India Transformed

by Rakesh Mohan

  7.    The words were new. But not the sentiments. V.P. Singh had issued dire warnings and made similar hardnosed statements about the ill health of the economy in his second budget for 1985–86. The difference lay in the circumstances. With an absolute majority of 414 Lok Sabha seats out of 514, Rajiv Gandhi believed the world was his oyster and that nothing could come in the way of modernizing India, least of all trivial stuff such as fiscal or current-account deficits. July 1991 was an altogether different story. Economic desperation and going around the world with a begging bowl forced the government to think of measures that would have been inconceivable six years earlier.

  Chapter 4: The Political Economy of Reforms … The Art of the Possible

  1.    The per capita national income in 1991–92 was Rs 7000. Calculated in 2014 dollars, using purchasing-power parity, that figure was $1146, or one-fifth the income level in 2014, calculated in the same dollars.

  2.    The rupee–dollar exchange rate is taken from the Economic Survey, Government of India.

  3.    Montek S. Ahluwalia, ‘Economic Reform in India since 1991: Has gradualism worked?’ The Journal of Economic Perspectives 16, no. 3 (1 August 2002): 22.

  4.    Passenger traffic during FY 2015–16 increased at a rate of 21.3 per cent to 85.57 million from 70.54 million in the FY 2014–15: Annual Report of the Ministry of Civil Aviation.

  5.    Monthly reports of Central Electricity Authority.

  6.    30 per cent in China, 28 per cent in Thailand, 21 per cent in Indonesia and 23 per cent in Malaysia; http://wdi.worldbank.org/table/4.2.

  Chapter 5: India’s Entry into the Global Economy

  1.    This chapter draws on Martin Wolf, ‘India in the World’, in India’s Economy: Performance and Challenges, Essays in Honour of Montek Singh Ahluwalia, edited by Shankar Acharya and Rakesh Mohan (Delhi: Oxford University Press, 2010), chap. 11.

  2.    Speech to the LSE Asia Forum 20067, 7 December 2006, http://www.lse.ac.uk/LSEAsiaForum/pdf/ManmohanSingh_OpeningAddress.pdf.

  3.    Martin Wolf, India’s Exports (Washington, D.C.: Oxford University Press, for the World Bank, 1982).

  4.    Jagdish N. Bhagwati and Padma Desai, India: Planning for Industrialization (London: Oxford University Press, for the Development Centre of the Organization for Economic Cooperation and Development, 1970).

  5.    Manmohan Singh, India’s Export Trends and the Prospects for Self-Sustained Growth (Oxford: Clarendon Press, 1964).

  6.    Vijay Joshi, India’s Long Road: The Search for Prosperity (Delhi: Allen Lane, 2016) 13.

  7.    World Trade Organization, ‘Trade Profiles’, http://stat.wto.org/CountryProfile/WSDBCountryPFView.aspx?Language=E&Country=IN.

  8.    ‘Information technology in India’, Wikipedia, https://en.wikipedia.org/wiki/Information_technology_in_India.

  9.    Arvind Subramanian, ‘An Indian Trade Paradox’, Business Standard, 10 January 2014, http://www.business-standard.com/article/opinion/arvind-subramanian-an-indian-trade-paradox-114011001430_1.html.

  10.  Vijay Joshi, India’s Long Road: The Search for Prosperity (Delhi: Allen Lane, 2016), 260.

  11.  ‘East India Syndrome’, Financial Express, 13 February 2007, http://www.financialexpress.com/archive/east-india-syndrome/39545/.

  12.  Joshi, India’s Long Road, 240.

  13.  ‘Foreign Exchange Reserves of India’, Wikipedia, https://en.wikipedia.org/wiki/Foreign_exchange_reserves_of_India.

  14.  James Crabtree, ‘Battered rupee highlights India woes’, Financial Times, 17 May 2012, https://www.ft.com/content/382214d4-a02a-11e1-94ba-00144feabdc0?mhq5j=e2.

  15.  Joshi, India’s Long Road, 241.

  16.  ‘List of Countries by Projected GDP’, Statistics Times, http://statisticstimes.com/economy/countries-by-projected-gdp.php.

  17.  World Trade Organization, World Trade Statistical Review 2016, Tables A7 and A9, 95 and 97, https://www.wto.org/english/res_e/statis_e/wts2016_e/wts2016_e.pdf.

  18.  Subramanian, loc. cit.

  19.  Ibid.

  20.  Ibid.

  21.  European Commission, ‘WTO Bound Rates/Applied Rate’, Country Fiche, India, http://trade.e.c.europa.eu/doclib/docs/2006/july/tradoc_111363.pdf.

