The media the press, everybody is talking about an India-China Free Trade Agreement (FTA)! The discussion, however, reflects a confusion between the need for increasing India-China trade and improving economic relations and the usefulness of an FTA. In WTO parlance an FTA means zero duties on all goods (with few exceptions). Further an FTA does not include Services, FDI or the movement of persons, issues of vital interest to India that would normally be covered in a CECA.
An ICRIER working paper (No. 151) has shown that the highest un-exploited potential of India’s trade with any/all countries is with China. Her study shows that trade could be more than doubled. I am sure most scholars would agree with this assessment, even though precise estimates may differ. Normalisation of Trade between the two countries is highly desirable and perhaps even necessary.
To ensure that this potential is realised two countries must jointly identify the constraints and barriers to trade and take steps to remove them. These include rules and procedures and their application, transparency, information-language barrier. All other trade facilitation measures must be taken to make sure that the gap between potential and reality is closed. This does not require an FTA.
Prime facie the economic benefits of a bilateral FTA between India and any other country are not obvious. India till two years ago had the highest non-agricultural tariffs in the world. With the reduction of the peak rate to 15% we now have rates that may be in the top 1/5th or 1/4th . Tariffs on agricultural goods are much higher with few as high as 100%. Reduction of these rates to zero under an FTA could result in substantial Trade diversion and welfare loss. Thus as long as our tariff rates remain high the a priori presumption must be that an FTA with any country with lower tariffs is likely to result in economic losses not gains. Only hard evidence to the contrary should overcome this basic scepticism.
Building mutually beneficial economic relations between India and China requires a clear understanding of the Chinese economy. There is a tendency for people involved in China to find economic similarities even when they do not exist. Definitions are adapted to make it appear similar to a normal market economy. This is reflected for instance in the definition of “Private sector’ “non-state sector” State owned enterprises (SOE), Collective enterprises, Town & Village enterprises (TVE), listed companies, joint venture companies etc. The standard international definitions in which ownership (majority, minority, largest share etc), management control (e.g. power to appoint CEOs) are not used/ applied in defining the “private” and “public” sector. This obscures the true nature of the economy and of the development strategy.
A recent Working paper (No. 160, ICRIER, March 2005: www.icrier.org/wp160.pdf ) has given a stylised model of China’s economy. China’s basic Goal is National power through Growth maximisation. Employment generation, individual income growth and public welfare act as constraints (rather than secondary objectives) to the growth maximisation objective. The CPC network, a mix of centralised and decentralised systems, implements these objectives. Like most other developing countries, quality of governance in China is gradually deteriorating. This involuntary lack of control (e.g. on corruption) should not be confused with deliberate policy change by the State/CPC.
The strategy adopted to achieve the growth objectives has four important elements. The FDI-export policy is the most important and critical means for achieving this goal. China is now a part of the global supply chain for labour-intensive exports, and these are highly competitive. The reason is not however the productivity of Chinese labour in terms of output per man-hour. A critical subsidiary element of the FDI-export strategy was the abolition/suspension of minimum wage conditions, upper limits on working hours and rules against firing workers. Control of labour market (labour responsibility system) ensured the supply of workers who worked 100 hours a week, 52 weeks a year. Thus high productivity per person-year is due to more hours worked per week compared to normal market economies (35 to 48).
The second element is the social ownership of capital assets (100% till 1980) . The returns from these assets are used to raise national investment rates to very high levels, without creating disincentives and distortions through high tax rates. High infrastructure investment since 1997 is a manifestation of this. The third pillar is normal markets for most goods and services where the forces of demand and supply operate to set prices. This removes the worst feature of the Soviet system that played an important role in its collapse.
The fourth pillar is the control over banks and capital markets, which allows subsidisation of capital-intensive and skill intensive exports as well as FDI investment in hi-tech industry, indirectly through banks (govt department). The modus operandi is to give loans to State/CPC owned/controlled enterprises that supply inputs to the target companies. These loans are not expected to be repaid and therefore the use of the word NPA is a misnomer.
The result: Incredible rates of growth of 9.5% per annum for 25 years. Even if there is overestimation of 2% (scholars estimate 1% to 3%), 7.5% per annum is the highest in the world during this period (30% higher than India’s).
The Asian crises showed that some of the elements of this strategy are risky. The strategy is a bit like peddling furiously on a bicycle to keep from tipping over. Expectations of foreigners play a key role in FDI. Euphoria about China’s growth keeps FDI flowing. That in turn ensures very high growth of production. Given the low share of private income and consumption in GDP, excess capacity is created in many industries. This can only be utilised by pushing exports. Either unit values fall (e.g. textiles) or implicit subsidies have to be provided.
This picture of the Chinese economy suggests that the arguments for an FTA with China and the according of “Market economy” status to it are very weak. We should focus on normalisation of economic relations, settlement of the border issue and collaboration in areas where there are clear identity of interests (e.g. oil purchases) rather than jump from one extreme to the other. It is said that India-China Bhai-Bhai, became India-China Bye Bye, which in turn has become India-China Buy-Buy (over the last five years). Let us not restart the cycle by getting euphoric over words like “strategic partnership.” It is much better for both countries, as well as for the rest of Asia, if we jointly build a normal, realistic and well-rounded relationship that will last through the 21st century.
Showing posts with label Trade and Finance. Show all posts
Showing posts with label Trade and Finance. Show all posts
Tuesday, April 12, 2005
Monday, February 21, 2005
What Should The SEZ Law Do?
China’s success in attracting export related FDI and its success in labour intensive exports contrasts sharply with that of India. Many of the policy reforms that are politically difficult in India were equally difficult in China. China however was able to introduce these reforms on an experimental basis in their Special Export Zones and then use the demonstrated success of these reforms to make them deeper and wider. This is an example worth emulating.
A number of surveys have shown that the key problems with respect to FDI are Bureaucratic red tape, Labour laws, rules & procedures and Private infrastructure policy and regulatory systems (“Foreign Direct Investment Reform,” Arvind Virmani, Occasional Policy Paper, ICRIER, April 2004; http://www.icrier.org/FDIsgpc03.pdf). Though the first best solution would be to improve these across the country, this could take decades. The Central and State SEZ laws should cover industrial, labour, environmental, infrastructure and administrative issues, with a view to simplifying and promoting investment and production in the SEZs. Though tax neutrality is an objective, the purpose is not to give sops and incentives that distort the system and are not sustainable .
Though it will take a decade or more to improve infrastructure services across the country, infrastructure availability and quality can be brought to global standards in the Special Economic Zones (SEZs) within a couple of years. The effect of a weak highway and railway system can be minimised by locating SEZs in the coastal regions as was done by China and many other countries in S. E. Asia. Among the measures needed for accelerated development of Infrastructure in and exports from SEZs are;
a. Power generation and distribution for the SEZ needs to be isolated from the crumbling SEBs to the extent possible. As size limitations make electricity generation for the SEZ (alone) non-optimal, the private electricity generator for the SEZ should be allowed to sell excess power to parties outside the SEZ subject to transparent wheeling charges and cross tax-subsidy arrangement.
b. There should be free entry and exit of Telecom service providers into the SEZ without any service or USO charges, subject only to the condition that the spectrum would be auctioned if and only if it ceases to be a “free good” within the SEZ. Inter-connectivity with other countries (ILD) should be free and unrestricted (subject only to the condition that this cannot be used as a conduit for provision of unregulated telecom services into the DTA). Automatic 100 per cent FDI should be allowed.
c. Private parties would also be free to set up a private airport or port to service the SEZs with automatic 100% FDI. If an unused harbour is not available nearby, the requisite number of berths in the closest port should be made available to private parties for the purpose of servicing the SEZ. These parties (or another developer) should be given the authority to set up toll highway connecting the port to the SEZ.
d. A law should be passed by the State governments under which 100% privately owned townships can be set and run by private developers as private municipalities. Private SEZs should be designated as private municipalities under this law and road, electricity transmission & other linkages provided by State/Central govt.
