MAJORS WANT FASTER BOP PHASE-OUT BY INDIA

12:12 PM Jun 11, 1997

MAJORS WANT FASTER BOP PHASE-OUT BY INDIA
Geneva, 10 June (Chakravarthi Raghavan) -- India presented at the World Trade Organization Monday a detailed 9-year plan for phasing out all import restrictions, but it was spurned by the major industrial nations, who wanted a faster phase-out.

Indian officials were holding intense bilateral consultations with some the major trading nations in an effort to win endorsement for their plans at the BOP committee Tuesday.

India's Commerce Secretary, P.P.Prabhu, presented the plan at the renewed consultations with the WTO/GATT BOP Committee. The consultations had been adjourned in January to enable India to draw and present a detailed plan.

The plan presented by India provides for phasing out the quantitative restrictions (QRs) on some 2400 items (at HS tariff-line levels) of consumer imports, which are now restricted under Art. XVIII:B, the Balance-of-Payments provisions of the GATT.

India presented a three-phase plan, the first phase from 1 April 1997 to 31 March 2000, the second from 1 April 2000 to 31 March 2003 and the third from 1 April 2003 to 31 March 2006.

It provides for removal of restrictions on about 25% of items under restraint in the first phase, a 40% in the second, and the balance by the end of the third phase.

Some big 'consumer' items, on which the majors want concessions and immediate market access, like motor cars, and farm products like fruit, coffee and tea and grains are in the last phase of liberalisation under the Indian plan, according to trade officials.

Many information technology products (where India by joining the ITP accord has to cut tariffs to zero levels) are set to have QRs removed in the first and early part of second phase.

According to Indian press reports, the room for manoeuvre of Indian negotiators at the WTO are limited - given the socio-politico-economic overtones to this debate in India where, the repeated reiteration of successive governments about liberalisation (and Fund-Bank driven) economic reforms, have merely helped to reignite these debates over the WTO system and its inequities.

The domestic political debate there on the BOP issue is fuelled by the fact that the very same nations seeking a faster phase-out by India of its BOP rights, have legitimised a 10-year phase out and their own right to maintain discriminatory QRs on imports of textiles and clothing (under protection since 1960, for 35 years) till end 2005, and endloaded the phase-out (even while striving to create new protectionist instruments like a social clause or the "social labelling" proposal at ILO), as well as seeking export markets for their subsidised agricultural exports, while their own domestic markets have been protected well into the next century by "dirty tariffication" of agricultural imports under the WTO.

The nine-year phase-out plan, India's commerce secretary Prabhu argued before the BOP committee, is necessary to ensure a smooth transition and maintenance of domestic support for its economic reforms and liberalisation programmes.

The International Monetary Fund, providing an assessment of India's external payments position, said as of end March 1997, India had reserves of $22.5 billion or some six months of import cover. At the January consultations, the IMF had said that the reserves provided a five-month import cover.

However, India underlined that the reserves cited by IMF (then and now) had all kinds of components of foreign flows -- in particular from non-Resident Indians, mainly short-term deposits, and portfolio investments -- which by their nature are highly volatile and cannot be relied upon completely.

This argument about composition of reserves, was endorsed and supported by Brazil which, during its own BOP consultations a year or more ago, had brought up this aspect of capital flows that is ignored by the IMF in providing an assessment to the WTO.

When Brazil raised it in its own BOP consultations, the argument was dismissed as a disguised effort to protect its automobile industry and received little attention.

But since then, these arguments about volatility of capital flows and inappropriateness of their being counted by the IMF, without distinction, in assessing liquidity and import needs and reserves of countries, has received the backing of respectable mainstream economists.

Canadian academic, Gerry Helleiner, who heads the research project of the G-24 deputies (of the developing world) at the Fund/Bank institutions), in summing up the differing views in the economic literature on this issue (in the 8th volume of International Monetary and Financial Issues for 1990s) has said: "What is clear is that in the new world of volatile private capital flows, traditional measures of the adequacy of international liquidity, based primarily on the relationship between owned foreign-exchange reserves and imports of goods and services, is obsolete."

India was praised at the BOP committee for presenting a detailed phase-out plan, and in time, but the industrialized nations -- among others US, EU, Japan, Australia, Switzerland -- all argued that nine years is too long a period, and India must phase-out its bop restrictions over a two to three year period.

