India in the WTO

We still don’t know who will be given charge of India’s commerce ministry, but this announcement can be expected by Tuesday. My sense is that Mr Kamal Nath himself is keen on continuing as Commerce minister and conclude the unfinished Doha round as well as FDI and other industrial  sector reforms.

In an interview to CNN-IBN (see the text here) Mr. Nath spoke about the prospects of the Doha round:

Rajdeep Sardesai: Between 2004-09, Kamal Nath came to be identified with the World Trade Organisation (WTO) talks. Do you believe that with this clear mandate you will have a freer hand in the sense negotiating at the WTO you should be the commerce minister. Do you see a quick completion of the Doha round?

Kamal Nath: I think India needs to have a rule based multilateral system, we have a big stake in that. But today I think the Western countries who are bigger proponents of this are the ones getting cold feet and not India.

Rajdeep Sardesai: Yes, exactly that is why the US democratic administration seems protectionist.

Kamal Nath: That is what I am saying, they are getting cold feet not us.

On FDI:

Rajdeep Sardesai: Just before the elections, you had amended the Foreign Direct Investment (FDI) policy through a press note. Now investments made by a company registered in India in which a foreign company has a less than 50 per cent stake will not be considered as FDI. Some believe this has allowed foreign companies to breach sectoral limits, was this the objective to open up?

Kamal Nath: When we have a global recession, we have to make India a good investment destination. I want to separate ownership and control and this seeks to do that and get more investment.

On FDI in retail:

Rajdeep Sardesai: In your first tenure, between 2004-09 there was this ghost of Left which was always haunting you. This time it doesn’t even exist, will there be FDI in the multi-sector retailing or do you believe that this might affect the kiranewalla (small grocery shop) and that might be a concern that your fellow Cabinet Ministers will against you?

Kamal Nath: It is not FDI, it is big versus small and if it is big you can have a multi-brand Indian company, you have Reliance, ITC etc.

Rajdeep Sardesai: Will you allow FDI?

Kamal Nath: No, I am not talking about retail. As long as FDI doesn’t displace existing employment it is good but talking about the retail sector it is a very grey area.

Rajdeep Sardesai: You see it as a grey area, I thought at one point of time you believed that it would help Indian agriculture.

Kamal Nath: No, we cannot generalise on retail. Retail is not cement and motor, it is technology. If we can have access to retail technology and in fact we must not be looking at man at the moment, we must be looking for the niece and the son and the daughter. And that is the key thing to look at.

On liberalisation (FDI) in education:

Rajdeep Sardesai: The Commerce Ministry had also been wanting to liberalise high education but the HRD Ministry previously under Arjun Singh was not helpful. He is no more there but the fact is that will it happen now?

Kamal Nath: I can’t say that this will happen, I can only say that we have to ensure that our youngsters have the access to the best education in India. Why are we sending thousands of youngsters abroad, why can’t they stay here and study at a fraction of the cost?

On the need for export stimulus measures:

Rajdeep Sardesai: Exports, a critical area again. The export sector has been badly hit by recession. Your (Commerce) ministry had proposed a one year exemption in the payment of the fringe tax to these export oriented companies. Will we see that?

Kamal Nath: Exemption is about competitiveness and cost. Today, if the economy is in recession we can’t plan a package for Europe or the US. We are going to ensure that all levies and taxes are refunded and are not there for export.

Rajdeep Sardesai: But the aam aadmi is the one who is being hit. Do you think the time has come for a comprehensive package for the export sector?

Kamal Nath: There is a need for a comprehensive package to refund taxes, levies on anything that is being exported. Today you go anywhere in the world and you buy something from a shop, you refund immediately. So, you must have all taxes and levies because no taxes and levies are exported.

On differences between the Commerce and the Finance ministeries (in the previous administration the Commerce and Finance ministries had differed over SEZs and over sops for exporters):

Rajdeep Sardesai: Last time there was a feeling that the Commerce Ministry and the Finance Ministry were not on the same track. Will it be different this time with Pranab Mukherjee as the Finance Minister?

Kamal Nath: Well, I think the job of the Finance Ministry is to collect the revenue and see that they do resource management so any Finance Ministry would do that. But you need to weigh it off, you may not export and you may be having an economic impact because of that.

