Assessment and recommendations

Over the past two decades, India has moved away from its former dirigiste model and has become a market-based economy. This process started in the mid-1980s and gathered substantial momentum at the beginning of the 1990s. Direct tax rates were significantly reduced, pervasive government licensing of industrial activity was almost eliminated, and restrictions on investment by large companies were eased. Furthermore, financial markets were reformed, with banks restored to health, entry barriers lowered, equity markets transformed and new supervisory bodies introduced. The process of reform has continued in this decade with a further opening of the economy to competition. The number of industries reserved for very small firms has been significantly reduced, and foreign suppliers have been encouraged to enter the market by a progressive lowering of tariffs to an average of 10% in 2007. The rules governing foreign direct investment have been markedly eased, notably in the manufacturing sector. Last but not least, fiscal discipline has been improved by the passage of fiscal responsibility laws for the central government and all but three of the 28 state governments.