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.

In his speech to Congress, Obama made the following statement on bail-outs for the US automobile industry:

As for our auto industry, everyone recognizes that years of bad decision-making and a global recession have pushed our automakers to the brink.  We should not, and will not, protect them from their own bad practices.  But we are committed to the goal of a re-tooled, re-imagined auto industry that can compete and win.  Millions of jobs depend on it.  Scores of communities depend on it.  And I believe the nation that invented the automobile cannot walk away from it.

None of this will come without cost, nor will it be easy.  But this is America.  We don’t do what’s easy.  We do what is necessary to move this country forward.

This immediately brought back to my mind, somewhat “undiplomatic” comments made by Indian trade minister Kamal Nath last year when he declared during the July Doha talks that "The future of automobiles is not in Detroit or Stuttgart, it’s in Asia.". Apparently, Nath had once stated in an interview to Outlook Magazine:

The developed countries must understand that the rules of trade and the leverage that they got from trade have always been in their favour. And these countries, which are the champions of globalisation, are now realising that they are no longer globally competitive, whereas countries like India, which are becoming globally competitive, have started demanding that there should be no curb on globalisation. So they (the developed world) are looking at various ways and means to ensure that there is no change in this balance of leverage. So I said where industrial products are concerned, I am going to protect my infant industries, protect my automobile industry because no more can you make automobiles in Detroit and Stuttgart and sell them in India. You have to make your automobiles in India.

A time will come when the automobiles will be made in India and sold in Stuttgart and Detroit. This is how the trade winds are changing. So my position on industrial products is clear: tell me how much of your duties and tariffs you will reduce and as per the WTO principle, I will reduce it slightly less. If they say they will reduce it by 50%, then I will do so by 40%. But it can’t be that they do (reduce their tariffs) by 20% and expect us to reduce it by 70%.

Watch out for some big battles over where cars will get made – in the land that invented them or where they can get made cheaper! Politics often trumps economics and therefore I think cars will continue to be made both in the US and in India and elsewhere. Who will own the car companies is quite another question of course.

The Economic Times reports:

… India’s exports tumbled 15.9% in January — its fourth straight monthly fall — and the acceleration in the pace of its decline amid a deepening recession in key markets such as the US, Europe and Japan has put into doubt prospects of a near-term revival.
Economists expect the downward trend to continue for the remainder of the current fiscal year to end-March and even spill over into the next fiscal. “The export figures for February are expected to be on the same line as the January figures. There is a contraction in world demand and it is obvious that exports will get affected,” a senior government official said.
Merchandise exports fell to $12.38 billion in January against $14.72 billion in the same month a year ago. The hardest-hit sectors include handicrafts, carpets, cotton yarn & fabrics, gems & jewellery, computer software, coal and minerals, oil meals and rice.
Providing further proof that the Indian economy was slowing down, imports also moved into negative territory for the first time this fiscal year, falling 18.1% in January, with non-oil imports slipping by 0.5%. The trade data comes close on the heels of weaker third quarter economic growth figures of 5.3% and a 2% drop in industrial production.
The sharp drop in imports had a flattering effect on the trade deficit, which at $6.07 billion in January 2009 compared favourably with $7.84 billion in the same month a year ago.  …

AFP has more on the job losses and elections link:

India’s trade performance is of critical concern to the Congress-led government as the export sector is one of the country’s biggest employment generators.

The export dive, underlining the slowdown in India’s buoyant economic expansion, came as India’s election commissioner announced that national polls would be held in stages from April 16 until May 13.

Imports tumbled 18.2 percent to 18.46 billion in January, falling for the first time this fiscal year, data showed. Oil imports plunged 47.5 percent from a year earlier to 4.46 billion dollars.

Imports are falling because of a "slowdown in industrial production which is growing at close to zero percent," as well as a downturn in domestic demand and a fall in global commodity prices, said Crisil principal economist D.K. Joshi.

Last Friday, the government reported India’s economy expanded by 5.3 percent in the third quarter to December, down from 8.9 percent in the same period a year earlier.

However, the drop in imports helped the trade gap narrow to 6.1 billion dollars in January from 7.8 billion dollars a year earlier.

The commerce ministry last week lowered its export target for this fiscal year to March 31, citing the deepening global economic slowdown.

The ministry cut its export goal for this year to 170 to 175 billion from an initial target of 200 billion dollars, projected when the global economy was booming.

"In an interconnected world, India cannot escape unscathed" from the global recession, Commerce Minister Kamal Nath said.

India logged 30 percent year-on-year export growth between April and September last year. But foreign shipments started shrinking in October as the worldwide financial crisis set in.

Nath, however, set an export target for the 2009-10 financial year of 200 billion dollars, the same as he had initially forecast for this financial year, insisting the outlook would pick up.