A number of other legal and bureaucratic changes can also be introduced much more quickly in the SEZs than is possible in the country in general. The applicable laws, rules, regulations and procedures in the SEZs should be made as attractive as in China’s coastal regions & other competing destinations. This requires,
a. Elimination of all price controls & distribution controls (e.g. on Power, Rents),
b. Removal of all investment restrictions (e.g. SSI reservation, foreign equity limits & bans, public sector reservation) for production and supply within the zone or for export. This would include removal of State & local restrictions (eg. Urban land ceiling, retail trade, real estate).
c. Removal of all capital account restrictions/controls/prior permissions for businesses operating within the SEZ (reporting requirements and regulations relating to inflow of Foreign exchange debt etc. into DTZ would remain).
d. International standard financial regulations for financial institutions operating within the zone with our unique Indian “controls” eliminated. Thus the FDI limits on Banking, Insurance, NBFCs would not apply, directed credit & SLR would be eliminated and CRR brought down to internationally comparable levels.
e. Customs, Excise & Service tax laws to be modified so that all transactions within the SEZ are exempt and transaction of DTA with the SEZ can be treated as if with a foreign country. Normal excise (& customs) rules would no longer apply for transactions within the SEZs. Customs and Additional duty (equal to CENVAT/Excise) would apply to all sales to DTA. SAD should not apply as state sales and other taxes would apply on DTA sale. State sales tax law should also be modified, so that within the SEZ only sales to resident consumers (not producers/traders) are taxed. No excise/CST/ST/Octroi would be charged for sales from DTA to SEZs.
f. Normal personal and corporate income taxes would apply, but not the surcharges, cesses, MAT or any other temporary/special imposts. The depreciation rate should be globally competitive.
g. A new labour law incorporating a work ethic. Abolition of Contract Labour restrictions. Freedom for multiple and night shift for workers of both sexes. Designation of Development Commissioner as Labour Commissioner.
h. An integrated unified industrial regulator (i.e. only one inspector for all continuing industrial regulations including pollution, labour safety).
i. Designation of the Development Commissioner as the Commissioner under all the relevant laws (industrial, environmental etc.) within the SEZ.
j. A modernised judicial sub-structure for SEZs that deals with cases in a time bound manner.
In fact we should experiment with an even bolder model of a market economy with no controls and restrictions complemented by a modern regulatory system based on trust that punishes violators quickly and effectively like the traffic light approach. For some regulations, self-certification may be adequate while for others outside (private) certification eg. by an accredited professional or certification agency) may be required.
A special marketing effort is needed for export oriented FDI. For instance, Taiwanese and other exporters in East and S.E. Asia can be targeted for this purpose. Our missions in OECD and other FDI source countries should be fully briefed on the comparative advantages of SEZs in India and distribute the required literature.
A number of surveys have shown that the key problems with respect to FDI are Bureaucratic red tape, Labour laws, rules & procedures and Private infrastructure policy and regulatory systems (“Foreign Direct Investment Reform,” Arvind Virmani, Occasional Policy Paper, ICRIER, April 2004; http://www.icrier.org/FDIsgpc03.pdf). Though the first best solution would be to improve these across the country, this could take decades. The Central and State SEZ laws should cover industrial, labour, environmental, infrastructure and administrative issues, with a view to simplifying and promoting investment and production in the SEZs. Though tax neutrality is an objective, the purpose is not to give sops and incentives that distort the system and are not sustainable .
Though it will take a decade or more to improve infrastructure services across the country, infrastructure availability and quality can be brought to global standards in the Special Economic Zones (SEZs) within a couple of years. The effect of a weak highway and railway system can be minimised by locating SEZs in the coastal regions as was done by China and many other countries in S. E. Asia. Among the measures needed for accelerated development of Infrastructure in and exports from SEZs are;
a. Power generation and distribution for the SEZ needs to be isolated from the crumbling SEBs to the extent possible. As size limitations make electricity generation for the SEZ (alone) non-optimal, the private electricity generator for the SEZ should be allowed to sell excess power to parties outside the SEZ subject to transparent wheeling charges and cross tax-subsidy arrangement.
b. There should be free entry and exit of Telecom service providers into the SEZ without any service or USO charges, subject only to the condition that the spectrum would be auctioned if and only if it ceases to be a “free good” within the SEZ. Inter-connectivity with other countries (ILD) should be free and unrestricted (subject only to the condition that this cannot be used as a conduit for provision of unregulated telecom services into the DTA). Automatic 100 per cent FDI should be allowed.
c. Private parties would also be free to set up a private airport or port to service the SEZs with automatic 100% FDI. If an unused harbour is not available nearby, the requisite number of berths in the closest port should be made available to private parties for the purpose of servicing the SEZ. These parties (or another developer) should be given the authority to set up toll highway connecting the port to the SEZ.
d. A law should be passed by the State governments under which 100% privately owned townships can be set and run by private developers as private municipalities. Private SEZs should be designated as private municipalities under this law and road, electricity transmission & other linkages provided by State/Central govt.
A number of other legal and bureaucratic changes can also be introduced much more quickly in the SEZs than is possible in the country in general. The applicable laws, rules, regulations and procedures in the SEZs should be made as attractive as in China’s coastal regions & other competing destinations. This requires,
a. Elimination of all price controls & distribution controls (e.g. on Power, Rents),
b. Removal of all investment restrictions (e.g. SSI reservation, foreign equity limits & bans, public sector reservation) for production and supply within the zone or for export. This would include removal of State & local restrictions (eg. Urban land ceiling, retail trade, real estate).
c. Removal of all capital account restrictions/controls/prior permissions for businesses operating within the SEZ (reporting requirements and regulations relating to inflow of Foreign exchange debt etc. into DTZ would remain).
d. International standard financial regulations for financial institutions operating within the zone with our unique Indian “controls” eliminated. Thus the FDI limits on Banking, Insurance, NBFCs would not apply, directed credit & SLR would be eliminated and CRR brought down to internationally comparable levels.
e. Customs, Excise & Service tax laws to be modified so that all transactions within the SEZ are exempt and transaction of DTA with the SEZ can be treated as if with a foreign country. Normal excise (& customs) rules would no longer apply for transactions within the SEZs. Customs and Additional duty (equal to CENVAT/Excise) would apply to all sales to DTA. SAD should not apply as state sales and other taxes would apply on DTA sale. State sales tax law should also be modified, so that within the SEZ only sales to resident consumers (not producers/traders) are taxed. No excise/CST/ST/Octroi would be charged for sales from DTA to SEZs.
f. Normal personal and corporate income taxes would apply, but not the surcharges, cesses, MAT or any other temporary/special imposts. The depreciation rate should be globally competitive.
g. A new labour law incorporating a work ethic. Abolition of Contract Labour restrictions. Freedom for multiple and night shift for workers of both sexes. Designation of Development Commissioner as Labour Commissioner.
h. An integrated unified industrial regulator (i.e. only one inspector for all continuing industrial regulations including pollution, labour safety).
i. Designation of the Development Commissioner as the Commissioner under all the relevant laws (industrial, environmental etc.) within the SEZ.
j. A modernised judicial sub-structure for SEZs that deals with cases in a time bound manner.
