India in the WTO

I found an extremely interesting paper on SSRN on this topic that examines the historical relationship between trading institutions and religious violence in India.

See  Jha, Saumitra,Trade, Institutions and Religious Tolerance: Evidence from India (January 10, 2008). Stanford University Graduate School of Business Research Paper No. 2004. Available at SSRN: http://ssrn.com/abstract=948734. The full-text is available for download.

Jha examined the prevalence of Hindu-Muslim religious riots in India during the period 1850 –1950 and found that trading ports had 25% less religious riots than other Indian towns. He also found that trading ports in Gujarat dating back to medival times, were less afflicted by the 2002 Gujarat riots. Jha explains this difference as due to the persistence of institutional mechanisms that developed to support inter-religious medieval trade. These institutions encouraged specialization, inter-ethnic complementarity, and the mitigation of incentives for ethnic violence by allowing the gains from inter-ethnic trade to be shared between religious groups. Mechanisms for sharing the gains from trade included joint ventures, voluntary provision of public goods and direct inter-group transfers.

Jha’s paper demonstrates the effects of social institutions in preserving social capital  and draws attention to how policy interventions are required for trade to contribute to peace.  It provides a good example of John Ruggie’s “embedded liberalism” idea, the need for trade liberalization to be embedded in the social community. 

Here is a YouTube video featuring Dr. Rajeev Kumar, Director and Chief Executive of ICRIER speaking to the Warwick Commission on ‘The Future of the WTO from an Indian perspective’.

Watch here

Mr. P. Chidambaram, Indian Finance Minister in a long interview to Tehelka has commented on the Indian growth story and on what’s going well, what’s going badly and his vision on how the Country can develop. Here are a few extracts on trade and investment related issues:

On diversion of food crops to biofuels –

“We grow food to consume it as food. We don’t grow food to be converted into fuel. Twenty percent of US corn is being diverted to fuel. Sugarcane is being diverted to fuel. Palm oil is being diverted to fuel and because of the high prices of fuel linked to the crude oil crisis, people are diverting land which is meant to grow food grain to grow crops for bio-fuels. How is this justified in a world where millions of people are still going without food? We are serious about making poverty history. We are serious about eliminating hunger and malnutrition. I think the first point everybody should agree on is that food should not be converted to fuel. If you want to produce bio-fuels using non-food, do so. Find other land to grow crops for producing bio-fuels.”

On urbanization as India’s future:

“Urbanisation cannot be stopped. It is an inexorable process. All you can do is mitigate the harmful effects of mindless urbanisation by building new cities, by limiting the size of cities, by creating more green and open spaces in cities. I don’t think it’s within the power of any country or people to stop this natural progression. We must try to manage it rather than interfere with it. My vision of a poverty-free India will be an India where a vast majority, something like 85 percent, will eventually live in cities. Not megalopolises but cities. In an urban environment it is easier and more efficient to provide water, electricity, education, roads, entertainment and security rather than in 6,00,000 villages. I also believe a significant number of Indians would want to live in the countryside and continue farming. That should be welcome and we should encourage it, but it would be a much smaller number than people who have moved to cities. My vision again is that we must continue to emphasise the imperative need of growth over a long period of time. We get weary easily. We have three to four years of high growth and we sit back as though it is a given. Growth is not a given. You have to work hard for it. We have to ensure that the growth process continues for the next 20-30 years. When we have eliminated poverty, illiteracy, some of the most debilitating diseases, when we have immunised every child, when we have eliminated very basic deficiencies like lack of drinking water, electricity, rural road connectivity — at that point of time, the process will become automatic and people will themselves ensure that growth continues at a fairly sustained pace. But for that that moment to arrive, to get rid of poverty in our lifetime, we need to work very hard to sustain a growth rate of nine percent moving up to 10 percent. If you want to get rid of poverty over the next hundred years, you can have a different model or system. But if you want to get rid of it in the next 20 years, we have to work very hard for it.”

