Service Sector Liberalisation in India 20110812.pdf · he rapid growth of India’s service sector...

South African Instit

ute of Inte

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iona

l Affa

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African perspectives. Global insights.

Economic Diplomacy Programme

O C C A S I O N A L P A P E R N O 8 8

Service Sector Liberalisation in India: Key Lessons and Challenges

A u g u s t 2 0 1 1

R u p a C h a n d a a n d P r a l o k G u p t a

A b o u t S A I I A

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A b S t r A C t

The service sector is one of the fastest-growing sectors in the Indian economy. It has

been integral to India’s overall liberalisation and structural reform programme, which was

initiated in the 1980s and gained momentum after 1991. The increasing significance of

India’s service sector has, however, raised issues and concerns that need to be addressed

domestically, in consultation with relevant stakeholders, and externally, in consultation with

key trade and investment partners. The paper analyses the liberalisation and structural

reform process carried out in India’s service sector since 1991 and the key lessons to

be learned. It considers a representative set of services from different subsectors, namely

telecommunication (infrastructure), banking (financial), higher education (social) and

retail distribution (commercial) services, to understand the liberalisation process and the

challenges faced in undertaking various reform measures.

The paper shows that the liberalisation process has involved a series of regulatory and

non-regulatory measures involving the government and other stakeholders. The reforms

have been challenging and have evolved over time, often involving a process of learning

through experience. In subsectors where liberalisation has been successful, this has resulted

in increased efficiency and productivity in that service sector and often in related sectors.

Where conflicting views of stakeholders have impeded the reforms process, only partial

and halting liberalisation has been possible.

Overall, the paper reflects that the market structure and domestic policies and frameworks

have shaped the pace and extent of liberalisation across different services in India. To be

successful, liberalisation has to be supported by regulatory and legislative reforms, and a

strengthening of regulatory and enforcement capacity. Instituting appropriate regulatory

bodies, clearly defining their roles and improving governance are just as important as

pursuing liberalisation.

A b o u t t h e A u t h o r S

Rupa Chanda is a professor of economics at the Indian Institute of Management (IIM)

Bangalore. She has a PhD in Economics from Columbia University and a Bachelor’s Degree

from Harvard University. Prior to joining IIM Bangalore, she was an economist at the

International Monetary Fund. Her research interests include services trade and migration

with a focus on information technology and health care, World Trade Organization (WTO)

issues and regional trade. She is a member of the Commerce Ministry’s Expert Group on

Services and was formerly a member of the Planning Commission’s High Level Group on

Services.

Pralok Gupta has a PhD in Economics and Social Sciences from IIM Bangalore. He has

been a visiting and full-time faculty member at various Indian institutions, including the

Indo-German Chamber of Commerce. He has also served in the State Audit Services of

the Government of Uttar Pradesh, India. His research interests include international trade

and related issues concerning poverty and the environment, economics of services trade,

regulations, the WTO and related issues, and international migration.

4

S A I I A O C C A S I O N A L P A P E R N U M B E R 8 8

E C O N O M I C D I P L O M A C Y P R O G R A M M E

A b b r e v I A t I o N S A N D A C r o N Y M S

AtB attheborder

BtB behindtheborder

BPO businessprocessoutsourcing

DOT DepartmentofTelecommunications

DFI developmentfinanceinstitution

FDI foreigndirectinvestment

FIPB ForeignInvestmentPromotionBoard

GATS GeneralAgreementonTradeinServices

GDP grossdomesticproduct

ICRIER IndianCouncilforResearchonInternationalEconomicRelations

INR Indianrupee

IT informationtechnology

NPA nonperformingasset

NTP NationalTelecomPolicy

RBI ReserveBankofIndia

TRAI TelecomRegulatoryAuthorityofIndia

TRI traderestrictivenessindex

UGC UniversityGrantsCommission

UNCTAD UnitedNationsConferenceonTradeandDevelopment

WTO WorldTradeOrganization

S E R v I C E S E C t O R L I B E R A L I S A t I O N I N I N D I A

5


I N t r o D u C t I o N

TherapidgrowthofIndia’sservicesectorinthepost-reformerahasplayedacritical

roleinthecountry’semergenceasoneofthefastest-growingeconomiesintheworld

inrecentyears.TheservicesectorhasalsofacilitatedIndia’sintegrationwiththeworld

economythroughtradeandinvestment.Itsservicesexportshavegrownsignificantly,

fromlessthan$10billionin1997toover$90billionby2009.1India’sshareinglobal

servicesexportshasrisenfrom0.5%in1995toover2%in2009.2Thesector’ssharein

thecountry’sexportshasrisenfromlessthan18%in1996toover35%in20093andis

expectedtosurpassmerchandiseexportsby2012.4

ThecurrentdynamismexhibitedbyIndia’sservicesectorislargelyareflectionofthe

liberalisationandreformprocesscarriedoutinthissectorandinthewidereconomy

sincethe1990s.However,thisprocesshasbeenfraughtwithdebateandcontroversyover

thedesiredpace,extentandimplicationsofthesereforms.Theseissuesandconcerns

havevariedacrossdifferentkindsofservices.Somehavebeenliberalisedrapidlyand

extensivelyforbothdomesticandforeignparticipants.Otherservicesremainlimitedfor

privateparticipationorhavebeenopenedupmainlyfordomesticplayersandremain

closedtothepresenceofforeignestablishments.Althoughconsiderableliberalisationand

regulatoryreformshavetakenplaceoverthepastdecadeormore,theprocesshasbeen

slowandhaltingforsomeservices.Keypiecesoflegislationhavetakenanumberofyears

tobepassed,owingtodomesticstakeholders’sensitivities,alackofpoliticalwilland

consensus,andavarietyofsocialandeconomicconcerns.

The paper provides an overview of the liberalisation and reforms carried out in

India’sservicesectorsince1991.Itoutlinesrecenttrendsintermsofthesector’sgrowth

performanceanditscontributiontotheoveralleconomyandtrade.Itthenexploresthe

natureofIndia’sservicesliberalisationandreformsinselectedservicesectors,highlighting

theoutcomes,concernsandfuturechallengesforeach.ThepaperbrieflydiscussesIndia’s

multilateralnegotiationsforvariousservices,andconcludesbyhighlightingthelessons

tobelearnedfromIndia’sexperiencesofservicesectorliberalisation.

t r e N D S I N I N D I A ’ S S e r v I C e S e C t o r

Theservicesectorhasbeenamajorcontributortothehighgrowthratesexperiencedby

theIndianeconomyinrecentyears.Theaverageannualgrowthrateofservicesrosefrom

7.7%in1994–955to10.1%in2009–10.6Figure1(seepage6)showstheannualgrowth

ratesofservicesandoverallgrossdomesticproduct(GDP)from2005–2010.

Thesectorregisteredsuperiorperformancecomparedtoindustryandagriculture,and

exceededtheoverallgrowthoftheeconomyfortheperiodunderreview.Thechanging

sectoralprofileofIndia’sGDPandthegrowingsignificanceofservicesisshowninFigure

2(seepage6).

GiventheperformanceofIndia’sservicesector,itscontributiontooverallGDPhas

increasedsharply,from41%in1990–91to63%in2009–10.7Thesharesofagriculture

andindustrydeclinedoverthisperiod.Thegrowthperformancewithintheservicesector

itselfhas,however,variedacrosssubsectors.Table1(seepage7)showstheyearlygrowth

ratesforallthesubsectorsforthe2005–10period.

6



Figure 1: Annual growth rates of services GDP and overall GDP in India (%), 2005–10

2005–060

2

3

1

4

5

6

7

8

9

10

11

12A

nnua

l gro

wth

(%)

2006–07 2007–08 2008–09 2009–10

Services gDP overall gDP

Source:India,MinistryofFinance,Economic Survey 2010–11.NewDelhi:Government,2011,p.238;

reproducedfromFigure10.1

Figure 2: Changing sectoral composition of India’s GDP (%), 1990–2010

Source:Authors’calculationsbasedoninformationfromtheCentralStatisticalOrganisationandthe

GovernmentofIndia’sEconomicSurveyofvariousyears

2009–102000–011990–91

Agriculture

Industry

Services

4157

63

27

2023

3223

14


7


Table 1: Annual growth rates in service subsectors in India (%), 2005–10

Service Sector 2005–06 2006–07 2007–08 2008–09a 2009–10b

Construction 12.8 10.3 10.7 5.4 7.0

Trade, hotels and restaurants

12.2 11.0 10.0 5.5 6.7

trade 11.7 10.7 9.7 6.5 7.2

Hotels and restaurants 17.5 14.4 13.1 -3.1 2.2

Transport, storage and communication

12.2 12.7 12.9 11.1 15.0

Railways 7.5 11.1 9.8 7.6 9.4

transport by other means

9.3 9.0 8.7 5.2 7.0

Storage 4.7 10.9 3.4 10.5 10.7

Communication 25.5 24.9 25.4 25.8 32.1

Financing, insurance, real estate and business services

12.7 14.0 11.9 12.5 9.2

Banking and insurance 15.9 20.6 16.7 14.0 11.3

Real estate, ownership of dwellings, and business services

10.6 9.5 8.4 11.2 7.5

Community, social and personal services

7.0 2.9 6.9 12.7 11.8

Public administration and defence

4.2 2.0 7.6 20.2 13.0

Other services 9.1 3.5 6.3 7.4 10.9

a Provisionalestimatesshowinggovernment’s figuresbasedonanalysisofrawdata

collected.

b Quickestimatesshowinggovernment’spreliminaryfindingsbasedonrawdata.