In fact we should experiment with an even bolder model of a market economy with no controls and restrictions complemented by a modern regulatory system based on trust that punishes violators quickly and effectively like the traffic light approach. For some regulations, self-certification may be adequate while for others outside (private) certification eg. by an accredited professional or certification agency) may be required.
A special marketing effort is needed for export oriented FDI. For instance, Taiwanese and other exporters in East and S.E. Asia can be targeted for this purpose. Our missions in OECD and other FDI source countries should be fully briefed on the comparative advantages of SEZs in India and distribute the required literature.
Thursday, September 30, 2004
Prospects for India-Korea Economic Partnership
The process of liberalisation initiated in the new economic policy by India in 1991-92 and South Korea's attempt to look beyond its traditional sources of growth in the last decade gave momentum to the India-Korea economic relationship. Since then, considerable progress has been made in trade and investment between the two countries. The volume of trade expanded from less than $1 billion in 1991 to over $2 billion in 2002-03. Trade between India and Korea witnessed a quantum jump in 2002-2003 registering a growth of 34%. Growth in trade is also characterised by diversification of the trade basket. The export basket for India, though still dominated by low value-added products, has in recent years expanded to cover a wider range of industrial products like machinery and mechanical appliances, iron ore, electrical machinery and equipment and man-made staple fibres. Exports of software and electronics have increased manifold in the last few years. Imports from Korea, on the other hand, continue to be dominated by electronic goods, even though the share of transport equipment is increasing rapidly. Imports of machinery and equipment are set to grow further as several Korean companies are engaged in highways, power plants, chemicals, petrochemicals and metro rail projects in India.
The bilateral economic relationship has, however, not achieved its full potential. In 2002-03 India’s trade with South Korea accounted for less than 2% of its total trade while Korea’s trade with India was less than 1% of its total trade in the year 2002.
Given the economic size and dynamism of the two countries, their civilisational ties and the fact that they are both members of the Bangkok Agreement, the largest PTA in terms of market potential, trade between India and Korea can be expected to double in the next few years. Opportunities for trade expansion and diversification are evident from the as yet unexploited sectoral complementarities between India and Korea. Korea has expertise in manufacturing and financial and international marketing know-how, while India has abundant low-cost and technically-skilled manpower and established strength in science and technology. India and Korea can thus utilise their synergies to boost bilateral trade further.
Sectors like steel, chemicals, pharmaceuticals, automobiles and auto components, textiles, agro-products and gems and jewellery offer scope for expansion in trade. Knowledge-based industries like biotechnology and information technology are the gateways to future trade ties between India and Korea. Korea is fast progressing towards becoming an IT society. Korea’s ratio of internet penetration is the highest in the world and this is where India can make inroads. Korea has world class broadband IT infrastructure, ideal test bed for technology innovation and is a leader in mobile technology. India’s strength lies in its high quality and talented engineering pool, world-class software and services industry and is the world central point for IT outsourcing. Opportunities for joint cooperation and development as well as outsourcing projects for third countries are, therefore, substantial.
India has also come up as an attractive investment destination for Korean companies. Korean motivation to invest in India is shaped by critical advantages in terms of labour costs and easy access to Chinese, S-E Asian and West Asian markets. South Korea ranks fifth in cumulative investment approved in India. Main sectors that have attracted Korean investment are transportation, largely in the automobiles sector, fuels, electrical equipment (such as computer software and electronics, mobile telephony and consumer goods), metallurgical industry and office and household equipment.
Today, South Korean business groups such as LG, Samsung and Hyundai have become household names in India and are diversifying their businesses into different sectors and also using India as a base for expansion of their global business.
Increased focus on cooperation between our small and medium enterprises is also on the agenda of India Korea bilateral economic relationship. Successful tie-ups in this category would have a beneficial impact on an otherwise technically lagging sector in India.
India and Korea have for long recognised the advantages of regional integration arrangements. India is a founder member of the Bangkok Agreement, signed in 1975 and recently rejuvenated by China's entry. This agreement is the only preferential trading arrangement that provides preferential access to three of the major markets of this region, i.e., India, Republic of Korea and China. This may be an initiative, therefore, where India and Korea can jointly work to broaden the scope of the agreement to deal with non-tariff barriers and trade in services as against its current coverage of tariff concessions on goods only. On the multilateral front also, it would be beneficial for both India and Korea to evolve a consensus on issues of common interest and jointly work for an early resolution of the Doha Development Agenda.
India-Korea economic relationship also offers scope for providing the foundation for a stronger Indian presence in the East-Asian economic zone. India has much to offer as a bridge between East Asia and Central and West Asia. Further, as Asean negotiates free trade agreements with China, Japan, South Korea and India individually, the vision of a larger framework that includes the Asean+3+1 or Asean + 4 is taking shape. The accumulated wealth of Japan and the Republic of Korea and the huge markets of China and India will create fresh opportunities for trade driven growth in the region.
An India-Korea equation with a strong underpinning of economic relations and supported by shared values, religion and culture can make a significant contribution towards the Asean + 4 economic integration process.
Co-authored with Amita Batra
The bilateral economic relationship has, however, not achieved its full potential. In 2002-03 India’s trade with South Korea accounted for less than 2% of its total trade while Korea’s trade with India was less than 1% of its total trade in the year 2002.
Given the economic size and dynamism of the two countries, their civilisational ties and the fact that they are both members of the Bangkok Agreement, the largest PTA in terms of market potential, trade between India and Korea can be expected to double in the next few years. Opportunities for trade expansion and diversification are evident from the as yet unexploited sectoral complementarities between India and Korea. Korea has expertise in manufacturing and financial and international marketing know-how, while India has abundant low-cost and technically-skilled manpower and established strength in science and technology. India and Korea can thus utilise their synergies to boost bilateral trade further.
Sectors like steel, chemicals, pharmaceuticals, automobiles and auto components, textiles, agro-products and gems and jewellery offer scope for expansion in trade. Knowledge-based industries like biotechnology and information technology are the gateways to future trade ties between India and Korea. Korea is fast progressing towards becoming an IT society. Korea’s ratio of internet penetration is the highest in the world and this is where India can make inroads. Korea has world class broadband IT infrastructure, ideal test bed for technology innovation and is a leader in mobile technology. India’s strength lies in its high quality and talented engineering pool, world-class software and services industry and is the world central point for IT outsourcing. Opportunities for joint cooperation and development as well as outsourcing projects for third countries are, therefore, substantial.
