India: April 1998
India's economic reforms and trade liberalization policies contributed to a dramatic increase in its economic growth in the mid-1990's. Larger flows of inward foreign investment and increased international trade helped India achieve annual average growth rates of 7 percent from 1993 to 1996.
India should keep up with its trade reforms to ensure strong economic growth
India's economic reforms and trade liberalization policies contributed to a dramatic increase in its economic growth in the mid-1990's. Larger flows of inward foreign investment and increased international trade helped India achieve annual average growth rates of 7 percent from 1993 to 1996. Economic growth slowed, however, in 1997 and, according to a new WTO Secretariat report on India's trade policies and practices, India should continue liberalizing its trade and investment regime to ensure strong and stable economic growth.
The WTO Secretariat report and a policy statement prepared by the Government of India, will provide the basis for a review of India's trade policies and practices on 16 and 17 April, 1998. The focus of the WTO's report is on India's policy and trade measures affecting imports, exports and production. The report notes that India recognizes the need to continue economic reform, with an increased emphasis on improving its industrial infrastructure. The latter has proved to be a constraint on expanding economic activity and stimulating exports. Other measures under consideration are reductions in tariffs and non-tariff measures, reforming the subsidies structure (estimated to account for 14 per cent of GDP), and restructuring public sector enterprises.
The Indian Government initiated a major programme of economic reform and liberalization in 1991. Reforms in the manufacturing sector have been widespread, including reductions in average tariff rates, import licensing restrictions for industrial inputs and capital goods and compulsory industrial licensing; the agricultural sector and consumer goods trade have, as yet, been relatively untouched by government reform efforts. While there has been some liberalization, there has been no change in the structure of agricultural incentives and subsidies.
India's financial services are gradually being liberalized while significant headway has already been made in liberalizing telecommunications. Other services, such as shipping, roads, ports and air, are beginning to open up, but, the report states, foreign participation remains relatively low and significant administrative barriers remain. India amended its Copyright Law in 1994 to comply with its obligations under the Trade-Related Intellectual Property Rights (TRIPS) Agreement. As a developing country, India has until the year 2000 for most products, but until 2005 for some goods, to comply with the TRIPS Agreement but is currently required to provide means for receiving product patent application in certain areas. On this issue, a decision by a WTO dispute settlement panel and the Appellate Body has stated that India was in violation of its obligation.
Tariffs have been reduced from an average of 71 per cent in 1993 to a current average of 35 per cent. The report notes, however, that the tariff structure remains complex and that escalation remains high in several industries, notably paper and paper products, printing and publishing, wood and wood products, and food, beverages and tobacco. In general, bound tariffs remain substantially higher than applied rates, especially on agricultural products.
The report observes that import licensing remains India's main non-tariff barrier, although reforms to the system of restrictive import licensing have moved ahead steadily. The number of goods subject to import licensing has been gradually reduced - albeit with an emphasis on industrial and capital goods, rather than consumer products. The report notes that last year India presented a phase-out programme for the remaining restrictions to its trading partners. Agreement was reached with all major partners except the United States, with which India is currently in dispute settlement proceedings over its remaining restrictions.
The report observes that reforms in tariffs and non-tariff barriers have not been accompanied by similar reforms on export subsidies and incentives. India continues to maintain a large number of incentive programmes for exports. These include income tax exemptions, subsidized credit, export insurances and guarantees. The overall scope of such incentives has been enhanced, resulting in more explicit export-oriented policies, which have increased the possibility of resource misallocation.
The report notes that India has simplified its foreign investment regime and opened up a number of sectors to foreign direct investment. This is the case in manufacturing where foreign participation of up to 51 or 74 per cent can take place automatically in a number of sectors. Production in the food manufacturing sector has grown rapidly following increased foreign investment. In this sector, up to 50 and 100 per cent of participation is allowed automatically for foreigners and non-resident Indians. In the automobile sector, 51 per cent foreign equity participation is granted automatically and up to 100 per cent foreign equity participation is also allowed if approved by government authorities. This has triggered a high rate of foreign investment, mostly through joint ventures with Indian manufacturers. Major policy changes since 1993 have also included automatic permission for foreign equity participation of up to 50 per cent in some mining activities. This also applies to oil exploration where the government seeks to reduce its dependence on imports and now offers investors incentives such as tax holidays.
The report concludes that India's increased openness and integration with the world economy are important factors in explaining the healthy economic growth recorded in the mid-1990s. However, the recent economic slowdown demonstrates the need for continued and even accelerated reform. Greater transparency in decision-making, for example, could complement India's ongoing trade liberalization process in promoting a more efficient and productive economic structure. Such reforms, notes the report, should lower the anti-export bias that is still inherent in both the trade and industrial support structures and allow the government to lower export incentives and move towards a more outward, rather than export-oriented policy framework. Such steps would not only help to further India's integration into the world's economy but provide it with a firm basis for future sustained growth.
Notes to Editors
The WTO's Secretariat's report, together with a report prepared by India will be discussed by the WTO Trade Policy Review Body (TPRB) on 16 and 17 April 1998. The WTO's TPRB conducts a collective evaluation of the full range of trade policies and practices of each WTO member at regular periodic intervals and monitors significant trends and developments which may have an impact on the global trading system. The two reports, together with a report of the TPRB's discussion and of the Chairman's summing up, will be published in due course as the complete Trade Policy Review of India and will be available from the WTO Secretariat, Centre William Rappard, 154 rue de Lausanne, 1211 Geneva 21.
The reports cover the development of all aspects of India's trade policies, including domestic laws and regulations, the institutional framework, trade policies by measure and by sector. Since the WTO came into force, the "new areas" of services trade and trade-related aspects of intellectual property rights are also covered. Attached are the summary observations from the Secretariat and government reports. Full reports will be available for journalists from the WTO Secretariat on request.
