India’s Trade Situation

Note:

Current Account = (Net trade in goods and services) + Income (net paid to
Indian employees; thus includes remittances. These are called
‘invisibles’) + Current transfers (inflow of money that doesn’t
need to be repaid, doesn’t give ownership of foreign assets etc.:
donations, aid, ODA etc.)

 Remittances contribute significantly to a steady inflow of foreign exchange.

While export earning are usually strongly pro-cyclical, remittances remain
pretty stable
 Current account deficit reflects the gap between a nation’s domestic savings
and investments

Till 1991, the levels of protection in the Indian economy were very high at about
117%; on top of that about 82% of all imports were subject to non-tariff barriers
as well.

Post reforms, between 1991 and 2011, India’s foreign trade has expanded
significantly:
 Trade now accounts for about 30% of India’s GDP, from 16% in 1991
 Exports/ GDP grew by 11 percentage points, and imports/ GDP by 18
 India’s share of world’s foreign trade increased from 0.5% in 1991 to
2.1% in 2014 (1.7% of exports and 2.5% of imports)
 Services have been growing at about 25% p.a. for the last 2 decades
 However, imports have grown at a much more rapid pace than
exports, resulting in a widening of the negative trade balance: it was -3%
of GDP in 1991, and -10% in 2011
 Even during the high-growth phase of the economy in mid-2000s, exports
never kept pace with imports

Both direction and composition of India’s trade remain highly skewed, and
the trade policy objective of diversification is yet to be achieved, and trade
is concentrated on a few countries and a few commodities.

Direction of trade:
 51% of all trade is with UAE, China, USA, and Saudi Arabia, thus
making India’s trade highly vulnerable to the domestic troubles of these
countries
 With most of its top trading partners, India maintains significant trade
deficits
 However, in terms of both exports and imports, India’s focus has been
shifting from developed countries in Europe and America to developing
ones in Asia and Africa
 In 2002, Asia accounted for about 30% of India’s total imports. This
has now doubled to about 60%
Composition of trade:
 Exports:
 India has been gradually moving away from labour intensive sectors
like textiles, leather, handicrafts etc. to capital and skill-intensive
sectors
 About 60% of India’s export earnings come from 4 commodity
groups: garments, gems, engineering goods, and petroleum products

 Imports:
 Share of petroleum imports is about 35% of total imports
 High-tech capital goods account for about 18% of all imports
 Distress purchases of gold are pretty common, taking it’s import
share to 12% recently from its average level of about 7%

Policy Considerations:

India’s CAD has been quite volatile in the post-reform phase. While we used to
have a marginal surplus till about 2002, since then we’ve maintained a deficit,
which fluctuates based on domestic as well as global conditions.

 Manufacturing accounts for about 85% of all of India’s merchandise

exports, and they are growing at a modest pace. Lack of a focused
approach in identifying, sustaining, and building the country’s
competitive advantage, the concentration of exports in low-value
categories, and relatively poor inflow of FDI in export-oriented industries
are the reason for the relatively poor performance of India’s exports

 In terms of imports, the focus on oil and gold imports detracts from other
important impediments that are also structural and policy induced:
 India has the world’s third largest coal reserves in the world, yet it
imports substantial amounts of coal for internal consumption (about
3.5% of all imports are of coal)
 A third of India’s fertilizer consumption is imported because of
inadequate production capacity within India
 India is the world’s largest edible oil consumer, and imports lots of
edible oil
 Thus, feasible import substitution in various commodities should be
explored

 A large CAD is a cause for concern as it has shown huge fluctuations in the
last decade- it increased from about 2% in 2003 to 10% in 2011, and in
the last quarter of 2014 was a manageable 1.6%.

In the short run, boosting investor confidence remains the key to

attracting stable capital flows that can help cover the CAD.
Overdependence on these is foolish, because of their volatility. Investor
confidence can be boosted by fiscal consolidation, reducing inflation, and
careful opening up of the capital account. Exchange rate depreciation can
boost exports and reduce the CAD.
 However, over the long-term, there are several measures that can be
undertaken for a more stable current account, by focusing on accelerating
exports:

 Fiscal consolidation raises domestic savings and reduces CAD- absurd

subsidies like LPG and Diesel should be done away with; reduces
import burden, improves fiscal health
 Controlled inflation (avoiding high inflation) helps manage exchange
rates, and also prevents distress imports of gold as a store of value
 Addressing supply bottlenecks in coal and other inputs will reduce
import burden
 Domestic investments in infrastructure such as ports, airports, roads
etc. will help remove the bottlenecks to movement of goods
 We need to reduce dependence on oil imports, by both new
explorations and investments in alternative forms of energy

FDI in India

Note: If an investor holds more than 10% equity in an Indian firm, it is called FDI;
less than 10% equity holders qualify as FIIs/ FPIs.

There is now a growing consensus on the relevance of capital controls as aspects of

the policy toolkit for the governments of emerging economies. The benefits of
maintaining a completely open capital account, if any, are ambiguous at best.

FDI flows represent longer-term investments made abroad bringing together

capital, technology, and managerial know-how, market-access in some cases,
along with entrepreneurship. They are thus seen as catalysts for domestic
development. FPIs, in contrast, tend to be short-term and speculative in nature.
They are often seen to be bringing volatility to the financial and exchange rate
markets.

Immediately post-independence, India was pro-FDI, to develop a base for local

manufacturing capability and entrepreneurship. As these developed to some
extent in the 1960s, India’s stance became more restrictive. Restrictions were
then imposed on FDI that was not accompanied with technology transfer, and
that seeked more than 40% ownership. This continued for the next 4 decades, till
the reforms of 1991. Today, foreign ownership up to 100% is allowed in most
manufacturing sectors- in some sectors even on automatic basis- except for
defense equipment where it is limited to 26%.

Determinants of FDI flow:

Market size, urbanization, infrastructure, proximity to major sources of capital,

and policy factors (such as tax rates, investment incentives, performance
requirements etc.) are major determinants of FDI flows.
Apart from market size, India doesn’t do well on most of these factors, as can be
seen by its abysmal rank of 142 in the World Bank’s Doing Business report.
However, despite these constraints, India routinely ranks as one of the top 3
destinations across the world for FDI flows. This shows that investors are
attracted to a country’s potential and are willing to put up with hardships rather
than going to countries with easier business conditions but poorer prospects of
making profits.

Quality of FDI Inflows:

 Sectoral Composition: This is one of the indicators of quality, as the host

country would benefit more from FDI that flows into modern technology-
intensive sectors, rather than from traditional sectors, where it would
have a crowding-out effect for domestic investment.

Before 1991, most of the FDI used to flow into manufacturing, especially
the high-tech kind, due to selective filtering policy. Today, services
account for an ever-larger share of FDI, and account for 35% of all
FDI (manufacturing: 40%). This is in contrast to China, where policy
directs most of the incoming FDI to export-oriented sectors, which has
help China emerge as the factory of the world.

