The Indian economy has recovered strongly. The government's poverty alleviation programs have focused on generation of employment in rural areas. The overall deficit of the consolidated public sector has risen sharply in recent years, erasing most of the consolidation that was achieved during the first half of the 1990s. The paper discusses the monetary and financial market developments, reforms and performance, external sector, trade policy, and structural policy developments in India. The new government has taken a number of initiatives committed to structural reform.

Abstract

The Indian economy has recovered strongly. The government's poverty alleviation programs have focused on generation of employment in rural areas. The overall deficit of the consolidated public sector has risen sharply in recent years, erasing most of the consolidation that was achieved during the first half of the 1990s. The paper discusses the monetary and financial market developments, reforms and performance, external sector, trade policy, and structural policy developments in India. The new government has taken a number of initiatives committed to structural reform.

VII. Recent Trade Policy Developments1

A. Overview

1. India significantly liberalized its trade regime during the 1990s, as tariffs were lowered and nontariff barriers (NTBs) were reduced. Prior to 1991, India had one of the most complicated and protectionist regimes in the world, and imports and exports were subject to significant tariff and nontariff measures. However, during 1991-97, the simple average of India’s tariffs was lowered from 128 percent to 34 percent, and licensing requirements were liberalized for imports of capital goods, raw materials, and components.2 Export incentives were largely limited to measures that provided exporters duty-free access to imported intermediate inputs and raw materials.

uA07fig01

Average Tariffs, 1991-2000

(In percent)

Citation: IMF Staff Country Reports 2000, 155; 10.5089/9781451818543.002.A007

2. Tariff revenue also declined as a share of government revenue and imports. During the period of 1992–2000 government revenue and grants increased on average by 13 percent per year in nominal terms and total imports increased by some 20 percent per year, both well above an average growth in custom duty revenues of 10 percent per year. During the 1991–97 period, tariff revenue declined as a share of government revenue and grants from 41 percent to 24 percent and as a share of imports from 36 percent to 32 percent.

uA07fig02

Tarrif Revenue, 1991-2000

(In percent)

Citation: IMF Staff Country Reports 2000, 155; 10.5089/9781451818543.002.A007

3. Recent trade liberalization has focused on the removal of NTBs. Since 1997, the authorities have made substantial progress toward phasing out remaining quantitative restrictions (QRs) on agricultural, textile, and industrial products, and investment policies were adjusted in the context of the implementation of the WTO TRIMs Agreement.3 The government has announced a timetable for the removal of the outstanding quantitative restrictions by April 2001. Average tariffs have been relatively steady since 1997, but the authorities have stated their intention to reduce tariffs significantly over the medium term.4 However, India’s use of antidumping duties has increased in recent years and India has become one of the world’s most active user of such measures.

4. India’s exports also have increasingly become a target for countervailing duties. India’s export incentives include duty-free access to raw materials and intermediate inputs, as well as the exemption of export income from corporate income tax. Countervailing duty cases initiated against India’s exports increased from an average of one per year during 1992–96, to an average of five during 1997–99, and an average often antidumping duties per year were initiated against India’s exports during 1997–99.

B. Nontariff Barriers

5. Nontariff barriers were the main instrument to protect domestic production prior to 1991, but over 80 percent of 6-digit tariff lines are now free of NTBs, and India is committed to removing the remaining QRs by April 2001. Prior to 1991, 90 percent of production was protected by some sort of NTB. By May 1995, 20 percent of tradable consumer goods had been liberalized, and the overall share of manufacturing covered by QRs had fallen to 36 percent. However, roughly two-thirds of total value added (including the agricultural sector) was still protected by QRs.

6. Since 1997, India has used five broad categories of import licenses: (i) Open General Licenses (OGL) for products that can be freely imported; (ii) licenses that are used to enforce health, environmental, and security regulations; (iii) licenses that are used to administer quantitative restrictions; (iv) canalized imports that may only be imported by state trading enterprises, and (v) Special Import Licenses (SILs). Special import licenses are used for items for which quantitative restrictions or canalization requirements have been recently been removed. Special import licenses are provided to selected exporters as an export incentive and can be traded freely (prices are reportedly in the range of 1–3 percent of the import value). Typically, after items have been subject to SILs for approximately 2–3 years, they are moved to the OGL category.

7. There has been significant progress in easing of import licensing requirements during recent years. In April 1997, a total of 542 8-digit tariff lines (about one-sixth of those remaining on the list) were removed from the list of items subject to quantitative restrictions. In 1998, quantitative restrictions on some 340 items were removed.5 In the March 1999 EXIM policy, 894 items were shifted to the OGL list and an additional 414 items were moved to the Special Import License list. In addition, about 20 items, mostly edible oils were decanalized.6 The March 2000 EXIM policy statement announced delicensing of 714 import items effective April 1, 2000.

