RESTRICTED
World Trade WT/BOP/R/32
18
September 1997
Organization
(97-3759)
Committee on Balance-of-Payments Restrictions
REPORT
ON THE CONSULTATIONS WITH INDIA
1. The
Committee resumed its consultations with India on
10-11 June 1997. Following a
"period of reflection" the Committee reconvened on 30 June and
the consultations ended on 1 July 1997. The consultation was held under the
Chairmanship of Mr. Peter R. Jenkins (United Kingdom), in accordance
with the Committee's terms of reference, pursuant to Article XVIII:12(b)
of GATT 1994 and the Understanding on the Balance-of-Payments Provisions
of the GATT 1994. The International
Monetary Fund was invited to participate in the consultation in accordance with
Article XV:2 of GATT 1994.
2. The
Chairman recalled that the purpose of the continued consultations was to
consider a plan by India to eliminate the measures notified under
Article XVIII:B. The Committee had
before it the document WT/BOP/N/24, which, in Annex III, set out a
nine-year phase-out plan, consisting of three three-year periods, beginning on
1 April 1997, during which quantitative restrictions from specified
products would be removed. The Chairman
observed that India had met its commitment to provide a plan three weeks in
advance of the resumption of consultations, a fact that the Committee should
take note of appropriately.
3. The
opening statement by the representative of India at the meeting of 10-11 June
1997 is attached as Annex I.
Statement by the representative
of the International Monetary Fund
4. The
statement by the representative of the International Monetary Fund at the
meeting of 10‑11 June is attached as Annex IV. In addition, the representative noted that
his answers to the questions posed during the January 1997 consultations
on India's balance-of-payments situation had not changed during the interim
period.
Discussion in the Committee
5. The
representative of the European Union thanked the delegation of India for
the statement made on liberalization measures that the Indian Government was
contemplating for implementation in order to bring India's obligations, or situation,
into conformity with undertakings in the WTO, and the considerable work that
had been accomplished in submitting this proposal in time. He also thanked the representative of the
International Monetary Fund for his brief, although very useful, statement and
particularly the concluding part which had just been presented. He recalled that at the January
consultations, the Committee had taken note of the IMF's statement indicating
that monetary reserves in India were appropriate and that there was no serious
threat of any decline in that country's monetary reserves; this view had been confirmed. The EC felt that on this basis, the Committee
had invited the Indian Government to prepare a plan for the lifting of
quantitative restrictions placed on imports, measures introduced by India under Article XVIII. It had been agreed that consultations would
resume to take a look at this plan, and to conclude these consultations in a
way compatible with the appropriate provisions
on balance of payments. The
European Community welcomed these commitments and the efforts made by India to
pursue the liberalization process, a process which already had been under way,
not only for a number of years following the new trade approach adopted by
India, but in particular, in the past few weeks when the Indian Government took
the initiative to liberalize some 300 tariff headings. Nevertheless, he expressed severe
disappointment with the plan submitted by the Indian authorities, a plan the EC
did not find acceptable. There was no
longer any justification for India's measures under Article XVIII:B. Under discussion for some two years now was a
transitional adjustment period, a favour granted to the Indian authorities. His authorities considered that immediate
disinvokation of Article XVIII:B was absolutely fundamental and that in
view of adjustment problems that might be faced, due to imbalances as a result
of the long period of application of these measures, a brief transition period
of two years could be considered reasonable.
Noting that India had stated its willingness to engage in constructive
dialogue, the EC was willing to reciprocate insofar as the Indian authorities
were willing to substantially reduce the transitional period.
6. The representative
of the United States expressed his appreciation for the timely and
comprehensive notification to the WTO Secretariat India's proposed phase-out
schedule of the measures justified pursuant to GATT Article XVIII:B
and recognized the considerable effort involved in preparing such a plan. His delegation could not support India's plan
in its current formulation. He
reiterated that to wait six to nine years more to eliminate the vast majority
of India's quantitative restrictions
purportedly justified by balance-of-payments problems that did not
exist, was neither credible nor commensurate with India's role in the
multilateral trading system, particularly for a country that had, until very
recently, enjoyed a number of years of double-digit export growth as a result
of its participation in the multilateral system. In his opinion, the Committee had concurred
with the judgement of the IMF at the January consultations that India did not
face a balance-of-payments problem, a view that had been reconfirmed; in his view, since January the fundamentals
of India's external account had improved.
The proposed phase-out period represented an unjustifiable delay. Nor did he consider it a responsible action
in terms of maintaining the system of rights and obligations in the WTO: to disregard the rules of the system by
embracing an unjustifiably long period for phase-out would not send a very
useful message, for example, to those countries which were seeking to gain accession
to the WTO. He urged the Government of
India to immediately disinvoke coverage under Article XVIII:B and to
reconsider its current plan and propose a schedule more consistent with its
role in the international trading system.
He added that the inability to do so would lead India's trading partners
to examine other WTO means of addressing this matter.
7. The
representative of Egypt expressed thanks and appreciation to the
delegation of India for both the valuable opening statement and the very useful
and comprehensive documents before the Committee. The conclusion reached by the Committee in
January had presented a big challenge to India, not only because of the
enormous number of tariff items to be included in its plan for liberalization,
but also the economic difficulties that India still faced. The balance of trade had witnessed a deficit
in 1996-97 of about US$5.4 billion, and the deficit on the current account
remained chronic. The recent improvement
in the balance of payments derived from portfolio inflows, short-term deposits
and remittances from Indians residing overseas and did not constitute a source
by means of which India could maintain equilibrium in its balance of
payments on a sound and lasting basis. His delegation believed that the Government
of India should be commended for its historic and courageous decision to
gradually eliminate the quantitative restrictions on a wide range of items
ending a long period of protection. In
this context, Egypt supported the
Government of India for this important step.
He viewed the timeframe for the implementation of the liberalization
plan as appropriate in view of the need for cautious and careful monitoring of
developments. In order to avoid any
set-backs to the reform process, a gradual liberalization plan was a must for
such a huge consumer market, a necessity for adjustment of the domestic
industry and for creating the appropriate atmosphere for popular acceptance of
the liberal reform. He made reference to
the provisions of Article XVIII, paragraphs 2, 8, 9 and 11, which
recognize the special needs of developing countries to maintain quantitative
restrictions under balance-of-payments cover in order to ensure that the
ultimate objective of economic development is achieved, while maintaining
economic stability and satisfactory levels of foreign exchange reserves,
stressing also the progressive relaxation of their restrictions. He believed that the Government of India had
proved its willingness to meet its obligations under the multilateral trading
system and therefore recommended that the Committee agree on the phase-out plan
and consider that India had fulfilled its obligations under
Article XVIII:B of GATT 1994 and the 1994 Understanding.
8. The
representative of Japan expressed his Government's appreciation for the
considerable efforts made by India to submit in a timely fashion a
comprehensive plan to phase-out quantitative restrictions, which had been
maintained for more than 35 years for balance-of-payments reasons. His Government was very conscious of the
politically sensitive environment in which the efforts of the Indian Government
had been made. However, he stated his
strong disappointment that the plan seemed to have paid little attention to
concerns expressed by WTO trading partners of India, as well as to the items of
interest to Japan which had been
indicated to India during bilateral discussions. Specifically, the phase-out plan did not
refer to the disinvokation of the
recourse to Article XVIII:B provision which Japan had requested as being essential. It seemed only logical that India expressly
disinvoke this provision, given the fact that there was no longer any
justification for India to maintain
restrictions for balance-of-payments reasons.
Secondly, the phase-out period of nine years was far too long to be
acceptable; although conscious of the
difficulties which the Government of India faced domestically, Japan was of the
view that restrictions on industrial products should be eliminated in principal
by the end of 1999. Thirdly, import
restrictions on many items would continue to be maintained on the basis of
Article XX and Article XXI of the GATT, instead of Article XVIII of
GATT 1994. He expressed concern
regarding the legal justification of
these restrictions. He requested India
to revise the plan as soon as possible, taking into consideration the concerns
of interested Members, adding that a successful settlement of this
long-standing issue was not only important to India, one of the key players of
the WTO, but also to the credibility of the Organization.
9. The
representative of Thailand, speaking on behalf of ASEAN, quoting
paragraph 8 of Article XVIII:B of the GATT 1994, pointed out that a Member
with a balance-of-payments problem caused by the expansion of its internal
markets in the process of development and instability in its terms of trade
should be able to maintain import restrictions in order to safeguard its
external financial position. In his
view, India found itself in such a situation.
Since 1960, India had faced a severe financial crisis, making it
necessary to invoke the balance-of-payments provisions; only in the 1990s did
the situation allow bold economic reforms and a welcome liberalization
process. Not until early in 1997 had
India's financial situation been well
enough for the IMF representative, based on economic data of 1995-96, to
conclude that "India's recent economic development has been encouraging,
that reform and adjustment efforts need to be sustained" with the
recommendation for the removal of quantitative restrictions on imports,
particularly for consumer products.
10. While he
recognized that sustainable economic growth
was best obtained by allowing the "invisible hand" of the
market force to work, almost 3,000 items had been under import protection for
more than three decades and any abrupt changes in the market might only result
in havoc. ASEAN hoped to see the
existing quantitative restrictions abolished as soon as possible, while
remaining sympathetic to the concerns raised by India. He hoped that India would give due
consideration to an appropriate phase-out period that would neither undermine
the continuation of reforms nor cause unnecessary damage to the commercial or
economic interests of other Members.
11. The
representative of Canada appreciated that a country of India's
importance in the WTO had embarked on reform.
Recalling the conclusions of the last consultation with India, he thanked
the delegation for providing the plan on time.
While it remained Canada's view that India did not face anything close
to a balance-of-payments problem, his Government was sensitive to the political
difficulties of overnight adjustment.
Still, the timing and substance of the proposed phase-out plan were
extremely disappointing and nine years was far too long. Canada had stated repeatedly to the Indian
authorities that an acceptable period for phasing out quantitative restrictions
would be two years, i.e. by June of 1999.
He reminded the Committee that this time-period, in effect, granted
India a total of almost four years since the Balance-of-Payments Committee had
begun this set of consultations in 1995.
Apart from the total time-frame being proposed, Canada was extremely
disappointed that the removal of quantitative restrictions on many of the items
of particular interest to Canada, especially agricultural products, was
proposed to take place in the second and third tranches of the plan. Also of major concern was the fact that the
Indian phase-out plan did not give a clear commitment that India would disinvoke its recourse to
Article XVIII:B. This, in his view,
was an essential element of any phase-out plan.
India, he added, was an increasingly important international
trader. It had played, and would
continue to play, a leadership role within the World Trade Organization. Accordingly, how this Committee dealt with India's
proposed phase-out plan would be very carefully watched by many WTO Members.