Since December 1989, the following reports have been completed: Argentina (1992), Australia (1989 & 1994), Austria (1992), Bangladesh (1992), Benin (1997), Bolivia (1993), Brazil (1992 & 1996), Cameroon (1995), Canada (1990, 1992, 1994 & 1996), Chile (1991 & 1997), Colombia (1990 & 1996), Costa Rica (1995), C˘te d'Ivoire (1995), Cyprus (1997), the Czech Republic (1996), the Dominican Republic (1996), Egypt (1992), El Salvador (1996), the European Communities (1991, 1993, 1995 & 1997), Fiji (1997), Finland (1992), Ghana (1992), Hong Kong (1990 & 1994), Hungary (1991), Iceland (1994), India (1993), Indonesia (1991 and 1994), Israel (1994), Japan (1990, 1992, 1995 & 1998), Kenya (1993), Korea, Rep. of (1992 & 1996), Macau (1994), Malaysia (1993 & 1997), Mauritius (1995), Mexico (1993 & 1997), Morocco (1989 & 1996), New Zealand (1990 & 1996), Nigeria (1991), Norway (1991 & 1996), Pakistan (1995), Paraguay (1997), Peru (1994), the Philippines (1993), Poland (1993), Romania (1992), Senegal (1994), Singapore (1992 & 1996), Slovak Republic (1995), South Africa (1993), Sri Lanka (1995), Sweden (1990 & 1994), Switzerland (1991 & 1996), Thailand (1991 & 1995), Tunisia (1994), Turkey (1994), the United States (1989, 1992, 1994 & 1996), Uganda (1995), Uruguay (1992), Venezuela (1996), Zambia (1996) and Zimbabwe (1994).
The Secretariats report: summary
TRADE POLICY REVIEW BODY: INDIA
Report by the Secretariat Summary Observations
The Indian Government initiated a major programme of economic reform and liberalization in 1991, reversing a policy direction followed for decades. Since then, successive Governments have progressively reduced tariff protection and relaxed and simplified India's restrictive import licensing regime. Internal reforms have included reduced control over locational and industrial licensing controls, in addition to some loosening of controls on administered prices in some sectors. In this process, however, the policy focus was principally on liberalization of capital goods and inputs for industry, to encourage domestic and export-oriented growth: by and large, imports of consumer goods remained regulated.
These reforms contributed to a dramatic increase in growth in the 1990s, accompanied by larger flows of inward foreign investment and increased international trade. The balance of payments situation also improved greatly. To build on this success, India has recognized the need to continue the economic reform process, with an increased emphasis now on improving infrastructure, which appears to be a major constraint on the growth of industrial activity and exports; further liberalizing trade through reductions in tariffs and non-tariff measures; reforming the subsidy structure, which is estimated to cost around 14 per cent of GDP; and restructuring public sector enterprises, which continue to be a fiscal drain. These reforms, if fully implemented, should lower the anti-export bias that is still inherent in both the trade and industrial support structures. This would also permit India to lower export incentives, thus moving towards a more outward, rather than export, oriented policy framework, further integrating India into the multilateral system and providing a firm basis for future sustained growth.
The Economic Environment
Since its previous Review in 1993, India has continued liberalizing its economy, albeit at a somewhat slower pace. Economic reforms initiated in 1991 have produced strongly positive results, most notably annual real growth rates averaging 7 per cent between 1993/94 and 1996/97, led by strong industrial recovery. Over the same period, merchandise exports grew at an annual rate of some 20 per cent in current US dollar terms. In 1996/97, however, some economic slowdown occurred and export growth fell to 8 per cent, partly as a result of infrastructural bottlenecks and indicative of the need for continued structural reform.
In the area of trade reform, a tariff reduction programme has continued and is to progress further. Average rates have consequently declined. The number of goods subject to import licensing restrictions has been gradually reduced albeit with an emphasis on industrial and capital, rather than consumer goods until recently. The foreign investment regime has also been simplified with a number of sectors being opened up to foreign direct investment.
Further structural reform needs the support of continued macroeconomic stability. An important issue is the reduction of the public sector deficit, estimated at 8.5 per cent of GDP in 1996/97. The Central Government deficit fell to 5 per cent in 1996/97, but adjustments to reduce State deficits have not been as forthcoming and shoring up parts of the public sector, prior to planned reform and disinvestment, has been expensive. With the cost of supporting important sectors such as agriculture and related transfer programmes, it is unclear how far the public sector deficit may crowd out investment. Overall, subsidies remain a drain on Government revenue and lead to a misallocation of resources.
Trade Policy Features - Type and Incidence of Trade Measures
Since 1993, tariff reform has brought the simple average of all rates down to 35 per cent in 1997/98, from 71 per cent in 1993/94; the process of tariff reform and reduction is ongoing. However, the structure of the tariff remains complex, with a large number of bands; in several industries, notably paper and paper products, printing and publishing, wood and wood products and food, beverages and tobacco, tariff escalation remains high.
Reforms to the system of restrictive import licensing have moved ahead steadily, but further steps remain to be taken and are encouraged. In general, products are first moved to a Special Import Licence (SIL) list, with producers being exposed to limited foreign competition, before the product is moved to the list of freely importable goods. The list of freely importable goods currently covers some 68 per cent of tariff lines: remaining restrictions cover mainly consumer goods, and India has proposed a six year phase-out programme for these restrictions. India is currently in dispute settlement proceedings with the United States regarding its remaining restrictions. Approximately 10 per cent of all tariff lines are presently subject to the SIL list, increasing SIL coverage by around one-third from 1995/96. India also continues to use state trading monopolies to retain some control over exports and imports of certain products (canalization). Since the previous Review, the product coverage of imports through such canalization has increased slightly; however, private operators can also trade in some of these canalized products and the share of such products in total imports has declined to 19 per cent, compared to 27 per cent at the turn of the decade.
The reforms in tariff and non-tariff barriers have not been accompanied by similar reforms to export subsidies and incentives. India continues to maintain a large number of incentive programmes for exports, incentives which, according to the authorities, are intended to compensate for import restrictions. These include income tax exemptions, subsidized credit, export insurance and guarantees, export promotion and marketing assistance schemes and access to some imports that are normally subject to restrictive licensing. The overall scope of such incentives has been enhanced, turning India's overall policy stance more explicitly export-oriented and increasing the possibility of resource misallocation.
Sectoral Policy Developments
The agricultural sector has thus far remained relatively untouched by the reform programme. Nevertheless, agriculture has benefited from the price realignments resulting from manufacturing sector trade reforms. Some progress has also been made in the removal of state controls on the inter-state movement of certain grains and of administered prices; however, controls on the export and import of certain products through licensing policies remain.