  22.  Joshi, India’s Long Road, 253.

  23.  ‘Doha Development Round’, Wikipedia, https://en.wikipedia.org/wiki/Doha_Development_Round.

  24.  World Trade Organization, ‘Regional Trade Agreements: Facts and Figures’, https://www.wto.org/english/tratop_e/tradfa_e/tradfa_e.htm.

  25.  World Trade Organization, ‘Trade facilitation’, https://www.wto.org/english/tratop_e/region_e/regfac_e.htm.

  26.  Department of Commerce, Government of India, ‘International Trade: Trade Agreements’, http://commerce.nic.in/trade/international_ta_current.asp.

  27.  Demetri Sevastopulo, Shawn Donnan and Courtney Weaver, ‘Trump pulls US out of Pacific Trade Pact’, Financial Times, 23 January 2017, https://www.ft.com/content/cc7742a4-e17e-11e6-8405-9e5580d6e5fb?mhq5j=e3 .

  28.  Joshi, India’s Long Road, 239.

  29.  K.K. Ghai, ‘Exchange Rate System in India: Objectives and Reforms’, Your Article Library, http://www.yourarticlelibrary.com/essay/foreign-trade-essay/exchange-rate-system-in-india-objectives-and-reforms/40406/.

  30.  ‘Statutory and Institutionalised Framework for Monetary Policy; Central Government in Consultation with RBI Announces the Inflation Target of Four Percent’, Press Information Bureau, Ministry of Finance, 5 August 2016, http://finmin.nic.in/press_room/2016/MonetaryPolicy05082016.pdf; and Amy Kazmin and Simon Mundy, ‘Reforms will not be reversed, says outgoing RBI chief’, Financial Times, 4 September 2016, https://www.ft.com/content/5f791c46-70fd-11e6-a0c9-1365ce54b926.

  31.  See Martin Wolf, Fixing Global Finance (Baltimore: John Hopkins University Press, 2008) for a discussion of vulnerabilities that caused, or exacerbated, the Asian financial crisis.

  32.  Joshi, India’s Long Road, 240.

  33.  Ibid., 242.

  34.  Independent Commission on Banking, ‘Final Report Recommendations, September 2011, https:/hmt-sanctions.s3.amazonaws.com/ICB%20final%20report/ICB%2520Final%2520Report[1].pdf.

  35.  See Martin Wolf, The Shifts and the Shocks: What we’ve Learned—and Still have to Learn—from the Financial Crisis (London and New York: Penguin Books, 2015), chap. 7.

  36.  John Maynard Keynes, ‘National Self-Sufficiency’, Yale Review 22, no. 4 (June 1933): 755–69, https://www.mtholyoke.edu/acad/intrel/interwar/keynes.htm.

  37.  See Robert Triffin, ‘International Currency and Reserve Plans’, in Policies to Combat Depression (Princeton: Princeton University Press, for the National Bureau of Economic Research, 1956), 377–411, http://www.nber.org/chapters/c2810.pdf.

  38.  See ‘The IMF at a glance’, 3 October 2016, http://www.imf.org/en/About/Factsheets/IMF-at-a-Glance.

  39.  Joshi, India’s Long Road, 250–53, provides an excellent discussion of these issues in the international monetary system.

  40.  International Monetary Fund, ‘IMF Members’ Quotas and Voting Power, and IMF Board of Governors’, 30 October 2016, https://www.imf.org/external/np/sec/memdir/members.aspx.

  41.  ‘Congress Approves IMF Change in Favour of Emerging Markets’, http://www.bloomberg.com/news/articles/2015-12-18/congress-approves-imf-changes-giving-emerging-markets-more-sway.

  42.  Joshi, India’s Long Road, 243.

  Chapter 6: Trade-policy Reform in India since 1991

  1.    I thank Rakesh Mohan for his detailed comments, and Arvind Subramanian, Geethanjali Nataraj and Ramandeep Singh for their comments and discussions.

  2.    See, for example, the data in https://stats.oecd.org/index.aspx?queryid=66237.

  3.    Trade in services is classified in four different ca
tegories based on the manner in which services exports take place. This differs from the conventional situation of goods trade that involves the exported product crossing the border into the territory of import. These four different categories are referred to as four ‘modes’ of services exports, and are specified in Article 1.2 of the WTO’s General Agreement on Trade in Services (GATS), which states: ‘For the purposes of this Agreement, trade in services is defined as the supply of a service: (a) from the territory of one Member into the territory of any other Member; (b) in the territory of one Member to the service consumer of any other Member; (c) by a service supplier of one Member, through commercial presence in the territory of any other Member; (d) by a service supplier of one Member, through presence of natural persons of a Member in the territory of any other Member.’ The classifications under ‘a’ to ‘d’ in this definition are respectively referred to as Modes 1 to 4 of services exports.

