 4.3
(a) Priority sector (i+ii+iii) 14627 15104 3924 5678 17.2 15.2 3.9 5.0
(i) Agriculture 3427 4765 1750 1536 10.9 13.7 5.0 3.9
(ii) Small scale industry 7564 4975 592 174 21.0 11.4 1.4 0.4
(iii) Other priority sectors 3636 5364 1582 3698 21.5 25.4 7.5 15.0
(b) Medium and large industries 14926 12986 2293 1981 10.3 11.0 2.0 1.5
(c) Wholesale trade (excluding 877 748 -61 1247 3.0 5.7 -0.5 8.9
food procurement)
(d) Other sectors 5974 8560 2239 5095 18.0 14.9 3.9 7.7
II. Export credit2 3939 1944 -1056 -1800 1.4 5.7 -3.1 -5.0
1 As on the last reporting Friday of the period.
2 Also included in non-food credit; figures in paragraph 3.27 are more up-to-date.
Note :Data are provisional and relate to 50 scheduled commercial banks which account for 90-95 per cent of the
bank credit of all scheduled commercial banks. Gross bank credit data include bills rediscounted with RBI,
IDBI, Exim Bank and other approved financial institutions.

(SHGs) with banks. As against the target of 20

lakh KCCs indicated in the Union Budget for
1999-2000, the issue of KCCs by the public
sector banks in the country numbered 9.1 lakh
during April-December 1999. The amount
sanctioned through these cards was Rs. 2377
crore, which worked out to Rs. 26161 per card.
In order to enable NABARD to leverage its capital
funds for raising more resources, its capital base
has been progressively increased from Rs. 500
crore in 1996-97 (at the rate of Rs. 100 crore by
GOI and Rs. 400 crore by RBI every year) to Rs.
2000 crore as on March 31, 1999. Besides share
capital contribution, Reserve Bank has been
providing to NABARD a General Line of Credit
(GLC) under Section 17(4E) of the RBI Act to
enable it to meet the short-term credit
requirements of co-operatives and Regional
Rural Banks (RRBs). A line of credit of Rs.5700
crore (Rs.4850 crore under GLC-I and
Rs.850 crore under GLC-II) has been sanctioned
to NABARD for the year 1999-2000 (July-June).
An additional limit of Rs. 400 crore under
GLCI has also been sanctioned in December
1999.
3.30. An important development in the area of
rural infrastructure has been the creation of the
Rural Infrastructure Development Fund (RIDF)
in 1995-96 in NABRAD with a corpus of Rs. 2000
crore to provide funds to State Governments and
State owned corporations to enable them to
complete various types of rural infrastructure
projects. So far there have been five RIDFs
(RIDF-I to RIDF-V) with total corpus of Rs.13,500
crore. The funds for RIDF are mobilised from
domestic commercial banks on the basis of
shortfall in their priority sector advances
vis--vis the stipulate targets. The cumulative
sanctions and disbursements out of RIDF
amounted to Rs. 12109.33 crore and Rs. 4639.48

crore respectively as at the end of November

1999. Analysis of the trends in utilisation of RIDF
at the state level has revealed considerable
shortfall vis--vis sanctions. There have,
however, been inter-state variations in this
regard. In some States, the utilisation has been
poor mainly due to inadequacy of own funds to
supplement the provisions under RIDF. In other
cases, there have been a wide range of factors
which contributed to the relatively poor
utilisation of funds. In order to enable the
States to enhance utilisation, the Union Budget
for 1999-2000 has widened the scope of
RIDF to include lending to Gram Panchayats,
Self Help Groups and other eligible
institutions for implementing rural infrastructure
projects.

Financial Performance
Profits and Provisions
3.19 Profitability analysis of scheduled
commercial banks (SCBs) revealed a decline in
profits during 1998-99 (Tables 3.5 and 3.6).
Substantial increase in provisions and
contingencies by nearly 40 percent over the
previous year led to significant decline in the net
profits of public sector banks. Despite fairly
significant decline in provisions and
contingencies, the net profits of private sector
banks also declined in 1998-99. In the case of
foreign banks, the decline in provisions and
contingencies contributed to higher net profits in
1998-99. For SCBs as a whole, provisions and
contingencies increased by about
15 percent, and this contributed to a decline of
28.3 percent in their net profits. The operating
profits of SCBs declined by 4.4 percent from
Rs. 14,640 crore in 1997-98 to Rs. 13,992 crore
in 1998-99. As can be seen from Table 3.6,
operating profits of all bank groups except the
public sector banks declined in 1998-99. Even
in the case of public sector banks, operating
profits of the State Bank of India (SBI) and its
TABLEABLE3.5
WorkingResultsofScScheduledheduledCommerCommercialcialBanksfforor
199798and199899
SBI Group 19 Nationalised 27 Public Foreign 25 Old Pvt. 9 New Pvt. All
Banks Sector Banks Banks Sector Banks Sector Banks SCBs
1997-98 1998-99 1997-98 1998-99 1997-98 1998-99 1997-98 1998-99 1997-98 1998-99 1997-98 1998-99 1997-98 1998-99

A. Rupees Crore
A. Income 24871 29349 42835 49518 67706 78867 8697 9719 6438 7361 3015 4131 85857 100078
i) Interest 21209 25126 37867 44348 59076 69474 6783 7857 5496 6498 2395 3541 73751 87370
ii) Other income 3662 4223 4968 5170 8630 9393 1914 1862 942 863 680 590 12106 12708
B. Expenditure 22412 27884 40265 47725 62677 75609 8068 9026 5996 7050 2616 3733 79354 95418
i) Interest Expended 13904 16983 26269 30857 40174 47840 4222 5201 4084 5088 1820 2777 50299 60905
ii) Intermediation
cost 6235 7719 11025 12731 17259 20450 1931 2579 1272 1482 456 669 20917 25180
iii) Provisions and
contingencies 2273 3182 2971 4137 5244 7319 1915 1246 640 480 340 287 8138 9333
C. Operating Profit 4732 4648 5541 5929 10274 10578 2545 1940 1082 791 740 684 14640 13992
D. Net Profit 2460 1466 2570 1792 5030 3258 630 693 443 311 400 397 6502 4660
E. Total Assets 232843 285904 416661 484417 649504 770321 65098 76623 54966 65423 25845 38531 795412 950898
B. Per Cent of Total Assets
A. Income 10.68 10.27 10.28 10.22 10.42 10.24 13.36 12.68 11.71 11.25 11.90 10.72 10.79 10.52
i) Interest income 9.11 8.79 9.09 9.15 9.10 9.02 10.42 10.25 10.00 9.93 9.27 9.19 9.27 9.19
ii) other income 1.57 1.48 1.19 1.07 1.33 1.22 2.94 2.43 1.71 1.32 2.63 1.53 1.52 1.34
B. Expenditure 9.63 9.75 9.66 9.85 9.65 9.82 12.39 11.78 10.91 10.78 10.12 9.69 9.98 10.03
i) Interest Expended 5.97 5.94 6.30 6.37 6.19 6.21 6.49 6.79 7.43 7.78 7.04 7.21 6.32 6.40
ii) Intermediation
cost 2.68 2.70 2.65 2.63 2.66 2.65 2.97 3.37 2.31 2.27 1.76 1.74 2.63 2.65
iii) Provisions and
contingencies 0.98 1.11 0.71 0.85 0.81 0.95 2.94 1.63 1.16 0.73 1.32 0.74 1.02 0.98
C. Operating Profit 2.03 1.63 1.33 1.22 1.58 1.37 3.91 2.53 1.97 1.21 2.86 1.78 1.84 1.47
D. Net Profit 1.06 0.51 0.62 0.37 0.77 0.42 0.97 0.90 0.81 0.48 1.55 1.03 0.82 0.49
Note : Number of foreign banks for 1997-98 and 1998-99 are 42 and 44 respectively.
Number of scheduled commercial banks for 1997-98 and 1998-99 are 103 and 105 respectively.

TABLE 3.6
Variations in Profits of SCBs
(Rs. crore)
Operat- Provisions Net
Banking-Group ing and Profit
Profit Contingencies
1. Public Sector (i+ii) 303.8 (3.0) 2075.4(39.6) -1771.6(-35.2)
(i) SBI & Associates -84.3 (-1.8) 909.8(40.0) -994.1 (-40.4)
(ii) Nationalised Banks 388.1(7.0) 1165.5 (39.2) -777.5 (-30.3)
2. Private (Old) -1.4(-26.9) -159.7(-25.0) -131.7(-29.8)
3. Private (New) -55.3(-7.5) -52.8(-15.5) -2.5(-0.6)
4. Foreign -604.9(-23.8) -668.3(-34.9) 63.4(10.1)
Total -647.8(-4.4) 1194.5(14.7) -1842.3(-28.3)
Note : Figures in brackets show percentage change over the previous
year.

