India Transformed

by Rakesh Mohan

  The next five years from 1993–94 onwards saw a period of relative stability for both weighted average tariffs and Net Effective Exchange Rate (NEER), and then the decline in average tariffs outstripped the fall in the value of the rupee (see Chart 1).43

  Thus, it is clear that devaluation/depreciation provided a cushion to the domestic industry when tariffs were decreasing, especially in the initial years of reform. In certain years, the Budget speech has also noted the impact of depreciation and the breathing space it provided.

  Chart 1: Nominal Exchange Rate (Rs to $), Ratio of Basic Customs Revenue to Imports, and Nominal Effective Exchange Rate (1991–92 to 2015–16)

  Source: Handbook of Statistics, for the years 2014–15 and 2015–16, RBI.

  An important aspect of exchange rates and competitiveness is that we need to go beyond NEER and consider the movement of the Real Effective Exchange Rate (REER), which adjusts for inflation rates. While the declining NEER denotes a weakening of the rupee, the competitive conditions faced by domestic producers also depend on the changes in price levels in different countries. India’s REER shows a different picture in comparison to its NEER (see Chart 2). The REER saw a decline in the value of the rupee in the two years after 1990–91 due to the devaluation, but has since then been largely stable or seen a small increase. The relative competitiveness of the rupee has thus not improved, even though a substantial fall in the value of the rupee has taken place in nominal terms.

  Chart 2: India. REER and NEER, 1990–91 to 20015–16

  Source: Handbook of Statistics, for the years 2014–15 and 2015–16, RBI.

  (j) Simplification of Tariff Regime

  The 2002–03 Budget expressed a vision that ‘by the year 2004–05, there would be only two basic rates of customs duties, namely, 10 per cent covering generally raw materials, intermediates and components and 20 per cent covering generally final products.’

  Over time, different finance ministers have reduced the number of tariff slabs, but India still has a large number of them. Nonetheless, two very important changes have taken place over time.

  One, there is a concentration of tariffs in a single, small range: about 72 per cent of tariffs are in the range of 5–10 per cent; for non-agriculture products, the share is about 78 per cent. In contrast, the largest concentration in 1993 was with tariff ranges of 30–40 per cent and 80–90 per cent, each with about a quarter of the total tariff lines. Second, most tariff lines are with tariffs at 10 per cent or below.44

  Thus, in effect, the Indian tariff structure has been considerably simplified compared to earlier. However, we are still far from the vision expressed in the 2002–03 Budget, and more needs to be done to further simplify the tariff structure.45

  (k) Structure of Tariff Escalation

  The Chelliah Committee Report had proposed its tariffs with a view to have tariff escalation or effective protection for domestic industry, with inputs or products at lower stages of processing having lower tariffs than the final products. For average tariffs, this was achieved by 1996–97 and 1997–98 (see Table 8). However, compared to the late 1990s, the tariffs on unprocessed products did not decrease much but those on semi-processed and processed manufactured products decreased significantly. This led to a reduction in effective protection; in fact, one of the concerns of some industries in India is that the tariffs on their inputs are higher than the tariffs on the finished products. This is one of the areas of tariff reform that remains incomplete.

  (l) Tariff Concessions

  Tariff concessions were quite pervasive when reform began in 1991. They made the tariff scheme complex and non-transparent, with tariffs for specific product categories often linked to end-use aimed at social, industrial, economic and industrial use for tariff classifications at six, eight or ten tariff lines. Over time, the scope of these was enhanced when free trade zones were established. In line with duty drawback or refund schemes across the world for imported and domestic inputs used in exports, India also provides other concessions when a product is exported.46 The proportion of this aspect of concessions has increased over time as the share of imports in India’s exports has increased. Analysis of Indian products as part of global value chains shows that: ‘The foreign content of India’s exports has increased significantly in the last two decades, more than doubling from under 10 per cent in 1995 to 24 per cent in 2011.’47

  Even today, India continues to have a number of concessions in its tariff regime. Though less than earlier, they are still a part of the system, introducing unpredictability and lack of transparency.

  (m) Lower Tariffs Due to Free Trade Agreements (FTAs)

  With the ongoing WTO negotiations facing a deadlock, the focus of trade negotiations has moved towards FTAs. For both strategic and economic reasons, therefore, India will have to focus on FTA while being active in improving the substantive content of the work in WTO.

  In the early 1990s, India had few Free Trade Agreements or the Preferential Trade Agreements (PTAs).48 Over time, these have increased and the proliferation of FTAs has been supplemented by larger agreements in the form of the Comprehensive Economic Partnership Agreement (CEPA) or the Comprehensive Economic Cooperation Agreement (CECA), which cover many more areas than conventional market opening under FTAs. Most of the significant Indian FTAs/PTAs have been implemented in this century, in general from 2005 onwards. The agreements prior to 2005 were with relatively small coverage or less deep than the more comprehensive economic partnership agreements later; the first CECA was with Singapore, in 2005.49 In addition, India provides preferential schemes for least developed countries.

