Lecture 5

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Key points from last class

Since 1991, India has made substantial progress in opening up both capital and current accounts Became o cially current account convertible in 1994 Though we do not have full capital account convertability, but by opening up foreign direct and potfolio investment, we can access foreign savings Competitive exchnge rate remains a high priority as India is still not integrated on the trade front With an open economy and large capital inows which are bound to happen with full capital account convertibility, management of the exchange rate will become an independent and important concern as the domestic currency can begin to appreciate if there are large capital inows, Managed exchange rate system
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RBI has bought dollars to prevent a sharp appreciation of the rupee that might have hurt prospects of the Indian exporters However, e cacy of o cial interventions in the forex market has always been a controversial issue, especially in the context of post-intervention sterilisation (Bhaumik and Mukhopadhyay (2000)) Genesis of the debate
Suppose that RBI purchases dollars in order to prevent a sharp appreciation of the domestic currency The resultant increase in the volume of high powered money increases the money supply Suppose the central bank sterilises the entire addition to the money stock by way of open market operations The resulting increase in the supply of bonds may still aect capital ows, and hence the nominal exchange rate, by aecting the interest rate. Thus the (initial) impact on the nominal exchange rate by the central bank intervention may be partially (or fully) oset s Given the nature of the controversy, economists disagree about the net eect of a sterilised intervention
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Export-Import policies (highlights)

EXIM 1999-2000 concept of Free Trade Zones introduced
it is an area within which goods may be landed, handled, manufactured or recongured without the intervention of the customs authorities when the goods are moved to consumers within the country in which the zone is located, they become subject to the prevailing customs duties corporations setting up in a zone may be given tax breaks as an incentive. usually in underdeveloped parts of the host country; the rationale beng that the zones will attract employers and thus reduce poverty and unemployment, and stimulate the area economy s

EXIM 2000 Setting up of SEZs (Deemed Export Sector);

is a geographical region that has economic and other laws that are more free-market-oriented than a country typical or national laws s includes Free Trade Zones (FTZ), Export Processing Zones (EPZ) etc deemed to be foreign territory for the purposes of trade operations, duties and taris
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EXIM policy...
exemption from customs/excise duties for development of SEZs for authorized operations Income Tax exemption on income derived from the business of development of the SEZ

Removal of import QRs in most of the essential goods

The process of removal of import restrictions, which began in 1991, was completed in a phased manner during 2001-02 with removal of restrictions on 715 items. Out of these 715, 342 are textile products, 147 are agricultural products and 226 are other manufactured products including automobiles. Import of agricultural products like wheat, rice, maize, other coarse cereals, copra and coconut oil has been placed in the category of State Trading The nominated State Trading Enterprise will conduct the imports of these commodities solely as per commercial considerations Similarly, import of petroleum products including petrol, diesel has also been placed in the category of State Trading
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EXIM policy 2000-2002 contd...

In view of road safety and environment considerations, imports of second hand automobiles have been allowed subject to certain conditions
Import of autombiles older than three years was not allowed Imported automobiles to have a minimum residual life of ve years and the importer to ensure supply of spares and service during this period Import of left hand drive vehicles not allowed

Similarly, import of new automobiles allowed subject to conditions

Import allowed only from the country of manufacture Import of left hand drive vehicles not allowed

To ensure that import of agricultural products do not lead to unwanted inltration of exotic diseases and pests in the country
import of primary products of plant and animal origin was made subject to Security & Sanitary and Phyto-Sanitary Permitto be Bio issued by Deptt. of Agriculture and Cooperation. This was in accordance with the WTO agreement
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Evaluation: Removal of QRs leading to entry of imports of essential agricultural goods & petroleum products throrough State Trading Enterprise
State trading enterprises are dened as governmental and non-governmental enterprises (legitimate trading entities), including marketing boards, which deal with goods for export and/or import.