  4.    For India’s services content of different exports categories, see Figures 10 and 11 of ‘Trade in Value Added: India’, OECD, 2015, https://www.oecd.org/sti/ind/tiva/CN_2015_India.pdf.

  5.    See Abstract and page 3 of Rainer Lanz and Andreas Maurer, ‘Services and Global Value Chains—Some Evidence on Servicification of Manufacturing and Services Networks’, WTO Working Paper ERSD 03, 2 March 2015.

  6.    See https://www.tpp.mfat.govt.nz/text. With strong anti-TPP positions taken by President-elect Trump, the possibility of implementing TPP is now out of question. However, the issues covered by TPP are those that the US industry wants to address in a trade agreement, and they are likely to re-emerge after a few years to help pave the way for a similar trade agreement.

  7.    See, for example, paragraphs 2 to 5 of the 1991–92 Budget speech, http://indiabudget.nic.in/bspeech/bs199192.pdf.

  8.    See paragraph 11 of the Budget speech.

  9.    Software, processed minerals, leather, certain capital goods, TCMTB and PCMC, polyurethane film and foil, polyols, isocyanates, tourism exports encouraged by lower duty on adventure sports equipment, and 100 per cent export-oriented units.

  10.  There was a Tariff Commission even before the present one was established in September 1997. The present Tariff Commission was established by giving a new mandate, which included the core mandate of erstwhile Bureau of Industrial Costs and Prices (BICP), and some additional tasks relating to making ‘recommendations as an expert body, on matters referred to it by government regarding fixation of tariff and all tariff-related issues in relation to trade in goods and services, keeping in view the interest of various sectors including production, trade and consumers and taking into account the international commitments.’ See http://tc.nic.in/History.pdf.

  11.  This Budget speech, which introduced trade-policy reform, was given on 24 July 1991.

  12.  See paragraphs 111 to 114 of the 1991 Budget speech. The Budget also mentioned objectives such as environment protection.

  13.  Chelliah Committee Final Report on Tax Reforms, Part II, January 1993, 1, http://111.93.33.222/RRCD/oDoc/TR_Ccr_93.pdf.

  14.  These categories excluded petroleum products and agriculture subject to quantitative restraints, and non-essential goods that are banned. The categories were dealt with separately in the proposals.

  15.  five per cent for essential goods; 10–15 per cent for basic raw materials; 20 per cent for capital goods and parts; 25 per cent for chemical intermediaries; 30 per cent for final products; and 50 per cent for non-essential consumer products. The committee also recommended the possibility of a time-bound surcharge on imports.

  16.  To get a quick idea on some of the changes in India’s customs duties, see ‘India: Selected Issues’, IMF Staff Country Report Number 98/112, IMF, 1998, 11, 15 and 16, https://www.imf.org/external/pubs/ft/scr/1998/cr98112.pdf.

  17.  See paragraphs 102–129 of the 1996–97 Budget speech, and 123–141 of the 1998–99 Budget.

  18.  Paragraph 122 of the 1998 Budget speech. For the changes made, see paragraphs 123–147 of that speech.

  19.  In the case of the United States, paragraph 9 on page 46 of the WTO’s Trade Policy Review, Secretariat Report 1996 (WT/TPR/S/46), states: ‘From 1 January 1995, zero MFN rates were applied [by the US] to 18.3 per cent of all tariff lines, as compared to 15.3 per cent of all tariff lines in 1992. Eighty-three per cent of tariff lines (including ad valorem equivalents) have tariff rates of 10 per cent or less and 3.8 per cent of tariff lines are subject to rates above 20 per cent. Tariff escalation is not a major feature of US trade policy. However, tariff peaks at above 15 per cent are concentrated in agricultural, food and tobacco products, as well as in textiles and footwear; above-quota tariffs on tobacco (reflecting tariffication) are as high as 350 per cent.’

  20.  Paragraph 77 of the speech. Alcoholic beverages and baggage remained the exception in other years as well when maximum tariff rates were reduced.

  21.  Thus, Indian announcement of a peak-rate reduction is different from the general use of the term ‘peak tariff’ which denotes the highest tariff levels in the tariff schedule.

  22.  This includes Thailand (11.6 per cent), Cambodia (11.2 per cent), Laos (10 per cent) and Vietnam (9.5 per cent).

  23.  An important reason for the increase in weighted average tariffs in 2015–16 was the decline in the import share of petroleum (a low-tariff item), due to the oil price decrease.