During the Uruguay Round, India bound its agricultural tariffs at ceiling rates ranging from 0 to 300 per cent. In reality, applied rates for 1997/98 are considerably lower, averaging 26 per cent for the sector, with a peak of 45 per cent. This is however likely to change as India tariffies its present licensing restrictions; in this context, India is currently renegotiating its tariff bindings on some zero-or low-duty products. Progress in changing the structure of agricultural incentives and subsidies is likely to remain constrained by the Government's policy of providing support prices to farmers and ensuring low cost supplies to the population through the public distribution system.
Although tariff reforms have resulted in average duties in the food sector being halved since 1993 (currently around 29 per cent for food products and 134 per cent for beverages), industrial and import licensing restrictions continue to be maintained for a number of industries. In addition, a number of products are reserved for production by the small scale sector. Production by the food manufacturing sector has grown rapidly, especially following increased foreign investment where up to 51 and 100 per cent of participation is allowed automatically for foreigners and non-resident Indians, except for products reserved for the small scale sector.
Mining and petroleum
Major policy changes since 1993 include automatic permission for foreign equity participation of up to 50 per cent in the mining of 13 minerals; foreign equity above this share must be approved by the Foreign Investment Promotion Board (FIPB). In an attempt to increase exploration, liberalization has also taken place in licenses granted for exploration. Trade reforms include a reduction in tariff rates to averages of around 10 per cent (from 46 per cent in 1993/94) for non-ferrous and iron ores and to 13 per cent (from 65 per cent in 1993/94) for coal.
India depends on imports of petroleum. Prices, until recently, continued to be administered although some effort has been made since 1993 to raise these prices periodically to reduce the fiscal burden of the "oil-pool". Despite this, the growing subsidy for petroleum products prompted the Government in 1997 to declare a phase out of most administered prices in the sector. The Government has recently also placed an emphasis on increased oil exploration domestically to reduce import dependence, through the New Exploration Licensing Policy which offers companies investment incentives such as tax holidays to invest in India.
Reforms have been most widespread in the manufacturing sector, including reductions in average tariff rates, import licensing restrictions, compulsory industrial licensing, and a liberalization of foreign investment policies. The sector has responded positively to the reforms, although some slowdown in growth has occurred in 1996/97 due, in part, to infrastructure constraints.
Since India's previous Review, the average tariff on imports of manufactures (ISIC3) has been lowered from 73 to around 36 per cent in 1997/98. Despite this, tariff escalation in some areas remains high, since the largest reductions in tariff rates have taken place for capital goods and intermediate inputs. Tariff escalation is important in sectors such as paper and paper products and to some extent in textiles and clothing, where India has traditionally maintained, and still has, high levels of protection. In certain sectors, such as automobiles, tariff reform has had little impact on imports of fully assembled items, because the liberalization of foreign direct investment without accompanying reform of import licensing restrictions has promoted local investment in manufacturing. Approximately 1,977 tariff lines, at the HS eight-digit level, in the manufacturing and mining sectors, continue to be subject to import licensing restrictions. As noted, the authorities have proposed a phase out of these restrictions over a six year period.
Foreign investment has also been considerably simplified, with an enlarged list of industries, including the automobile sector, where foreign equity participation of up to 51 or 74 per cent can take place automatically. Compulsory industrial licensing is now limited to nine industries, compared to 18 during India's previous Review; some reduction in the list of items reserved for production by the small-scale sector has also occurred.
Services contribute more than 40 per cent to India's GDP. Their overall growth has been underpinned by rapid expansion of activities in the area of finance, and, to a lesser extent, commerce and tourism.
Significant headway has been made in liberalizing telecommunications. While the government-controlled corporation VSNL operates as the exclusive provider of international long-distance services and the monopoly Department of Telecommunications for the domestic long-distance services, private investors in joint ventures are allowed to provide intra-voice telephone services in various States and metro areas. Many value added services - including voice mail, radio paging and cellular mobile telephone - are now open to 49 per cent foreign equity participation. In the area of financial services, the banking sector remains fairly closed to foreign participation, while the insurance sector is still monopolized by the Government. Under the Financial Services Agreement, the Government has offered to remove reciprocity requirements in the banking sector and also raised the annual limit on new banking licenses from eight to 12. Other services areas - such as shipping, roads, ports and air - are beginning to open up, but foreign participation remains relatively low and significant administrative barriers remain.
India in the Multilateral Trading System
India was, from the start, an active member of the GATT and a founding member of the WTO. As a result of the Uruguay Round, India bound 67 per cent of its tariff lines; lines remaining unbound include those on certain industrial items and many consumer products. Under the General Agreement on Trade in Services (GATS), India has made commitments in 33 activities (compared with an average of 23 for developing countries) out of a total of 161. In addition, India also took part in the Information Technology Agreement - covering computers, telecommunication equipment, semiconductors, semiconductor manufacturing equipment, software, and scientific instruments. India's anti-dumping and countervailing legislations have been amended in line with relevant WTO Agreements. With respect to intellectual property rights, India's Copyright Law was amended in 1994 in accordance with its obligations under the TRIPS Agreement. India plans to make use of the transition period available to developing member countries of the WTO to implement other changes to its intellectual property rights; however, in a dispute with the United States over "pipeline" patent protection and exclusive marketing rights, the WTO's Dispute Settlement Body has found that India is obliged to implement the necessary measures. India is currently in two WTO disputes: one as a defendant with the United States, as noted above, and the other as a complainant with Hungary, relating to restrictions on textiles and clothing.
In terms of WTO tariff commitments, India has bound 67 per cent of its tariffs in manufacturing and 100 per cent in agriculture in consequence of its Uruguay Round commitments; however, most of these bindings are at ceiling levels, ranging up to 300 per cent in agriculture. The bound simple average tariff to be implemented by the year 2005 is 54 per cent, compared with the present applied rate of 35 per cent, itself set to decline further. In the services area, the initial commitments made under GATS are such that the existing policy framework is either more liberal, or equivalent to the bound measures. In both areas, thus, India, like most other developing countries, has put a ceiling on its protective structure, rather than binding it at effective levels, while pursuing unilateral liberalization.
India maintains several plurilateral agreements with countries in the region: the Bangkok Agreement, the South Asian Preferential Trading Agreement (SAPTA), and the Global System of Trade Preferences (GSTP). Further concessions to some of these countries are also provided within the framework of bilateral trade agreements. However, the impact of these agreements on India's trade seems to have been minimal. India' merchandise imports resulting from the eighth Bangkok Agreement and SAPTA member countries accounted for only 3 per cent of total merchandise imports and about 7 per cent of its merchandise exports in 1995/96.