On fixing the agricultural sector in India:

“This year, the latest assessment of 2008 by ICRA will show a growth rate of 4.5 to 4.7 percent in agriculture. We are going to end up with 227 to 230 million tonnes of food grains. So agriculture in itself is doing well. Yet farmers are poor because of the vast numbers dependent on agriculture. If the numbers were much smaller, let’s say half, you would say agriculture is doing very well in India. So I don’t think we should confuse the issue between agriculture doing well and farmers doing poorly. The way to fix agriculture is to address the five key inputs required for agriculture:water, power, seeds, fertiliser and credit.

I think we have done well on credits. We are beginning to do well on water, thanks to the massive outlays and irrigation projects. It will take some time, but when these projects are completed, we will do well on water. We have neglected seeds, we have got a completely distorted fertiliser subsidy regime, and we have failed miserably on the power front. But Gujarat has shown us the way on how to fix power for agriculture. With seeds, we made a beginning last year. We are trying to increase the replacement rate of seeds and, with fertilisers, there is a clear way out provided we are willing to bite the bullet. If all these five things come together, agriculture will grow at a very rapid rate of more than four percent a year. But even if it grows at four percent, farmers will continue to remain poor because of the large numbers dependent on agriculture. So the answer is to wean farmers away from agriculture into industrial services — not urban slums, just non-farm related activity. Do away with the romantic idea that we can continue to sustain 60 percent of our population on agriculture.”

On opening up retail to FDI:

“This is a genuine fear. There is no empirical evidence to show that mom and pop stores will be wiped out if retail chains come. For example, Walmart. I met its chairman the other day and he said their 47th store has opened in China and there’s no evidence that mom and pop stores in China are being wiped out. But still, the fear is genuine, and it is the duty of the government to allay that fear. And until it is completely removed, we are moving slowly and cautiously. We are not saying the fear is unjustified. That is why we have opened only wholesale, cash-and-carry and single brand retail to foreign investments. We have not yet opened multi-brand retail.”

Sharma, Gunjan, “Competing or Collaborating Siblings? Industrial and Trade Policies in India” . Available at SSRN: http://ssrn.com/abstract=964740

SSRN Abstract:
This paper investigates the link between economic de-regulation – domestic as well as trade de-regulation – and firm-level productivity using two unique data sets. We use the industrial licensing regime in India (operating from the 1950s onwards) and its gradual relaxation during the 1980s and 1990s to test whether industrial de-regulation that leads to more competition domestically, affects firm-level productivity. To our knowledge, ours is the only detailed, disaggregated data set on Indian industrial policy at the four-digit level. Our firm-level data for the period 1980-94 is a census of firms in India and has been rarely used in literature. We also use the interesting chronology of reforms in India (industrial de-regulation in the 1980s and trade reforms in 1991) to test whether industries that faced more competition domestically tend to perform better when facing foreign competition. Our identification strategy uses an important institutional feature of Indian policy. Firms with assets below a certain defined rupee threshold were exempt from licensing requirements. This institutional feature provides us within-industry variation that allows us to identify the interaction between de-licensing and exemption status. We find that industrial de-regulation during the 1980s led to a significant rise in firm productivity. Further preliminary results suggest that there exists a strategic complementarity relationship between industrial and trade policies – industries and firms that were de-licensed tend to perform better vis productivity after trade liberalization. Our results are robust to the inclusion of a wide variety of firm and industry fixed effects and controls for policies other than de-licensing that may affect productivity. This paper contributes to the literature by being the only detailed empirical analysis of the industrial licensing regime in India, especially the de-licensing that took place during the 1980s and by providing evidence of the crucial link between trade and industrial de-regulation.

There is an interesting passage in the concluding section:

“Our results have interesting policy implications. An important one is that domestic competitive environment can be used to prepare firms in the economy for trade reforms. Under competition from high-productivity foreign firms, domestic firms that are not productive may want to cut their losses and not invest in productivity-enhancing technology. However a rise in the level of domestic competition can spur these firms to make investments in technology prior to facing competition from abroad and hence prepare them for an even more competitive environment.”

The author suggests that the chronology of reforms was important, in that industrial de-licencing preceded liberalization of trade policy.

