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India: April 1998

“ On the structural front, infrastructure services were identified as a severe bottleneck to trade and growth;  Members encouraged India to promote further investment in these areas.  It was also emphasized that trade liberalization would assist further effective agricultural reform.”

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  > Summary of Government report

17 April 1998

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The Trade Policy Review of the World Trade Organization (WTO) concluded its second review of India's trade policies on 16 and 17 April 1998. The text of the Chairperson's concluding remarks is attached as a summary of the salient points which emerged during the discussion.

The review enables the TPRB to conduct a collective examination of the full range of trade policies and practices of each WTO member country at regular periodic intervals to monitor significant trends and developments which may have an impact on the global trading system.

The review is based on two reports which are prepared respectively by the WTO Secretariat and the government under review and which cover all aspects of the country's trade policies, including: its domestic laws and regulations; the institutional framework; bilateral, regional and other preferential agreements; the wider economic needs and the external environment.

A record of the discussions and the Chairperson's summing-up, together with these two reports, 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.

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), the Czech Republic (1996), Cyprus (1997), 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 & 1998), Indonesia (1991 and 1994), Israel (1994), Japan (1990, 1992, 1995 & 1998), Kenya (1993), Korea, Rep. of (1992 & 1996), Macau (1994), Malaysia (1993 and 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).

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The second Trade Policy Review of India was conducted by the TPRB on 16-17 April 1998.  These remarks, prepared on my own responsibility, are intended to summarize the main points of the discussion and not to be a full report.  Details of the discussion will be reflected in the minutes of the meeting.  Participants raised a large number of questions in writing.  The representative of India provided written replies in the context of the meeting and undertook to supply further details as necessary.

The discussion developed under three main themes: (i) the economic environment, (ii) import and export policy issues and (iii) sectoral issues.

(i) The economic environment

Members commended India for the pursuit of its economic reforms initiated in 1991, which had contributed to healthy economic growth.  However, in the light of the fiscal imbalance, the sustainability of this economic performance was queried;  it was suggested that comprehensive tax reform and a reduction in subsidies would be desirable to reduce the fiscal deficit.  On the structural front, infrastructure services were identified as a severe bottleneck to trade and growth;  Members encouraged India to promote further investment in these areas.  It was also emphasized that trade liberalization would assist further effective agricultural reform.

It was noted that in recent years the overall policy stance appeared to focus on export-orientation, rather than more general outward orientation.  Clarification was sought on whether the recently announced Export-Import Policy reflected a continued emphasis on exports or a more neutral policy orientation.

Some members noted that, in India, liberalization of foreign investment in combination with restrictive import licensing could mean that investment substituted for trade, rather than being a complement to it.  Further liberalization of the trade regime was, in their view, essential for attracting the right kind of foreign direct investment.  Clarification was sought on the discrepancy between approved and effective foreign investment;  increased transparency in the approval mechanism was seen as necessary.

Several members sought a statement of the new Government's commitment to ongoing reform and the promotion of competitiveness through more open import policies.  Some members questioned the implications of the new Government's National Agenda for Governance for protection of local industry, as well as the policy stance regarding investment in "core" and "non-core" areas.  It was stressed that internal deregulation could complement the trade liberalization process.

In reply, the representative of India described the scope and context of India's economic and trade reforms and reiterated the new Government's commitment to the reform process.  Trade, investment, tax and exchange reforms were all important elements in the process.  The removal of infrastructural bottlenecks was a priority commitment, being addressed by streamlining procedures for foreign investment and decentralizing decision-making.  The problem of the fiscal deficit was being addressed, inter alia, by efforts to increase public sector savings and better targeting of domestic subsidies.

The new Government was committed to liberalization within an open, equitable multilateral trading system.  The new Export-Import Policy, oriented to enabling India to maximize its international trade, provided for further liberalization, greater transparency, and simplification of import procedures. Domestic deregulation, tax reform and foreign investment reforms complemented the trade reform process.

(ii) Import and export policy issues

Members complimented India for its tariff reform, under which the simple average rate had fallen from 71% in 1993/94 to 35% in 1997/98, with a weighted average of 20%.  However, concerns were raised regarding the complex structure of the tariff system;  the distinction in treatment between capital goods and inputs, on one hand, and consumer goods on the other;  and remaining tariff escalation in several industries.  Some Members sought clarification about the time-table for elimination of the special rate of 5 percentage points.  Noting significant gaps between WTO bound rates and MFN applied rates in some areas, several Members asked if there were plans to bind closer to applied rates;  they also raised concerns about India's proposals to renegotiate some of its bindings.  Members noted that import duties constituted a large share of Government revenues and that continued tariff reductions, complemented by tariffication of import licensing, could contribute to raising revenue.