Source: India,MinistryofFinance,Economic Survey 2010–11. NewDelhi:Government,2011,

p.243

Communicationservicesregisteredthehighestgrowthratesduringthisperiod,withan

averagegrowthrateof26.7%.8Othersubsectors,suchastrade,hotelsandrestaurants,

construction,financing,insurance,realestateandbusinessservices,havealsogrown

rapidlyinrecentyears.

Table2(seepage8)reflectstheshareofemploymentofthebasicsectorsintheIndian

economyfortheyears1993–94,2004–05and2007–08.

8



Table 2: Share of employment per sector in India (%), 1993–94, 2004–05 and 2007–08

Year Primary Secondary Tertiary

1993–94 64.5 14.3 21.2

2004–05 57.0 18.2 24.8

2007–08 55.9 18.7 25.4

Source:India,MinistryofFinance,Economic Survey 2010–11. NewDelhi:Government,2011,p.238

Althoughtheprimarysector(predominantlyagriculture)wasthedominantemployer,

the share of employment in the tertiary sector (predominantly services) increased

over theyears.Theshareof theprimarysector inemployment fell sharplybetween

1993–94and2004–05.Theconsequentriseintheshareofemploymentinthesecondary

(predominantlyindustry)andtertiarysectorswasfairlybalancedbetweenthetwo.9

ThecontributionoftheservicesectortoIndia’stradeandforeigndirectinvestment

(FDI)flowshasalsogrownsignificantlyoverthepastdecade,facilitatingIndia’sintegration

withtheworldeconomy.Table3showsIndia’sservicesectorexportsandimportsandits

shareinworldexportsandimportsofservicesfrom1998–2009.

Table 3: India’s services trade and share in world services exports and imports,

1998–2009

Year Exports of India’s services

($ billion)

Imports of India’s services

($ billion)

India’s share in world exports of

services (%)

India’s share in world imports of

services (%)

1998 11.7 14.5 0.8 1.0

1999 14.5 17.3 1.0 1.2

2000 16.7 19.2 1.1 1.2

2001 17.3 20.1 1.1 1.3

2002 19.5 21.0 1.2 1.3

2003 23.9 24.9 1.3 1.3

2004 38.3 35.6 1.7 1.6

2005 52.5 47.3 2.1 1.9

2006 69.7 58.7 2.4 2.1

2007 87.0 70.5 2.5 2.2

2008 102.9 87.9 2.6 2.4

2009 91.1 74.4 2.7 2.3

Owingtosuchdynamicgrowthinservicesectorexports,India’sshareintheworldexports

ofservicesmorethantripledfrom1998to2009.ItconsistentlyexceededIndia’ssharein

worldmerchandiseexports,whichalsoincreasedfrom0.6%in1998to1.3%in2009.10


9


Theservice sector increased its contributionnotonly to India’sGDPbutalso to

India’strade.IthasprovenintegraltoIndia’soverallliberalisationandstructuralreform

programme,whichwasinitiatedinthe1980sandgainedmomentumafter1991.

S e r v I C e S e C t o r L I b e r A L I S A t I o N A N D r e f o r M 11

ThegrowthwitnessedinIndia’sservicesectorislargelyduetodomesticliberalisation

andgrowinglinkageswithexternalmarkets.A2004WorldBankstudy12showsapositive

correlationbetweentheextentofliberalisationandgrowthindifferentservicesubsectors

inIndia.Althoughthisstudyshowsgrowthratesofselectedservicesectorsduringthe

1990s,itisstillusefulinhighlightingthepositiveimpactofservicesectorliberalisation

ongrowthandemployment.Thestudyfindsthatservicesthathavebeenliberalisedthe

mostintermsoftradeandFDIpolicieshavetypicallyexperiencedhighergrowthratesand

employmentcreationopportunities.Figure3showstheliberalisationandgrowthlinkages

inIndia’sservicesectorforthe1990s.

Figure 3: Liberalisation and growth linkages in India’s service sector (%), 1990s

Source:WorldBank,Sustaining India’s Services Revolution: Access to Foreign Markets, Domestic Reform

and International Negotiations.Washington,DC:WorldBank,2004,p.16,reproducedfromFigure6

Thehighest growth segmentswerebusiness and communication services.Thiswas

followedbybankingandlifeinsuranceservices,whichwerealsoclassifiedassignificantly

Significantly liberalised sector

Moderately liberalised sector

Non-liberalised sectorStorage

Postal

railways

entertainment services

Dwellings

Water transport

real estate

Construction

Legal services

Air transport

road transport

Distribution

Medical & health

education

hotels & restaurants

Life insurance

banking

Communication

business services 21.1%

15.1%

11.8%

11.0%

10.1%

9.9%

9.0%

8.1%

7.7%

6.1%

5.8%

5.2%

4.9%

4.4%

4.1%

3.4%

3.2%

1.8%

1.7%

10



liberalisedsectors.Storage,postalandrailwaysservicesregisteredthe lowestgrowth

rates,andwereclassifiedasnon-liberalisedormore-restrictedsectors.Severalservices

thatexperiencedmoderategrowthrateshadgenerallyundergonemoderateliberalisation.

Somesegments,suchasdistributionservices,registeredreasonablyhighgrowthrates

despitetheirlimitedliberalisation,whichwasmainlyduetotheoverallbuoyancyofthe

Indianeconomyandgrowingdomesticdemand.ThegrowthdynamicsofIndia’sservice

sectorreflecteddomesticeconomicconditionsandtheoutcomeof liberalisationand

reformsinthesectorandinthewidereconomy.

Thefollowingdiscussionhighlightsthenatureofliberalisationandregulatoryreforms

thathavebeenundertakeninselectedservices,andthechallengesthathaveariseninthe

process.

t e L e C o M M u N I C A t I o N S e r v I C e S 13

ThetelecommunicationservicesectorisperhapstheshowpieceofIndia’sliberalisation

andreformprogramme.Theroadmapforreformswaslaiddownbymajornationalpolicy

frameworks following the introduction of an extensive reform programme in 1991.

Themostsignificantaspectofthesereformshasbeentheconsistent liberalisationof

FDIrestrictions,inboththebasicandvalue-addedsegments,andthegradualremoval

ofrestrictionsonprivateparticipants.TheDepartmentofTelecommunications(DOT)

hasbeenrestructured,withitsmonopolystatusasatelecommunicationserviceprovider

graduallyreducedandeventuallyeliminated.

Liberalisation process

TelecommunicationreformscommencedwiththeintroductionoftheNationalTelecom

Policy(NTP)of1994.14Thispolicycalledforthesystematicliberalisationofthesector

byopeningupbasicservicestoprivatetelecommunicationcompaniesandsettingup

anindependentstatutoryregulatorybody,theTelecomRegulatoryAuthorityofIndia

(TRAI),in1997.Thefirstmajorstepinthesector’sliberalisationwastheentryofprivate

participantsintothebasictelecommunicationservicessegmentin1997,tosupplement

theDOT’sservicesandtohelpachieveuniversalaccesstargets.Entrywaspermittedona

duopolybasis,withboththeDOTandprivateparticipantsparticipatinginthissegment.

Licenceswererationedandforeignequityparticipationinbothbasicandcellularmobile

serviceswaspermittedupto49%.15

Theseinitialyearsoftelecommunicationreforms,however,werenotverysuccessful

owingtoinsufficientliberalisationandunmettargets.TheDOTretaineditsmonopoly

overnational long-distancetelephonyuntil theyear2000.Althoughthemarketwas

dividedintoseparatezones,called‘telecommunicationcircles’,privateparticipantscould

onlyprovide intra-circle long-distance services,while thegovernmentproviderwas

permittedtoprovidebothintra-circleandinter-circlelong-distancecallingservices.Thus,

althoughcompetitionwaspermittedbetweenthepublicproviderandalimitednumberof

privateparticipants,anunevenplayingfieldremained.Theregulatoryframeworkwasalso

toblame.TheDOTandTRAIexperiencedconflictsofinterestsonseveraloccasions.This

wasbecauseofthelatter’slackofautonomyoverissuessuchastheissuanceoflicences,



11

settingtermsandconditionsforserviceproviders,settingtariffs,oroverridingdecisions

takenbytheDOT.Suchconflictsadverselyaffectedthecredibilityoftheregulatorinthe

initialyearsofliberalisation.