There haven’t been many detailed studies on comparative gains to India in adopting a multilateral versus a bilaterals focussed trade policy. With the Doha round still stuck, India has been aggressively open to offers for bilateral trade pacts. The Carnegie Endowment for International Peace has published a report (January 2008) titled “India’s Trade Policy Choices: Managing Diverse Challenges” which suggests that the multilateral route would be preferable for India. The key conclusions of the report available here are:

• India’s economy would grow most under a Doha agreement, although the gains would add a very modest 0.25 percent to the economy. Free trade pacts with China or the United States would produce even smaller gains. An agreement with the EU, India’s largest trading partner, would have a slightly negative overall impact on India’s economy.
• Dramatic swings in world agricultural prices—a common occurrence—could have much larger impacts on India if the country lowers its agricultural tariffs. A decrease of even 25 percent in the world price of rice, which has happened repeatedly, would negatively impact all but the top 10 percent of Indian households, with the poorest households losing the most.
• The EU, the United States, and China would each gain more from free trade agreements with India than would India itself, but in all cases, gains would be a modest and would represent a very small percentage of the affected economies. While China would gain more overall than India from a bilateral agreement, India would see a greater increase in exports than China.
• All of the proposed trade agreements would reduce India’s tariff revenue, which accounts for about 11 percent of the government’s total revenue. This would force the Indian government to either reduce spending or increase taxes at the expense of Indian households. An EU-India trade agreement would reduce revenue the most.
• The trade agreements would have a positive but very modest impact for India’s unemployed, currently estimated at 40.4 million. A Doha agreement, which has the most sizeable impact of the simulated agreements, would increase the demand for unskilled labor by 0.9 percent, about 4 million jobs. Job gains would be spread across a number of sectors, including transport, construction, apparel, textiles and a few agricultural commodities. Under free trade agreements with the EU and the United States, job creation would be concentrated in the apparel and textile sectors, with other manufacturing sectors actually shedding some workers.

While this report seems well-timed to “help” the Doha round on its way, an assessment of its findings would be a worthwhile exercise. It would be interesting to read other studies on the same issue.

CNBC- TV 18 has a report on differences of opinion between India’s finance and commerce ministeries on direct tax benefits for India’s Special Economic Zones (SEZs). Go to http://sezindia.nic.in/, for official information on India’s SEZs. 

SEZs continue to be a bone of contention between the Finance Minister and the Commerce Minister. The Finance Ministry has been wanting almost all direct tax benefits for SEZs to be eliminated. Now, it has found new ammunition to drive home its point.

For long, the Finance Ministry has been driving home the point that SEZs are nothing but a huge revenue linkage tool. It is inventing new tools to ensure that it drives home this point. One contention that it is making right now is that rebating or exempting direct tax benefits to SEZ units and developers is not WTO compliant. Other countries might just impose countervailing duty, or CVD, on Indian exports from SEZs.

The other contention is that this is really not equitable in terms of a tax principle. It is a distortion and might also lead to an erosion of tax base, which could ensure that the government does not actually oblige or meet its FRBM targets.

Of course, the Commerce Minister has rubbished these claims saying that this is not really in the domain of the Finance Ministry anymore. It is an act of Parliament that governs it.

If at all there have to be changes, it has to be routed through the Parliament. It essentially means what the Finance Ministry is claiming-tax benefits to offshore banking units, re-imposition of MAT on developers or SEZs as well as units, as also a re-imposition of dividend distribution tax on developers of SEZs. So, they are trying to finish off the entire gamut of direct tax benefits or the very fiscal edifice on which SEZs are built.

