1

INDIAN TRADE POLICIES IN THE WAKE OF THE GLOBAL FINANCIAL

AND ECONOMIC CRISIS

Garry Pursell*

*Visiting Fellow, ASARC. Contact at ggp28435@aol.com

Power point presentation at the Indian Economy and Update Conference sponsored by the Australia South Asia Research Centre, Australian National

University, Canberra Australia on Thursday, 17 Sept 2009

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Outline(1) The state of trade liberalization before the crisis :

around FY 06/07(2) Global turbulence and India’s trade since FY 07(3) Policy reactions: the exchange rate(4) Policy reactions: manufacturing (5) Policy reactions: agriculture(6) Policy reactions: the oil and gas sector(7) Policy reactions: fertilizers(8) Policy reactions: anti-dumping(9) The crisis and future policies

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(1) The state of trade liberalization before the crisis : around FY 06/07

ManufacturingNearly all QRs goneLow tariffs : on average <10%Rapidly growing exports

AgricultureAggregate implicit protection low or only mildly positive

BUT prohibitive “just in case” tariffs Continuing role of STEs (e.g. FCI & NAFED)Continuing & growing input subsidiesContinuing use of export controls and export subsidies

Services tradeRapid growth of IT & outsourcing exports in a free trade policy environment

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Indian trade policy liberalization: the main exceptionsAgricultureOil & gasFertilizers Textiles and clothingThe auto sectorAnti-dumping

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India 1965-2005: Assistance for ag & livestock sectors versus assistance for manufacturing & mining sectors

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11 crops

11 crops+f&v+milk

11 crops+f&v+milk incl inputsubsidiesManufacturing & minerals

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Fig 1India 2002/03-2006/07: Unweighted average tariffs

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2002/03 2003/04 2004/05 2005/06 2006/07

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All tariff linesAgriculture HS 01-24Non-agriculture HS 25-99

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(2) Global turbulence and India’s trade since FY 07

Exports and imports: boom and collapse Oil and gas: extreme world price instability The link to other commodies: urea The link to ag and mineral commodities

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India: total merchandise exports & imports 1996/97 to 2008/09 ($US billiion)

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1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

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India FY 1991 -2009: Net invisibles

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1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

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Net invisibles_totalNon-factor services netPrivate transfers_net

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India total merchandise exports quarterly FY 2000- 2001 to 2008-09 ($US billion)

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2025

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India: total merchandise imports quarterly 2000/01-2008/09

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India: Total merchandise exports & imports net of HS 27, 1996/97 to 2007/08

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India: HS 27 (mineral fuels) exports and imports 1996/97 to 2007/08 ($US billion)

0102030405060708090

100

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

$US

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ExportsImports

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Share of POL net imports in total non-POL exports FY 1996/97 to 2008/09

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_9 m

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Indian trade with Australia 1996/97 -2008/09

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$US

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onIndian exports to Australia

Indian imports from Australia

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World crude oil and urea prices (monthly averages) Jan 1996-June 2009

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Urea Crude oil

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(3) Policy reactions: the exchange rate

India Jan 1980-March 2009: Monthly REER indices base 2000=100 (Total trade weights: Increase = devaluation)

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India: REER index Apl 04 to June 09 (Increase=devaluation)

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1.154 6 8 10 12 2 4 6 8 10 12 2 4 6 8 10 12 2 4 6 8 10 12 2 4 6 8 10 12 2 4 6

REE

R in

dex

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/94=

100

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(4) Policy reactions: manufacturing

During the export and domestic boom years: trade liberalization facilitated. Little resistance to the FY 03-FY 08 tariff reduction program

Reemergence of protectionist/interventionist pressures during FY 09 largely pre-empted by Rupee devaluation

No serious backtracking in the 2008 budget, or in the 2009 interim & final budgets

But no further progress either: the principal exceptions to open non-interventionist trade policies in manufacturing remain viz:

Prohibitive specific tariffs protecting low value textiles and garmentsProhibitive auto tariffs …still 60%Fertilizer production… highly distortionary policies continue (see below)Anti-dumping….the joker in the pack. See below

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(5) Policy reactions: agriculture