Associates registered a marginal decline of about

2 percent. The operating profits of nationalised
banks, however, increased by 7 percent in
1998-99.
3.20 There have been changes in the net profit
structure of various bank groups on account of
increase in competition as well as diversification
of activities. The share of State Bank of India and
its seven Associated Banks (SBI Group)
increased from 19.3 percent of total net profits
of SCBs in 1991-92 to 31.5 percent in 1998-99,
while the share of nationalised banks declined
from 43.9 percent to 38.5 percent during this
period. The share of foreign banks in the total
net profit of SCBs also declined from
30.4 percent to 14.9 percent , whereas the
combined share of old and new private sector
banks increased from 6.4 percent to 15.2 percent
during the same period.
Net Interest Income (Spread)
3.21 The net interest income or spread of
nationalised banks registered a marginal
increase from 2.78 percent of their total assets

in 1997-98 to 2.79 percent in 1998-99. However,

the corresponding proportion in respect of the
SBI Group declined by 29 basis points from
3.14 percent to 2.85 percent during the same
period. As a consequence, the net interest
income of public sector banks, which account
for more than 80 percent of total business of
SCBs, declined by 10 basis points from
2.91 percent of total assets in 1997-98 to
2.81 percent in 1998-99. During this period, the
net interest income of old private sector banks
declined by 41 basis points from 2.57 percent of
their total assets to 2.16 percent, while in the
case of new private sector banks it declined by
25 basis points from 2.23 percent of total assets
to 1.98 percent in the same period. As regards
foreign banks, net interest income declined by
46 basis points from 3.93 percent of their total
assets in 1997-98 to 3.47 percent in 1998-99.
Nevertheless, it is significant to note that of the
different bank groups, foreign banks group
registered the maximum spread in 1998-99 at
3.47 percent, followed by the SBI Group at 2.85
percent, nationalised banks at 2.79 percent , old
private sector banks at 2.16 percent and the new
private sector banks at 1.98 percent as against
2.78 percent for all SCBs.
Non-Performing Advances
3.22 A non-performing asset (NPA) in India
represents an advance that has not been
serviced, as a result of past dues accumulating
for 180 days and over. A distinction is also made
in India between Gross NPAs and Net NPAs. In
view of the time lag in recovery process and the
detailed procedures and safeguards involved in
regard to write-off, even after making provisions
for advances considered as irrecoverable banks
continue to hold such advances in their books.
These are termed gross NPAs while provisionadjusted
NPAs are termed as net NPAs. Net
NPAs of SCBs declined marginally from
3.0 percent of their total assets as on March
31,1998 to 2.9 percent as on March 31,1999. The
corresponding proportion in respect of public
sector banks declined from 3.3 percent to
3.1 percent while it increased from 2.3 percent
to 2.8 percent in respect of private sector banks
during the same period. In the case of foreign
banks net NPAs declined from 1 percent of their
total assets as on March 31, 1998 to 0.8 percent
as on March 31,1999. As the build-up of NPAs

has been a major factor in the erosion of

profitability of public sector banks in India, the
Narasimham Committee (II) underscored the
need to reduce the average level of net NPAs for
all banks to 3 percent by 2002. The definitions of
weak banks given by this Committee have
internalized the concept of NPA. The Working
Group on Restructuring Weak Public Sector
Banks supplemented the above definitions by a
combination of seven parameters covering
solvency, earnings capacity and profitability
(Box 3.4). The high level of NPAs of banks in
India reflects the weak loan recovery mechanism.
Data as on March 31, 1999 indicate that out of
the total number of 21,781 cases involving a sum
of Rs. 17,921 crore transferred to/filed with the
Debt Recovery Tribunals (DRTs), the number of
cases decided was 3,774 or 17.3 percent of the
total, and they accounted for 10.0 percent of
the total locked-up amount in the cases
transferred to/filed with DRTs. The net NPAs of
SCBs as a whole increased marginally from
7.3 percent of their net advances in 1997-98 to
7.5 percent in 1998-99. The net NPAs of public
sector banks declined marginally from
8.2 percent to 8.1 percent whereas net NPAs of
private sector banks increased significantly from
5.3 percent in to 6.9 percent during the same
period. The net NPAs of foreign banks declined
from 2.2 percent in 1997-98 to 2.0 percent in
1998-99. The gross NPAs of SCBs (sub-standard
+ doubtful + loss) increased from 14.4 percent
of their gross advances in 1997-98 to 14.6
percent in 1998-99 (Table 3.7) . As regards
different bank groups, gross NPAs of public
sector banks declined marginally from
16.0 percent to 15.9 percent while gross NPAs
of private sector banks increased significantly
from 8.7 percent to 10.4 percent during the same
period. The gross NPAs of foreign banks also
rose from 6.4 percent to 7.0 percent in this period.
Capital Adequacy
3.23 Capital to Risk-Weighted Assets Ratio
(CRAR) reflects the financial viability of
commercial banks. As on March 31,1999, CRAR
of public sector banks as a whole was
11.2 percent, which was marginally lower than
the level of 11.5 percent attained as on March
31,1998.However, all public sector banks except
one have achieved CRAR of 9 percent as on
March 31,1999. As per the prudential norms,

SCBs are required to achieve CRAR of

9 percent by March 31,2000. A number of banks
have entered the capital market to satisfy the
capital adequacy norm. Till end-March, 1999,
8 public sector banks raised capital through equity
issues from the new issues market. In fact,
Government is encouraging public sector banks
to raise capital through public issues. To facilitate
this, they have been allowed to write off
accumulated losses against paid up capital so
as to enable them to have higher earnings per
share. The growing presence of commercial
banks in the capital market is reflected in the
increase in the number of banks listed on
recognised stock exchanges from 6 SCBs in
1994-95 to 28 SCBs in 1998-99. As at
end-March, 1999, the shares of 8 public sector
banks and 17 private sector banks were listed for
secondary market trading on the National Stock
Exchange (NSE).
Bank Supervision and Regulation
3.24 The term of the Board for Financial
Supervision (BFS) in the RBI, which is the
supervisory authority for banks, AIFIs, and
NBFCs, has been extended upto March 27, 2000
or till the reconstitution of the Central Board of
RBI, whichever is earlier. The main supervisory
issues addressed by BFS relate to on-site and
off-site supervision of banks, AIFIs and NBFCs,
and registration and prudential norms of NBFCs.
The on-site supervision system for banks is on
an annual cycle and is based on the CAMELS
model. It focuses on core assessments in
accordance with the statutory mandate, i.e.,
solvency, liquidity, operational soundness and
management prudence. Banks are rated on the
basis of this assessment. In view of the recent
trends towards financial integration, globalisation
and technological upgradation, it has become
necessary for supervisors to supplement on-site
supervision with off-site surveillance. The aim is
to capture early warning signals from off-site
monitoring which would avert financial crisis of
the nature of the East Asian or Latin American
crisis. The off-site monitoring system consists
of 12 returns on capital adequacy, asset quality,
large credit and concentration, connected
lending, earnings and risk exposures (namely,
currency, liquidity and interest rate risks). These
efforts are further supplemented by an in-depth
analysis of the secondary market movements

of listed scrips, which serve as an indicator of

public confidence in financial performance of
banks. In order to enable banks to manage the
TABLE 3.7
Classification of Loan Assets of SCBs
(percentage distribution of total loan assets)
Asset Public Private Foreign SCBs
Standard
1997-98 84.0 91.3 93.6 85.6
1998-99 84.1 89.6 93.0 85.4
Sub-standard
1997-98 5.1 4.8 3.9 4.9
1998-99 4.9 6.0 3.6 4.9
Doubtful
1997-98 9.1 2.9 0.8 7.7
1998-99 9.0 3.6 1.5 7.8
Loss
1997-98 1.9 1.0 1.7 1.8
1998-99 2.0 0.9 1.9 1.9
Total
1997-98 100.0 100.0 100.0 100.0
(Rs. crore) (284971) (36753) (30972) (352696)
1998-99 100.0 100.0 100.0 100.0
(Rs. crore) (325328) (44492) (31433) (401253)
Note : Due to rounding, total may not add up to 100.

