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G. Srinivasan

AS A sovereign government, India has enough leeway in framing its economic policies without being directed or dictated to by international agencies such as the IMF, which used to provide policy-based lending and which, in some measure, contributed to the economic reforms of the 1990s. However, being a member of the WTO, its economic policies and programmes do invite comment from Geneva.

If Washington's twin institutions — the IMF and the World Bank — have their own Article IV Agreement talks and country-specific reports to make on India every year, though India has stopped taking jumbo loans from them, the WTO has also been holding trade policy reviews (TPRs) of its members since 1989. So far, it has held two TPRs on India, in 1993-94 and 1998; the latest one, held on June 19-21, 2002, was the third quadrennial review.

Though the appellation trade policy review seems cryptic, the WTO Secretariat has prepared a full-fledged report, running to 161 pages, on India, which not only traces trade issues but also deals extensively with other macro-economic issues and overall management of the economy. Its members have hailed India's track record of maintaining its growth rate at an annual average of 6 per cent over the past decade and its success in poverty reduction.

A notable feature of India's trade composition is the continuing decline in agriculture's share in merchandise exports from 20 per cent in 1997-98 to 14 per cent in 2000-01. The share of manufactures rose from 74 per cent to 76 per cent during this period; textiles and clothing continue to form the largest share of manufacturers, at 27 per cent (27.5 per cent in 1997-98). India imports mainly manufactures, including machinery and transport equipment, and other semi-manufactures; the share of fuels, however, has risen significantly.

On India's foreign direct investment (FDI) success, the WTO report says that the liberalisation policies of the early 1990s initially led to a surge in FDI inflow. Thus, as the last TPR on India noted, inflows increased from an insignificant amount in 1990-91 to some $2.8 billion (just under one per cent of GDP) in 1996-97. Since peaking in 1997-98 at $3.6 billion, however, FDI inflows have been falling (to some $2.3 billion in 2000-01, with an additional $2.8 billion entering as portfolio investment), despite liberalisation of foreign investment, including allowing FDI in a larger number of sectors and raising foreign equity limits in several areas.

The WTO also notes "an improvement" in the discrepancy between the FDI approved and the actual inflows. At the time of the last review of India, it was estimated that some 22 per cent of approved FDI was actually invested; more recent data show a gradual improvement in this share, with some 52 per cent of approved FDI entering the country. Evidence suggests that domestic firms in India tend to export more when foreign ownership is 51 per cent or more, as this level of ownership enables foreign investors to exercise operational and strategic control over the firm, ensuring that intellectual and other property rights devolve unambiguously to the foreign shareholder.

In this context, the WTO states that further liberalisation might enhance FDI flows and contribute to export growth. According to the WTO, FDI restrictions remain in place for agriculture, including plantations, railways, retail trading, legal services and real estate, except development of integrated townships and settlements.

The WTO notes that the fact that FDI has not increased but, indeed, declined slightly since the mid-1990s despite further liberalisation of foreign investment policies might indicate the need for further reform. It has also been suggested that India has failed to attract as much FDI in export-oriented industries as many other developing countries. The reasons for this, other than the remaining FDI restrictions, include the anti-export bias of foreign trade policies, the unusual rigidity of labour laws, the policy of reservation for the small-scale sector, the weakness of infrastructure (especially power, ports, roads and railways) and slow and cumbersome administrative procedures.

No doubt, since the early 1990s, India has moved gradually from a strategy of industrialisation through import-substitution and public sector production to a more open, market-oriented trade and investment regime. Nevertheless, policies continue to shield domestic producers from foreign competition, affecting the efficient allocation of resources. Besides, having made selling in the large domestic market more lucrative than exporting, such policies have imparted an anti-export bias to India's trade regime, hampering the economy's ability to generate growth through exports. The use of a wide array of trade policy measures to protect domestic producers from foreign competition, regulate domestic production and at the same time promote exports renders the import and export regime "unduly complex", a point that authorities managing the macro-economy are well-advised to heed and set right.

On tariffs, it said the Indian Customs tariffs are a major source of revenue for the Centre, accounting for almost 30 per cent of net tax revenue (22 per cent of gross tax revenue) in 2001-02, compared with 46 per cent net tax revenue (33 per cent of gross tax revenue) in 1996-97. The applied MFN tariff continues to provide a high level of protection for Indian industry, though average rates have declined from 35 per cent to 32.5 per cent since the last Review of India; the average rate is to decline further to 29 per cent after this year's budgetary proposals are approved by Parliament.

The WTO maintains that with its numerous exemptions, the Indian tariff structure is also complex and, consequently, opaque, leading to administrative problems. There are now some 105 end-use exemptions, and 415 entries are proposed for 2002-03. The use of such exemptions not only increases the complexity of the tariff, it also reduces transparency and hampers efficiency-enhancing tools such as computerisation of customs. It has been suggested that removing or reducing the exemptions and introducing a lower and uniform duty structure would be more simple and transparent, with clear implications for governance.

On bound tariffs, the WTO Secretariat says that since its previous Review, India has submitted rectification and modification of its schedule under Article XXVIII:1 of the General Agreement on Trade and Tariffs (GATT), 1994. As a result, the number of lines bound has increased from 67 per cent to 72.4 per cent in 2001. Bindings have been undertaken for previously unbound products, such as textiles and clothing, and some commitments renegotiated on previously bound items, relating mainly to agriculture. India bound 100 per cent of all agricultural lines (under the WTO definition of agriculture) and 68.2 per cent of lines for non-agricultural products. Bindings were not made in several chapters, including fish and crustacean products, in agriculture; leather products (footwear and headgear) and base metals, in manufacturing. In general, India bound its tariff at ceiling rates ranging from 40 per cent for non-agricultural products to 100 per cent for most agricultural products, and 300 per cent for edible oil.

The report says that as a result of India's commitments, the final average bound tariff is expected to be 50.6 per cent in 2005, with an average of 115.7 per cent in agriculture and 37.7 per cent in non-agricultural products. These averages do not include lines where different parts of the harmonised system six-digit line were bound at different rates. Most of these excluded tariff lines are in textiles and clothing. The average bound tariff is considerably higher than the current MFN average tariff of 32.3 per cent, especially in agriculture, where the current average applied rate is 41.7 per cent.

This difference, the WTO says, lends uncertainty to economic agents in India as it provides the Government considerable power to raise applied MFN tariffs within these bindings; however, according to the WTO, in the period under review, there have not been many instances (save agriculture) where the applied tariffs have been increased.

It has been made clear by the WTO that India needs to hone its trade policy to further its vital trading interests, especially if it intends to capture at least one per cent share of global trade in the medium term. It is up to the Vajpayee Government to devise strategies to realise this remit.

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