8

International Trade and Investment

India’s insulation from world markets until the reforms of 1991 stemmed
from a long-standing distrust of markets and international trade in general and
the fear that greater involvement in foreign trade would inevitably retard
India’s industrialization. More than six decades ago Sir M. Visveswaraya,
asserted that ‘India may be an industrially developed country or it may be a
market for manufactured goods from outside and not both’ (Visveswaraya
1934, pp. 351–3). Pandit Nehru’s National Planning Committee agreed in
1938 that
The objective for the country as a whole was the attainment, as far as possible, of national self-
sufficiency. International trade was certainly not excluded, but we were anxious to avoid being drawn
into the whirlpool of economic imperialism. The first charge on the country’s produce should be to meet
the domestic needs of food, raw materials, and manufactured goods. Surplus production would not be
dumped abroad but be used for exchange of such commodities as we might require. To base our
national economy on export markets might lead to conflicts with other nations and to sudden upsets
when those markets were closed to us. [Nehru 1946, p. 403]

The authors of People’s Plan wanted post-independence India ‘to exercise

a monopolistic position in respect of foreign trade as well as financial
transactions with foreign countries’ (Banerjee et al 1944, pp. 3–8). The
desire to achieve self-sufficiency is also implicit in the Bombay Plan: ‘We
consider it essential for the success of our economic plan that the basic
industries, on which ultimately the whole economic development of the
country depends, should be developed as rapidly as possible … it should be
our aim simultaneously to develop consumption goods industries so as to
meet at least our essential requirements’ (Thakurdas et al. pp. 31–2, 58).
With the establishment of the Planning Commission in 1950, and the
formulation of successive five year development plans as frameworks for the
centralized economic management of the economy, controls over agriculture,
industry, foreign trade, and indeed economic decision-making by individuals
and enterprises became the norm. The First Five Year Plan went so far as to
claim that controls provide the appropriate incentive structure for rapid
development:
Control and regulation of exports and imports, and in the case of select commodities state trading, are
necessary not only from the point of view of utilizing to the best advantage the limited foreign exchange
resources available but also for securing an allocation of the productive resources of the country in line
with targets defined in the Plan… fiscal, monetary and commercial policy can influence the allocation of
resources, but physical controls are also necessary … Viewed in the proper perspective, controls are
but another aspect of the problem of incentives, for to the extent that controls limit the freedom of action
on the part of certain classes, they provide correspondingly an incentive to certain others and the
practical problem is always to balance the loss of satisfaction in one case against the gain in the other.
For one to ask for fuller employment and more rapid development and at the same time to object
to controls is obviously to support two contradictory objectives. [Planning Commission 1951, pp.
42–3, emphasis added]

In reality, the controls, largely in the form of various quantitative restrictions

(QRs) and prohibitions, rather than in the form of taxes and subsidies (though
these were also used, but often in conjunction with, rather than instead of,
QRs and prohibitions) which operate through the market mechanism, ended
up creating a chaotic incentive structure. They also encouraged and
eventually unleashed rapacious rent seeking and political corruption, rather
than the rapid development our planners claimed they would.
The consequences of the misguided state-controlled, public sector
dominated, import-substituting industrialization with the emphasis on heavy
industry are well known and well documented. As economic theory teaches
us, restricting imports through tariffs and quotas, that is, explicit and implicit
taxation of imports, is at the same time taxation of exports. In addition, our
exchange rate remained overvalued for long periods of time. To offset the
negative impacts on exports of import taxes and exchange rate overvaluation,
various implicit and explicit measures of export subsidization were put in
place. But access to some of them, such as duty drawbacks, were
cumbersome, time-consuming, and corruption prone. The overall impact of
export subsidization in offsetting the bias against exports, created by the
import control regime, was at best modest and incomplete, and at worst
negligible. While world exports grew at a rapid pace of 8 per cent per year
from 1951 until the first oil shock of 1973 and at more modest rates (average
rate of 2.6 per cent per year during 1973–85 and 5.7 per cent per year during
1985–96) thereafter, India’s share in this growing world market dwindled
from a high of 2.1 per cent in 1951 to a low of 0.4 per cent in 1980. It has
climbed slowly since to about 0.6 per cent in 1997. Interestingly, China,
whose share in world exports also declined in its pre-reform period from a
high of 2.7 per cent in 1959 to a low of 0.7 per cent in 1977, has now
regained what had been lost and gained some more. In 1997, China’s share
was 3.2 per cent (ibid.). The share of India’s foreign trade in GDP remained
virtually unchanged, around 12 per cent to 14 per cent of GDP during the four
decades prior to the reforms of 1991.