BOX 3.4
Major Recommendations of the Working Group on Restructuring of Weak Public Sector Banks
Keeping in view the urgent need to revive the weak banks, the Reserve Bank of India set up a Working Group
in February, 1999 under the Chairmanship of Shri M.S. Verma to suggest measures for the revival of weak public
sector banks in India. The major recommendations/points of the Working Group, which submitted its Report in
October, 1999, are listed below :
l Seven parameters covering three areas have been identified; these are (i) Solvency (capital adequacy ratio
and coverage ratio), (ii) Earning Capacity (return on assets and net interest margin) and (iii) Profitability (ratio
of operating profit to average working funds, ratio of cost to income and ratio of staff cost to net interest income
+ all other income).
l The definitions/tests provided by the Committee on Banking Sector Reforms (CBSR) should be supplemented
by performance analysis based on the seven parameters cited above for identifying weakness in banks in
future.
l The seven parameters can also be used to evolve benchmarks for competitive level of performance by public
sector banks; to begin with these benchmarks maybe set at the median levels of ratios pertaining to the
24 public sector banks (excluding the three identified weak banks, viz. Indian Bank, UCO Bank and United
Bank of India).
l Narrow banking cannot by itself be adopted as a long-term restructuring strategy.
l Closure involves many negative externalities affecting depositors, borrowers and employees, and should not
be exercised unless all other options are exhausted.
l Comprehensive restructuring can succeed but calls for firm and decisive actions in exercise of hard options.
The Government, management and employee unions must agree upon every important condition of the
proposed restructuring programme before it is begun.
l Restructuring of weak banks should be a two-stage operation; stage one involves operational, organisational
and financial restructuring aimed at restoring competitive efficiency; stage two covers options of privatisation
and/or merger.
l Operational restructuring essentially involves building up capabilities to launch new products, attract new
customers, improve credit culture, secure higher fee-based earnings, sell foreign branches (Indian Bank and
UCO Bank) to prospective buyers including other public sector banks, and pull out from the subsidiaries (Indian
Bank), establish a common networking and processing facility in the field of technology, etc.
l The action programme for handling of NPAs should cover honouring of Government guarantees, better use
of compromises for reduction of NPAs based on recommendations of the Settlement Advisory Committees,
transfer of NPAs to ARF managed by an independent AMC,etc.
l To begin with, ARF may restrict itself to the NPAs of the three identified weak banks; the fund needed for ARF
is to be provided by the Government; ARF should focus on relatively larger NPAs (Rs. 50 lakh and above).
l A 30 35 percent reduction in staff cost required in the three identified weak banks to enable them to reach
the median level of ratio of staff cost to operating income.
l In order to control staff cost, the three identified weak banks should adopt a VRS covering at least 25 percent

of the staff strength; for the three banks taken together, the estimated cost of VRS ranges from Rs. 1100 to Rs.
1200 crore.
l The organisational restructuring includes delayering of the decision making process relating to credit,
rationalisation of branch network, etc.
l Financial restructuring involves efforts to maintain a CAR well above the minimum required level, further
recapitalisation subject to strict conditionalities relating to operational and organisational restructuring of the
recipient bank, etc.
l System restructuring may include setting up of an independent agency under a special Act of Parliament to
approve bank-specific restructuring programmes, initiate their implementation and monitor their progress. Such
an agency may be designated as the Financial Restructuring Authority (FRA).
l The existing legal provisions, which are out of line with the present day realities, need to be amended and
new enactments relating to bankruptcy, foreclosures, etc. made.
l For speeding up the recovery process, a mechanism should be worked out to make DRTs more effective.

risks associated with asset-liability mismatches,

detailed Guidelines on Asset-Liability
Management and Risk Management Systems
have been issued by RBI. The RBI has also
recently renewed the existing supervisory
framework in India in relation to the BASLE core
principles which are the minimum requirements
for effective banking supervision laid down by the
BASLE Committee on Banking Supervision.
Steps are being taken to bridge the gaps
which are mainly in the area of Risk
Management, Consolidated Supervision, Interagency
Cooperation and Cross Border
Supervision.

PUBLIC FINANCE

2
The Budget for 1999-2000 was framed in
the context of continuing global economic
turbulence, fiscal slippage in 1998-99, weak
performance of industrial and export sectors,
and imposition of economic sanctions after the
Pokhran nuclear tests. The constellation of
adverse factors strained central government
finances during 1998-99. Gross fiscal deficit
(GFD) as a proportion of GDP for 1998-99
which was placed at 4.5 per cent as per the
revised estimates now stands at 5 per cent on
the basis of provisional1 un-audited figures.
2.2 The fiscal slippage in 1998-99 set in motion
a medium term strategy for restoring the fiscal
health. The Budget for 1999-2000 envisages a
fiscal deficit target at 4.1 per cent of the GDP.
A new accounting framework has been effected

in respect of small savings and its

sharing between the Centre and the States
(Box 2.1).
2.3 The Budget for 1999-2000 charts out a
path of fiscal correction over a medium term
with a view to eliminate the revenue deficit and
reduce the fiscal deficit to below 2 per cent of
GDP in four years. The Budget has outlined a
six fold strategy encompassing (i) medium term
process of revenue and fiscal deficit reduction,
along the lines indicated in the Ninth Plan
(ii) reform of indirect taxes (iii) deepening and
widening of economic reforms in all major
sectors (iv) safeguarding the economy from
external shocks (v) strengthening the
knowledge based industries and (vi) revitalising
and redirecting public programmes for human
development. Besides, the Budget speech has
acknowledged the very high growth in
non-development expenditure as a major hurdle
in expenditure management and has taken
some initiatives to curb the growth of
non-developmental expenditure in particular.
2.4 The 1999-2000 Budget undertook a major
overhaul of indirect taxes by reducing the
multiplicity of rates, rationalising the rate
structure and drastically curtailing the scope
for discretion by abolishing the power to grant
ad-hoc duty exemptions. It reduced number of
duty rates for excise from 11 to 3. The cap on
MODVAT credit of 95 per cent of the admissible
amount was lifted and restored to 100 per cent.
The Budget has also to a large extent fulfilled
the governments intention to ensure
convergence towards a central rate of 16 per
cent, a merit rate of 8 per cent and a demerit
rate of 24 per cent. Further, Budget also
indicated government's intention to move
towards a single rate and a full-fledged VAT in
the medium term. On the customs side, a
modest reduction in peak protective customs
tariff from 45 per cent to 40 per cent was
effected. This was accompanied by reduction
in the number of ad-valorem basic custom duty
rates from seven to five. To reduce dispersion
and provide some minimal protection to the
domestic industry, a basic duty of 5 per cent
was imposed on a number of commodities
which earlier enjoyed duty exemption. To
mitigate the impact of the incidence of 5 per
cent duty, these were exempted from the 4 per

cent special additional duty. A uniform

1Since

February, 1999, Government has been making available provisional actual (un-audited) monthly data on the internet on
Union
Government Accounts. Where possible, these more recent estimates of fiscal aggregates have been used in place of revised
estimates for 1998-99 in this chapter.