Continuing overriding objective: domestic availability and domestic price stability

To achieve these objectives highly interventionist policies continued and became more marked during the 2007 & 2008 commodity world price boom and collapse. These have included:

Export controls on exportables (e.g. rice) to insulate domestic markets from world price increases. India’s controls in turn exacerbated world price instability and hurt some of its neighbours (in particular Bangladesh)Drastic tariff reductions on importables (e.g. palm oil) to insulate domestic markets. These reductions also exacerbated world price instabilityLarge changes in applied tariffs & the use of export controls and subsidies to stabilize domestic markets (e.g. especially sugar markets)

Continued very large and growing agricultural input subsidies, especially for fertilizers and electricity

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(6) Policy reactions: the oil and gas sector

India: Production and imports of crude oil

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India 1997/98 to 2008/09: Annual average retail petroleum product prices and crude oil import prices in constant 2007/08 Rupees

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PetrolDieselKeroseneCrude oil

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Comparison of retail gasoline prices August 2009

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India USA Europe

Rs/L

itre

Tax Price excl tax

Comparison of retail diesel prices August 2009

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India USA Europe

Rs/

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Tax Price excl tax

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-0.51-5.8-24919Net revenue-0.65-7.5-31979"Upstream Assistance"-1.45-16.7-71313Oil bonds1.5918.378373Customs & excise revenue

billion

% GDP$USRs Crore

GOI 2008/09: Net revenue from petroleum sector

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(7) Policy reactions: fertilizers

India 1982‐2009: Urea prices in constant 2007‐08 prices

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Estimated import price at farm Domestic farm price CIF price

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India FY 1982-FY 2009: Comparison of domestic urea producer prices with import prices (in constant 2007/08 $US)

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1982198319841985198619871988198919901991199219931994199519961997199819992000200120022003200420052006200720082009

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India 2001/02-2007/08: Comparison of urea import prices with domestic producer ("retention") prices and with producer prices adjusted for

natural gas feedstock subsidy (constant 2007/08 Rs/MT)

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???Gas feedstock subsidy

1.9421.495848TOTAL official subsidy

0.414.520000Fertilizer bonds

1.5417.075848Total budgetary subsidy

0.9810.848351"Decontrolled" complex fertilizers

0.222.510981Imported urea

0.333.716516Domestic urea

% of GDP$US billionRs crore

Fertilizer subsidies 2008/09

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(8) Policy reactions: anti-dumping

India: Number of Anti-Dumping notifications calendar 1992-2008

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101520253035404550

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Num

ber o

f not

ifica

tions

30Source: WTO

5418 others12USA13Taipei17Bulagaria17EU17Korea38China

No of measuresCountries affected

July 1to Dec 31 2008

measures in force

Indian AD definitive

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120TOTAL1Mexico

1Korea

1Canada

2Colombia

2Australia

3USA

3Pakistan

4Ukraine

6Indonesia

9EU

9Argentina

10Turkey

11China

16Brazil

42India

WTO: no of new AD initiations July 1-Dec 31 09

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(9) The crisis and future policies

Manufacturing…remains open & serious backtracking averted, but needed reforms delayed: especially T&C, autos, & fertilizer sectors. But it’s encouraging that on the whole open policies have continued in petrochemicals (caveat…anti-dumping!!)

Ag…serious long term set back for needed trade lib, including on the export side Petroleum and natural gas: If world crude prices stay at or above $70/barrel &

unless there are large new discoveries of crude &/or natural gas, something will have to give. The 2008/09 subsidies and even the prospective 2009/10 subsidies are just too big.

Fertilizer: a long term well recognized problem. Huge distortions and huge subsidies. As with POL, if world crude and therefore world nitrogenous fertilizer prices stay high something will have to give. In this case it has to involve real increases in the farm price & major reforms to the domestic industry

Anti-dumping: the joker in the pack. How protective?…nobody really knows. Serious attention and serious study is badly needed

Excellent exchange rate management by the RBI: has helped fend off counter productive QRs & tariff increases. Flexible ex rate management is now politically acceptable …a revolution compared to attitudes 20 years ago.