12. Since the
coming into force of the WTO, the Balance-of-Payments Committee had been
successful in ensuring a much higher standard of adherence to the WTO rules and
could not afford now to apply a different standard to India. A consistent application of the rules was
even more important today for all WTO Members when one considered that over the
course of the next few years, a number of significant new Members might be
brought into the WTO through the accession process. Canada was convinced that India could do much better than it had in its proposed
phase-out plan. Worries about potential
future balance-of-payments problems could not determine present policy when
there was no existing balance-of-payments problem. Future import problems, if they did occur,
would need to be dealt with on a case-by-case basis. Depending on the nature of such possible
import surges, provisions other than those related to balance-of-payments could
well be the most appropriate way of dealing with such problems, for instance
Article XIX on product safeguards or Article IX:3 of the Marrakesh
Agreement dealing with waivers. Under
the circumstances, he concluded that Canada could not accept the proposed
phase-out plan as fulfilling the requirements of Article XVIII and looked
to the Indian delegation to produce a plan which would be acceptable.
13. The
representative of Sri Lanka expressed his delegation's deep appreciation
to the Government of India for the efforts made in presenting a comprehensive
phase-out plan for progressive elimination of quantitative restrictions
maintained for balance-of-payments reasons in response to deliberations and
conclusions of the previous session held in January. These efforts were indicative of India's
strong commitment to the multilateral trading system and its long-term
disciplines and he commended the Indian Government for the continuation of its
economic reforms and its determination to maintain a liberal and open trading
system. There was no doubt that by
presenting a bold and credible plan which envisaged elimination of quantitative
restrictions in three phases, stretching over nine years, the Government of
India had fulfilled an essential condition in achieving lasting improvements in
the Indian balance-of-payments position and completing its transition started
in the early 1990s. With a carefully
designed plan to gradually phase-out quantitative restrictions as an integral
part of the process of economic reforms, India appeared to have taken another
major step in adapting its trade policies to the needs of liberalization
and openness to the world outside. In his opinion, what was important was the
fact that the present plan to eliminate quantitative restrictions had been
announced at a time when the Indian economy was experiencing unsatisfactory
export growth resulting in an increased trade deficit. In spite of this unfavourable situation, the
unwavering commitment of the Indian Government, as reflected in the document
WT/BOP/N/24, to pursue an open, liberal and market-oriented trade policy, was
indeed commendable. Being a neighbouring
country having substantial trade interest with India, Sri Lanka viewed the
proposal under discussion in this Committee as a positive development. His Government was particularly pleased to
note the desire of India to include agricultural products on which India had bound tariffs at very low levels. He went on to say that the effectiveness and
viability of proposals with social and political repercussions for many sectors
of the economy would depend upon the consensus on such proposals amongst all
concerned. particularly for a country like India given its size and
diversity. His delegation appreciated
the cautious and pragmatic approach followed in drawing up the proposed
phase-out plan, recognizing the uncertainty and fragility in India's
balance-of-payments situation and with a view to ensuring its broad
acceptance. The efficacy of the proposal
could be enhanced by extending necessary support and encouragement to sustain
the momentum of the process. His
Government accepted the proposed phase-out plan and was ready to extend
whatever support was needed for its successful implementation.
14. The
representative of Australia stated that a more open and transparent
import regime based on tariffs would, in the long term, be in the interests of
both India and its trading partners.
Australia supported the trade liberalization provisions of India's
recently announced Export-Import policy, but expressed serious concerns with
the tabled phase-out plan. Like others before him, he considered the
phase-out period of up to nine years as far too long, especially in view of the
improvement in India's balance-of-payments and foreign-reserves position,
indicating that there were no longer WTO grounds for the maintenance of
quantitative restrictions. Australia's
view was that it should be possible to phase-out all quantitative restrictions
by 1 January 2000. While he
understood that India did have politically sensitive sectors, he emphasised
that Article XVIII was never intended to provide for domestic
protection. There was no justification
for an excessively delayed phase-out since most of the items received
considerable tariff protection. If India
was concerned about the impact on particular industries, other WTO provisions
might be more appropriate. Secondly,
Australia was concerned about the extraordinary protection given to
agriculture. Most agricultural raw
materials and processed foods would continue to remain under quantitative
restrictions for another six years until the start of the third stage of
India's phase-out plan. India had made
it abundantly clear that the delayed phase-out for agriculture was not for fear
of balance-of-payments problems but to protect the agricultural sector. This was unacceptable to Australia. Thirdly, he saw a need for a clear commitment
on disinvokation of Article XVIII:B, given the absence of a
balance-of-payments problem for India.
India was not entitled to Article XVIII:B cover and disinvokation
was the only means to provide certainty to India's trading partners. Australia strongly urged India to improve its
proposal, adding that it would be a mistake for India to underestimate the
trade interests and concerns of Australia.
15. The
representative of South Africa commended the Government of India for the
relaxation of the restrictions already implemented and for demonstrating its
commitment to further liberalization to be properly managed in a transparent
manner. He appreciated that the period of time proposed for the
phase-out of its remaining restrictions was a matter of great sensitivity to
India and simply wished to encourage India to accelerate the process of liberalization
as its overall balance-of-payments situation would permit.
16. The
representative of Hungary felt that the
plan demonstrated that the Government of India was firmly committed to
the progressive liberalization of
imports. The phase-out plan was
transparent, balanced and comprehensive, covering all restricted sectors. Hungary believed that the rapid removal of
quantitative restrictions would undermine the external and economic stability
of the country; after many years of
restrictions, a gradual phase-out of quantitative restrictions seemed to be
more reasonable, both from the political and the economic point of view. The Government of Hungary was convinced that
the Government of India could best determine the appropriate phase-out
programme for the remaining restrictions, taking into account the
development needs of the country and
ensuring the level of reserves adequate for implementation of its programme of
economic development.
17. The representative
of Peru noted that over the last year there had been a substantial fall
in India's exports and reserves covered only six months of imports. Thus, he believed that the
balance-of-payments situation was still fragile, justifying the submission of a
progressive phase-out plan over a nine-year period. It was important that the phasing out of
quantitative restrictions in India be accomplished without sacrificing the
growth of the Indian economy or creating a balance-of-payments problem. As such, the plan submitted by India provided
a good basis for reaching an agreement within the Committee.
18. The
representative of Norway first asked if it would be possible for India
to produce a breakdown of the 100 per cent increase in imports over
the last five years between investment goods and consumer goods. He recalled that in January the Committee had
taken note of the IMF's statement that India's current monetary reserves were
not inadequate and there was no threat of a serious decline in India's monetary
reserves. The IMF had stated, inter alia, that quantitative
restrictions should be removed over a
relatively short period and had repeated this view today. In January his delegation had adopted the
position that a period of two years
would be reasonable for phasing out the quantitative restrictions. Consequently his Government noted with
considerable regret and disappointment that the timetable provided by the
Indian authorities for a phase-out period would not be completed until
31 March 2006. In the view of his
delegation, the phase-out plan presented by India contained some serious
flaws. First, the plan did not contain
any reference to the elimination of the
restrictions. According to
Article XVIII:B, paragraph 11, a contracting party shall eliminate
the restrictions when conditions no longer justify their maintenance. Nor could a phasing-out period of nine years
be considered as a reasonable period for restrictions on imports not warranted
under balance-of-payments provisions. A
substantial reduction of this time was therefore a matter of the highest
priority. In conclusion, he stated
that the nine-year phase-out plan
proposed by India was not acceptable, a view justified by a combination of
systemic concerns and the objective, economic and financial, criteria of
the case.
19. The
representative of Brazil
expressed firm conviction that the success of the on-going economic reforms in
India was positive for India and for the multilateral trading system. Before commenting on the phase-out, the
Brazilian delegation repeated its view that India's balance-of-payments
position, although now much healthier than at the beginning of the decade, was
by no means securely stable and certainly not irreversible. The balance-of-payments data presented last
January certainly reflected, to a large extent, the positive effects of the
liberalization programme carried out by the Indian Government. The statement of the IMF representative had
been very illustrative in this regard.
Nonetheless, it was the Government of India which could best gauge the
uncertainties and destabilizing forces in the Indian economy. The Committee had received clear indications
that such forces existed in that
economic trends in India in the past months warranted caution. He listed a few of these recalling the sharp deceleration of exports in
1996: the growth rate was one third
that of the previous year; the
85 per cent increase in imports from 1991/1992 to 1995/1996,
especially the crude-oil bill, which had risen by over 40 per cent
between April and November 1996; the
widening trade deficit from $1.5 billion in 1991/92 to $4.5 billion
in 1995/96; the widening of the current
account deficit to 1.7 per cent of GDP in 1995/96 against
0.9 per cent in the previous year;
and above all, the high incidence of volatile capital inflows in
short-term liabilities on India's external account. As of 6 June, the total amount of reserves
was $24.6 billion, yet portfolio investments last March accounted for
$7.5 billion and short-term outstanding debt amounted to $4.03
billion. Furthermore, the outstanding
balance on the different non-resident deposits schemes was at
$20.8 billion. Globalization of
private capital had dangerous implications, most obviously high volatility
which should be carefully monitored, both in India and other host
countries. He noted that, in 1996,
73 per cent of all private investment in developing economies went to
only 12 countries. These points, he
felt, underlined the fact that the Indian balance-of-payments situation was
complex and deserved to be treated as such.
With regard to the phase-out plan, his delegation thanked the Indian
delegation for its extensive and competent work in presenting the comprehensive
documentation, which clearly reiterated India's commitment to proceed with the
consultations in a high degree of transparency.
He was pleased to notice that Annex 3 encompassed all areas subject to
quantitative restrictions, including agriculture. While recognizing the sensitivity of
agriculture to the developing economies, its progressive opening to the world
market was an important step to a more efficient, competitive and functionally
stable economy. In sum, his delegation
felt that the present phase-out plan should be evaluated in flexible terms,
bearing in mind the very encouraging efforts undertaken by India in the
direction of economic liberalization. He
warned that any premature decisions that might jeopardize these efforts and the
progress achieved so far should be avoided.
20. The
representative of Switzerland stated that, as had been clearly
demonstrated by the expertise and the statement of the IMF, India no longer
faced balance-of-payments difficulties and it had adequate monetary
reserves. Consequently, India had no
justification in maintaining trade restrictions under Article XVIII:B of
GATT 1994 and thus the restrictions maintained by India should be
immediately dismantled. Aware, however,
of the structural adjustment difficulties that an overnight elimination could
engender, his Government was willing to consider a transitional period of some
two to three years as a favour granted in order to take into account a rather
particular economic situation. He also
considered the proposal as much too long a period and regretted that India did
not intend to explicitly renounce recourse to Article XVIII:B. Consequently, India's proposals were not
acceptable to Switzerland. He enjoined
India to significantly improve its plan and to renounce, without concessions,
any invocation of exception for balance-of-payments reasons. The outcome of this consultation would
undoubtedly serve as an example for the multilateral trading system particularly
given that countries with considerable economic potential were in the course of
accession to the WTO. Therefore,
Switzerland sincerely hoped that the Committee would reach conclusions that
were in conformity with the spirit and the letter of the World Trade
Organization Agreement.