On financial sector liberalisation:

Rajdeep Sardesai: The new Government this time is largely free of the pressures of allies and therefore you will expected to push it with reforms. Last time, every time you were asked about reform you said look my hands are tide. Your hands are no longer tide, will it be different this time?

Kamal Nath: Let’s not say that there were no reforms in the last government. There were reforms in the financial sector which we didn’t do but let us recognise this. We should remember that the reforms that were asked by those financial icons of the Western world, the ones which were wound up.

Rajdeep Sardesai: So, are you among those who think that it is good to be cautious about financial sector liberalisation?

Kamal Nath: No, it depends which reforms we are talking about. We are looking at the reforms which are India specific; we can’t be talking about reforms all over the world. Today the most important reform is the reform in the governance. Reform in our Labour Act, the labour laws must be made employment generating.

On labour law reforms:

Rajdeep Sardesai: So, you would support reforms in labour laws which allow companies to hire and fire easily?

Kamal Nath: We must recognise this that for example if a textile company wants to hire some people to complete an order in four months but they can’t take that order because he can’t hire them for four months. So at that point of time, we are losing on that amount of employment.

Rajdeep Sardesai: But will the politicians allow this kind of labour laws reform? The problem is this is where the politics seem to clash with good economics.

Kamal Nath: No, I am all for the reform in labour laws which generate employment, provide employment security. We have to have this because employment generation is our No 1 priority with the young population.

On Special Economic Zones:

Rajdeep Sardesai: But let’s look at land because there has been controversy over Kamal Nath’s policies as commerce minister when it came to the Economic Zones. You were looked at someone who was liberally granting Special Economic Zones (SEZs), some suggested that it was little more than a land scam. And now you have got Mamata Banerjee who after Nandigram and Singur is going to get tough with any attempts made to liberalise land acquisitions.

Kamal Nath: Let us not talk in the abstract. There are SEZs today on the ground, you can measure easily how much investment is coming to the nearest rupee. We can measure how much employment has been generated, how much export has happened so all that are stories of the past. There are concerns in high density states.

Rajdeep Sardesai: But after Singur and Nandigram, won’t there be pressure to sort of modify your land acquisition policies, your own minister will suggest that.

Kamal Nath: I am all for that and that is what I am suggesting that there was a Cabinet committee, there was a group of ministers selected for that. That has moved the new land acquisition rehabilitation suggestive policy and that parliament had approved that and now this Parliament will take it up.

The videos of this interview (in 5 parts) can be watched here.

Continuing on the topic of the previous post, an American Professor of Strategy and Organization, School of Business, University of Maryland, (Ralph J Tyler) had an interesting opinion piece in the Economic Times earlier this year in January. He writes that by 2050, the bilateral trade relationship between India and China will be the most important economic relationship in the world. Tyler argues that India should grant China market economy status because:

While government subsidies do remain an issue in some industries in China, there is no evidence that this problem is endemic throughout large sectors of the Chinese economy. Also, other countries (such as Russia) which suffer from similar problems already enjoy a Market Economy Status.
Whether or not a country grants MES to China has minimal impact on trade balance with China. Take the US as an example. Even though the US has not granted MES to China, its trade deficit with China was $162 billion in 2004, $202 billion in 2005, and $232 billion in 2006. Thus, from China’s point of view, whether or not a country grants MES to it has little substantive value. The value is entirely “symbolic” and, as we know well, symbolism is a hugely valued commodity in China.
In any case, China will automatically get the Market Economy Status around 2015-16. Thus, for China, the symbolic value of getting MES goes down with each passing year. If India were to grant MES to China now (rather than after Japan, the US, or the EU have done so), the symbolic value to China will be much greater than if India were to be a mere follower.
Granting MES to China will not take away India’s rights to file legitimate anti-dumping cases. Even after China is granted MES, it has to provide verifiable information to the country filing an anti-dumping complaint. If such information is not provided, the latter retains the right to use the best information available, including third-country (surrogate) information. As it is, the current anti-dumping cases filed by India against China total less than 5% of China’s annual exports to India. In short, the substantive value of granting or not granting MES to China is insignificant not just for China but also for India. Yes, India will have a $9-10 billion trade deficit with China in 2007; however, MES has little if anything to do with the trade deficit.
Substance aside, if India were to grant MES to China before Japan, the US, and the EU do so, the symbolic value to China will be very high. If India is smart, it should exploit this opportunity to the maximum by getting quid-pro-quo concessions from China on issues that matter enormously to India (e.g., a settlement of the border disputes). In essence, India should look at MES for China as an issue whose salience rests almost totally in non-economic rather than economic domains.
We agree that, at the margins, granting MES to China will put greater pressure on Indian manufacturers to become more efficient (and on the Indian government to accelerate the elimination of India’s disadvantage in infrastructure).
However, this pressure is likely to be a net plus. India’s political and business leaders have always responded with vigour to external economic pressures and competition. Look at the country’s response in 1991. Or, look at the accelerated pace with which India’s IT giants are globalising their footprint and moving up the value chain in response to an appreciation of the rupee and growing competition from other countries.