The secondphaseof telecommunication reformsbeganwith the introductionof

theNTPof199916underanewgovernment.Thepolicystateditscommitmenttoan

independentregulatorandmoreclearlydefinedtheroleofTRAI.Severalliberalisation

initiativesandchangesintelecommunicationlegislationhavetakenplacesince1999.In

August2000nationallong-distancetelephonywasopeneduptoprivateoperators,aswas

intendedundertheNTPof1999.In2001unlimitedentrywaspermittedineachpolicy

circlefortheprovisionofbasicandmobileservices.Thelicenceregimewasmigratedfrom

afixedfeeschemetooneofrevenuesharing.InApril2002theinternationallong-distance

servicewasopeneduptocompetitionbyprivatisingthepublicproviderandremoving

restrictionsonthenumberofoperatorsinthissegment.Otherliberalisationmeasures

undertakenafter1999includetheopeningupofinternettelephony;disinvestmentand

corporatisationofpublicsectortelecommunicationprovidersinsomemetros;introduction

ofnew technologiesand formsof servicedelivery;andapproval for internet service

providerstosetupinternationalinternetgateways.

SinceFebruary2005thegovernmenthasincreasedtheforeignholdinglimitfroman

earlierlimitof49%to74%.Theaffectedservicesarefixed-linebasicservices,cellular

services,unifiedaccess services,national and international long-distance telephony,

publicmobiletrunkedservices,globalmobilepersonalcommunicationservices,and

variousvalue-addedservicessuchasvoicemailande-mailservices.17Subsequently,FDI

waspermittedupto100%invalue-addedservicessuchase-mail,voicemail,electronic

datainterchange,on-lineinformationanddataprocessing,andinternetserviceprovision

withoutgateways.18Competitionwasencouraged,withtheentryofbothlocalandforeign

providers,thegrantingofgreaterflexibilitytoexistingparticipantswiththewaiverof

various obligations and permission to provide additional services, and substantial

reductionsinentryandlicensingfeesharesfromproviders.

Empirical estimation19

Doctoralresearch,titled‘Regulatorybarriersaffectingfactormobilityintradeinservices:

Measurement and implications’, by one of the authors of the paper quantifies the

qualitativenatureofregulatorybarriersaffectingtelecommunicationservicestoassessthe

trendsofliberalisationinthesector.Theregulatorybarriersfallintotwocategories–‘at

theborder’orAtBbarriersand‘behindtheborder’orBtBbarriers.AtBbarriersaffectentry

decisionsofforeignfirms,suchasFDIlimitsandjointventureagreements,whereasBtB

barriersaffectongoingoperationsoftheforeignfirmssuchasmarketstructure,licensing

requirementsandtaxstructure.TheempiricalestimationdifferentiatesbetweenAtBand

BtBbarriers.Accordingly,twotypesofrestrictivenessindicesarecalculated.Theseare

thetotaltraderestrictivenessindex(TotalTRI),showingquantificationofregulatory

barriersinbothAtBandBtBcategories,andthe‘behindtheborder’traderestrictiveness

index(BtBTRI),reflectingthequantificationoftheregulatoryregimearisingonlyfrom

BtBregulations.Therestrictivenessindicesarecalculatedbyassigningweightstovarious

regulatorybarriersandarecalculatedoveraperiodoftimefrom1995to2010atfour

differentpoints,namely1995,2000,2005and2010.

12



Tables4and5andFigures4and5presenttheTotalTRIandBtBTRI,asconstructed

forfixedandmobiletelecommunicationservicesinIndiafor1995,2000,2005and2010.

Table 4: Total TRI and BtB TRI for telecommunication services (fixed) in India, 1995, 2000,

2005 and 2010

Year Total TRI BtB TRI Contribution of BtB TRI in Total TRI (%)

1995 0.716 0.511 71

2000 0.621 0.441 71

2005 0.491 0.333 68

2010 0.309 0.219 71

Source:Authors’owncalculations

Figure 4: Total TRI and BtB TRI for telecommunication services (fixed) in India, 1995,

2000, 2005 and 2010


Table 5: Total TRI and BtB TRI for telecommunication services (mobile) in India, 1995, 2000, 2005 and 2010


1995 0.697 0.492 71

2000 0.602 0.423 70

2005 0.447 0.315 70

2010 0.265 0.201 76


0.00

0.200

0.400

0.600

0.800

1.000

1995 2000 2005 2010

total trI btb trI

0%

20%

40%

60%

80%

100%

1995 2000 2005 2010

Percentage contribution of btb trI in total trI


13


Figure 5: Total TRI and BtB TRI for telecommunication services (mobile) in India, 1995,

2000, 2005 and 2010


TherewasasignificantdeclineinboththeTotalTRIandBtBTRIovertheyears.This

indicatedthatbothAtBandBtBregulations,whichaffectedforeigncommercialpresencein

Indiantelecommunicationservices,hadbeenliberalisedconsiderably.Thesignificantdrop

wasbecauseofincreasedFDIlimits(74%in2010),thesimplificationoftheFDI-approval

process,andanevolutionofthecompetitivemarketstructure.20ThechangesintheBtB

TRIwereduetotheeasingoflicensingprocedures,theremovalofsomerestrictionson

value-addedservicesandtheintroductionofeasiertaxlaws.Theindiceswereverylowin

2010,whichshowedahighlyliberalisedtelecommunicationsectorinIndia.

Outcome

Theoutcomeofreformsintelecommunicationserviceshasbeenstriking.Thisisreflected

in thenetwork expansion,productivity improvements, increasednumberof lines in

operation,reductionsinpricesandwaitinglists,increaseddemandforbasicandvalue-

addedservices,andincreasedteledensityinruralandurbanareas.Liberalisationhasled

toagrowingnumberoftelecommunicationoperators.Theprivatesectoroutnumbers

publicsectorproviders,althoughthelattercontinuestodominateboththefixedservices

andcellularsegmentsintermsofmarketshare,particularlyintheurbanareas.Reform

measuresandtechnologicaladvanceshaveresultedinchangesinthesector’sprofile.Value-

addedandmobiletelephonyhavebecomethefastest-growingsegmentsandgrowthdrivers.

TheliberalisationofthetelecommunicationsectorinIndiahasledtorapidgrowth

andbenefited consumers through lower tariffs and increased competition,with the

telecommunicationservicepriceindexfallingfrom100in2004–05to85.08in2007–

08.Thesectorhasgrownfroma levelof22.8milliontelephonesubscribers in1999

to54.6millionin2003,andtoafurther764.77millionattheendofNovember2010.

Wirelesstelephoneconnectionshavecontributedtothisgrowth.Thenumberofwireless

connectionsrosefrom3.57millioninMarch2001to729.58millionbyNovember2010.

Teledensity,whichwas2.32%,increasedto64.34%.21

0.00

0.200

0.400

0.600

0.800

1.000

1995 2000 2005 2010

total trI btb trI

0%

20%

40%

60%

80%

100%

1995 2000 2005 2010


14



Overall,theliberalisationandregulatoryreformexperienceinthetelecommunication

sectorhasbeenasuccessfulone.However,ithasalsobeensubjecttovariouschallenges,

whichhaveincludedtheintroductionofandchangesinregulationsandframeworks,

redefiningresponsibilitiesfortheregulator,andevolvingapproachestomarketentryand

equity.

Concerns and future challenges

Notwithstanding such growth and benefits, certain critical issues remain in India’s

telecommunicationsector.Onechallengeisinfrastructure,particularlytheavailabilityof

spectrumortheprescribedelectromagneticfrequencyrange,whichiscurrentlyinshort

supply.Furtherreductionsinbandwidthcostsareessential,asfirst-milecostsforIndian

businessprocessoutsourcing(BPO)providersremainhigherthanthoseabroad.Lower

bandwidthcostswouldhelptoincreasethecompetitivenessofIndianBPOproviders.

Thereisalsoaconcernabouttransparencyinspectrumallocation.The2Gspectrum

allocationprocess,whichisunderthescrutinyofIndianinvestigationagencies,revealed

thepossiblemisuseofdecision-makingpowerbytheconcernedauthorities.Thelicences

wereawardedonafirstcome,firstservedmethod,ratherthanthroughtheprocessof

auction,asstipulatedundertheNTPof1999.Moreover,theministryreducedthecut-off

timeforlicenceapplicationwithoutconsultingandinformingotherrelatedministries,and

withoutmandatoryapprovalfromthecabinetcommitteeforsuchimportantdecisions.

AccordingtoestimatesoftheComptrollerandAuditorGeneralofIndia,thechanging

policystanceandnon-transparencyin2Gspectrumallocationhasresultedinalossof

approximatelyINR221.7trilliontotheexchequer.23

Anotherareaofconcernistheurban–ruraldivide,whichhasincreasedsignificantly

post-liberalisation.Thisismainlybecauseofthelargelyurbancoverageofthefast-growing

mobiletelephonysegment,whichhasovertakenthefixed-linesegment.Thisgrowing

divideisshowninFigure6.