Besides quantitative restrictions on imports there were tariffs as well,
though clearly, with binding quotas, tariffs were not the effective constraints
on imports.1 The import weighted average of tariffs on all imports on the eve
of reforms was 87 per cent, with the average for consumer goods being
almost double at 164 per cent (World Bank 1998a, Annex Table 10). There
was, of course, an enormous variance in tariffs across commodities, with
rates on some imports exceeding 300 per cent. Given that tariffs on raw
materials and capital goods were lower than on final goods, the rates of
effective protection on some of the manufactured goods were extremely high.
For example, imports of passenger automobiles were virtually banned on the
ground that they were luxury goods. But this gave unlimited protection to the
domestic manufactures. By controlling the price of this presumed luxury and
rationing its available domestic output, the policy in effect transferred high
rents to those who got the allocations, such as politicians and bureaucrats.
The rationale of this policy by an ostensibly socialist regime was
inexplicable, unless one believed that the rent transfer was indeed the
intended outcome.
With respect to agriculture as a whole, as I discussed in Chapter 2, taking
the explicit subsidies on some purchased inputs, such as fertilizers, the
implicit taxes through export restrictions and other means and exchange rate
overvaluation, the situation was one of disprotection on the average. Foreign
trade in a number of agricultural commodities was canalized and the
operation of the canalizing agencies was not exactly conducive to promote
agricultural trade. Taking QRs and other non-tariff barriers into account, the
coverage of non-tariff barriers was almost universal, around 90 to 95 per
cent of trade prior to reform (World Bank 1998a, Annex Table 8).
I should also again refer to our policy of reservation of certain
commodities for production by small scale enterprises. As stated in Chapter
1, the reservation of production of certain categories of cloth to handlooms
together with import-substitution in machinery as well as restriction on
technology imports in effect crippled our cotton textile mills, several of
which became sick, then were taken over by the government, only to become
more sick. Ironically a successful small enterprise had no incentive to grow
beyond the size that would entitle it to receive government provided favours
of all kinds as a small enterprise.
Given the harm that the control regime was doing to our growth and
foreign trade, it is not surprising that Dr Manmohan Singh, who in his
doctoral thesis at Oxford (later published as Singh 1964) had called attention
to the crippling effect of India’s trade policy and unwarranted export
pessimism, would tackle the reform of the external trade regime as a priority.
He abolished licensing and quantitative restrictions on most imports, except
consumer goods. However, external trade in agricultural commodities was
largely left out of his reform. Tariffs were reduced. By the time he left office
in 1995, import weighted average tariffs on all imports had come down to 33
per cent from its level of 57 per cent in 1990–1. It has come down further to
30 per cent in 1998–9. The variance in tariffs had been reduced as well.
Even consumer goods imports on an average had an import weighted tariff of
48 per cent in 1995, only 50 per cent higher than the overall average as
compared to 100 per cent higher as it was in 1990–1. In 1998–9, the rate was
39 per cent, a third higher than the overall average. On agricultural products
the weighted average tariffs were 70 per cent in 1990–1, 17 per cent in
1994–5, and 16 per cent in 1998–9 (World Bank 1998a, Annex Table 10). It
is clear that since 1994–5 there has not been much further liberalization of
tariffs.