India has also come up as an attractive investment destination for Korean companies. Korean motivation to invest in India is shaped by critical advantages in terms of labour costs and easy access to Chinese, S-E Asian and West Asian markets. South Korea ranks fifth in cumulative investment approved in India. Main sectors that have attracted Korean investment are transportation, largely in the automobiles sector, fuels, electrical equipment (such as computer software and electronics, mobile telephony and consumer goods), metallurgical industry and office and household equipment.
Today, South Korean business groups such as LG, Samsung and Hyundai have become household names in India and are diversifying their businesses into different sectors and also using India as a base for expansion of their global business.
Increased focus on cooperation between our small and medium enterprises is also on the agenda of India Korea bilateral economic relationship. Successful tie-ups in this category would have a beneficial impact on an otherwise technically lagging sector in India.
India and Korea have for long recognised the advantages of regional integration arrangements. India is a founder member of the Bangkok Agreement, signed in 1975 and recently rejuvenated by China's entry. This agreement is the only preferential trading arrangement that provides preferential access to three of the major markets of this region, i.e., India, Republic of Korea and China. This may be an initiative, therefore, where India and Korea can jointly work to broaden the scope of the agreement to deal with non-tariff barriers and trade in services as against its current coverage of tariff concessions on goods only. On the multilateral front also, it would be beneficial for both India and Korea to evolve a consensus on issues of common interest and jointly work for an early resolution of the Doha Development Agenda.
India-Korea economic relationship also offers scope for providing the foundation for a stronger Indian presence in the East-Asian economic zone. India has much to offer as a bridge between East Asia and Central and West Asia. Further, as Asean negotiates free trade agreements with China, Japan, South Korea and India individually, the vision of a larger framework that includes the Asean+3+1 or Asean + 4 is taking shape. The accumulated wealth of Japan and the Republic of Korea and the huge markets of China and India will create fresh opportunities for trade driven growth in the region.
An India-Korea equation with a strong underpinning of economic relations and supported by shared values, religion and culture can make a significant contribution towards the Asean + 4 economic integration process.
Co-authored with Amita Batra
Thursday, December 18, 2003
A Single Currency For S. Asia?
The Prime Minister at a recent conference revealed his dream of a single currency for South Asia. Adopting the spirit in which the PM’s statement was made, let us lay out a road map for achieving a common currency by the end of this decade. The first step in this process is the granting of MFN status by Pakistan to India and the signing of a framework agreement for the formation of SAFTA. This can be achieved during 2004 if Pakistan follows the precedent established by the USA in rechristening MFN as Permanent Normal Trading Status before granting it to China some years ago. The likely conclusion of a Comprehensive Cooperation agreement between India & Sri Lanka in 2004 covering Services, FDI and temporary migration of professionals will improve the atmosphere further. An Indo-Bangladesh FTA is then a possibility by 2005 with Sri Lanka convincing Bangladesh about the asymmetric benefits that have accrued to it from the FTA, as demonstrated by a SANEI research study. This will allow the formation of SAFTA by 2006 as these countries (SL,Bd) convince Pakistan of how much it has to gain and how little to loose (as any gains to India are at the cost of Japan and other exporters). Though not an essential next step, it would be helpful if SAFTA is followed in 2007 by a comprehensive co-operation agreement under the newly created SAFTA to include services, FDI and skilled migration.
2008 will see three preparatory steps (am I dreaming?): (a) the formation of a S Asian currency fund for mutual aid in case of a BOP crisis in any country. (b) An agreement for harmonization of monetary and exchange rate management policies. (c) Removal of all restrictions on capital flows within the region. The final pre-requisite can then be completed in 2009 by the formation of a Customs Union with a common uniform external tariff of 5% to 10%. The common currency (S. Asian Rupee/Rupiah/Taka) can then be adopted/introduced in 2010-11.
Will this be of benefit to the people of S. Asia? Without any doubt! Is this sequence of events possible? Yes, if the five members of the Security Council decide that it is in their own interests and make this clear to every country in S. Asia. Is it likely? No.
2008 will see three preparatory steps (am I dreaming?): (a) the formation of a S Asian currency fund for mutual aid in case of a BOP crisis in any country. (b) An agreement for harmonization of monetary and exchange rate management policies. (c) Removal of all restrictions on capital flows within the region. The final pre-requisite can then be completed in 2009 by the formation of a Customs Union with a common uniform external tariff of 5% to 10%. The common currency (S. Asian Rupee/Rupiah/Taka) can then be adopted/introduced in 2010-11.
Will this be of benefit to the people of S. Asia? Without any doubt! Is this sequence of events possible? Yes, if the five members of the Security Council decide that it is in their own interests and make this clear to every country in S. Asia. Is it likely? No.
Monday, October 20, 2003
FTA Agreement With Thailand
The free trade agreement with Thailand has to be viewed in the background of the ‘look East policy’ initiated by India in the early nineties and deepened and widened over the last five years. With minor fluctuations and diversions India has actively pursued since the 1990 a policy of establishing closer economic and political relations with ASEAN. The attitudes of different member countries of ASEAN towards India have however changed at a different pace. Singapore was the first country to recognise the benefits to ASEAN of closer ties with India. It has been actively pursuing FDI opportunities in India since the new reforms and helped India in getting the status of dialogue partner and member of the ASEAN security forum. The “ASIAN crisis” of 1997-1998 has accelerated the transformation of other ASEAN country’s attitude towards India-ASEAN co-operation. The earlier resistance of Malaysia has mellowed with the recognition that it faces much greater competition from China as a destination for FDI (and particularly export-oriented FDI). This was brilliantly encapsulated in a statement by the Singapore Prime minister at an earlier ASEAN summit that, ASEAN was like the body of a plane with China as one wing. Without India as the other wing ASEAN could not fly and would crash. Malaysia’s recognition of India’s prowess in software and IT enabled services has also contributed to the change in mindset towards India as a potential contributor to the growth of modern service exports from Malaysia.
Thailand’s approach to closer ties with India has also evolved. The first major breakthrough was the establishment of BIMSTEC in 1997 (BISTEC in June, addition of Myanmar in December & change to BIMSTEC). Thailand’s Deputy Prime Minister and DG WTO (designate) reportedly played a major role in this initiative. Mr Thaksin Shinwatra who become PM of Thailand after the Thai elections in January 2001 has also taken a very positive approach to Indo-Thai and Indo-ASEAN relations. The India-Thai FTA agreement is a culmination of this process. Thailand’s recognition of the benefit of ties with India has also facilitated the signing of India-ASEAN framework agreement for establishment of FTA by 2011 (2016 for new ASEAN & Philippines)). Because the India-Thai agreement has a faster schedule of tariff reductions than the India-ASEAN FTA it will act as a precursor and trial blazer for the latter. It will help demonstrate to apprehensive countries such as the Philippines the minimal costs and clear benefits of greater opening to India. The signing of these two agreements will also (incidentally),
(a) Put pressure on Bangladesh to accelerate formation of an India-Bangladesh FTA/PTA (which is currently under discussion in Dacca),
(b) Revive efforts for greater co-operation within the BIMSTEC framework (for instance on establishing road-rail-waterway links between India and Thailand through Myanmar and Bangladesh).
(c) Provide greater flexibility to India in multilateral negotiations under the ages of the WTO.