Figure 6: The urban–rural divide in the telecommunication sector in India, 1998–2009

2004 20090

2030

10

405060708090

100

1998 1999 2000 2001 2002 2003 2005 2006 2007 2008

urban teledensity rural teledensity

Source:Authors’calculationsbasedonIndiastat,database,http://www.indiastat.com


15


Universalserviceobligationsandregulatorymechanismsthatpromoteequitywith

efficiencyarealsoanimportantconcernasIndia’stelecommunicationsectorisliberalised

further.ThenewcompetitionregimeundertheCompetitionCommissionofIndia,and

theexistingregulatorybodyinthetelecommunicationsector,TRAI,willbothneedto

ensurethatprofitabilityoftelecommunicationprovidersandefficiencyarenotatthecost

ofsocialobligations.Itisalsoimportantthattheyavoidregulatoryconflicts,especially

giventhegrowingconvergenceofcommunicationservices.

b A N k I N g S e r v I C e S 24

Thebanking systemreformsand liberalisationbegan in the1992–1997periodwith

acautiousandprogressiveapproach.Thesubsequentreformshavebeeninlinewith

thethreebroadobjectivesofrelaxingexternalconstraintsaffectingthebankingsector,

strengtheningthebankingsystem,andputtinginplaceaninstitutionalframeworkto

overseeitsfunctioning.


Keybankingsectorliberalisationmeasuresincludethephasingoutofdirectedcredit;

deregulationofinterestrates;introductionofBASEL/BankforInternationalSettlements

normsforcapitaladequacy;tighteningofprudentialnorms;allowingofparticipationby

domesticprivatebanks;reducingofrestrictionsonentrybyforeignbanks;saleofbank

equitytothepublic;andphasingoutofprivilegedaccesstofundsbydevelopmentfinance

institutions(DFIs)andincreasingcompetitioninlendingbetweenDFIsandbanks.These

measureshavebeenimplementedgraduallytoincreasetheefficiencyandprofitabilityof

thepublicsectorbanksandtoimprovethesafetyandsoundnessofthebankingsystem.

Bankbranchingpolicyandentrynormsforprivatedomesticandforeignbankshavebeen

liberalisedsteadily.Since1993theReserveBankofIndia(RBI)–theCentralBank,which

istheregulatorofthebankingsystem–hasallowedentryofprivatesectorbanksto

increasecompetition.In1996guidelineswereissuedforsettingupnewprivatelocalarea

bankstoincreasecompetitioninruralbanking.25

FDI limits in thebanking systemhavebeen raised slowly.Before, onlyminority

participationofupto20%waspermittedforforeignbankingcompaniesorfinancial

companies in private Indian banks. This could be accomplished through technical

collaboration or through the Foreign Investment Promotion Board (FIPB) route. A

40% limitwas set fornon-resident Indians and associatedborrowers fromoverseas

commercialbanks.26InMay2001thislimitwasincreasedto49%fromallsourceson

theRBI’sautomaticroute.Thismeansthatnopriorapprovalwouldberequiredfromthe

FIPB,subjecttotheCentralBank’sguidelines.Thislimitwasfurtherraisedto74%inthe

2004–05budget,withtheprovisionthatatleast26%ofthepaid-upcapitalbeheldby

residents,exceptinthecaseofwhollyownedsubsidiariesofaforeignbank.Theform

ofestablishmentbyforeignbankswasalsorelaxed.Before,foreignbankswereallowed

tooperateonlythroughbranches.Now,thecurrentFDIpolicyallowsforeignbanksto

operateinIndiathroughbranches,whollyownedsubsidiariesandsubsidiaries.27

16



Measureshavealsobeenintroducedtoimprovetheoperatingnormsandpractices

ofthebankingsystem.Prudentialnormshavebeenimplementedforcapitaladequacy,

incomerecognition,assetclassification,provisioning,accountingandvaluationpractices,

exposure limits, and transparency and disclosure practices. The objective of these

measuresistomovetheIndianbankingsystemtowardsinternationalbestpracticesand

standards.

Empirical estimation28

Aswith telecommunication services, restrictiveness indiceshavebeenestimated for

bankingservicesoveraperiodoftimefrom1995to2010atfourdifferentpoints,namely

1995,2000,2005and2010.ThesearegiveninTable6andFigure7.

Table 6: Total TRI and BtB TRI for banking services in India, 1995, 2000, 2005 and 2010


1995 0.639 0.329 51

2000 0.522 0.341 65

2005 0.360 0.254 70

2010 0.397 0.241 61


Figure 7: Total TRI and BtB TRI for banking services in India, 1995, 2000, 2005 and 2010


Table6andFigure7showadecreasingtrendintheindexforbankingservices.Thistrend

wasmainlybecauseoftheincreasedlimitforforeignequityparticipationinprivatebanks

inIndia,easingoftheFDI-approvalprocess,andthegrantingofestablishmentrightsto

0.00

0.200

0.400

0.600

0.800

1.000

1995 2000 2005 2010

total trI btb trI

0%

20%

40%

60%

80%

100%

1995 2000 2005 2010



17


whollyownedsubsidiariesofforeignbanksinIndiaovertheperiodunderconsideration.

TheRBIreleasedaroadmapforthepresenceofforeignbanksinIndiainFebruary2005,

whichproposedsignificantliberalisationofvariousAtBandBtBregulations.29

AlthoughTable6 indicatesadecreasing trendover time, the indexvalueslightly

increasedin2010comparedwith2005.Thiswasbecauseofanadditionalcondition

imposedontheFDI-approvalprocessin2010.UndertheFDIpolicyof2005,30FDIin

bankingserviceswasallowedfullythroughtheautomaticroute.In2010thegovernment

stipulatedthatFDIinbankingserviceswouldbeallowedthroughautomaticrouteonly

upto49%;andbetween49%and74%throughthegovernmentroute.31

Certain conditions remain for foreign investment in thebanking sector.Foreign

banksoperatingassubsidiariesarerequiredtosetupatleastone-quarteroftheirtotal

branchesinruralandsemi-urbanareas;althoughlicensedbranchesarenotsubjectto

ruralbranchingrequirements.Foreignbanks,aswithdomesticbanks,aresubjecttocredit

disbursalobligationstotheprioritysector.Moreover,theshareofforeignbankassets

intotalbankingassetsisnotallowedtoexceed15%,andFDIandportfolioinvestment

innationalisedbanksaresubject toanoverall20%statutory limit.Votingrights for

shareholdersofforeignbanksarerestrictedto10%,althoughthisrestrictionwillprobably

berelaxedinthenearfuture.

Outcome

Theliberalisationofoperationsinthebankingsectorhasaffectedthissectorinmany

ways.Ithasresultedinbothdomesticandforeignstructuralchanges,themostimportant

beingincreasingprivateparticipation.Theshareofprivatesectorbanksintotalbanking

systemassetshasrisenovertheyears.However,publicsectorbankscontinuetodominate

thebankingsystem.

Bankingsectorreformshavehelpedtoimprovetheprofitabilityofthebankingsystem.

Thisisreflectedintheiroperatingandnetprofits,andimprovedintermediationindicators.

Theentryofprivatebankshasresultedingreatercompetitionforpublicsectorbanksforthe

loaningoffunds.Theentryofotherfinancialinstitutions(suchasnon-bankingfinancial

companiesanddevelopmentfinanceinstitutions)hasalsoledtoincreasedcompetition

forpublicsectorbanksinsourcingfunds.Thenetresulthasbeenanimprovementinthe

overallefficiencyofthebankingsystem.Theseincludereductionsinoverheadexpenses

andinterestmarginsfordomesticbanks,andgreaterpressureonthepublicsectorbanks

toimprovethequalityoftheirservices.Theefficiencygainshavebeenthemostsignificant

inthecaseofpublicsectorbanks.Depositmobilisationandotherindicators,suchas

disbursementofcredit,perpersondepositsandperpersoncreditavailability,haveshown

considerableimprovement.Thespreadofthebankingsectorhasalsoincreased.

Table7(seepage18)showsthetrendsinsomeofthemajorperformanceindicatorsof

thescheduledcommercialbanksinIndiabetween1996–97and2006–07.

The RBI, which regulates the banking system, has also taken steps to address

governanceandownershipissuesinprivatesectorbanks.Thisisinresponsetoproblems

createdbypoorriskmanagementandlendingpracticesofsomeprivatesectorbanks

followingderegulation,whichcausedadeclineintheirassetqualityandposedrisks

todepositors.InJuly2004theRBIissuedguidelinestoensureadiversifiedownership

structureinprivatesectorbanks,bettercapitalisation,andfairandtransparentprocesses.

18



Theguidelinesrestricttheownershipofprivatebanksthroughcrossholdingsbycapping

thestakeofprivateandforeignbanksoperatinginIndiainotherprivatebanksto5%

(previously30%).Theyalsoputa10%caponasingleentitywithregardtotheownership

structure,whichrestrictspromoterholdingto10%.32

Thus banking sector reforms have included prudential measures, competition-

enhancingmeasures,stepstoincreasetheroleofmarketforces,andtheintroduction

ofinstitutional,legal,supervisory,andtechnology-relatedmeasures.Thesehaveledto

considerableimprovementsinprofitability,assetqualityandoperatingconditions.