The exchange rate is now by and large market determined, though it would
be more accurate to say that we have a regime of managed, rather than
cleanly floating, exchange rates. The real effective exchange rate had
depreciated by about 48 per cent in 1995 relative to its value in 1990 (ibid.,
Annex Table 9). This depreciation, together with the reduction of import
duties and restrictions, brought about a very modest increase in India’s share
of world exports from 0.53 per cent in 1990 to about 0.62 per cent in 1997
(ibid., Annex Table 7). With the slowing down of the reduction in tariffs
since 1995, no change in non-tariff barriers, and some appreciation of the
real effective exchange rate since 1995, it is not surprising that our export
share has gone up only by 0.02 per cent to 0.62 per cent between 1995 and
1997 (ibid., Annex Table 7). In absolute terms, India’s exports at $33 billion
in 1998 were less than Thailand’s post-crisis figure of $54 billion (IMF
1999, p. 64). In the last two years, export growth has slowed down
considerably. The share of total trade (using data from the Department of
Commercial Intelligence and Statistics) in GDP has, however, increased
from 15.8 per cent in 1990–1 to 19.5 per cent in 1997–8 (Government of
India 1999, Appendix Table 0.1). However, if we use the balance of
payments data of the Reserve Bank, which report higher levels of exports and
imports (particularly the latter), the share of trade in GDP goes up from 17.4
per cent in 1990–1 to 22.4 per cent in 1997–8 (ibid., Appendix Table 6.2).
Turning now to the present and the future, I will concentrate on areas
directly related to foreign trade such as tariffs and non-tariff barriers,
consumer goods imports, on integrating agriculture into the world markets, as
well as on infrastructural bottlenecks on trade. In passing, let me say that we
should liberalize trade with all our partners on a most favoured nation
(MFN) basis rather than engage in preferential liberalization of our trade
with our neighbours through the South Asian Preferential Trade Agreement
(SAPTA). Of course, the untouched components of the reform agenda, such as
labour and bankruptcy laws and the insurance sector, as well as unfinished
items such as reform of the financial sector and privatization are also
important from the perspective of foreign trade.
First, turning to consumer goods imports, as a signatory of the Uruguay
Round Agreement we are committed to a phase-out of our quantitative
restrictions. But our major trading partners filed a complaint against us in the
World Trade Organisation (WTO) on the ground that our scheduled phase-out
was too slow. We negotiated bilateral settlements on the pace of the phase-
out with Australia, Canada, the European Union, Japan, New Zealand, and
Switzerland. However, the US pursued its complaint and the WTO’s Dispute
Settlement Body (DSB) has ruled that we can no longer use the Balance of
Payments (BOP) provision of GATT-WTO (Article XVIII B) for continuing
with our quantitative restrictions. We have appealed against this ruling on the
ground that the DSB has no jurisdiction for deciding whether the BOP
provision could be invoked and only the BOP committee of the WTO can
decide. The appeal is pending. In the meantime, tentative steps, by
transferring around three hundred and fifty items from a list of restricted
imports to the Open General Licence (OGL) categories have been taken, but
many of these items are of limited significance. I would urge that we
immediately convert the remaining QRs on consumer goods imports into
tariffs and announce their reduction fairly rapidly.
I would also reduce our other tariffs, both in their levels and their
variance. Compared to other developing countries in our region, our average
and maximum tariffs are still high. Announcing a phased reduction would
create more certainty for both domestic investors and FDI. It is very
unfortunate that the Finance Minister, in his 1998–9 budget, announced an
almost across the board additional tariff of 8 per cent (later reduced to 4 per
cent) on all imports. This is an entirely wrong signal to send to the rest of the
world if our intention in fact is to convey the idea that we have opened our
economy significantly to foreign trade and investment. Bureaucratic and
procedural hurdles faced by exporters and others are still formidable. The
claim that all hurdles can now be cleared at one ‘window’ rather than from
several windows separately will not do in a world where there are no
hurdles at all to clear in many countries.
As pointed out in the previous chapters, our agricultural trade has yet to be
freed from internal barriers, let alone be integrated with world markets. To
repeat what I said, imports accounting for nearly three-fourths of the value of
agricultural production are still subject to non-tariff barriers and quantitative
restrictions on exports of most agricultural commodities still apply. I noted
that India is still not a common market with taxes on interstate sales.
Restrictions on interstate movement of agricultural commodities still exist.
Restrictions on exports have often been imposed to moderate increases in
domestic prices of politically sensitive commodities, for example, onions
and raw cotton. There is massive government intervention in the market for
cotton—for example, there is monopoly procurement in Maharashtra. Cotton
export policy is driven by the consideration of keeping its price low for the
textile industry.