India's increased openness and integration with the world economy have been important factors in explaining the healthy economic growth recorded in the 1990s. The recent economic slowdown demonstrates the need for continued and even accelerated reform. Transparency in decision-making, especially with regard to foreign investment, should also be increased if India is to reach its foreign investment targets. Continued opening of the trade regime and liberalization of the foreign investment regime are likely to be translated into even higher growth rates than have been experienced so far.
Other factors constraining economic growth may include the fiscal deficit, which may, for example, contribute to high interest rates. There is also concern with regard to the large share of subsidies in government expenditures: while many of these are aimed at assisting the very poor, it is not clear that this target is being reached. Second, the poor quality and coverage of certain infrastructure facilities - notably power and transportation services - which are all essential for the development of both domestic and export markets, needs to be addressed. Third, reform efforts in industrial restructuring, need to be accelerated, especially to enable the closure of unviable units in order to release resources for use in more productive areas. Internal deregulation could therefore complement India's ongoing trade liberalization process in promoting a more efficient and productive economic structure.Back to top
TRADE POLICY REVIEW BODY: INDIA
Report by the Government
India has taken important policy initiatives since July 1991 to emerge as a significant player in an increasingly inter-dependent world economy. The policy reforms provided a free and conducive environment for trade and include various measures which helped to achieve the high export growth rates in some recent years. The Eighth Plan recognized that for India it was not a choice between market mechanism and planning, but that the challenge was to effectively dovetail the two, so that they are complementary to each other. The Government introduced major reforms to provide greater competitive stimulus to Indian trade and industry. India's active participation in the WTO continued and the general direction of her trade and investment reforms initiated in 1991 and highlighted in the last Trade Policy Review in December 1993, have been maintained by successive governments.
The following presentation is divided into four sections. The first deals with liberalization of trade and other economic reforms, which are mutually supportive. The second deals with India's inter-action with the WTO. The third focuses on Regional Trade Arrangements. The final section contains conclusions.
Key developments in trade and economic policy since the last review
Objectives of Trade Policy
In 1991, India initiated a wide-ranging programme of trade liberalization and economic deregulation, with the objective of integrating the Indian economy more closely with the world economy. The principal objective of India's trade policy defined in the Export-Import Policy for 1997 to 2002 are:
(i) to accelerate the country's transition to a globally-oriented, vibrant economy, with a view to deriving maximum benefits from expanding global market opportunities;
(ii) to stimulate sustained economic growth by providing access to essential raw materials, intermediates, components, consumer goods and capital goods required for augmenting production;
(iii) to enhance the technological strength and efficiency of Indian agriculture, industry and services thereby improving their competitive strength, while generating new employment opportunities, and to encourage the attainment of internationally accepted standards of quality;
(iv) to provide consumers with good quality products at reasonable prices.
Moreover, the Eight Five Year Plan (1992-97), called for the movement of India's trade policy regime "towards greater openness and to reap the full benefits of international trade". This has been sought to be achieved through (i) a reduction of the "negative" list of imports and exports, (ii) a gradual reduction in the level of tariff rates, and (iii) other trade policy reforms.
Significant Trade Policy Reforms
With increased liberalization and globalization of trade, India's focus is on areas of her strength and advantage to meet global competition, as also areas having trade potential.
This is the rationale which has given the impetus for shortening of the Negative List of Imports considerably and for expanding the freely importable list. Currently, approximately 6,647 items are freely importable; 58 items are prohibited, 168 items are canalized, and as notified by India to the WTO (Notification No. WT/BOP/N/24, dated 22 May 1997) certain products included in 2,714 tariff lines at the eight-digit level of the Indian tariff classification are restricted for balance-of-payments reasons as per Article XVIII:B of GATT, and certain products included in some 600 tariff lines are restricted under Articles XX and/or XXI of GATT, the two categories being non-additive. Compared to 1.4.96, when the percentage of restricted items came to 37%, the figure for 1.4.1997 is only 32%. There is a decrease of 5% in the restricted items, whereas there is increase of 488 items in the free list. Out of the restricted items, 1,051 are importable against Special Import Licences (SILs), which are freely tradeable and transferable. Among the items importable under freely transferables SILs are a number of consumer durables. An agreement on time schedules for removal of quantitative restrictions (QRs) maintained for balance-of-payment reasons has been reached by India with its major trading partners other than the United States.
Many of the canalized items (equivalent to 47 items out of 176 in total) are also under the SIL regime, and imports of canalized items have fallen from 27% of merchandise imports in 1988-89 to 19% in 1996-97, with all canalizing agencies amongst the PSUs being required to follow commercial principles in carrying out their operations.
Several stages of reforms have lifted all licensing restrictions on imports of capital goods, liberalized partially imports of consumer goods and reduced maximum tariffs from over 300% to 45% (including a surcharge of 5%). Collection rates, which are a better indicator of protection than declared rates, came down from the level of 47% in 1990-91 to 29% in 1995-96.
Exchange Market Reforms
The Eight Plan had envisaged exchange rate reforms as part of the general trade policy reforms, and in March 1993 the exchange rates were unified and transactions on the trade account were freed from foreign exchange control. Further measures taken to simplify procedures related to the purchase of foreign exchange so as to enhance current account convertibility. These included permission to Exchange Earner's Foreign Currency (EEFC) account holders to use these funds for business-related current account transactions. Authorized dealers were allowed to export surplus currency to private money changers abroad, in addition to their own branches and correspondents. They were empowered to allow Indian resident families to remit US$5,000 per year to close relatives abroad,without reference to the RBI. Monetary ceilings on remittances for a wide range of purposes were also removed.
Reforms in the Foreign Investment Regime
Since export growth depends on the existence of a strong production base in thrust sectors, which could expand to meet further growth needs, the stimulus in such thrust areas has been provided by streamlining the procedures for foreign investment. The Foreign Investment Promotion Board (FIPB) has been revamped to make the rules and regulations pertaining to foreign investment more transparent. The first-ever guidelines for approving FDI by the FIPB have been announced to expedite approval of foreign investment in areas not covered under automatic approval. Priority areas for allowing 100% foreign equity have been spelt out. An expanded list of 46 industries eligible for automatic approval up to 51% foreign equity, three industries relating to mining activity eligible for automatic approval up to 50% foreign equity and another set of nine industries eligible for 74% foreign equity have been announced by the Government. The limit on holdings by individual foreign institutional investors (FIIs) in a company has been raised from 5% to 10% of the company's shares, while the aggregate limit has been increased from 24% to 30%. FIIs have also recently been allowed to invest in non-listed companies. It is no longer necessary for automatic approvals by the Reserve Bank of India (RBI) that the amount of foreign equity should cover the foreign exchange requirements for import of capital goods needed for the project. To impart flexibility in sourcing of technology imports, technology transfer has been delinked from equity investment.