Unlike China, India has not been able to direct FDI towards export-
oriented sectors. FDI in India continues to flow in primarily to tap
into the domestic market, and the share of foreign affiliates in
exports is only about 10%. It should consider imposing export
obligations as a condition for FDI to promote export-orientation of these
firms.

 Effect on domestic economy: This largely depends on government

policies. In certain industries, local content requirements (LCRs) have
proved useful to promote vertical inter-firm linkages, and hence help the
domestic firms learn and grow.

Similarly, India should explore imposing technology transfer

requirements on foreign enterprises (although international evidence as
to its efficacy is mixed)

Policy Lessons for FDI: Even though India has been able to attract significant
FDI, we are yet to harness their development potential fully. India has received
FDI of mixed quality and the development impact has been uneven. It is known
that government policies play an important role in determining the quality or
development impact of FDI and in facilitating the exploitation of its potential
benefits by host country’s development.

Policy should focus on promoting export-oriented FDI, which minimizes the

possibilities of crowding-out of domestic investments and generates favorable
spillovers for domestic investments by creating demand for intermediate goods.
Government intervention may also be required to promote diffusion of
knowledge brought in by foreign enterprises. An important channel for this is
vertical inter-firm linkage with domestic enterprises.

Intellectual property rights: Implications of TRIPS, TRIMS, GATS and new

EXIM policy

The text of TRIPS, TRIMS, and GATS was prepared during the Uruguay round of
GATT talks, between 1986 and 1994, with the resolutions coming into effect
from 1995 onwards.

The basic philosophy underlying any WTO text is neoclassical macroeconomics,

which states that anything that can be provided by the private sector, should be.
When governments operate in what is potentially a ‘market’ their actions
bring distortions. The agreements therefore focus on removing barriers that
would ‘distort’ trade in industry or services.

TRIPS: Agreement on Trade Related Aspects of Intellectual Property Rights

Basics:

 TRIPS requires member states to provide strong protection for intellectual

property rights; this is a WTO agreement that sets down minimum standards
for many forms of IP regulation as applied to nationals of WTO countries

 Ratification of TRIPS is a compulsory requirement of World Trade

Organization membership; thus, any country seeking to obtain easy access to
the numerous international markets opened by the World Trade Organization
must enact the strict intellectual property laws mandated by TRIPS

 Unlike other agreements on intellectual property, TRIPS has a powerful

enforcement mechanism. States can be disciplined through the
WTO's dispute settlement mechanism

 Thus, through TRIPS, WTO makes it mandatory for its member countries to
follow basic minimum standards of IPR and bring about a degree of
harmonization in domestic laws within the field

 IPRs covered under TRIPS include Copyrights, Trademarks, Industrial

Designs, Patents (including new varieties of plants), Geographical Indications
etc. - generally, these can just be covered under the ambit of ‘patents for
innovations’

 In addition to the baseline intellectual property standards created by the

TRIPS agreement, many nations have engaged in bilateral agreements to
adopt a higher standard of protection. Collection of these bilateral standards
is collectively known as TRIPS+, and are increasingly becoming a common
feature of many FTAs
 By entering into FTAs with the developed countries, developing countries
see some advantages in tariff reductions. In return, developed countries
 seek better market access and investment opportunities, and also seek to
raise the minimum levels of protection for IPRs as they have a
comparative advantage in technology products and services
 At the same time, developing countries find it difficult to put forward the
issues of their concern through the FTA negotiations including the
harmonisation of TRIPS and CBD, access to medicines, and protection
against the bio-piracy of their biological genetic resources, farmers' rights
and associated traditional knowledge, ability of their farmers to continue
their subsistence and livelihood related farming practices
 As a consequence, FTAs create an imbalanced set of rights and
obligations in favour of developed countries by ratcheting up the
levels of IPR protection

 Since TRIPS came into force it has received a growing level of criticism
from developing countries, academics, and non-governmental organizations:
 TRIPS's wealth concentration effects (moving money from people in
developing countries to copyright and patent owners in developed
countries) and its imposition of artificial scarcity on the citizens of
countries that would otherwise have had weaker intellectual property
laws, are common bases for such criticisms
 Proponents of strong IPR say money is needed for R&D; however, IPR
laws in places like Africa don’t really affect revenues of big firms, whose
primary profits come from developed markets, where their products are
safe from competition anyway

 Panagaria:
 TRIPS doesn’t really fall under the domain of WTO’s core mandate,
which is trade liberalization
 Proponents of TRIPS say that as technology became more important
in goods and commodities, having higher proportion of invention
and design (intellectual creativity) in their value, IPR became
important in international trade
 Trade liberalization benefits everyone, including the country
undergoing such liberalization. On the other hand, WTO’s
championing of non-trade agendas, such as TRIPS, and labour and
environment laws, are inefficiency inducing, and often benefit rich
countries while hurting poorer ones
 TRIPS leads to ever-larger patent protection timelines, and high prices
for products, especially medicines, that can be cheaply produced if the
innovation is made public quickly enough
 Studies also show that the price effect of TRIPS is not limited only to
patented products, but generally leads to higher prices of other goods
in the market as well

Doha Declaration on Public Health:

 The framework of stringent intellectual property rights established by the

TRIPS Agreement enables pharmaceutical manufacturers to charge prices
above marginal cost of production. This affects the ability of governments to
 monitor and protect public health because of their obligations to protect IPRs
of the manufacturers. This means that Governments may find their capacity to
ensure affordable access to medications restricted

 In 2001, in response to concerns of developing countries regarding limited or

no access to medicines at affordable prices, the WTO members agreed to
issue the Doha Declaration to clarify the TRIPS Agreement in the context
of Public Health. This was a huge win for the G33 countries.

 The declaration states that the TRIPS Agreement would not prevent
members from taking steps to protect public health and makes clear that
each member has the right to create certain exceptions to its IPR laws to
enable it to grant compulsory licenses for manufacture of essential goods such
as life-saving drugs even if the consent of the holder of the IPR is not
forthcoming

 A 2003 agreement loosened the domestic market requirement, and allows

developing countries to export to other countries where there is a national
health problem as long as drugs exported are not part of a commercial or
industrial policy

 Challenges to Doha declaration:

 After Doha, PhRMA, the United States and to a lesser extent other
developed nations began working to minimize the effect of the
declaration
 The official documents left a number of legal and technical problems
unresolved: e.g., the term ‘epidemics’ hasn’t been defined, which might
mean that chronic diseases such as AIDS, TB, Malaria etc. are not covered
under the exemptions

Future Issues Concerning TRIPS negotiations:

 Debate is on about TRIPS provisions that ask member countries not to exclude
life forms and plants from their IPR laws
 Protection of the innovations of indigenous and local farming communities
and the continuation of the traditional farming practices including the right to
save, exchange seeds, and sell their harvest
 Protection of the rights of indigenous communities and prevent any private
monopolistic intellectual property claims over their traditional knowledge
 Grant of the same level of protection of geographical indications in other
products as is granted to wines and spirits