I argued in Chapter 2 that full integration of agriculture with world markets
and refraining from imposing restrictions on domestic trade is very likely to
have significant once and for all price effects. But if we move, as we must,
towards creating an efficient safety net for the truly poor, then its once and
for all price effects need not come in the way of integration with world
markets. Full integration also means that fluctuations in world prices of
agricultural commodities will pass through to domestic prices. As stated
earlier, this in fact will dampen domestic price fluctuations as compared to
our current regime of insulating India’s agriculture from world markets. I
should also mention the fact that in some commodities, such as rice, the
world trade is a small proportion of world output and, as such, any large
trade by India could affect world prices. However, this is no reason for not
trading, though we need to ensure that traders take into account the potential
effect on world prices of their trade. The mechanism for bringing this about
without violating WTO articles should be put in place.
I had drawn attention earlier to the forthcoming multilateral negotiations on
agricultural trade in 2000. Let me emphasize that before entering these
negotiations we should formulate our negotiating positions based on a
rigorous analytical and empirical analysis of the issues involved. My
impression is that in our participation in the Uruguay Round and earlier
rounds, we took positions that were not thought through, based more on
ideology than on our long term national interests, and opposed any trade
liberalization. Because of this, I am told, the Indian delegate to GATT
negotiations was named as Mr No by other delegates! Unfortunately some of
the statements of the Commerce Minister, Mr Hegde, and the fact that not all
delegates at the G-15 meeting of August 1999 in Bangalore shared our
attitude towards a new round, suggest that the old mindset has not lost its
hold.
My next set of remarks relate to infrastructural structural constraints on our
foreign trade. The unreliability and poor quality of our power supply add to
the costs of production of exportables and adversely affect our international
competitiveness. Reforms of cargo handling at ports and road, rail, and air
transportation to make them efficient and cost-effective are at an early stage.
Also, to be able to break into the lucrative export markets for perishables,
such as cut flowers, fresh fruits, and vegetables, we need an efficient cold
storage, grading, and air transportation infrastructure.
Our policy with respect to private foreign capital of all types (foreign
direct investment (FDI), portfolio investment, and debt) had been as
restrictive, if not more, as the case of trade in goods and services before the
1991 reforms. Prior to 1991, restrictions on foreign direct investment
included limits on entry into specified priority areas, an upper limit of 40 per
cent on equity participation, and requirements on technology transfer, phased
manufacturing, and export obligations. According to an estimate of Chopra
et. al. (1995), government approvals for private investment were needed for
60 per cent of new investment in the industrial sector during the pre-1991
policy regime. They estimate that FDI averaged only around $200 million
annually between 1985–91 with most of capital flows consisting of foreign
aid, commercial borrowing, and deposits of non-resident Indians (NRIs).
The reforms of July 1991 affected FDI only to a limited extent. A
discretionary mechanism of approval was introduced through the Foreign
Investment Promotion Board (FIPB) for some industries. In addition, Indian
firms with good standing have been allowed (since February 1992) to issue,
with government approval, equity and convertible bonds abroad through the
Global Depository Receipts (GDR) and American Depository Receipts
(ADR) respectively in European and American capital markets. Since
September 1992, registered foreign institutional investors (FIIs) have also
been permitted to purchase both equity and debt securities directly in the
local market subject to certain upper limits.
As a consequence of the limited liberalization, FDI increased from $233
million in 1992 to an estimated $3.3 billion in 1997. India’s share of total
FDI in all developing countries increased from 0.5 per cent to 2.2 per cent
over the same period. However, over this period China attracted massive
flows of FDI amounting to $194.4 billion (cumulative) compared to $9.4
billion for India (Government of India 1999, p. 86). India’s share in the total
portfolio investment for all developing countries increased from 6.2 per cent
in 1994 to 8.7 per cent in 1996 and declined to 5.1 per cent during 1997—the
year of the East Asian currency crisis. Portfolio investment is volatile;
fluctuations in the absolute amount of net flows were sharp: $5.3 billion in
1994, $1.4 billion in 1995, $4.6 billion in 1996, and $2.8 billion in 1997
(Government of India, p. 87).
