Opening the floodgates

Print edition : April 14, 2001

It is in the midst of growing evidence of an imminent global slowdown that India has crossed a crucial threshold in its engagement with the global economy in the form of the Exim Policy for 2001-2002 that promises a sea change in the fortunes of several crucial sectors of the nation's economy.

ON March 31, India crossed a crucial threshold in its decade-long journey of integration into the global economy. On that day the Export and Import Policy for the year 2001-02 was notified, or more accurately, a series of amendments were introduced to the five-year Export and Import policy announced in 1997. As Union Commerce Minister, Murasoli Maran had the privilege of making the announcement at a crowded press conference in Delhi's Vigyan Bhavan. The expectant gathering knew that the occasion itself was of decisive importance not for the content of the announcements that the Minister would make, but for all that would follow.

Commerce Minister Murasoli Maran releasing the Exim Policy for 2001-2002.-KAMAL NARANG

The main features of the Exim Policy were known to the public well in advance of the actual announcement. Under conditions that India acceded to in 1994, at the moment that it signed the agreement creating the World Trade Organisation (WTO), quantitative restrictions (QRs) on imports of any commodity were strictly disallowed. Nations, or "contracting parties" to the WTO that maintained these forms of import controls, were obliged to switch over to the more "market friendly" device of adjusting tariffs within a reasonable period of time.

With its immense dependence on agriculture and small industries to sustain mass employment, India was among the nations that had been seeking the maximum recourse to protection through QRs. Together with the thorny issue of amending its patent laws, the dismantling of QRs became the focus of public concern and decisive proof in many observers' estimation that the WTO regime was hopelessly skewed in its application against the interests of the developing countries.

All the misgivings aside, there was no escape, though, from the commitments made in 1994, as a gesture of faith that a rule-based multilateral trading system was better than none at all. However, every turn in the debate proved contentious. The Bharatiya Janata Party suffered a virtual revolt within its own ranks over the issue of amending the Indian Patents Act in order to ensure conformity with the WTO regime. On QRs, there proved to be a long and tortuous process of bargaining in WTO forums before an acceptable modus vivendi between India and its trading partners could be reached.

Six separate complaints against India were lodged with the WTO Dispute Settlement Body (DSB) in 1997, all pertaining to the continued application of QRs on imports. Following a direction from the DSB, India simultaneously negotiated a six-year time-table for the removal of QRs with five of the complainants - the European Union, Canada, Australia, New Zealand and Switzerland. There remained only one recalcitrant, the United States, which unfortunately had sufficient leverage to ordain a new schedule that was more to its convenience.

The negotiations that ensued with the U.S. were conducted between an Additional Secretary in the Ministry of Commerce and his counterpart in the U.S. In December 1999, the U.S. negotiator proposed a certain schedule for the removal of QRs and suggested that the Indian acknowledgment of this official communication be treated as a conclusive agreement. The following January, a schedule to remove all QRs by April 1, 2001 was formally notified to the WTO by India and the U.S.

Half the commodities (or tariff lines) on which QRs were applicable till March 2000 were decontrolled over the course of 2000-01. The remaining commodities, numbering 715, that the highly disaggregated classification scheme adopted in international trade statistics, were unfettered from all restraints on April 1.

Even prior to that critical date, many of the commodities that were being decontrolled had started trickling into grocery shops in the more affluent metropolitan neighbourhoods in the country. Marine and dairy products, confectionery and fruits from hitherto exotic locations were conspicuous. This has been certified by some of the more avid champions of the global economy as an unequivocal triumph for the Indian consumer. Those with a more realistic understanding have pointed out that the consumer would have little to spend if production processes were to be disrupted, since without a viable level of domestic output, incomes would collapse and so too would consumption.

