A PRESENTATION ON

Impact of WTO on Indian Manufacturing Industry and Other Macro-Economic Factors

Flow of the Presentation

India and WTO Impact of WTO Agreements on India Impact of Tariff and QR Removal on Indian Industry
Removal of Quantitative Restrictions

Tariff Reform
Removal of QRs in 2000 and 2001

Impact on Different Businesses of India by WTO

Overall Impact of WTO on the Indian Economy

India's Commitments to the WTO

India was to amend patent laws within five years of the Agreement so as to include both product and process patents. The Indian Patent (Amendments) Act 1999 was passed in March 1999 by the Parliament. All Quantitative Restrictions had to be removed and replaced by tariffs by April 2001. All farm subsidies had to be withdrawn by the year 2000. Nothing substantial has been done in this regard.

India's Commitments to the WTO

TRIPs require a protection of 10 years to layout the designs of integrated circuits. Legislation is under way to achieve this. Reduce tariffs in respect of non-agricultural and nontextile sectors. Prescribed time limits have been followed in this area.

TRIMs requires dismantling of restrictions on all trade related investments. Due to the inconclusive Seattle Ministerial, India hasnt taken any decision in context.

Balance Sheet of the WTO

Expected Pitfalls SSI Sector to be hit hard Anticipated Benefits Access to more markets May harm domestic industry International Trade to increase. Farm sector need to improve Competition to boost industry.

Unemployment may increase R&D to get fillip

Drain of wealth by MNCs Jolt to Swadeshi effort May create a dichotomized economy India may get lesser benefit
Competition may improve productivity.

Improved agricultural sector. Overall rapid growth. May result in Specialization.

Impact of WTO Agreements on India

General Agreement on Tariffs & Trade (GATT)

Reduction of peak and average tariffs on manufactured products. Commitments to phase out the quantitative restrictions over a period as these were considered non-transparent measure in any countries policy structure.

Trade Related Investment Measures (TRIMS)

The agreement prohibits the host country to discriminate the investment from abroad with domestic investment, which implies that it favours national treatment of foreign investment.

Trade Related Intellectual Property Rights (TRIPS)

Since the law for these intangibles vastly varied between countries, goods and services traded between countries incorporating these intangibles faced severe risk of infringement.
Therefore the agreement stipulated some basic uniformity of law among all members. This required suitable amendment in domestic IPR laws of each nation.

Trade Related Intellectual Property Rights (TRIPS)

Since this process is not a simple one, a time period of 10 years was given to the developing countries.
As a result, in India there was a requirement to change the Patents Act, Trade & Merchandise Mark Act and the Copyright Act.

Agreement on Agriculture (AOA)

The agreement on agriculture deals with market access, export subsidies and government subsidies.

Broadly, as of now the requirement is to open up the markets in specific products in market access and in case of subsidies, it is to go for tarrification and phase it out eventually or reduce it to bound limits.

Agreement on Sanitary and Phytosanitary Measures (SPM)

This agreement refers to restricting exports of a country if they do not comply with the international standards of germs / bacteria / other pests etc.

Multi-Fiber Agreement (MFA)

This agreement is dismantled with effect from 1 January 2005. The result was removal of QR on the textile imports in several European countries. As a consequence a huge textile market is opened up for developing countries textile industry.

Other Major Agreements

Market Access Safeguard Measures

Subsidies on Exports
Counter-Veiling Duties (CVD) Anti-Dumping Duty (ADD)

Certain Other Unresolved Issues

Labour Standards Trade and Environment Trade and Investment Trade and Competition

Transparency in Procurements made by the Government

Impact of Tariff and QR Removal on INDIAN INDUSTRY

Removal of Quantitative Restrictions

Uruguay Round
In the Uruguay Round negotiations, India agreed to reduce tariff on a large number of commodities and remove quantitative restrictions (QRs) on all commodities, except for about 600 commodities. For industrial products, Indias commitment was to bring down the average tariff rate from about 71% in the pre-Uruguay Round period to about 32% in the post-Uruguay Round era.

Removal of QRs
As regards to removal of QRs, India had removed most but not all QRs on manufactured intermediate goods and machinery in 1991. But, nearly all consumer goods remained subject to import licensing and the import of nearly all agroproducts was subject to import licensing. In May 1995, about two-thirds of tradable GDP was still protected by some kind of non-tariff import restrictions: 84 % of agriculture, 36 % of manufacturing and 40 % of mining and querying.

