Trade policies and practices by measure introduction

Measures Affecting Production and Trade

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Measures Affecting Production and Trade

  1. Incentives

    1. Tax incentives

        1. India provides a number of tax incentives aimed at promoting investment. Under the Income Tax Act 1961, tax incentives are provided to several sectors (Section 35AD) and to disadvantaged areas. Section 80IB provides for tax benefits to industrial undertakings in the State of Jammu and Kashmir; these incentives will be provided for industries set up until 31 March 2012. Similar benefits available for industrial undertakings in the states of Himachal Pradesh and Uttarakhand will be phased out in 2012‑13 and those provided to industries in the North‑Eastern states by 2017‑18. The authorities noted that several tax incentive programmes have been phased out since 2007 (Table III.22). During the period under review, revenue forgone due to incentives amounted to some US$27.94 billion (Table AIII.8).

Table III.22

Tax incentives phased out, 2006‑10

Tax incentive

Income Tax Act 1961, Section


Tax deductions provided to cooperative banks



Profit‑linked tax deduction provided to companies carrying on scientific research and development



Profit‑linked tax deduction provided to the business of operating and maintaining a hospital in rural areas



Profit‑linked tax deduction provided to the business of laying and operating a cross‑country natural gas distribution network, including pipelines and storage facilities



Source: Information provided by the Indian authorities.

            1. Tax incentives provided under the New Exploration Licensing Policy for the exploration and production of crude oil and natural gas under contracts entered into on or after 1 January 1999 are still in place.

            2. The Income Tax Act 1961 provides additional incentives, including for the shipping companies (Section 33AC) and deductions for revenue and capital expenditure (other than for land) on scientific research (under Section 35).231 In 2009, a new section (35AD) was introduced in the Income Tax Act 1961, which provides investment‑linked deduction of 100% of capital expenditure (other than on land, and financial instruments) to sectors such as cold‑chain facilities, agricultural warehousing and cross‑country natural gas and oil pipeline networks. This incentive was extended to the hotel, hospital, and slum rehabilitation sectors in 2010.232
        1. Other support

          1. Explicit subsidies233

            1. Direct or explicit subsidies as reported in the Central Government's annual Budget amounted to Rs 1,641.5 billion (2.1% of GDP) in 2009/10, up from Rs 571.3 billion (1.3% of GDP) in 2006/07.234

            2. The bulk of India's explicit subsidies continues to be aimed mainly at supporting the agriculture sector, to promote food security and reduce poverty. As a result, most of the outlays are allocated to food and fertilizers (Chart III.6). Food subsidies are provided by the Department of Food and Public Distribution to meet the difference between actual prices and the central issue prices fixed under the Targeted Public Distribution System (TPDS) and other welfare schemes. The Central Government also provides a subsidy to the Food Corporation of India to keep buffer stocks of wheat and rice as a food security measure. "Other subsidies", which account for 3% of the total explicit subsidies in 2010/11, include market intervention and price support schemes for agricultural products (section (iv) below and Chapter IV(2)). India continues to subsidize indigenous and imported (urea) fertilizers. The scheme was introduced after the prices of phosphatic and potassic fertilizers were decontrolled, with a view to enable farmers to maintain a proper ratio of nitrogen, phosphorus, and potassium, to keep the price of fertilizers under control, and to give producers a "reasonable" return on investment. India's farmers also benefit from input support for irrigation water, electricity, diesel, and seeds.

            1. Subsidies for domestic liquefied petroleum gas and kerosene under the Public Distribution System (PDS), and for freight235, were put in place in 2002 after the dismantling of the administered pricing mechanism (APM), with the aim of protecting the poor.
          1. Credit policies

            1. The Central Government allocates funds to subsidize interest rates, including to exporters (Table III.23). Under these schemes, which are managed by different ministries (e.g. Ministry of Finance, and of Heavy Industries and Public Enterprises) central public sector enterprises (CPSEs) also have access to credit at preferential rates. Information is neither available regarding the amount of credit provided at preferential rates or subsidized rates for each sector nor on the CPSEs which benefit from preferential interest rates.

Table III.23

Preferential interest rates to exporters, 2007‑11



Interest rate


Floor rate

01.04.2007 to 30.09.2008

Textiles (including handlooms, jute, and carpets), readymade garments, leather products, handicrafts, engineering products, processed agricultural products (including cashew, coffee, and tea), marine products, sports goods, toys, solvent extracted de‑oiled cake, plastics and linoleum, man‑made fibre, and exporting small and medium enterprises (SMEs)

2 percentage points


Leather and leather manufactures, marine products, and textiles (including readymade garments and carpets but excluding man‑made fibre and handicrafts)

4 percentage points


01.12.2008 to 31.03.2010

Textiles (including handloom), handicrafts, carpets, including readymade garments and carpets but excluding man‑made fibre and leather, gem and jewellery, marine products, and exporting SMEs

2 percentage points


01.04.2010 to 31.03.2011

Handicrafts, carpets, handlooms, textiles, engineering goods, leather and leather manufactures, jute and floor covering, and exporting SMEs

2 percentage points


Source: Information provided by the Indian authorities.

