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Impact Of WTO on Indian Economy

WTO GENESIS

  • The General Agreement on Trade and Tariff (GATT) came into existence in 1947
  • It sought substantial reduction in tariff and other barriers to trade and to eliminate discriminatory treatment in international commerce.
  • India became a signatory to GATT in 1947 along with twenty two other countries
  • Reasons for GATT to be carved into WTO

GATT faced many problems, with the world trade becoming more and more complex, GATT was unable to deal with it.Eg.In the agriculture sector, loopholes in the multilateral system were heavily exploited, and efforts at liberalizing agricultural trade met with little success.

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In the textiles and clothing sector, an exception to GATT’s normal disciplines was negotiated in the 1960s and early 1970s, leading to the Multifibre Arrangement. Even GATT’s dispute settlement systems were causing concern. The Uruguay round negotiations lasted for about seven and a half years, twice the time originally planned for.

But economists conclude that it was worth the trouble, basically all issues related to trade were discussed in these negotiations, GATT’s articles were reviewed and most importantly the Final Act concluding the Uruguay Round and officially establishing the WTO regime was signed during the April 1994 ministerial meeting at Marrakesh, Morocco, and hence is known as the Marrakesh Agreement.

WTO kept the basic objectives of GATT same, while worked on their implementation.

WTO

  • WTO on paper came into existence on 1-1-1995 with the conclusion of Uruguay Round Multilateral Trade Negotiations at Marrakesh. Finally, enforced on 1-1-2005: For Transparent, free and rule-based trading system
  • To provide common institutional framework for conduct of trade relations among members To facilitate the implementation, administration and operation of Multilateral Trade Agreements
  • Follow rules and Procedures Governing Dispute Settlement
  • Trade Policy Review Mechanism
  • Concern on Non-trade issues such as Food Security, environment, health, etc.

What INDIA seeks from WTO

Protecting our food and livelihood security by having sufficient flexibility for domestic policy measures. Protecting domestic producers from the surge in imports or significant decline in import prices. Substantial reduction in export subsidies to other countries and domestic support to agriculture in the developed countries for greater market access to products of India as a developing country. Finally, a more equitable & fair trading framework for agricultural commodities

India and its Non-Trade Concerns

The issue of non-trade concerns was articulated as under:

The Article of Association provides an enabling environment for the countries to address the concerns relating to food security and livelihoods. Non-trade concerns were adequately reflected in the decisions, particularly those related to market access and domestic support. The relevant decisions of the World Food Summit on food security and livelihoods were taken as the integral part of the negotiations.

IMPACT OF WTO ON WORLD ECONOMY

SYNTHESIS OF WTO – WORLD TRADE ORGANISATION

One of the most eventful time that the world witnessed was the culmination of GATT 1947 into WTO, which came into force on 1st January 2005. This WTO had
set very high expectations in various member countries regarding increase in world trade where India had insignificant share i.e. only 0.75% at the most. Even in IT exports the share of Indian exporters was just peanuts in view of overall world market.

PROBLEMS FACED BY INDIA IN WTO & ITS IMPLEMENTATION:

Predominance of developed nations in negotiations extracting more benefits from developing and least developed countries Resource and skill limitations of smaller countries to understand and negotiate under rules of various agreements under WTO – Incompatibility of developed and developing countries resource sizes thereby causing distortions in implementing various decisions

Questionable effectiveness in implementation of agreements reached in past and sincerity – Non-tariff barriers being created by developed nations.
Regional cooperation groups were posing threat to utility of WTO agreement itself, which is multilateral encompassing all member countries – Agriculture seemed to be the bone of contention for all types of countries where France, Japan and some countries were just not willing to budge downwards in matter of domestic support and export assistance to farmers and exporters of agriculture produce.

Implications for India

IMPACT OF W.T.O ON INDIAN AGRICULTURAL SECTOR

Trade is an engine of economic development. The establishment of W.T.O is an important landmark in the history of international trade. When developing countries were liberalizing their economies, they felt the need for better export opportunities. The W.T.O provides opportunities for countries to grow and realize their export potentials, with appropriate domestic policies in place. The issue of globalization in the Indian context has occurred in the patterns of trade and capital flow in recent years; unfortunately, so far we have not made much use of it. At one time a country’s trade pattern was determined by its natural resources and the productivity of its land. Leaving aside political and institutional factors, a country’s level of
income was also largely determined by the global demand for its natural resources and its relative efficiency in exploiting them. The importance of land as a source of comparative advantage, however, changed dramatically after the industrial revolution. Today, it is almost insignificant. After the industrial revolution, the availability of “capital” became the most dominant source of comparative advantage.