Imposition of Conditions on import of used vehicles trying to protect Indian industry Fear of Destruction of Indian Industry particularly artisans, marginal & small farmers EXIM policy 2002-2007 Oshore Banking Units (OBUs) were permitted in SEZs. It was also decided that permit External Commercial Borrowings (ECBs) for a tenure of less than three years would be allowed in SEZs
the objective was to provide opportunities to these units to access working capital loan at internationally competitive rates.
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Small scale/ Cottage & Handicrafts granted Export House Status and hence became recipents of privileges Customs duty on import of rough diamonds is being reduced to 0% Gem & Jewellery units can receive precious metal i.e Gold/silver/platinum prior to exports or post exports equivalent to value of jewellery exported Restrictions on export of all cultivated (other than wild) varieties of seed, except Jute and Onion, removed In order to promote diversication of agriculture, transport subsidy was made available for export of fruits, vegetables, poultry and dairy products. In order to neutralise high fuel costs and enhance cost competitiveness of exporters, it was decided that fuel costs wold be rebated for all export products. Focus Africa was launched
Diversication of Export markets to sub- Saharan countries was encouraged realizing the tremendous potential for trade with the Sub Saharan African region
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Evaluation: Another step towards free trade Focus Africa to capture the fast growing economy Oshore banking units Increasing competitiveness of SEZs by providing International Finance at international rates To boost up Agricultural Exports Foreign Trade Policy 2004-09 Objectives:
to double India percentage share of global trade within 5 years s expand employment opportunities, especially in semi urban and rural areas use trade expansion as an eective instrument of economic growth and employment generation concerted eorts to promote exports in agriculture, handlooms, handicraft, gems & jewellery and leather sectors. To boost exports of fruits, vegetables, owers, minor forest produce
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Evaluation: Increase in exports substantially (GOI) Agriculture and industry has shown remarkable resilience and dynamism in contributing to a healthy growth in exports exports witnessed robust growth to reach a level of US $168 billion in 2008-09 from US $63 billion in 2003-04. India share of global merchandise trade was 0.83% in 2003; it rose s to 1.45% in 2008 as per WTO estimates Our share of global commercial services export was 1.4% in 2003; it rose to 2.8% in 2008. India total share in goods and services trade was 0.92% in 2003; it s increased to 1.64% in 2008 On the employment front, studies have suggested that nearly 14 million jobs were created directly or indirectly as a result of augmented exports
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History of WTO
The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the world trading nations and ratied in their parliaments. s The goal is to help producers of goods and services, exporters, and importers conduct their business. The organization o cially commenced on January 1, 1995 The Uruguay Round was the 8th round of Multilateral trade negotiations conducted within the framework of the General Agreement on Taris and Trade (GATT), spanning from 1986-1994 and embracing 123 countries as contracting parties. This Round transformed the GATT into the World Trade Organization. GATT is now the WTO principal rule-book for trade in goods. s
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WTO principles
WTO members operate a non-discriminatory trading system that spells out their rights and their obligations. National Treatment towards imports
Each country receives guarantees that its exports will be treated fairly and consistently in other countriesmarkets. Each promises to do the same for imports into its own market. This was introduced to tackle non-tari barriers to trade (e.g. technical standards, security standards etc that discriminate against imported goods)

Most Favoured Nation (MFN) Favour one, favour all

the MFN rule requires that a WTO member must apply the same conditions on all trade with other WTO members a WTO member has to grant the most favorable conditions under which it allows trade in a certain product type to all other WTO members.
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General Prohibition of Quantitative Restrictions

stipulates that no prohibitions or restrictions other than duties, taxes or other charges shall be instituted or maintained by any contracting party it generally prohibits quantitative restrictions one reason for this prohibition is that quantitative restrictions are considered to have a greater protective eect than tari measures and are more likely to distort the free ow of trade

Taris as Legitimate Measures for the Protection of Domestic Industries

accepts imposition of taris as the only method of trade control, and attempts to gradually reduce tari rates for individual items in tari negotiations. Member countries make concessions (bind themselves to maximum rates) the imposition of taris beyond such maximum rates (bound rates) or the unilateral raise in bound rates is banned. tari rates are to be reduced in negotiations on a reciprocal and mutually advantageous basis
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Exceptions to the Basic Principles

WTO has provisions that permit exceptions to the basic principles when it is necessary to take measures (so-called trade remedies) to countervail the eects of other countriestrade actions Anti dumping policies If a company exports a product at a price lower than the price it normally charges in its own home market, it is said to be "dumping" the product. (predatory pricing) many governments consider it unfair compeition and take action against dumping to protect domestic industry The WTO agreement does not pass judgment typically anti-dumping action means charging extra import duty on the particular product from the particular exporting country in order to bring its price closer to the normal value Thus countries are allowed to act in a way that would normally break the principles of binding a tari and not discriminating between trading partners

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another case: consider the ability of a country to implement its obligations based on the degree of its economical development. Thus, the WTO Agreements permit the protection of domestic industries via taris and contain various exception provisions to its principles for developing countries

The WTO agreements cover goods, services and intellectual property They spell out the principles of liberalization, and the permitted exceptions. They include individual countriescommitments to lower customs taris and other trade barriers, and to open and keep open services markets. They set procedures for settling disputes. They prescribe special treatment for developing countries. They require governments to make their trade policies transparent by notifying the WTO about laws in force and measures adopted through regular reports
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General Agreements
Agreement on Agriculture
Taris on all agricultural products are now bound. Almost all import restrictions that did not take the form of taris, such as quotas, have been converted to taris a process known as tari cation. Previously more than 30% of agricultural produce had faced quotas or import restrictions. The rst step in tari cation was to replace these restrictions with taris that represented about the same level of protection. Then, over six years from 19952000, these taris were gradually reduced (the reduction period for developing countries ended in 2005) The market access commitments on agriculture also eliminate previous import bans on certain products. The new rule for market access in agricultural products is taris only.