IPR laws in India and TRIPS

 Key: India hasn’t been afraid to stand its ground, and while adhering to TRIPS
clauses, has ensured that its industry (especially pharmaceuticals industry)
does not suffer. This is evidenced by the fact that although India has now
allowed product patents in pharmaceuticals, clause 3(d) still allows it to
overturn patents that impinge upon public health delivery. Similarly, it has
 increased the timeline for patent from 7 to 20 years, but has made the
granting of new patents significantly tougher, and much more merit based, so
the value of a patent has grown significantly. The number of patent
applications has been growing at about 12% p.a. since the new Patent Act of
2005, which is a healthy growth rate by any standards

 Although TRIPS agreement was finalized in 1994, it took India over a decade
to make its laws compliant; this was achieved in 2005

 Several domestic laws such as the Patent Act, Trademarks Act, Copyrights
Act etc. have been modified from time to time to make them TRIPS compliant

 In 1970s, India moved from the colonial-era strict patent laws to more relaxed
ones, to promote indigenous manufacturing. The 1970 Patent Act abolished
product patents for food, pharmaceuticals, and chemicals, and restricted grant
of patents in these fields only to process patents. The maximum duration of a
product patent was fixed at 7 years
 The 1970 Patent Act, thus, provided an impetus to the generic drugs
industry in India; between 1970-1995, the sector grew at 15%+ p.a.
 The amendments made to the 1970 PA in 1999, 2002, and then in 2005
made it TRIPS compliant:
 2002 (2nd amendment): ‘License of right’ deleted, ‘burden of proof’
reversed, microorganisms made patentable
 2005 (3rd amendment): Product patents allowed in pharmaceuticals,
food, and chemicals, compulsory license now required for export of
patented pharmaceutical products

 Thus, under WTO pressure, when the Indian parliament passed the new
patent law in 2005, it not only brought back product patents, but also granted
all patents a term of 20 years. Moreover, the new law paved way for the
formation of the Intellectual Property Appellate Board, a specialised
judiciary to hear IP cases 

 There is of course a major commercial reason for copyright enforcement, and

that has to do with the global cross-sectoral marketing of products
 The emergence of strong contenders in the domestic software and
Bollywood business have led to the emergence of a new culture of IP in
India, consonant with the global IP regime
 Given the changes to many acts such as Patent Act, Copyrights Act,
agreement to join the Berne convention, Trademark Act etc., along with
liberalization of telecom and many other services, show that the global
‘proprietary’ agenda has become a significant part of India’s social and
economic features

 This transition has been chaotic. Patent litigations have increased three-
fold since 1995, and many of these have been highly controversial and long-
drawn affairs. Interestingly, it appears that the courts are also grappling with
how to balance the pro-innovation and anti-competitive effects of IPR
 The Indian Patent Office and courts face significant challenges in interpreting
and applying the new Patent Act’ s provisions. In the short-term, opponents of
stronger patent protection may be able to take advantage of ambiguities in the
interpretation of various provisions of the patent law. But this can have
serious long-term consequences, as a lack of confidence in the patent system
could adversely impact indigenous innovation to a large extent and foreign
direct investment to a small extent

 USA and India: (May 2015) The office of the USTR has once again placed
India on its ‘priority watch list’ citing what it believes to be India’s poor record
in protecting IPRs. India’s stance is that its IPR laws are TRIPS compliant, and
haven’t been significantly challenged at the WTO. To change these laws only
based on US pressure would reflect badly on the government (Read:
http://www.thehindu.com/opinion/editorial/patent-
pressures/article7177626.ece)
 The U.S. administration is irked over the government’s announcement of a
series of 1,000-MW grid-connected solar photovoltaic (PV) power
projects that has a mandatory condition that all PV cells and modules
used in solar plants set up under this scheme will be made in India.
 There is already an ongoing dispute at the World Trade Organisation,
where the U.S. has complained against India over the Jawaharlal Nehru
National Solar Mission’s domestic content requirement (DCR) for solar
cells and solar modules in projects that it awards.

 ISB paper: Despite enforcement and judicial hurdles, the outcomes of

stronger IPRs in India have mostly been beneficial:
 The amount of R&D activity in India has increased since TRIPS. Stronger
IPR has spurred Indian companies to invest in R&D and encouraged
multinational corporations to outsource more R&D work to India
 The average number of patent applications filed per year with the Indian
Patent Office (IPO) by Indian residents grew by about 10% since 1995,
and by about 12% from 2005 onwards- number of trademark
applications increased from 10% growth to 17%
 It looks like under TRIPS, getting a patent issued has got tougher, but
once granted, the patent is seen as a mark of quality and is valued
higher as compared to before
 (Several commentators seem to be saying that patent applications grew
‘dramatically’; see what line to take here)

 Impact on India’s pharmaceutical sector: Several domestic laws such as the

Patent Act, Trademarks Act, Copyrights Act etc. have been modified from time
to time to make them TRIPS compliant
 The advent of TRIPS has done wonders for the Indian pharmaceutical
sector; for the first time in years, the industry was challenged, and
consequently had to make investments in Drug Discovery Programmes,
greater capacity addition in production of generic drugs, organized efforts
to manufacture patented drugs under license, and efforts to get deals for
marketing patented drugs to the Indian market
  All of this has led to greater dynamism in the industry
 While this is true, ‘big pharma’ firms from developed countries haven’t
been allowed a free run in India, due to carefully drafted exemptions
 Pre-TRIPS, Indian firms has started exporting large amounts of drugs to
LDCs; post-TRIPS, the orientation is changing towards developed
countries

 One unique provision of the Indian Patent Act is embodied in Section 3,

clause (d). This provision prevents patenting of minor improvements in
chemical and pharmaceutical entities unless the invention results in the
enhancement of known efficacy of that substance. This provision is a
safeguard for public health purposes and sets a higher threshold for granting
pharmaceutical patents. In January, Gilead Sciences (a US company) was
denied a patent by the Indian Patent Office for its drug Sofosbuvir that
cures Hepatitis C, owing to application of Section 3(d)

Section 3(d) has been extremely contentious since its introduction in

2005. The transnational pharmaceutical industry regards it as establishing an
unacceptably high barrier to patenting, as do many foreign governments. But
many observers, including the United Nations Programme on HIV/AIDS and
civil society groups, defend 3(d) and point to India as a model for developing
countries attempting to use TRIPS flexibilities to promote public health
 In 2013, pharma giant Novartis lost a six-year legal battle after the Indian
supreme court ruled that small changes to its leukaemia drug Glivec did
not deserve a new patent
 This gives a clear distaste in India for ‘evergreening’- the practise of big
pharma firms to make small changes to drugs whose licenses are about to
expire, simply to renew their licenses. In such cases, India has started
giving out ‘compulsory licenses’
 The best thing is that India broke no TRIPS laws; it’s decision is valid
under TRIPS, but so far countries had just been too scared to try it

 Due to India’s considered stance, it’s pharmaceutical industry is still

growing at a strong 15% p.a. rate

 India and other developing countries have been raising the issue of protection
of traditional knowledge and the relationship between the CBD and the TRIPS
Agreement for the last few years in the WTO

