GAAT Agreement under the WTO: The Impact on Indian Economy

Present Scenario The Indian economy has grown rapidly over the past decade, with real GDP growth averaging some 6% annually. Despite external shocks, such as the Asian economic crisis and fluctuations in petroleum prices, which resulted in a slowdown to 4.8% in 1997/98, the economy recovered to grow at over 6% during the two subsequent years. Social indicators, such as poverty and infant mortality have also improved during the last ten years. Higher growth during this period is, in part, due to continued structural reform, including trade liberalization, leading to efficiency gains. In order to achieve further significant reductions in poverty, India is currently targeting higher real GDP growth of between 7% and 9% (compared with 5.4% expected for 2001/02); to meet this goal it will be important, as stressed by the authorities, to continue, and even accelerate, the reform process and increase competition in the economy. Recognizing the important linkages between trade and economic growth, the Government has simplified the tariff, eliminated quantitative restrictions on imports, and reduced export restrictions. It plans to further simplify and reduce the tariff. To help counteract the anti-export bias, inherent in import and other constraints, export promotion measures have gained in importance. The Government has recently announced a further increase in these measures and pledged to reduce export restrictions. The policy has also suggested the creation and strengthening of enclaves such as export processing and special economic zones, which would "immunize" exporters from the constraints affecting the rest of the economy, such as infrastructure and administrative problems. Indias foreign direct investment (FDI) policy has been liberalized since its previous Review. Investment is not only allowed in a greater number of sectors, but a larger number of sectors than before are eligible for automatic investment procedures, involving registration with the Reserve Bank; permission from the Government is still required for investment in some sectors, while foreign investment is not permitted in a few sensitive sectors. A major development since the previous Review was the removal of all import restrictions maintained for balance-of-payments reasons. As a result, the customs tariff has become the main form of border protection. There have been significant recent efforts to rationalize the tariff, but with numerous exemptions based on end-use, it remains complex. Tariffs are relatively high, but the average applied MFN rate fell from 35.3% to 32.3% between 1997/98 and 2001/02 and is expected to fall further, to 29% in 2002/03, as the peak rate of tariff is reduced from 35% to 30%. The tariff shows substantial escalation in some sectors, especially for paper and printing, textiles and clothing, and food, beverages and tobacco. The Government announced recently that it intends to simplify and lower the tariff to two tiers by 2004/05; 10% for raw materials, intermediates and components, and 20% for final products. As part of its policy to encourage exports, the Government is planning to confine export restrictions to a few sensitive items, as announced by the Export and Import Policy 2002-2007. Export and import prohibitions are maintained mainly for health and security reasons. Internal reforms have concentrated on improving efficiency and competition in the economy. Thus, while industrial policy remains important, its scope seems to have been reduced significantly. Compulsory licensing now appears to be required mainly for environmental, safety, and strategic reasons. In addition, since the previous Review, the number of activities reserved for the public sector has been reduced from six to three and the number of sectors reserved for the small-scale industry has been reduced from 821 to 799; another 50 items are expected to be removed from the list of items reserved for the small-scale sector. Price controls are maintained on several products, including fertilizers, petroleum products, and some agricultural products; some of these, including on petroleum and fertilizers, are gradually being phased out.

The need for increased competition is being addressed by gradually reducing the degree of direct government involvement in economic activities, including through a programme to privatize stateowned companies. State-owned companies, which were used to implement industrial and development goals, are a drain on government resources. The Government has redefined its privatization strategy recently and is willing to privatize all non-strategic companies; in strategic companies, including those involved in the arms and ammunition, defence, atomic energy and railway transport sectors, the Government will reduce its equity to 26%, or lower in some cases. Efforts are also under way to modernize Indias laws dealing with competition and industrial sickness, while new measures have been taken to strengthen corporate governance. A new Competition Bill, which would replace the current Monopolies and Restrictive Trade Practices (MRTP) Act, is currently being examined in Parliament. Policy in the agriculture sector has been guided by domestic supply and self-sufficiency considerations. Thus, the sector is shielded through import and export controls, including tariffs, state trading, export restrictions and, until recently, import restrictions. With the removal of import restrictions, tariffs on several agricultural products have been raised; as a result, the overall average MFN tariff for agriculture has risen from 35% in 1997/98 to 41% in 2001/02, but is expected to fall to around 37.5% in 2002/03 with the passage of the Budget for 2002/03. Textiles and clothing accounts for around 30% of Indias total merchandise exports. Exports go mainly to the European Union and the United States, both of which maintain restrictions under the Agreement on Textiles and Clothing (ATC). In preparation for the removal of such restrictions, and to improve the sectors competitiveness, a number of measures have been taken recently. The new Textile Policy also acknowledges the need to restructure, or close down, non-viable units, while ensuring adequate compensation for displaced workers. Significant reforms have been pursued since the previous Review, especially in telecommunications, financial services and, to some extent, in infrastructure services, such as power and transport. Liberalization in the telecommunications sector began in the early 1990s, with licences being issued to private investors for cellular telephone services.The resulting increased competition from private service providers, as well as efforts by the regulator to rationalize tariffs and reduce crosssubsidization between local and international rates, has contributed to a significant improvement in Indias telecommunications service network and to a reduction in tariffs. The reduction in telecommunication tariffs is likely to benefit the software sector, one of the major success stories in recent years. This success is in part due to Indias abundant supply of relatively highskilled and low-cost labour; compared with other sectors, software has also been relatively free of barriers to trade and investment. The Government does, however, provide support to the sector, including through tax and tariff exemptions, and software technology parks. The banking sector has been subject to gradual reform since the early 1990s. The Reserve Bank of India, which regulates the banking sector has also strengthened prudential requirements, including raising minimum capital and capital adequacy ratios. Supervision of banking and non-bank financial companies is based on both on-site and off-site monitoring on a regular basis. Key challenges continue to be the high level of non-performing loans and the restructuring of weaker public-sector banks. The insurance industry has recently been opened to competition from the private sector and new licences have been issued to private companies; foreign equity is restricted to 26% of the total. The role of the regulator, the Insurance Regulatory and Development Authority (IRDA), has been enhanced. Infrastructure remains a major constraint on economic activity in India. Major shortages in the supply of electricity have resulted in the use of captive generation. The main suppliers of electricity, the state electricity boards (SEBs), have run losses, estimated in 2000 at around 1% of GDP, partly as a result of subsidized tariffs to the agriculture sector. Recent reforms have concentrated on addressing

the issue of cross-subsidization of tariffs, through the establishment of regulators and reform of the SEBs; in addition, foreign investment restrictions in transmission were removed. In transportation services, the current Railway Budget has revised the tariff structure, reducing the cross-subsidy between freight and passenger transport; investment by the private sector has also been allowed. The private sector has also been encouraged to invest in the development and operation of national highways.

Conclusion: History of GATT reveals that whenever newly industrialized nations have challenged the competitive strength of the developed countries, they have immediately retaliated by imposing tariff and non tariff barriers. They have now enlarge it in the form of TRIPs and TRIMs. The social clause was also conceived with the same intention of blunting the competitive advantage of developing nations. The solution lies in the fact that developing countries should take advantage of multi lateral trade organizations and show their combined strength by choosing their ranks, rather than surrender their sovereignty one after another.