The official response to these apprehensions has been to promise a constant monitoring mechanism to assess when imports could threaten the viability of domestic production. This so-called "war room", in the Commerce Minister's picturesque phrase, would keep a resolute vigil over import transactions in close to 300 tariff lines. Included in the watch-list are the major foodgrains, most domestically produced fruits, dairy and marine products, and meat and all its derivative items of consumption. Articles of special significance for the small-scale sector, such as toys, pencils, pens and other stationery items, also feature on the priority list. And in an effort at even-handedness, even imports of automobile assemblies, parts and components - which are of concern to Indian big business - also will be monitored for any possible surge. Statistics pertaining to all these products would be collated on a monthly basis and at the least suggestion of distress among domestic producers, appropriate safeguards would be instituted.

The challenge for the Indian government here would be to work out the kind of safeguards that could successfully negotiate the welter of rules and guidelines embodied in the WTO. QRs, for instance, may be introduced in certain specified circumstances by WTO member-states. But if one were to cut through the multiple provisions of the WTO agreement, then the grounds for doing so amount substantively to only one - a significant balance of payments crisis that threatens to drain a country's foreign exchange reserves. And even in this situation, QRs may be applied for only so long as it takes to rebuild exchange reserves.

The alternative would be for India to utilise the tariff option to restore the price advantage for domestic producers. For the bulk of the commodities that have been freed for import over the last two Exim policies, tariffs have been set at levels of up to 70 per cent. These are well within the binding commitments (or "bound tariffs") that have been given by India to the WTO - which represent the customs duty rates beyond which recourse is not permitted. As a general principle, India has set bound tariffs at 100 per cent for primary agricultural commodities, at 150 per cent on processed items and at 300 per cent for edible oils.

On the face of things, India enjoys a high degree of flexibility in invoking tariff protection for sectors that suffer serious injury from unrestricted imports. But here again, the adjudicatory authority of the WTO could be invoked, since "trade distortion" is a widely defined term that could be applied even to escalating tariffs. The tough-minded trade negotiators at the WTO headquarters in Geneva have recently indicated that they will vigorously challenge any country that seeks to replace QRs with high tariff walls as an equivalent method of protection.

Another safeguard that has been built into the Exim policy is the reservation of certain tariff lines for import through "state trading enterprises". This list is limited to the most sensitive commodities, such as rice, wheat, maize, coconut and coconut oil, urea and petroleum products. The Commerce Ministry is convinced that this mode of conferring an import monopoly on certain enterprises is well within WTO rules. But a closer reading of the protocols appended to the 1994 agreement would indicate that even here there is a substantial power of review available to the trade body.

THERE is, clearly, another phase of contention foretold in the WTO councils by the multiple safeguards that India has sought to impose against a destabilising import surge. The import of used cars is another area where friction could be encountered. Citing safety and environmental considerations, the Exim policy restricts the import of used cars to those that are not more than three years old and also stipulates a single point of entry through Mumbai. This is clearly an effort to neutralise the freight advantage that the Japanese auto industry - the biggest player in the trade in reconditioned cars - may enjoy. Another concern perhaps is the need to prevent any possibility of misuse of India's special trading arrangements with Nepal. But in unsettled times for the world economy, it is not beyond the realms of possibility that Japan, for one, could sense a deliberate "trade distorting" intent in these stipulations and take the matter to the DSB.

The agriculture sector, however, remains the core of the problem. Coincidentally, India's Exim policy announcement comes just when the WTO seems to have moved into a decisive phase in negotiations over further liberalisation of agricultural trade. Between January and March, a number of proposals were received from interested member-states on the measures that would be appropriate to further reforms in agricultural trade. And quite in contrast to the confident tone of official pronouncements in the domestic forum, India's submission points to certain serious threats faced by the developing countries in general.

Quoting a study by the Food and Agriculture Organisation, India's submission to the WTO notes, for instance, that the six-year record of liberalisation in agriculture has been asymmetric in its impact: "While trade liberalisation had led to an almost instantaneous surge in food imports, (developing) countries were not able to raise their exports." This, in turn, has led to "small producers" being "marginalised" and "added to unemployment and poverty".