Removal of QRs
Within manufacturing, the relevant proportions were 10 % for machinery, 12 % for intermediate goods, and 79 % for consumer goods. During the years 1995 to 2001, these restrictions on imports were gradually removed in a large measure due to international pressures. The first of these pressures came from Uruguay Round negotiations on textiles and clothing. And, the second from a dispute brought against India at the WTO.

Liberalization of Textiles Imports

Reforms of 1991 brought a little change in the import policy for textiles and clothing, and the imports of these products remained practically banned. The situation began to change substantially in December 1994 when in separate treaties with the EU and the USA, India agreed to a comprehensive liberalization of import policies for textiles.

This liberalization in imports of textiles was agreed and also to phase out the MFA quotas.

Liberalization of Textiles Imports

Selected textile fabrics, selected textile products and a fairly long list of apparel items were made eligible to be imported against SIL (Special Import License) given to exporters.
It was also agreed that these products would be free from import licensing altogether at specified future dates (1998, 2000 or 2002), and tariff rates would be reduced to levels of between 20 and 40 % by 2000.

International Pressure
Soon after the Uruguay Round agreements became effective, Indias unconstrained use of the balance of payments provision was challenged by US, EU and other developed nations. It became difficult for India to justify QRs on grounds of balance of payments since there was a strong current account, substantial capital inflow and large foreign exchange reserves. India reached mutual agreement with Australia, Canada, EU, New Zealand, Switzerland and Japan for elimination of QRs on these products in a phased manner by March 31, 2003. However, the US did not agree to this plan, and persisted in the Dispute Settlement Body. The US won the case, and India had to eliminate QRs on all commodities (except the 600 odd items mentioned). QRs on imports were removed for 715 items at 6-digit HS level (or 772 items at 8 or 10 digit level) in Export-Import Policy of 2000/01, and for another 714 items on April 1, 2001.

Tariff Reform

Introduction
Indias customs tariff rates have been declining since 1991. The peak rate came down from 150% in 1991-92 to 40% in 1997-98. The downward momentum was reversed the next year with the imposition of a surcharge. This momentum resumed with the reduction of the peak rate to 35% in 2001-02 and 30% in 2002-03. Peak rate (applicable to all manufactured and mineral products except alcoholic beverages and automobiles) was reduced to 20% at the end of 2003-04.

Tariff Rates
The simple average tariff rate has accordingly declined from 81.8% in 1990 to 32.4% in 1999 and to 29% in 2002 (Virmani, et al. 2003). For industrial products, the import weighted average tariff has declined from about 91% in 1987-88 to 84% in 1993-94, 30% in 1998-99 and further to 27% in 2001-02.
Thus, there was a substantial fall in the average tariff for industrial goods in the post-reforms period.

Applied vs. Bound Tariff Rates

A comparison of applied tariff rates with the bound rates for industrial products for 2001-02 brings out that the applied rates in that year were significantly lower than the bound rates for a large number of items. Out of 3298 lines for which India has bound the rates of duty (mostly at 40% or 25%)
Applied Rate = Bound Rate ~ 1040 lines Applied Rate < Bound Rate ~ 1670 lines Applied Rate < Bound Rate ~ 588 lines (less by 15% or more)

It seems therefore that for a majority of industrial products the current applied rate is significantly lower than the bound rate.

Benefits or Commitments !!
It seems reasonable to argue that the tariff reform undertaken by India in the last 14 years was mostly done at Indias own initiative (induced by the benefits expected from such reforms) and had little to do with Indias commitment under WTO.

The Results
The findings of some of the studies are as follows:

Das (2003) finds that, on an average, the import penetration ratio in Indian industries didnt increase in the period 1991-95 as compared to the period 1986-90, and there was only a marginal increase in the import penetration ratio in the period 1996-00 despite marked reduction in the tariff and nontariff barriers.
Goldar, Kumari (2003) and Topalova (2003) find tariff reforms making a good favourable effect on industrial productivity. Virmani et al. (2003, 2004) find that tariff reductions had a significant favourable effect on exports in a number of industrial sub-sectors, which is attributed to tariff reform.

