by Rakesh Mohan
In the last twenty years, global markets have changed in major ways, with increased competitive pressures resulting from larger participation of several developing economies in world trade (particularly, China). The rise in FDI stock has meant an increasing overlap between trade and investment, and a rise in the significance of international value chains, and lead firms managing those value chains to specify the conditions relevant for quality and social and sustainability standards. An important realization in the context of value chains is that imports contribute to exports. Recent data show that imported inputs contribute about one quarter of the total value of India’s exports.2
The world of international trade and trade policy continues to evolve as the focus areas in trade policy are framed by new efforts to establish trade agreements, especially bilateral and regional trade agreements by some large economies.
This implies a need for trade-policy reform to encompass both the likely changes in regional and global markets and the evolution of international trade policy in major economies. In this context, a quick look at the evolution of the scope of trade policy will help us better understand the range of trade policies currently relevant for policymakers and business.
(a) Evolution of Trade Policy
Earlier, trade policy focused mainly on border measures, such as tariffs, quotas, import licensing and prohibitions on imports. Some inside-the-border policies that were seen as impacting trade conditions, such as subsidies and local content requirements, were also part of the consideration. Over time, many more inside-the-border policies that affect trade began to be part of the trade-policy focus, such as IPR, trade-related investment measures, and a recognition that trade rules also needed to apply to services (including regulatory conditions). With increasing competition in global markets and larger economic presence of many developing economies, additional trade-policy considerations started emerging, which reflected an increasing focus in developed economies on conditions that they considered as necessary to create a ‘level playing field’ in world trade. These included policies that affect ‘competitive neutrality’, like differences in social and sustainability (labor and environment) standards, preferential support provided to state enterprise, competition policy, regulatory practices, and ‘responsible business conduct’. Rules or codes of conduct had to be agreed upon for ensuring that standards do not become trade barriers, thus leading to a focus on principles of good regulatory practice, the framework for regulatory coherence and emphasis on establishing a memorandum of understanding or processes for determining conformity among the standards used in different economies.
World trade has been accompanied by an increase in Foreign Direct Investment (FDI), which together with greater tradability of services, led to a rise in the prominence of international value chains in world trade. Effective and efficient value chains require quick response and turnover, with consistent good-quality products and reliable supply. This changed the focus of trade policy towards greater facilitation of processes and value chains, improving infrastructure, and on conditions of investment in other economies.
The spread of digital services and their importance in trade have brought into trade-policy focus the rules for e-commerce, data transfer and certain IPR issues relevant to the digital realm. An interesting feature of the disaggregated value-chain component shows that a large part for many of the major products with a wide reach (e.g. the cell phone) is returns to technology and knowledge (IPRs). The new technologies that are emerging in several areas such as communications technology, material science, biotechnology and renewable energy are creating new technology-intensive ‘sunrise sectors’ in global markets. The emergence of new technologies and related ‘sunrise industries’ has meant greater emphasis on IPRs by owners of technology.
Together with the growth of FDI and value chains, services markets too have opened up, encouraged by greater tradability of services, improved communications technology, and greater experience with generally accepted principles of ‘good regulation’. This has led to the recognition of a need to expand the concept of trade as applied to services (spanning Mode 1 to Mode 4 as agreed in WTO’s General Agreement on Trade in Services3).
The rise of international value chains has also led to a recognition of the fact that a significant portion of value added in goods is due to services. This has led to new ways of identifying and collecting trade data on services trade. Recent data on trade in terms of value added have shown that the share of services in international trade is much higher than previous calculations because manufactured products also include value added from services.4 Value-added trade data show that the share of services in international trade is about 40 per cent, much more than previous estimates. As Lanz and Maurer explain: ‘Services account for more than 70% of world GDP but only for around 20% of world trade in balance of payments terms. In value added terms, accounting for services embodied in exported goods, services account for 40% of world trade.’5
An important feature of services trade-policy reform is that it involves both opening up of market entry to new service providers, and creating a ‘level playing field’ for newcomers through a robust regulatory regime. This consequently established the importance of regulatory regimes as an integral part of the services trade policy.
The enhanced role of value chains and larger links between goods, services and investment in trade have extended the scope of trade policy. There is a growing awareness of the importance of facilitation for international value chains, because consistency of standards and timely response are crucial for efficient operation of these chains.
With several rounds of trade negotiations at the GATT/WTO, the incidence of tariffs and import quotas has come down, though they still remain a focus in trade negotiations. However, other, inside-the-border trade-related policies are now a much larger part of trade-policy considerations. This has implied not only that trade policies have a wider scope and coverage, but that they are now more controversial, as policies hitherto considered the complete domain of domestic policy are now part of trade-policy considerations, both globally and within India.