 With TRIPS and GATT the level of competition rose with stronger
requirements, and India needs policy options to catch up the leading firms.
The typical SMEs Indian system has to face a competition with established
MNCs, bringing in new kind of business models and dynamic capabilities

 Plant varieties: India is one of the only countries in the world to have passed
sui generis ('of its own kind') legislation granting rights to both breeders and
farmers under the Protection of Plant Varieties and Farmers Rights Act,
2001. Where a country excludes plant and animal inventions and plant
varieties from patentability, it is expected to protect them under an effective
 sui generis system as mandated by TRIPS

TRIMS: Agreement on Trade-Related Investment Measures

Basics

 TRIMS are rules that apply to the domestic regulations a country applies to
foreign investors, often as part of an industrial policy. These restrict
preferential treatment of domestic firms, and thereby enable international
firms to operate more easily within foreign markets

 Policies that have traditionally been used to both promote the interests of
domestic industries and combat restrictive business practices are now
banned; some examples are:
 Local content requirements (which require that locally produced goods be
purchased and used)
 Trade balancing rules (require that an enterprise’s purchases or use of
imported products be limited to an amount related to the volume or value
of local products that it exports)
 Domestic sales requirements and export restrictions
 Export performance requirements
 Forex and local equity share restrictions
 Manufacturing requirements (require domestic manufacturing of certain
parts)
 Technology transfer requirements
 Employment restrictions
 Fiscal incentives to promote the above-mentioned behavior are also seen
as trade distorting, and are hence banned

 Under the WTO TRIMS Agreement, countries were required to rectify any
measures inconsistent with the Agreement, within a set period of time after
the agreement came into force (in 1995, so all the timelines below have
passed):
 Transitional period: developed countries had a timeframe of 2 years,
developing countries of 5 years, and LDCs of 7 years to implement TRIMS
measures
 Equitable provisions were allowed, letting national governments impose
existing rules on new FDI coming in during the transitional phase
 Some exceptions for developing countries, such as allowing them to
deviate temporarily from the TRIMS provisions on ground of adverse
Balance of Payments

 Several criticisms of TRIMS agreement exist:

 It prevents the imposition of any performance clauses on foreign
investors in respect of earning foreign exchange, foreign equity
participation, and transfer of technology
 It requires foreign companies to be treated on par with, or even better
than, local companies
  It prevents the imposition of restriction on areas of investment and it
requires the free import of raw materials, components and intermediates

India and TRIMS

 India had notified different provision that would violate TRIMS, and had
removed all such clauses well before the transition period lapsed. India today
has no outstanding obligations to WTO in this regard (this is the official line on
the Commerce Ministry website)

 While the above is the official line, India regularly imposes local content
requirements for sourcing from SMEs, restrictions on foreign equity shares in
FDI in some sectors (although such sectors are very few now) etc.

 In 2002, India had to do away with local content requirements and trade
balancing requirements in the automobile sector, following a WTO ruling

 India was dragged to the WTO dispute resolution mechanism by the US in

2013, regarding India’s domestic content requirements under the
Jawaharlal Nehru National Solar Mission, for solar cells and solar modules;
the US claims that this amounts to preferential treatment to national industry,
and hence violates Article III of GATT and 2.1 of TRIMS. This dispute is
ongoing, and judgment is expected in August 2015
 India’s response might include the fact that most of the sourcing
requirements are from government, and this is exempt from WTO rules
 Environmental groups from across the globe, and many from the US, have
strongly expressed that the US should not discourage emerging
economies such as India from creating an optimal environment for use of
renewable energy
 If the ruling goes in favour of the US and against India, it can spark a
north-south divide with respect to climate justice actions. The US
government is strongly defending its action before the WTO by stating
that it supports the deployment of clean energy technologies all across
the world, including India.  However, if a country’s clean energy initiatives
adversely affect the US manufacturers and workers, whereby there is a
rise in the cost of clean energy, it would result in the undermining of the
shared vision with regard to promotion of use of renewable energy
 A ruling in favour of India will serve as a great encouragement to
emerging economies such as India which wish to reduce the dependence
on fossil fuels and increase the use of renewable energy, and at the same
time create a sustainable industry

 As a follow-through within a couple of months, India also dragged the USA to

WTO alleging that the US, both at the federal and state levels, is offering
subsidy programmes in the sector for local content requirements, making the
entry of Indian companies difficult and breaching global trading rules.

GATS- General Agreement on Trade in Services

Basics

GATS Articles: These are discussed here with reference to the Indian education
sector.

Article 1: This defines four modes of supply in any service sector trade:

 Mode 1: Cross-border supply:

 E-learning, correspondence course etc.
 Market for such courses is expected to be huge in India, and
universities from the west have a massive comparative advantage

 Mode 2: Consumption abroad:

 Involves movement of consumers; say, students going abroad
 Barriers include visa requirements, recognition of prior qualifications,
quotas on number of students, restrictions on employment while
studying etc.

 Mode 3: Commercial presence:

 Issues of FDI and IPRs will feature in this mode
 Internal ‘brain drain’ of academics from domestic to foreign players
might occur

 Mode 4: Presence of natural persons:

 Will affect teachers or researchers going abroad on a temporary basis
 Perceived barrier is tight immigration policy, recognition of
qualifications etc.
 So far, most of Mode 4 liberalization has been ‘horizontal’ (people
moving from one country to the other for the same firm), and
concentrated among the top layer of employees (executives, managers,
specialists etc.)
 India has a comparative advantage in labour resources, so opening up
movement of all categories of employees is in India’s favour

(GATS Part 2 covers articles 2-5)

Article 2: Most Favoured Nation clause; this has been a fundamental principle,
first of GATT and then of WTO- any benefits being accorded to one nation has to
be accorded to all WTO member nations

Article 3: Transparency

 Each member has to promptly and annually inform WTO of the

introduction of any new laws, or any changes to existing laws that
significantly affect trade in services
 The issues of transparency is an uneasy one for developing countries such
as India, as it makes the regulatory mechanism public, and brings out its
weaknesses. In the education sector, this would involve making
transparent regulations related to fee structure, financing of an institute,
land acquisition, etc., where rules aren’t always followed by the book
  A ‘clean’ regulatory mechanism will be beneficial for the general
population as it will eliminate monopolistic tendencies

Article 4: Increasing participation of developing countries

 Proposals include: improving third world’s domestic capacity and

efficiency via access to technology on a commercial basis
 Access to distribution channels and information networks
 Liberalization of market access in sectors and modes of supply of export
interest to the third world
 Problems in negotiation here arise because the third world isn’t a
homogeneous block, with BRICS countries having much higher
development levels as compared to most other countries

Article 5: Recognition of qualifications as well as work experience

 Would involve international standardization of quality and content of a

particular degree, and recognition of a certain university based on
predetermined criteria
 For the 3rd world, such international accreditation is one of the most
difficult impediments in the process of opening up developed markets for
their services; if such standards are set high, they would block movement
of professionals from the 3rd world, while making such movement easier
for the developed countries