Table 7: Major performance indicators of commercial banks, 1996–97 and 2006–07

Performance indicator

Foreign banks Private sector banks Nationalised banks

1996–97 2006–07 1996–97 2006–07 1996–97 2006–07

Business per employee (INR Lakhsa)

474.02 996.08 210.43 697.75 72.91 490.21

Capital risk-weighted assets ratio (%)

62.58 12.00 12.47 12.10 8.67 12.50

Net NPAb as percent to net advances

3.69 0.80 5.24 1.00 10.41 1.00

Profit per employee (INR Lakhs)

9.68 16.46 2.47 4.69 0.47 2.87

Return on assets (%)

1.10 2.27 1.49 1.03 0.58 0.94

a OneLakhisequalto100,000rupees.

b Nonperformingasset.

Source:SenguptaA,‘Bankingandinsuranceservices:LiberalisationinthecontextofanIndo–EU

tradeandinvestmentagreement’,NewDelhi:IndianCouncilforResearchonInternationalEconomic

Relations(ICRIER),2008,Table4,p.5


AlthoughIndia’sbankingsectorreformshaveresultedincompetitionandefficiencygains,

certainproblemsstillexist.Despiteimprovementsinthequalityofbankassets,some

banksstillhavehigherthanthe5%targetlevelforNPAs.Someoftheprivatesectorbanks

havebeensubjecttofraudandpoorriskmanagementpractices.Althoughstepshavebeen

takentobetterregulatesuchentities,concernsaboutinvestorprotectionremain.33

There isalsotheproblemofthecontinuedinterferenceof thegovernment inthe

banking system. Efficiency and growth in financial intermediation continues to be

hamperedbythegovernment’spre-emptionofbankingsystemassetsthroughrequired

investmentsingovernmentsecuritiesandmandatedcreditallocationrequirements,and

bygovernmentinfluenceonthepublicsectorbanksthroughguaranteesandsubsidies.


19


In turn, Indianbankscontinue to relyon returns fromgovernment securities.Such

governmentinterferencecreatesproblemsofadministrativeautonomy,regulatoryfailures

andconflictsofinterests.AkeyelementoffinancialsectorreforminIndiawillbeto

reducethegovernment’sstakeinfinancialsectorinstitutionsbydivestinggovernment

ownership inpublicsectorbanks.The latter largelydependsonprogresswith fiscal

consolidation.

ThefragmentedstructureofIndia’sbankingsystemisanotherissue.Consolidationin

thebankingsystem,whichistheglobaltrend,isyettotakeoffinIndia.Alargenumberof

commercialbanks,withthousandsofbranchesincludingmanyregionalruralbranches,

existinIndia.Thegovernmenthasintroducedregulationsonownershipstructuresof

privatebankstoencouragetheacquisitionofstakesbyforeignbanks,privatebanksand

financialinstitutionsintheprivatebankingsystem.However,consolidationhasbeenslow

andfraughtwithconcernsoverretrenchmentofworkersandprotestsbyunions.

ThereformandliberalisationagendainIndia’sbankingsectorremainsunfinished,

andfuturestructuralchangesarelikely.Furtherregulatorystrengtheningisalsorequired.

Mostimportantly,fiscalandfinancialreformshavetogohandinhand.Giventhecurrent

politicaleconomyinIndia,alackoffiscalreformmayultimatelybethebiggestobstacle

forthefurtherprogressofIndia’sbankingsectorreforms.

h I g h e r e D u C A t I o N S e r v I C e S 34

HighereducationinIndiahaswitnessedrapidgrowthinrecentyears.Thisisbecauseofa

risingdemandforhighereducation,improvementsinschooleducation,andthechanging

structureoftheIndianeconomythatrequiresnewandvariedskills.Themoststriking

characteristicof India’shighereducation sectorand its transformationhasbeen the

growingroleoftheprivateparticipantsinresponsetoanincreasingsupply-and-demand

gapandarisingdemandforprofessionallyorientedprogrammes.


PartialliberalisationhastakenplaceinIndia’shighereducationservicesector.Since2000

thegovernmenthasallowedforeignequityparticipationupto100%forentrythrough

franchises,twinningarrangements,studycentresandprogrammecollaboration,andup

to49%forresearchandteachingactivities.However,therehasbeenlimitedinvestment

intheeducationsectorbecauseofregulatoryconditions,whichrequirethattheentity

establishingtheschool,collegeoruniversityshouldbeanon-profitone.Thismeansthat

theserviceproviderinthissectormustbeatrust,societyoraSection25Company.A

foreignuniversityseekingtoestablishaneducationalinstitutioninIndianeedstoregister

undereitheroftheseforms.Theregulationsalsorequirethatsurplusfundsgenerated

byformalschoolsshouldbeploughedbackintothesameschool,andnotdistributedas

dividends.

AnimportantrecentdevelopmentintheliberalisationprocessofIndia’seducation

sectoristheapprovaloftheForeignEducationalInstitutionsRegulationofEntryand

Operations,(MaintenanceofQualityandPreventionofCommercialisation)Bill,2010

bythecentralgovernmenton15March2010.Thebillisundertheconsiderationofthe

20



ParliamentaryStandingCommitteeonHumanResourceDevelopmentbeforeitbecomes

alaw.ThebillproposestoallowforeigneducationproviderstosetupcampusesinIndia

andtoofferdegreesanddiplomastostudents.Itcontainsspecificclausestohelpprevent

potentialmisuse.Thebillalsoprescribesatime-boundformattograntapprovaltoforeign

educationalinstitutionsandrequiresforeigneducationproviderstoberegisteredwiththe

regulatorybody,atpresenttheUniversityGrantsCommission(UGC).35

ThebillrequiresaforeignuniversityseekingtosetupacampustodepositINR500

millionasacorpusfund.Theforeignuniversitycannottakeanysurplusgeneratedfrom

educationactivitiesinIndiaoutofthecountry.Thebillrequiresthataforeigneducation

providershouldutiliseupto75%oftheincomereceivedfromthecorpusfundforthe

developmentofitsinstitutionsinIndia.Theremainingincomeshouldbedepositedin

thecorpusfund.36Thebillstatesthataforeigninstitution‘shallnotimparteducationin

Indiaunlessitisrecognisedandnotifiedbythecentralgovernmentasaforeigneducation

providerundertheproposedlegislation’.37Thebillalsostatesthattheforeigneducation

providermustoffereducationinconformitywiththestandardslaiddownbythestatutory

authority,andofcomparablequality.38

Overall,liberalisationinthissectorhasbeendifficultbecauseofthelackofpolitical

willandconcernsoverregulatoryissues.However,recentlythegovernmenthasintroduced

newmeasurestoreformthissectorandtoattractqualityforeignproviderstoprovide

educationalservicesinIndia.

Outcome

Thepartialliberalisationofhighereducationserviceshasresultedintheentryofforeign

educationprovidersthroughvariousformsofdelivery.A2005studybytheNational

UniversityofEducationalPlanningandAdministrationacknowledgesthepresenceof

foreigneducationproviders’studycentres,programmecollaboration,franchisingand

twinningarrangements, inwhichforeignprovidershaveaminimumstakewhile the

Indiancounterpartsprovidetheinfrastructure.Mostareengagedincommerciallyoriented

programmes,suchasmanagementandinformationtechnology(IT),andaimtofulfil

growingdemandamongIndianstudentstoearnaforeigndegreeatalowercost.Many

domesticprivateparticipantshavetakenadvantageoftie-upswithforeignuniversities

tocircumventonerousregulationsinIndiaandtousethebrandnameoftheforeign

university.

Educationprovidersarealsodevisingnewwaysandstructurestocircumventthe

stipulatedgovernmentregulations.Onesuchstructureistocreateatrust,societyora

Section25Company,asrequiredbythelawtoruntheeducationalinstitute,andthen

tocreateasubsidiarytowhicheducationalandinfrastructureservicesareoutsourced.

Foreign investmentsare thenmade into thesesubsidiaries insteadof into the trusts,

societiesorSection25Companiesrunningtheschool.Variousservicesprovidedbysuch

subsidiariesincludemanagementservices,teachertrainingandcurriculumdesigning.

Anotherimportantoutcome,linkedtothedevelopmentoftherealestatesectorin

India,isthatmanyentitiesarenowestablishingschoolsinjointventureswithrealestate

developers.Thishelpsinensuringqualityschoolswithinresidentialcomplexes,which

makesthepropertiesmoreattractiveandreducestherequirementforinvestinghugefunds

toacquireland.


21



DespitetherapidgrowthandprivatisationofthehighereducationservicesinIndia,the

sectorremainsplaguedbydeficienciesininfrastructure,resources,qualityandregulatory

frameworks.Themainproblemis the inadequacyandunevendistributionofpublic

funding.Nearlyone-thirdoftheinstitutionsreceivenogovernmentfundsatall.Only

abouthalfoftheremainingtwo-thirdsreceivecentral(federal)governmentfunding.

Thereisalsoalackofequitableaccesstoqualityhighereducation.Relativelywell-

offstudentsareabletoaccesshighlysubsidisedandreputedpublichighereducation

institutions.Thepoorandlessadvantagedareforcedtoseekexpensiveprivateeducation,

which isoftenofdubiousquality.Theregulatorysystemhasbeenunable toprotect

studentsandpreventprivateprovidersfromchargingexorbitantfees.