Members noted that, since the previous review, the number of items subject to import licensing had decreased;  some restricted items had also been liberalized by permitting their importation through freely transferable Special Import Licences (SILs).  However, this liberalization was mainly applied to capital and intermediate goods, while most consumer goods remained subject to import licensing.  Some members noted that the SIL, which can be sold at a premium of some 15%, may be perceived as an export subsidy.  Details on the phase-out plans for quantitative restrictions negotiated with several WTO Members were sought.

Information was requested on plans to reform India's various export assistance schemes (including exemption from income tax, export finance at below-market interest rates, guaranteed access to a minimum of 10% of commercial bank net credit, export insurance and guarantees, access to a wide range of export promotion and marketing assistance schemes, and import access to restricted items).  The WTO consistency of the income tax exemption was questioned.

Some members noted that India had become an active user of anti-dumping procedures, and was even strengthening its capacity to conduct anti-dumping investigations.  In addition while no safeguard measures had been enforced up to the end of 1997, India had recently initiated several such investigations;  Members asked if it was the new Government's intention to continue using safeguard measures.

Some members requested information regarding India's state trading system, including reasons for the increased coverage of products subject to state-trading, and concerning plans to modify or remove privileges granted to state-trading agencies.

Some delegations noted that India's industries could benefit from more effective intellectual property protection, and asked about the time-table for bringing intellectual property legislation into line with the TRIPS Agreement.

In reply, the representative of India noted that the phasing out of QRs was proceeding according to a six year programme;  he gave an explanation of the import licensing system and the use of SILs.  Items recently added to the free list included 99 textile items, 49 agricultural items, 26 marine products, with most of the balance in consumer goods.  All capital goods, assemblies, etc. were already in the free list.  Reduction and rationalization of tariffs was also an integral part of India's trade liberalization.  The simple average tariff had fallen to 35%, but the import-weighted average had declined from 87% in 1990-91 to 20% today, even taking into account the temporary duty of 5%.  Applied tariffs were maintained well within bound rates.  He described the tariff-setting process, including the recent establishment of the Tariff Commission.  The new Exim policy facilitated imports of capital goods at zero duty as well as raw materials for export production.  The number of exemptions had been substantially reduced and the simplification of tax laws was an ongoing process.  Negotiations for revised bindings under Article XXVIII were related to tariffs bound at historically low levels.  Liberalization of industrial licensing and administered pricing, decontrol of banking and capital market reforms were important domestic complements to trade policy reforms.

India remained committed to a rule-based multilateral trading system;  in this context, India regarded safeguard and anti-dumping measures as an integral part of the WTO system.  The Customs Tariff Act had been amended in early 1997 to provide for GATT-consistent safeguard procedures;  there had been a surge of safeguard actions following this measure.  The Government had also set up an independent Directorate of Anti-Dumping, primarily to provide transparency and independence to the process and expedite cases.

India's investment policy was to encourage FDI in core areas, to overcome significant bottlenecks;  such areas included infrastructure, fuel, fertilizers, cement and information technology. Improvement of implementation was a clear priority and India's attraction for FDI was increasing.

He gave details of the standard-setting process in India and the extent of harmonization of Indian with international standards, including in health- and food-related areas.

The representative outlined India's traditions in knowledge-related areas and recalled that, as a developing country, India had until 1 January 2000 to bring its intellectual property laws into conformity with the TRIPs Agreement, and until 1 January 2005 to extend product patents to areas of technology not protected so far.  He gave details of licensing procedures under patents, "reasonable price" conditions and protection of well known trademarks.

India had no export subsidies;  exports were disadvantaged by the wide range of national, State and local taxes.  Policy sought to neutralize these handicaps through permissible means.  Minimum export prices for wheat and coarse grains had been abolished on 13 April 1998.

The representative believed that state trading for a few items of mass consumption (such as petroleum products, vegetable oils and cereals) was inevitable in view of the level of production, seasonal variations, the size of the domestic market and social sensitivity.  The list of items under canalization was shrinking, not expanding.  Canalizing agencies were independent corporate entities with full authority to function as independent commercial organizations;  import or export of canalized items could also be effected by private businessmen in consultation with canalizing agencies, and in some cases exceeded those of the agencies.