Reforms in the Infrastructure Sector
Removing infrastructural bottlenecks has been another key component of the trade reforms package. In the telecommunications sector, significant progress has been made in involving the private sector in value-added services, such as cellular, mobile and paging services. A Telecom Regulatory Authority was established in March 1997, which will separate the regulatory functions from policy formulation and operational functions. New guidelines allow private participation in ports, investments being on B.O.T. basis, and already approval for a private container terminal valued at Rs 70 billion has been awarded. Similarly, fresh guidelines for private investment in the highway sector have been announced, procedures have been simplified and environmental clearance and equity participation made easier. Approval has been given for a rail-based mass rapid transit system (MRTS) in Delhi, and the cities of Bangalore, Hyderabad, Mumbai and Calcutta have proposed major improvements in their public transport system through the introduction/augmentation of rail-based transit systems. A new policy for private investment in civil aviation has been announced, and this includes allowing 40% equity in domestic airlines.
Domestic Tax Reforms
Several new measures for streamlining and rationalizing the tax structure have been initiated. The MODVAT scheme has been extended to the textile sector by rationalization of rate structure to modernize and revive the textile industry. The direct tax regime has been strengthened by measures like moving towards a "presumptive" tax system, greater reliance on "pay as you earn" and self assessment schemes, restricting "scrutiny assessment" to a limited number of cases, broadening of the tax base through the "four economic criteria" scheme and the introduction of the Minimum Alternate Tax (MAT) for the corporate sector (with the exception of companies engaged in power and infrastructure sectors) and measures such as progressive computerization. The rates of corporate tax have also been progressively reduced to 35% for assessment year 1998-99 and the corporate surcharge has been eliminated.
Other Key Economic Reforms
Other than the reforms directly connected with the trade regime, an array of reforms to make the economy more competitive, and thereby, indirectly, provide a greater impetus to trade, both domestic and international, have been introduced.
Through the New Industrial Policy of 1991, the total number of industries reserved for public sector enterprises was reduced to eight, and since then two more industries in the mining sector have been further de-reserved. With delicensing of consumer electronics, at present only 14 industries remain under the purview of industrial licensing. Guidelines for Euro Issues and External Commercial Borrowing (ECB) have been liberalized to ease the access of Indian companies to international capital markets. Some deregulation of administered prices have taken place with the deregulation, in February 1997, of the prices and distribution of certain grades of coal and by the decision of the Government on 1.9.1997 to dismantle the Administered Pricing Mechanism in the petroleum sector by introducing reforms in a phased manner, whereby consumer prices of major petroleum products will be moved towards import parity.
Decontrol of the banking system is continuing. There has been deregulation of interest rates on term deposits of over one year, and on non-resident external rupee deposits above two years. Selective credit controls on a number of commodities were eliminated from October 1996. Competition in the banking sector has increased gradually as ten new private sector banks, out of the 13 "in principle" approvals given so far, have started functioning. The RBI has issued guidelines for the setting up of new local area private banks. Two such banks have already been given "in principle" approval. Banks were allowed to fix their own foreign exchange aggregate gap limits, starting April 1996. From October 1996, banks were permitted to provide foreign currency denominated loans based on their FCNR accounts, to be used to meet either foreign currency or rupee requirements. The Incremental Cash Reserve Ratio of 10% for banks has been removed and the Statutory Liquidity Ratio on incremental net domestic demand and time liability reduced substantially. The replacement of the system of issue of ad hoc Treasury Bills by the RBI to meet temporary mismatches in Government receipts and expenditure with a system of Ways and Means advances has been put in place to act as an effective ceiling on the automatic monetization of the fiscal deficit and create a favourable macroeconomic condition for setting a "monetary target". An Insurance Regulation Authority has been established.
Significant capital market reforms introduced and encompassed primary and secondary markets, equity and debt, and foreign institutional investment. Among the reforms undertaken to impart greater flexibility were the Capital Depositary's Act 1996 to facilitate dematerialization of securities; formulation of SEBI regulations, 1996 which allow the Securities and Exchange Board of India (SEBI) to regulate establishment and functioning of depositories; giving up vetting of public issue offer documents by SEBI; FIIs permitted to set up pure (100%) debt funds, and make investments in Government securities; modification of eligibility criteria for registration as an FII to allow endowment funds, university funds, foundations and charitable trusts to register; issuance of SEBI regulation on Venture Capital Fund (VCFs), allowing them to invest in unlisted companies etc. so as to provide flexibility to VCFs to provide high-risk finance; introduction of a modified take-over code; and the decision to constitute an Independent Tariff Commission.
India is of the view that not all areas of economic activity can be made a subset of trade concerns for consideration in the WTO, since many of these areas have a development perspective. However, insofar as the ongoing reforms have proved conducive to trade, they have been touched on in this presentation.
Recent Trade Facilitation Measures
Since the last Review in 1993, the green channel facility for customs clearance has been enhanced. Large established exporters receive expeditious assessment of their imports Bills of Entry by a group of Appraisers and Assistant Collectors especially earmarked for this purpose. They are also provided facilities for de-stuffing containers at their factory premises by the Central Excise Officers, after the containers are moved straight from the port to the factory. On-line assessment and clearance through Electronic Data Interchange (EDI) has started at Delhi and is likely to be extended to all other Customs Stations by the end of 1998. An importer can file documents 30 days in advance of the expected date of arrival of a vessel, which facilitates customs clearance. Exports of perishable goods have been exempted from routine customs examination. A large number of ICDs/Container Freight Stations have been started in the hinterland areas to facilitate imports and clearing cargo at production/consumption sites.
Further, import of cargo by courier has been provided and the Multimodal Transport Act has been enacted with the objective of expeditious movement of cargo.
Harmonization of Indian standards with international standards, which is progressing rapidly under the activities of BIS, etc., are also adding to the quality/sanitary aspects of Indian products and therefore to their competitiveness.