Removal of QRs in 2000 and 2001

Introduction
QR removal for 1429 items was being done in 2000 and 2001.
In the list of these items published by the Ministry of Commerce at 8-digit or 10-digit HS, there are 1522 items. Out of these items, about 27% belong to textiles. Total value of imports of the 1522 items in 1999-00 was about Rs 600 billion, constituting about 30% of the total value of imports of all commodities in that year.

Through the data of 2003-04 and 1999-00, it is found that aggregate imports of some specific items grew by about 70%.
The growth in total imports of all commodities in this period was by about 64 %.

The Impact
For a large number of items out of the 1522, the imports were nil or negligible in 1999-00 and there has been little increase in imports between 1999-00 and 2003-04 in spite of removal of QR. From a comparison of import data for the years 1999-00 & 2003-04, the value of imports of some 100 identified items, which increased by more than Rs 50 million between the two years.

Sensitive Items
Following the removal of QRs on imports in 2000/2001, the Indian government has been monitoring imports of 300 sensitive items.

The Table presents data on imports of these items for four years.
In all the cases, the value of imports during April to December is considered.

No. of Items Milk and milk products Fruits and vegetables Poultry Tea and coffee Spices 22 48 13 32 35

Apr-Dec 2000 8.9 287.6 6.1 28.3

Apr-Dec 2001 1.9 154.6 5.9 45.3

Apr-Dec 2002 7.4 280.6 0.0 17.8 63.7

Apr-Dec 2003 9.2 324.9 0.0 10.2 44.9

Negligible 0.1

Food grains
Edible oils Alcoholic beverages Rubber Cotton and silk Marble and Granite Automobiles

12
27 8 11 6 14 32

6.3
1021.5 4.8 6 319.3 1.6 12.3

0.7
1051.1 4.2 21.1 446.1 4.1 10.5

0.2
1345.7 3.7 10.1 323.9 8.9 53.7

0.2
1946.5 9.1 33.9 433.4 12.8 59.8

Products of concern to SSI

Others (wheat, sugar and salt) Total

20
20 300

19
6 1727.8

16.8
2.3 1764.8

32.3
3.8 2151.9

46.5
12.4 2943.6

CONCLUSION
Two major components of trade liberalization that may be traced to Indias commitments are: (a) removal of quantitative restrictions on textile imports, and (b)removal or quantitative restrictions on 1429 items (at 6-digit HS) in 2000/2001 after India had to give up the BOP cover.

CONCLUSION
Three reasons can be given for the absence of any large-scale across-the-board increase in imports of items recently freed from QR. 1. First, a number of them (nearly half) were already importable by the SIL route, and the removal of QR is unlikely to have led to any large increase in imports. 2. Second, a number of agricultural items in the list have been canalized. 3. Third, a number of trade defensive measures were put in place to provide adequate protection and a level playing field to domestic players vis--vis import as a result of phasing out of QR.

IMPACT ON DIFFERENT BUSINESSES OF INDIA BY WTO

SMALL SCALE INDUSTRIES

No single agreement of WTO directly dealt with SSIs. Tariffs were reduced & dismantling of non-tariff barriers. Under this scenario Indian SSIs would not only face competition from MNCs but large Indian firms also. The government removed QRs on 714 items and remaining 715 items have been removed from Quantitative Restrictions by 31st March 2001.

SMALL SCALE INDUSTRIES

The textile industry of Gujarat and South India will face stiff competition due to imports from China, Korea and Thailand. Any and every kind of fabric can be sold locally after paying custom duties averaging at 35%. Textile items are now freely importable. Dumping of goods was there.

TEXTILE AND CLOTHING

The sector has been protected by developed countries since the 1960s through quantitative restrictions imposed on exports of the third world. Normally in such a situation, the developed countries should have resorted to some precautionary action under the provisions of Article XIX of GATT 1994 to restrain the imports. There had been a Short Term Agreement and a Long Term Agreement covering textiles and clothing. A comprehensive agreement in this sector was worked out in 1973.

FOOD PROCESSING INDUSTRY

Because of inadequate storage facilities, farmers usually do not get a good price for their produce since there are not enough processing units. Lack of liberalization of rules; which are needed to encourage investment in these areas. Food safety and security will continue to be an important plank for restoration of WTO standards. Less development in food processing.