8. As of January 1, 2000, roughly 17 percent of 6-digit tariff lines were partially or fully covered by some NTB. At the 8-digit level, 695 lines were covered by quantitative restrictions, 685 items were covered by special import licenses, and 44 items remained reserved for state trading companies. Quantitative restrictions and special import licenses applied to a wide range of agricultural and consumer products, but were particularly prevalent in the textile, clothing and automobile sectors. State trading requirements applied mainly to bulk agricultural products, petroleum, gasoline, and fertilizers. For imports from South Asian Association for Regional Cooperation (SAARC) member countries, quantitative restrictions were abolished on August 1, 1998 and state trading restrictions applied to 36 items (8 less than other to imports from other trading partners). By import value, tariff lines that were partially or fully covered by some licensing or state trading requirement represented 37 percent of imports using 1996 trade weights, of which 9 percent were subject to quantitative restrictions, 27 percent were canalized (including petroleum imports), and 1 percent was subject to SILs.7

9. India is committed to removing all quantitative restrictions on imports of agricultural, textile, and industrial products by April 2001. Since the establishment of the WTO, India had justified the use of specific QRs under the WTO rules as necessary for balance of payment reasons.8 Following inconclusive consultations in the WTO Balance of Payment Committee, these restrictions were successfully challenged by the United States under the WTO dispute settlement procedures. In December 1999, India reached a bilateral agreement with the United States under which it agreed to phase out the disputed measures by April 2001.

C. Tariffs

10. Following a significant decline in import duties during the 1991–97 period, the average tariff remained broadly unchanged during 1997–2000. During this period, the simple average of the basic rate plus the special customs duty remained around 34.0 percent (Table VII.1). The average for agricultural products remained unchanged at 25 percent, the average tariffs for mining products was around 23 percent, and the average for manufacturers at 35 percent. Tariffs for consumer goods declined, since the 10 percent import surcharge was not imposed on the highest standard rate (40 percent) that was applied to most consumer goods. The introduction of a minimum tariff rate of 5 percent in April 1999 further reduced the standard deviation of the tariff regime which declined from 15 percent on April 1, 1997 to 13 percent in January 1, 2000. The 2000/01 budget lowered the average tariff rate by around ½ percentage point.

Table VII.1.

India: Tariff Structure, 1997/98–1999/00

(In percent)

article image
Source: World Bank staff estimates.

Including a special additional duty that is levied on the value of imports as well as the basic duty value and the additional duty value. The special additional duty is levied on both imports and domestic production.

11. There has been some progress in simplifying the tariff structure during recent years. Tariff rates of 0, 10, 20, 30, 35, 40, and 45 percent were rationalized in the 1999/00 budget to 5, 15, 25, 35, and 40 percent, and the 2000/2001 budget reduced the peak rate further from 40 percent to 35 percent.9 A special surcharge of 2 percent applicable to all imports was introduced in the 1996/97 budget, increased to 5 percent in September 1997, and replaced by a 10 percent import surcharge in the 1999/2000 budget. In addition, preferential rates apply to imports from selected countries and tariff exemptions apply to imports for export processing and for specific end-use. Almost all India’s tariffs are ad valorem rates.

12. While tariff policy reform is generally formulated as part of the budgetary process, the authorities occasionally adjust tariffs at other times in response to specific circumstances. In December 1999 the government hiked the import duty on sugar to 40 percent from 27 percent and that of edible oil to 27.5 percent from 16.5 percent to give protection to domestic industry. During the same month, a 50 percent customs duty on wheat was reintroduced to avoid lower world prices causing a build-up of government stocks after a record wheat harvest.10

13. In spite of significant reductions in exemptions during the 1990s, tariff exemptions remain significant. In 1997/98, net customs collections were Rs 405 billion, around 20 percent of total central government tax revenue and the value of tariff exemptions was roughly 20 percent of customs revenue (i.e., over 4 percent of central government tax revenue).11 Key exemptions applied to selected imports used by the fertilizer, leather, foodgrain, precious stones, power and sports goods industries. In May 1999, the government also exempted 11 megapower projects from customs and countervailing duty.12 The 2000/01 budget contained a commitment by the Finance Minister to avoid ad hoc exemptions, but left statutory exemptions largely unchanged.