21. The
representative of Cuba considered that India had complied with all of
its obligations provided for in Article XVIII of GATT 1994 and with
the 1994 Understanding. This
Article recognizes the need for developing countries to adopt measures for
balance-of-payments purposes. In view of
a growing trade deficit and a reduction in the growth of India's exports, these
were justified by Article XVIII:B.
Measures taken since 1991 (such as the progressive reduction in
restrictions on imports by some 75 per cent) were testimony to
India's efforts. At the past meeting of
this Committee, it had been requested that restrictions still in place for
balance-of-payments reasons be notified and this had been done. India had submitted a three-phase plan for
the phasing-out of measures notified pursuant to Article XVIII:B and thus
had complied with its obligations under paragraph 1 of the relevant GATT
provisions. Cuba considered that India
had complied with its obligations under Article XVIII:B and the 1994
Understanding and since it continued to face difficulties, India's plan was
transparent, reasonable and acceptable and hopefully this would be the
conclusion reached by the Committee.
22. The
representative of Poland recognized the substantial effort and good will
of the Indian delegation in submitting the comprehensive notification of
restrictions in advance of the Committee meeting and in line with past
recommendations. He expressed gratitude
for the level of transparency demonstrated by the Indian delegation during the
informal contacts on a plurilateral basis.
He was happy to learn about the gradual, but constant, improvement in
the macroeconomic equilibrium of India and appreciated the liberalization
effected so far by India. He noted the
visible improvement in the balance of payments of India which did not cause, as
argued by the IMF, an immediate danger to its reserves. This did not mean that Poland did not
recognize the problem of the trade deficit and the fragility of the
balance-of-payments situation, as well as political problems related to
maintaining restrictions in India. He
understood that the long-standing application of restrictive measures created per
se some difficult political and social problems. Balance-of-payments problems were like a
disease and threatened many countries facing radical changes in their
macroeconomic and trade policy. In his
view, every case, like a disease, should be treated in an individual way,
although the medicaments should be those as defined and viable in a reliable
diagnosis. As far as the disinvokation
of Article XVIII was concerned, he saw some possible ambiguity in the
interpretation of paragraph 13 of the Understanding. He wished, however to appeal to the Indian
delegation to consider this problem in the spirit of common responsibility for
the system, the system in which each case should be judged on its own
merits. He was convinced that the WTO
provisions enabled countries to take recourse to them when a balance-of-payments
situation was deemed in disequilibrium.
Poland and her major trading partners in the region had their own record
of using the balance-of-payments provisions.
He believed that the type of treatment should be adequate for the type
of the problem. The phase-out proposal
presented by India was a very prudent one but he was not convinced that the
nine-year period was not an excessively long one. He drew attention to the possible
demonstration effect of the proposal, given the crucial position of India in
the WTO system.
23. The
representative of Pakistan believed that the phase-out plan demonstrated
India's commitment regarding its obligations to the WTO. He suggested that the Committee should keep
in mind the following points: economic
development was the primary objective of developing countries, including
India. This objective was well-covered
by the provisions of Article XVIII:B;
policies and actions in other areas by developing countries were often
in the context of facilitating this process of economic development. Gradual phase-out was in the interest of not only the country invoking
balance-of-payments restrictions but also its trading partners. A sudden shock resulting from an immediate
phase-out could be counter-productive;
disruptions resulting from a sudden phase-out could lead to
balance-of-payments problems in the near future and necessitate the
reimposition of quantitative restrictions,
which would not be a desirable outcome.
Price-based measures might not be a perfect substitute due to the
prevalence of conspicuous consumption in many developing countries. He believed that the management of the
phase-out plan should be seen against the background of the size of the economy,
its population, the size of a growing middle class of potential consumers,
development objectives and the need to achieve economic reforms on the basis of
political consensus. In India's case,
the recent trends, a dramatic fall in export growth, and an increase in the
trade deficit, should be kept in mind.
These trends, coupled with the composition of Indian reserves,
demonstrated the inherent instability and uncertainty in the
balance-of-payments position. He therefore
expressed his Government's support for India and urged Committee Members to
show understanding and sympathy for the Indian position, particularly in view
of its good intentions, the on-going process of economic liberalization and its
political situation.
24. The
representative of New Zealand welcomed the fact that India had now
tabled a proposed plan for the phasing out of quantitative restrictions under
GATT Article XVIII:B and appreciated India's considerable efforts in
drawing up this plan. However, he
expressed his severe disappointment with the phase-out plan which fell far
short of meeting the expectations of India's major trading partners. New Zealand urged India to table further
proposals so that progress could be made in the consultations. His Government had two principal concerns,
both with the period of nine years which
New Zealand did not believe was realistic or justified in the context of
India's improved balance-of-payments situation.
While noting India's continued anxiety about the current account
situation, it was clear that while export growth might not be meeting
expectations, the overall external position had continued to strengthen. It was clear also that international
confidence in India's economic performance had improved, precisely because of
the reform process and liberalization.
He recognized that there was a continued need for structural adjustment
in the Indian economy, but he did not believe that such adjustment could
continue to take place under GATT Article XVIII:B. New Zealand wished, once again, to urge
the Indian Government to give consideration to a short phase-out period as
suggested by the International Monetary Fund and by India's trading
partners. He also wished to reiterate a
point made earlier by Australia, i.e. that even in the absence of
quantitative restrictions India had considerable tariff protection available to
it. Secondly, his Government was
disappointed with the proposal to maintain quantitative restrictions on many
agricultural items, possibly until the year 2006. New Zealand had a strong interest in the
agriculture sector and this had been reflected in the list submitted earlier to
India. While welcoming the
liberalization of some of the products contained in that list in the recently
announced Export and Import policy, most of the key agricultural items of
interest to New Zealand had not been scheduled for liberalization in the
proposed plan until the end of the phase-out period. In addition, some were subject to the added
uncertainty of renegotiation under Article XXVIII. These items had been subject to bans for a
very long time and for New Zealand to have to wait up to nine years for their
full liberalization along with the expectation of considerable tariff
uncertainty would not represent a fair and balanced outcome to this process. In conclusion, he pointed out that further
trade liberalization could only benefit the Indian economy. He believed, speaking from experience, that
the process of reform would not be served by extending the use of such highly trade-distortive measures as quantitative
restrictions far into the future. It was
New Zealand's view that India should
take advantage of the overall improvement in its balance-of-payments situation
to disinvoke GATT Article XVIII:B cover and quickly phase out its
remaining quantitative restrictions.
25. The
representative of the Republic of Korea recalled that the Indian
Government had implemented economic
reforms over the course of the last five years.
These reforms had achieved successful results in terms of GDP growth, employment, reduction of poverty,
export increases and lowered inflation.
Considering the overall size of the Indian economy, and its potential
contribution to the rest of the world, those achievements were very
encouraging. He did not consider nine
years to be a short phase-out period.
Since India had used the balance-of-payments provisions for a long time, its economy had become
accustomed to that situation. He could,
therefore, understand that India needed some time in which all players in the
economy could avail themselves of a freer market.
26. The
representative of Nigeria believed that the phase-out proposal was a
positive development which the Committee should recognize and supported India's
time-frame for the phase out. Where a
number of delegations had referred to India's phase-out proposal as incomplete
since it did not contain an explicit undertaking to disinvoke
Article XVIII:B, his delegation was of the view that this Committee should
look at India's proposal within a positive
context, particularly in India's presentation of a detailed programme
for phase-out in line with the 1994 Understanding. With regard to calls for an immediate
phase-out over a two-year period,
Nigeria believed that the Committee should take into account the political and
social implications of such a drastic
decision. A longer time-frame for
phase-out would enable the relevant authorities to take far-reaching economic
decisions while avoiding the possibility
of political and social disruption.
27. The
representative of Hong Kong said that he had been very impressed by the
transparency shown by India. Obviously,
great care had been taken to present a
clear picture and to fully inform Members.
He welcomed the liberalization and public policy initiatives currently
being pursued by India. Hong Kong, known
for its free trade policy and practice, had general systemic concerns about the
use of Article XVIII:B which might go beyond pure balance-of-payments needs. He did not underestimate the problems faced
by India in reviewing and phasing-out the quantitative restrictions currently
in place, but felt that within the spirit of Article XVIII these should be
phased out as quickly as is possible.
28. The
representative of El Salvador (Observer) considered that India had
discharged its obligation under Article XVIII of the GATT of 1994 and the
provisions of the Understanding. In
El Salvador's view, the growing trade deficit and the fall in exports in
India justified its recourse to
Article XVIII:B, which, in paragraph 8 recognizes difficulties which
may stem from such instability in the terms of trade of a developing country. Since the economic reform programme of 1991
had begun India had aligned itself with the Harmonized System and lowered its
import restrictions. India had
discharged its obligations in notifying its BOP restrictions in WT/BOP/N/11 and
Corr. 1 and in responding to the invitation to submit a three-stage plan
to phase-out measures (WT/BOP/N/24), a plan covering all sectors currently
under restriction. In evaluating the
plan, the development goals of India should be kept in mind as well as the fact
that the plan was an integral part of the economic reform plan based on national
political consensus. This should be
borne in mind in the Committee's deliberations.
The representative added that India had been absolutely candid about
notifying its programme to the Committee and had given due consideration in a
balanced way to the Members of the WTO.
On this basis, the Committee should conclude that India had discharged
its obligations under Article XVIII of the GATT and under the
1994 Understanding.
Replies from India
29. The
representative stated that India had approached the process of consultation
with a view to achieving results which would satisfy everybody. He was pleased that a large number of
delegations representing developing countries empathized with the problems
India faced. He responded to the points
made in two parts. First, where specific
clarification had been sought and, secondly, on two or three important
areas. He addressed a question regarding
details of the restrictions maintained for other than balance-of-payments
purposes which had been the subject of informal discussions with all the
trading partners. Most of the items
listed, more than 95 per cent, were permitted for import subject to
the conditions indicated in the notification;
for example, imports of aircraft and helicopters were subject to a
certification issued by the Director-General of Civil Aviation. He would be happy to provide any further
clarification on the measures notified under Article XX or XXI
restrictions. With respect to the
question as to whether the trade data included services exports, exports that
went through customs were reflected, i.e. most services exports were
included in the data provided, but not data on trade conducted through
electronic means. Regarding the
breakdown of imports between investment goods and consumer goods, he offered to
provide this information separately.
With respect to Australia's comment that India should not underestimate
Australia's trade interest, this had never been the intention. India had met frequently with every delegation,
to ensure that their interests and concerns were taken into consideration. Nonetheless, if he could have fully satisfied
the requests and concerns of all India's trading partners, there would not have
been any need for consultations. While
reference had been made to some other WTO provisions, such as safeguards, he suggested that India had
little experience in using these provisions:
e.g. while India could argue against textiles quotas, for India to
design a textiles quota would be difficult. It would take time to develop the capabilities
required to use some of the WTO provisions which some partners had
advised. While pleased to hear that
India should not have such a long phase-out period because it was such an
important Member of the WTO, and thus should play a leadership role, he
preferred to be considered an active Member.
