India Transformed

by Rakesh Mohan

  Building domestic capacity to meet standards is an essential part of creating trade opportunities. However, in the context of international trade, meeting standards is not sufficient for exports to be accepted in other markets. Accepted conformity assessment procedures are very important to get agreement in other markets that standards have been met by the product exported to that market.

  The story of standards trade policy in India has been an increasing realization regarding the importance of all these factors: shifting from a focus on developing domestic standards towards aligning policies and capabilities towards international standards; recognition of the importance of private standards, conformity assessment, and expanding the capabilities of small and medium enterprise through focused training; and including social and sustainability standards in the scope of both training and conformity assessment.

  Recognizing the importance of standards for international trade, the Government of India established an annual meeting in 2014 under a Standards Conclave, which brings all standards-related stakeholders on a single platform and develops road maps for standards-related policies. The government has designated Quality Council of India (QCI) as India’s focal point agency for private standards. It has changed two laws to facilitate the policy framework for conformity assessment, has enabled training programmes that use step-wise upgrading of small and medium enterprises to reach regional or global standards, and has streamlined and increased scope of linking up with international standards. The government encourages or supports initiatives for MOUs between Indian agencies and international agencies that work on standards (i.e., agencies that develop or validate standards/conformity assessment). Such MOUs have been signed with the African nodal standards agency as well as those in many developed economies.

  Regarding India’s use of standards for trade restrictive purposes, it is useful to consider the specific trade concerns (STCs) raised in WTO about India’s SPS and TBT policies. These data show that India has been amongst the top ten economies whose standards were raised as a concern in the WTO, though far less than the top countries in terms of new STCs.61 Thus, for TBT, during 1995 to 2015, new concerns raised for Indian measures were twenty-four, in comparison to 102 for the EU, fifty-six for China and forty-seven for the US. For SPS, during 1995 to 2015, India’s policies were raised as STC in thirteen instances in the WTO’s committee on SPS, in comparison to seventy-seven for the EU, forty-five for the US and twenty-seven for China. It is worth bearing in mind that China became a member of WTO in November 2001, and its STCs were therefore mentioned in this process from only 2002 onwards.

  In terms of standards-related disputes in WTO, India has not faced many complaints. Only three WTO disputes have been raised with respect to Indian SPS policies and one for TBT.

  This could be both because India’s policies are a matter of lower concern and the fact that the Indian market is not large enough for more concerns to be expressed at the relevant SPS/TBT fora in the WTO. Nonetheless, there is a prevailing view amongst many stakeholders that India’s quality of domestic products and process standards need to improve, particularly for products of the large informal sector in India. This issue would need to be addressed through training and better implementation of existing systems, to encouraging and pacing the way for sequentially moving towards international standards. Some schemes that build capacities in a progressive and step-wise manner are now part of the Indian standards training methods.62

  6.   Export-related Policies

  Similar to imports, India’s exports too are subject to controls and monitoring for several products, but with a much smaller coverage. In 1991, a limited number of exports were prohibited (mainly for moral or environmental reasons) or were subject to export quotas. A relatively larger number of products were subject to export licensing. While exports taxes were used, they were applied to selected specified products.63

  Exports policies have been reformed significantly since the early 1990s. Now, exporters have a self-assessment system to facilitate trade. Currently, about 80 per cent transactions are cleared without intervention by customs and 98 per cent of documents are processed electronically.64 Exporters are required to register and get a code for record and facilitating any processes. Several products are subject to quality inspections and certification. This is required both to reduce risks of exports being rejected and to meet various conditions relating to internationally agreed practices. Export taxes and cess do apply to a few items. In some cases, minimum export prices are imposed for some sensitive products. Likewise, exports of some products are prohibited or subject to export licensing: about 190 tariff-line items are subject to export licensing.

  Thus, over time, export-policy reform has facilitated and provided greater freedom to exporters to conduct their business. However, though major facilitating steps have been implemented, some aspects of the broad nature of policies remain similar to those used in the 1990s; although the restrictive coverage of such policies is much less today and their focus is on a limited number of products for various reasons of public policy.65

  We have earlier mentioned the schemes that provide concessions and support to exports. The Foreign Trade Policy (FTP) 2015–2020 aims to raise India’s share of global exports from 2 per cent to 3.5 per cent by 2020.66 Exports have conventionally been encouraged through various types of support schemes, e.g. duty exemption of remission schemes, export subsidies, export credit schemes, export promotion agencies established for specific products, twenty-nine separate export promotion councils provide advice and other support, and easier procedures for exports from Special Economic Zones.67

  7.   Services and Regulation as Integral Part of Trade-policy Reform

  India is amongst a small number of countries whose experience has changed the conventional understanding that the pattern of growth follows a transition from agriculture to manufactures, and then to services. India is widely seen as more prominent in services exports than manufacturing and has served as a model for several other developing nations to seek opportunities from international trade in services.