Aradhna Aggarwal of ICRIER has a paper titled “Impact of Special Economic Zones on Employment, Poverty and Human Development”. Its available at   http://www.icrier.org/publication/working_papers_194.html. The abstract:

This study aims at examining the impact of Special Economic Zones (SEZs) on human development and poverty reduction in India. It identifies three channels through which SEZs address these issues: employment generation, skill formation (human capital development), and technology and knowledge upgradation.  It examines how the impact of SEZs is passed through each of these channels. The analysis reveals that ‘employment generation’ has been the most important channel through which SEZs lend themselves to human development concerns, in India. Employment generated by zones is remunerative. Wage rates are not lower than those prevailing outside the zones. Besides, working conditions, non monetary benefits (such as transport, health and food facilities), incentive packages and social security systems are better than those prevailing outside the zones, in particular, in the small/informal sector. The role of SEZs in human capital formation and technology upgradation is found to be rather limited. The study argues that the zones’ potential could not be exploited fully in India. This could primarily be attributed to the limited success of SEZs in attracting investment and promoting exports. The new SEZ policy gives a major thrust to SEZs. However the creation of SEZs alone does not ensure the realization of their potential. The government will need to play a more proactive role for effective realization of the full range of benefits from SEZs

In an interview to the Business Standard, senior vice-president of the PHD Chamber of Commerce and Industry (PHDCCI) said that a common economy for north India would increase the North’s GDP by 2% and add 8-10 billion $ to the economy.

What do the prospects for this happening look like?

It is a difficult process since it involves co-ordination at all levels to ensure free movements of goods, be it regulating mandis and trade, movements of vehicles, quality assurance, processing goods, storage and so on. T K A Nair, principal secretary to the Prime Minister, had called for a standing committee of state secretaries to push this concept. We are hopeful this will be realised in the near future.

… Currently north India contributes nearly 40 per cent of the country’s GDP. We are trying to move towards an integrated market, and want a step-by-step removal of inter-state barriers to trade, apart from promoting e- governance, encouraging hydroelectric projects and so on. All these issues were raised at the chief secretaries’ summit we had this year. Through fora like this we plan to take these issues forward.

While the PHDCCI with a membership base in 10 states in North India is limiting its mandate to a common market in North India, the idea of a common market for India as a whole has also been discussed in other fora.

ICRIER’s working paper no. 83 titled Domestic Market Integration studied the extent of market integration in India and had come up with the following policy suggestions:

• restriction of the Essential Commodities Act, 1955 for emergency use.
• A new central statute to prohibit controls on movement between states
• abolish octroi and other indirect taxes and levies on food articles across India
• agricultural policy reforms to remove restrictions on movement, tax structure reforms on agri commodities, enlarging coverage under the agri commodities futures market,
• reducing commodity coverage in food subsidy programs
• enhance role of private sector in food procurement
• improve transportation infrastructure
• remove tariff policy distortions that subsidise passenger traffic by overcharging freight
• allow FDI in retail
• tariff rationalization in the power sector, provision of universal access to commercial fuel at affordable prices
• policies aimed at establishing competitive real estate prices for retail sector

The OECD’s Economic Survey of India 2007 also discusses the reforms needed to create a common market for India.

Though difficult to execute within India’s decentralized constitutional and political structure, with Indian federalism witnessing a devolution of power to the states, a common market for India is an idea whose time seems to have arrived. 

Cipla of India is setting up an HIV anti-retroviral manufacturing unit in Uganda as a joint venture with a local Ugandan entity. NDTV reports that this unit is viewed as so important that the Ugandan president is personally supervising its progress.

To beat WTO rules, Indian manufacturers decided to set up factories in African nations, rather than just exporting the drugs. These factories mean that African countries are no longer dependent on others’ skills – while Indian businessmen can continue to make money.
This is where the Uganda factory comes in. It will produce Triomune, a combination containing lamivudine, stavudine and nevirapine. It will also make the anti-malarial combination Lumartem.
Said Emmanuel Katongole, managing director of Uganda’s QCI, which has teamed up with Cipla for the factor: ”Our first client is going to be the government, which is committed to providing free ARVs for all those who need them.
”For us TRIPS is a window of opportunity,” Katongole added. ”India has ratified the TRIPS agreement, so it ceases to be a source of generic drugs for Africa.”

If the TRIPS agreement closed some doors, it seems to have opened up others.