14. Tariff preferences apply to only a small share of imports, but are set to become more important over time. Tariff preferences are administered under a bilateral free trade agreement with Sri Lanka, as well as under a regional arrangement with its SAARC partners: Bangladesh, Bhutan, Maldives, Nepal, Pakistan, and Sri Lanka.13 Tariff reductions under the bilateral agreement with Sri Lanka are gradually being phased in, starting April 2000. Consistent with the SAARC Preferential Trade Arrangement, India announced in August 1999 tariff concessions of 10–60 percent of the basic duty on some 1,800 tariff lines.

15. Applied tariff rates are generally well below WTO bound rates. India bound some 67 percent of its tariff lines in the WTO Uruguay Round, including all tariffs on agricultural products and some 66 percent of tariffs on industrial goods. Most applied tariffs are well below bound rates, and the average bound rate is 54 percent compared to the simple average of under 35 percent. Bound rates on agricultural goods range up to 300 percent, which offers few constraints on applied tariffs. As a signatory to the Information Technology Agreement, India has offered to reduce tariffs to zero on 217 items by 2005 and on some 95 lines by 2000.14 India is currently renegotiating some of its tariff bindings with bilateral trading partners, notably for items which were previously protected by quantitative restrictions.

D. Antidumping and Countervailing Duties

16. India’s use of antidumping and countervailing measures have become more important during the 1990s. As of end-1999, India had 61 antidumping measures in force, up from 43 at end-1998. Imports from China were most frequently targeted with 18 active cases followed by imports from Japan (6 cases), Korea (5 cases) and the United States (4 cases). On a trade-weighted basis, India was one of the most active users of antidumping measures during 1995–98 (Mattoo and Subramanian, 1999).

uA07fig03

Anidumping Actions Initiated by India, 1992-99

Citation: IMF Staff Country Reports 2000, 155; 10.5089/9781451818543.002.A007

Source: World Trade Organization (WTO).

17. Legislation covering antidumping and countervailing duties was amended with the Customs Tariff (Amendment) Act, 1995, in line with India’s WTO obligations. Under the Act, the Federal Government has authority to impose antidumping and countervailing duties on goods that are imported at less than their “normal” value if such imports “injure” domestic production. A more stringent “injury” test applies to trigger safeguard measures for which neither dumping or subsidies need to be present. Investigations are launched by the Ministry of Commerce following a private sector petition. A petition has to be supported by petitioners responsible for more than 25 percent of domestic production. However, even if dumping is found to have taken place and a petition is supported by the required share of domestic producers, a national interest clause allows the government not to impose antidumping duties to protect downstream users and consumers. This national interest clause is rarely used.

E. Export Incentives and Restrictions

18. India has used a variety of instruments to promote exports. Most importantly, exporters are exempt from import duties on raw materials and intermediate inputs and income tax on export earnings. The 2000/01 budget announced that the income tax exemption would be phased out in equal installments over a five-year period. Exporting firms have preferential access to bank credit and selected firms receive additional incentives in the form of special import licenses, which may be sold to importers (as discussed above).

19. Unlike in other Asian economies, export processing zones (EPZs) have not been successful in India. The reasons for their failure include bureaucratic impediments and poor locations (Venkatesan, 1998). In contrast to the experience elsewhere in Asia, most of the firms operating in the EPZs are Indian-owned, and are established with the objective of avoiding domestic regulations. The 1999 and 2000 EXIM policy statements removed most barriers to the establishment and expansion of EPZs.

20. Exporters outside EPZs are exempt from import duties on imported inputs through a duty exemption scheme and a duty-drawback scheme. The duty exemption scheme exempts imports by exporters who have paid a bond as guarantee that imports will be used for export processing. Duty-drawback rates are standardized by product and published by the Ministry of Commerce and Industry. Changes announced in March 1999 that facilitated the use of these instruments appear to have coincided with an increase in their use.15 While standard duty-drawback rates are easier to administer and reduce the scope for corruption, they are also more susceptible to countervailing measures in India’s export markets.16 The March 2000 EXIM Policy announced that the standard duty drawback rate (Duty Entitlement Pass Book, DEPB) scheme would be subsumed into a duty drawback scheme as of March 31, 2002.

21. Exporting firms also receive preferential access to India’s highly protected domestic market through duty exemptions and exemptions from industrial regulations. Exporters of handicraft and leather products, which account for 22 percent of India’s exports, are allowed to import consumer goods duty free up to an amount of 2 percent of the previous financial year’s export earnings. While industrial regulations reserve some 810 sectors for small-scale companies, larger firms are allowed to establish themselves in these sectors provided they export more than 50 percent of their output.17

22. Exports are also supported by subsidized interest rates and an income tax exemption for income earned on exports. In addition, eligible exporters are also supported through the allocation of SILs, which may be sold to importing companies, but which are to be phased out by April 1, 200l.18 The income tax exemption for export earnings was extended in March 1999 to cover earnings from services exports, but the 2000/01 budget announced that the exemption for export income would be phased out over five years.