Although government approved FDI proposals amounting to $54.3 billion
during the eight-year period 1991–8, actual inflows were only $11.8 billion
(cumulative) or a little over one-fifth of the approvals. A more disaggregated
breakdown of the total FDI and portfolio investment over a seven-year
period from 1990–1 to 1997–8 shows that India attracted a much larger
magnitude of more volatile portfolio investment (cumulative $15.5 billion)
than long-term FDI (cumulative $10.7 billion). Besides, two-thirds of FDI
came through the non-transparent discretionary process of FIPB, 22 per cent
from non-resident Indians, and only 11 per cent through the automatic route
opened for private foreign investment in physical infrastructure in the July
1991 industrial policy. Private capital flows have indeed increased since
1991, but it is obvious that India has not attracted enough to finance the
growing infrastructure investment requirements. The reason is also obvious:
the old restrictive mindset with respect to foreign investment still prevails
and liberalization has not been carried far enough. Equally, the limited
liberalization resulting from the persistence of the old approach to foreign
collaboration agreements can be gauged from some illustrative calculations
of the World Bank. Of the 1,637 approvals granted during the two-year
period 1988–9 and 1989–90 (under the pre-reform policy), as many as 888
or nearly 54 per cent would still have required government approval under
the post-reform policy!
India failed to share in the expansion of private capital flows in the 1990s.
Developing countries as a group attracted foreign direct investment (FDI)
flows of $29 billion per year on an average during 1986–91 (UNCTAD
1998). India had a share of 0.5 per cent of these flows compared to 12 per
cent for China. FDI flows to developing countries increased nearly 4.5 times
to $129.8 billion in 1996 and by more than 5 times to $148.9 billion in 1997.
India increased its share to 1.8 per cent by 1996 but China’s share rose to 31
per cent. The same report mentions that approvals of FDI in China have been
going down and hence a short-term decline of FDI is to be expected in China.
Given a receptive policy regime, there is plenty of room for India to expand
its share of FDI flows. Much smaller countries like Thailand, Malaysia, and
even Indonesia have received larger flows of FDI than India.

1 However it is possible that in the competition for import licences some might enter at lower tariffs but
would drop it at higher rates. Also the composition of import demand would be affected by the structure
of tariffs.
 Postscript

The preceding eight chapters are obviously not comprehensive enough to

cover all aspects of reform. I could also have delved more deeply than I did
on those aspects that I covered. But the most serious of my omissions is a
discussion of the politics or political economy of reforms.
My first visit to ISEC coincided with the general elections of 1998 that
brought the BJP coalition to power. My lectures were delivered while the
coalition had announced its first budget for the Union for the year 1998–9. I
am writing this postscript in August 1999 after the fall of the coalition
government while awaiting the polls for electing the next parliament to start
in early September 1999. I would hope that the elections will bring to power
a government at the Centre which will have a sufficient and stable majority in
the Lok Sabha to be able to not only revive the reform agenda but to also
deepen it and extend it. A different coalition led by BJP won an absolute
majority and took oath of office in October 1999. The new government has
announced its intention to acclerate reforms.
It is no exaggeration, but merely stating the obvious, if one were to say that
not only the prospects of success of any reform agenda, but the scope, depth,
sequencing, pace, and effectiveness of implementation of the agenda, which
together influence the prospects of success, depend crucially on their
political economy. The failures of several of our five year plans to achieve
many of their targets, including, importantly, their aggregate growth targets,
were attributed by some to their poor implementation, rather than to any
faults in the formulation of the plans. But such an attribution reflects
intellectual confusion—after all, any plan that had been formulated without
taking into account the feasibility of its implementation is not a plan in any
meaningful sense of the term. In the same vein, attributing the slowdown, if
not altogether stalling, of the pace of our reforms to politics and lack of
political will once again displays the same intellectual confusion. Put another
way, a reform agenda not based on political realities but on wishful thinking,
or worse still on myopic political calculations, is not a reform agenda but a
recipe for frustration. This is not to say of course that political realities are
either immutable or exogenous to the process of reform itself, but only to
argue that the hallmark of farsighted and visionary political leadership is that
it would mobilize the people by convincing them that reforms are in their
interest. Only a myopic politician would surrender to the groups that have a
vested interest in not reforming the system.