  Many services, particularly in developing countries, were earlier provided by public-sector enterprises, as they require large, fixed investment. Many major services sectors were earlier considered as not being amenable to international trade. This situation changed with the advent of new technology (particularly, communications), increasing sophistication of financial markets, growth in FDI, international supply chains, and a breakup of existing large service providers in certain service sectors, which showed that the smaller size of service suppliers could also be efficient. These changes led inter alia to seeking trade-policy regulatory disciplines within trade agreements, most importantly at the WTO.

  An interesting feature of the progress of trade negotiations in WTO was a recognition that trade in services could occur in four different ways, including movement of labor, capital and consumers, in addition to the conventional cross-border trade which is the way goods trade is conceptualized.

  Thus, trade-policy reform in services requires different combination of policy steps in comparison to goods, including market access and regulatory reform to create conditions for introducing competition in the sector and to ensure good quality of services. The possibility of new entrants in services markets with dominant suppliers meant that regulatory conditions had to be created to enable efficient entry and maintenance of a ‘level playing field’, in order to address the possibility of anti-competitive behaviour in the market. This implies the provision of both B2B and B2C services in a timely manner at the requisite quality and reasonable prices.

  Consequently, an essential part of services trade reform is establishment of a regulatory body and a regulatory framework to give predictability and facilitate entry of competitors in the market. In addition, the large network or fixed capital required for expanding the reach and scope of services may need both supportive policies and a reorientation of public policy.

  The I
ndian government has established regulatory bodies in several services-related areas such as telecom, ports, insurance, pensions, food safety, petroleum and natural gas, electricity, and inland waterways. In certain cases, such as power, separate regulatory authorities have been established at the Centre and the individual states because of the nature of distinct responsibilities in that service area for the Centre and the states. In addition to sector-specific regulatory bodies, India has also established those with a more wide-ranging reach, such as the Competition Commission of India. The government has also helped with the development of infrastructure in several of these areas (in railways, it is effectively a monopoly), and some of its flagship projects focusing on the digital, ease of doing business, skill building, and improving cost effectiveness, contribute to reform and efficiency in the services sector. Thus, services trade-policy reform, which became a focus of reform much later than goods trade policy, has progressed tremendously. Nonetheless, as shown in Table 13, there is considerable scope for improvement in a number of these areas.68

  Improving the efficiency in services sector is of major importance because services are products that potentially have extensive upstream and downstream impact in the production chain. They affect the operations of a country’s economic system relating to trade and investment, value chains and ability to compete with others to be an effective part of international value chains. An important part of services reform is to introduce timeliness and quick response, efficient and effective infrastructure, and procedures that seamlessly link up the different part of the supply chain.

  8.   Trade Facilitation

  The combination of FDI, international value chains and services reform has led to a shift in the focus of trade policy from restrictions towards trade facilitation. Trade facilitation policies include a focus on timeliness, transparency, paperless procedures (domestic and cross-border), simplifying procedural formalities, and institutional arrangement as well as domestic and international cooperation.69 The OECD includes a more specific list of components in its consideration of trade facilitation: advance rulings, appeal procedures, fees and charges, formalities (documents), formalities (automation), formalities (procedures), internal border agency cooperation. governance and impartiality, information availability, and the involvement of the trade community.70

  These aspects have been a part of reform in India for about two decades, with the momentum picking up in recent years. Significant importance to trade facilitation was given by the Task Force on Indirect Taxes, set up under the chairmanship of Vijay Kelkar.71 More recently, India has signed on to the Trade Facilitation Agreement of the WTO. Thus, while the importance of trade facilitation was recognized in the early 2000s, a stronger focus on it has emerged in this decade after a substantive and practical recognition of its significance for improving competitiveness, ability to connect with international value chains and attracting FDI based on ease of doing business within the country.72 Even in the Budget of 2016, specific focus was given to some trade-facilitation measures.73

  Thus, considerable movement has taken place towards trade facilitation in India, but as in the case of other trade-policy areas, much more needs to be done.74

  9.   Other Emerging Trade-policy-related Issues

  The discussion above shows that the scope of trade policy has expanded with larger coverage of existing topics and addition of new topics under the framework of trade-related policies. Examples of both these can be found most clearly in TPP, in the chapters relating to market access in goods and services, competition policy, investment, e-commerce, IPR, TBT and SPS, regulatory coherence, trade facilitation, supply chains, cooperation and capacity building.

  Recent trade agreements or negotiations indicate that trade policy is also seen as an integral part of strategic policy. Furthermore, with an increase in economic importance of countries such as China in global trade, producers in developed economies who are losing market share, have started taking a closer look at the conditions of production in the emerging economies. The objective is to have a ‘level playing field’ and one of the areas of emphasis is on the social and sustainability standards regime in different economies. Both formal and informal efforts are being made to extend the standards prevalent in the supply chains of developed markets to other parts of the global markets as well.