India had taken an active interest where issues had systemic
implications, but the argument that India played a leadership role should not
be used to deny India its legitimate expectations. It seemed that India's phase-out plan was
under scrutiny in the context of "impending events". As an active Member of the WTO for almost 50
years, he believed that the proposed phase-out should be viewed independently
and should not be linked with future events not related to India. Turning to the time-frame, he recalled that
in 1989 the Committee on Balance-of-Payments Restrictions gave a fairly long
phase-out period - close to nine years - to another Asian country which had
maintained fewer restrictions. He added
that the agricultural and textiles sectors were extremely sensitive because of
the high rural employment involved and the inability of India's economy, at
least in the foreseeable future, to offer alternative employment. With regard to disinvokation, it was India's
intention to do everything in terms of the WTO Agreements. Once the Committee and the General Council
had approved India's phase-out plan, and India implemented the phase-out plan
as agreed, its trading partners would have legal certainty, as would India as
far as insurance against possible other WTO actions were concerned. He quoted paragraph 13 of the
Understanding: ..."in those cases
in which a time schedule has been presented for the removal for restrictive
measures, taken for balance-of-payments purposes, the General Council may
recommend that in adhering to such a time-schedule the Member shall be deemed
to be in compliance with his GATT 1994 obligations. Whenever the General Council has made specific
recommendations, the rights and obligations of Members shall be assessed in the
light of such recommendations ...".
He asserted that this provided
legal certainty to both sides, by ensuring that once the phase-out plan was
agreed, India would adhere to such a phase-out plan which would provide
certainty for its trading partners and which, for India, would offer insurance
against certain actions by its trading partners. He looked forward to a constructive dialogue
and successful conclusions in the consultations. While some delegations had stated that the
phase-out period was a favour being granted to India, India viewed the process
of consultations in a spirit of partnership and expected that others would also
see the process in the same spirit so that a solution could be found.
30. Following
informal and bilateral meetings, at which the length of the phase-out plan was
discussed, the Chairman saw no prospect of arriving at a consensus in the time
available, despite the flexibility and constructive spirit demonstrated by all
parties concerned, and a significant narrowing of the gap between Members'
positions. He therefore proposed a
period of reflection and that the
Committee reassemble on 30 June.
31. When the
Committee reassembled, and after the Chairman had opened the discussion, the
representative of India made the statement attached as Annex II.
32. The
representative of the European Union appreciated the effort by India to
try and bridge the gap, but considered that it was only a first step. While recognizing that the fundamental
orientation of Indian trade policy was liberalization of foreign trade, there
were limits to flexibility: the scenario
three, plus three, plus one seemed still to be far from what had been expected
from India. The European Union was
now willing to accept the transitional
period of five years achieved after very difficult internal negotiations and
re-evaluation of the situation. The
elimination of restrictions should have taken place two years ago and, if not
now, after a brief transition period.
Although five years could not be considered a brief transition period,
the European Union would be willing to
consider this satisfactory. With regard
to the question of legal cover, the European Union could be flexible in order
to arrive at a successful conclusion. It
was in the light of the arguments regarding development policy that the
European Union could condone a phase-out period of five years, although he
thought that the Committee was not the place to discuss economic and
development policy. He invited the
Indian delegation to review its position.
33. The
representative of the United States acknowledged that the revised proposal
suggested a shorter time period but added that it would come as no surprise to
anyone that the United States found the plan unsatisfactory. Essentially, the Committee found itself at
the end of a two-year process. As noted
by the European Union, the consultations began two years ago; at that time the representative of the IMF
saw no reason why the measures could not be eliminated within two years. Two years later the Committee was still
discussing a transition period. The U.S.
had tried to show flexibility and to understand the concerns of India and had
hoped that this process would result in a satisfactory outcome. The United States had hoped that the
delegation of India would have used the three-week recess period to reflect on
the implications of no agreement and present a plan that would be
acceptable - a reasonable plan.
Certainly liberalization was always a bitter pill, but one could not
escape the fact that there was no balance-of-payments cover for these
measures. There had been a significant
increase in reserves in 1996 and 1997 of almost US$6 billion. The IMF had confirmed in January that there
was no threat to the balance-of-payments situation and three weeks earlier, the
IMF reiterated that its answers to the questions posed in January would not
have changed. Under the circumstances,
seven years was not a reasonable period for the phasing-out of measures
inconsistent with the WTO. Therefore his
delegation had no choice but to reserve its rights.
34. The representative
of Australia deemed that the gap between India and its trading partners
had narrowed and that it would be a pity if the remaining gap could not be
bridged. Australia had shown flexibility
in its approach to this issue and
encouraged India to do likewise. As
others had noted, it was indisputable that India's balance-of-payments and
reserve position had improved to such an extent that there could no longer be
any WTO grounds for the maintenance of quantitative restrictions. The current offer of seven years by India,
although a welcome improvement on the original offer at the last Committee
meeting, was still unacceptably long.
Many of the items of particular significance to Australia would
presumably fall in the seventh year.
Australia was prepared to take a flexible approach to the phase-out
timetable and could consider five years, provided that agricultural items
received more equitable treatment in the phase-out package. And, although not strictly relevant to the
present discussion, Australia would need to see an agreement on a satisfactory
basis to handle the Article XXVIII negotiations. In sum, he strongly urged India to improve
its offer and repeated that India should not underestimate Australia's trade
interests in this matter.
35. The
representative of New Zealand, while appreciative of the efforts that
India had made and the flexibility shown, did not see much improvement in the
proposal. Flexibility depended on a
comprehensive approach: agricultural
items, still subject to Article XXVIII negotiations, should be
incorporated into the same timeframe: a
five-year period. Five years was not a
hasty liberalization, but a very generous period of time for removing the
measures that New Zealand considered inconsistent with WTO
provisions. He hoped that India would
reconsider its proposal in the light of the considerable flexibility that its
trading partners had shown.
36. The
representative of Switzerland viewed the new proposals as an improvement
compared to the plan presented during the last meeting, but emphasised that his
Government's view of the balance‑of‑payments situation in India had
not changed. He agreed with the IMF's
opinion according to which restrictions applied by India for reasons of
balance-of-payments difficulties - difficulties which did not exist, as the
statistics had shown - could be dismantled over a short period of two
to three years. As previously indicated,
Switzerland was ready to take into account the special situation of India and
envisage additional flexibility to agree on a period of four or five years,
which would constitute a favour, given that the measures had no basis in WTO
Agreements. He urged the Indian delegation
to continue along this path in order to reach a timeframe acceptable to his
delegation. The fact that the Indian
measures had no basis in WTO Agreements, he added, should be stated clearly in
the conclusions of the Committee.
37. The
representative of Egypt expressed his appreciation for the spirit of
flexibility shown by India concerning the shortening of the period of
implementation of the phase-out plan. He
believed that giving this reasonable period of time would ensure the full
implementation of the plan and would help to avoid any unforeseen setbacks.
38. The
representative of Tunisia appreciated the efforts undertaken by India in
order to shorten the period of the phase-out plan. As the process of dismantling required a
period of adjustment, he supported the request made by India.
39. The
representative of Hungary considered the proposed phase-out programme
reasonable, taking into account the fragility in India's balance-of-payments
situation, its development needs and objectives and the achievement of its
economic reform. Hungary supported the
proposed phase-out programme for the elimination of balance-of-payments-related
quantitative restrictions.
40. The
representative of Sri Lanka felt that two weeks of soul-searching
appeared to have had positive results.
The revised phase-out plan significantly reduced the phase-out period of
India's current quantitative restrictions to effectively a six-year period as
opposed to nine years. It appeared that
India had brought forward a number of items under the third stage of its
earlier plan to the second stage, while keeping a marginal number of items,
currently subject to low levels of tariffs, to an extra year. The latest phase-out plan had been drawn up
in a systematic manner allowing India to manage its balance-of-payments
restrictions without having to seek recourse to intensification of restrictive
measures during the phase-out period.
The new plan was both a balanced and a constructive one, in keeping with
the development needs of the Indian economy in the long term. He noted the Indian delegation's reference to
the serious political and social ramifications which could result from further
liberalization of its trade regime, considering these measures by a coalition
government, a courageous step on the part of India. His delegation was of the view that the
modified Indian phase-out plan was reasonable and fulfilled India's
obligations.
41. The
representative of Venezuela wished to be associated with the expressions
of recognition for all the efforts made by India throughout the consultations
and in particular with its latest proposal.
In connection with the latter, he added that the guarantees given by
India that the import restrictions would be eliminated in a maximum of six to
seven years demonstrated the flexibility of this Government, which Venezuela
could accept in good faith. He was
satisfied that the dismantling of the import restrictions would not be
concentrated in the last years of the period but rather that it would be done
gradually and would cover all the products in each one of these sectors for
each phase of the dismantling of these restrictions. He also considered that with the complete
elimination on the part of India of these restrictions, they would have
fulfilled the obligations of paragraph 13 of the
1994 Understanding. Finally, he
expressed the view that non-recourse to these provisions would severely
unbalance the equilibrium of rights and obligations for developing countries in
the WTO.
42. The
representative of Cuba joined in the view that India had fulfilled all
its commitments vis-à-vis the Committee by reducing the period for the
elimination of quantitative restrictions in a time span that was necessary and
logical, given that precipitate action could cause unforeseen difficulties.
43. The
representative of Norway recalled that during the last round of
consultations, his Government had called for substantial reductions of the
nine-year phase out plan that was then presented, having reviewed the IMF analyses thoroughly and found that the basis for maintaining
quantitative restrictions was meagre at best.
He noted that the IMF called for a removal of quantitative restrictions
during a relatively short period; his
delegation did not consider a phase-out plan of seven years to be justified and
would have problems in accepting this as the result of these consultations. He therefore appealed to India to reconsider
its current position.
44. The
representative of Peru pointed out that the gap between the most recent
proposal by India and the demand for a five-year phase-out did not constitute a
major difference. In his view, the
balance-of-payments situation showed fragility suggesting that a period of six
to seven years was appropriate.
With respect to the question of disinvocation, he added that it had
rather serious systemic implications.
45. The representative
of the Republic of Korea stated that India needed some period of time to
phase out all restrictions during which its economy could adapt to a more open
market and hoped that the Committee could finalize this long consultation.
46. The
representative of Japan, while grateful for India's efforts in improving
its offer, felt that a five-year period was not a short period and urged India
to made additional efforts to further narrow the gap.
47. The representative
of Thailand, speaking on behalf of ASEAN, symphathized with India
on its attempt to satisfy all requests of Members and supported the phase-out
plan that India had tabled, given the uncertainty India faced in its economic
situation as well as its political setting.