Roger Douglas, former Finance Minister of New Zealand, who was the
architect of his country’s successful structural reforms of 1984–95 (Evans et
al. 1996), describes the conventional politics of reform very well:
… politicians tend, worldwide, to avoid structural reform until it is forced upon them by economic
stagnation, a collapse of their currency, or some other economic and social disaster. Politicians tend to
close their minds as long as they can to the need for structural reform, because they believe that
decisive action must inevitably bring political calamity upon their governments.
As their countries’ economies drift closer to crisis and structural problems are no longer deniable,
they persuade themselves that action before the next election would give the advantage to their political
opponents. [Douglas 1990, p. 2]

This could as well be a description of our own politicians. After all, it is

the severe macroeconomic and balance of payments crisis of 1991 that
brought India to a near default on her external debt and led to the Rao-
Manmonhan Singh reforms. The current slowdown of the reform process
could be seen as illustrating Douglas’ point that, incumbent politicians,
particularly of a weak and unstable governing coalition such as ours at
present, naturally would wish to postpone any decisive action that might
conceivably erode their political support prior to the next election.
Douglas points out that
A fundamental choice is always there: You can take the costs upfront for larger medium-term gains, or
focus on short-run satisfaction and be sandbagged later by the accumulated costs. There is a deep well
of realism and common sense among the ordinary people of the community. They want politicians to
have guts and vision to deliver sustainable gains in living standards, [ibid., p. 2]

This is well taken. While Prime Minister Rao and Dr Manmohan Singh
indeed had the courage to realize the utter failure of the development strategy
pursued until then and the need for systemic reforms and introduced them
even though their party did not command an absolute majority in the
parliament, unfortunately they did not try to mobilize public support for
reforms. It is true that the crisis forced their hands with respect to the timing
of announcement of reforms. But more could have been done to generate
popular enthusiasm. In the absence of such an effort, like all the five year
plans, the reforms appear to be more like ‘top-down’ impositions, than a
consensus from a ‘bottom-up’ movement of ideas.
It is tragic that the Vajpayee government, while it did attempt to push the
reform agenda further and faster, unfortunately chose to abandon our long-
standing policy of creative ambiguity of our nuclear capability and resumed
nuclear testing after a gap of twenty four years. Notwithstanding the
hypocrisy of the five declared nuclear powers and the Chinese transfer of
nuclear technology to Pakistan, our own security has been weakened rather
than strengthened by the explosion and the proposed weaponization coupled
with our declared ‘no first use’ policy. With respect to Pakistan, our security
situation now is one of a balance of terror. With respect to China, our nuclear
capability and ‘no first use’ are not credible policies since we do not have a
convincing ‘second strike’ capability to retaliate and inflict sufficiently high
damage if the Chinese were to attack us with nuclear weapons. In any case,
the Chinese Communist leadership which did not hesitate to let thirty million
people die in an avoidable famine not so long ago is unlikely to be deterred
by the possibility that we might be able to destroy one or two of their cities.
Those who naively point to the balance of nuclear terror between the NATO
and Warsaw Pact nations as having prevented the cold war from escalating
into a hot nuclear exchange forget that conventional wars with tragic
consequences in Afghanistan, Angola, and Vietnam were fought even while
nuclear wars were eschewed. There is no reason to believe that the
probability of a conflict with China or Pakistan using conventional arms has
been reduced by the tests. Indeed the Kargil conflict with Pakistan is a
demonstration of this fact and an even more ominous fact, namely that on both
sides of the line of control extremists demanded its escalation to a nuclear
confrontation. It must be said to the credit of the Vajpayee government that it
showed tremendous restraint and ignored the clamours of the Sangh Parivar.
Be that as it may, all that the testing has gained us is not greater security, but
only international condemnation and economic sanctions by the US. In August
1999, a draft nuclear doctrine was announced—while confirming the ‘no first
use’ policy, it stresses in effect a second strike capability by building a triad
of delivery systems, land-based, air-based, and submarine-based. I am afraid
that building a credible second-strike capability through such a triad would
be very costly and in any case will trigger another arms race with Pakistan.
