Sunday, September 18, 2011


Can India afford to antagonize the World Trade Organization (WTO) and if so what will be the consequences? These are relevant questions in the context of latest salvo from WTO regarding India's faulty export policies. Historically India has been practicing highly protective trade policies with severe restrictions placed on imports and exports. The excise duty regime was used to slap high import duty on imports so that domestic products could compete with them price-wise. Similarly high export subsidies were in place to support inefficient domestic industries to gain a foot hold in the global market. The situation changed dramatically once India became a signatory to WTO regime in the nineteen nineties. Once India is part of the global trading community, there are certain handicaps for continuing with a purely domestic agenda. Government of India (GOI) cannot be blamed entirely for this situation because it has its first obligation to its citizens and others come only after this constitutional responsibility is discharged. It is here GOI is is pulled between its political compulsions and international commitments. It will be interesting to see how GOI is going to resolve this dilemma.

"The World Trade Organisation has slammed India for its protective trade policy on food items that prevents exports at a time when world is facing record food prices. In its review of India's trade and economic policies, the WTO observed that India was one of the highest user of anti-dumping and a frequent user of safeguard measures against imports from other countries. "Trade policy seems to be lacking an overall thrust and is being conducted mostly on a sector or product basis," it said. India uses trade policy to attain short-term goals such as containing inflation, although it aims to provide a stable trade policy environment to reach its long-term goals, the report said. This use of trade policy for short term non-trade-related objectives may detract from the stability sought, as it requires constant fine-tuning of policies to attain these short-term goals. Focusing on two farm products, cotton and onions, the report highlighted how the government changed its policies frequently to meet its domestic needs, restricting, canalising, prohibiting and allowing free exports of the product within a short period. "This has resulted sometimes in actions with an anti-export bias (such as setting minimum export prices or applying export taxes), in contrast with the asserted general goal of seeking export expansion," it said. The country also links the use of import restrictions and licensing, and other non-tariff measures, or NTMs, to domestic policies. For example, NTMs are relaxed when imports are necessary to alleviate inflation or shortages. State trading is also used as a policy tool, to ensure, a "fair" return to farmers, food security, the supply of fertiliser to farmers, and the functioning of domestic support price systems, the report said. Between January 2006 and December 2010, India initiated 209 anti-dumping investigations against 34 trading partners, compared with 176 reported in its last review. On December 31, 2010, 207 anti-dumping measures were in force, compared with 177 on June 30, 2006. Since its last review in 2007, India has also imposed several safeguard measures, the report notes. On the positive side, India's average applied tariff rate declined to 12% in 2010-11, from 15.1% in 2006-07. Commenting on India's FDI policy, the report said that while the economy seems to be more open to FDI as a result of the recent policy changes, even where FDI is allowed up to 100% and under the automatic route, specific conditions or permits apply, which could in some cases be more restrictive than an explicit investment cap".

India being an agriculture oriented country, the performance of farming sector depends on the rains and it is true to say that the Monsoon rains decide the performance of the economy to a large extent. Recent examples regarding onion, sugar and wheat bring out this unenviable situation sharply. One cannot forget how the sky rocketing onion prices literally brought the government to a standstill and same situation repeated itself vis-a-vis sugar and wheat exports. In spite of large quantities of wheat rotting in the open due to the failure of the government to install adequate grain storage facilities in the past, GOI was afraid of exporting the surplus for fear of increase in domestic wheat price once export is cleared. Same is rue with sugar in spite of the fact India is the second largest producer of sugar after Brazil. While it is easy for WTO to "slam" GOI's flip flop policies which have a bearing on world food prices, there is no ready solution to the dilemma of GOI facing the proverbial Hobson's choice! One wonders whether this situation is unique to India or whether other agriculture products exporting countries also face similar difficulties during times of adverse natural conditions affecting the crop yields significantly. WTO ought to come up with a strategy to deal with such extra ordinary situations having bearing on global food prices.


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