48. The
representative of Brazil reiterated the Brazilian point of view that the
balance-of-payments situation of India was not irreversible, that it was
actually quite complex and deserved to be treated as such. He also believed that the approach towards
India's situation should be flexible, particularly in light of the liberalizing
efforts undertaken by the Indian Government.
India had shown good will and a constructive spirit. He saw that there was a significant gap
between the Indian proposal and the position or the aspirations of some
Members, but hoped that it was not unsurmountable and that common ground
could be found leading to a favourable
outcome of the consultations.
49. The
representative of Canada thanked the Indian delegation for the work
performed over the past few weeks in trying to come up with a proposal that
might meet others' concerns. While
recognizing that there had been some shift forward in the products of major
interest to Canada, agricultural products remained in the final tranche of what
was a seven-year period. In the view of
the IMF, the body legally responsible for making the determination, there was
no serious threat of a decline in the monetary reserves of the Indian
Government. Thus, even a two- or a
three-year phase-out plan would not be given in recognition that India was
facing a balance-of-payments problem, but because there was support for the
process of liberalization by India, not because there was a legal obligation to
do so. Canada was prepared to consider
something along the lines of 4½ to five
years if there were consensus, but would have to see what product coverage
shifts there might be. Regarding
disinvocation, he found curious and incomprehensible the remark made earlier
that for India to state explicitly that it would no longer have recourse to
Article XVIII would be upsetting the balance of rights and obligations of
WTO Members. Should India face a real
balance-of-payments problem, it would always have the right to invoke again
Article XVIII. Meanwhile, all
parties required some kind of legal certainty, in his view through some form of
a waiver procedure. In conclusion, he
said that Canada fully recognized that there were enormous domestic political
sensitivities which is why Canada was prepared to go along with a phase-out
period, even though India did not face a balance-of-payments problem. He acknowledged the threat of structural
adjustment and ensuing social problems, but recognizing that India could always
reinvoke balance-of-payments provisions or use other mechanisms to protect
itself, considered that a phase-out of four to five years would be appropriate.
50. The
representative of Nigeria believed that the three, plus three, plus one
proposal would give India sufficient room for phase-out of the quantitative
restrictions and, at the same time, avoid political and social disruption of
the status quo. In considering India's
revised plan, the priorities of development objectives and the need to meet the
basic needs of the people and the process of structural adjustment of
developing economies should be kept in mind.
India's economy was undergoing a rigorous process of reform and
adjustment and the WTO should be seen to be supportive of such bold
measures. He believed that the
Committee should demonstrate flexibility by accommodating India's proposal for
phase-out over a seven-year period.
51. The
representative of India pointed out that Annex 2 of WT/BOP/N/24
documented all the liberalization measures undertaken since December 1995
to the present, evidence that, in parallel with the consultation begun in
December 1995, India had been liberalizing products. Since January 1997, 400 products had
been liberalized; irrespective of what
was happening in the Committee, the process of liberalization was
continuing. As far as he was concerned,
once a phase-out plan was agreed and implemented, legal certainty was provided
for both India and its trading partners in paragraph 13 of the
Understanding. India, he continued, had
shown considerable flexibility in revising
its nine-year plan to a seven-year plan, in which the seventh year would
contain a minimum number of products.
Flexibility should not be one-sided, and India had done its bit. While he appreciated the concerns expressed
by certain Members, this situation required that the WTO be supportive of the
process of liberalization undertaken by countries like India. By showing some extra flexibility or
consideration, the WTO could send a signal to India and, in a way, to all
developing countries that the WTO was appreciative of the problems faced by
developing countries, and that when they faced special situations or
difficulties, the WTO would provide the necessary support rather than create
any problem. He appealed to those who
were not completely satisfied with the seven-year phase-out plan to appreciate
India's enormous difficulties and to show additional flexibility so that the Committee
might arrive at a consensus decision.
52. The
representative of the European Union believed that the European
Community had shown great flexibility towards India and now had reached its
limits. He proposed that the European
Union could give up its initial request of two years (on top of the two years
that had elapsed) and could go as far as five years, provided that the
structure for elimination of quantitative restrictions was acceptable. During this period of five years, measures
should be covered by the appropriate legal provisions, i.e. a waiver under
which India should not invoke Article XVIII:B. If this was not acceptable, he suggested that
the consultations terminate and Members seek other ways to solve this problem.
53. The
representative of the United States seconded the view that flexibility
had not been a one-way street. All the
major participants had made the effort to arrive at a compromise, but the
limits of flexibility had been reached.
All sides had shown flexibility but a significant gap remained: there was no consensus.
54. The
representative of Australia sought clarification as to whether the
Indian delegation could react to the five-year proposal to which the
representative of India responded that India's reaction was the same as
Australia's reaction to the seven-year plan.
55. Following
a suspension of the meeting to allow informal exchanges, the Chairman reported
to the Committee that he had concluded that it would not be possible to close
the remaining gap between delegations' positions. He therefore noted that in the absence of
specific proposals for recommendation by the General Council, the Committee's
conclusion should record the different views expressed in the Committee as
required by paragraph 13 of the Understanding.
56. The
representative of India delivered his closing statement
(Annex III).
57. The
representative of the European Union
stated that the EU had been ready to work on the basis of an informal
proposal by the Chairman and regretted that the political will to reach a
definitive result had been lacking.
Referring to the point made by India that Governments were the best
judge as to whether the level of reserves was appropriate or not, he recalled
that Article XV, paragraph 2 of the General Agreement states that
"in reaching a final decision in cases involving the criteria set forth in
paragraph 2(a) of Article XII in the paragraph 9 of
Article XVIII:B, CONTRACTING PARTIES shall accept the determination
of the Fund as to what constitutes a serious decline in the contracting party's
monetary reserves, a very low level of its monetary reserves or reasonable rate
of increase in the monetary reserves, and as to the financial aspect of other
matters covered in consultation in such cases". Nor did he share, as previously stated, the
interpretation by the Indian delegation of the
Understanding in connection with
Article XVIII:B. In conclusion, he
observed that the Community was available at any time for discussion with the
Indian authorities in order to find a satisfactory solution on the basis of
consensus.
58. The
representative of Canada joined the European Community in referring to
Article XV:2, "that the CONTRACTING PARTIES shall accept the
determination of the Fund as what constitutes a serious decline in the
contracting party's monetary
reserves ...". Canada had made
it clear that, in their view, India did not face a balance-of-payments
problem. Rather, in order to support
India's trade liberalization efforts, which would be in India's own best
interests, Canada had gone beyond what was required under the WTO. He stated clearly that, in Canada's view, the
quantitative measures in place were inconsistent with Article XVIII:B of
the GATT.
59. The
representative of the United States aligned himself with the views taken
on Article XV:2 noting that the conclusions in the January consultations
had specifically indicated that the Committee took note of the IMF statement
that India's current monetary reserves were not inadequate and that there was
no threat of serious decline in India's monetary reserves. The Committee thus placed quite a high value
on the IMF's views on these matters. It
was clear to many that there was no
longer a balance-of-payments problem justifying further invocation of Article XVIII:B,
nor did he recall the Indian delegation denying this. Nothing in the Understanding, in particular
paragraph 13, changed the rights and obligations of Members with respect
to Article XVIII, which, in paragraph 11 states that measures be eliminated
when conditions no longer justify their maintenance. Under the circumstances, he added that all
rights were reserved, and agreed with the Chairman's proposal that the
consultations be concluded on the basis of a report reflecting the different
views of Members.
60. The
representative of the Republic of Korea expressed great disappointment
to see that no agreement had been reached, and asked which, if any, phase-out
plan would be implemented.
61. The
representative of Japan explained that, in spite of maximum flexibility,
he could not accept the Indian proposal.
A phasing-out period of seven years could not be seen as short.
62. The
representative of Australia associated his delegation with the comments
made by the European Union, the United States, Canada and Japan.
63. The
representative of Brazil addressed the question of disinvocation of
Article XVIII. He understood that
the approval of a phase-out plan recognizes that a Member faced a serious
balance-of-payments situation and underlines that the country cannot
immediately do away with all restrictions without serious implications to its
balance of payments. Brazil subscribed
fully to the view that GATT 1994 provisions or the Understanding do not
require Members to disinvoke Article XVIII:B. With regard to Article XV:2 of GATT
1994, he recognized that the IMF played an important role in the consultations,
but a balance-of-payments situation dealt in various shades of grey, in which a
single statistic or opinion should not be decisive. The Committee's purpose was, in his opinion,
to evaluate all circumstances pertaining to the balance-of-payments situation,
many of which clearly went beyond the parameters set out in Article XV:2
concerning the IMF's role in the consultations.
64. The
representative of Switzerland also associated himself with the comments
by the Communities, the United States, Canada and Australia concerning the
substance and interpretation of Articles XV:2 and XVIII:B.
65. The
representative of New Zealand also associated his delegation with the
views expressed by the European Union, the United States, Australia, Japan and
others who did not believe that India's balance-of-payments restrictions were
justified by Article XVIII:B.
66. The
representative of Peru stated for the record that his Government agreed
with Brazil on the question of disinvocation and the other points made by
Brazil.
67. The
representative of Pakistan
regretted that the problems of a developing country like India had not been
assessed in the right perspective and, like Peru, joined Brazil in the views
expressed.
68. In
response to the question regarding the current status of the phase-out plan,
the representative of India said that he would consult with his
Government and inform the General Council
of the decision. He reserved his
Government's position.
69. The Chairman,
noting that the Secretariat would produce a record of views expressed, as he
had already proposed, closed the meeting.
ANNEX I
Statement by
the Representative of India at the Meeting of 10-11 June
Mr. Chairman,
distinguished Members of the Committee, distinguished representative of the
IMF, and friends from the Secretariat, I am indeed very happy to be here for
this important meeting of the Balance of Payments Committee for making these
opening remarks on behalf of the Government of India.
In the last meeting of
the Committee on 20 January 1997, it was decided to resume consultations in
June 1997. For the resumed
consultations, India was invited to present a plan to eliminate the measures
notified under Article XVIII:B, and to conclude the consultations consistently
with all relevant WTO balance of payments provisions. In drawing up its plan, India was to give due
consideration to the interests of WTO Members in a balanced manner.
India has presented,
Mr. Chairman, well on time, a phase‑out plan which has been circulated
among all Members. The phase‑out
plan presented by us for elimination of measures notified under Article XVIII:B
is comprehensive, and expresses our commitment to remove all quantitative
restrictions progressively. Perhaps, the
phase‑out plan is very detailed, but this reflects our objective to be
direct, fully transparent and unambiguous. I will also like to go on record that, before drawing up this plan, we gave due
consideration to the interests of WTO Members in a balanced manner.
As a backgrounder, let
me inform that among the significant developments on the policy front since we
met last on 20 January 1997 is the Union Budget, which was presented on 28
February 1997, and was immediately acclaimed by the financial community as a
"landmark" budget. The Budget
announced that the process of fiscal consolidation, which had been under way in
1996‑97, will continue in 1997‑98.
