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to sell 60 percent of their foreign exchange in the free market and 40 percent to the government
at the lower official price. Importers were authorized to purchase foreign exchange in the open
market at the higher price, effectively ending the exchange control. Within a year of establishing
this market exchange rate, the official exchange rate was unified with it. Starting in February
1994, many current account transactions, including all current business transactions, education,
medical expenses, and foreign travel, were also permitted at the market exchange rate. These
steps culminated in India accepting the IMF Article VIII obligations, which made the rupee
officially convertible on the current account. The exchange rate has been kept flexible
throughout the period and allowed to depreciate as necessary to maintain competitiveness. It
currently stands at approximately Rs 45 per dollar.
Liberalization of Trade in Services
Since 1991, India has also carried out a substantial liberalization of trade in services.
Traditionally, services sectors have been subject to heavy government intervention. Public
sector presence has been conspicuous in the key sectors of insurance, banking, and
telecommunications. Nevertheless, considerable progress has been made toward opening the
door wider to private-sector participation, including participation by foreign investors.
Until recently, insurance was a state monopoly. On December 7, 1999, the Indian
Parliament passed the Insurance Regulatory and Development Authority (IRDA) Bill, which
established an Insurance Regulatory and Development Authority and opened the door to
private entry including foreign investors. Up to 26 percent foreign investment, subject to
obtaining license from the Insurance Regulatory and Development Authority, is permitted.
Though the public sector dominates in the banking sector, private banks are permitted
to operate in it. Foreign direct investment (FDI) up to 74 percent in the private banks is
permitted under the automatic route. In addition, foreign banks are allowed to open a
specified number of new branches every year. More than 25 foreign banks with full banking
licenses and approximately 150 foreign bank branches are in operation presently. Under the
1997 WTO Financial Services Agreement, India committed to permitting 12 foreign bank
branches annually.
The telecommunications sector has experienced much greater opening to private
sector including foreign investors. Until the early 1990s, the sector was a state monopoly.
The 1994 National Telecommunications Policy provided for opening cellular as well as basic
and value-added telephone services to the private sector with foreign investors granted entry.
Rapid changes in technology led to the adoption of the New Telecom Policy in 1999, which
provides the current policy framework. Accordingly, in basic, cellular mobile, paging and
value added service, and global mobile personnel communications by satellite, FDI is limited
to 49 percent subject to grant of license from the Department of Telecommunications. FDI up
to 100 per cent is allowed with some conditions for Internet service providers not providing
gateways (both for satellite and submarine cables), infrastructure providers providing dark
fiber, electronic mail, and voice mail. Additionally, subject to licensing and security
requirements and the restriction that proposals with FDI beyond 49 per cent must be