While efforts within the WTO continue to evolve disciplines in new areas of trade policy, greater scope of trade-policy agreements can be witnessed through recent trade negotiations involving large economies. The implicit aim of these negotiations is to create trade-policy disciplines that would potentially apply more widely, and pave the way for common standards being applicable to their producers and markets.
This paper discusses India’s trade-policy changes since the 1990s in many of the above-mentioned areas. We begin with a summary look at the economic situation since 1991 and then take a more detailed look at the main trade-policy developments in the country. The issues relating to tariffs and non-tariff measures are addressed in some detail, followed by trade facilitation and services. The paper concludes with a summary look at factors relevant to ongoing trade-policy concerns, such as international value chains, investment, social and sustainable standards, and some other policy areas likely to become significant in the near future.
1. Evolution of Some Key Economic Parameters since 1991
Table 1 shows that India’s experience in terms of the external sector has a number of positive achievements as well as some emerging concerns. Foreign-exchange reserves have increased and the current-account deficit is relatively low, but the trade deficit as a share of GDP has increased to very high levels. This results in the government focusing on the large increase in merchandise imports compared to exports, and on seeking ways that would limit the rise in imports and improve the country’s export performance.
The overall improved economic performance shows that since 1991 India has, in general, managed positive economic achievement with limited disruptions that otherwise usually follow major economic reforms. Today, with its greater economic strength, India should be able to continue its process of reform to address the current situation in international trade.
2. Tra
de Policy: Many Types of Policies and Still Evolving
There is a whole range of trade policies that need to be considered for understanding comprehensively the evolution of Indian trade-policy reform (see Table 2). Furthermore, with potential new Free Trade Agreements such as the Trans-Pacific Partnership (TPP), the issues covered in the context of trade policies is even more extensive.6
Table 2: Examples of Trade Policies Covered by
WTO’s Trade-policy Review Report
Tariffs; Other charges affecting imports; Tariff concessions; Tariff rate quotas; Preferential tariffs
Import prohibitions, restrictions, and licensing; Import surveillance; Import quotas; Other import restrictions
Customs procedures and requirements; Pre-shipment inspection; Customs valuation;
Rules of origin
Standards and other technical requirements; Certification and conformity assessment; Accreditation
Anti-dumping; Countervailing; and Safeguard measures
Export taxes, charges, and levies; Minimum export prices
Export support and promotion; Special economic zones (SEZs); Drawback schemes; Export duty and tax concessions,
Export procedures and requirements; Export prohibitions, restrictions and licensing
Export promotion and marketing assistance; Export finance, insurance and guarantees
Government procurement; IPRs; Competition policy; Subsidies; Price controls; State trading
This paper will not cover each of these policies in detail. It will focus on some of the major trade-policy areas to show the direction of trade-policy change for India in the last twenty-five years, and, based on that, indicate some further steps needed in that context. The paper begins with the key features of trade-policy reform introduced in 1991. This reform addressed four different aspects of trade policy: tariffs, non-tariff measures, measures affecting exports, and institutions and procedures relating to trade. The paper takes a summary look at these trade-policy areas, and then discusses trade-policy reforms in the context of other areas such as services, whose importance in terms of trade-policy has grown in more recent times. This is followed by a discussion of the more current trade-policy concerns and the need to recognize that trade-policy initiatives are taking place in multiple ways, with a shift from formal and government-led initiatives to informal and more private-sector participation in determining the contours of trade-policy frameworks. This suggests a need for enlarging the scope of our trade-policy considerations and preparation to carry forward the momentum that was provided by the reform in 1991.
3. Trade-policy Reform in 1991
In 1991, India’s foreign-exchange reserves had plummeted to levels that would finance only a fortnight’s imports; the debt service burden was one-fifth of current-account receipts, fiscal deficit was above 8 per cent, leading to pressure on balance of payments; and the consumer price index had increased by 13.6 per cent with implications for changing the foreign-exchange rate. Those was dire times requiring major policy changes.7
The 1991 Budget recognized the significance of trade-policy reform as part of the overall reform programme, stating, for instance: ‘The policies for industrial development are intimately related to policies for trade.’8
A number of steps were taken to reform trade policy: a more outward-oriented regime was put in place; tariffs were reduced in a phased manner; import duties were streamlined or simplified; and a process transforming quantitative border restrictions to price-based measures was begun. Likewise, export incentives were continued or new ones provided for a number of products,9 and institutional changes were made to bring transparency and to facilitate transactions involving domestic and foreign markets. This included the establishment of certain institutions or revised mandate for existing institutions that would help implement the new focus areas (e.g. the Tariff Commission10).