It also announced an end to the automatic monetisation of deficit
through the system of ad hoc treasury bills.
Budget 1997‑98, yet again, demonstrated the Government’s abiding
commitment to measures aimed at achievement and maintenance of macroeconomic
stability.
In a bold and
determined bid, the Budget lowered rates of direct tax across‑the‑board
on personal income, bringing the peak rate down from 40 per cent to 30 per
cent. This is expected to significantly enhance disposable
incomes. Dividends from domestic companies,
with tax deducted at source, were fully exempted from personal income tax. The effective rate of corporate tax on Indian
companies was slashed from 43 per cent to 35 per cent ‑‑ a move
that is expected to give a fillip to the supply side of the economy.
Mr. Chairman, let me
touch upon the policy aspects regarding trade liberalisation. This year, the Budget contained significant
measures for external liberalisation of the economy. The rate of customs duty on capital goods was
brought down from 25 per cent to 20 per cent, and those on many items reduced significantly. I hope our trading partners will view these
duty reductions with considerable satisfaction.
Since we met last in
January, we have continued with our policy of progressive withdrawal of
quantitative restrictions. In fact,
since February 1997, we have removed quantitative restrictions on 400 tariff lines in just four months. I would like to add that even before the
January 1997 meeting, we had removed
during 1996 quantitative restrictions on
around 200 tariff lines. This action on our part is ample proof, if
required, of our commitment to progressively withdraw quantitative
restrictions. Thus, even before we
formally presented the phase‑out
plan, we had eliminated,
autonomously, in the last one year,
quantitative restrictions in respect of around 600 items. This does not include the intermediate
liberalisation effected through the special import liberalisation route.
The phase‑out
plan now presented is based on the confidence that if we calibrate the
withdrawal of quantitative restrictions carefully, it should be possible to
manage our balance of payments position without having to take recourse to intensification of restrictive measures during the phase‑out
period. The need for caution arises
because of the difficult external trade
environment. Trade liberalisation
measures undertaken since 1991‑92 have resulted in a surge in imports by nearly 100 per cent
during the last five years; in the same period, exports have gone up by only 86
per cent. Our trade deficit has been
widening every year, and is large as a
proportion of our total export turnover.
The trade deficit has further widened during the current financial year
starting April 1997. The trade deficit
was over half a billion US dollars on an
export turnover of just US$2.5 billion in April 1997. The difficult external trade scenario is due
to many factors, including a deceleration in the growth of world trade and
market access difficulties. However,
this is not the occasion to elaborate on this aspect.
The components of the
balance of payments indicate a degree of fragility, and point to the need for
close monitoring. The major reason for
this fragility, as pointed out earlier,
is the export situation; export growth has decelerated sharply during the last
one year. After a sustained growth of 18‑20
per cent in each of the previous three
years, in US. dollar terms, the growth declined to 4 per cent in 1996‑97. When we consider on a month‑over‑same‑month‑a‑year‑ago
basis, the picture is even more worrisome: after 0.2 per cent growth in
February 1997, exports actually declined by 8.5 per cent in March 1997, and by
over 10 per cent in April 1997.
Unfortunately, the factors which have caused the export decline,
including the deceleration in world trade growth may continue to constrain our
exports in the near future as well. The
market access constraints appear to
continue, if not worsen. Second, the
recent improvements in the overall balance of payments are principally due
to inward remittances from Indians
residing overseas, NRI deposits and portfolio investment. As the history of the last ten years
demonstrates, these are not secure sources of balance of payments
financing. Third, there has been a
rapid reduction in customs tariffs on a large number of items in the last six
years of reform. The weighted average
tariff rate, according to World Bank calculations, has come down from 87 per
cent in 1990‑91 to 20.3 per cent after the recent Budget. This reduction
in customs duty, combined with the removal of quantitative restrictions on more
than 75 per cent of the tariff lines, have imparted an upward thrust to
imports, which is manifest in the import growth of the last few years. Thus, in April 1997, the latest month for
which trade data are available, relative to the same month a year ago, exports
declined by over 10 per cent while non‑petroleum imports grew by over 6
per cent. Fourth, our self‑reliance
index for petroleum, which measures the proportion of our petroleum
requirements that is met through domestic production of crude, has declined
from 55 per cent in 1991‑92 to 40 per cent in 1996‑97. The increased dependence on imported crude
coupled with increasing international price of oil resulted in a burgeoning oil
import bill in the last few years.
Import of petroleum and petroleum products for 9 consecutive months
ending December 1996 grew by over 41 per cent on average. Last
but not the least, let us not
forget that despite the recent
improvements in our debt profile, we continue to be a moderately indebted
country by the World Bank's classification.
Recent indicators of
economic performance have fallen somewhat short of our expectations. We ended the year 1996‑97 with an
estimated GDP growth of a little above 6
per cent, and an average annual inflation rate of below 7 per cent. Although agriculture rebounded from its low
of 1995‑96, there are signs of a slowdown in the industrial sector in
1996‑97. In the first ten months
(i.e. April‑January) of the financial year 1996‑97, the index of industrial production grew by
only 7.6 per cent over the same period a year ago. In the first ten months of the previous year , i.e., 1995‑96, the
corresponding growth rate was 11.7 per cent.
I would like to also
add that the current foreign exchange reserves position should be viewed in the
context of future development needs. It
has been estimated that India requires $ 115 billion to $130 billion to meet
infrastructure development costs until
2000‑2001, and another $215 billion during the next five years, in
order to achieve reasonable rates of
growth envisaged by us to sustain the reform process. This implies a large increase in imports and
current account deficit in years to come.
It may be mentioned here that Article XVIII:B is closely related to
development needs as it provides for the maintenance of quantitative
restrictions for balance of payments purposes “in a manner which takes full
account of the continued high level of imports likely to be generated by their
programmes of economic development”.
The phase‑out
plan that we have presented to this Committee balances the twin considerations
of progressive removal of quantitative restrictions on imports, and avoidance
of undue risks to the balance of payments within our overall programme for
economic development. On the first
aspect, we have consistently maintained that we are committed to remove the
remaining quantitative restrictions on imports and the phase‑out plan
presented is the confirmation of our commitment. While I have already pointed out why the
balance of payments situation needs careful monitoring, allow me to explain the
latter consideration. The balance of
payments crisis of 1990‑91, as well as the reserve loss of
US$3 billion in 1995‑96, are still fresh in public memory. We do not want to risk any precipitate
decline in our reserves triggering a balance of payments crisis. The Indian reform process has been based on
the solid foundation of popular consensus and any intensification of balance of
payments crisis will be a setback to this reform process and trade liberalisation.
India's proposal for a
phase‑out period of nine years should be viewed in the context of flexibility given to developing countries for
maintaining quantitative restrictions under Article XVIII:B and the sensitivity
and significance of agriculture and textiles sectors. It is a known fact that over 180 million of
India's labour force depend on agriculture for their livelihood with low
average earnings. Likewise, about 40
million people are employed in the textiles sector which is also mostly in the
unorganised sector. Import flows unless
carefully monitored and calibrated could affect the domestic agricultural price
structure and food security of the country apart from causing unemployment and
balance of payments problems.
As I had mentioned
earlier, the phase‑out plan presented by us is comprehensive as it covers
all sectors of industry including textiles, and agriculture. It is well known that we have historically
bound some of our agricultural tariffs at very low rates and that we did not,
at the time of Uruguay Round negotiations, increase these bindings. We have initiated necessary action for
increasing the bindings of those agricultural items which are bound at very low
levels. In the last stage of our phase‑out
plan, we have included even those agricultural products which are bound at very
low levels. This is an act of
faith. Members would appreciate that it
would not be possible for India to remove quantitative restrictions on such
items before increasing the bindings to
acceptable levels. As we had
indicated in our communication forwarding the documentation for current
consultations, we have included these products in the phase‑out plan
subject to a satisfactory conclusion of Article XXVIII negotiations at an early
date.
Mr. Chairman, I trust
the Members of the Committee would appreciate that by presenting a phase‑out
plan, India has undertaken a momentous step forward for progressive elimination
of all quantitative restrictions over a reasonable period of time. It would be seen that our phase‑out
plan is comprehensive, balanced and not back‑loaded. I would also like to mention in this context
that within the three year period in each phase there will be liberalisation
every year. It is no secret that we had
presented this phase‑out plan after considerable amount of internal
debate within the various systems in our country; hence,
we are confident of building up the necessary consensus for the phase‑out
plan that you have before you. As
Members are aware, India has been consistently on the path of reforms and
liberalisation since 1991, and the phase‑out plan presented to the
Committee today represents another major milestone in India's liberalisation
programme. We do recognise that some of
our trading partners might feel that the period of phase‑out programme,
from their perspective, is a little long.
However, I am sure that even these trading partners would appreciate the
need to ensure that the general perception in India about the liberalisation
programmes becomes increasingly positive.
This objective can be helped by adopting a gradual process of removal of
quantitative restrictions and avoiding precipitate action involving avoidable
risks. Furthermore, we have been
attracting foreign investment on the basis of our policy reforms, and a healthy balance of payments
situation is critical to the continued confidence of international investors in
our country.
Mr. Chairman, before
concluding, I would like to emphasise that India has complied with its
obligations under Article XVIII:B and fulfilled the expectations of the
Committee. The phase out plan is
comprehensive, complete and transparent.
As Members are fully
aware, India reposes strong faith in the multilateral trading system which the
WTO represents. Members would recall
that on a number of occasions the Indian delegation has stressed the importance
of the multilateral trading system providing a supportive environment to
developing countries undertaking liberalisation measures. The Committee has an opportunity today to
demonstrate to the outside world that it is capable of being sensitive to the
concerns of countries like India and that it also has the resilience to find
equitable solutions to problems. We look
forward to a constructive dialogue and the successful conclusion of these
consultations.
Thank you.
ANNEX II
Statement made by the
Representative of India at the Meeting of 30 June-1 July 1997
Mr. Chairman,
You would recall that,
when you adjourned the meeting of the Committee in the afternoon of the 11th
June 1997, you had proposed a period of
reflection and had suggested that we should pick up today where we left off on
the 11th. Mr. Chairman, in the light of
your advice, we have carried out, at all levels, a re‑evaluation of our position. We have, extensively re‑examined the list of items under quantitative
restrictions for balance of payments purposes. Subsequently, we have also held
several meetings with our trading partners and explained the rationale and
justification for the phase‑out period sought by us. We feel
that our trading partners have shown understanding of the Indian
position.
