India And The World Trade Organisation Economics Essay

India is a founder member of the General Agreement on Tariffs and Trade (GATT) 1947 and its successor, the World Trade Organization (WTO), which came into effect on January 1st, 1995 after the conclusion of the Uruguay Round (UR) of Multilateral Trade Negotiations. India’s participation in an increasingly rule based system in the governance of international trade is to ensure more stability and predictability, which ultimately would lead to more trade and prosperity for itself and the 134 other nations which now comprise the WTO. India also automatically avails of MFN and national treatment for its exports to all WTO Members.

The Economic Environment: A Background

    Since its previous Review in 1993, India has continued liberalizing its economy, albeit at a somewhat slower pace. [] Economic reforms initiated in 1991 have produced strongly positive results, most notably annual real growth rates averaging 7 per cent between 1993/94 and 1996/97, led by strong industrial recovery. Over the same period, merchandise exports grew at an annual rate of some 20 per cent in current US dollar terms. In 1996/97, however, some economic slowdown occurred and export growth fell to 8 per cent, partly as a result of infrastructural bottlenecks and indicative of the need for continued structural reform.

Further structural reform needs the support of continued macroeconomic stability. An important issue is the reduction of the public sector deficit, estimated at [] 8.5 per cent of GDP in 1996/97. The Central Government deficit fell to 5 per cent in 1996/97, but adjustments to reduce State deficits have not been as forthcoming and shoring up parts of the public sector, prior to planned reform and disinvestment, has been expensive. With the cost of supporting important sectors such as agriculture and related transfer programmes, it is unclear how far the public sector deficit may crowd out investment. Overall, subsidies remain a drain on Government revenue and lead to a misallocation of resources.

Objectives of Trade Policy: An Indian perspective

    In 1991, India initiated a wide-ranging programme of trade liberalization and economic deregulation, with the objective of integrating the Indian economy more closely with the world economy. The principal objective of India’s trade policy defined in the Export-Import Policy for 1997 to 2002 are:

To accelerate the country’s transition to a globally oriented, vibrant economy, with a view to deriving maximum benefits from expanding global market opportunities;

to stimulate sustained economic growth by providing access to essential raw materials, intermediates, components, consumer goods and capital goods required for augmenting production;

to enhance the technological strength and efficiency of Indian agriculture, industry and services thereby improving their competitive strength, while generating new employment opportunities, and to encourage the attainment of internationally accepted standards of quality;

    (iv) to provide consumers with good quality products at reasonable prices.

    Moreover, the Eight Five Year Plan (1992-97), called for the movement of India’s trade policy regime “towards greater openness and to reap the full benefits of international trade”. This has been sought to be achieved through (i) a reduction of the “negative” list of imports and exports, (ii) a gradual reduction in the level of tariff rates, and (iii) other trade policy reforms.

Significant Trade Policy Reforms

With increased liberalization and globalization of trade, India’s focus is on areas of her strength and advantage to meet global competition, as also areas having trade potential.

Several stages of reforms have lifted all licensing restrictions on imports of capital goods, liberalized partially imports of consumer goods and reduced maximum tariffs from over 300% to 45% (including a surcharge of 5%). Collection rates, which are a better indicator of protection than declared rates, came down from the level of 47% in 1990-91 to 29% in 1995-96.

1.Exchange Market Reforms

The Eight Plan had envisaged exchange rate reforms as part of the general trade policy reforms, and in March 1993 the exchange rates were unified and transactions on the trade account were freed from foreign exchange control.

2.Reforms in the Foreign Investment Regime

Since export growth depends on the existence of a strong production base in thrust sectors, which could expand to meet further growth needs, the stimulus in such thrust areas has been provided by streamlining the procedures for foreign investment. The Foreign Investment Promotion Board (FIPB) has been revamped to make the rules and regulations pertaining to foreign investment more transparent. The first-ever guidelines for approving FDI by the FIPB have been announced to expedite approval of foreign investment in areas not covered under automatic approval. Priority areas for allowing 100% foreign equity have been spelt out. An expanded list of 46 industries eligible for automatic approval up to 51% foreign equity, three industries relating to mining activity eligible for automatic approval up to 50% foreign equity and another set of nine industries eligible for 74% foreign equity have been announced by the Government. The limit on holdings by individual foreign institutional investors (FIIs) in a company has been raised from 5% to 10% of the company’s shares, while the aggregate limit has been increased from 24% to 30%. FIIs have also recently been allowed to invest in non-listed companies. It is no longer necessary for automatic approvals by the Reserve Bank of India (RBI) that the amount of foreign equity should cover the foreign exchange requirements for import of capital goods needed for the project. To impart flexibility in sourcing of technology imports, technology transfer has been delinked from equity investment.