23. Export taxes and quotas are applied to a small number of products to address product-specific issues. Export taxes apply to 26 products and export levies apply to another 10 products. In practice, all products subject to export tariffs are resource based and function predominantly as resource taxes. Exports of some items are restricted on environmental and cultural ground and state-trading requirements apply to petroleum products, some minerals and seeds as well as onions. Export quotas apply only to textile and clothing products and are administered under the WTO Agreement on Textiles and Clothing (ATC), which is set to expire by the end of 2004.19

24. Under the WTO-ATC, India limits exports of textiles and clothing to Canada, the European Union, Norway, and the United States. Product and country-specific quota are allocated on the basis of: past performance (55 percent of quota in the case of textiles and 70 percent in the case of garments and knitwear; manufacturers exporters entitlement (15 percent of most textile categories); power loom exporters entitlements (15 percent of some textile quotas); ready goods entitlement (15 percent of textile quotas); new investor entitlement (15 percent of clothing quota), and first-come-first-served entitlement as well as other criteria (15 percent of clothing quota). India’s U.S. quota utilization rates were 94.7 percent in 1997 and 97.3 percent in 1998.

25. India’s exports benefit from trade preferences in export markets under regional and GSP Schemes. India is a member of and receives some preferential treatment from member states of the South Asian Preferential Trading Arrangement (SAPTA), which became operational on December 7, 1995. Indian exports receive preferential treatment under the GSP schemes of Australia, Bulgaria, Belarus, Canada, the Czech Republic, the European Union, Hungary, Japan, New Zealand, Norway, Poland, Russia, the Slovak Republic, Switzerland, and the United States. However, in contrast to benefits which are protected by the WTO dispute settlement mechanism, such preferences are granted on a unilateral basis and may be withdrawn at will by the importing countries.

26. The main restrictions imposed on India’s exports as applied by its trading partners on an MFN basis appear to be: import duties that are progressively higher for finished goods, agricultural subsidies, sanitary and phytosanitary regulations, and technical barriers to trade. In addition, however, India’s exports are also a frequent target for antidumping and countervailing duties. On an export-weighted basis India’s exports are now one of the world’s favored antidumping duty targets (Table VII.2).

Table VII.2.

India: Developments in Antidumping, Selected Countries, 1992-99

article image
Source: WTO, Rules Divison Antidumping Database; IMF, Direction of Trade Statistics, 1999 Yearbook.
uA07fig04

Antidumping and CVD Actions Taken against India, 1992-93

Citation: IMF Staff Country Reports 2000, 155; 10.5089/9781451818543.002.A007

Source; World Trade Organisation (WTO).

F. Concluding Remarks

27. Significant trade policy reforms were implemented during 1997–99. Nontariff barriers were reduced significantly and the stage has been set for their elimination by April 2001. Import tariffs have also been reduced and simplified. However, even after taking account of the significant progress achieved so far, India’s trade regime remains more restrictive than other rapidly growing economies. Further liberalization could contribute to India’s economic development and openness to international trade.

28. However, continued trade liberalization will need to be coordinated carefully with fiscal consolidation efforts. Tariff rate reductions during the 1990s were associated with a drop in customs receipts as a share of GDP, and further rate reductions and the implementation of free trade and preferential tariff arrangements raises concerns about the risks to the already worrisome fiscal situation. Although there is evidence to suggest that current tariffs are above revenue maximizing rates,20 it will be critical to ensure that rate reductions are coupled with measures to broaden the tax base including the tariffication of QRs and the withdrawal of other tax exemptions.

29. Successful trade reform will also require complementary reforms to industrial and agricultural policies. India’s industrial sector faces significant structural rigidities that undermine its competitiveness, including the reservation of certain sectors for small-scale firms, restrictive labor laws, outmoded and ineffective bankruptcy regulations, and a large and relatively inefficient public enterprise sector. The agricultural sector also is subject to a range of restrictions that undermine efficiency, including limits on plot size, an administered pricing system for crops, and constraints on interstate trade and agroprocessing. Progress in addressing these issues will need to be accelerated in order to facilitate the adjustment to a more open trade system, and to avoid pressures to increase resort to antidumping measures.

References

  • Ebrill, Liam, Janet Stotsky, and Reint Gropp (1999), Revenue Implications of Trade Liberalization, International Monetary Fund, Occasional Paper, No. 180, Washington, DC.

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  • International Monetary Fund, 1998, Trade Liberalization in IMF-Supported Programs, World Economic and Financial Surveys (Washington).