GATS Part 3: Covers market access and national treatment

 There are 6 limitations defined on market access, relating to number of

service providers, value of transactions, number of service operations,
number of natural persons, specific types of legal entities, and
participation of foreign capital
 Quotas are often used by developed countries, and limitations on FDI by
developing countries
 National treatment means an Indian university cannot be accorded any
special treatment as compared to a foreign one

Some other provisions

 While the overall goal of GATS is to remove barriers to trade, members

are free to choose:
 Which sectors are to be progressively "liberalised", i.e. marketized and
privatised
 Which mode of supply would apply to a particular sector
 To what extent liberalisation will occur over a given period of time

 Services Sector Classifications addressed in the GATS are defined in the

so-called "W/120 list", which provides a list of all sectors which can be
negotiated under the GATS
  Members' commitments are governed by a "ratchet effect", meaning that
commitments are one-way and are not to be wound back once entered
into. The reason for this rule is to create a stable trading climate

 However, Article XXI does allow Members to withdraw commitments,

and so far two members have exercised this option (USA and EU)

USA has been very vocal in GATS negotiations:

 The US position of liberalizing services is obvious, given that services

account for over 80% of US employment, and over 65% of GDP

 The entertainment industry in the US is increasingly being come to known

as the ‘copyrights industry’; it contribute between 5-7% of the US GDP,
thereby making the US a big proponent of liberalizing AV services
 Side note: in AV services, the debate across the globe is whether culture
should be considered a tradable commodity, or as an expression of
heritage that needs to be protected from unbridled globalization
 EU’s stance is one of protectionism; India and US favor liberalization,
given their strong entertainment industries (think TV channels, movies
in theatres, songs on the radio)

GATS and India

 While national governments have the option to exclude any specific

service from liberalisation under GATS, they are also under pressure from
international business interests to refrain from excluding any service
‘provided on a commercial basis’
 Important public utilities such as water and electricity most commonly
involve purchase by consumers and are thus demonstrably ‘provided
on a commercial basis’
 The same may be said of many health and education services which are
sought to be 'exported' by some countries as profitable industries

 The single biggest apprehension about GATS is the opening up and

liberalization of sensitive social sectors like education, health, water, and
energy

 GATS could lead to erosion of autonomy and sovereign right of

governments to lay down policy, regulate, and legislate

 Several proponents of GATS say that concessions made under GATS by

India need not necessarily be counter-productive to India, but their
effects will depend on our diplomatic and negotiating capabilities. They
say that as long as we can make use of cross-sectoral and cross-modal
leverages, outcomes need not turn out unbalanced
 However, such arguments forget that in any such negotiations, sections
of the society with a comprehensive political voice are likely to gain
(such as the middle class, who would want easing the restrictions on
 Mode 4 of GATS, which deals with movement of labour in the services
sector across national boundaries), while poor rural population is
likely to lose, in the form of privatization of essential services (Modes 1
and 3)

 GATS does specify that members may take measures to ‘protect public
morals or public order’, but these terms aren’t concretely defined. Any
dispute arising from differing interpretations will be adjudicated not by
India’s courts, but by a WTO tribunal, which brings forth serious
questions on India’s autonomy

 Important: Thought listed and discussed separately, the Articles in GATS

have a high degree of overlap.
 For example, if Mode 4 in Article 1 is accepted by India, without
proper negotiations about Article 5 which deals with recognition of
qualifications, it will not lead to better circumstances for Indian
workforce
 If Mode 3 (Commercial presence) is liberalized before Mode 4
(movement of natural persons), FDI flows in India will precede
international skilled migration
 The ‘sequencing’ of acceptance during negotiations of different Articles
in therefore very important

General Notes on WTO, Sectoral Implications etc.

WTO was the successor of the GATT, which ran from 1948. It came into existence
in 1995 under the Marrakech agreement (where the Uruguay Round ended
negotiations). Most of the issues that the WTO focuses on derive from previous
trade negotiations, especially from the Uruguay Round (1986–1994).

The WTO is attempting to complete negotiations on the Doha Development

Round, which was launched in 2001 with an explicit focus on developing
countries.

As of June 2012, the future of the Doha Round remained uncertain: The conflict
between free trade on industrial goods and services but retention
of protectionism on farm subsidies to domestic agricultural
sector (requested by developed countries), and the substantiation of fair
trade on agricultural products (requested by developing countries) remain the
major obstacles. This impasse has made it impossible to launch new WTO
negotiations beyond the Doha Development Round. As a result, there have been
an increasing number of bilateral free trade agreements between governments.

A trade facilitation agreement known as the Bali Package was reached by all

members in 2013, the first comprehensive agreement in the organization's
history.

Since it’s coming into existence, there have been various challenges to the
legitimacy of the WTO as a viable trade-mediating organization. Concerns have
been cited about the ‘democratic deficit’ of the organization, where developed
countries are believed to have a much larger sway. Also, over its various
ministerial meetings, there has been a significant move away from
multilateralism and towards PTAs. This has become more pronounced since the
Cancun meeting, where developing countries, led by the G4, demonstrated their
negotiating capability. Since then, the US, EU, and China are increasingly relying
on bilateral and regional route to pursue their trade interests.

Recognizing the rise of PTAs, the WTO has finally taken a step towards
rationalizing its approach towards them. A start has been made with the setting
up of the ‘transparency mechanism’, whereby member countries are bound to
disclose details of their PTAs for the WTO’s scrutiny. However, while a step in the
right direction, this mechanism for now simply remains an information
disclosure mechanism, and nothing else.

WTO has also failed to factor in the fact the trade liberalization does not happen
in isolation, and has wider socio-economic repercussions, with impact on
questions of equity and justice.

Uruguay Round (1986-1994)

This was the 8th GATT round, and GATT’s deficiencies were well recognized by
now. TRIPS, TRIMS, and GATS came into being after this (pre-WTO). The
Uruguay Round has been successful in increasing binding commitments by both
developed and developing countries, as may be seen in the percentages of tariffs
bound before and after the 1986–1994 talks.

Ministerial Conferences

The highest decision making body of the WTO is the Ministerial Conference,
which usually meets every 2 years. It brings together all WTO members
(countries and unions). There have been 5 ministerial conferences so far:

1. Singapore (1996): Emergence of ‘Singapore Issues’, which refer to

disagreements about 4 working groups set up during this meeting. These
issues were:
 Transparency in government procurement 
 Trade facilitation (customs issues) 
 Trade and investment, and 
 Trade and competition

These issues were opposed by most developing countries, and

disagreements prevented a resolution despite repeated attempts to revisit
them, notably during the 2003 Ministerial Conference in Cancú n, Mexico,
whereby no progress was made. Since then, some progress has been achieved
in the area of trade facilitation (‘July Package’ under the Doha round)

2. Geneva (1998)
3. Seattle (1999): Ended in failure, after massive demonstrations that had to be
contained by use of police force. Negotiations never started

4. Doha (2001): Doha Development Round was launched here, and China was
inducted as the 143rd country in WTO (see below for more details)

This is the current trade-negotiation round of WTO; started in 2001. Doha

round talks are overseen by the Trade Negotiations Committee (TNC).