  Another development regarding trade policy is the growing importance of informal methods in comparison to formal ones. The formal efforts are through trade agreements. Informal efforts are through decisions of groups such as G7, or the OECD guidelines, and most importantly through private standards that are a major part of trade transactions in large markets.

  Yet another area with significant private presence is the digital platform, where technology is progressing rapidly and the public policymaker does not have the capacity to keep abreast with new developments and policy implications without support from the private stakeholders who are more closely associated with these technologies. Further, a digital platform combined with mobility and new technologies such as 3-D printing or M2M communications, makes it very difficult to determine location or to ascertain ex ante either the package of services that could be bundled together or the pricing strategy which could be used when diverse products are bundled as a package. This, in turn, has implications for the relevant regulatory regime which would be effective or relevant in the new situation. The limited extent of national jurisdiction in a world where location is indeterminate also points towards an increasing need for collaboration amongst the relevant regulatory agencies in different nations.

  In this context, a policy emphasized frequently by producers in developed economies is the IPR regime, particularly for new technologies, including digital or e-commerce. Many ‘sunrise industries’ embody new technology and knowledge, and IPR becomes an important mechanism to sustain market leadership in those areas.

  Yet another area that is acquiring prominence in trade-policy discussions and negotiations is the issue of exchange rate used as a trade-policy tool. This issue is emphasized both by developing economies (e.g. Brazil) and developed economies (e.g. the US in its TPP negotiations and thereafter). The objective is to develop disciplines against the use of exchange rate as a mechanism for tilting the competitive position in favor of domestic producers.

  These developments have several implications. One, the composition of trade policy becomes more open-ended with an evolving set of new issues becoming part of consideration, including those mentioned above and others such as corporate social responsibility,75 corruption,76 and remuneration systems.77 Two, the increasing scope of trade policy means that no single international institution deals with all relevant issues. Therefore, policymakers would need a comprehensive perspective and knowledge of both the relevant topics and initiatives at the diverse institutions that deal with them. Three, without a common understanding, different regulatory and standards schemes are likely to come up in different economies, showing a need for regulatory coherence at the bilateral, regional or multilateral level. Four, there are considerable tensions in world markets following the adverse economic conditions since the major economic decline in 2008–09, and the pressure on jobs as new labor-saving technologies emerge, creating significant difficulties particularly for the small and medium enterprises. This implies a need to augment the framework of trade policy from one with a major focus on market opening or higher levels of trade-policy disciplines, to one which includes mechanisms (or safeguards) to address trade-related concerns in domestic markets, collaborate and assist each other in building capacity for SMEs and develop closer regulatory cooperation and coherence.

  All these areas require coordinated efforts amongst domestic policymakers and industry in any nation, to better address the large and increasing agenda of today’s trade-policy issues.

  10.   Conclusion

  Trade-policy reform in India has come a long way on the road, which was paved since 1991, with a large reduction in tariffs (includ
ing peak tariffs), simplification of tariffs, improved regime for non-tariff measures, services regulation and opening up internal markets for services, greater opportunities for investment, better trade-facilitation institutions and policies, and improving domestic capacities to meet the relevant standards required to link up with domestic and international value chains.

  Since 1991, trade-policy reform has opened up India’s trade. It has increasingly provided Indian consumers and producers access respectively to world-class consumer goods and the relevant capital and intermediate goods. The situation today is extremely different compared to the period when trade policy encompassed high border restrictions. The major trade-policy reform, together with other policy changes, have led to a greater integration of India with the world economy, and improved capacities as well as potential for growth.

  It is worth recalling that India’s trade reforms were accomplished with a high degree of success in the sense that domestic disruption was manageable. High trade growth was achieved until the recent past, with ratio of exports and imports to GDP reaching about 49 per cent in 2014 from about 24 per cent in 2000. The current-account deficit has also been contained at sustainable levels except for a brief period between 2011 and 2013.

  The trade deficit, however, has been significantly high. With the recent experience of exports and imports declining for one and a half years and subdued global markets, policymakers would be particularly hesitant in their approach towards further trade-policy reform in terms of border measures.

  However, the content and substance of trade policy has expanded compared to the 1990s. We must again examine whether there is a need to consider further trade-policy reform with significant impact on consumers, producers and economic efficiency.

  Further, in addition to various trade-policy changes, it is worth recalling that in the initial years, trade-policy reform was accompanied by exchange-rate changes as an important complementary tool to soften the impact of tariff reductions. Bearing in mind the complementarity of changes in tariffs and exchange rates, and the increasing reliance and significance of exchange-rate issues in the context of trade policy, a pertinent question would be whether attention is needed to address this situation through the exchange rate. This is especially so since the REER now is higher than in 2008–09, the years since global trade has suffered due to the massive economic and financial crisis. Of course, ultimately, India would need to improve its overall productivity through technological and skill enhancement, in order to progress beyond the middle-income category to become a high-income economy. Several trade-policy reforms have contributed to paving the way towards greater competitiveness of Indian enterprises.