WTO and Issues Concerning India

Background

• India one of members of General Agreement on Tariffs and Trade (GATT) since 1948.

• After Marrakesh Agreement, India joined WTO since inception in 1995.

• Aim to participate in WTO rule based system with greater stability, transparency and predictability in governance of international trade.

Background(continued)

• Developing countries like India availed of greater trade opportunities and also challenged certain policies of developed countries (DCs)

• Developmental issues increasingly focused along with trade issues

• S&D treatment for developing and LDCs incorporated

Areas of concern

• In spite of special provisions for developing countries, certain imbalances and inequities experienced.

• A number of DCs not fulfilled some obligations for trade liberalisation while developing countries asked to reduce import duties and provide greater market access.

Areas of concern(continued)

• India has reduced tariffs to bring them to bound levels. Even lower for a large number of commodities as part of the reforms process. Now, India committed to reduce tariffs to bring in line with South East Asian countries by 2007. We are not in a position to reduce tariffs substantially to the extent suggested by developed countries since

• Customs duties important source of revenue for developing countries like India.

• The industrial sector faces several constraints-some protection warranted for specific industries.

Areas of concern(continued)

• Non-agricultural tariffs gradually reduced but agricultural tariffs require greater caution due to following reasons.

• India and other developing countries have argued that agriculture is way of life and employs large proportion of workforce while contributing significantly to GDP.

• Exposure to volatile international market would affect not only domestic prices but also incomes of poor.

Areas of concern(continued)

• Some DCs not fully implemented the required reduction of domestic support to farmers, export subsidies and tariffs.

• WTO permits non-distortionary subsidies. Experience shows these can be trade distorting and DCs have steadily increased such subsidies leading to excessive global production.

• Disadvantage to developing countries since such subsidies unaffordable. Get less competitive in world market.

Areas of concern(continued)

• Technical barriers to trade and stringent restrictions on grounds of SPS regulations to be relaxed to prevent protectionist measures by DCs on this plea.

• Grant of patents on non-original innovations, particularly linked to traditional medicines issue of concern.

Areas of concern(continued)

• Mechanism proposed for disclosure of source of origin of biological material used along with consent of country of origin. Dissemination of knowledge and also patent rights for seed diversity important for developing countries.

• Under agreement on Trade in Services, developing countries have asked for relaxing restrictions on movement of natural persons.

Areas of concern(continued)

• India has advantage in movement of highly skilled and experienced professionals.

• Developing countries had wanted unbundling of Singapore issues comprising MAI, competition policy, trade facilitation and transparency in Government procurement.

• Some issues of concern for developing countries incorporated in Doha Declaration.

Status of Negotiations

• Continued negotiations at WTO for remaining issues and implementation of Doha Declaration.

• These issues brought forth by developing countries at Cancun but no consensus arrived at. Divergence of interests. No agreement on formula for tariff reductions for agricultural commodities as well as on Singapore issues. Proposed relaxations under S&D found inadequate by developing countries.

Status of Negotiations(continued)

• Under Singapore issues, definition of investment and scope for investors’ obligations could not be made. Extent of competition policy and trade facilitation not arrived at.

• Formula for tariff reductions in non-agricultural products that would take care of tariff peaks, high tariffs and tariff escalations not agreed.

• Group could not arrive at consensus towards finalising a declaration.

Status of Negotiations(continued)

• There is continued attempt to work out a mutually acceptable solution and negotiations.

• A ‘blended’ formula for tariff reductions in agriculture proposed by US and EC whereby a proportion of tariff lines would be subject to Uruguay Round formula tariff reductions and a proportion to be made duty free. However, G-20 not found this acceptable. Felt it would prevent proper delivery of Doha mandate for market access. Continued negotiations are on.

Tariff Structure in India

• Given importance attached to reduction of tariffs, we look at tariff structure in India and alternative strategy for tariff negotiations.