Key economic parameters: results of the reform process
The initial spurt of reforms from 1990-91 to 1993-94 was successful, by all accounts, resulting in a jump in economic growth to 7.2% in 1994-95 (in terms of GDP at factor cost). GDP grew by 7.1% in 1995-96 and at 6.8% during 1996-97. The average growth rate during the latest three years at 7% probably places India among the top ten performers in the world during this period. Foreign currency assets grew by 16.4% during 1996-97.
The average annual growth of exports during 1993-94 to 1995-96 was buoyant, amounting to 20% in US$ terms. Consequently, India's share in world exports increased from 0.41% in 1992-93 to 0.6% in 1995-96. The growth rate of imports also increased, from a rate of 15.3% in 1993-94 to 36.4 in 1995-96. However, a slow-down occurred in 1996-97, with exports registering a growth of only 4% and imports a growth rate of 6% with an increase in the trade deficit to $5.4 billion in 1996-97 as compared to $4.5 billion in 1995-96.
Impediments to growth of india's international trade
India's share of world exports had declined from 2.53% at the time of independence (1947) to only 0.4% in 1980, but the reforms instituted led to some growth, with India's share in trade reaching 0.64% in 1995. However, the deceleration of the growth rate of exports from 20% in the initial years of the reforms to just 4.01% during 1996-97, and the slow down in the growth rate of imports, has caused concern. While the slow down is partly related to a general slow-down in the growth of world merchandise trade from an annual increase of 19% in 1995 to 4% in 1996, it is also, to a degree, due to denial of meaningful market access to Indian goods, and to non-tariff barriers, including anti-dumping activity, by developed countries.
This is attributable to the fact that although multilateral negotiations conducted under the aegis of GATT have greatly helped in bringing down tariffs all over the world, similar success has not, however, been achieved on non-tariff barriers affecting world trade. Although quantitative restrictions are not overtly being used by most of the countries to restrict the flow of trade, quotas, standards, subsidies and indiscriminate use of anti-dumping/countervailing duty investigations are some of the most important NTBs being used to restrict the flow of trade from countries such as India.
An analysis of India's external trade reveals that the 16 countries/territories to whom four-fifths of our exports are directed, maintain eight major categories of non-tariff barriers restricting our market access. These are (i) restrictive import policy regimes (import charges other than customs tariff, quantitative restrictions, import licensing, customs barriers); (ii) standards, testing, labelling and certification (including phytosanitary standards) which are set at unrealistic levels for developing countries or are scientifically unjustified; (iii) export subsidies (including agricultural export subsidies, preferential export financing terms, etc.); (iv) barriers on services (visible and invisible barriers restricting movement of service providers, etc.); (v) lack of intellectual property protection; (vi) government procurement regimes; (vii) barriers to investment; (viii) other barriers (including anti-dumping and countervailing measures).
Amongst the import policy issues, quantitative restrictions, especially in the textiles area, are one of the most important of the non-tariff barriers affecting India's trade. While the MFA is being phased out, there is a certain "back loading" insofar as items of interest to India are concerned. Another problem in the area of textiles arose with the introduction of new "country of origin rules" by some of our major trading partners, limiting the flexibility of Indian exporters in finishing garment/textile items from other countries for export to the trading partners, which have invoked such rules. Numerous restrictions on sanitary and phytosanitary grounds on India's agricultural products are often not supported by adequate scientific justification. Even the so-called environmental bans, as, for example, on Indian marine products harvested without certain environmental protection devices insisted on by certain trading partners, do not appear to be substantiated by sufficient scientific evidence. The restrictive visa regime in several developed countries has proved to be a disincentive for exports in the services sector by our skilled professionals, especially in the software sector. Repeated anti-dumping investigations on the same items, without regard to the special dispensation enshrined in Article 15 of the Agreement on Anti-dumping, have proved to be extremely disruptive to our external commerce.
Most of these problems are being vigorously addressed in the appropriate fora, including the Dispute Settlement Body. However, it is our perception that the time has come when nations would suo motu realise that in an interdependent world, there is no room for unjustified trade confrontations. Non-tariff barriers, especially levy of anti-dumping duties and repeated investigations on the same issues give rise to a feeling that we should, in turn, retaliate by denying market access to outsiders. A slow-down in exports, with consequent widening of the trade gap, will definitely militate against our efforts to bring down tariffs. Export growth, especially for reduction of the trade deficit, is very necessary if India is to progress with further trade and economic liberalization. This calls for better and greater market access by India's trading partners.
India and the wto
India's role in the WTO
India is a founding member of the GATT (1947), it actively participated in the Uruguay Round Negotiations, and is a founding member of the WTO. India strongly favours the multilateral approach to trade relations and grants MFN treatment to all its trading partners, including some who are not members of WTO. India participated actively in the last Ministerial Conference held in Singapore. Within the WTO, India is committed to ensuring that the sectors in which the developing countries enjoy a comparative advantage are adequately opened up to international trade, and also that the Special and Differential Treatment Provisions for developing countries under the different WTO Agreements are translated into specific enforceable dispensations, in order that developing countries are facilitated in their developmental efforts. India feels that the multilateral system would itself gain if it adequately reflected these concerns of the developing countries, so as to create the necessary impetus to enable developing country members to catch up with their developed country counterparts.
India's WTO Commitment
Under the Uruguay Round India has bound 67% of all its tariff lines, whereas prior to that only 6% of tariff lines were bound. The bindings range from 0 to 300% for agricultural products from 0 to 40% for other products. Under the Uruguay Round manufactured products were bound at 25% on intermediate goods and 40% on finished goods.
The phased reduction to these bound levels from the very high level prevailing in 1990, is where necessary, in instalments over the period March 1995 to the year 2005. In textiles, where reductions will be achieved over ten years, India has reserved the right to duty levels prevailing in 1990, if the integration process envisaged under the Agreement on Textile and Clothing does not materialize in full or is delayed. Finally, in agriculture, where, except for a few goods, India's bound rates range from 100 to 300%, India is in the process of renegotiating some of its tariff bindings. Many applied tariffs are below the Uruguay Round levels.