The 1991 Budget speech11 gives the main thrust of policy change as follows:
The time has come to expose Indian industry to competition from abroad in a phased manner. As a first step in this direction, the government has introduced changes in import export policy, aimed at a reduction of import licensing, vigorous export promotion and optimal import compression. The exchange rate adjustments on 1st and 3rd July 1991 and the enlargement and liberalization of the replenishment licence system constitute the two major initial steps in the direction of trade-policy reform. They represent the beginning of a transition from a regime of quantitative restrictions to a price based mechanism. (para 11)
The 1991 trade-policy reform was an exercise that balanced several objectives. For instance, loss of revenue was a major concern, and this was mentioned as a reason for not reducing the import duty more than what was being announced. In a number of instances, import tariffs were kept high to encourage infant industry. The need for protecting Indian industry against foreign competition, and to save foreign exchange, were explicitly recognized (paragraphs 10, 80 and 130 of the Budget speech). This was balanced with a reduction in tariffs to lower input costs and to encourage export activities.12 The Budget speech stated, for instance:
I have attempted to structure the proposals for customs and excise levies in a manner that indigenous industries are encouraged, and, at the same time, imports of items required for export production are not thwarted. In the long term, if revenues are buoyant and tax compliance improves, I expect to bring down the rates of customs and excise levies. Even now, some moderation in import duties is being attempted and a more broad-based effort may be attempted to streamline the structure and reduce the rates in the next Budget. I have also tried to ensure that the proposed changes improve competitiveness of the industrial sector, particularly the export oriented industries. (para 105)
In the sphere of customs duties, over time, the objective of protection for infant industries and the need to raise revenues have led to a situation where import duties prescribed for certain items are inordinately high and, in several cases, more than 300 per cent. As a measure of reform, I propose to reduce the ad valorem rate of basic plus auxiliary duties of customs to a maximum of 150 per cent where it is more than that at present, thereby eliminating the tariff peaks above 150 per cent. The only exceptions that would remain hereafter are imported alcoholic beverages and passenger baggage. (para 107)
Interestingly, while a major part of the Budget was oriented towards reform, much of it was conventionally focusing on certain ongoing objectives emphasized by the government and promoted through the Budget, such as promoting technological upgradation, facilitating capital goods imports, keeping prices low for products such as essential drugs and certain machinery and equipment, improving the environment, promoting tourism by facilitating products that contribute to the value chain, and promoting software exports.
Three interesting features emerge from the 1991 Budget. One, though the tariff levels were reduced, they were still kept at significantly high levels. Two, the trade-policy reform in 1991 was an initial step, which would be continued over time. Three, the nature and pace of reform would depend on the underlying economic factors, which were a matter of concern for the government. The trade-policy reforms were notified by the Five-Year EXIM Policy in 1992, which provided stability to the content and direction of change brought in by the 1991 reform.
Another important feature of the 1991 reform was that it began opening up the regime for FDI. While FDI was not linked at that time with trade policy, it created a base for increasing economic linkages with global markets. We consider below how this objective of greater links with world markets was implemented through changes in tariffs and non-tariff measures.
4. Tariff Reform
The government established a committee under Raja Chelliah on tax reforms, to provide expert inputs for policy reform. In its final report in 1993, with respect to tariffs, the Chelliah Committee was of the view:
The very high or high rates applicable to most commodities, the multiplicity of statutory rates, the wide spread of rat
es and the continued issue of a large number of exemption or concessional rate notifications not only made the administration of the system extremely complicated, but led to unintended and undesirable effects on the allocation of resources in the economy … there is general agreement now that the import tariff system should be drastically simplified, the levels and spread of the rates of duty must be reduced significantly and as early as possible with the re-structuring of the duties, most of the notifications must be eliminated.13
The committee suggested seven different rates covering different product categories14 to be in place latest by March 1998.15 The committee recommended that India’s import-weighted duty rate come down to 25 per cent by March 1998. The government accepted the report and further tariff reform in India was based on these recommendations.16
A clear enunciation of the various considerations that underlay India’s tariff reform initiation is contained in the Budget speech of 1993, and is very instructive to understand the reasoning behind those changes. The factors enunciated then, remain largely relevant even today in terms of such reform. Relevant excerpts from that speech are reproduced in Annex I to this paper.
(a) A Major Decrease in Tariffs over Time, Including Reducing Maximum Tariff Rates
Average tariff levels prior to 1991 were in triple digits, as shown by the 1990–91 estimates in Table 4. The 1991 tariff reform reduced these very significantly, but the new levels too were very high at the end of the 1990s. However, the downward trend in India’s tariffs continued for much of the period since 1991. Before 1991, the maximum tariff was 355 per cent. In the 1991 Budget, it was specified at 150 per cent, as shown by the text of paragraph 107 of the Budget speech quoted in Section 2 above.
The peak tariffs were reduced every year except for two during the period 1991–92 to 2007–08. The exceptional years were 1996–97 and 1998–99 (see Table 3). In the 1996–97 Budget, the peak rate was not reduced, and on top of that a special duty of 2 per cent (akin to a surcharge) was added, thus raising the maximum tariff rate. Similarly, in 1998–99, the previous year’s peak rate plus surcharge was not reduced.