Over the 23 years since 1980 Thailand’s GDP has grown at an average of 6.1% per annum 0.4% points faster than India’s GDP growth rate of 5.6% per annum. This made Thailand the fourth fastest growing economy in the world relative to India, which was at ninth position during this period. Hidden behind this average is the fact that the position has changed considerably since the Asian crisis. Pre-crisis for almost three decades the Thai economy was either the second or third fastest growing economy in the world, a remarkable achievement. India therefore has a lot to learn from closer interaction with Thailand. Its ranking has, however, deteriorated sharply since the crises. In terms of 10 year moving averages it fell to 7th position in 1998, 11th in 1999, 14th in 2000, 22nd in 2001 and 28th in 2002. India’s ranking in contrast was 12th in 1997, 2001 and 2002 with a temporary worsening during 1998 to 2000. India’s attraction to Thailand as a trading partner has therefore increased. Thailand along with Indonesia and China is one of the closest competitors of India in World trade. Contrary to popular conception, this means that in purely economic terms the trade creation effect of the FTA are likely to be greater than the trade diversion effects. In other words both countries will benefit from the FTA in terms of peoples welfare. The flip side of this consumer benefit is the fact that selected industries such as SUVs will face intense competition from Thailand and will have to adjust and adapt to this competition. Research at ICRIER has shown that Indian industry is quite capable of doing this through specialisation and increased intra-industry trade.
Thailand’s approach to closer ties with India has also evolved. The first major breakthrough was the establishment of BIMSTEC in 1997 (BISTEC in June, addition of Myanmar in December & change to BIMSTEC). Thailand’s Deputy Prime Minister and DG WTO (designate) reportedly played a major role in this initiative. Mr Thaksin Shinwatra who become PM of Thailand after the Thai elections in January 2001 has also taken a very positive approach to Indo-Thai and Indo-ASEAN relations. The India-Thai FTA agreement is a culmination of this process. Thailand’s recognition of the benefit of ties with India has also facilitated the signing of India-ASEAN framework agreement for establishment of FTA by 2011 (2016 for new ASEAN & Philippines)). Because the India-Thai agreement has a faster schedule of tariff reductions than the India-ASEAN FTA it will act as a precursor and trial blazer for the latter. It will help demonstrate to apprehensive countries such as the Philippines the minimal costs and clear benefits of greater opening to India. The signing of these two agreements will also (incidentally),
(a) Put pressure on Bangladesh to accelerate formation of an India-Bangladesh FTA/PTA (which is currently under discussion in Dacca),
(b) Revive efforts for greater co-operation within the BIMSTEC framework (for instance on establishing road-rail-waterway links between India and Thailand through Myanmar and Bangladesh).
(c) Provide greater flexibility to India in multilateral negotiations under the ages of the WTO.
Over the 23 years since 1980 Thailand’s GDP has grown at an average of 6.1% per annum 0.4% points faster than India’s GDP growth rate of 5.6% per annum. This made Thailand the fourth fastest growing economy in the world relative to India, which was at ninth position during this period. Hidden behind this average is the fact that the position has changed considerably since the Asian crisis. Pre-crisis for almost three decades the Thai economy was either the second or third fastest growing economy in the world, a remarkable achievement. India therefore has a lot to learn from closer interaction with Thailand. Its ranking has, however, deteriorated sharply since the crises. In terms of 10 year moving averages it fell to 7th position in 1998, 11th in 1999, 14th in 2000, 22nd in 2001 and 28th in 2002. India’s ranking in contrast was 12th in 1997, 2001 and 2002 with a temporary worsening during 1998 to 2000. India’s attraction to Thailand as a trading partner has therefore increased. Thailand along with Indonesia and China is one of the closest competitors of India in World trade. Contrary to popular conception, this means that in purely economic terms the trade creation effect of the FTA are likely to be greater than the trade diversion effects. In other words both countries will benefit from the FTA in terms of peoples welfare. The flip side of this consumer benefit is the fact that selected industries such as SUVs will face intense competition from Thailand and will have to adjust and adapt to this competition. Research at ICRIER has shown that Indian industry is quite capable of doing this through specialisation and increased intra-industry trade.
Thursday, August 28, 2003
WTO Negotiations: The role of Economics and Politics
The issues of interest to India in the context of the WTO negotiations can be apportioned into three broad categories. (a) Implementation issues, (b) Singapore issues (c) Market access. The focus of the current seminar is on the Market access issues. A number of developments have taken place at the WTO over the past week or two, such as the USA-EU joint proposal on Agriculture and the counter-proposal by India and other emerging economies, the paper on proposed modalities for non-agricultural market access and the Chairman’s draft Cancun ministerial text.
Let me start by making a few general remarks on the economics and politics of negotiations and touch on the two topics not covered by this seminar, before saying a few words on the topics of this seminar. Economic theory and empirical analysis as understood and accepted by academics in the USA, EU and other market economies, says that removal of controls, restrictions and obstacles to Imports will by and large lead to an increase in the welfare of both the importing and the exporting countries. Then why is it that each country ignores what its own academics are telling it with respect to policy reforms and focuses mostly on the import restrictions imposed by other countries on its export items (whether these are goods, services or factors)? The answer is politics. In every country, politics imposes a cost on the nation as a whole while benefiting some sub-set of individuals. The geopolitics of negotiations is motivated by a desire to transfer some of the national costs of policy distortions onto other countries, while retaining as much of the benefits for sub-groups within the country. A good example of this is the multi-fibre agreement (MFA).
One implication of this strategic approach to multilateral economic rules is that economic analysis must drive our (autonomous) reforms in the external sector irrespective of what happens (or does not happen) at WTO. That is, liberalisation is beneficial to the country and must continue independently at the pace and timing of our choice. Economic analysis also provides us with the true costs and benefits to our citizens, of specific policy changes. This forms the basis of our evaluation of what policy changes we should be willing to concede in the negotiations (those having a higher benefit to us in any case) and which changes we should resist conceding (those that have higher cost). The public position that we take at the negotiation need not however lay all this out publicly for other countries. In the tactics and strategy of negotiations, politics/geo-politics will inevitably play a substantial role.
Implementation Issues
There are three implementation issues of interest to the Indian government. These are special and differential treatment with respect to Anti-dumping, Geographical Indicators and Traditional knowledge and related issues of bio-piracy. We at ICRIER have been doing research on all three issues and Working papers on these issues can be found on our web site.
Singapore Issues
The four Singapore issues are, Transparency in Government Procurement, Competition Policy, Trade Facilitation and Foreign investment. From the economic perspective it is quite clear that Indian citizens will benefit, either as consumers, taxpayers or recipients of public services in India if there is enhanced competition and greater transparency in government procurement. In the case of ‘transparency in government procurement’, the interests of the government (no matter which party is in power) will differ from that of the public, the latter will gain from greater transparency while the former will loose. Similarly in the case of competition policy the interests of the monopoly (and oligopoly) producers, whether public or private sector, will be diametrically opposite of that of consumers. Greater competition and transparency are therefore clearly in the economic interests of the general public but can be thwarted by the political clout of vested interests. It does not however follow that allowing these two issue to be integrated into the WTO framework is of unalloyed benefit to us. It is quite consistent to argue for accelerated reforms on the one hand while taking a tough stand in the negotiations.