The Indian government has announced various measures to try to shield exporters from the slump including cheaper financing and duty refunds.

The Federation of Indian Exporters Association has forecast 10 million job losses in the export sector to the end of March.

Here is a curiously interesting report from the Economic Times … the Indian Committee of Secretaries has advice for the Ministry of Commerce:

Apply WTO-approved curbs to ban imports, advises CoS
28 Feb 2009, 0102 hrs IST, Amiti Sen, ET Bureau

NEW DELHI: The commerce department, which restricted the import of a number of items from China this fiscal by allowing only actual users to import them through special licences issued by the government, may no longer be able to take the measure on its own.

The committee of secretaries (CoS), headed by the Cabinet secretary, is of the view that such restrictions could lead to violation of multilateral trading norms established by the World Trade Organization (WTO) and should be used sparingly. It suggested that the decision to impose such restrictions, when absolutely necessary, should be taken by the CoS, a government official said.

The commerce department should, instead, use the WTO-approved special safeguard mechanism (SSM)—where special import duties are imposed to prevent import surges—to help industry against cheap imports, the CoS proposed in a recent meeting.

The commerce department, in November last year, had put a number of items on the restricted list of imports like hot-rolled steel and radial tyres which are being mostly imported from China. Import of all items on restricted list is allowed only by actual users through import licences issued by the government.

The import of restricted products is, thus, totally in control of the government — a situation WTO may not tolerate. “If we are taken to WTO by an exporting country and found guilty of violating WTO rules, retaliatory sanctions can be imposed against our exports,” an official said.

The use of special safeguard mechanism, however, is allowed by WTO as it leads to imposition of additional import duties on products once it is conclusively proved there has been a surge in the import of an identified product leading to domestic market disruption and injury to the industry.

New Delhi has already imposed safeguard duties on four items, all chemicals. The directorate general of safeguards, set up under the department of revenue, carries out investigations following complaints made by the domestic industry against increased imports of a particular commodity.

Once it is satisfied that there has been a sharp increase in the import of a product and has led to losses for the domestic industry, it imposes 200-day temporary import duties on the product. The safeguard duty could be in place for up to three years if the domestic industry continues to be threatened by imports.

With the slowdown leading to contraction in global demand, the government is focusing on protecting the domestic industry against cheap imports.

Thoughts … turf wars?

Also, the Committee of Secretaries view might give ideas to Chinese trade officials about a potential WTO violation here on Indian restrictions on imports of hot-rolled steel and radial tyres. 

And with the global economic crisis and the slow-down in India, there seems to be general protectionist sentiment all-around. In an election year, the Indian government has not much option but to protect domestic industry and very little appetite for signing new FTAs and lowering any tariffs. See earlier post

This Economic Times story reflects Indian industry and policymakers sensitivity on the issue of any protectionist clamp-down on outsourcing. Though I think the Economic Times jumped the gun here a bit. Its too early to be talking about WTO contests especially since the whole story seems to be based upon this sentence in President Obama’s speech to Congress:

We will root out the waste, fraud, and abuse in our Medicare program that doesn’t make our seniors any healthier, and we will restore a sense of fairness and balance to our tax code by finally ending the tax breaks for corporations that ship our jobs overseas. 

The news report captioned “India may contest Obama’s move against outsourcing in WTO” seems to be based upon Minister Kamal Nath’s response on being asked whether India would respond to the suggestion in Obama’s speech. This is what Nath is reported to have answered:

We have to ensure what they (US) are doing is WTO compatible when we are talking about trade, movement of goods, movement of people and movement of services," Commerce and Industry Minister Kamal Nath said here.
"Yes, of course," he said when asked if India will take up the issue of outsourcing with the US administration.
…

Nath said, "One has to see how the US companies using India as a base for technological development respond to their own government." Outsourcing of technology development by large companies cannot be switched on and off, he added.

It should be interesting to see what shape the US measure on discouraging outsourcing takes. A PTI story has more:

Nearly 1,000 US firms, which have shipped their jobs overseas are anticipated to be affected with the proposed elimination of tax incentives. The plan mainly refers to one of the provisions in the tax code that allows companies to pay lesser taxes for profits earned from foreign shores.

Here’s another interesting aspect linking the outsourcing issue with H-1B visas. A Computerworld story discusses this:

The U.S. government’s H-1B visa usage data for fiscal 2008 shows that offshore outsourcing firms based in India are employing a growing number of H-1B workers — a hiring trend that is affecting the IT workforces in communities such as Oldsmar, Fla.

Oldsmar is the home of a technology center operated by The Nielsen Co., which measures TV audiences, consumer trends and other metrics for its clients. Nielsen last year began laying off workers at the facility after announcing in October 2007 a 10-year global outsourcing agreement valued at $1.2 billion with Tata Consultancy Services Ltd.