BOX 2.1
New System of Accounting for Small Savings in the Budget
l The Budget for 1999-2000 made a change in the system of accounting of loans to States & Union Territories

(UTs) with legislature against net small savings collections w.e.f. 1.4.99. The change over was effected in the
interest of transparency and viability of the small savings schemes and in deference to a suggestion made in the
Inter-State Council in December 1998 on delinking the small savings from Central Governments fiscal deficit
concerns. A committee set up under the chairmanship of Shri R.V. Gupta, former Deputy Governor, Reserve Bank
of India, examined the modalities of transfer of small savings to an outside organisation. After examining the
issue, the committee recommended for establishment of National Small Savings Fund (NSSF) in the Public
Account of India to account for all the transactions relating to small savings.
l The amount (75 per cent States share now has been enhanced to 80 per cent from 15-1-2000) released to
State and UT Governments out of net Small Savings & PPF collections w.e.f. 1.4. 1999 would be treated as
investment in the Special Securities of the respective State Governments and booked under Investments of
NSSF . Further, interest at the rate of 12.5 per cent would be payable from 15-1-2000 and these securities
would be redeemed from the sixth year over a period of 20 years. The remaining part (25 per cent) of net small
savings and PPF collections (Centres Share) would be treated as investment in the Special Securities of the
Central Government. Similarly, the outstanding balances at the close of the last financial year (1998-99) under
various small savings schemes and PPF would also be treated as investment of NSSF in the Special
Securities of Central Government.
l In essence, under the new accounting system small savings collections would be credited to NSSF. Similarly
all withdrawals of small savings by the depositors would be made out of the accumulation to the Fund. The
balance in the NSSF will be invested in Central and State Government securities. The income of the NSSF
will consist of the interest earned from the government securities while the servicing cost and the cost of
management of small savings will be the expenditure of the Fund. All investments in Central Government
securities out of the Fund would form a part of Central Government internal debt from 1999-2000.The
investment of the net collections in 1999-2000 in Central and State Governments securities is budgeted at
Rs.8000 crore and Rs.25000 crore respectively. Due to this change in the accounting practice, non plan
expenditure of the Centre is budgeted to be lower by Rs.25000 crore which consequently leads to reduction
in the Gross Fiscal Deficit (GFD) by a similar amount. The table below gives GFD as percentage of GDP
(new series base 1993-94) under old and new accounting framework.
Fiscal Deficit As Per Old and New Definition
(As per cent of GDP)
Fiscal Deficit 1990-91 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000#
Old (inclusive of State's share of small savings) 8.3 5.7 5.1 4.9 5.9 6.4** 5.4
New (exclusive of State's share of small savings) 7.0 4.8 4.3 4.1 4.9 5.0** 4.1
Centre & State Combined* 10.0 6.9 6.4 6.2 7.1 8.5 7.6
* For the years 1994-95 to 1999-2000, RBI Annual Report 1998-99; for the year 1990-91 the ratio to GDP has been
worked out using old series (Base 1980-81) of National Account Satistices.
**On the basis of provisional un-audited figures. # B.E.
Note: 1. Ratios to GDP at current market prices for the year 1990-91 use old series (Base 1980-81) and from 1994-95 onwards
use new series (Base 1993-94) of National Accounts Statistics released by the Central Statistical Organisation (CSO).
2. The ratios to GDP at current market prices for 1999-2000 are based on CSO's Advance Estimates.

l Although the different accounting treatment of small savings reduces the Central Government GFD, it has no

effect on the combined GFD deficit of the Centre and States. Earlier any computation of the consolidated deficit
of the Centre and the States had to net out this inter governmental flow, so that the consolidated deficit was
less than the sum of its parts.
l It may also be noted that the small savings transactions under the new dispensation will reflect the treasury
banking nature of these operations. These flows to a large extent are determined by public preferences, and
relative attractiveness of these instruments.

surcharge at the rate of 10 per cent of basic

duty was imposed on all commodities excluding
crude oil and petroleum products, items
attracting 40 per cent rate of basic duty, certain
GATT bound items and gold and silver. The
Budget also signaled governments intention
to phase down customs duty structure to Asian
levels in five years.
2.5 On the direct tax front, the Budget retained

the basic tax rates for personal and corporate

taxes, widened the tax base, offered new
incentives for housing construction sector,
infrastructure and capital markets and
strengthened enforcement through tapping of
high value transactions. The period for availing
benefits under section 80 IA was made uniform
at 15 years across the infrastructure and core
sectors. The Budget also accorded ten year
tax holiday for industries in North-Eastern region
to promote industrialisation. To promote housing
construction activities, it unfolded a package of
comprehensive fiscal incentives. With a view
to encourage small investors and invigorate
capital markets, all income from UTI and other
Mutual Funds received in the hands of the
investors were fully exempted from income tax.
However, income distributed by Mutual Funds
where the equity investment is less than 50 per
cent was subjected to 10 per cent dividend tax.
2.6 The Budget provides a multi-pronged
programme to revitalise and strengthen the rural
economy in particular. Recognising the critical
role of rural infrastructure, the Budget has
enhanced the corpus for Rural Infrastructure
Development Fund V to Rs.3500 with extended
repayment period of seven years and wider
coverage. Other major initiative outlined in the
Budget for the benefit of the rural economy
include, inter alia, setting up of a National
Watershed Development Fund, encouraging
better management of irrigation assets through
larger provision of financial assistance to States
that rationalise their water rates and rationalising
the existing rural employment schemes with a
view to enhancing their effectiveness. Budget
also unveiled a National Human Development
Initiative with emphasis on access of vulnerable
groups to food, health care, education,
employment and shelter.

INFRASTRUCTURE

9
Provision of quality infrastructure services
at reasonable cost, is a necessary condition
for achieving sustained economic growth. In
fact, one of the major challenges being faced

by the Indian economy, as we enter the new

millennium is to enhance infrastructure
investment and to improve the delivery system
and quality of services. Government recognizes
the critical importance of the infrastructure
sector and accords high priority to development
of various infrastructure services such as
power, telecommunications, seaports, airports,
railways, roads etc. Investments in these
sectors involve high risk, low return, lumpiness
of huge investment, high incremental capital/
output ratio, long payback periods, and superior
technology. These prerequisites pose a
constraint on the Governments efficient delivery
of quality infrastructure services. Government
is moving away from its traditional role as a
provider of services to one of facilitator and
regulator by ensuring that infrastructure
services are actually delivered in a desirable
manner. While liberalizing the rules and
procedures, it has created an environment
conducive for private participation including
foreign investment in infrastructure sector. The
government however, continues to safeguard
the interests of the consumers and needs of
the poor by providing appropriate regulatory
framework. A series of tax incentives and
concessions have been announced, regulations
and procedures have been simplified for
enhancing competition in this sector. Box 9.1
summarizes some of the recent initiatives.
TABLE 9.1
Trends in the Performance of Infrastructure Sectors
April - Dec.* Change over previous year
Unit 1997- 1998- 1998 1999 1985- 1994- 1995- 1996- 1997- 1998- 1998- 199998 99* 90 95 96 97 98 99 99@ 2000@
(Avg.)
(per cent)

I. Energy
1 Coal Production Mn.tonnes 295.9 292.3 206.7 205.6 6.4 3.2 6.4 5.7 3.6 -1.2 0.2 -0.5
2 Electricity generated
(Utilities only) Bn. kwh 420.6 448.4 330.8 355.3 9.4 8.1 8.4 3.8 6.6 6.5 7.0 7.4
(a) Hydro-electric ,, 74.5 82.7 64.6 63.2 3.5 17.5 -12.2 -5.5 8.6 8.8 14.9 -2.2
(b) Thermal (incl.nuclear) ,, 346.1 365.7 266.2 292.1 12.3 5.6 14.8 6.1 6.2 5.7 5.2 9.7
3 Petroleum
(a) Crude oil Mn.tonnes 33.9 32.7 24.4 24.3 3.3 19.3 9.1 -6.5 2.9 -3.4 -4.1 -0.4
(b) Refinery
throughput ,, 65.2 68.5 46.6 56.8 8.0 4.1 3.9 7.2 3.7 5.2 3.1 21.9
II. Cement Mn.tonnes 83.1 88.0 62.5 72.5 8.7 9.9 6.6 8.6 12.8 5.9 4.2 15.9
III. Transport and
communications
1 Railway revenueearning
goods traffic ,, 429.4 420.9 306.3 330.7 5.6 1.7 7.0 4.7 5.0 -2.0 -2.5 8.0
2 Cargo handled
at major ports ,, 251.7 251.7 184.3 201.3 6.9 10.0 9.1 5.6 10.6 0.0 0.0 9.2
3 Telecommunications:
New telephone
connections
provided (DELs) '000Nos. 3259.0 3792.0 1649.7 2199.9 16.6 44.0 23.3 17.5 27.1 16.4 26.1 33.4
*Provisional. @ April-December.