3.Reforms in the Infrastructure Sector

Removing infrastructural bottlenecks has been another key component of the trade reforms package. In the telecommunications sector, significant progress has been made in involving the private sector in value-added services, such as cellular, mobile and paging services. A Telecom Regulatory Authority was established in March 1997, which will separate the regulatory functions from policy formulation and operational functions. New guidelines allow private participation in ports, investments being on B.O.T. basis, and already approval for a private container terminal valued at Rs 70 billion has been awarded. Similarly, fresh guidelines for private investment in the highway sector have been announced, procedures have been simplified and environmental clearance and equity participation made easier. Approval has been given for a rail-based mass rapid transit system (MRTS) in Delhi, and the cities of Bangalore, Hyderabad, Mumbai and Calcutta have proposed major improvements in their public transport system through the introduction/augmentation of rail-based transit systems. A new policy for private investment in civil aviation has been announced, and this includes allowing 40% equity in domestic airlines.

4.Domestic Tax Reforms

Several new measures for streamlining and rationalizing the tax structure have been initiated. The MODVAT scheme has been extended to the textile sector by rationalization of rate structure to modernize and revive the textile industry. The direct tax regime has been strengthened by measures like moving towards a “presumptive” tax system, greater reliance on “pay as you earn” and self assessment schemes, restricting “scrutiny assessment” to a limited number of cases, broadening of the tax base through the “four economic criteria” scheme and the introduction of the Minimum Alternate Tax (MAT) for the corporate sector (with the exception of companies engaged in power and infrastructure sectors) and measures such as progressive computerization. The rates of corporate tax have also been progressively reduced to 35% for assessment year 1998-99 and the corporate surcharge has been eliminated.

India’s role in the WTO

India is a founding member of the GATT (1947), it actively participated in the Uruguay Round Negotiations, and is a founding member of the WTO.

India strongly favours the multilateral approach to trade relations and grants MFN treatment to all its trading partners, including some who are not members of WTO. India participated actively in the last Ministerial Conference held in Singapore. Within the WTO, India is committed to ensuring that the sectors in which the developing countries enjoy a comparative advantage are adequately opened up to international trade, and also that the Special and Differential Treatment Provisions for developing countries under the different WTO Agreements are translated into specific enforceable dispensations, in order that developing countries are facilitated in their developmental efforts. India feels that the multilateral system would itself gain if it adequately reflected these concerns of the developing countries, so as to create the necessary impetus to enable developing country members to catch up with their developed country counterparts.

IS WTO DOING THE JOB ASSIGNED?

The WTO is at its very basic level criticized to be biased towards the richer countries. The other main criticism of the WTO’s philosophy comes from environmental circles. It is felt that the free trade paradigm is detrimental to the environmental protection and preservation. In fact some environmentalists would argue that the idea of the ultimate economic good being GDP growth which is implicit in the WTO’s philosophy is fundamentally misguided in that it neglects and fails to take into account the negative environmental affects of pursuit of this economic goal .

Criticism of WTO Practices & Structure-

First that the structure and personnel of the WTO is undemocratic in various ways that lead to developed richer countries winning out over less developed poorer countries.

While not actively biased or undemocratic, the WTO facilitates and permits powerful groups to dominate the others (these groups being either the richer developed countries or e.g. TNCs – transnational corporations). 

The other main criticism of WTO practices would be that it does not implement its philosophy evenhandedly, in particular free trade arguments are used to open up the markets of third world countries while the developed world retains all kind of protectionist measures. In this view the WTO has just been a method of institutionalizing the accumulated advantage of developed countries.