Mr. Chairman, we had
presented on 19th May a plan, for the elimination of quantitative restrictions
maintained under the provisions of Article XVIII:B, spanning nine years in
three phases of three years each. During the deliberations of the Committee on
June 10th and 11th 1997, you will recall that all the Members had appreciated
India’s commitment to eliminate
quantitative restrictions over a period of time. Members had also voiced their appreciation of
the comprehensiveness of the plan as well as its transparency. However, some Members had expressed some
concern about the length of the time period over which residual restrictions
would be eliminated. Taking into account
the views expressed by some of our trading partners and the requests made by
them, I am pleased to say that we have decided to considerably modify the
schedule. Effectively, most of the
items now under quantitative restrictions for Balance of Payments purposes will
be eliminated in two phases, each of three years. The duration of the third phase will be
reduced to just one year and only a very small number of items of high sensitivity
and those items which are bound at zero or low rates will be retained for
elimination in the truncated third phase.
I am sure that all our trading partners would appreciate the sincere
effort we have made to take on board their suggestions and present a plan
covering a shorter time period. While
preparing this plan for the elimination of quantitative restrictions, we have given due consideration
to the interests of WTO Members in a
balanced manner.
I am sure that, with
these significant changes, the Committee will appreciate the enormity of
efforts put in by India and bring to conclusion this consultation. I would particularly urge our trading
partners to appreciate the several important considerations which had weighed
with us while preparing the plan.
Repeatedly in the past, I have drawn attention to the fact that balance
of payments problems are unpredictable, and that balance of payments have
inbuilt pressures arising out of development needs of countries like India,
pressures that GATT negotiators had the foresight to predict and
recognize. We consider that advance liberalisation schedules, or
even “standard” time frames for removal of quantitative restrictions may be
meaningless for countries in this process of development.
I would like to again
emphasise that in keeping with the provisions of Article XVIII:B, India has
been removing BOP related quantitative restrictions gradually. I have already expressed before this
Committee our commitment to removal of quantitative restrictions imposed for
balance of payments purposes as quickly as possible in tandem with the
improvement of our reserves position and development needs. We have tangibly demonstrated our commitment
by removing quantitative restrictions on a large number of HS lines since
1991. It is also well known that we have removed quantitative restrictions on
400 tariff lines since January 1997.
In a large country like
India, with a huge consumer market, we have to approach the task of phasing out
quantitative restrictions in a measured, cautious manner. There is apprehension that hasty
removal of quantitative restrictions could lead to another balance of
payments crisis with severe problems in the future. It is feared that inflow of imported goods,
unless calibrated, may adversely impact on domestic production capacity due to
the instability in the terms of trade and due to the inability of production in
India to compete with capital‑intensive large scale production overseas
which have attendant advantages of economies of scale. It is a well known fact
that a substantial portion of our production and a sizeable number of jobs in
the industrial sector are accounted for by small scale units.
The predominance of small and marginal holdings in agriculture, with
very small marketable surpluses, make the vast majority of Indian farmers and
the huge mass of agricultural labourers vulnerable to even small shifts in the
market situation. This may lead to
widespread unemployment, fall in incomes, reduced production and greater imports
leading to balance of payments crises in the short and
medium term.
I would like to recall
at this point of time that there was clear recognition on the part of GATT
negotiators of the strong interface between the import regime and economic
development in the case of developing countries. In my view, paragraphs 2, 8, 9 and 11 of
Article XVIII clearly bring out the fact that the development needs of a
developing country have to be taken fully into account while assessing the
adequacy or otherwise of foreign exchange reserves. The strength of the balance of payments
position of a developing country cannot be related to the total value of
imports during the past two or three years alone. Nor would it be correct to project the growth
of foreign exchange reserves on the basis of recent trends. The Committee must take into account the
enormous resources required to build the infrastructure for future rapid
economic growth. Any assessment that
does not take into account this important element of the growth process is
obviously inadequate.
During our discussions,
we have been told by some Members that macro‑economic instruments
and price‑based measures can be
used to stabilise the balance of payments and that, for some of the highly
sensitive products, protective tariffs can replace quantitative restrictions to
avert balance‑of‑payments‑related problems. We have also been told that if balance of
payments difficulties arise in future, we can reimpose Article XVIII:B measures.
Our trading partners would surely
prefer a stable economic regime in India, not one that has to resort to
further restrictions and certainly not one that swings from one crisis to
another. Members are aware that price‑based
measures are not the panacea for all ills that beset balance of payments in
developing countries. Price‑based
measures can have a delayed impact and inflationary effects, and may not permit
the efficient allocation of scarce resources in a country like India where income distribution is skewed. Further, macro‑economic instruments
may not help in economies which are
dependent on exports of primary commodities because demand may be inelastic for
such products. The demand for imports in
developing countries like India is also typically inelastic as the import
basket is heavy with basic inputs for industry and essential consumer
goods.
Many trading partners
have also referred to the possibility of employing other defence mechanisms in
place of quantitative restrictions on balance of payments considerations. Our laws will need to be amended and
institutions will have to be created to put such protective measures in
place. I may also point out that, even
now a number of barriers exist in various forms to deny access to products of
developing countries. On several
occasions in the past, in this same body, concerns have been voiced against
such denial of access. While we open our
markets, we would also request our friends in the developed world, who are
better positioned economically, to ensure improved access to their markets for
the products of developing countries.
Mr. Chairman, it is not
my intention to elaborate the points I had already made in my statement on 10th
June, since this is really a continuation of that meeting. I would request you
to recall that, at the January 1997 meeting of the Committee, we had been
invited to present a plan, to eliminate quantitative restrictions maintained on
imports for safeguarding our balance of payments, giving due consideration to
the interests of WTO Members in a balanced manner. In May 1997, we presented a set of documents,
which were recognised by all delegations as complete, comprehensive and
transparent. The documents included a
plan for phasing out balance‑of‑payments‑related quantitative
restrictions over nine years. Our
trading partners then requested us to curtail the period under this plan as
best we can. We have now curtailed the
time period to seven years; the period is effectively six years, as only a very
limited number of items are included in the final year. We have, therefore, fulfilled our commitments
by showing as much flexibility as we possibly could. We would now request our trading partners to
make positive contribution towards successful conclusion of these
consultations, just as we have done.
Thank you, Mr.
Chairman
ANNEX III
Closing
Statement by the Representative of India
Mr Chairman,
It is with deep regret
that I wish to make these remarks on behalf of my delegation at this meeting.
India has consulted regularly with this Committee on its measures maintained
under the provisions of Article XVIII:B of GATT 1994, and has always
participated constructively in the discussions in this Committee, in order for
all of us, as Members of this multilateral trading organisation, to arrive at
consensus recommendations.
Mr Chairman, the World
Trade Organisation, like its predecessor the GATT, was founded to promote the
objectives of trade liberalisation keeping in mind the diversity of its
membership. We cannot wish away the fact that because of historical reasons, some
of us are at lower stages of economic development than others. It has been the
objective of the founders of GATT to enable the less developed Members to
participate more effectively in the functioning of the multilateral trading
system.
To this end, more than
thirty years ago, we jointly decided that we should demonstrate a new and more
positive approach to economic development, since economic development is
integral to the objectives of GATT. We decided to enable developing countries
to take measures, which would be related to their requirements of economic
development, and which would contribute in a positive manner to the growth of
their economies as a whole. We decided to provide the means to resolve
transitional problems which may arise from the implementation of the programmes
of economic development of developing countries, and formulated specific
provisions to take care of balance of payments difficulties which are generated
by the demands of development itself. We recognised that the problem of
adequate reserves is the adequacy of reserves in relation to the programmes of
economic development of developing countries. We recognised that these reserves should have to be
adequate to enable such developing countries over a period of time to control
the general level of imports . We also recognised that developing countries
needed to maintain the level of these
reserves not only to meet current import requirements, but also to pay for imports as the progress of
development programmes creates new demands. This common vision that we all
agreed to, and formulated, is contained in the provisions of Article XVIII:B.
Ever since our current
consultations began in December 1995, we have been aware that, consciously or
unconsciously, some of our major trading partners have tended to lose sight of
these provisions. Instead of providing a supportive approach to our
liberalisation efforts, which have benefitted not only India, but also our
trading partners, and strengthened the multilateral trading system, we have been subjected to the application of
a different set of standards, reminiscent of the provisions of other Articles
of GATT, but not of Article XVIII:B.
We have been called
upon to acknowledge that we no longer have a balance of payments problem.
However, Article XVIII:B does not deal with balance of payments problems in the
narrow perspective of trade policy alone.In our view , technical advice to this Committee should be limited to the findings of statistical and
other facts specifically mentioned in Article XV.2 of GATT. The views and
opinions of technical experts on matters related to our domestic programmes of
economic development cannot however be binding on this Committee. Governments
of developing countries must be the best judges of the level of reserves they
need to assist the programmes of economic development. Article XVIII, as its very title demonstrates, deals with
governmental assistance to economic development. How can we in this context, Mr Chairman, acknowledge that we possess adequate
reserves to safely project that all our developmental needs and objectives will
be met by the level of reserves we currently have, constituting barely 6 months
of import cover, that too reckoned on the basis of the level of imports during
the past two to three years?
We need reserves not only for our trade, but
also for our economic development programmes. While we have no doubt made great
progress in our economic programmes, we still have to confront the fact that
over 400 million Indians are still in need of the basic necessities of life,
that our infrastructure is woefully in need of funds for development , that a
significant portion of our reserves is of a volatile nature, which we cannot
count on as a permanent source of funds for purposes of economic
development. We therefore cannot agree
with the assessment of some of our trading partners with regard to our
reserves.
However, I will not go
into such details today, especially since our statements made at all the three
meetings of these consultations substantiate my point amply. I would only
reiterate that we have fulfilled our obligations under Article XVIII:B.
Mr Chairman, I would like to mention one issue
which has important legal implications, and which has been raised during this meeting.
We all belong to an organisation in which commitments, once given, are adhered
to. Otherwise, the credibility of the rules‑based system which is the
foundation stone of the WTO would be seriously undermined, and there would be
no predictability in the multilateral trading system. India has consistently
met all its obligations made to this Committee, and we would like to emphasise
this point. We have never agreed with the interpretation being given by some of
our trading partners that we are in violation of our obligations under Article
XVIII:B. In fact, the obligation we undertook in January this year to present a
phase out plan was based on the provisions of the 1994 Understanding on Balance
of Payments Provisions. A view has been expressed in this consultation that the
Understanding relates only to those
Members who are facing balance of payments problems, and still wish to
phase out their import restrictive
measures. In my view, Mr Chairman, this is totally untenable.
The chapeau of the Understanding
clearly sets out the object and I quote: “ Members, recognising the provisions
of Articles XII and XVIII:B of GATT 1994 and of the Declaration of Trade
Measures taken for Balance of Payments Purposes, adopted on 28 November 1979,
and in order to clarify such provisions, hereby agree as follows.” An
interpretation of the Understanding that it is confined only to situations in
which a Member has a balance of payments problem and still prefers to announce
a phase out schedule is clearly inconceivable. Such an interpretation would
make the Understanding redundant and superfluous. It is very difficult to
imagine that negotiators would have sat together and worked out an elaborate
Understanding just to cover cases in which Members announce phase out schedules
even when they have balance of payments problems. It is therefore unfair to
deny the protection given to all Members by paragraph 13 of the Understanding.