Since the eighties most of Asia to the East of us has successfully used the FDI-Export model to generate growth rates rarely seen before in history (the only exceptions being Japan and S. Korea). First the NICs (Singapore, Taiwan, Hong Kong), then the ASEAN 3 (Thailand, Malaysia and Indonesia) and most recently China and Vietnam have used FDI to accelerate their rate of growth of manufactured exports as well as the overall growth rate of the economy. At the beginning of a new century India is poised to receive and benefit from an influx of export oriented FDI if (I re-emphasise if) we recognise the advantages of FDI and modify some critical domestic policies to facilitate it. A recent ICRIER working paper shows how FDI-export linkage has started to work in India against all odds. Reduction in the transaction costs of trade and the removal of the remaining barriers to FDI is therefore in our own economic interests. This is something that we as a nation should do irrespective of what happens at the WTO. It does not follow, however, that bringing this issue into the WTO would add to our advantage in any way.
From the perspective of politics/geo-politics therefore, it is quite rational for India to concede to others on any of the Singapore issues if and only if we gain concessions and benefits in other areas. In other words we must use these as counters to bargain for what would not be available to us otherwise. It should be remembered however that these bargains are sometimes informal, on the sidelines of the formal negotiations or a meeting another capital.
Market Access
Non-agriculture Market Access
As you all know India has reduced its ‘peak’ tariff rate from about 150% in 1991-2 to 25% in 2003-4. As per the budget announcement of the Finance Minister in 2002-3 this should come down to 20% next year (2004-5). In addition two groups of non-agriculture items, automobiles and alcohol (liquor) have tariff rates exceeding this peak. Despite this reduction over a decade, our tariffs remain the highest in the world. In fact if we do not continue the process of reduction beyond 2004-5, our peak tariffs will be four times that of ASEAN. An inter-ministerial expert group that I chaired a few years ago, therefore recommended that the peak rates be brought down to 10% some time after 2004-5. We also recommended that the tariff on automobiles should not exceed two times the peak, and on alcohol three times the peak. A subsequent Working paper in the Planning Commission goes even further by recommending a peak tariff rate of 10% by 2006-7 (with automobile tariffs at 20%) and a uniform tariff rate of 5% by 2011-12.
Research at ICRIER has shown that the tariff rationalisation and reduction that has taken place since 1991-2 has improved the competitiveness of Indian Industry. One aspect of this is an increase in intra-industry trade across most sub-sectors of industry. Thus each sub-sector is giving up the production of some items and importing them while at the same time exporting more of the items that it is competitive in. This move towards specialisation and exploitation of comparative advantage has improved the competitiveness of Indian industry.
At ICRIER we are also doing research (funded by the ministry of Industry) to find out the potential effects of further tariff reductions on Indian manufacturing. Preliminary results show that even sharp tariff reduction to 10% or 5% has few adverse effects. Tariff reductions, along with resultant changes in exchange rates raise the net exports (exports – imports) in a majority of manufacturing sub-sectors and the overall net exports of the manufacturing sector. Not only is there little to fear from further tariff reductions, these reductions will prove beneficial to industry.
WTO Negotiations on Agriculture
Agriculture is an area where the economic arguments of rich countries are very weak (because of high subsidies) while those of poor countries are relatively strong. It is quite clear that many countries in the EU and to a lesser extent the USA are hostage to agriculture producers who constitute a small fraction of their population. On our side a large proportion of the population is dependent on agriculture, lives in rural areas, is very poor and less educated and has little access to up to date and relevant knowledge. This puts their lively hood and sometimes even their survival at risk from exogenous shocks. Over the last few years we have also raised the import duties on a number of agricultural products above the peak rate. These must in the interest of economic efficiency, eventually be brought down to the peak rate, with an intermediate step of two times the peak rate. In the meanwhile, we should carry out a thorough de-control and reform of the agriculture, agro-processing and food retail sectors (as detailed in a Planning commission working paper).
As far as the WTO negotiations are concerned, however, offence is the best form of defence. We should marshal the global NGOs to expose the hypocrisy of the rich countries vis-Ã -vis free trade and verbal concern for the poor (while giving subsidies to rich farmers that destroy poor agriculturists jobs).
WTO Negotiations on Services
The USA activated the GATS when it perceived that its comparative advantage was shifting from manufacturing to services. At that time the USA and other OECD countries opened up their service sector to cross-border imports (Mode 1), while we had some justification for taking a cautious approach to an area in which the rich countries appeared to have an increasing comparative advantage. More by accident than by design ur position has been completely transformed since then. At the beginning of the 21st century, India is poised to become the largest developing country exporter of Service in the World by the end of the decade. What is needed is a change in our mind set, by transiting from a defensive to an activist posture. We must lock-in ‘free trade in services’ under mode 1, against the emerging threat from the new protectionists in the rich countries, the ‘unions of white collar workers.’ This also requires that we be more forthcoming with respect to opening sectors in mode 1 where we have been excessively defensive. We must trade in greater access for FDI from the rich countries under mode 3 against clear and transparent rules for ‘temporary migration,’ of skilled and semi-skilled personnel from India to these countries under mode 4. The focus of the latter (mode 4) must be on facilitation of cross-border export of services under mode 4, not on the export of labour per say.
The request-offer mode that is currently in process may not however give much scope for progress from our new pro-active perspective, in either of these two areas. In that case we may have to explore a bilateral approach with USA and the EU.
Let me start by making a few general remarks on the economics and politics of negotiations and touch on the two topics not covered by this seminar, before saying a few words on the topics of this seminar. Economic theory and empirical analysis as understood and accepted by academics in the USA, EU and other market economies, says that removal of controls, restrictions and obstacles to Imports will by and large lead to an increase in the welfare of both the importing and the exporting countries. Then why is it that each country ignores what its own academics are telling it with respect to policy reforms and focuses mostly on the import restrictions imposed by other countries on its export items (whether these are goods, services or factors)? The answer is politics. In every country, politics imposes a cost on the nation as a whole while benefiting some sub-set of individuals. The geopolitics of negotiations is motivated by a desire to transfer some of the national costs of policy distortions onto other countries, while retaining as much of the benefits for sub-groups within the country. A good example of this is the multi-fibre agreement (MFA).
One implication of this strategic approach to multilateral economic rules is that economic analysis must drive our (autonomous) reforms in the external sector irrespective of what happens (or does not happen) at WTO. That is, liberalisation is beneficial to the country and must continue independently at the pace and timing of our choice. Economic analysis also provides us with the true costs and benefits to our citizens, of specific policy changes. This forms the basis of our evaluation of what policy changes we should be willing to concede in the negotiations (those having a higher benefit to us in any case) and which changes we should resist conceding (those that have higher cost). The public position that we take at the negotiation need not however lay all this out publicly for other countries. In the tactics and strategy of negotiations, politics/geo-politics will inevitably play a substantial role.
Implementation Issues
There are three implementation issues of interest to the Indian government. These are special and differential treatment with respect to Anti-dumping, Geographical Indicators and Traditional knowledge and related issues of bio-piracy. We at ICRIER have been doing research on all three issues and Working papers on these issues can be found on our web site.
