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, kinda
+ve since 2019
 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/pat
ent-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 Cancún, 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.