The concept of India being a member of WTO evolved with the objective of expanding its exports of agricultural products in which it had tremendous comparative advantage(i.e. ability of a country to produce a particular good or service at a lower opportunity cost than another) The provisions of W.T.O offered ample opportunities to India to expand its export market. Contrary to this, the price situation changed drastically after 1996, which was the first year after implementation of Urguay Round Agreement and formation of W.T.O. International price of agricultural commodities have since then plummeted(fallen drastically), because of which domestic price turned higher than international price, which made India an attractive market for import of most agricultural commodities.

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This situation resulted in a wide spread decline in agricultural export and had also pressurized domestic prices. The impact of W.T.O on agriculture was severely felt by India as cheap imports were frequently hitting the Indian market that caused shock waves among the agriculture producers. The changes in the agricultural sector reveal that during pre W.T.O period i.e. just before the culmination of GATT into WTO there was significant increase in the exports of India rendering it remarkable than the post W.T.O period which could not sustain the rising import trends whereas the exports rose steadily.

ANALYSIS – IMPACT OF WTO ON VARIOUS SECTORS

The global agriculture trade regime under the World Trade Organization (WTO), that came into force 10 years ago in 1995, has led to an increase in the import of farm products into India rather than boosting exports.

Barring the first three years after the enforcement of the agreement, (1995-1998) agriculture imports continued to grow faster than exports. Between 1998 and 2000-01, the average annual import of farm products rose by
about 64 per cent, while exports declined by 7 per cent. Though the years 2002-03 have seen some buoyancy in farm exports, imports have also continued to grow.

A study on this particular aspect reports that the annual import of agriculture goods rose from $1,190 million in the three years preceding the WTO to $1,996 million in the first triennium after the WTO. In the same period, exports increased from $3,725 million to $6,530 million. But, this favourable trend in the initial years of the WTO did not last long and the next three years witnessed a whopping rise in imports and a slight decline in exports.

This crash was due partly to the cyclical nature of international prices partly due to increased global competition in agro-export because of liberalising trade.

The situation was aggravated by an increase in the already high farm subsidies in the developed countries. The Indian non-Basmati rice and wheat could not face global competition. The export of oilmeal, the second biggest export item after marine products, also suffered a set back due to a decline in global prices.

The export earnings from traditional export commodities like tea, coffee, spice and tobacco suffered mainly due to a sharp fall in international prices, as the quantum of exports in most cases did not drop.

Exports of marine products, livestock and horticulture items maintained the tempo of growth that was build up in the pre-WTO period. This implies that the post-WTO situation was favourable for the export of high-value food products.

In case of imports, liberalisation of trade in the initial years after the WTO did not result in any perceptible spurt because global prices were high. But subsequently, when global prices began to fall, India’s imports started
rising. The level of imports nearly doubled in the three years between 1996-97 and 1999-2000. This downturn in global prices continued even in the subsequent years.

The international prices of cereals in the years 2000 and 2001 were almost half of what they were in the beginning of the WTO-era.

The composition of items in the import basket indicates that edible oils accounted for the bulk of the increase in total agro-imports. The other items clocking significant increase in imports include pulses, spices, cotton, wood and wood products.

The study has also revealed that the spurt in the imports vegetable oils, and wood and its products has depressed their domestic prices, adversely impacting indigenous production.

What India should do?

The agricultural products from India can be made competitive in international market and the prices of agricultural goods in the domestic market can be improved by taking serious steps of reform. It appears that India does not stand to gain much by shouting for agriculture reforms in developed countries because the overall tariff is lower in those countries. India will have to tart major reforms in agriculture sector in India to make Agriculture globally competitive. In Pharma-sector there is need for major investments in Research ; Development and mergers and restructuring of companies to make them world class to take advantage. India has already amended patent Act and both product and Process are now patented in India. India has solid strength, at least for mid term (5-7 years) in services sector primarily in IT sector, which should be tapped and further strengthened. It should rather focus on Textile industry modernization and developing international Marketing muscle and expertise, developing of Brand India image, use its traditional arts and designs intelligently to give competitive edge, capitalize on drug sector opportunities, and develop selective engineering sector industries like automobiles ; forgings ; castings, processed foods industry and the high end outsourcing services. It
wont be a bad idea if Indian textile and garment Industry go multinational setting their foot in western Europe, North Africa, Mexico and other such strategically located areas for large US and European markets. The petroleum sector has to be boosted to tap crude oil and gas resources within Indian boundaries and entering into multinational contracts to source oil reserves.