The intent of the round, according to its proponents, was to make trade rules
fairer for developing countries. However, by 2008, critics were charging that
the round would expand a system of trade rules that were bad for
development and interfered excessively with countries' domestic policy space.

Since 2008, talks have stalled over a divide between developing and
developed nations on major issues, such as agriculture,
industrial tariffs and non-tariff barriers, services, and trade remedies. There is
also considerable contention against and between the EU and the USA over
their maintenance of agricultural subsidies—seen to operate effectively as
trade barriers.

The negotiations are being held in five working groups. Some important topics
under negotiation are: market access, development issues, WTO rules, and
trade facilitation.

As of 2014, the future of the Doha round remains uncertain, and one of the
major sticking point is agricultural subsidies, that India steadfastly refuses to
back down on.

5. Cancun (2003): Aimed at forging agreements on the Doha round. The G20

developing nations (led by India, China, Brazil, ASEAN led by the Philippines)
resisted demands for agreements on the ‘Singapore issues’, and called for an
end to agricultural subsidies (most important contention) within the EU and
the US.

The talks broke down without progress, and the collapse of the talks was seen
to be a major victory for the developing countries, who were now seen to
have the confidence and cohesion to reject a deal that they viewed as
unfavorable. This was reflected in the new G20 trade block, led by the G4
(India, China, Brazil, South Africa)

Geneva (2004): Not a ‘full’ ministerial meeting; several achievements:

 EU accepted the elimination of agricultural subsidies by a ‘date certain’

 Singapore issues were moved off the Doha agenda
 Developing countries accepted trade facilitation (custom duties etc.) as
a subject to be negotiated
 After intense negotiations, members reached what has come to be
known as the ‘Framework Agreement’ or the ‘July Package’, which
 covers agriculture, non-agricultural market access, services, and trade
facilitation

6. Hong Kong (2005): This was considered vital if the four-year-old Doha
Development Round negotiations were to move forward sufficiently. Key
achievements:
 Countries agreed to phase out all their agricultural export subsidies
by the end of 2013, and terminate any cotton export subsidies by the
end of 2006
 Further concessions to developing countries included an agreement to
introduce duty-free, tariff-free access for goods from the Least Developed
Countries, following the ‘Everything but Arms’ initiative of the European
Union 
 That is, industrialized countries agreed, in principle, to open up their
markets for developing countries
 Other major issues were left for further negotiation to be completed by
the end of 2010

Bali Package, 2013

Official discourse:

Addresses a small portion of the Doha programme, principally, bureaucratic ‘red-

tape’, by means of the ‘Trade Facilitation Agreement’

Because of the controversial nature of reforming laws on intellectual property,

trade in services and subsidizing crops for Food Security, the talks focused
on trade facilitation, which means lowering cross-border tariffs and other
regulations that impede international trade.

The main aim was lowering of tariff barriers, and it promised to be the first
agreement reached through the WTO that is approved by all its members.

The only binding target is reforming customs bureaucracies and formalities to

facilitate trade. The accord includes provisions for lowering
import tariffs and agricultural subsidies, with the intention of making it easier
for developing countries to trade with the developed world in global markets.
Developed countries would abolish hard import quotas on agricultural
products from the developing world and instead would only be allowed to
charge tariffs on amount of agricultural imports exceeding specific limits.
However, all other agreements apart from TF-related are given on a best-faith
basis, where no developed country has undertaken legal promises to
reduce agricultural subsidies.

The trade facilitation measures agreed in Bali could cut the cost of shipping

goods around the world by more than 10%, by one estimate, raise global output
by over $400 billion a year (another estimate says $1 trillion), with benefits
flowing disproportionately to poorer countries
From EPW etc.: The real story, and why India has vetoed the TF agreement in
August 2014 (after it was approved in December 2013 by the UPA government)

 Agreement on TF (meaning, requirements, provisions and exemptions for

developing countries and LDCs)
 Possible impact on third world and India (market access issues, hollowing
out of domestic manufacturing, more imports, increasing trade
imbalance)
 India’s sticking point: (‘green box’ provisions, AoAs and ERPs, US/ EU
farm subsidies, India’s farm subsidies etc.)

WTO’s Dispute Settlement Mechanism

A plus for WTO has been its dispute settlement mechanism- disputes in WTO are
essentially broken promises. WTO members have agreed that if they believe
fellow-members are violating trade rules, they will use the multilateral system of
settling disputes instead of taking action unilaterally. That means abiding by the
agreed procedures, and respecting judgements.

A procedure for settling disputes existed under the old GATT, but it had no fixed
timetables, rulings were easier to block, and many cases dragged on for a long
time inconclusively. WTO introduced greater discipline for the length of time a
case should take to be settled, with flexible deadlines set in various stages of the
procedure.

The Uruguay Round agreement also made it impossible for the country losing a
case to block the adoption of the ruling. Rulings are automatically adopted unless
there is a consensus to reject a ruling — any country wanting to block a ruling
has to persuade all other WTO members (including its adversary in the case) to
share its view.

The Dispute Settlement Body consists of all WTO members, and has the sole
authority to establish panels of experts to consider the case. It also has the power
to authorize retaliation in case of non-compliance of its rulings.

Either side can appeal the panel’s ruling, and appeals have to be based on points
of law; they cannot re-examine existing evidence or examine new issues.

The strength of the mechanism is evidenced by the frequency with which both
developed and developing countries utilize it. India has been one of the biggest
players in the mechanism.

WTO: Domestic Support- Amber, Blue, and Green Boxes

 ‘Green box’ roughly translate into a green ‘go’ signal, and amber could be
considered a cautionary light, there is no red box. Instead, the WTO has
invented a ‘blue box’ which is used for what the organization considers
production-limiting programs
 To further complicate matters, you could consider yourself ticketed for
 running a red light if the amber box subsidies exceed pre-set reduction
commitment levels. In addition, there are exemptions for many of the boxes,
including those designed to help make developing countries more trade
competitive

Green box
 Policies not restricted by the trade agreement because they are not
considered trade distorting
 These green box subsidies must be government-funded — not by charging
consumers higher prices, and they must not involve price support. They
tend to be programs that are not directed at particular products, and they may
include direct income supports for farmers that are decoupled from current
production levels and/or prices

Amber box
 Agriculture's amber box is used for all domestic support measures
considered to distort production and trade
 As a result, the trade agreement calls for 30 WTO members, including the
United States, to commit to reducing their trade-distorting domestic supports
that fall into the amber box
 U.S. agricultural subsidies listed as changing production and/or changing the
flow of trade include commodity-specific market price supports, direct
payments and input subsidies