Singapore Issues
The four Singapore issues are, Transparency in Government Procurement, Competition Policy, Trade Facilitation and Foreign investment. From the economic perspective it is quite clear that Indian citizens will benefit, either as consumers, taxpayers or recipients of public services in India if there is enhanced competition and greater transparency in government procurement. In the case of ‘transparency in government procurement’, the interests of the government (no matter which party is in power) will differ from that of the public, the latter will gain from greater transparency while the former will loose. Similarly in the case of competition policy the interests of the monopoly (and oligopoly) producers, whether public or private sector, will be diametrically opposite of that of consumers. Greater competition and transparency are therefore clearly in the economic interests of the general public but can be thwarted by the political clout of vested interests. It does not however follow that allowing these two issue to be integrated into the WTO framework is of unalloyed benefit to us. It is quite consistent to argue for accelerated reforms on the one hand while taking a tough stand in the negotiations.
Since the eighties most of Asia to the East of us has successfully used the FDI-Export model to generate growth rates rarely seen before in history (the only exceptions being Japan and S. Korea). First the NICs (Singapore, Taiwan, Hong Kong), then the ASEAN 3 (Thailand, Malaysia and Indonesia) and most recently China and Vietnam have used FDI to accelerate their rate of growth of manufactured exports as well as the overall growth rate of the economy. At the beginning of a new century India is poised to receive and benefit from an influx of export oriented FDI if (I re-emphasise if) we recognise the advantages of FDI and modify some critical domestic policies to facilitate it. A recent ICRIER working paper shows how FDI-export linkage has started to work in India against all odds. Reduction in the transaction costs of trade and the removal of the remaining barriers to FDI is therefore in our own economic interests. This is something that we as a nation should do irrespective of what happens at the WTO. It does not follow, however, that bringing this issue into the WTO would add to our advantage in any way.
From the perspective of politics/geo-politics therefore, it is quite rational for India to concede to others on any of the Singapore issues if and only if we gain concessions and benefits in other areas. In other words we must use these as counters to bargain for what would not be available to us otherwise. It should be remembered however that these bargains are sometimes informal, on the sidelines of the formal negotiations or a meeting another capital.
Market Access
Non-agriculture Market Access
As you all know India has reduced its ‘peak’ tariff rate from about 150% in 1991-2 to 25% in 2003-4. As per the budget announcement of the Finance Minister in 2002-3 this should come down to 20% next year (2004-5). In addition two groups of non-agriculture items, automobiles and alcohol (liquor) have tariff rates exceeding this peak. Despite this reduction over a decade, our tariffs remain the highest in the world. In fact if we do not continue the process of reduction beyond 2004-5, our peak tariffs will be four times that of ASEAN. An inter-ministerial expert group that I chaired a few years ago, therefore recommended that the peak rates be brought down to 10% some time after 2004-5. We also recommended that the tariff on automobiles should not exceed two times the peak, and on alcohol three times the peak. A subsequent Working paper in the Planning Commission goes even further by recommending a peak tariff rate of 10% by 2006-7 (with automobile tariffs at 20%) and a uniform tariff rate of 5% by 2011-12.
Research at ICRIER has shown that the tariff rationalisation and reduction that has taken place since 1991-2 has improved the competitiveness of Indian Industry. One aspect of this is an increase in intra-industry trade across most sub-sectors of industry. Thus each sub-sector is giving up the production of some items and importing them while at the same time exporting more of the items that it is competitive in. This move towards specialisation and exploitation of comparative advantage has improved the competitiveness of Indian industry.
At ICRIER we are also doing research (funded by the ministry of Industry) to find out the potential effects of further tariff reductions on Indian manufacturing. Preliminary results show that even sharp tariff reduction to 10% or 5% has few adverse effects. Tariff reductions, along with resultant changes in exchange rates raise the net exports (exports – imports) in a majority of manufacturing sub-sectors and the overall net exports of the manufacturing sector. Not only is there little to fear from further tariff reductions, these reductions will prove beneficial to industry.
WTO Negotiations on Agriculture
Agriculture is an area where the economic arguments of rich countries are very weak (because of high subsidies) while those of poor countries are relatively strong. It is quite clear that many countries in the EU and to a lesser extent the USA are hostage to agriculture producers who constitute a small fraction of their population. On our side a large proportion of the population is dependent on agriculture, lives in rural areas, is very poor and less educated and has little access to up to date and relevant knowledge. This puts their lively hood and sometimes even their survival at risk from exogenous shocks. Over the last few years we have also raised the import duties on a number of agricultural products above the peak rate. These must in the interest of economic efficiency, eventually be brought down to the peak rate, with an intermediate step of two times the peak rate. In the meanwhile, we should carry out a thorough de-control and reform of the agriculture, agro-processing and food retail sectors (as detailed in a Planning commission working paper).
As far as the WTO negotiations are concerned, however, offence is the best form of defence. We should marshal the global NGOs to expose the hypocrisy of the rich countries vis-Ã -vis free trade and verbal concern for the poor (while giving subsidies to rich farmers that destroy poor agriculturists jobs).
WTO Negotiations on Services
The USA activated the GATS when it perceived that its comparative advantage was shifting from manufacturing to services. At that time the USA and other OECD countries opened up their service sector to cross-border imports (Mode 1), while we had some justification for taking a cautious approach to an area in which the rich countries appeared to have an increasing comparative advantage. More by accident than by design ur position has been completely transformed since then. At the beginning of the 21st century, India is poised to become the largest developing country exporter of Service in the World by the end of the decade. What is needed is a change in our mind set, by transiting from a defensive to an activist posture. We must lock-in ‘free trade in services’ under mode 1, against the emerging threat from the new protectionists in the rich countries, the ‘unions of white collar workers.’ This also requires that we be more forthcoming with respect to opening sectors in mode 1 where we have been excessively defensive. We must trade in greater access for FDI from the rich countries under mode 3 against clear and transparent rules for ‘temporary migration,’ of skilled and semi-skilled personnel from India to these countries under mode 4. The focus of the latter (mode 4) must be on facilitation of cross-border export of services under mode 4, not on the export of labour per say.
The request-offer mode that is currently in process may not however give much scope for progress from our new pro-active perspective, in either of these two areas. In that case we may have to explore a bilateral approach with USA and the EU.
Sunday, March 30, 2003
Exports as an Engine of Growth
Introduction
The Minister of Commerce and Industry opened his speech by re-iterating the goal of increasing India’s share of merchandise trade to 1% of global levels by 2007 (“up from the level of 0.67”). He followed this up by taking head on the question of “whether we need an annual EXIM policy?” The most noteworthy aspect of the Exim policy was the identification of service exports and special economic zones as, “engines of growth.”
Growth Performance & Target
In the fiscal year 2002-03 till February 2003, exports are reported to have grown by 16.8% in US dollar terms, over the corresponding period of the previous year, a noteworthy achievement. This achievement comes however on the back of negligible growth the previous year (2001-2). Thus the level of exports during this period is only about 17% over the exports in 2000-1. In an earlier study (India’s BOP crises and external Reform) we have shown that during the eighties and nineties India’s export growth exceeded world growth, as a result of which our share of world exports rose from 0.42% in 1980 to 0.67% in 1999. Even if our export growth exceeds that of Asia, which it did during the nineties, and given the trend rate of economic reforms, our export share is unlikely to exceed 0.8 % of world exports by 2009. There was nothing in the EXIM policy (or the Budget) that denotes an acceleration of trend rate of reform.