Balance of Payments
Under the exceptional provision of Article XVIII:B of GATT, India has some residual quantitative restrictions on imports maintained for balance-of-payments purpose. These aggregate to 2,714 tariff lines at the eight-digit level of the Indian Trade Classification. In May 1997, India presented to the WTO a plan for the elimination of these restrictions in imports, including those on consumer goods. This plan was considered at the consultations with India of the WTO Committee on Balance-of-Payments Restrictions in June-July 1997, when noting the divergence of opinion among WTO Members on, inter alia, the length of the plan, it was agreed to conclude the consultations. However, pursuant to consultations under Article XXII of the GATT 1994, a bilateral mutually agreed solution has been reached with Australia, Canada, the European Communities, New Zealand and Switzerland, as well as with Japan (which had third-party interest in these disputes).
At the request of the United States, a panel was constituted on 18 November 1997 to examine the US allegation that the continued maintenance of quantitative restrictions on imports by India is inconsistent with India's obligations under the WTO Agreement.
Simplification of customs procedures
The Customs Valuation Rules, 1988, India's legislation on Customs Valuation, has been amended to bring it into conformity with provisions of the WTO Agreement on Implementation of Article VII of GATT 1994, the Customs Valuation Agreement.
Steps for international standards in trade and industry
India is a signatory to the Agreement on Technical Barriers to Trade and that on Sanitary and Phytosanitary measures and there is greater emphasis on bringing Indian standards to international levels. Most standards in India are voluntary although health and safety regulations are mandatory for several products.
The Bureau of India Standards (BIS) responsible for formulating and setting national standards, has been harmonizing Indian standards with international standards for the last decade. So far nearly 3,500 Indian standards have been harmonized with ISOTEC and EC standards/regulations.
Although BIS is the national standards body of India, standards and certification schemes are also operated and enforced in certain specified sectors by other bodies. Thus for example, sanitary and phytosanitary measures are regulated by Director of Marketing and Inspection, Ministry of Agriculture, and quality and hygiene of processed foods are dealt with by the Ministries of Health and Food Processing.
India is concerned that although the BIS and the expert bodies in the field of sanitary standards participate in the policy making committees of international bodies such as the ISO, the Codex Alimentarius etc. the developing countries are grossly outnumbered in these deliberations, at times resulting in standards development not conducive to their implementation. There is a strong sentiment in India that in view of our lack of access to technologies developed abroad for achieving standards acceptable to importing countries, specific measures need to be taken by developed country Members to give effect to the clauses extending "Special and Differential treatment" to India as a developing country in the implementation of these WTO Agreements.
The only commitment India has undertaken under the Agreement is to bind its agricultural tariffs. This commitment has been fulfilled by India binding its tariffs for primary agricultural products at 100%, processed food products at 150% and edible oils at 300%. India's prevailing agricultural tariffs are well within the bound rates. Under the Uruguay Round, whenever we have bound tariffs on agricultural commodities at zero or very low-levels, renegotiation of tariff bindings have been sought under Article XXVIII of GATT. The phased reductions of quantitative restrictions would also cover certain agricultural products.
The Agreement on Agriculture was designed to improve world trade, raise prices of agricultural products and ensure higher standards of living for farmers. The retention of domestic subsidies at a high rate by many developed countries continues to give us cause for concern. In our view, the clamour for greater market access for agricultural products would carry more conviction if a definite effort is also made to force the pace in respect of bringing down such subsidies.
As per the obligations under the Agreement on Textile and Clothing (ATC) to integrate this sector into GATT 1994 in stages, the Indian Government moved cotton and wool yarn, polyester staple fibre and 20 other industrial fabrics on to the list of freely importable goods in 1995. For implementation of the second stage of integration, with effect from 1.1.98, a second tranche of textile products, mainly fabrics, was placed on the "free" list. India is concerned about the fact that repeated anti-dumping investigation by certain trading partners on the same product lines, without giving full effect to the special dispensation provisions of Article 15 of the Anti-dumping Agreement has resulted in trade harassment for its exporters of textiles.
India is availing itself of the transition periods due to her under Article 65 of the TRIPS Agreement to meet her obligations under the seven areas covered by the Agreement.
India's achievements in this field have been in the passing of TRIPS plus legislation in the field of Copyright Law. The 1994 amendments to the Act of 1957 provides protection to all original literary, dramatic, musical and artistic works, cinematographic films and sound recordings. The most recent changes bring sectors such as satellite broadcasting, computer software and digital technology under Indian copyright protection.
Trade related investment measures
Substantial modifications have already been made to the foreign investment regime, increasing the number of sector where foreign investment can take place and also increasing the foreign equity limit on these investments. India has already notified the trade-related investment measures maintained by it in terms of Articles 2 and 5 of the TRIMs Agreement and the illustrative list annexed to the TRIMs Agreement. India has time up to 1.1.2000 to eliminate these TRIMs. TRIMs which have already been removed include dividend-balancing requirements and mixing requirements in respect of newsprint.
Anti-dumping and safeguards
Anti-dumping and countervailing duties are imposed under the Customs Tariff Act 1975 and the Rules made thereunder. The Act and Rules are on the lines of the respective GATT Agreement on anti-dumping and countervailing duties. The time limits and the procedures prescribed under the Indian laws/GATT Agreement are strictly followed by the designated authority. With the increasing number of cases, the Government of India proposes to set up a Directorate General of Anti-dumping and Allied Duties for expeditious disposal of anti-dumping and countervailing duty cases.
Section 8 (B) of the Customs Tariff Act, 1975, was introduced recently to make provisions for imposition of safeguard duties as per the provisions of the WTO Agreement on Safeguards. The Act provides for imposition of safeguard duties on products being imported in increased quantities such as to cause or threaten to cause serious injury to the domestic industry that produces directly or indirectly a competitive product. The Director General of Safeguards has been appointed to consider complaints received from domestic industry suffering injury from the increased imports, for imposition of safeguard duties.
The services sector accounts for about 40% of India's GDP, 25% of employment and 30% of export earnings. Recognizing the importance of the services sector in achieving higher economic growth, the government is giving added emphasis to improving services such as telecommunications, shipping, roads, ports and air transport. The foreign direct investment regime has been liberalized to attract foreign investment in the services sector. However, a path of gradual liberalization has been adopted so as to have wider acceptability of the reform process. India actively participated in the Uruguay Round services negotiations and made commitments in 33 activities as compared to an average of 23 for developing countries. India also participated in the spill-over negotiations. In basic telecommunication services, India has undertaken commitments in the areas of voice telephone service for local and long-distance (within the service area), cellular mobile services and other services such as circuit switched data transmission sources, facsimile services, private leased circuit services as per details given in the schedule of commitments. India also participated in the recently concluded financial services negotiations and improved its offer by enhancing the annual limit for foreign bank branches from 8 to 12 and withdrawing India's MFN exemptions relating to banking services.