  The situation for India is summarized in a government note on FTAs as follows:

  India has preferential access, economic cooperation and Free Trade Agreements (FTA) with about 54 individual countries. India has signed bilateral trade deals in the form of Comprehensive Economic Partnership Agreement (CEPA)/Comprehensive Economic Cooperation Agreement (CECA)/FTA/Preferential Trade Agreements (PTAs) with some 18 groups/countries. India is a late, and cautious, starter in concluding comprehensive preferential tariff agreements covering substantially all trade with some of its trading partners.50

  The different agreements lead to diverse rules of origin criteria for imports from different sources. This causes additional costs of trading and confusion in carrying out international trade, particularly for small and medium enterprises.

  These preferential or free-trade initiatives have resulted in much lower tariffs faced by a number of India’s trading partners, a feature likely to increase further with new FTAs such as the Regional Comprehensive Economic Partnership Agreement (RCEP).

  The combined effects on tariff decline due to MFN tariff reductions over time, exemptions on tariffs and to some extent the impact of FTAs/PTAs on tariffs can be seen in Table 5.

  Another way of considering the overall situation regarding the impact of concessions on tariffs is to consider the difference between the average MFN tariff and the average tariff reflected by basic customs revenue collected. Table 9 shows this difference between these two estimates. We can see that even though the average MFN tariff of India has decreased very significantly over time, the difference between India’s MFN tariffs and trade-weighted tariff average calculated from basic customs revenue is almost as much as the MFN simple tariff average itself.

  Though the estimates of simple average MFN tariff and weighted average tariff are not directly comparable, this difference does qualitatively indicate the large combined effect of tariff reduction resulting from concession schemes and the FTAs.51 Two insights seem relevant from this information.

  One, any judgement of the tariff regime of India based on the MFN tariffs would not be appropriate. Second, that there is a large potential for simplifying the existing tariff regime, and providing more transparent forms of lower tariffs.

  5.   Non-Tariff Measures

  India’s non-tariff measures are mainly contingency trade protection measures (anti-dumpi
ng, countervailing measures and safeguards), Technical Barriers to Trade (TBT) and Sanitary and Phytosanitary (SPS) measures, quantity control or licensing and quantitative restrictions, and export-related measures (see Table 10).

  The largest number of contingency measures used by India are anti-dumping actions, as shown by Table 11 below.

  Table 11: India. Different Forms of Contingency Protection Measures in Force on 30 June 2016

  Anti-dumping

  Countervailing Measures

  Safeguards Measures

  252

  1

  6

  Source: Annual Reports (2016), WTO committees on Anti-dumping; Subsidies and Countervailing Measures; and Safeguard Measures.

  Note: The data in this Table correspond to the bilateral measures reported by the UNCTAD database. Bilateral contingent trade protection measures are 259. In addition, UNCTAD reports contingency-protection measures affecting all members in terms of ongoing investigations (sixty-six for India), which, added to the figure in Table 11, makes it consistent with that in Table 10. For details on contingency-protection measures by UNCTAD, see

  http://i-tip.unctad.org/Forms/TableView.aspx?mode=modify&action=search.

  In this section, we will focus on three important non-tariff measures affecting imports: quantitative restrictions (including licensing), anti-dumping measures, and SPS/TBT measures.

  (a) Quantitative Restrictions, Including Licensing

  As in the case of every country, India has provisions for import restrictions, including import prohibition, quantitative restrictions or licensing. In many cases, these restrictions are for health and safety reasons, to meet environmental or moral objectives, or to implement obligations under international agreements.

  India’s import restriction regime today is much more liberal than the early 1990s, due to both the policy of easing trade restrictions over time and a consequence of India losing the WTO BOP-related dispute in 1999, which pertained to India’s quantitative import restrictions. Following the WTO dispute, India had to remove its quantitative restrictions that it had imposed for BOP reasons. It did so in two tranches, the first one by 1 April 2000 and the second by 1 April 2001: ‘At the DSB [Dispute Settlement Body of WTO] meeting of 5 April 2001, India announced that, with effect from 1 April 2001, it had removed the quantitative restrictions on imports in respect of the remaining 715 items and had thus implemented the DSB’s recommendations in this case.’52 (emphasis added)

  In the case of agriculture, the Uruguay Round Agreement required all quantitative restrictions to be replaced by ‘equivalent’ tariffs. Therefore, in one stroke, the quantitative import restrictions for agriculture were removed.

  In 1991, India’s import-licensing regime was considerably complex and highly restrictive. All imports unless specifically exempted were subject to licensing requirements, which operated under a system with twenty-six ‘positive’ commodity lists. Imports were classified under four broad categories: banned items, restricted items, limited permissible items, and open general licence (OGL) items. Different import-approval systems applied for different licence categories. While OGL was notionally unrestricted, several OGL items required government approval and were subject to ‘actual user’ conditions: the actual-user condition required the importer to also be a user of the imported product.