Engine of Growth
One of the most interesting things in the EXIM policy is the assertion that, “Exports can act as the motive power of growth for a rapidly developing Indian economy.” This is perhaps the closest any official document of the government of India has come to recognising, Exports as an Engine of Economic growth and the minister is to be commended for bringing this to the attention of the nation. This fact has been well known to S. E. Asian and E. Asian countries, including China, for many decades and they have fully exploited it to achieve high growth rates over the past two to four decades.
The minister has identified two sub-engines of growth, namely service exports and Special Economic Zones (SEZ). We are in full agreement with him about the important role that these can play in propelling growth of exports. Sadly however there is little in the EXIM policy that will ensure that this happens, particularly in the case of Special Economic Zones.
Special Export Zones
As is by now well known India’s exports of labour intensive manufactures (as well as the employment in such production for export) are a fraction of those from China. We can identify SSI reservation, Labour laws and procedures and bureaucratic control mentality as factors that have discouraged FDI in such export-oriented manufactures. Special Economic Zones provide an area where we could minimise or eliminate such handicaps. Unless this is done Special Economic Zones cannot attract sufficient FDI to act as engines of growth for the economy. Though we cannot fault the EXIM policy per se for not doing anything about these matters, unless the Minister of Commerce and Industry can convince his cabinet colleagues about the importance of these reforms, the promise of Special Economic Zones engine of growth will not be fulfilled.
Service Exports
In our view service exports can play an important role in accelerating economic growth. The extension of zero duty imports of, ‘consumables, office and professional equipment, spares and furniture….’ to the service sector can act as positive (short term) signals to encourage export of services. By themselves, however, it is unlikely that they will propel service exports to the point that they begin to act as engines of growth for the economy as whole. For this to happen we need a change in our mind set with respect to the global rules of Service trade from that of protection from imports and external forces to looking at the world in terms of the opportunity for service exports. Our research has identified a number of internal and external policies that need to be liberalised if India is to become a major exporter of Services.
Agriculture Export Zone
The proposal in EXIM policy to involve corporates in the AEZ is a positive one. As in the other cases liberalisation of land related policies and other laws relating to agricultral produce such as the Essential Commodities act and the unification of Food related laws, rules and regulations are essential for a sustained increase in value added aggriculture and allied products.
Quantitative Restrictions
I was both pleased and dismayed to read the announcements on lifting of QRs. The removal of 69 import items and 5 export items from the restricted list is very positive feature of the EXIM policy. I am however dismayed that so many items remain on the restricted list. Such restrictions are an anachronism that must be eliminated in the next EXIM policy. All QRs on imports and exports must be eliminated, leaving only those restriction on health, safety and security grounds that are common even in OECD countries and those required by international obligations (such as on export of endangered spicies).
Transaction Costs
Any measures to reduce the very high transaction costs for importers are welcome. I, however, have a small caveat. Electronic Data Exchange (EDI) a proprietary technology, was the technology for trade about 10 or 15 years ago. It is my understanding that during the past decade the Internet has replaced EDI in up and coming e-enabled countries. The MOC may like to take another look at this alternative.
The Minister of Commerce and Industry opened his speech by re-iterating the goal of increasing India’s share of merchandise trade to 1% of global levels by 2007 (“up from the level of 0.67”). He followed this up by taking head on the question of “whether we need an annual EXIM policy?” The most noteworthy aspect of the Exim policy was the identification of service exports and special economic zones as, “engines of growth.”
Growth Performance & Target
In the fiscal year 2002-03 till February 2003, exports are reported to have grown by 16.8% in US dollar terms, over the corresponding period of the previous year, a noteworthy achievement. This achievement comes however on the back of negligible growth the previous year (2001-2). Thus the level of exports during this period is only about 17% over the exports in 2000-1. In an earlier study (India’s BOP crises and external Reform) we have shown that during the eighties and nineties India’s export growth exceeded world growth, as a result of which our share of world exports rose from 0.42% in 1980 to 0.67% in 1999. Even if our export growth exceeds that of Asia, which it did during the nineties, and given the trend rate of economic reforms, our export share is unlikely to exceed 0.8 % of world exports by 2009. There was nothing in the EXIM policy (or the Budget) that denotes an acceleration of trend rate of reform.
Engine of Growth
One of the most interesting things in the EXIM policy is the assertion that, “Exports can act as the motive power of growth for a rapidly developing Indian economy.” This is perhaps the closest any official document of the government of India has come to recognising, Exports as an Engine of Economic growth and the minister is to be commended for bringing this to the attention of the nation. This fact has been well known to S. E. Asian and E. Asian countries, including China, for many decades and they have fully exploited it to achieve high growth rates over the past two to four decades.
The minister has identified two sub-engines of growth, namely service exports and Special Economic Zones (SEZ). We are in full agreement with him about the important role that these can play in propelling growth of exports. Sadly however there is little in the EXIM policy that will ensure that this happens, particularly in the case of Special Economic Zones.
Special Export Zones
As is by now well known India’s exports of labour intensive manufactures (as well as the employment in such production for export) are a fraction of those from China. We can identify SSI reservation, Labour laws and procedures and bureaucratic control mentality as factors that have discouraged FDI in such export-oriented manufactures. Special Economic Zones provide an area where we could minimise or eliminate such handicaps. Unless this is done Special Economic Zones cannot attract sufficient FDI to act as engines of growth for the economy. Though we cannot fault the EXIM policy per se for not doing anything about these matters, unless the Minister of Commerce and Industry can convince his cabinet colleagues about the importance of these reforms, the promise of Special Economic Zones engine of growth will not be fulfilled.
Service Exports
In our view service exports can play an important role in accelerating economic growth. The extension of zero duty imports of, ‘consumables, office and professional equipment, spares and furniture….’ to the service sector can act as positive (short term) signals to encourage export of services. By themselves, however, it is unlikely that they will propel service exports to the point that they begin to act as engines of growth for the economy as whole. For this to happen we need a change in our mind set with respect to the global rules of Service trade from that of protection from imports and external forces to looking at the world in terms of the opportunity for service exports. Our research has identified a number of internal and external policies that need to be liberalised if India is to become a major exporter of Services.
Agriculture Export Zone
The proposal in EXIM policy to involve corporates in the AEZ is a positive one. As in the other cases liberalisation of land related policies and other laws relating to agricultral produce such as the Essential Commodities act and the unification of Food related laws, rules and regulations are essential for a sustained increase in value added aggriculture and allied products.
Quantitative Restrictions
I was both pleased and dismayed to read the announcements on lifting of QRs. The removal of 69 import items and 5 export items from the restricted list is very positive feature of the EXIM policy. I am however dismayed that so many items remain on the restricted list. Such restrictions are an anachronism that must be eliminated in the next EXIM policy. All QRs on imports and exports must be eliminated, leaving only those restriction on health, safety and security grounds that are common even in OECD countries and those required by international obligations (such as on export of endangered spicies).
Transaction Costs
Any measures to reduce the very high transaction costs for importers are welcome. I, however, have a small caveat. Electronic Data Exchange (EDI) a proprietary technology, was the technology for trade about 10 or 15 years ago. It is my understanding that during the past decade the Internet has replaced EDI in up and coming e-enabled countries. The MOC may like to take another look at this alternative.
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