BOX 9.1
New Initiatives for Infrastructure Development
General Measures
l Uniform tax holiday of 15 years for all infrastructure sector projects.
l Creation of Foreign Investment Implementation authority to smoothen flow of FDI into the infrastructure sector.
l The import duty structure for project imports rationalized.
Power
l Mega Power Project policy announced.
l Restructuring of SEBs to be encouraged; new transmission and distribution systems to get fiscal benefits given
to infrastructure sector.
Telecom
l New telecom policy announced
Domestic long distance calls to be opened up.
Department of Telecom Services (DTS) to be corporatised by 2001.
DTS/MTNL to enter as third cellular operators.
l TRAI reconstituted through an ordinance
Clear distinction between the recommendatory and regulatory functions of the Authority.
Mandatory for government to seek recommendations of TRAI in respect of matters dealing with need and
timing for introduction of new service providers and the terms and conditions of license to a service provider.
Composition of Authority i.e. TRAI has been changed.
Separate disputes redressal body known as Telecom Disputes Settlement and Appellate Tribunal has
been set up.
l Specific Targets for Telecom
Make available phone on demand by 2002.
Encourage development of telecom in rural areas and increase rural tele-density from the current level of
0.4 to 4.0 by the 2010.
Achieve telecom coverage of all villages in the country by 2002.
Provide internet access to all district headquarters by 2002.
Resources for meeting the Universal Service Obligation (USO) would be raised through a universal access
levy which would be a percentage of revenue earned by all operators under various licenses.
Existing licence holders of basic and value added services allowed to switch over to a revenue sharing
agreement.
Provide high-speed data and multi-media capability using technologies including ISDN to all towns with a
population greater than 2 lakh by 2002.
Roads
l A new cess of Re.1 per litre on HSD imposed to generate funds which will be transferred to Central Road
Fund. Most of it will be used for development and maintenance of State Roads and National Highway etc.
l Model Concession Agreement for BOT road project more than Rs. 100 crore and less than Rs. 100 crore
finalized.
Railways
l Indian Railway Catering &Tourism Corporation (IRTC) Ltd. incorporated as a Government Company with the
objective of upgrading and managing rail catering and hospitality
l Indian Railways have issued Letters of Intent for ownership, operation and management of two luxury trains
in private sector.
Civil Aviation
l Restructuring of airports of Airport Authority of India (AAI) through long-term leasing route.
Urban Infrastructure
l Special Package for Housing construction and Services which will facilitate development of urban infrastructure.

Foreign Exchange Reserves

6.60 The foreign exchange reserves of the
country consist of (i) foreign currency assets
held by the RBI, (ii) gold holdings of the RBI
and (iii) Special Drawing Rights (SDRs). The
trend in reserves is largely governed by the
foreign currency assets component, which
tends to move in either direction on a day-today
basis. The foreign currency assets
increased by US $3.55 billion in 1998-99 and
further by about US $2.42 billion in 1999-2000

(till end-January 2000) to US $31.94 billion. The

quantity of gold held by the RBI fell from 396.2
tonnes at the end of March 1998 to 357.3 tonnes
at the end of March 1999 on account of
redemption obligations under the Gold Bond
Scheme. Reflecting this reduction in quantity
as well as valuation losses on account of
decline in international gold prices in the first
half of 1999, the value of gold held by the RBI
declined from US $3391 million at the end of
March 1998 to US $2960 million at the end of
March 1999. At the end of January, 2000 the
quantity of gold holdings amounted to 357.8
tonnes, valued at US $2945 million. In sum,
total foreign exchange reserves (including gold
and SDRs) at the end of January 2000
amounted to US$ 34.90 billion, which provides
cover for about 8 months of estimated imports
in 1999-2000 and reflects a record high for
reserves stock.

Foreign Investment
Foreign Direct Investment
6.35 Foreign Direct Investment (FDI) inflows
into developing countries continue to remain
sluggish. In India, FDI inflows declined from US$
3557 million in 1997-98 to US$ 2462 million in
1998-99. The declining trend continued in 19992000. Inflows during the first eight months of
1999-2000 were lower at US$ 1330 million
compared to US$ 1610 million during the
corresponding period in the previous year (Table
6.7).
6.36 As in the previous two years, in 199899, Mauritius continued to be the largest source
of FDI inflows followed by the USA, though there
has been substantial decline in inflows from
these two sources. Inflows from Mauritius were
US$ 900 million in 1997-98, which declined to
US$ 590 million in 1998-99. Inflows from USA
also declined from US$ 687 million in 1997-98
to US$ 453 million in 1998-99. Japan and Italy
were, respectively, the third and fourth largest
sources of FDI in 1998-99. Both these countries
increased their investments in 1997-98 and in
1998-99. Inflows from Germany were less in

1998-99 compared to the previous year though

it was the fifth largest source of FDI in that
year. There was substantial decline in inflows
from South Korea and Netherlands in 1998-99
compared to 1997-98. Germany, South Korea
and Netherlands accounted for a decline of US$
391.3 million in 1998-99 compared to 1997-98.
6.37 While the engineering sector continued
to remain at the top of the list among the FDI
recipients during the last three years, the
magnitude of inflows declined over this period.
The second in importance was Chemicals and
Allied Products with inflows into this sector
increasing by 46 per cent in 1998-99 compared
to the previous year. Investment in the services
sector increased from US$ 321.3 million in
1997-98 to US$ 368.5 million in 1998-99, thereby
maintaining its position. Electronics and
Electrical Equipment, which received maximum
inflow in 1997-98 was, however, relegated to
fourth position in 1998-99 due to a significant
reduction in inflows.
6.38 Table 6.8 shows the trends in approvals
of FDI proposals vis--vis inflows. There has
been a steep fall in approvals in 1998 compared
to 1997 (a reduction of 55.7 percent in dollar
terms). However, actual inflow as a proportion
of approvals improved from 21.1 percent in
1997 to 32 per cent in 1998. The decline in
inflows therefore has followed from a
substantial reduction in approvals.
6.39 FDI inflows into developing countries are
estimated to have declined slightly from US$
172 billion in 1997 to US$ 166 billion in 1998
TABLE 6.7
Foreign Investment Flows by Different Categories
(U.S. $ million)
April-Nov.*
1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1998-99 1999-00
A. Direct Investment 315 586 1314 2144 2821 3557 2462 1610 1330
a. RBI automatic route 42 89 171 169 135 202 179 109 120
b. SIA/FIPB route 222 280 701 1249 1922 2754 1821 1252 867
c. NRI (40% & 100%) 51 217 442 715 639 241 62 48 48
d. Acquisition of Shares$ 11 125 360 400 201 295
B. Portfolio Investment 244 3567 3824 2748 3312 1828 -61 -722 1341
a. FIIs # 1 1665 1503 2009 1926 979 -390 -791 831
b. Euro equities@ 240 1520 2082 683 1366 645 270 15 401
c. Offshore funds & others 3 382 239 56 20 204 59 54 109
Total (A+B) 559 4153 5138 4892 6133 5385 2401 888 2671
Source : RBI.
* Provisional.
$ Relates to acquisition of shares of Indian companies by non-residents under Section 29 of FERA.
# Represent fresh inflow/outflow of funds by FIIs.
@ Figures represent GDR amounts raised abroad by the Indian Corporates.

TABLE 6.8
Foreign Direct Investment : Actual Flows vs. Approvals

1991 1992 1993 1994 1995 1996 1997 1998 Total

(91 to 98)

Approvals
Rs crore 739 5256 11189 13590 37489 39453 57149 28783 193648
US$ million 325 1781 3559 4332 11245 11142 15752 6975 55111
Actual Inflows
Rs crore 351 675 1786 3009 6720 8431 12085 9116 42173
US$ million 155 233 574 958 2100 2383 3330 2230 11963
Actual Inflows as %
of Approvals 47.7 13.1 16.1 22.1 18.7 21.4 21.1 32 21.7
(In US $ terms)
Source : RBI
Note : The approval and actual inflows figures include NRI direct investments approved by RBI, but exclude flows
under acquisition of shares of Indian companies by non-residents.

(Table 6.9). It is worrying to note that Indias

share in developing countries inflows declined
from 1.9 per cent in 1997 to 1.4 per cent in
1998.
Portfolio investment
6.40 Fresh inflows from FIIs started declining
in 1997-98 and turned into net outflows
amounting to US$ 390 million in 1998-99 (Table
6.7). However, recent trends in 1999-2000
indicate a sharp reversal reflecting improving
external investor sentiment as a result of, inter
alia, improved global prospects. Fresh inflows
amounted to US$ 831 million during April to
November 1999 as against an outflow of
US$ 791 million during the same period in the
previous year.
6.41 Amounts raised by Indian corporates
through GDRs and ADRs declined from US$
645 million in 1997-98 to US$ 270 million in
1998-99. Depressed capital market, industrial
slackness at home and adverse emerging
market sentiments affected GDR prospects
unfavourably last year. However, there has been
a turnaround in the first half of the current
financial year with large issues raised in the
TABLE 6.9
FDI by Host Region (US $ million)
Country 1992 1993 1994 1995 1996 1997 1998e
China 11156 27515 33787 35849 40800 44236 45460
India 233 550 973 2114 2426 3351 2258
Indonesia 1777 2004 2109 4346 6194 4673 -356
Korea, Rep. of 727 588 809 1776 2325 2844 5143
Malaysia 5183 5006 4342 4178 5078 5106 3727
Philippines 228 1238 1591 1478 1517 1222 1713
Thailand 2114 1805 1364 2068 2336 3733 6969
All developing countries
including China 51108 78813 101196 106223 135343 172533 165936
Share of India in developing
countries (%) 0.4 0.7 1.0 2.0 1.8 1.9 1.4
Source: World Investment Report, United Nations, 1999.
e : estimates.
Note : Figures for India in this table may not be comparable with those in other tables because of differences in coverage and
source of information.