However, a number of developing countries - among them Brazil, Egypt, Cuba, Sri Lanka, Peru, Pakistan and Nigeria -- supported the Indian position and said the social and political dimensions of India needs to be taken into account.

Even before presenting the plan, India has held a series of bilateral consultations, and these are expected to be continued, till the meeting of the BOP Committee late Wednesday evening to adopt a report and recommendations.

The major industrial nations who felt the phase-out plan was too spread out, in complained that some of their trade interests had not been taken into account by India in its phase-our programme. In particular, they complained about restrictions on imports of agricultural and textiles and clothing products and luxury items like automobiles being put on the last phase.

However, India repudiated there was any end-loading in its plan, and stressed that it was a carefully calibrated exercise for careful withdrawal of QRs - so that India could manage its bop position without having to have any recourse to intensification of restrictive measures during the phase-out period.

The plan was not back-loaded, but provided for a steady removal of restrictions and provided for a progressive removal of QRs on imports, while avoiding undue risks to BOP within India's overall programmes for economic development.

Such a plan, he argued, was necessary to ensure continued public support, and any precipitate action that could generate BOP pressures or crisis would be a setback to the entire reform process. The nine-year phaseout should be seen in the context of the flexibility developing countries have been provided for maintaining QRs under Art. XVIII:B, and the sensitivity and significance of agriculture and textile sectors in India's economy.

Some 180 million of India's labour force depended on agriculture and another 40 million were engaged in the textiles sector - mostly in the unorganized (hand-looms) sector. Imports, unless carefully calibrated and monitored could affect domestic agriculture price stability and food security of the country, apart from creating unemployment and BOP problems.

Prabhu told the committee that in 1996, India has removed QRs on some 200 tariff lines, and since January on another 400.

However there was need for caution on the Indian side. Trade liberalisation since 1991-92 had resulted in a surge of 100% in imports over the last five years, while exports had gone up only 86%. India's trade deficit had been widening every year and os large as a proportion of total export turnover. The trade deficit had widened in the current financial year (beginning April) and a trade deficit of half a billion dollars was registered on an export turnover of just $2.5 billion in April 1997.

The major reason for fragility on the BOP front has been the export growth, which has decelerated sharply over the last year. After a 18-20 percent growth in each of previous three years, exports had declined by four percent in 1996-97. The factors behind this decline included deceleration in world trade growth, and worsening market access constraints.

The recent improvements in BOP is entirely due to NRI deposits and portfolio investments -- both not secure sources of BOP financing.

India has rapidly reduced customs tariffs - from a 87% weighted average in 1990-91 to 20.3% in the recent budget, according to World Bank calculations. This has imparted an upward thrust to imports.

The 'self-reliance' index of Petroleum -- amount of needs met from domestic production - has declined from 55% in 1991-92 to 40% in 1996-97. Increased dependence on imports and burgeoning world oil prices have pushed up the oil import bills, and imports of petroleum and petroleum products over nine months ending Dec 1996 had grown by over 41 percent.

India's foreign exchange reserve position had also to be weighed against its future development needs: some 115-130 billion dollars will be needed to meet infrastructure development costs until 2000-2001, and another $215 billion over the five years after - to achieve a reasonable rate of growth envisaged to sustain reforms. This implied need for a large increase in imports and current account deficits.

Some tough bargaining is expected over the next 24 hours, between India and the major trading nations, for a plan to be approved by the BOP committee. It is even possible that consultations would once again be adjourned in an effort to pressure New Delhi.

Trade observers noted that if India had clinched the issue in the January consultations, it would probably have got off much easier: the capital inflows, mostly NRI deposits and portfolio investments, since then appear to have increased, swelling the reserves, and the mercantalist appetites of the majors and their corporations have been fuelled.

But differences in New Delhi, among various departments and ministries, and within the political spectrum, appear to have prevented a deal being clinched in January.

But if trade officials go back without winning endorsement here, the renewed debate in India may not necessarily go the way the majors inside the BOP committee desire.

The irony of US and Europe demanding a 2-3 year phaseout by India of quota restrictions on all products when, after 34 years of discriminatory quota regime to protect their textiles and clothing industries, they got WTO legitimacy for ten years of phase-out of the GATT-derogated textiles regime, is reigniting a debate across India on the asymmetry of the WTO system, hiding behind free-trade slogans on international trade.