  This scheme was considerably simplified by the Export Import Policy of 1992, which replaced the previous lists by a consolidated ‘negative’ list that specified products subject to import licensing. Other products were freely importable. Nonetheless, almost all consumer goods were still under import licensing,53 and both consumer products and other products were part of the negative list.54

  Even today, India continues with import prohibitions and other restrictions on imports, mostly for health and safety reasons, technical compatibility of requisite standards, or moral or environmental reasons. In certain cases, the interests of domestic industries also form a basis of these policies. For these reasons, imports are prohibited for sixty eight-digit tariff lines (about 0.5 per cent of tariff lines). In addition, eight four-digit lines covering milk and milk products are at present temporarily prohibited for imports from China.55 Import licensing is required for 428 eight-digit tariff lines (about 3.6 per cent of the total lines) whose imports are restricted.56 In addition, toxic and other chemicals, psychotropic drugs and narcotic substances require import licensing; eight narcotic drugs are banned for imports, and three can be imported only by the Government Opium and Alkaloid Factory.57

  These types of various import prohibitions or restrictions are used by other nations as well, for reasons similar to those cited by India. These restrictions are normally not focused on import substitution, but on other public-policy reasons linked to, for instance, health, safety, moral reasons, and meeting international obligations (chemical weapons, endangered species, Montreal Protocol and other international agreements).

  Though India still has import restrictions in place, their number is much less than in 1991. The regime is more simple and transparent.

  (b) Anti-dumping

  India imposed its first-ever provisional anti-dumping duty in January 1993.58 Over the years, it has become among the largest users of anti-dumping measures in the world. On 30 June 2016, it had the second largest number of anti-dumping measures in force (twenty-one less than the topmost user, United States). See Table 12.

  It is interesting that as India’s tariffs decreased, its number of anti-dumping actions increased over the next ten years, and continue to be at a significantly higher level compared to the initial years after the commencement of tariff reform (see Chart 3).59 This is consistent with the conventional understanding of the political economy of trade liberalization where the general opening up of the economy is accompanied by alternative trade restrictions like anti-dumping or other non-tariff measures to provide targeted protection to sensitive sectors whenever there is a felt need for doing so.

  Chart 3: Anti-dumping Initiations (July to June), and Total Customs Revenue Divided by Imports (Fiscal Year), 1990–91 to 2014–15

  Source: WTO and Government of India.

  Though India is amongst the largest users of anti-dumping in the world, till now only four of its anti-dumping actions have been brought to the dispute-settlement panel since the WTO was established in 1995. In contrast, forty-nine disputes have been brought against the United States, out of a total of 114 anti-dumping cases under the WTO dispute-settlement system. The third highest user in Table 10 (Brazil) has only two cases brought against its anti-dumping actions. Therefore, it is not just the number of actions but also the size of the economy or share in global trade that determines the total number of WTO disputes brought against the anti-dumping action of a country. For instance, China’s anti-dumping actions have faced eight disputes within the WTO, though its number of definitive anti-dumping measures in force on 30 June 2016 were about one-third the number of such actions taken by India. Therefore, as India’s market share increases together with the number of its anti-dumping measures, other nations subject to those actions will give greater importance to questioning the basis for those actions. In this background, it would be useful for Indian authorities to examine the procedures in place so that they follow both the WTO legal requirements in an obvious way as well as meet the criteria of good governance in general.60

  A significant feature in the context of contingent protection is that, until recently, India had not established regulations or amended its law to impose contingency protection measures under FTAs, a gap that needs to be addressed.

  (c) SPS/TBT

  Large international markets today are far more impacted by standards than tariffs or other non-tariff measures; even anti-dumping measures, which are far more numerous but limited in scope, do not affect trade at as wide-scale a level as standards. Furthermore, while anti-dumping measures are used only by the government, standards are imposed by both the government and the private sector, with most value chains su
bject to specified standards overseen by lead firms in that chain. Therefore, the standards are amongst the most significant trade measures in present-day markets. Further, their scope is increasing from only quality or health and safety concerns to include social and sustainability concerns that are now prominent in most large markets. Interestingly, these concerns are also increasingly emphasized in FDI.

  It is important to bear in mind the fact that standards are not always trade barriers or trade restrictions: They are required to achieve legitimate policy goals. They become barriers when their operational conditions or levels exceed what may be required to meet the desired objective. That is when trade concerns arise with respect to standards. Therefore, standards-related policies (SPS/TBT) address five aspects of policy: addressing trade-related concerns; transparency and provision of relevant information to stakeholders; opportunity to provide comments on standards when they are being formulated; bringing trade-related concerns to the attention of the implementing party and seeking solutions; and developing domestic capacity in the context of standards.