            1. India sets targets for priority‑sector lending to ensure that banks provide credit to specific sectors.236 Domestic and foreign commercial banks are required to reserve a percentage of their adjusted net bank credit (ANBC) or credit equivalent amount of off‑balance‑sheet exposure (OBSE), whichever is higher, for priority sectors. Domestic banks must reserve 40% of their ANBC/OBSE to lend to priority sectors and foreign banks 32% of their ANBC/credit equivalent of OBSE to priority sectors, out of which 12% must be channelled to exports (Table III.24). In 2009/10 public, private domestic, and foreign banks exceeded these targets, reaching 41.7%, 46%, and 35.1%, respectively; 24 out of 27 public banks, 20 out of 22 private domestic banks, and 24 out of 28 foreign banks met the target (Chapter IV(3)(ii)(a)).237

            2. Subsidies are also provided to regional rural banks, cooperative banks, and public sector banks to provide short‑term credit to farmers at preferential rates (Chapter IV(2) and (3)(ii)). For example, in 2009/10, the Central Government provided a subsidy of 2 percentage points on its own loans to public sector banks, to provide short‑term production credit to farmers, of up to Rs 300,000 per farmer, at an interest rate of 7%.238 If farmers reimbursed their loans within one year, an "additional subsidy" was granted to public banks so that they would reduce the interest rate by a further 1 percentage point, bringing the interest rate down to 6%. In 2010/11, the interest rate subsidy is at 1.5% and the "additional subsidy" was increased to 2 percentage points, lowering the effectively paid interest rate by farmer to 5%.239 The funds allocated to this scheme amounted to Rs 70.5 billion during 2006/07‑2009/10. Apart from this subsidy granted by the Central Government, farmers may benefit from other subsidized interest rate at the state level.

Table III.24

Targets for lending to priority sectors, 2011

Priority sectors

Domestic commercial banks

Foreign banks

Total advances to priority sectors

40% of the adjusted net bank credit (ANBC) or credit equivalent amount of off‑balance‑sheet exposure, whichever is higher

32% of ANBC or credit equivalent amount of off‑balance‑sheet exposure, whichever is higher


18% of ANBC or credit equivalent amount of off‑balance‑sheet exposure, whichever is higher

No target

Micro and small enterprises (MSEs)

12% of ANBC or credit equivalent amount of off‑balance‑sheet exposure, whichever is higher

10% of ANBC or credit equivalent amount of off‑balance‑sheet exposure, whichever is higher

Micro enterprises within MSEs

60% of advances to MSEs should go to micro enterprisesa

Same as for domestic banks

Export credit

No target

12% of ANBC or credit equivalent amount of off‑balance‑sheet exposure, whichever is higher

Weaker sectionsb

10% of ANBC or credit equivalent amount of off‑balance sheet exposure, whichever is higher

No target

Differential Rate of Interest (DRI) Schemec

1% of total advances outstanding as at the end of the previous year. At least 40% of the total advances should go to scheduled caste/scheduled tribes. At least two third of advances should be granted through rural and semi‑urban branches

No target

a Advances to micro enterprises amount to 50% of the total advances to MSEs in 2010‑11. They will be increased to 55% in 2011‑12 and 60% in 2012‑13.

b Weaker sections include, inter alia, small and marginal farmers; artisans, and village and cottage industries; scheduled castes/scheduled tribes; and beneficiaries of the Differential Rate of Interest (DRI) Scheme.

c The DRI Scheme applies to borrowers with annual family income of Rs 18,000 in rural areas and Rs 24,000 in urban areas.

Source: Reserve Bank of India, Master Circular No. RBI/2010‑11/80, 1 July 2010; and Reserve Bank of India, Master Circular No. RBI/2007‑2008/279, 10 April 2008.
          1. Micro and small enterprises

            1. Support is also provided to micro and small enterprises (MSEs). Historically, in India a number of products have been reserved for exclusive manufacturing by MSEs. Products are eligible for reservation if manufacturing by MSEs is economically viable and technically feasible.240 MSEs accounted for around 39% of India's manufacturing output and 33% of exports (in value) at end‑March 2009.241 However, the reservation policy, which has limited competition in reserved industries, has reportedly hindered competitiveness among MSEs. A recent study shows that MSEs continue to use obsolete technology, attract unskilled labour, have inefficient management, and face challenges such as marketing bottlenecks and poor infrastructure.242 This lack of policy success may have been one of the reasons why there has been a progressive de‑reservation of products.243 The reservation/de‑reservation of products is reviewed regularly by the Advisory Committee on Reservation, under the Ministry of Micro, Small, and Medium Enterprises (MSMEs). The trend towards de‑reservation accelerated substantially during the period under review: at present, 20 products are in the reserved category, down from 236 in May 2006 (Table III.25).