The enforcement of Intellectual Property Rights (IPR) have increased the cost of technology transfers to developing countries, which, in an increasingly knowledge-intensive global economy, reduces their ability to take advantage of opportunities that globalization offers.

At the same time, the provisions on special and differential treatment in favour of developing countries have not yet been fully implemented and operationalised, and labour markets have not been opened to the same extent as capital markets. Moreover, tariffs remain high on goods with the greatest potential for the poorest countries, as in textiles and agricultural commodities.

The anti-industrialisation thrust of the GATT-WTO accord is made even more manifest in the agreement on Trade-Related aspects of Investment Measures (TRIMs) and the agreement on Trade-Related aspects of Intellectual Property Rights (TRIPs).

The WTO is probably the most non-transparent of international organisations. Most, if not all, its key decisions are worked out in informal meetings. In many cases, only a few countries are invited to these meetings. Where these meetings took place, when, and who attended, as well as the positions taken by the various countries, are not made known. When these small informal groups work out decisions among themselves, they these are taken before the formal meetings, and made into decisions.

Most times, the “major countries” (the largest developed countries) get the decisions they want. A few big countries are also able to veto the issues or decisions they do not want even if the vast majority of countries agree to them. In fact , often, when the US and the EC do not want an issue to be raised, it does not even come before the formal sessions.

Lastly, the vast majority of developing countries have very little real say in the WTO system. Many lack the financial and human resources to adequately participate, even in the formal meetings, let alone the many informal meetings to which they are not invited. Sometimes, pressures may also be exerted on selected developing countries to get them to go along with decisions or positions , which they may have originally opposed. Especially vulnerable are the developing countries that are indebted, and rely on bilateral aid or IMF and World Bank loans.

DIAGNOSING THE PROBLEM:

3Until today, the WTO has produced a raft of unfair trade rules, which plague the developing of the majority of its members who are developing countries. Why such a result for an organisation, which has the mandate among its core objectives to help provide developing countries with trade opportunities commensurate with their development needs? For two reasons which are closely interlinked: shortsightedness of trade policies and secret diplomacy.

Short – sightedness of trade policies:

Trade liberalisation has ignored issues like market failure, imperfect competition or public goods, which warrant state intervention, ignoring infant industry arguments (build comparative advantage) or food security. No country has developed through rapid liberalisation. WTO has followed the policy of ‘one size fits all’, ignoring the diversity of country’s situation in terms of development, natural resource and political constraints. This shortsightedness is the root cause of the making of really unfair rules that in the end are damaging for everybody. It also completely ignores the links between growth, reduced inequalities and international security. Sustainability and more equal shares of world trade would benefit everybody as sustainable growth would bring shared prosperity for all.

Secret Diplomacy:

The WTO is an organisation that has been bestowed with enormous power. As the world is becoming more globalized, its decision and actions have far-reaching effects on the lives of people. One of the key responsibilities of such an institution is to produce results that are fair and decisions that are reached in a transparent and inclusive way. Nothing could be further away from truth.

4REFORMING WTO: The Way Forward

Following are the recommendations that would improve the functioning of WTO:

Respect views of all members, even the smallest ones. This also means that political and economic pressure should not be applied to force a country to agree to decisions completely adverse to its fundamental interests.

Adopt a realistic agenda and work schedule that is fair for smaller delegations.

In preparation of and at ministerial conferences, clear procedures and agenda agreed in advance, with elected chairs with a clearer mandate and clearer transparent drafting of negotiation texts including a fair reflection of the diversity of views.

Rebalancing of governance system

5Improved technical assistance to developing countries as well as other measures to facilitate their full participation (funding/access to independent advice such as UNCTAD but also money to hire experts).

Improved external transparency at national and international level is needed to improve the quality and legitimacy of WTO rules.

The WTO must break away from isolation and move towards reciprocal multilateral concessions based on consensus and ways to contribute actively in arenas where actual liberalization is taking place

Promote procedures that make pluri-lateral agreements less exclusive and subject to an effective dispute settlement process that protects the weakest

Implementing more flexible, multi- dimensional and opportunistic global trade reforms which require more empowered WTO Secretariat and more engaged membership including more active and ongoing participation of ministers

Establishing effective rules to govern regional trade agreements should be WTO’s long term objective which it should realize by constructive regional synergies.