An EU-India business summit in New Delhi became a venue for trading of blows between Kamal Nath, the Indian commerce minister and Peter Mandelson, the European trade comissioner. When the EC commisioner attempted to challenge India’s WTO status as a developing country, Nath responded vigorously.

Nath took on Mandelson on India’s classification as an emerging economy, saying that in WTO there were only three categories — developed, developing and least developed — and EU had suggested that India, China, Brazil and South Africa be given the new tag so that they could take on additional burden in WTO talks.
“If India is an emerging economy, the EU is a submerging economy,” Nath said.

Remarks were also exchanged regarding the bonafides of raising non-trade issues, referring back to recent allegations of child labour use in textile exports by India:

Nath said EU was trying to raise non-trade issues, pointing to demands from Brussels to include animal welfare in talks. “I don’t know what does it have to do with trade. India is very concerned about NTBs. If NGOs in Europe are producing reports about our factories showing them in bad light, our NGOs are also concerned about forced feeding of animals,” Nath said.

The Doha talks also featured in the exchange. The Economic Times reported:

The minister said the Doha Round was supposed to be a development round where India was just going to negotiate trade issues and not subsistence.
Taking a dig at both the EU and the US on Thursday, Mr Nath urged EU trade commissioner Peter Mandelson to ask “your friends in the US” to lower their trade-distorting subsidies by just $1. “I have already told the US that if they commit on lowering their subsidies by just $1, the deal is acceptable to us. But I have not got any response so far,” he said.
The commerce minister said distortions in the global trading system had to be addressed as the ongoing WTO round was not about perpetuating these distortions.
He added that the high tariffs on finished products such as jackets and coats and the relatively low tariffs on raw materials should be corrected.
Addressing Mr Mandelson directly, the minister said India had unilaterally brought down its tariffs substantially over the last few years, but the developed countries were not ready to acknowledge it. “You have pocketed whatever tariff reductions we have made unilaterally and you are pressuring us to make cuts over and above what we have already done,” the minister said.
Mr Nath said there were millions of subsistence farmers in India whose interests had to be protected at all costs. “While we are ready to negotiate trade, we cannot negotiate subsistence,” he said.

 A few years ago, the international economic law interest group of the American Society of International Law organized its annual conference on the theme of trade as the guarantor of peace, liberty and security. I was reminded of this linkage upon reading this recent news item. In an academic conference on trade, in a university in the Indian state of Jammu and Kashmir, the unanimous advice to the government was to resolve border disputes with Pakistan in order to create new trade routes connecting the central Asian countries with Jammu and Kashmir.

“Seminar on exports underway at BGSB Varsity

GK NEWS NETWORK

Rajouri, Oct 20: In a path-breaking academic initiative, a brainstorming two day national seminar on India’s exports with particular reference to changing world scenario got underway at the Baba Ghulam Shah Badshah University Rajouri, a spokesman of the university said.
Vice Chancellor Masud A Chaudhary threw open the deliberations with his inaugural address this morning. Scores of economists and experts in foreign trade are attending the seminar which is first such academic discussion in Jammu and Kashmir on the issue immense significance.
While the speakers and participants of the seminar discussed the technical and legal aspects of the world trade regime and new emerging business paradigms, there was unanimity in making Jammu and Kashmir as a launching pad for India’s trade relations with the Central Asian countries. The participants stressed that Governments of India and Pakistan must hammer out the hitches to launch cross-LoC trade between two parts of Jammu and Kashmir and then reach out to the central Asian countries.”

For the full story, read here http://www.greaterkashmir.com/full_story.asp?Date=21_10_2007&ItemID=24&Cat=5

Two other aspects of this story are of interest. First, this is the first ever conference on trade in Jammu and Kashmir. This only shows how the intitative on trade policy discourse is spreading to new regions and stakeholders within India. Also, the opening of new land routes for trade through what used to be hostile borders, is creating new opportunities for development and growth in regions of India which have historically stagnated due to their geographical location. Another example of this phenomenon is the recent opening of the Nathula pass that connects the Indian state of Sikkim with Tibet in China. This is expected to boost Indo-China trade and create growth and development opportunities for the entire North-East region of India.