We are therefore
surprised that the phase out plan, presented by us in the light of the provisions
of Article XVIII:B and the 1994 Understanding,
and on which there has been so much divergence of opinion in the
Committee, should have been used to project the view that India no longer
fulfils the conditions of Article
XVIII:B. The phase out plan is very much
part of the provisions of the WTO’s Balance of Payments provisions, and we
cannot agree with those who would question its legal basis. In our view, the
Committee could only discuss the phase
out plan if it is presented under the
balance of payments provisions of the WTO. Otherwise, the Committee would not
have the competence to have any discussions on a non‑balance of payments
related issue.
Mr Chairman, before I
close I would like to repeat what we had stated in our opening statement. We
had complied with the invitation of the Committee to present a plan for
elimination of quantitative restrictions maintained for balance of payments
purposes, giving due consideration to the interests of WTO Members in a
balanced manner. We have shown flexibility by curtailing the phase out period
from 9 years to 7 years. We have shown further flexibility by making the phase
out plan effectively a 6 year plan by including only a limited number of items
in the seventh year. It is a matter of deep regret for us that some of the
developed country delegations have not been, in our judgement, able to respond
to our efforts towards agreed conclusions in a positive manner.
In conclusion, Mr
Chairman, I would like to request that the report of this meeting contain the different views on this issue by the
Members of this Committee, as stipulated in paragraph 13 of the 1994
Understanding, in the absence of any agreed conclusions. This, in our view,
would be the most equitable and transparent
manner of dealing with this unfortunate situation.
ANNEX IV
Statement by
the Representative of the International Monetary Fund
1. The Fund’s overall
assessment of Indian economic performance remains broadly as it was at the last
meeting of the Committee on Balance of Payments Restrictions with India in
January 1997. Recent political developments are not expected to affect the main
thrust of economic policies, which will continue to be directed towards
consolidating the gains from more than five years of reform designed to move
the economy on to a sustained high growth path. In this connection, the main
policy challenges remain to bring down the still high fiscal deficit and to
push through further structural reform. In addition, while the overall
performance of the economy continues to be quite favourable, there remains some
uncertainty about the short‑term outlook that will place a premium on
careful macroeconomic management during the coming months.
2. Real GDP growth was
6¾ per cent in 1996/97 (the fiscal year is April 1‑March 31).
The impact of a slowdown in investment and industrial production linked to high
real interest rates and infrastructure constraints (especially power shortages
and port bottlenecks) was compensated by an increase in agricultural output following
a good monsoon. The authorities anticipate that in 1997/98 investment and
industrial production will be given a boost by the budget tax cuts and the
easing of credit conditions late in 1996/97. However, if infrastructure
constraints tighten further, the cost of long‑term borrowing remains
high, or heightened political uncertainty persists, growth in 1997/98 could
fall below the expected 7 per cent.
3. There was a pickup in
inflation during 1996/97, fuelled by an increase in administered petroleum prices
and rising grain prices. Wholesale price inflation—the principal price
indicator used by the authorities—ended 1996/97 at about 7½ per cent,
slightly above the 6‑7 per cent target. Inflation has since
fallen to 6½ per cent, and the aim is to bring it down to close to
6 per cent by the end of 1997/98.
4. With the fiscal deficit
still high, monetary policy continues to carry the main burden of
stabilization. In response to concern about weakening industrial demand,
monetary conditions were progressively eased during 1996/97—through a phased 4
percentage point cut in the cash reserve ratio that was only partly offset by a
welcome consolidation of various rediscount facilities. Nevertheless, growth in
bank credit to the private sector remained weak—in part reflecting the impact
of tighter prudential regulations on
banks’ willingness to lend—and broad money growth stayed within the
authorities’ 15½ ‑ 16 per cent target range during most of the
year. Reflecting the injection of liquidity, short‑term interest rates
fell from 13 per cent to 8 per cent, long‑term rates
declined only slightly and the yield curve steepened significantly.
5. The recent semi‑annual
monetary policy statement by the Reserve Bank of India announced a target for
broad money growth of 15 ‑ 15 ½ per cent for 1997/98, broadly
consistent with 7 per cent real GDP growth and 6 per cent
inflation. Steps were also taken to liberalize restrictions on bank lending to
the private sector, to lower the ceiling on bank deposit rates, and to foster development
of the money, foreign exchange, and government
securities markets. Banks and non‑bank financial companies
subsequently announced reductions in prime lending rates, and interest rates on
government securities also declined. It will be important, however, to ensure a
monetary policy stance consistent with achieving the inflation goal, and a rise
in short‑term interest rates may well be warranted in the period ahead to
keep the monetary program on track.
6. The central government
deficit is estimated to have come down from 5½ per cent of GDP in
1995/96 to 5 per cent of GDP in 1996/97, in line with the budget
target. A substantial shortfall in divestment receipts and increased defense
spending were offset by budgetary
savings from funds provided to cover the cost of the Fifth Pay Commission award
(which was postponed until 1997/98) and from cuts in plan spending. However,
the overall public sector deficit (which covers the central government, the oil
pool account, state governments, and central public enterprises) remained
around 9 per cent of GDP as the reduction in the central government
deficit was more than outweighed by a sharp increase in the oil pool deficit, a
consequence of a sharp increase in oil imports and a rise in international oil
prices that was not passed through to domestic petroleum prices.
7. The 1997/98 budget aims
to lower the central government deficit to 4½ per cent of GDP. The
budget provides for sharp cuts in income tax rates as well as reductions in
customs duties. The sizable revenue loss from tax cuts is assumed by the
authorities to be compensated mainly by improved tax compliance. On the
expenditure side, provision is made to implement the Fifth Pay Commission award
and a new targeted public distribution system, while grants to states are
lowered. The budget also announced the replacement of automatic RBI financing
of the deficit by a system of limited ways and means advances, which should
impose greater discipline on government finances and enhance the autonomy of
the Reserve Bank of India. The principal risk entailed by the budget is that,
with only limited steps taken to broaden the tax base, there could be a
significant revenue shortfall if tax compliance does not improve as expected.
It is therefore important that contingency measures be identified which could
be implemented should emerging revenue trends be weaker than projected.
8. The government aims to
reduce the central government deficit to 3 per cent of GDP by the
turn of the century. Achieving this objective will require fundamental reforms
to broaden the tax base, to reprioritize government expenditure, and to push
ahead with civil service reform. Fiscal adjustment also has to extend beyond
the central government level. Petroleum price increases to eliminate the oil
pool deficit and to pave the way for more general petroleum price
liberalization are a priority. State
governments must also contribute to the fiscal consolidation process. There are
signs that a few states are beginning to strengthen their finances through
improved cost recovery, curtailing unproductive spending and state‑level
tax reform. The central government could bolster these efforts by linking
central transfers more closely to strong fiscal performance and by giving
states greater discretion to raise financing from the market. As regards public
enterprises, privatization would not only benefit the budget but would also
yield significant efficiency gains. The recent proposals by the Disinvestment
Commission for sales of majority shares in a number of enterprises are
thus welcome. Increasing enterprise
autonomy and strengthening management will also be important.
9. India’s balance of
payments recorded a sizable surplus in 1996/97 while the current account
deficit remained around 1½ per cent of GDP. A sharp slowdown in
export growth reflected weakening demand in partner countries, sector specific
developments that temporarily dampened exports of gems and jewellery, leather,
and aquaculture products, and the diminishing impact of trade reform earlier in
the 1990s. However, import growth also slowed significantly despite higher oil
imports. Meanwhile, there were strong inflows of private capital, both
portfolio investment and direct foreign investment. Gross official reserves
increased by more than $5 billion to nearly $22½ billion (six months of
imports) in March 1997.
10. For 1997/98, the balance
of payments is expected to register another sizable surplus. Exports are likely to rebound only moderately
while imports should increase as investment picks up. The current account
deficit is projected to widen to about 2¼ per cent of GDP. Strong
private capital inflows are likely to continue, with a number of international
equity issues in the pipeline and further liberalization of portfolio flows. External
commercial borrowing limits have also been raised and borrowing norms eased.
Gross official reserves are expected to increase by a further $5 billion to
over $27 billion (six and a half months of imports). The current level of the
exchange rate would appear to be broadly consistent with current and capital
account trends. However, a flexible approach to exchange rate management should
be maintained, especially in view of the potential for an even stronger‑than‑projected
out‑turn for capital inflows.
11. Over the medium term, the
current account deficit is likely to continue to widen as infrastructure
investment accelerates, even if export growth responds positively to trade
liberalization measures. Further capital account liberalization—as part of a phased
transition to full convertibility—should encourage private capital inflows, and
the emphasis should be placed on promoting further portfolio investment and
foreign direct investment. With continued prudent macroeconomic policies—and
especially significant fiscal adjustment—a current account deficit rising to 3‑4 per cent
of GDP would be consistent with the authorities’ target of maintaining a debt
service ratio below 20 per cent.
12 The government has taken
a number of structural reform initiatives in recent months in addition to the tax rate reductions in the
1997/98 budget and the market reforms announced in the recent monetary policy
statement. There have been steps to liberalize foreign investment regulations,
the financial sector, and the industrial policy regime, mainly with a view to
revitalizing a weak capital market and to boosting business confidence and
investment. While the pressing need is for a bold second wave of structural
reform in areas where progress has so far lagged—agriculture, public
enterprises, and labour markets—a more incremental approach is likely under
current political circumstances. The priorities from a macroeconomic
perspective should include: further trade liberalization; financial sector
reforms that would reduce credit costs and bolster the soundness of the banking
system; a phased approach to capital account liberalization which would link
the removal of capital controls to progress with strengthening domestic
financial institutions, fiscal consolidation and trade liberalization; and
putting in place an effective exit policy for both public and private firms to
promote efficient resource deployment.
13. Some further progress has
also been made with trade liberalization in recent months. With the lowering of
import duties in the 1997/98 budget, the peak duty rate is now
40 per cent and the average (import‑weighted) duty rate is
slightly above 20 per cent. However, the 2 per cent import
surcharge is still in place, while duty rates still remain high by East Asian
standards. Moreover, while the recent Export‑Import Policy for 1997‑2002
moved about one sixth of the remaining number of items off the restricted
import list, quantitative restrictions (QRs) still cover a significant part of
the consumer goods sector. A time‑bound program for eliminating the
remaining QRs would reduce distortions to investment and promote an efficient,
export‑oriented consumer goods industry. Complementary measures would
include scaling back reservations of certain sectors for small‑scale
industry and pushing ahead with agricultural reforms. It remains the Fund’s
view that the external situation can be well managed using macroeconomic policy
instruments alone; QRs are not needed for balance of payments adjustment and
should be removed over a relatively short time period. The tariffs applied to
previously restricted consumer good imports could initially be kept close to
the top of the existing tariff structure, but should be gradually scaled back
according to a pre‑set timetable.