(iii) Sectoral issues

Some members stated that the agriculture sector in India had been almost unaffected by the reform process.  It was suggested that the public distribution system, with minimum prices, was a disincentive to agricultural development and an ineffective means of poverty alleviation.  Some delegations urged India to extend outward-oriented reform policies to agriculture.

While noting that important trade policy reforms had been pursued in manufacturing, some members noted the continued wide application of import licensing in textiles and clothing, which constrained Indian producers in improving productivity and preparing for a more liberal world market, as envisaged in the WTO Agreement on Textiles and Clothing.  Some members questioned the consistency of India's export bans on leather, hides and skins with WTO provisions;  they also noted that certain local-content measures and trade balancing requirements in the motor vehicles sector included in recently concluded Memoranda of Understanding between the Indian Government and car manufacturers, could be inconsistent with India's WTO obligations.

The role of the services sector in supporting many economic activities was noted;  however, Members took note of the uneven pattern of liberalization in this area.  While banking had been gradually liberalized, insurance was still closed to foreign participation.  Members also noted that access for foreign suppliers in basic telecommunications services had been implemented more slowly than planned and that many licenses awarded were being disputed in the courts.  Members asked about plans for further liberalization of the services sector and welcomed India's active participation in the recent negotiations.

In reply, the representative if India recalled that more than 70% of the population was directly or indirectly dependent on agriculture for its livelihood.  Production had increased thanks, inter alia, to improved use of fertilizers and increased access to credit.  The pace of reform had been, and had to be, carefully calibrated;  however, the direction was clear and both liberalization and other reforms had been introduced in agriculture, including frontloading of some agricultural products in the proposed phase-out plan for quantitative restrictions, removal of restrictions on agro-processing units, acceleration of infrastructural investment, improving the public distribution system and reforming the support price system to take into account the interests of both producers and consumers.  Agriculture had also benefited from other reforms, including the reduction of high tariffs and controls on imports of manufactures.  India's domestic support measures continued below the de minimis levels and no export subsidies were being provided at present.  India's draft agricultural policy resolution, currently under finalization, sought to accelerate the process of liberalization and reform.

Regarding textiles and clothing, he noted that very few restricted items had yet been integrated into GATT by developed country members, resulting in lower export earnings than anticipated when India agreed to the ATC.  India had included textile and clothing items in its phase-out programme for import restrictions;  99 tariff lines had been liberalized to date.

He stated that the MOU policy for automobile investment has been framed to create a level playing field for all foreign investors;  import licensing procedures for CKD/SKD cars by foreign automobile companies had been liberalized to provide the companies unlimited access to such imports in return for certain minimum criteria.

Exports of hides and skins were restricted because of a domestic shortage owing to socio-cultural and religious reasons.

The representative emphasised the importance of services in promoting economic growth.  Commitments were in line with the GATS provisions which seek to achieve progressively higher level of liberalization of trade through successive rounds of multilateral negotiations, with flexibility for members.  India's legislation for banking was liberal;  for non-banking financial services, foreign investment up to 51% was allowed, and up to 49% for stockbroking.  In the field of insurance, reforms proposed by the Malhotra Committee could not be passed by the previous Parliament:  the scope and pace of reform were yet to be examined by the new government.  The Government was committed to rapid expansion of telecommunications;  six licences for basic telecom services had been signed and cellular services were in operation.  All such companies could have foreign equity up to 49%.  The independent telecommunications statutory regulatory authority (TRAI) was fully operational.  To encourage the rapid development of trade in services, the Government had autonomously undertaken greater liberalization of foreign equity participation in sectors such as financial services and telecoms, than was reflected in India's schedule of specific commitments.  New guidelines for private participation in ports, highways and civil aviation had been announced and approval given for mass rapid-transit systems in Delhi and other major cities.  He gave details of conditions for multi-modal transport and in shipping.  India was engaged in discussions with its major trading partners regarding liberalization of professional services;  at the same time, India felt that the outcome of the negotiations on movement of natural persons left much to be desired.

Overall, Members commended India for its continued programme of economic reforms, including trade reforms which have constituted an integral part of the programme.  Members appreciated the direction of reforms, welcomed the commitment expressed by India to further broad-based trade liberalization, domestic deregulation, and encouragement of private investment and looked forward to further concrete, well-co-ordinated implementation in these areas.  Members also welcomed India's continued positive participation in the WTO and the importance attached by the Indian delegation and authorities to a stable, liberal, rules-based multilateral trading system.  Members looked forward to receiving written replies to major outstanding questions and clarifications of various areas of interest. Back to top