  • Mattoo, Aaditya and Arvind Subramanian, 1999, “India and the Multilateral Trading System Post-Seattle: Defensive or Proactive?” paper presented at the Workshop on South Asia and the WTO, New Delhi, December 20 21, 1999 (mimeo).

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  • Srivastava, Vivek, 1999, “India’s Accession to the GPA: An Attempt to Quantify Cost and Benefits,” paper presented at the Workshop on South Asia and the WTO, New Delhi, December 20–21 (mimeo).

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  • Venkatesan, R., 1998, Policy Competition among States in India for Attracting Foreign Direct Investment, National Council of Applied Economic Research, New Delhi (mimeo).

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  • World Trade Organization, 1996, Trade Policy Review—United States, Geneva.

1

Prepared by Johannes Herderschee.

2

A description of India’s trade policy reform during 1991–97 is included in India—Selected Issues, (IMF Staff Country Report No. 97/74, September 1997).

3

Selected provisions of the WTO Agreements apply with a delay to developing countries. The Customs Valuation Agreement, the TRIMs Agreement, most provisions of the TRIPS Agreement, and some provisions of other agreements applied to India as of January 1, 2000.

4

The 1999/2000 budget speech refered to bringing Indian tariffs down to “Asian levels,” which are estimated to be in the range of 15–20 percent. Compared to other countries, India’s trade regime currently still rates a “10” on the IMF’s 10-point index of trade restrictiveness, but the implementation of these and other measures could reduce its rating to a “3” over the medium term.

5

The number of products that are delicenced are indicative only, as some licenses apply to 6-digit tariff lines while others apply to 8-digit lines.

6

An import ban on imports of second-hand machinery was introduced in 1999, but later relaxed to allow for imports of machinery less than ten years old.

7

As trade data are available at 6-digit Harmonized System (HS) disaggregation and import licensing is done at the 8-digit level, in calculation these shares it was assumed that import licensing applied to the whole 6-digit tariff line even if only part of it was covered at the 8-digit level. Consequently, the share of imports subject to quantitative restrictions and SILs may be somewhat overstated.

8

The WTO was established on January 1, 1995, but India used the same arguments under the GATT (1947) that applied prior to the establishment of the WTO.

9

Duties above 35 percent apply to less than 0.5 percent of India’s tariff lines.

10

As international prices declined, it became cheaper to buy imported wheat rather than purchase from the government at official issue prices. With a view to reducing the growth of government stocks of wheat, the government also lowered the issue prices by between Rs 2/quintal in the north zone to Rs 49/quintal in the east zone, bringing the new issue price to Rs 688–705/quintal down from Rs 690–725/quintal.

11

Government officials estimated revenue loss as a result of tariff exemptions to be in the range of Rs 95 billion.

12

Exemptions applied provided that the state in which the projects were located fulfilled several conditions, including the constitution of regulatory commissions and privatization of distribution networks in cities megapower projects, defined as thermal power plants with a capacity of 1,500 MW or more and hydroelectric power plants with a minimum capacity to 500 MW. There are seven thermal and four hydroelectric mega projects in India.

13

India also had some minor tariff preferences under the Bangkok Agreement and the Global System of Trade Preferences.

14

The 2000/01 budget reduced tariffs on various information technology products.

15

During the first five months of fiscal year 1999/00, amounts paid under the duty drawback scheme for exports increased from Rs 22 billion to during the first five months of 1998/99 Rs 25 billion during the first five months of 1999/00, while the amount exempted from import duties increased from Rs 9 billion to Rs 16 billion during the same two periods.

16

The WTO Agreement on Subsidies and Countervailing Measures notes “…drawback systems can constitute an export subsidy to the extent that they result in an excess drawback of the import charges levied initially on the imported inputs for which the drawback is being claimed” (Annex III), Guidelines in the Determination of Subsitution Drawback Systems as Export Subsidies).

17

Small-scale firms are defined as companies with and investment below Rs 10 million. The number of sectors subject to such reservations was reduced from 836 to 821 in April 1997 and to 810 in February 1999.

18

Eligible exporters include small-scale firms, as well as exporters of fruit, vegetables, horticulture, electronics, and “quality” products. Total imports subject to SIL licenses were in 1999 approximately US$400 million and licenses traded at 1–3 percent of their import value, suggesting that total rents amounted to some US$4–12 million.

19

While quota administered under the WTO-ATC Agreement are phased out in four stages it appears that most quota applied to India’s exports are classified in the final phase of the transition period (WTO, 1996).

India: Recent Economic Developments
Author: International Monetary Fund