  24.  For imports, see Trade Profiles 2016, WTO, 378; for customs revenue, see Historical Tables of the US Government, Office of Management and Budget, Fiscal Year 2017, Table 2.5. For the latter, see https://www.whitehouse.gov/sites/default/files/omb/budget/fy2017/assets/hist.pdf. For the former, see https://www.wto.org/english/res_e/booksp_e/trade_profiles16_e.pdf.

  25.  Non-agriculture tariff lines account for 86 per cent of India’s total tariff lines.

  26.  See ‘Will the Trans-Pacific Partnership Agreement Reshape the Global Trade and Investment System? What’s In and What’s New: Issues and Options’, Global Agenda Council on Trade and FDI, World Economic Forum, 2016, 6, 7.

  27.  Any decrease in current tariff of the high-tariff item—say the tariff falls by 1/X times—will require a multiple of ‘X times’ increase in imports of the product concerned, say, ‘Y’ times, where Y/X is greater than one, for the overall average tariff to rise. Even in that situation, the increase in overall tariff would be mitigated by the very small import share of the product, i.e., the average total tariff would increase by a very small fraction of Y/X. Furthermore, such situations are also valid for the other countries with very low average tariffs, in that they too have some products with high tariffs.

  28.  See World Tariff Profiles, 2016, 81 and 175, for the spread of tariffs in the EU and the United States. https://www.wto.org/english/res_e/booksp_e/tariff_profiles16_e.pdf.

  29.  For more details on ‘ceiling binding’, see R. Sharma, ‘Preparing for Negotiating Further Reductions of Bound Tariffs’, FAO. For a comparison of India’s ceiling bindings with other developing countries, see Table 2 of this article. http://www.fao.org/docrep/003/x7353e/X7353E02.htm.

  30.  If there is a BOP problem, then Article XVIII(b) of GATT allows developing countries to breach commitments under WTO and impose higher trade restrictions than allowed under WTO under normal conditions without the BOP problem.

  31.  The maximum period for implementing the decrease in the relevant tariffs following loss in the dispute was 1 April 2001. See https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds90_e.htm.

  32.  India’s trade weighted average MFN tariff in 2015 was 47.2 per cent for agriculture and 4.9 per cent for non-agriculture. See WTO, ITC and UNCTAD, World Tariff Profiles, 2106, 96.

  33.  These include chapters 1–24 of the HS nomenclature.

  34.  The definition of agriculture is as used by the WTO in its data on World Tariff Profiles.

  35.  Final Report, 4. It is i
nteresting that the committee recommended not to have any zero duties. In the world of today with free trade areas and a recognition of the importance of imports in both domestic and international value chains at a time of intense international competition, this would seem to be a proposition that would need reconsideration.

  36.  See Montek S. Ahluwalia, ‘Economic Reforms in India since 1991: Has Gradualism Worked?’, The Journal of Economic Perspectives 16, no.3 (2002): Table 3, 67–88.

  37.  This CVD is different from the countervailing (or anti-subsidy duties) that are imposed to counter the adverse effects of subsidized imports that cause material injury to domestic industry.

  38.  This is imposed under section 3, sub-section 1 of the Customs Tariff Act, 1975. For an explanation, see page 1 onwards of the Act given in the General Notes section in http://www.cbec.gov.in/resources//htdocs-cbec/customs/cs-tariff2015-16/cst-act-2015-16.pdf.

  39.  ‘Under the Cenvat Scheme, a manufacturer of final product or provider of taxable service shall be allowed to take credit of duty of excise as well as of service tax paid on any input received in the factory or any input service received by manufacturer of final product.’ See http://www.archive.india.gov.in/business/taxation/modvat.php.

  40.  This is imposed under section 3, sub-section 5 of the Customs Tariff Act 1975. For an explanation, see page 5 onwards of the Act given in the General Notes section in http://www.cbec.gov.in/resources//htdocs-cbec/customs/cs-tariff2015-16/cst-act-2015-16.pdf

  41.  See paragraph 119 of the Budget speech, http://indiabudget.nic.in/bspeech/bs199697.pdf.

  42.  For more details, see Pami Dua and Rajiv Ranjan, ‘Exchange Rate Policy and Modelling in India’, RBI Development Research Group, Study Number 33.

  43.  NEER value declined when the value of the rupee decreased in relation to the basket of foreign currencies.

  44.  Tariffs above 10 per cent are only for 14.8 per cent of the total lines. Of these, 9.7 per cent of the tariff lines are in the range of 25 to 30 per cent.