Theregulatoryframeworkiscomplicated,withtheresponsibilityforhighereducation

beingsharedbetweenthecentral(federal)governmentandthestategovernments.The

centralgovernmenthastheresponsibilityofco-ordinatinganddeterminingstandards

inhighereducation.Thestategovernmentsareresponsibleforalladministrativeand

operationalmatters.Aplethoraofinstitutionsandcouncilsinvolvedinstandardsetting

andimplementationexistinIndia.Toeliminatetheadministrativeandco-ordination

problemsarisingfromthismultiplicityofinstitutions,theHumanResourceDevelopment

MinistryrecentlymadepublicthedraftbillonthecreationofaNationalCommissionfor

HigherEducationandResearch.Thiswillreplaceexistingstatutorybodiessuchasthe

UGC,theAllIndiaCouncilforTechnicalEducationandtheNationalCouncilforTeacher

Education.However,concernsremainthatthebillmaytendtowardsthecentralisationof

powersandcontroloveracademicinitiatives.

Capacityanddistributionisanotherconcern.Significantunmetsocialdemandexists

notonlyforhighereducationbutalsoforcertainvocationalandprofessionalstreams

ofhighereducation,particularlyengineeringandmanagement.Thereisalsogrowing

politicalinterferenceandalackoffinancial,operationalandadministrativeautonomy,

particularlyinpublicsectorinstitutions.

Owingtothelackofregistrationrequirements,ithasnotbeenpossibletokeeptrack

oftheexistenceandoperationsofforeignprovidersthroughtheirnon-campusmodes

ofdelivery.Thereisinsufficientenforcementofexistingregulationsonthequalityand

relevance of the education provided, consumer protection, and on equivalence and

accreditationissues.Suchpoorregulationcouldleadtoprofiteering,exploitationand

dishonestoperators,andlittleornospillovereffectsineducationalinfrastructureand

curriculumdevelopment.

Reform in India’s higher education services is a difficult task, which has been

exacerbatedbyadhocliberalisation.Seriousthoughtshouldbegiventothekindofforeign

providersthatarebeingsought,thescopeofregulation,theroleandstructureofdifferent

regulatorybodies,andlegislativeandadministrativemeasures.Itisalsoimportantto

addressissuesofstandardsandtheprovisionofqualityeducation;thecriteriaforapprovals

andregistrationofforeignserviceproviders;andequivalenceandrecognitionofdegrees

providedbysuchproviders.

22



r e t A I L D I S t r I b u t I o N S e r v I C e S 39

TheretaildistributionsectorinIndiaischaracterisedbythepresenceofalargenumber

ofintermediariesandafragmentedsupplychain.Mostretailoutletsarefamily-runstores

offeringlimitedchoicetoconsumers.Theyarelowprofitstoresthatsurviveonunpaidor

cheaplabourandfreelanduse.Theretailservicesectorisestimatedtocontribute6–7%of

India’stotalemploymentsector.40ItformsthelargestportionofIndia’sservicesectorGDP

andemployment.However,giventhefragmentedandlargelyunorganisednatureofretail

distributioninIndia,itisdifficulttocapturethefullextentofoutputandemploymentin

thissector.


ModerndistributionnetworksstarteddevelopinginIndiaafterliberalisationandreforms

inthe1990s.However,itisonlyrecentlythatthesectorhasundergonemajorchanges.

Thesearearesultofhighincomegrowth,agrowingworkingclasspopulation,growing

consumerism,easyaccesstocredit,andgrowingcompetitionandforeigninvestmentin

manufacturing.Thenatureandextentofliberalisationofthedistributionservicesector

havevariedacrossthedifferentsegments.Non-retailsegments,suchaswholesaletrading,

exporttrading,cash-and-carry,andfranchising,arefarmoreliberalisedthantheretail

segment.

Inthenon-retailsegments,FDIofupto100%withFIPBapprovalisallowedforthe

tradingofitemsthataresourcedfromthemedium-scalesector.Itisalsoallowedforthe

testmarketingofitemsforwhichthecompanyhasapprovalformanufacturing,subjectto

certainconditions.FDIupto100%throughautomaticrouteispermittedforthetrading

forexportsande-commerceactivities(onlyonabusiness-to-businessbasisandnotin

retailtrading).FDIparticipationupto100%throughautomaticrouteisalsoallowedin

cash-and-carrywholesaletrading.41

Intheretailsegment,thegovernmenthasallowed51%FDIinsingle-brandretailing

since2006,subjecttoFIPBapprovalandcertainconditions.Theseconditionsarethat

onlysinglebrandproductsshouldbesold;productsshouldbesoldunderthesamebrand

internationally;single-brandproductretailingshouldonlycoverproductsthatarebranded

duringmanufacturing;andthatanyadditiontoproductcategoriessoldunderthesingle

brandwouldrequirefreshapprovalfromthegovernment.42In2005thegovernmentalso

allowedFDIinrealestatetofacilitatethegrowthofretailinfrastructure.Theactualextent

ofFDIinsingle-brandretailinghas,however,beenmeagre.FromApril2006toMarch

2010,FDIinflowsvaluedat$194.69millionhaveenteredthesector,accountingfor0.21%

oftotalFDIinflowsduringthisperiod.43

Although FDI in cash-and-carry wholesale trading and single-brand retailing is

permitted inIndia,FDI inmulti-brandretailing isprohibited.TheEconomicSurvey

for2010–1144proposedthatFDIshouldbeallowedinmulti-brandretailing,butina

phasedmanner.Italsosuggestedthatthephasedapproach,beginningwithmetrosand

incentivisingmodernisationofexistingretailshops,islikelytohelpinaddressingconcerns

offarmersandtheconsumers.


23


Outcome

Liberalisation and reforms and changing economic and demographic structure

haveresultedintheemergenceofnewretailformatsinIndialikedepartmentstores,

supermarkets,hypermarketsandotherretailchannelssuchasdirectselling,e-commerce

andtelevisionshopping.Theconceptofbrandinghasevolved,andarisingnumberof

manufacturersarebrandingtheirproducts.ManyforeignbrandshaveenteredtheIndian

marketandIndianbusinesshousesareincreasinglyinvestinginthissector.Somelarge

domestic participants have already emerged in retail distribution sector. The sector

developmentsextendbeyondthecities,withretailersventuringintosmallercitiesand

sourcingtheirproductsfromlocalsmall-scaleindustries.Somecompaniesareentering

ruralmarketstosourcedirectlyfromfarmerstoensureproductqualityandtosetupthe

supplychainfromtheruraltotheurbanmarket.

ForeignentryintoIndia’sretailsegmenthasoccurredinmanyforms.Examplesinclude

localsourcing,franchising,settingupmanufacturingunits,wholesalecash-and-carry

trade,andjointventureswithlocalcompanies.SinceFDIispartiallyallowedbutwith

conditions,mostinternationalbrandshaveestablishedaretailpresenceinIndiathrough

thefranchisingroute.Alargenumberofforeignbrandshavealsoenteredintoshop-in-

shoparrangementswithleadingdepartmentstoresinIndia.Somebrandshavedistribution

officesinIndiathatsupplyproductstolocalIndianretailers.Thus,theFDIrestrictionson

single-brandretailandthebanonmulti-brandretailhavebeenbypassedtosomeextent,

giventhemoreliberalconditionsinothersegmentsofdistributionservices.


Thereisongoingdebateamongvariousstakeholdersaboutfurtherliberalisationofsingle-

brandretail,from51%to74%or100%;andinparticular,aboutthepositiveandnegative

effectsofliberalisingthemulti-brandretailsegment.Themainconcernisthepotential

impactofthemarketentrybylargeforeignparticipants(suchasWalmartandCarrefour)

andlargeorganiseddomesticparticipants(suchasReliance)ontheunorganisedretail

businesses. Critics argue that the entry of large foreign retailers would lead to the

displacementofsmalltraders.Thiswouldresultinunemploymentamonglow-skilled

workers,whowouldnothavetherequisiteskillsortrainingtofindjobsinthemodern

retail formats.Proponentsof liberalisation,however, argue that foreignentrywould

forceconsolidationwithinthesector.Thiswouldleadtoco-existenceoflargedomestic

participantsandforeignparticipants.Theextentofcompetitionfromforeignparticipants

wouldinanycasebelimitedbydomesticconstraints,suchasinfrastructureandlackof

qualitymanpower.

Itisdifficulttodeterminethevalidityofconcernsovertheemploymentdisplacement

andnegativerepercussionsforfamily-runstoresasaconsequenceoffurtherliberalisation

oftheretailservicesector.Recentstudiesontheimpactofmodernisationandforeign

entryintoIndia’sretailsectorsuggestthattheoutcomemaynotbeasnegativeasinitially

thought,andthattheunorganisedsegmentisalreadyadjustingtothechangesbrought

aboutbymodernisation.A2008studyofICRIER45onthe impactoforganisedretail

sectoronthecurrentunorganisedretailsectorfoundthatbothsectorswouldco-existand

continuetogrow.Thestudyalsofoundthatproductivityimprovementsinagricultureand

24



industrywouldbeconstrainedintheeventoftheretailsectorremainingdominatedby

theunorganisedsegment.