Blue box
 Any support payments that are not subject to the amber box reduction
agreement because they are direct payments under a production limiting
program
 The blue box is an exemption from the general rule that all subsidies linked to
production must be reduced or kept within defined minimal levels. It covers
payments directly linked to acreage or animal numbers, but under
schemes which also limit production by imposing production quotas or
requiring farmers to set aside part of their land
 Opponents of the blue box want it eliminated because the payments are only
partly decoupled from production, or they want an agreement in place to
reduce the use of these subsidies. Others say the blue box is an important tool
for supporting and reforming agriculture, and for achieving certain ‘non-
trade' objectives, and argue that it should not be restricted as it distorts trade
less than other types of support

Agriculture and WTO

See: http://infochangeindia.org/trade-a-development/backgrounder/wto-
negotiations-and-indias-stand-agriculture-nama-and-services.html

See: http://www.frontline.in/world-affairs/expose-us-hypocrisy-in-wto-
talks/article7188323.ece?homepage=true
When the AoA was brought in in 1995, India didn’t have to make many
commitments:
 Under domestic support, although price distorting subsidies are
prohibited, India’s schemes of input subsidies and farm price supports
(MSP) were both under the 10% ceiling in the base year. Also, as a
developing country, these were counted in the ‘Special and
Differential Treatment’ box, which provides enough flexibility for
developing countries for their prevailing set of domestic policies
 India had no market subsidies apart from the ones in which developing
countries had already been exempt from reduction commitments during
the implementation period (i.e., the first 10 years, till 2004)
 It was only in market access that India committed to tariff-bound rates
representing a ceiling on tariffs that could potentially be levied

Thus, India did not have to alter many policies significantly in all but a few areas
on account of the AoA.

Opinion on the utility and effectiveness of the WTO as a forum for negotiating
rules on agricultural tariffs and subsidies is split. According to one view, in most
developing countries agriculture is not so much a matter of commerce as one of
livelihood. It may, therefore, not be appropriate to treat it at par with industrial
goods. Accordingly, disciplines on agriculture should not be included in trade
agreements at the WTO.

Contrary view: WTO negotiations are the only available vehicle for seeking a
reduction in developed-country subsidies, which have significantly distorted
global trade and agricultural production

Negotiations towards an Agreement on Agriculture are being undertaken on

what are called three pillars -- domestic support, market access, and export
competition

Domestic Support:

For domestic support policies, subject to reduction commitments, the total

support given in 1986-88,measured by the total Aggregate Measurement of
Support (AMS) had to be reduced by 20% in developed countries (13.3% in
developing countries). Reduction commitments refer to total levels of
support and not to individual commodities.

Special and Differential Treatment provisions are also available for

developing country members. These include purchases for and sales from food
security stocks at administered prices provided that the subsidy to producers is
included in calculation of AMS. Developing countries are permitted untargeted
subsidised food distribution to meet requirements of the urban and rural poor.
Also excluded for developing countries are investment subsidies that are
generally available to agriculture and agricultural input subsidies generally
available to low income and resource poor farmers in these countries.
Agricultural subsidies (domestic support) provided by developed countries:
 Restrict the access of developing-country exports
 Depress world food prices
 Subsidised exports by developed countries pose a threat to food and
livelihood security in developing countries by depressing domestic
market prices

The July Framework distinguishes between two broad categories of domestic

support:
 Trade-distorting support:
 Under the existing WTO regime, the EU and the US have the flexibility
to provide very high levels of trade-distorting support, and
current level of trade-distorting subsidy provided by them is less than
the ceiling under the WTO
 The US has been offering to lower the ceiling for maximum support;
however, the new ceiling it is offering is still more than the actual level
of support it provides. Thus, the offered 53% reduction in ceiling
would have resulted in only ‘paper reduction’, without any actual cut
on the ground. In fact, the US would have the space to increase trade-
distorting subsidies.
 This has been a matter of considerable disappointment for developing
countries like India and other G20 members, particularly because the
US is seeking effective tariff reduction from developing countries
in exchange for paper reduction in its subsidies

 Non-trade-distorting (‘Green Box’) support:

 Under the green box category, almost US$ 90 billion subsidies are
provided by the US, the EU and Japan
 There is evidence that green box subsidies significantly enhance
production through different economic effects. In short, green box
subsidies provided by developed countries are adversely affecting
the interests of farmers in developing countries
 While the Doha Round negotiations do not envisage any reduction
commitment or ceiling on green box subsidies, proposals have been
made by G20 countries to limit such payments to farmers with low
levels of income, landholding and production. This might indirectly
prevent big farmers and agri-business from receiving handouts under
green box
 India wants reduction of green box subsidies, as these are trade
distorting too
 For ‘Amber box’ subsidies, the cap is set at 1986-88 price levels (which
is frankly kind of ridiculous)
 (However, remember that almost every economist agrees that India’s
input subsidies are a menace, and if these were directed instead to
public investments, the returns would be far greater. Pronab Sen said
that even simply monetizing the farm subsidies and giving direct cash
transfers to farmers will mean that India can meet its WTO
commitments easily)
Thus, even if the most ambitious proposal of reducing trade-distorting
domestic support is agreed upon, it would still provide considerable
leeway to developed countries to grant billions of dollars of farm support.
Further, the absence of strict disciplines on green box could undermine gains
that may be achieved through a reduced ceiling on trade-distorting subsidies.

Market Access:

Market access issues include ‘tarrification’ (all non-tariff barriers such as

quotas, variable levies, minimum import prices, discretionary licensing, state
trading measures, voluntary restraint agreements etc. need to be abolished and
converted into an equivalent tariff); ‘Special safeguard’ provision allows the
imposition of additional duties when there are either import surges above a
particular level or particularly low import prices as compared to 1986-88 levels.

Developed countries have consistently demanded that developing countries,

including India, reduce their agricultural tariffs. However, it is widely understood
that tariff liberalisation by developing countries could have severe consequences
(such as large-scale unemployment, poverty and hunger) unless they are
accompanied by a substantial reduction in, if not removal of, developed-country
farm subsidies.

Thus, developing countries under WTO have the right to self-designate

certain products as Special Products (SPs), which are subject to flexible
tariff reduction

 Self-designation of SPs is required to be guided by indicators based on

criteria such as food security, livelihood and rural development concerns
 Some developed countries have suggested that SPs be restricted to not
more than five products; this would severely undermine the ability of
developing countries to protect the livelihood of their farmers against a
surge in cheap and subsidised imports from developed countries

India has been arguing for worldwide phasing out of the ‘tariff-quota system’,
under which the developed countries have been setting prohibitively high rates
of protection (under this system, a quota, say the first Q imports, are accorded a
low level of tariff; anything above that faces a prohibitively high level of tariff)

It is sometimes argued that, in order to address food shortages in India, the

country should not be averse to reducing agricultural tariffs during the WTO
negotiations. This argument is fallacious, as India can apply low customs duty to
facilitate food imports while continuing to keep high bound rates on agricultural
products.