ADR/GDR market. The successful ADR issues

include M/s Infosys Technologies ($ 75 million),

M/s Satyam Infoway Ltd. ($ 86 million) and
M/s ICICI ($ 315 million). To facilitate conversion
of its GDRs into American Depository Shares
(ADS), ICICI listed the ADS on the New York
Stock Exchange with effect from 17 November,
1999 after complying with stringent listing
requirements of the Securities and Exchange
Commission(SEC) of the USA, including
adherence to GAAP standards.
Policies on foreign investment
6.42 Several initiatives have been taken to
enhance the flow of FDI into the country. In
August, a Foreign Investment Implementation
Authority (FIIA) was established within the
Ministry of Industry in order to ensure that
approvals for foreign investments (including NRI
investments) are quickly translated into actual
investment inflows and that proposals fructify
into projects. In particular, in cases where FIPB
clearance is needed, approval time has been
reduced to 30 days.
6.43 With a view to expand the FIIs category,
the Government has permitted foreign
corporates and high net worth individuals to
invest through SEBI registered FIIs. Such
investments will be subject to a sub-limit of 5
per cent within the aggregate limit for FII portfolio
investments of 24 per cent in a single company.
The Government has also permitted SEBI
registered domestic fund managers to manage
foreign funds for investment in the Indian capital
market through the portfolio investment route
provided the funds are channeled through
internationally recognised financial institutions
and subject to the reporting requirements as
applicable to FIIs.
6.44 In March 1999, the RBI issued a
notification granting general permission to
Mutual Funds for issuing units to NRIs /PIOs/
OCBs subject to certain specified norms,
thereby dispensing with the existing procedure
of obtaining prior permission. In addition,
approval procedures have been simplified by
the RBI in respect of NRIs/PIOs/OCBs by
granting them general permission in lieu of a
case by case approval procedure in a large
number of areas. This includes acceptance of
deposits by Indian companies, investment in
Air Taxi operations, sale of shares in stock
exchanges, transfer of shares/bonds/

debentures and immovable property to

charitable trusts/organisations in India as gift,
raising of loans by resident individuals/
proprietorship concerns on non-repatriable
basis, issue of Commercial Papers by Indian
companies to NRIs etc.
6.45 Foreign owned Indian holding
companies were hitherto required to obtain
prior approval of the FIPB for downstream
investment. They have now been permitted
to make such investments within permissible
equity limits through the automatic route
provided such holding companies bring in the
requisite funds from abroad. Also, the need
to obtain prior approval of the FIPB for
increasing foreign equity within already
approved limits has been dispensed with in
all cases where the original project cost was
up to Rs.600 crore.
6.46 Considering the enhanced opportunities
of Indian software companies for expanding
globally, operational norms governing their
overseas investments and mode of financing
acquisition of overseas software companies
have been liberalised. In December, 1999 a
notification was issued by the Ministry of
Finance permitting Indian software companies,
which are listed in foreign exchanges and have
already floated ADR/GDR issues, to acquire
foreign software companies and issue ADRs/
GDRs without reference to the Government of
India or the RBI up to the value limit of US$ 100
million. For acquisitions beyond US$ 100 million,
proposals would require examination by a
Special Composite Committee in the RBI.
6.47 With a view to further liberalise the
operational guidelines for ADR/GDR issues, it
has been decided to dispense with the track
record scrutiny process for ADR/GDR issues
and the two stage approval by the Ministry of
Finance. Indian companies would henceforth
be free to access the ADR/GDR markets
through an automatic route without the prior
approval of the Ministry of Finance subject to
the specified norms and post-issue reporting
requirement. As ADR/GDR are reckoned as
part of FDI, such issues would need to conform
to the existing FDI policy and permissible only
in areas where FDI is permissible. Such ADR/
GDR issues would, however, be governed by
the mandatory approval requirements under the

FDI policy.
6.48 An Insurance Regulatory and
Development Act(IRDA) was passed by
Parliament in December, 1999. The Act , which
seeks to promote private sector participation in
the insurance sector permits foreign equity stake
in domestic private insurance companies upto
a maximum of 26 per cent of the total paid up
capital.
6.49 In February 20000, Government took a
major decision to place all items under the
automatic route for FDI/NRI/OCB investment
except for a small negative list, which includes
the follwing : (i) items requiring an industrial
licence under the Industries (Development and
Regulation) Act, 1951; (ii) foreign investment
being more than 24% in the equity capital of
units manufacturing items reserved for small
scale industries; (iii) all items requiring industrial
licence in terms of the locational policy notified
under the New Industry Policy of 1991;
(iv) proposals having previous venture/tie-up in
India with foreign collaborator; (v) proposals
relating to acquisition of shares in existing Indian
company by foreign/NRI/OCB investor;
(vi) proposals falling outside notified sectoral
policy/caps or under sectors in which FDI is
not permitted and/or applications chosen to be
submitted through FIPB rather than automatic
route by the investors. This is an important step
to dispense with case-by-case approval
procedure and to impart greater transparency
in the process of foreign investment.
6.50 Furthermore, subject to sectoral policies
and sectoral caps the automatic route would
be available to all foreign and NRI investors
with the facility to bring in 100% FDI/NRI/OCB
investment. All proposals for investment in public
sector units, as also for EOU/EPZ/EHTP/STP
units would qualify for automatic approval
subject to the aforesaid parameters.
External Commercial Borrowing
6.51 Disbursements under ECB (including
US$ 4230 million from RIBs), were US$ 7226
million in 1998-99, almost at the same level as
in 1997-98 (US$ 7371 million). Subdued
demand for funds from borrowers due to
slackness in domestic industry and higher
premia for emerging market borrowers in the
international market contributed to lower
disbursements excluding RIBs. However, since

repayments fell from US$ 3372 million in

1997-98 to US$ 2864 million in 1998-99, net
overall borrowings showed an improvement
from US$ 3999 million in 1997-98 to US$ 4362
million in 1998-99.
6.52 The sluggish trend in disbursements has
continued in the current year. In the first quarter
of the current financial year, disbursements
were US$ 621 million against US$ 754 million
during the corresponding period in the previous
year. Repayments at US$ 631 million were only
marginally higher by US$ 9 million. Therefore,
there has been net repayment in the first quarter
of 1999-2000 as compared to net borrowing of
US$ 132 million in the corresponding period of
the previous year.
6.53 ECB guidelines in 1999-2000 were further
liberalised and procedures streamlined to
facilitate better access to international financial
markets, keep maturities long, costs low and
encourage infrastructure and export sector
financing. The major changes in the guidelines
in 1999-2000 are summarised in Box 6.2.
6.54 ECB approvals in 1998-99 were much
lower at US$ 5200 million compared to US$
8712 million in 1997-98. In 1999-2000 (up to
end-December), approvals amounted to US$
2136 million (Table 6.10). The Power sector
accounted for the highest approvals of
TABLE 6.10
Status of ECB Approvals
(US $ million)

Sector 1997-98 1998-99 1999-00*

Power 3014 3998 1699
Telecom 1492 75 0
Shipping 210 37 27
Civil Aviation 373 0 0
Petroleum & Natural Gas 230 40 218
Railways 179 15 0
Financial Institutions 795 150 50
Ports, Roads, etc. 61 0 80
Others (including exporters) 2358 885 62
Total 8712 5200 2136
* as on 31.12.99
Source : ECB Division, Ministry of Finance, Government of India.