Overall,economicgrowthandfurtherliberalisationshouldencouragethegrowthof

India’sretailservices.However,severalareasofweaknesscouldinhibitgrowthandthe

extenttowhichtheopportunitiesarisingfromfurtherliberalisationcanbeexploited.The

lackofeconomiesofscaleinsourcingduetothepresenceofseveralintermediariesinthe

supplychainisonesuchweakness.Anotherrelatestothelackofsupportinginfrastructure

andfacilitiesinothersegmentsofthedistributionservicesector.Studieshaveshownthat

40%offreshfruitsandvegetablesarewastedinthesupplychainbecauseofinefficient

distributionnetworksandpoorstoragefacilities.46

Significant restrictionson trade insomecommoditiesalso remain,withdifferent

Indianstateshavingtheirownpoliciesonproduction,distributionandtaxation.Multi-

point taxationmakes itdifficult tosetupacentralisedsourcing infrastructure.Asa

result,mostretailerstendtosourcetheirproductslocally,whichaffectstheeconomies

ofscaleinsourcing.AnotherbarrierfacedbytheIndiandistributionservicesectoris

accesstoinstitutionalfunding.Fewbanksarewillingtoinvestinthissectorbecauseof

itsunorganisednature.Thelackoftrainedandqualitymanpowerandlowproductivity

levelsarefurtherconstraints.ThisiscompoundedbyIndia’srigidlabourlawsthatmake

itdifficultforretailersandfranchiseestoemploystaff.

Overall,India’sretailservicesectorislikelytogrowinthefuturewithimprovements

inorganisationandconsolidation.LargeIndianretailerscanbeexpectedtoturntheir

focusfromthedomesticmarkettointernationaloperations,oncetheformerbecomes

saturatedandconsolidationhastakenplace.Liberalisationofmulti-brandretailingand

furtherliberalisationofsingle-brandretailingwillplayanimportantroleindetermining

futuretradeandinvestmentprospectsinthissector.

I N D I A ’ S b I L A t e r A L , M u L t I L A t e r A L A N D r e g I o N A L N e g o t I A t I o N S I N S e r v I C e S

TheservicesectorhasbeenanintegralpartofIndia’snegotiatingagendaintheWorld

TradeOrganization(WTO).Indiaisalsoincreasinglyengagingindiscussionsonservices

inthecontextofitsbilateralandregionalinitiativesagreements.Itrecognisestherole

suchagreementscanplayinenhancingIndia’sexportinterestsintheservicesector,while

helpingtoinducemuch-neededFDIandtechnologytransferinkeyservices,suchas

telecommunications,transport,logisticsandconstruction.

India’s multilateral commitments and offers under the General Agreement on Trade in Services47

IndiahasbeenanimportantparticipantintheGeneralAgreementonTradeinServices

(GATS) negotiations. India made limited commitments in the Uruguay Round that

concludedin1994,anditsmultilateralcommitmentsinservicesreflectedaconservative

approach. It did not schedule sectors such as energy, distribution, education and

environmental services. When it did present important sectors such as financial


25


and telecommunication services, key subsectors and activities such as insuranceor

internationallong-distancetelephonywerenotcommitted.

In theensuingDohaRoundservicesnegotiations,whichwerebasedonbilateral

requestsandoffers,Indiareceivedrequestsinmostservicesectorsfromallthemajor

WTOmembercountries.Inresponsetotheserequests,Indiasubmitteditsinitialoffer

ofservicesinJanuary2004.Thisoffer,however,differedlittlefromitsearlierUruguay

Roundcommitment.Thiswasmainlybecauseofalackofprogressinthecommitments

byothermember countries in themodes and sectors thatwereof interest to India.

However, in the revisedofferofAugust2005, India significantly improvedupon its

UruguayRoundcommitment.Itpresentedseveralnewservicesectorsandsubsectors,and

indicatedawillingnesstoremovecommercialpresencerestrictionsinkeyareasthathad

beenautonomouslyliberalisedsincetheUruguayRound.Newservicesectorsincluded

education,distribution,accountancyandenvironmentalservices.

India’sgeneralapproachhasthusbeentoinitiateunilateralliberalisationandthen

extendthismultilaterally,either to the fullextentorbelowtheautonomous levelof

liberalisation.Thisreflectsacautious,gradualistandconservativeapproachoflearning

throughexperience.Politicaleconomyconsiderationshavealsoshapedthemultilateral

negotiatingstrategy.

India’s bilateral and regional initiatives in the service sector48

India isalsopursuing its interests in theservicesector throughbilateralandregional

agreements.Inrecentyears,Indiahasenteredintowide-rangingtradenegotiationsthat

gobeyondgoods tocoverservices, investment, labourmobilityandother issues that

haveabearingontheservicestrade.TheseincludetheIndia–SingaporeComprehensive

Economic Co-operation Agreement signed in 2005, the India–Korea Comprehensive

EconomicPartnershipAgreementsignedin2009,andtheIndia–MalaysiaComprehensive

EconomicCo-operationAgreementsigned in2011.Otheragreementsareatdifferent

stagesofnegotiation,includingthosewiththeEU,AustraliaandNewZealand.Inallthese

agreements,Indiaaimstofacilitateinvestmentsinvariousservicesfromitspartnercountries

inreturnforsecuringitsowninterestsincertainsectors.ThesesectorsincludeIT–BPO,

engineering,healthcareandotherprofessionalservices,andeasieraccessforIndianservice

supplierstothesemarkets.ThecomprehensiveagreementsrecognisethatIndia’smain

interestandcompetitiveadvantageliesintheservicesector.TheconcessionsIndiamakes

ongoodscanbetradedoffagainstconcessionsitcansecurefrompartnercountriesinareas,

suchassoftwareservices,andonkeyissues,suchasmode4andmode1.49

C o N C L u S I o N A N D k e Y L e S S o N S

ThepaperhighlightsseveralcommonissuesthatemergedoutofIndia’sliberalisation

experienceacrosstheinfrastructure,commercialandsocialservicesubsectors.

The reformexperience in all serviceshasnotbeen smooth. Ithas taken time to

introducenewlegislationonreformsandliberalisation.Proposalsandbillshavebeen

delayedforlongperiodsandhavenotpassedintoacts.Thiscanbeattributedlargelytoa

lackofpoliticalwillandtheabsenceofastrongcentralgovernment.

26



Inseveralservices,theliberalisationandreformprocesshasbeenanevolvingoneof

learningthroughexperience.Regulatoryframeworkshaveevolved,therolesofregulators

havebeendefinedandredefined,andlegislationandpolicieshavebeenamended.

There have also been conflicts of interests among different stakeholders. These

conflictshavebeenbetweenthegovernmentandprivateparticipants;thegovernment

andindependentregulators;publicsectorentitiesandprivateparticipants;largeandsmall

privatedomesticparticipants;largedomesticandlargeforeignparticipants;andregulatory

bodiesorprofessionalcouncilsandthegovernmentorforeignparticipants.

Themarketstructureanddomesticpoliciesandframeworkshaveshapedthepace

andextentofliberalisationacrossdifferentservices.Thepresenceoffragmentedmarket

structures,withalargenumberofsmallunorganisedparticipantsandrelatedconcerns

aboutdisplacementfollowingliberalisation,havehinderedliberalisationinretailservices.

In other service subsectors, such as telecommunication and financial services, the

dominanceofpublicsectorentitiesandthegovernment’sreluctancetorelinquishcontrol

havebeenthemainstumblingblock.Themainchallengeinsomeservicesectors,suchas

highereducation,hasbeentheregulatoryframeworkandregulatorycapacity.

Therehasbeendifficultyinbalancingequityandefficiencyconcerns,andpublicand

privateinterests.Thisalsoextendstoensuringtherightbalancebetweeninstitutional

autonomyand regulation, so thatwhileparticipantsarenotburdenedwithonerous

regulations,theyalsodonotfunctioninwaysthatunderminethelargerpublicinterest.

Liberalisationhastobesupportedbyregulatoryandlegislativereforms.Instituting

appropriateregulatorybodies,clearlydefiningtheirrolesandimprovinggovernanceare

justasimportantaspursuingliberalisation.Therealsoneedstobeastrengtheningof

regulatoryandenforcementcapacity.Intheabsenceofthis, liberalisationcanleadto

undesirableoutcomes.

TheanalysisofIndia’sliberalisationstrategyinrelationtoitsmultilateral,regionaland

bilateralcommitmentsshowsthatthelatterwerenotcatalystsforIndia’sliberalisation

process.LiberalisationofserviceshasbeenundertakenaspartofIndia’sgeneraleconomic

reformprogrammeandhasbeenshapedbydomesticneeds.Multilateralcommitmentsand

offershavegenerallybeenlessthanthestatusquo.Thisindicatesanoverallconservatism

in thenegotiatingstrategy,andanallowance for leverage innegotiations forcertain

servicesinthefuture.Althoughregionalorbilateralcommitmentshavebeenoccasionally

moreliberalthanthosemademultilaterally,autonomousandnon-bindingreformshave

ledthewayinalmostallservices.