• Tariff structure in India highly complex in early 1990s. With initiation of reforms, substantial reduction in customs duty rates. Simple average duty rates declined from 128% in 1991-92 to 22.4% as per interim budget for the year 2004-05. Weighted average duty rates declined from 72.5% to 18.2% during this period, as in table.

1991-92 2004-05Simple Avg. Agriculture 108.0 32.5All Coms. 128.0 22.4Wtd Avg. *Agriculture 47.0 27.5All Coms. 72.5 18.2CVAll Coms. 32.0 53.6Tot duty includes basic, surcharge, SAD & excludes CVD.

* For 1991-92 imports of 1992-93 are taken as weights, while

for 2004-05 of 2002-03

Average Import Duty Rates in India

Tariff Structure in India(continued)

• While average duty rates have declined, still large number of tariff rates prevalent ranging from zero per cent to over 150% during 2004-05.

• Co-efficient of variation (CV) around average duty rates quite high.

Tariff Structure in India(continued)

• Commodity Groups in range 100% or higher in 2004-05 include coffee, tea, alcoholic beverages, essence and perfumes, sugar items, grapes and juices, motor cars, and motor cycles.

• In the 50-100% range, commodities are edible oils, wheat, rice and some other agricultural goods.

Tariff Structure and Imports

• While undertaking tariff reductions, important to look at trade implications of plausible scenarios

• Simple econometric exercise undertaken to look at relation of imports and tariff structure at two digit HS level. Period taken is 1991-92 to 2001-02.

• Several functional forms attempted.

Tariff Structure and Imports(continued)

• Relative share of imports to GDP as functional tariffs seen as function of tariffs in linear and as a double log function.

(Mi /GDP) = a + *(Ti)

(Mi /GDP) = a * (Ti)

where Mi is imports in US $ million and Ti is tariff rate in the ith commodity groups respectively seen at the 2 digit level.

• Latter function yielded better fit and hence chosen for further analysis. co-efficient gave elasticity of imports to GDP ratio.

Tariff Structure and Imports(continued)

• Projections made accordingly, given growth rates of GDP and actual tariff rates.

• Results not very robust although R2 and t values not insignificant for most commodity groups. Import projections compared to actual imports for the year information available i.e. for 2002-03 suggest that projected imports much higher than actual quantities imported.

• Sectoral analysis suggests that actual imports much lower for sectors like petroleum and products and other mineral oils and mineral

Tariff Structure and Imports(continued)

products; cereal products, certain oilseeds; pharmaceutical products; fertilisers; printed books; railway locomotives & equipments; and project goods.

• This requires further analysis. Important identify reasons why this fit gave ‘good’ projection in earlier study taking period 1991-92 to 1997-98 but not for this longer period up to 2001-02.

Tariff Structure and Imports(continued)

• Looking at import elasticities, found elasticity less than (-)1.0 for 13 commodity groups out of 99. This suggests that reduction in tariff would result in higher percentage increase in import ratio for these commodities.

• These items included animal/vegetable fat, sugars, cocoa, vegetable and fruit preparations, tobacco items, carpets and textile, floor coverings, apparels and clothing, human hair, feathers, ships and boats, furniture, beddings, toys, sports items

• Other sectors’ elasticity found to be between (-)1.0 and zero and even positive for few.

Some Final Observations

• Large tariff reductions of essential import items like cereals, dairy products, edible oils and other agricultural products with low elasticity would benefit the consumers but would be unacceptable on considerations of number of people dependent on these items for their livelihood and implications on domestic production. These sensitive items are also heavily subsidised by DCs.

• On the other hand, drastic tariff reductions on items with high import elasticity could lead to substantial surge in imports and affect the domestic economy adversely.

Some Final Observations (continued)

• It is imperative that tariff rates need to be rationalised and more importantly made more uniform and transparent.

• While undertaking reduction commitments, need to carefully identify sectors that could be subjected to greater tariff reductions than others.

Some Final Observations (continued)

• At the same time, items of export interest with high import content need separate treatment.

• Delicate balance of various considerations required to determine tariff reductions such that have minimal detrimental impact on economy.

Thank you