PHARMACEUTICAL INDUSTRY
All QRs on pharmaceutical products are to be removed latest by the year 2002. Free trade in medicines was there worldwide. Indias share in the world pharma market was just 1.5%, which is likely to rise to 2.4% by 2005. M&As increases in the Indian Pharmaceutical Industry, as global R&D centres undergo consolidation. Exports are increased as a result of WTO accord. Deductions limit for expenses by pharmaceutical & bio-tech companies raises from 125% to 150%.

MARKET ACCESS IN INDIA

Rates of import tariffs in India are quite high, which had its impact on development of trade and industry. The indirect taxes contribute a major proportion of the revenue of the Union Government. Any reduction in the rates of import duties will have its impact on the central kitty unless suitably augmented by other resources. The domestic producers in India have several comparative disadvantages, such as higher cost of capital and power, low productivity of labour. There is a lack of efficient infrastructural support.

OPPORTUNITIES PROVIDED BY WTO

Technically Qualified Personnel will increase Indias service exports.
Reduced Import Tariff by Industrially Developed Countries. The removal of quotas under a multi-fiber agreement will help Indias textiles & garment export to increase. MFN Status, which ensures favourable treatment in the administration of tariffs.

RECOMMENDATIONS
Both the external as well as the internal balances should be there in a business for the overall development of the economy. India may have to accelerate the pace of economic reforms, financial liberalization, liberalization policy on FDI and higher investment on infrastructure. Industry needs Competitive. to be Internationally

RECOMMENDATIONS
Commercial and corporate farms may need to be encouraged. On the trade front, a roadmap must be drawn and strategic action be initiated to raise its share in world exports to at least 2% over the next 5 years. Need based changes must be introduced in Land Ceiling Act, to enable farmers to make their small holdings economically sustainable and viable.

Impact of WTO on the Indian Economy

FAVOURABLE IMPACT
1. Increase in export earnings
a) Growth in merchandise exports b) Growth in service exports

2. Agricultural exports 3. Textiles and Clothing 4. Foreign Direct Investment 5. Multi-lateral rules and discipline

UNFAVOURABLE IMPACT
1. TRIPs 2. TRIMs

3. GATS
4. Trade and Non Tariff Barriers 5. LDC Exports

TRIPs
The agreement on TRIPs goes against the Indian patent act, 1970, in the following ways: PHARMACEUTICAL SECTOR Under the Indian Patent Act, 1970, only process patents are granted to chemicals, drugs and medicines. Thus, a company can legally manufacture once it had the product patent. So, Indian companies could sell good quality medicines at low prices. However under TRIPs agreement, product patents will also be granted that will raise the prices of medicines, thus keeping those out of reach of the poor people.

TRIPs
AGRICULTURE Since the agreement on TRIPs extends to agriculture as well, the MNG, with their huge financial resources, may also take over seed production and will eventually control food production. Since a large majority of Indian population depends on agriculture for their livelihood, these developments will have serious consequences. MICRO-ORGANISMS TRIPs Agreement also provide patenting for microorganisms as well, which will largely benefit MNCs and not developing countries like India.

TRIMs
The Agreement on TRIMs also favours developed nations as there are no rules in the agreement to formulate international rules for controlling business practices of foreign investors. Also, complying with the TRIMs agreement will contradict our objective of self-reliant growth based on locally available technology and resources.

GATS
The Agreement on GATS will also favour the developed nations more. Thus, the rapidly growing service sector in India will now have to compete with giant foreign firms.

Moreover, since foreign firms are allowed to remit their profits, dividends and royalties to their parent company, it will cause foreign exchange burden for India.

Trade and Non Tariff Barriers

Reduction of trade and non-tariff barriers has adversely affected the exports of various developing nations. Various Indian products have been hit by non- tariff barriers. These include textiles, marine products, floriculture, pharmaceuticals, basmati rice, carpets, leather goods etc.

LDC Exports
Many member nations have agreed to provide dutyfree and quota-free market access to all products originating from least developed countries. India will have to now bear the adverse effect of competing with cheap LDC exports internationally. Moreover, LDC exports will also come to the Indian market and thus compete with domestically produced goods.

Thanks . . . . . .