Neither country can afford this madness.
If another unstable coalition comes to power, it is very unlikely that the
reform process will be accelerated any time soon. On the other hand, if the
BJP comes to power with a majority, and succumbs to the demands of
Swadeshi Jagaran Manch, it would send the economy back to the failed era
of import-substitution. Even if this dire eventuality does not materialize but
no further reforms take place, infrastructural constraints would become more
severe, fiscal deficits would crowd out productive investment, export
potential would remain underutilized, and our growth rate would regress
back towards the contemporary Hindu growth rate, that is a rate adjusted for
the changes in the sectoral composition of GDP since the 1950s, of 5 per cent
per year. Fortunately, the election manifestos of the BJP-led National
Democratic Alliance and the Congress Party promise fiscal prudence
(through the enactment of a Fiscal Responsibility Act) and recognize the need
for FDI (particularly in the infrastructural sectors) and for faster export
growth. Unfortunately neither manifesto seriously addresses privatization,
labour market, and bankruptcy reforms. As noted earlier the National
Democratic Alliance won an absolute majority and it has promised to
accelerate reforms.
There is one slight glimmer of hope in this gloomy scenario, namely that
weakness and instability at the centre might lead some states to be bolder and
more imaginative in introducing reforms and their success would lead other
states to emulate them. I certainly hope that I am proved wrong in my
pessimism. If I am proved right, we would once again have let down our
poor masses. It would be indeed unconscionable if the realistic possibility of
rapid growth and poverty alleviation is sacrificed at the altar of jingoistic
and myopic politics.
The government that comes to power after the September 1999 elections,
whether stable or not, reform-minded or not, has to face the fact that the third
ministerial meeting of the WTO will convene in Seattle, USA in late
November 1999. It is expected that the meeting will launch another round of
multilateral negotiations. Whether it is launched or not, the TRIPS and
Agriculture agreements will come up for review in 2000 as a part of the
built-in agenda of the Uruguay Round. In addition, as yet there is no
agreement on movement of natural persons. Negotiations on this and on the
Maritime Services component of General Agreement on Trade in Services
(GATS) are also to take place in the same year. It is essential that the new
government develop our negotiating positions after careful thought. Let me
conclude with a few remarks on my view of what India should ask for in
these negotiations.
India has a vital interest in ensuring that any agreement reached on
movement of natural persons is very liberal. India is likely to have
comparative advantage in labour-intensive services as well as in certain
skill-intensive ones such as software. The software industry is one of India’s
fastest growing industries in the electronics sector. Software exports grew by
an impressive 43 per cent per year between 1991–2 and 1996–7 and 68 per
cent in 1997–8. Although India’s share in the world software market has been
low, in customized software India’s recent share is a commanding 16 per
cent. In the Silicon Valley of California
Almost 3000 of the region’s high tech companies are run by Chinese and Indian engineers … Apart
from generating annual sales of almost $17 bn last year and providing 58,000 jobs in California’s high-
tech zone, Asian entrepreneurs have established long-distance business networks especially with
Taiwan and India, which offer valuable openings for investment and trade … Chinese and Indian chief
executives ran 13 percent of the Silicon Valley technology companies started between 1980 and 1984
and 29 per cent of those launched between 1995 and 1998. [Financial Times, 3–4 July 1999, p. 3]

While exports of software from a domestic base will continue to grow, to be

able to provide in situ services in foreign markets and to keep up with
technological developments it is essential that Indian software technicians
have the opportunity to work abroad without necessarily having to migrate
permanently. Most of the Indian engineers entered the United States under a
special category of non-immigrant visas but there is strong pressure to
restrict the number of such visas issued. A liberal agreement on movement of
natural person would facilitate such temporary migration.