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The agreement allows governments to support their rural economies, but preferably through policies that cause less distortion to trade Developing countries do not have to cut their subsidies or lower their taris as much as developed countries

The Agriculture Agreement distinguishes between support programmes that stimulate production directly, and those that are considered to have no direct eect. Domestic policies that do have a direct eect on production and trade have to be cut back.
Developed countries agreed to reduce these gures by 20% over six years starting in 1995 Developing countries agreed to make 13% cuts over 10 years.

Measures with minimal impact on trade can be used freely

They include government services such as research, disease control, infrastructure and food security.
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Other Agreements
They also include payments made directly to farmers that do not stimulate production, such as certain forms of direct income support, assistance to help farmers restructure agriculture The agreement prohibits export subsidies on agricultural products unless the subsidies are specied in a member lists of commitments s

Agreement on Technical Barriers to Trade

Standards and conformity assessment systems, such as industrial standards and safety/environment regulations, may become trade barriers if they are excessive or abused This agreement aims to prevent such systems from becoming unnecessary trade barriers by securing their transparency and harmonization with international standards However, the agreement also recognizes countries rights to adopt the standards they consider appropriate

Agreement on Textiles and Clothing

Agreement expired on 1 January 2005
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Other Agreements

The General Agreement on Trade in Services

The agreement covers all internationally-traded services for example, banking, telecommunications, tourism, professional services, etc. Individual countries commitments to open markets in specic sectors and how open those markets will be are the outcome of negotiations.

Agreement on Trade related Investment Measures (TRIMS) Agreement on Trade-Related Aspects of Intellectual Property Rights

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India at Doha
Reference: Mehra, Banerjee, Bajaj and Fernandez "India at the Doha ministerial meeting: an analysis" Trade and environment
India vehement opposition to the inclusion of environment in the s WTO framework could not stop its mainstreaming into the multilateral trading system The Doha Declaration recognizes the right of countries to take measures for environmental and health protection, with the caveat that these measures should not be used as protectionist devices that hinder trade ows This sanctioning of unilateral imposition of environmental measures is a worrying development for India Environmental requirements have been criticized not only for the potential for them to be used as non-tari barriers but also for the way in which they areformed, which do not take into account diering environmental resource bases, and social and economic conditions among countries.
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India at Doha
Market access with specic reference to agriculture
India had been calling for the elimination of domestic support, trade distorting subsidies, and non-tari barriers that prevent the free ow of agricultural exports from developing countries. India emphasized the critical dependence on agriculture of large rural populations in developing countries, and the need to adequately provide for their food and livelihood security and for promoting rural development In the Doha Declaration, WTO members have committed to comprehensive negotiations aimed at increasing market access, reducing and eventually phasing out export subsidies and substantial reductions in trade distorting domestic support policies. Getting this commitment from developed nations, particularly those that from the EU, which were opposed to reducing domestic farm support, has been seen as a major negotiating gain for India

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the Doha Declaration species that special and dierential treatment would be accorded to developing countries for the implementation of commitments to trade liberalization in the agriculture sector so as to address their development needs, such as food security and rural development

The TRIPS Agreement

The impending imposition of product patents under the TRIPS Agreement would result in increased prices of many drugs and medicines, in addition to having adverse impacts on the domestic pharmaceutical industry. India asserted that availability and aordability of essential medicines is a universal human right. WTO should not deny that right a demand was made that the Ministerial Conference should send out a message that the TRIPS Agreement should be interpreted and implemented in a manner supportive of the WTO Membersright to protect public health and ensure access to medicines to all. The adoption of the Declaration on the TRIPS Agreement and Public Health at Doha is thus a substantive gain for India and other developing countries who had been pressing for this
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Countries now have the exibility of determining what constitutes a public health emergency, including diseases such as HIV/AIDS, tuberculosis, malaria, and other epidemics. The government can then grant compulsory licenses to pharmaceutical companies to produce drugs and medicines for alleviating the particular health emergency. Thus, the restriction on production of patented drugs and medicines could be sidestepped if required and deemed necessary by the government.

Geographical indications
Another area of concern for India under the TRIPS Agreement is the issue of protection through GI (Geographical Indications) for products such as Basmati Rice, Darjeeling Tea, Coorg Coee, and Alphonso Mangoes, which are produced in specic regions in India. The need for such protection was only recognized for products such as wines and spirits, where developed countries have a comparative advantage India had been calling for the rectication of this distortion.
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The Doha Declaration addresses their concern, but in a limited manner. it stipulates that further study be undertaken on the issues relating to extension of GI protection to other products. India and other developing countries have been calling for the protection of traditional knowledge and products or processes that emanate from it The need for this protection has arisen on the basis of several instances of misappropriation of the biological and genetic resource of developing countries. The Doha Declaration recognizes this concern

Thus India had a signicant role to play in shaping the outcome of the Doha Ministerial Conference, particularly considering its small share in world trade.

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