US$ 1699 million followed by US$ 218 million

for Petroleum and Natural Gas. The third largest
recipient of approvals was Ports and Roads
with US$ 80 million. There has been no approval
in Telecom, Civil Aviation and Railways so far
in the current financial year.
6.55 It is expected that as the domestic
industrial recovery gathers pace and emerging
market spreads narrow, ECB will be accessed
more in the coming months. Further fillip in this

regard could come from the October, 1999

Moodys revision of Indias long term ratings
outlook from stable to positive. Ratings by other
agencies remain unchanged.
Non-Resident Deposits
6.56 All redemption payments under FCNRA
were completed in 1998-99. In all other
accounts, net inflows were lower in 1998-99
compared to 1997-98 (Table 6.11). The declining
overall trend in rupee deposits could reflect
investors concerns regarding a possible decline
in the external value of rupee in the context of
an overall emerging market outlook. There was
also a decline of US$ 144 million in 1998-99 in
foreign currency denominated deposits of
FCNR(B), which was partly on account of a
shift of these flows to RIBs. In this regard, it is
noteworthy that after the closure of the RIB
scheme in August 1998, inflows started picking
up in FCNR(B). The trend continued with a
positive net inflow of US$ 503 million in this
account during April-October 1999 reflecting
continuing investors preference towards foreign
currency denominated assets.
6.57 In the Monetary and Credit Policy
Measures announced by the RBI for the second
half of 1999-2000, the minimum maturity of
FCNR(B) deposits has been raised to one year
from six months to minimise the countrys short
term external borrowing liabilities. At the same
time, the requirement by banks to maintain an
incremental CRR of 10 per cent on increase in
liabilities over the level as on April 11, 1997 has
been withdrawn.
TABLE 6.11
Outstanding Balances and Net Flows under various Non-Resident Deposit Schemes
(US$ million)
A. Outstanding Balances under Different Schemes*
Schemes As at the end of
March 95 March 96 March 97 March 98 March 99 Oct. 99
(P.E.)
FCNR(A) 7051 4255 2306 1
FCNR(B) 3063 5720 7496 8467 8323 8826
NR(E)RA 4556 3916 4983 5637 6220 6530
NR(NR)RD 2486 3542 5604 6262 6758 6806
FC(B&O)D
TOTAL 17156 17433 20389 20367 21301 22162
B. Net flows under Non-Resident Deposits*
Apr-Oct. (P.E.)
Schemes 1994-95 1995-96 1996-97 1997-98 1998-99 1998-99 1999-00
Foreign Currency Non-Resident (Accounts) (FCNR(A)) -2249 -2796 -1949 -2305 -1 -1
Foreign Currency Non-Resident(Banks) (FCNR(B)) 1979 2669 1773 971 -144 -267 503
Non-Resident External Rupee Accounts (NR(E)RA) 964 -208 1244 1197 980 519 459
Non-Resident (Non Repatriable) Rupee Deposits
(NR(NR)RD) 682 1279 2246 1256 941 548 209
Foreign Currency (Banks & Others) Deposits
(FC(B&O)D) -558

TOTAL 818 944 3314 1119 1176 799 1171

P.E. : Provisional Estimates. * All figures are inclusive of accrued interest.
Source : RBI.

BOX 6.2
Salient Features of External Commercial Borrowings 1999-2000
Average maturities for ECB
ECBs should have the following minimum average maturities:
l Minimum average maturity of three years for external commercial borrowings equal to or less than USD 20 million in respect of
all sectors except 100% EOUs;
l Minimum average maturity of five years for external commercial borrowings greater than USD 20 million in respect of all sectors except
100% EOUs;
l 100% Export Oriented Units (EOUs) are permitted ECB at a minimum average maturity of three years for any amount.
l Bonds and FRNs can be raised in tranches of different maturities provided the average maturity of the different tranches within the
same overall approval taken together satisfies the maturity criteria prescribed in the ECB guidelines.
USD 5 million Scheme
All Corporates and Institutions are permitted to raise ECB upto USD 5 million at a minimum simple maturity of 3 years.
Exporters/Foreign Exchange Earners
Corporates earning foreign exchange are permitted to raise ECB up to thrice the average amount of annual exports during the previous three
years subject to a maximum of USD 200 million. The minimum average maturity will be three years up to USD 20 million and five years for
ECBs exceeding USD 20 million. 100% EOUs are permitted to have foreign currency exposure up to 60% of the project cost.
Infrastructure projects
Holding Companies/promoters will be permitted to raise ECB upto a maximum of USD 200 million to finance equity investment in a subsidiary/
joint venture company implementing infrastructure projects. This flexibility is being given in order to enable domestic investors in infrastructure
projects to meet the minimum domestic equity requirements. In case the debt is to be raised by more than one promoter for a single project
then the total quantum of loan by all promoters put together should not exceed USD 200 million.
Long term Borrowers
l ECB of eight years average maturity and above will be outside the ECB ceiling, although the MOF/RBIs prior approval for such
borrowings will continue to be necessary. The Government will review the extent of debt under this window periodically.
On-lending by DFIs and other Financial Intermediaries
While DFIs are required to adhere to the average maturity criteria prescribed, namely, minimum of five years for loans of more than USD
20 million equivalent and minimum three years for loans less than or equal to USD 20 million for their borrowing, they are permitted to onlend
at different maturities. They may also on-lend for project-related rupee expenditure. However, other financial intermediaries are required to
adhere to the general ECB guidelines on maturity as well as end-use in their on-lending programmes
Proceeds from Bonds, FRNs and Syndicated loan
Corporate borrowers who have raised ECB for import of capital goods and services through Bonds/FRN/Syndicated loans are permitted to
remit funds into India. The funds can be utilised for activities as per their business judgement except investment in stock market or real estate,
for up to one year or till the actual import of capital goods and services takes place, whichever is earlier. In case borrowers decide to deploy
funds abroad until the approved end-use requirement arises, they can do so as per the RBIs extant guidelines. RBI would continue to monitor
ECB proceeds parked abroad
ECB entitlement for new projects
All greenfield projects other than infrastructure projects will be permitted to avail ECB to the extent of 35% of the total project cost, as appraised
by a recognised Financial Institution/Bank, subject to the fulfillment of other ECB guidelines.
All infrastructure projects will be permitted to have ECB exposure to the extent of 50% of the project cost as appraised by a recognised
financial institution/bank, subject to fulfillment of other ECB guidelines. Greater flexibility beyond 50% of the project cost may be allowed in
case of power sector and other infrastructure projects based on merits.
Pre-payment of ECB
Presently, prepayment facility is permitted subject to certain conditions if they are met out of inflow of foreign equity. In addition to this
the corporates can avail of either of following options for prepayment of ECBs.
i. 10% of the outstanding ECBs once during the life of a loan
ii. All ECBs, with residual maturity up to one year.
iii. 100% prepayment is allowed where the source of funds is from Exchange Earners Foreign Currency accounts.
Refinancing the existing foreign currency loan
Refinancing of outstanding amounts under existing loans by raising fresh loans at lower cost may also be permitted on a case-to-case basis,
subject to the condition that the outstanding maturity of the original loan is maintained. Rolling over of ECB will not be permitted.
Liability Management
Corporates can undertake liability management for hedging the interest and/or exchange rate risk on their underlying foreign currency exposure.
End use Relaxation
ECBs can be used for any purpose except investment in real estate and in capital markets.
Government equity holding in PSUs
In view of on-going dis-investment programmes, borrowing by PSUs should not incorporate any covenant that Government will continue to
hold at least 51% of equity in PSUs concerned.
Operating Expenses
Operating and out-of-pocket expenses incurred for ECB approvals, not resulting in loans, are allowed as per prevailing RBI guidelines on current
account transactions subject to a cap.
Simplification of approval procedures
The Regional Offices of RBI would take loan agreement/documents on record of all ECB approvals once the Government/RBI has approved
them.
Default interest not exceeding 2% over the applicable rate will be incorporated in the approval letter/taken on record letter itself. No further
approval would be required from the Government/RBI.
Structured Obligation
In order to enable corporates to hedge exchange rate risks and raise resources domestically, domestic rupee denominated structured obligations
would be permitted to be credit enhanced by international banks/international financial institutions/joint venture partners subject to certain conditions.
The denomination of debt service in the post default situation may be in rupees or in forex as envisaged in the contract document.
Source : Guidelines on External Commercial Borrowings: Policies & Procedure (1999-2000), Govt. of India, New Delhi, July,1999 and
Press Release of the Ministry of Finance dated 9.2.2000.