Theservicesectorhascontributedtotheeconomy’sgrowthprospects.However,itis

uncertainwhetherthecurrentpatternofservicesectorgrowthcanbesustained.There

hasbeenaninsignificantincreaseintheservicesector’sshareinemployment,considering

averylargeincreaseinitsshareinGDPduringthelasttwodecades.Morebroad-based

growthwithin thesector is requiredtoensurebalanced,equitableandemployment-

orientedgrowththatislinkedtotherestoftheeconomy.Furtherreformsininfrastructure,

regulationandFDIliberalisationwillhelptodiversifythesourcesofgrowth,thereby

increasingemploymentopportunitiesandprovidingtherequiredmomentumforfurther

growth.


27


e N D N o t e S

1 UNCTADStat,UnitedNationsConferenceonTradeandDevelopment(UNCTAD)database,

‘Internationaltradeinservices’,http://unctadstat.unctad.org,accessed3March2011.

2 Ibid.

3 Ibid.

4 Metrics2.0Business&MarketIntelligence,‘Indiaservicesexportstohit$310billionand

surpassmerchandiseexportsby2012’,5April2007,http://www.metrics2.com/blog/2007/04/05/

india_services_exports_to_hit_310_billion_and_surp.html,accessed10August2009.

5 India,MinistryofFinance,Economic Survey 1997–98.NewDelhi:Government,1998,p.3.

6 India,MinistryofFinance,Economic Survey 2010–11.NewDelhi:Government,2011,p.237.

7 Ibid.

8 Ibid,p.243.

9 Ibid,p.238.

10 UNCTADStat,UNCTADdatabase, ‘Valuesandsharesofmerchandiseexportsandimports,

annual,1948–2009’,http://unctadstat.unctad.org/ReportFolders/reportFolders.aspx,accessed

3March2011.

11 ThediscussionsonservicesliberalisationinIndiainthissectionarelargelybasedonChandaR,

‘ServicesectorreformsinIndia:Updateandchallenges’,paperpresentedatSettingPrioritiesfor

ServicesTradeReform,AustralianNationalUniversityConference,Canberra,17–18November

2008.

12 WorldBank,Sustaining India’s Services Revolution: Access to Foreign Markets, Domestic Reform

and International Negotiations.Washington,DC:WorldBank,2004,p.16.

13 ThediscussionontelecommunicationservicesisprimarilybasedonKathuriaR,‘Prospects

for theTelecommunicationSectorunder theIndo–EUTradeandInvestmentAgreement’,

ProjectReport.NewDelhi:IndianCouncilforResearchonInternationalEconomicRelations

(ICRIER),2008;KathuriaR,SinghHV&ASoni, ‘Telecommunicationspolicy reform in

India’,inMattooA&RMStern(eds),India and the WTO.Washington,DC:WorldBankand

OxfordUniversityPress,2003;andNarsalayR,‘LiberalisationofIndia’stelecomsectorunder

theWTOandpreferentialtradeagreements’,inChandaR(ed.),Trade in Services and India:

Prospects and Strategies.NewDelhi:WileyIndia,2006,pp.119–44.Itissupplementedby

informationfromtheGovernmentofIndia,TelecomRegulatoryAuthorityofIndia(TRAI)and

TheIndianTelecomServicesPerformanceIndicators;VirmaniA,‘EconomicReforms:Policy

andInstitutionsSomeLessonsfromIndianReforms’,WorkingPaper,121.NewDelhi:ICRIER,

2004;andvariousonlinedocuments.

14 India,TRAI,NationalTelecomPolicy(NTP).NewDelhi:Government,1994.

15 India,MinistryofCommerce&Industry,DepartmentofIndustrialPolicyandPromotion

(DIPP),ForeignDirectInvestment(FDI)Policy.NewDelhi:Government,1997.

16 India,TRAI,NTP.NewDelhi:Government,1999.

17 India, Ministry of Commerce & Industry, DIPP, Consolidated FDI Policy. New Delhi:

Government,2010.

18 NarsalayR,op. cit.

19 Thediscussiononempiricalestimationandconstructionofrestrictivenessindicesforthe

telecomsectorisbasedonadoctoralthesisofoneoftheco-authorsofthepaper,PralokGupta.

SeeGuptaP,‘Regulatorybarriersaffectingfactormobilityininternationaltradeinservices:

28



Measurementandimplications’,PhDthesis,IndianInstituteofManagement,Bangalore,March

2011.

20 India,MinistryofCommerce&Industry,DIPP,2010,op. cit.

21 India,MinistryofFinance,op. cit.,p.251.

22 Indianrupee.

23 ArticlesBase.com, ‘2Gspectrumscam–Allocationof spectrumor lootof spectrum?’,15

November2010,http://www.articlesbase.com/banking-articles/2g-spectrum-scam-allocation-

of-spectrum-or-loot-of-spectrum-3670753.html,accessed11March2011.

24 MostofthediscussioninthissectionisbasedonChandaR,‘TradeinFinancialServices:India’s

OpportunitiesandConstraints’,WorkingPaper.152,NewDelhi:ICRIER,2005;andGupta

AS,‘Bankingandinsuranceservices:LiberalisationintheContextofanIndo–EUTradeand

InvestmentAgreement’.NewDelhi:ICRIER,2008.

25 IBA(IndianBanks’Association), Indian Banking Yearbook 2001.Mumbai: IBA,2002;and

variousReserveBankofIndia(RBI)speechesavailableathttp://www.rbi.org.in.



28 Thediscussiononempiricalestimationandconstructionofrestrictivenessindicesforthe

bankingsectorisbasedonadoctoralthesisofPralokGupta.SeeGuptaP,op. cit.

29 India,RBI,‘RoadMapforPresenceofForeignBanksinIndia’,28February2005,http://www.

rbi.org.in/upload/content/pdfs/RoadMap.pdf,accessed31December2010.

30 India,MinistryofCommerce&Industry,DIPP,FDIPolicy.NewDelhi:Government2005.


32 ThediscussionisbasedonReddyGS,‘Managementofnon-performingassets(NPAs)inpublic

sectorbanks’,Banking Finance. Bangalore:AcharyaInstituteofManagementandSciences,

2004.

33 Stepshavebeentakentoaddressgovernanceandownershipissuesinprivatesectorbanks,and

toaddresstheinterestsofdepositorsandensurefinancialstability.InJuly2004,RBIissued

draftguidelinesforadiversifiedownershipstructureforprivatesectorbankstoensuresuch

banksarewellcapitalisedandthatprocessesaretransparentandfair.

34 MuchofthisdiscussionisbasedonAgarwalP,‘HighereducationservicesandIndia’,inChanda

R(ed.),Trade in Services and India: Prospects and Strategies.NewDelhi:WileyIndia,2006,pp.

299–358.

35 UnadkatM&TRaghani,‘Opinion:Foreigninvestmentineducationsectortogetboostby

raftofstatutes’,Legally India,15July2010,http://www.legallyindia.com/201007151099/Legal-

opinions/opinion-foreign-investment-in-education-sector-to-be-boost-by-raft-of-statutes,

accessed11March2011.

36 Ibid.

37 Ibid.

38 Ibid.

39 Muchofthediscussioninthissectionisbasedonthefollowingchapter,unlessotherwise

indicated.SeeMukherjeeA,‘India’stradeindistributionservices’,inChandaR(ed.),op. cit.,

pp.145–176.

40 MukherjeeA&NPatel,FDI in Retail Sector: India.NewDelhi:AcademicFoundation,2005,

p.17.


42 Ibid.


29


43 India,MinistryofFinance,op. cit.,p.246.

44 Ibid.

45 JosephMNet al.,‘ImpactofOrganizedRetailingontheUnorganizedSector’,WorkingPaper,

222.NewDelhi:ICRIER,2008.

46 MukherjeeA&NPatel,op. cit.,p.154.

47 Thediscussiononmultilateralandbilateralcommitments inthissectionis largelybased

onChandaR,‘TradeinservicesandtheIndianeconomy’,inPatnaikP,ChandrasekharCP

&JGhosh(eds),India in the World Economy,IndianCouncilforSocialScienceResearch,

forthcoming.

48 Ibid.

49 Asper theWTOclassification, international trade in servicescanoccurvia fourmodes.

Mode1orcross-bordersupplyisdefinedasservicesflowsfromtheterritoryofonemember

intotheterritoryofanothermember(egbankingorarchitecturalservicestransmittedvia

telecommunicationsormail).Mode2or consumption abroadoccurswhen a consumer

(egtouristorpatient)movesintoanothermember’sterritorytoobtainaservice.Mode3or

commercialpresenceoccurswhenaservicesupplierofonememberestablishesaterritorial

presence,includingthroughinvestment,ownershiporleaseofpremises,inanothermember’s

territorytoprovideaservice(egdomesticsubsidiariesofforeigninsurancecompaniesorhotel

chains).Mode4ormovementofnaturalpersonsconsistsofpeopleofonememberenteringthe

territoryofanothermembertosupplyaservice(egaccountants,doctorsorteachers).Itisto

benotedthatMode4onlycoverspeoplemovingtemporarily,althoughtheWTOclassification

doesnotdefine‘temporary’byspecifyinganytimeperiod.

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