9:42 AM Jan 22, 1997

INDIA TO PRESENT PHASED PLAN TO END QRS ?

Geneva 21 Jan (Chakravarthi Raghavan) -- India is to formulate and present at the World Trade Organization in June this year a plan for elimination of various quantitative restrictions (QRs) on imports being maintained for balance-of-payments considerations.

This was the outcome of the resumed consultations held by the WTO's Committee on Balance of Payments with India at the WTO this week.

In the Uruguay Round, and since then too, India has been a strong advocate of the BOP rights of developing countries, and it has been a special target of the industrial countries who want developing countries not to have recourse to this.

This is advocated by the IMF, World Bank and others on theoretical neo-liberal grounds, and on their reform approaches aimed at widening and increasing the markets in the South for the exports of the North.

The BOP Committee is to resume the consultations with India in the week beginning 2 June when India has been invited to present a plan to eliminate the measures notified by it to the WTO under Art. XVIII:B.

The committees decision, adopted Tuesday afternoon, says that in drawing up its plan, India will give due consideration to the interests of WTO members in a balanced manner.

The outlines of the Indian scheme is expected to be revealed to Parliament in April when traditionally the Ministry of Commerce presents its import-export policy and regime.

It is expected that India will present a phased plan for removal of BOP restrictions, as was done by South Korea (when it agreed to disinvoke its BOP rights).

With India's reserves currently estimated by the International Monetary Fund to be at about five months of imports, the IMF and the major trading partners of India, including the US, EU and Japan -- have been applying pressures on India to remove its BOP restrictions and disinvoke recourse to Art. XVIII:B

Late last year, and early this year (before the BOP consultations), the EC, Japan and others had made statements that if India did not do, they would challenge the Indian restrictions before the WTO panels.

Consultations last year were adjourned when India made it clear it would be unable to take any measures in the runup to last year's general elections which saw the defeat of the Congress Party government at the Centre and its replacement by a coalition.

In presentations before the BOP Committee, by the IMF and India, there were not many disputations about the facts, though there were some differences on their interpretations, including the volatility of some of the investments and reserves and likely effects of any speedy liberalisation on the large small and medium business and industry sectors and its negative effects on the domestic support for the current reform and liberalisation process.

The IMF's report, as that of the WTO secretariat, and the IMF and Indian presentations though did not indicate that any of them have drawn the necessary conclusions from the 1994 Mexican crisis, and a policy of liberalisation and imports financed by capital inflows that go to buttress consumption rather than investment.

The IMF does not make any distinctions between short-term and long-term capital flows and their effects on a country's reserves. Some World Bank studies have even questioned this distinction, arguing that both could be equally volatile.

While underscoring the volatility of some of its portfolio and other short-term capital flows, India too did not dwell too much on this -- perhaps for the understandable reason that a negative picture would have unsettling effects on the market and the country's ability to continue to attract flows.

In its presentation to the BOP committee, the IMF said that India should eliminate the QRs maintained by it for BOP reasons over a "relatively short period" and liberalise the import regime and cut down its tariffs, particularly on consumer goods imports, as well as liberalisation of the system of reservation for small-scale units of many manufactured products.

This last though, if undertaken at a precipitous pace the IMF and the major trading nations and their corporations advocate, might unleash a social and political backlash in India that might undermine what the government claims to be a domestic consensus behind the liberalisation process in the country.

In its presentation, and survey of the Indian economy, the IMF has also advocated that the government should undertake in its budget for 1997-98 (usually presented to Parliament on 28 February) a "strong front-loaded fiscal adjustment" for deficit reduction. This, the IMF advocates, should be done by improved revenue mobilisation -- by cutting tax exemptions, broadening the tax base, and moving towards the Value Added Tax at state level. The IMF also wants India to curb (and eliminate) expenditures on subsidies and the wage bill, with the various constituent states too contributing to deficit reduction.

Both the IMF and the Government of India's presentations acknowledge that after several years of BOP surplus, India's BOP moved into deficit in 1995/96, with current account deficit widening (according to the IMF to 1-1/2 percent of GDP, due to a strong rise in import growth. And while portfolio equity flows slowed, FDI rose. IMF expects a small BOP surplus in 1996/97, with current account deficit rising modestly to 1-3/4 percent of GDP. The international reserves, IMF estimates,will rise to a gross $18-1/2 billion or a "comfortable five months of imports", and a sizeable level compared to India's stock of $5 billion in short-term debt and a cumulative stock of portfolio equity inflows of $14 billion.

In its presentation, India has argued that trade liberalisation was an essential component of its economic reform programme, and that most of the QRs had been removed on raw materials, intermediates and capital goods, and that the process of removing QRs on consumer goods has also commenced. The QRs now applied only to around 30% of its tariff lines, that the maximum tariffs had been brought down from a high of 100% to around 52%, and the weighted average from 87 to 22.7%. As a result of various measures, imports have surged but not exports as much. The rise in reserves has been due to invisible receipts and capital inflows.

India however insisted its BOP situation needs close monitoring and exercise of caution in taking trade liberalisation. Its reserves in fact declined by $3 billion in 1995-96.

The soundness of the BOP would depend crucially on success in attracting FDI, and while the government is optimistic on this, there were uncertainties.

The current reserves, India said provided for four months cover against imports of goods and services, and the volatility of the domestic stock market was getting reflect in behaviour of portfolio investments.

Apart from the deceleration of exports and rapid growth in petroleum imports, there were also potential outflows associated with the redemption of $2.2 billion of India Development bonds to be taken into account. India's debt service payments have also increased from $8.2 billion in 1991-92 to $12.3 in 1995-96.

While India was committed to remove its QRs, doing so in a phased and gradual manner was important to avoid any risk of adverse fall out and its effects on popular support for reforms.

In its decision, the BOP Committee took note of the IMF view that Indian reserves were "not inadequate" and that there was no threat of a serious decline in India's monetary reserves. The decision also mentioned India's view that the BOP needs close monitoring and any precipitous remove of QRs could have the effect of undermining the stability of the Indian economy and the reform process.

In the light of these, the Committee agreed to resume its consultations with India in the week beginning 2 June, when it would consider a plan, which the Committee invited India to present, to eliminate measures notified to the WTO under Art. XVIII:B and conclude the consultations.

In drawing up its plan, the Committee said, India will give due consideration to the interests of WTO members in a balanced manner.