As a remedy, India has proposed that developed countries should adopt "tariff bindings (that effect a) substantial reduction in all tariffs". Concurrently, developing countries should be allowed to "maintain appropriate levels of tariff bindings, keeping in mind their developmental needs and the high distortions prevalent in the international markets". And in addition, a special safeguards mechanism is urged that would allow for the "imposition of quantitative restrictions under specified circumstances".

At a grocery shop in New Delhi, checking out new arrivals in the wake of the removal of quantitative restrictions on imports on a range of products.-AMIT BHARGAVA/AP

Considering that the Commerce Ministry is claiming that all these powers are already available to it under WTO rules, it should seem rather curious that it is making a case for precisely the same rights in the WTO forum. The implication is clear: in the thicket of rules that the global trade watchdog has been overseeing, there are several areas of ambiguity. But these are still subject to adjudication and failing a further comprehensive agreement that specifically enshrines them, the outlook could be for further disputation and acrimony.

ANOTHER proposal that India has placed before the WTO goes right to the core of the developed countries' policies on agriculture. Under the 1994 agreement, income support programmes for the farm sector are exempted from any reduction commitments, since they are deemed to have minimal distorting effects on trade. The argument is devoid of any convincing rationale other than that of the developed countries' convenience. Since the late-1980s, both the U.S. and the E.U. have favoured the mechanism of directly funding farm incomes rather than propping up prices through assured purchase commitments. Under the system of deficiency payments that the U.S. and the E.U. practise, farmers are compensated directly by governments if the prices of their produce fall below a certain level. Since this means effectively that the farmer is able to sustain situations of glut in the agricultural market, there seems little basis to the argument that income support is less trade distorting than price support.

India has now proposed that these programmes also be recognised as subsidies that distort trade patterns to the disadvantage of developing countries. There is a case, then, for their inclusion in the discipline of subsidies reduction that WTO member-states are enjoined to accept.

Apart from these exemptions, the developed countries also benefit from relatively less stringent requirements on the reduction of export subsidies. While countries that had no export subsidies in operation at the conclusion of the WTO agreement are prohibited from introducing them, heavily subsidising exporters like the E.U. and the U.S. were obliged to reduce export subsidies by the relatively modest order of 36 per cent over six years. India's submission now claims that even within this less demanding regime, the developed countries have been reallocating subsidies between different commodities, rolling them over from one year to another, and resorting to a variety of devices to neutralise the competitive advantage of the developing countries in agriculture.

According to recent estimates, the total support rendered to the agriculture sector by the countries comprising the Organisation of Economic Co-operation and Development (OECD) increased from $308 billion in the reference period (1986-88) to $347 billion in the most recent three-year period for which data are available (1997-99). This means effectively that the global market continues to be awash in highly subsidised agricultural products, which could penetrate developing country markets - with potentially destabilising consequences.

DESPITE the formidable odds he faces in the international market, Murasoli Maran struck an upbeat tone in presenting his Exim policy. His emphasis was not so much on the defensive measures needed to adopt to cope with the new situation, but on the many opportunities that India could capitalise on. There are proposals, for instance, to formulate a comprehensive policy for agricultural exports and to strengthen the scheme of "special economic zones" that was introduced last year in the interests of boosting exports. The intention is to overcome decades of "export pessimism" and reach a target of 1 per cent of world trade by 2004. In absolute terms, this means hitting an export level of $75 billion in three years, at an annual growth rate of 18 per cent. This, says Maran, is an eminently achievable goal.

Global multilateral bodies, seeking to put a brave face on the increasing evidence of recessionary trends, have been forecasting a dramatic upturn this year. This refrain, however, sounds increasingly at odds with reality as each week brings a reversal of the patchy evidence of an economic rebound registered the previous week. India's own exports for the last year could register a growth rate of 20 per cent. But for the last month that provisional data is available for, that is, February 2001, the growth rate was just over 10 per cent. Whether this is on account of the global slowdown or other contingent factors, remains to be analysed. But just when India seeks to cross a critical threshold in its engagement with the global economy, it seems that the environment may just be turning rather too inclement for its comfort.

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