On the growing importance of India China trade he writes:

Each country’s aggregate international trade is expanding by 23-24% annually. In comparison, India-China trade grew at a 50% rate during 2002-2006 and will increase by a further 54% during 2007 to reach $37 billion.
Second, after adjusting for partner GDP (i.e., bilateral trade divided by the trading partner’s GDP), India’s trade with China is greater than that with Japan, the US, or the entire world. After similar adjustments, China’s trade with India is only slightly below that with Japan, the US, or the entire world.
Third, China already is (or will shortly become) India’s number one trading partner. From China’s side, India already is one of its top ten trading partners. Also, China’s trade with India is growing much faster than with any of the other nine. Thus, India is rapidly becoming an increasingly important trading partner for China.
Fourth, India’s overall international trade is significantly below that of China’s, in terms of both absolute figures (for 2006, $306 billion vs $1,760 billion) as well as relative to GDP (34% of GDP vs. 65% of GDP).
Fifth, even if the growth rate in India-China trade slows down to 25% annually (a conservative projection) from the current rate of over 50%, bilateral trade between them will be almost $75 billion in 2010 and $225 billion in 2015, i.e., as large as China-US trade just three years ago. These are very large numbers. Political and business leaders need to start getting ready now for this radically different world.
Trade theory tells us that, in an increasingly flat world, trade between two countries should be a multiplicative function of their GDPs. Since it is almost certain that, by 2050, China and India will be the two largest economies in the world, it is inevitable that bilateral trade between them will become the most important economic relationship in the world.

Tyler offers an interesting stance on investment ties between India and China:

At present, investment links between the two countries are relatively modest. Haier and Huawei have significant presence in India. Similarly, Bharat Forge, TCS, and Infosys are building a noteworthy presence in China.
These types of greenfield investments will continue to grow. However, the quantum leap will come as some of the bigger companies from India and China acquire third-country companies that already have a significant presence in the other country (e.g., if an Indian auto company were to acquire a western auto company with significant presence in China). It is certain that, over just the next five years, we will see a growing number of foreign acquisitions by Indian and Chinese companies. As these acquisitions materialise, it is inevitable that investment linkages between India and China will grow rapidly.

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.”

Another interesting India related paper on SSRN:

Julien Chaisse, Debashis Chakraborty, Arup Gupta, “Prospects for a Multilateral Framework on Investment – The Indian Bolt” NCCR Trade Regulation Working Paper No. 2007/37

Abstract:
The potential inclusion of a multilateral framework for investment at the WTO aims to coordinate the global regulation on trade and investment. In addition to the difficulties arising during these negotiations, one major concern is the fact that certain countries like India do not have an interest to go for a full-scale Capital Account Convertibility. As a part of the G4, India is currently a major player in the trade-related international regulatory framework. It is argued here that the question of a multilateral framework for investment cannot be solved without taking into account the Indian reluctance to a freer investment regime. There is a historical reluctance of developing countries to establish freer investment regimes. The project on a New International Economic Order already put as a pre-eminent point the sovereignty of States and their necessary control of the private sector notably of foreign capital. But that political approach is reinforced by objective arguments analysed here. First we briefly discuss the debate on having a freer investment framework and foreign investment regime in India. India’s submissions to the WTO on this front are reviewed next. Finally in order to evaluate the legitimacy of India’s concerns, through an empirical model the potential impact of a destabilizing shock on her capital account is analysed. Finally based on the findings, the policy lessons are drawn.

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.