General improvements required by all sections of economy

Our tariffs are still high compared to Developed countries and there will be pressure to reduce them further and faster. India must improve legal and administrative infrastructure, improve trade facilitation through cutting down bureaucracy and delays and further ease its financial markets. India has to downsize non-plan expenditure in Subsidies (which are highly ineffective and wrongly applied) and Government salaries and perquisites like pensions and administrative expenditures. Corruption will also have to be checked by bringing in fast remedial public grievance system, legal system and information dissemination by using e-governance. The most important things for India to address are speed up internal reforms in building up world-class infrastructure like roads, ports and electricity supply. The performance of India in attracting major FDI has also been poor and certainly needs boost up, if India has to develop globally competitive infrastructure and facilities in its sectors of interest for world trade.

The Objective of WTO Reiterated:

It is very clear that the intention of the negotiators was to use trade as an instrument for development, to raise standards of living, expand production, keeping in view, particularly, the needs of developing countries and least-developed countries. The WTO must never lose sight of this basic principle. Every act of implementation and of negotiation, every legal decision, has to be viewed in this context. Trade, as an instrument for development, should be the cornerstone of all our deliberations, decisions and actions. Besides, the system should be seen to be equitable and fair. It must be used in such a manner that the letter and spirit of the Agreements is fully observed. The WTO Members must mutually support and encourage each other to achieve the final goal. It must be recognized that all Members should assume a negotiating rather than an adversarial posture. It should also be recognized that different economies have different features and structures, different problems, different cultures. The pace of change must be carefully calibrated to take into account such differences. All Members should guard against unilateral action that cuts at the root of multilateral agreement and consensus. Developing countries have generally been apprehensive in particular about the implementation of special and differential treatment provisions (S;D) in various Uruguay Round Agreements. Full benefits of these provisions have not accrued to the developing countries, as clear guidelines have not been laid down on how these are to be implemented. ” The first Ministerial Conference held in 1996 in Singapore saw the commencement of pressures to enlarge the agenda of WTO. Pressures were generated to introduce new Agreements on Investment, Competition Policy, Transparency in Government Procurement and Trade Facilitation. The concept ofCore Labor Standards was also taken up for introduction. India and the developing countries, which were already under the burden of fulfilling the commitments undertaken through the Uruguay Round Agreements, and who also perceived many of the new issues to be non-trade issues, resisted the introduction of these new subjects into WTO. They were partly successful. The Singapore Ministerial Conference (SMC) set up open-ended Work Program to study the relationship between Trade and Investment; Trade and Competition Policy; to conduct a study on Transparency in Government Procurement practices; and do analytical work on simplification of trade procedures (Trade Facilitation).

Most importantly the SMC clearly declared on the Trade-Labor linkage as follows: ” We reject the use of labor standards for protectionist purposes, and agree that the comparative advantage of countries, particularly low-wage developing countries, must in no way be put into question. In this regard we note that the WTO and ILO Secretariat will continue their existing collaboration”. Not many people in this country are aware that there is a dispute settlement system in the WTO. This is at the heart of the WTO and sets it apart from the earlier GATT. Countries like the USA and the European Union have brought cases against us and won these cases like in pharmaceutical patents. India too has complained against the US and Europe and it too has won its fair share of disputes in areas like textiles.

India must effectively use this mechanism to extract fair share in world markets. It would be advantageous for India to give concrete shape to SAARC economic forum or Free market and align itself with ASEAN.

CONCLUSION

“Globalize or Perish” is now the buzzword synonymous to “Do or Die” which conveys that there is no alternative to globalization and everybody should learn to live with it. India, being a signatory to the agreement that led to W.T.O, can no way step backwards. This is not the time to curse the darkness but to work for making India emerge as a global market leader.