Reminiscent of its resistance to the start of the Uruguay Round of
multilateral trade negotiations, India is again reluctant to endorse the start of
a new ‘millennium’ round on the grounds, among others, that developed
countries have not lived up to their commitments in earlier rounds. This
reluctance is unfortunate. First of all, if the major trading powers of the
world are for it, there is nothing India or the developing countries, which
together do not account for a significant share of world trade, could do to
stop it. Winham (1989, p. 54) attributed to one official who was involved in
the negotiations that led to the Uruguay Round the following description of
those negotiations: ‘It was a brutal but salutary demonstration that power
would be served in that nations comprising five per cent of world trade were
not able to stop negotiation sought by nations comprising ninety-five per cent
of world trade.’ Second, there are several reasons why it is in India’s
interest to ensure an early launch and successful completion of the
Millennium Round. Bergsten (1999) lists many of them and also identifies
several issues that are of great interest to India and which, in his view, India
could present in the new round:
1. Elimination of the high tariffs that will remain, especially in the United
States, on many Indian apparel and textile exports after the phase-out of
quotas under the MFA;
2. Elimination of the very high tariffs on agricultural imports in many
industrialized countries, especially on products of export interest to
India (such as rice);
3. New agreements on foreign direct investment that would both expand
its levels and help India achieve a fair share of its benefits, as
described above;
4. Tougher disciplines on the use of anti-dumping duties, especially by the
United States and the European Union;
5. Liberalization of movement of natural persons, where India has a strong
competitive advantage, under the General Agreement on Trade in
Services;
6. Elimination of preferential tariffs in regional arrangements, including
the EU and NAFTA, that discriminate against Indian exports; and
7. Further straightening of the DSM to help protect the rights of countries
with smaller trade levels.
I would, however, strengthen a few of Bergsten’s suggestions and add
some of my own. The European Commission had recommended the
imposition of anti-dumping (ADM) duties on gray cotton cloth exports of
India and a few other countries, a recommendation that could be attributed
only to crass protectionist motives. Fortunately the Council of Ministers
rejected this recommendation. Unless checked, the use of ADMs to
circumvent or evade liberalization commitments will grow. Rather than
attempt to toughen the disciplines on the use of ADMs, I would suggest that
India and other developing countries should take the lead in pushing for the
abolition of their use altogether. In my view, ADMs are the analogues of
chemical and biological weapons in the arsenal of trade policy instruments.
Unfortunately India has begun to emulate the worst practices of the
industrialized countries by becoming the third or fourth most frequent user of
ADMs in 1998. I strongly deplore this.
Also, rather than ask for elimination of preferential tariffs against Indian
exports in regional and preferential trade agreements (PTAs) of which India
is not a member, we would go further and suggest that India should push for
replacing Article xxiv of GATT dealing with Customs Unions and Free Trade
Areas, with the requirement that preferences granted to partners in any PTA
should be extended on a MFN basis to all members of the WTO within a
specified period, say five to ten years. Here again India, like many other
developing countries, is moving in the wrong direction of championing
regional agreements such as South Asian Preferential Trade Agreement
(SAPTA) and also clamouring to become a member of other regional
agreements. In my judgment, the discriminatory and trade-diverting aspects of
PTAs, regardless of whether they are ‘open’ or not, far outweigh any benefits
to be reaped. In fact, Open Regionalism is almost an oxymoron—either a
trading arrangement is open in the only relevant sense, viz. it does not
discriminate among trading partners or it is regional and discriminates
against non-members outside the region. It cannot be both.
It was a mistake to have included TRIPS in the mandate of the WTO. If
India and other developing countries are not vigilant, it is possible that the
use of trade sanctions for enforcing non-trade-related objectives such as
human rights, labour, and environmental standards would become legitimized
through the expansion of WTO’s mandate. Thus far, at the first two
ministerial meetings of WTO in Singapore (1996) and Geneva (1998), the
ministers have firmly shut the door against a social clause in the WTO. But
the future is unclear. The inability of members of the WTO to arrive at a
consensus on a candidate to replace Mr. Renato Ruggiero, whose term as
Director General of WTO expired on 30 April 1999, was in part related to
the desire of some industrialized countries to replace him with one of the two
candidates who are viewed as more sympathetic to the inclusion of a social
clause and the opposition of developing countries as well as some
industrialized countries to such a choice. Now that the members of WTO
have decided on a compromise that both candidates will share a six year
term, it is to be hoped that the struggle that occurred before the compromise
was reached does not weaken the organization. Be that as it may, developing
countries, including India and the sympathetic developed countries, should
ensure that in any future round of trade negotiations labour standards issues
are forever kept out of the WTO.