Table III.25

Products reserved for MSEs, 2011

Food and allied industries: pickles and chutneys, bread, mustard oil (except solvent extracted), and groundnut oil (except solvent extracted)

Wood and wood products: wooden furniture and fixtures

Paper products: exercise books and registers

Other chemicals and chemical products: wax candles, laundry soap, safety matches, fireworks, and agarbatties

Glass and ceramics: glass bangles

Mechanical engineering, excluding transport equipment: steel almirah, rolling shutters, steel chairs (all types), steel tables (all other types), steel furniture (all other types), padlocks, stainless steel utensils, and domestic utensils (aluminium)

Source: Development Commissioner (Ministry of Micro, Small, and Medium Enterprises) online information, "List of items reserved for exclusive manufacture in micro and small enterprises". Viewed at:

            1. In addition to the set‑asides, MSMEs may benefit from a number of other assistance schemes, managed by the Ministry of MSMEs and supporting institutions (e.g. the Office of the Development Commissioner and the National Small Industries Corporation). These schemes aim to assist MSMEs, in particular MSEs, in the promotion and marketing of exports, product certification, technology upgrading, and human resources development (Table AIII.9). MSEs are also granted a 15% price preference for central government purchases (Table AIII.9). The authorities noted that this price preference is advisory in nature.

            2. Despite the support they receive, access to credit remains difficult for MSEs, as they are regarded as high risk by banks.244 According to the Associated Chambers of Commerce and Industry (ASSOCHAM), most MSEs operate at some 70% of their capacity due to lack of financial resources.245 Therefore, one of the Government's priorities for the development of MSEs is to increase the flow of credit/funds from banks and financial institutions. Hence, within the policy on lending to priority sectors, domestic commercial banks are required to reserve 12% of their adjusted net bank credit (ANBC) or credit equivalent amount of off‑balance‑sheet (OBSE), whichever is higher, to MSEs, while foreign banks must reserve 10%. Micro enterprises must receive 60% of the percentage of ANBC/credit equivalent amount of OBSE reserved for MSEs (Table III.24).246 Other schemes for improved access to credit have also been implemented (Table AIII.9). Despite these efforts, a study on 12,000 small and medium enterprises (SMEs) indicated that, on average, 25% of their funding comes from banks and financial institutions, 15% from internal sources, 10% from capital markets, and the remaining 50% from alternative sources (friends and family)247; 92% of SMEs remain dependent on personal and family savings.248

            3. At the state level, other schemes also implemented to support the development of MSMEs include: the development of industrial estates, tax incentives, and subsidies for electricity and capital.249 Under the General Excise Exemption Scheme, MSMEs with annual turnover of up to US$1 million are granted full excise exemption up to US$375,000250; MSEs may also benefit from excise duty exemptions.251

            4. Despite efforts to assist MSMEs, "sickness" or "incipient sickness" remain a concern.252 According to the 4th All India Census of MSMEs (2006‑07), sickness or incipient sickness among registered MSMEs has been due mainly to a lack of demand, shortage of working capital, marketing problems, and non‑availability of raw materials253; about 6.49% of registered MSMEs were identified as sick or incipient sick.254 According to ASSOCHAM, 74% of sick MSEs attributed their sickness to a lack of capital.255 The Reserve Bank of India has issued guidelines for the rehabilitation of potentially viable or viable sick MSEs, mainly through the provision of concessionary credit by banks and financial institutions. The concessionary elements of the credits provided include: subsidized interest rates for working capital loans (and for working capital term loans), of 1.5% below the prevailing fixed/prime lending rate; interest‑free credits for loans under the "funded interest term loan" modality; term loans (other than for working capital) are granted at a concessional rate of maximum 2% below the document rate (3% for tiny/decentralized small and medium enterprises); and contingency/loan assistance is granted at concessional rates of 1.5% below the prevailing fixed/prime lending rate.256

            5. The Government‑appointed Task Force on MSMEs has recommended a gradual agenda of actions in order to provide relief and stability to MSMEs. Recommendations cover credit, marketing, infrastructure, technology, skill developments, and taxation.257 The agenda has not yet been implemented.

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