And while Nielsen cut employees, Mumbai, India-based Tata was increasing its hiring of H-1B workers. Tata received approval for a total of 1,539 H-1B visas during the federal fiscal year that ended last September, according to government data released this week. That was nearly double the 797 visas that the outsourcing and IT services vendor received in fiscal 2007

 

The new Annual Supplement to India’s foreign trade policy was released by commerce minister Kamal Nath on 26 February.

His speech on the occasion can be accessed here. It provides an interesting insight into the trade policy priorities of the Indian government. Incidentally there is no mention of the stalled Doha round and the WTO  finds mention only in passing (the Minister quotes the WTO to warn about how the growth rate in global trade in goods and services is expected to decline from 7.2% in 2007 to 4.6% in 2008 and further to 2.1% in 2009).

On Indian FTAs the Minister had this to say:

We concluded a Comprehensive Economic Cooperation Agreement (CECA) with Singapore in 2004. It is India’s first CECA with any country covering goods, services, investment and other areas of cooperation. We are in an advanced stage of negotiations with ASEAN, Korea and Japan and are engaging significantly with SAARC, EU, EFTA and Thailand. These efforts have increased our confidence for a deeper engagement with other trading partners and also to understand their markets for promotion of trade in both goods and services.

The annual supplement with the trade facilitation measures can be accessed here while the Foreign Trade Policy 2004-2009 can be accessed here.

A new full year policy for 2009-2010 will be issued by the new government constituted after elections this year.

AFP reports on how the Indian rupee has fallen against the dollar and has widened India’s trade deficit. Here is the report in full: 

India’s currency is feeling the pressure as world oil prices soar and foreign investors lose their “risk appetite” for emerging market assets amid global financial turmoil, analysts say.

The Indian rupee — which a few months ago was trading at 10-year highs — now looks poised to post its worst monthly decline in a decade, analysts say.

“After having appreciated pretty much continuously against a soft US dollar since August 2006, the tide has turned for the rupee,” said HSBC economist Robert Prior-Wandesforde.

After touching a peak in early February of 39.4 to the dollar, the rupee has fallen by 9.5 percent, nearly wiping out last year’s 12 percent gain. It traded against the greenback Thursday at 43.15.

Its slide has been greased by fears a 40 percent jump in oil prices this year and rises in other global commodity prices along with a tight monetary policy to tame inflation will depress growth and boost India’s already soaring current account deficit, a measure of trade and investment flows.

The problem of oil prices, which catapulted above 135 dollars a barrel for the first time on Thursday on fears about rampant demand exceeding supply, is particularly acute for India as it imports 70 percent of its crude needs.

India’s trade deficit has widened 20.5 billion dollars this year with oil imports 10 billion dollars higher in the last quarter than the previous quarter.

“Unless either global crude oil prices ease or there’s a sharp improvement in global risk appetite that increases capital inflows into India” the rupee will remain under pressure, said JP Morgan analyst Rajeev Malik.

Many companies which took foreign loans and “kept the proceeds unhedged assuming super-optimistic scenarios for the rupee should be losing some sleep,” Malik added. Hedging involves making provision for adverse price movements.

Still, there is a silver lining in the rupee’s fall for India’s flagship software industry and other export-oriented sectors like textiles which sell mainly to the United States and whose profits had been hit.

The rupee’s fall has been exacerbated by official data last week showing industrial production rose by just three percent in March, its slowest pace in six years, as tighter credit to stem strong inflation hurt manufacturing.

Some private economists forecast growth in Asia’s third-biggest economy could decelerate to around seven percent in the fiscal year to March 2009. Even Finance Minister Palaniappan Chidambaram is projecting growth of just eight percent, the slowest pace since 2005.

The economy grew by an estimated 8.7 percent in the fiscal year ending March 31, 2008, down from 9.6 percent the previous year.

“We expect the Reserve Bank of India to intervene in the near term checking the volatility, but the direction of the rupee is unlikely to change” if the dollar continues its rise, said Morgan Stanley economist Chetan Ahya in a research note.

The rupee gloom is a far cry from bullish sentiment earlier this year when analysts were expecting the currency to strengthen to around 38 to the dollar by mid-2008.

But foreign investors’ ardour for Indian assets has been waning with risk appetite declining amid the global credit crunch.

Foreign fund share sales have totalled a net 2.51 billion dollars so far this year, compared with purchases of 2.87 billion dollars during the same period in 2007.

Still, foreign direct investment inflows remain strong “underscoring the fact that the medium-term (firm growth) story for India remains intact,” said HSBC’s Prior-Wandesforde.