Export Competition:

Includes various forms of direct and indirect export subsidies, export credits,
export insurance, food aid, etc. Hong Kong Ministerial meeting decided to
eliminate export subsidies by 2013. However, the actual impact of the
elimination of export subsidies may be rather limited, given the fact that the
amount of these subsidies -- less than $ 10 billion per year -- is significantly less
than the amount of domestic support.

India’s Stand on Agricultural Negotiations:

 Given the immense importance of agriculture in India, India’s stance at

the WTO is mainly defensive in trying to maintain its own subsidies, while
also going offensive by trying to get the developed countries to reduce
their own subsidies (focus is on defence)
 We have considerable flexibility to increase customs duties on most
agriculture products, as there is a substantial gap between the existing
bound rates and applied customs duty
 Strong pitch for according adequate tariff protection to certain products
by designating them special products. These include cereals, edible oils
and oilseeds and dairy products
 As part of G33, India has strongly supported the need for developing
countries to have a Special Safeguard Mechanism (SSM) which would
allow them to impose additional tariffs when faced with cheap
imports or when there is a surge in imports. However, developed
countries and some developing countries have sought to impose
extremely restrictive requirements for invoking SSM, which would render
this instrument ineffective
 While India’s negotiating strategy has been defensive, in general, there
are several products in which it may have an export interest. These
include cereals, meat, dairy products, some horticultural products and
sugar
 Elements of offensive strategy include asking for a cap under ‘green box’
subsidies, and rejecting any expansion of ‘blue box’ subsidies (provided
for limiting production)

Non-Agricultural Market Access:

The negotiations on industrial tariffs are mainly on two issues: how to reduce
tariffs by working out a formula for tariff reduction, and what percentage of
products will be covered by tariff bounds.

Under GATT negotiations, developing countries were not required to reduce

tariffs on a product-by-product basis. Under the Uruguay Round commitments,
they were required to undertake tariff cuts in the least onerous manner –
through average tariff reductions (low reduction on products requiring high
tariff protection and higher reduction on products not requiring special
protection).

India’s negotiating position has evolved considerably and changed significantly

from its initial approach to tariff reduction and its earlier stand on how unbound
tariff lines should be treated for purposes of tariff reduction.

From the outset, India does not appear to have supported the least onerous
approach to tariff reduction through average tariff cuts. Instead, it favoured the
relatively more onerous approach of a simple percentage cut on each product. In
April 2005, even this approach was abandoned in favour of a still more onerous
formula -- the non-linear ABI (Argentina-Brazil-India) Formula, which is a
variation of the Swiss Formula. Thus, India’s approach has evolved from seeking
a less tedious approach to tariff cuts to proposing and accepting tariff cuts based
on the Swiss Formula, which would result in significant tariff reductions.

The Doha mandate provided for the reduction or elimination of tariff and non-
tariff barriers on products of export interest to developing countries. This would
have been an issue of particular interest to India as its exports in competitive
sectors like apparel, leather and footwear, etc., face significant tariff barriers in
developed-country markets. So far no proposal has been made, either by India or
any other developing country, seeking reduction or elimination of tariffs on
products of interest to developing countries.

The main and substantial gain made by India so far in the NAMA negotiations
relates to having the flexibility to protect certain sensitive products by keeping
them outside the scope of the applicable tariff reduction formula.

As commitments on bound tariffs are almost irreversible, deep cuts in bound

tariffs would make it difficult for India to use tariff protection as a tool for
industrial policy in the future. In other words, India may not be able to protect
some sectors of its domestic industry through appropriate levels of customs
duty, even if there is a surge in imports of low-priced manufactured goods.

Given the employment potential of some of the informal sectors, including fish,
natural rubber, etc., it is important for India to seek import protection in these
areas. At the same time, India should not ignore the possibility of enhanced
exports generating additional employment in other sectors. 

Unlike many developing and developed countries, India is not a member of many
regional/free trade agreements. Thus, India’s exports become uncompetitive to
the extent of margin of preference enjoyed by its competitors in the domestic
market of preference-granting countries. This disadvantage would be addressed
after NAMA tariffs come down. 

Services

While India has defensive interests in agriculture and NAMA, in services it can
afford to be on the offensive, given the edge that it has in most areas in this
sector over other countries, both developed and developing.

India’s offensive interests in services 

India seeks more liberal commitments on the part of its trading partners for
cross-border supply of services, including the movement of ‘natural persons’
(human beings) to developed countries, or what is termed as Mode 4 for the
supply of services. Even with respect to Mode 2, which requires consumption of
services abroad, India has an offensive interest.

In sharp contrast, the interest of the EU and the US is more in Mode 3 of supply,
which requires the establishment of a commercial presence in developing
countries. Accordingly, requests for more liberal policies on foreign direct
investment in sectors like insurance have been received. These developed
countries are lukewarm to demands for a more liberal regime for the movement
of natural persons. 

India would also like to see issues like economic needs test, portability of health
insurance and other such barriers in services removed. As far as delivery of
services through commercial presence (Mode 3) is concerned, there is an
increasing trend of Indian companies acquiring assets and opening businesses in
foreign markets in sectors such as pharmaceuticals, IT, non-conventional energy,
etc. This is further evidenced by the increase in Outward Foreign Direct
Investment (OFDI) from $ 2.4 billion in 2004-05 to $ 6 billion in 2005-06. India
may, therefore, have some interest in seeking liberalisation in Mode 3, although
it may need to strike a balance with domestic sensitivities in financial services.  

India has received many pluri-lateral requests for the opening of a number of
services. However, while the demanders have high ambitions in terms of the
market access they want, they are not willing to open up their own economies to
the same degree, particularly in Mode 4. While the EU is fully committed to the
pluri-lateral process, the US continues to indicate the high importance it gives to
the bilateral request-offer. In fact, India has threatened to withdraw its offers if
better offers, which may enhance India’s services exports, are not forthcoming
from its trading partners. Mutual recognition of degrees, allowing portability of
medical insurance, reducing barriers to movement of professionals, etc., are
some of the areas of interest to India.  

An important issue relating to the delivery of services and liberalisation is

domestic regulatory reforms. Appropriate domestic regulations are necessary to
prevent market failure as well as to address issues like quality control,
accreditation and equivalence, effective registration and certification systems,
revenue sharing, etc., for protecting and informing consumers. In addition,
regulatory frameworks can also advance transparency. Any market access
commitments that India might make during the ongoing negotiations must be
preceded by an effective regulatory framework. The hiatus in the negotiations
could be utilised for putting into place appropriate regulatory regimes in
different service sectors.

Some experts are of the view that under the Uruguay Round commitments,
developed countries already have a liberal trade regime in Mode 1 (which covers
Business Processing Outsourcing or BPOs) with regard to some of the service
sectors of interest to India. Further research needs to done to assess the extent of
autonomous liberalisation undertaken by developed countries, which can be
locked in during the negotiations, and consequent gains that can accrue to India.
Further, even in the absence of additional liberalisation, India’s service exports
would continue to grow in view of its cost advantage and demography. India
could also explore the possibility of finalising mutual recognition agreements
with the main importers of services, so that differences in national regulatory
systems do not act as barriers to its exports.