BOX 6.3
Liberalisations on Capital Account during the Current Financial Year
(1.4.99 to 25.11.99)

l ADs are permitted to provide forward exchange cover to FIIs to the extent of 15 per cent of the market value

of their outstanding equity investment.

l Reserve Bank of India (RBI) will consider requests from Export Houses/Trading Houses/Star Trading Houses/
Super Star Trading Houses for availing of fund based/non-fund based facilities from overseas banks for their
trading offices abroad.
l Indian entities have been permitted to use Over-The-Counter (OTC) future contracts based on average prices.
They have also been permitted to hedge exposures (through London Bullion Market Association approved
brokers) to bullion prices arising from export commitments in the London Bullion Market besides recognised
international exchanges.
l RBI has issued notification granting (a) exemption to non-resident holders to acquire underlying shares
released by the Indian custodian of ADRs/GDRs upon surrender of the ADRs/GDRs, and (b) general
permission to the company/depository concerned for entering an address outside India in its register of books
in respect of such shares.
l The existing ceiling on investment abroad under Fast Track Route has been raised for SAARC countries and
Myanmar. Ceiling on Indian Rupee investment in Nepal and Bhutan has been raised.
l RBI has issued notification extending general permission to Indian companies to issue Commercial Paper
to Overseas Corporate Bodies on non-repatriation basis subject to certain conditions.
l Banks which have been permitted to accept gold under the Gold Deposit Scheme have been permitted to
use exchange traded and OTC hedging products to manage their price risk.
l Reserve Bank vide its notifications has granted general permission to:
non-residents to acquire shares of companies incorporated in India from other non-residents by way of
sale/transfer provided the seller/transferer had acquired the shares under general/special permission of
RBI.
NRIs, Persons of Indian Origin (PIOs) and OCBs to acquire shares of companies incorporated in India
from other NRIs/PIOs/OCBs by way of sale/transfer provided the transferer/seller had acquired the shares
under general or special permission of the RBI.
a person resident outside India or a company incorporated outside India which has been permitted to
set up a 100% Owned Subsidiary to acquire shares from shareholders who had acquired such shares
as signatories to the Memorandum and Articles of Association, subject to certain conditions.
Indian companies to issue rights/bonus shares to non-residents and to send such shares out of India,
and to non-residents to acquire such shares subject to certain conditions.
Indian companies for issuing non-convertible debentures to NRIs/OCBs on repatriation/non-repatriation
basis subject to certain conditions.
l RBI has empowered designated branches of authorised dealers to grant permission on repatriation/nonrepatriation
basis to NRIs/OCBs under all portfolio investment schemes to acquire shares/debentures of
Indian companies and other securities. NRIs/OCBs have also been granted permission to acquire such
shares/debentures of Indian companies and other securities.
l Authorised dealers have been permitted to grant loans and advances to NRI/PIOs against the security of
shares/debentures/immovable property held by them in India, according to their commercial judgement
subject to certain conditions.
l Authorised dealers have been permitted to allow the remittances towards prepayment/part prepayment of
ECBs to the extent such prepayment has been approved by the Government of India. RBI would consider,
on application, prepayment/part prepayment of ECBs approved by them.
Source : RBI

6.58 Overall, the outstanding balance under

various non-resident deposits was higher at
US$ 21301 million at end March 1999 compared
to US$ 20367 million as at the end of March
1998. The outstanding balance further
increased to US$ 22162 at the end of October
1999.
External Assistance
6.59 Gross disbursements of external
assistance in 1998-99 were US$ 2936 million,
almost the same level of US$ 2934 million in
1997-98. Repayments were higher at US$ 2105
million in 1998-99 compared to US$ 2028 million
in 1997-98. Because of larger amortisation
BOX 6.4

Status on Sanctions
Sanctions by the USA
It was reported in the Economic Survey 1998-99 that under Nuclear Proliferation Prevention Act, 1994, which
also includes the Glenn Amendment to the Arms Export Control Act, the US ordered sanctions against India on
May 13, 1998. The sanction was not applicable in assistance relating to humanitarian needs, food or other
agricultural commodities.
On November 6, 1998, the US President announced partial lifting of sanctions on the basis of authority given
to him by the Brownback Amendment passed by the US Congress. The relaxations were offered in the operations
of EXIM Bank, Trade Development Agency and OPIC. US Bank activities and Military Education and Training
Programmes were resumed.
Further, on 27 October 1999, the US President waived some of the sanctions, for an indefinite period. The
sanctions that are waived include :
(a) Activities and programmes of the Export-Import Bank (EXIM Bank).
(b) Activities and programmes of the Overseas Private Investment Corporation (OPIC).
(c) Assistance under the International Military Education and Training Programme (IMET).
(d) Making of any loan or providing of any credit to the Government of India by any US Bank.
(e) Assistance to the Asian Elephant Conservation Fund, the Rhinoceros and Tiger Conservation Fund, and the
Indo-American Environmental Leadership programme.
(f) Any credit, credit guarantee, or other financial assistance provided by the Department of Agriculture to
support the purchase of food and other agricultural commodities.
The effect of the Presidential Memorandum signed on 27 October, 1999 is that the following sanctions will
remain in effect until the President exercises his waiver authority:
(a) US opposition to the extension of any loan, financial or technical assistance to India by an international
financial institution ( i.e., World Bank, International Monetary Fund and the Asian Development Bank loans).
(b) Prohibition on the sale of defence articles, services, design and construction services, as well as the grant
of export licenses for the export of items listed on the US Munitions List.
(c) Grant of foreign military financing.
(d) Prohibition on the export of specific goods and technology (i.e., dual use goods and technology).
A press release dated 16 December, 1999 from the US Department of Commerce, Bureau of Export
Administration indicates removal of 51 Indian entities from the list of entities originally sanctioned in 1998. The
entities removed included mainly ordnance factories and scientific research institutions. Removal of the entities
will make it easier for them to obtain non-sensitive items and technology from the US.
Denmark
Decisions against any fresh aid. Further, all ongoing projects would be wound up in a phased manner so
that they can be transferred to Indian authorities in three to five years. Assistance under private sector is also
suspended.
Canada
Ongoing projects will continue. Future programmes will focus on environment; poverty reduction; gender
equity; human rights and child labour. No support to new non-humanitarian lending. Ban on defence sales.
Position remains unchanged in respect of others.
Source: Ministry of External Affairs.

payments in 1998-99, net inflows in 1998-99

were lower at US$ 831 million in comparison to
US$ 906 million in 1997-98. Gross
disbursements improved in the first half of the
current financial year. Disbursements were
higher at US$ 1184 million during April
September 1999 compared to US$ 933 million
during the corresponding period in the previous
year. Repayments were also higher at US$ 1068
million in the first half of the current financial
year compared to US$ 968 million during the
same period last year. Thus, net assistance
improved to US $116 million during AprilSeptember, 1999.
BOX 6.5
Group of Twenty (G-20)
l The Finance Ministers of the Group of Seven (G-7) countries established in September 1999, the G-20 as

an international forum to promote informal dialogue and cooperation among systemically important countries

within the framework of the Bretton Woods institutional system with a view to preserving international financial
stability.
l An important distinguishing characteristic of the G-20 from the G-7 is its broader participation from among
both the industrialised countries as well as key emerging markets, thereby representing a wider range of
viewpoints.
l Members of the G-20 are: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Italy, Japan,
Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, the United States, the
European Union and the Bretton woods institutions.
l During the inaugural meeting of the G-20, held in Berlin during December 15-16, 1999, the Group deliberated
on various prerequisites for a sound international financial system and highlighted the importance of the
following initiatives to avert global financial crisis:
1. Formulation of sound national economic and financial policies.
2. Strengthening of national balance sheet.
3. Strengthening of sovereign debt management.
4. Greater attention to the impact of government policies on borrowing decisions of private firms.
5. Sustainable exchange rate regime supported by consistent exchange rate and monetary policy.
6. Widespread implementation of codes and standards including transparency, data dissemination and
financial sector policy.
7. Measures to strengthen domestic capacity, policies and institutions.
l The Group welcomed the work of the Bretton Woods Institutions and other bodies in the areas of codes and
standards and agreed to undertake the completion of Reports on Observance of Standards & Codes and
Financial Sector Assessments.
l The members of the Group advised their Deputies to consider existing work in other forums, and to examine
further avenues to mitigate vulnerabilities to crisis.
l The Group affirmed its commitment to progress towards multilateral trade liberalisation within the WTO
framework.