While developed countries have surplus capital to invest, most of the developing countries have surplus of skilled, semi-skilled and unskilled workers. We have a large pool of well-qualified professionals capable of providing services abroad. As developed countries have a comparative advantage in exporting capital intensive services, similarly developing countries have a comparative advantage in exporting labour intensive services involving movement of persons. While GATS recognizes "movement of natural persons" as one of the modes for supply of services, the commitments undertaken by the developed countries have very little to offer to the developing countries in terms of opening their markets or facilitating the administrative arrangements or providing national treatment in the area of movement of natural persons. The present commitments are largely restricted to business visitors and intra-corporate transferees. There are very limited commitments for qualified specialist personnel and even where commitments are made for qualified specialist professionals, they cannot move in an individual capacity but should be an employee for a specified duration of the juridical person supplying the services.
In Article IV of GATS, there is a clear obligation to increase the participation of developing countries in trade in services. The Agreement also recognizes the basic asymmetry in the level of development of the services sector in developed and developing countries and a commitment that the developed countries will take concrete measures aimed at strengthening the domestic service sector of developing countries and providing effective market access in sectors and modes of supply of export interest to developing countries. However, the GATS objectives of increased participation of developing countries in trade in services has hardly been addressed. Therefore, in order to achieve required balance in GATS and increase the participation of developing countries in trade in services as per Article IV of GATS, the developed countries should undertake a higher level of commitments on movements of natural persons mode and other areas of export interest to the developing countries.
India is not a member of the Plurilateral Agreement on Government Procurement. However, we are taking part in the discussions in the Working Group on Transparency in Government Procurement set up as per the mandate of the Singapore Ministerial Conference of the WTO.
With the rapid increase in the international trade and consequent increase in cross-border movement of products, the linkage between trade and environment has become a relevant issue for the international community. GATT/WTO being the chief trade body addressing international trade issues has taken cognizance of it. Already certain Agreements within WTO, such as the Agreement on Technical Barriers to Trade, and the Agreement on Sanitary and Phytosanitary measures have addressed environmental issues to some extent.
India's approach on the issue of the relationship between trade and environment has been:
- work already accomplished in the GATT must provide the starting point;
- international rules should not create unnecessary or unjustifiable obstacles to international trade;
- there has to be a clear recognition that environmental standards differ from country to country and that the solution lies in mutual recognition of product-related standards rather than harmonization and, lastly;
- where proprietary substances or processes are mandated for use by international or national laws for environmental purposes, owners of intellectual property should be obliged to sell technologies or products at fair and most favourable terms and conditions.
Information technology (IT)
During the Singapore Ministerial Conference a Ministerial Declaration on Trade in Information Technology Products was adopted. This Declaration aims to expand world trade in information technology products. India participated in the negotiations on the Agreement from the early stages and after examination of the implications of the proposed agreement and extensive discussions with trading partners joined as a participant on 1 April 1997. India is committed to phasing out the import tariffs on the products covered by the ITA as scheduled. The quantitative restrictions imposed on these products for BOP reasons would also be phased out by 31 March 2000.
At the same time, India has also raised the issue during plurilateral discussion that if the global information technology infrastructure is to be strengthened, the rules for movement of skilled persons working in this sector should also be liberalized.
Trade and Investment and Competition Policy
India has been actively participating in the educative process in the Working Groups in the WTO. India's standpoint in this educative process is that the development dimension should be fully integrated into the process.
Regional trade arrangements
India attaches significance to her participation in regional agreements within the framework of multilateral rules. India has been instrumental in setting up the South Asian Association for Regional Cooperation (SAARC), whose major achievement in 1995 was the conclusion of the negotiations on trade preferences within the framework of the SAARC Preferential Trading Arrangement (SAPTA). SAPTA became operational on 7 December 1995 and includes preferential tariff concessions on 226 items and product groups. A second round of SAPTA trade negotiations was launched in January 1996 to broaden tariff concessions. India granted concessions on 902 tariff lines, effective 1 March 1997. The third round of trade negotiations commenced in July 1997. The goal is to continue the SAPTA process with the ultimate aim of having a South Asian Free Trade Area (SAFTA) not later than the year 2001. India is a member of the Bangkok Agreement, originally signed in 1975, and which now also includes Bangladesh, the Republic of Korea, the Lao People's Democratic Republic, Papua New Guinea and Sri Lanka. The Agreement provides for the liberalization of tariff and non-tariff barriers between its members.
The Indian Ocean Rim Association for Regional Cooperation was recently formed along with 13 other countries in the region. The Charter of the Association was adopted in March 1997. Economic cooperation is expected to take place in trade facilitation, promotion and liberalization, promotion of foreign investment, promotion of scientific and technological cooperation, tourism, the movement of natural persons and service providers, and the development of infrastructure and human resources. An enabling clause to identify other areas of cooperation is also included in the agreement. India has also signed sub-regional agreements with Nepal, Bangladesh, Myanmar and Bhutan and more recently with Bangladesh, Sri Lanka and Thailand. Details of the agreement known as BISTEC are presently being formulated.
India has signed bilateral agreements with two neighbouring countries, Bhutan and Nepal, to provide them with preferential access. More limited agreements have been signed with Bangladesh, which receives the preferential treatment India accords to least developed countries under SAPTA, and with Myanmar. Commonwealth preferences continue to be extended to Mauritius, Tonga and the Seychelles.
Conclusions Back to top
India, with its per capita GNP of barely US$340 (which is low even as per the general income levels of US$430 and US$1,090 for low-income and middle-income economies respectively) has already taken major strides in integrating herself with a globalized world trade order and is committed to fulfilling her multilateral obligations. It is her perception that the multilateral trading system is itself likely to gain in credibility and acceptance if the sectors of comparative advantage to the developing world are liberalized early, justified market access is not denied to them and enough time and resources are made available to the developing world to catch up with their developed country trading partners. To this end, it is our perception that the concerns of special interest to developing countries should be addressed early and the enabling special and differential treatment provisions for developing country members enshrined in the WTO Agreements translated into specific, enforceable dispensations.