RESTRICTEDWORLD  TRADE
ORGANIZATIONWT/TPR/S/100
22 May 2002
(02-2684)
Trade Policy Review Body
TRADE POLICY REVIEW
INDIA
Report by the Secretariat
This report, prepared for the third Trade Policy Review of India, has been drawn
up by the WTO Secretariat on its own responsibility.  The Secretariat has, as
required by the Agreement establishing the Trade Policy Review Mechanism
(Annex 3 of the Marrakesh Agreement Establishing the World Trade
Organization), sought clarification from the Government of India on its trade
policies and practices.
Any technical questions arising from this report may be addressed to
Ms. Rohini Acharya (tel. 739 5874), Ms. Eugenia Lizano (tel. 739 5529), and
Mr. Michael Daly (tel. 739 5077).
Document WT/TPR/G/100 contains the policy statement submitted by the
Government of India.
Note: This report is subject to restricted circulation and press embargo until the end of the meeting
of the Trade Policy Review Body on India.India WT/TPR/S/100
Page iii
CONTENTS
Page
SUMMARY OBSERVATIONS vii
(1) E CONOMIC ENVIRONMENT vii
(2) T RADE AND INVESTMENT POLICY FRAMEWORK vii
(3) T RADE AND TRADE -RELATED REFORMS viii
(4) O THER MEASURES AFFECTING TRADE ix
(5) S ECTORAL POLICIES x
(6) O UTLOOK xi
I. ECONOMIC ENVIRONMENT 1
(1) R ECENT ECONOMIC DEVELOPMENTS 1
(i) Economic performance 1(ii) Macroeconomic policies 5(iii) Structural measures 10
(2) D
EVELOPMENTS IN TRADE 12
(i) Composition of trade in goods and services 12
(ii) Direction of trade in goods and services 13
(3) T RENDS IN FOREIGN DIRECT INVESTMENT 13
II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVES 15
(1) T RADE AND TRADE –RELATED POLICY 15
(i) Objectives 15(ii) Institutional and legal framework 15
(iii) Trade policy formulation and implementation 16
(2) T
RADE AGREEMENTS AND ARRANGEMENTS 19
(i) World Trade Organization 19(ii) Other arrangements 20
(3) F
OREIGN INVESTMENT REGIME 22
III. TRADE POLICIES AND PRACTICES BY MEASURE 25
(1) I NTRODUCTION 25
(2) M EASURES DIRECTLY AFFECTING IMPORTS 26
(i) Customs procedures 26(ii) Customs valuation and clearance 26(iii) Tariffs 27
(iv) Tariff exemptions and other concessions 35
(v) Tariff quotas 35(vi) Tariff preferences and rules of origin 36(vii) Additional and special additional duties 37(viii) Import prohibitions, restrictions, and licensing 37(ix) Minimum import prices 40
(x) Countertrade 40
(xi) Contingency measures 40(xii) Standards, testing, and certification 44(xiii) Sanitary and phytosanitary measures 45WT/TPR/S/100 Trade Policy Review
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Page
(xiv) Labelling and marking 46
(xv) Government procurement 47(xvi) State-trading 48(xvii) Balance-of-payments measures 49
(3) M
EASURES DIRECTLY AFFECTING EXPORTS 49
(i) Procedures 49
(ii) Quality control and preshipment inspection for exports 50(iii) Export taxes 51(iv) Minimum export prices 51(v) Export prohibitions and restrictions 51
(vi) Voluntary restraints and surveillance 53
(vii) Measures maintained by importing countries 53(viii) Duty and tax concessions 54(ix) State-trading 58(x) Free-trade zones 60(xi) Performance requirements 62
(xii) Export finance, insurance, and guarantees 63
(xiii) Export promotion and marketing assistance 63
(4) M
EASURES AFFECTING PRODUCTION AND TRADE 64
(i) Industrial policy 64(ii) Tax measures and other incentives/subsidies 72(iii) State-owned enterprises 80
(iv) Competition policy and regulatory issues 85
(v) Intellectual property rights 88
IV. TRADE POLICIES BY SELECTED SECTOR 98
(1) I
NTRODUCTION 98
(2) A GRICULTURE 99
(i) Overview 99
(ii) Import policy 100(iii) Export Policy 103(iv) Internal Policies 104
(3) M
ANUFACTURING 108
(i) Introduction 108
(ii) Textiles and clothing 109
(4) S ERVICES 117
(i) Introduction 117(ii) General Agreement on Trade in Services (GATS) 118(iii) Electricity 119(iv) Banking and insurance 121
(v) Telecommunications 127
(vi) Transportation 133(vii) Software 134
REFERENCES 137
APPENDIX TABLES 143India WT/TPR/S/100
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CHARTS
Page
I. ECONOMIC ENVIRONMENTI.1 Public accounts, 1995-01 8
III. TRADE POLICIES AND PRACTICES BY MEASURE
III.1 Share of bound tariff lines in manufactured products by HS chapter, 2001/02 29
III.2 Tariff escalation by 2-digit ISIC industry, 1997/98 and 2001/02 34
III.3 Anti-dumping measures, January 1995 - December 2001 43
IV. TRADE POLICIES BY SELECTED SECTORIV.1 MFN and bound tariff rates on agricultural products, 1997/98, 2001/02, and 2004 102
TABLES
I. ECONOMIC ENVIRONMENT
I.1 Basic economic and social indicators, 1995-02 2
I.2 Economic performance, 1995-02 3
I.3 Balance of payments, 1995-01 6I.4 Foreign investment by source and activity, 1995-01 14
II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVES
II.1 Autonomous bodies 17
III. TRADE POLICIES AND PRACTICES BY MEASUREIII.1 Structure of tariffs in India 30
III.2 Summary analysis of Indian's MFN tariff, 1997/98 and 2001/02 32
III.3 Preferential rules of origin 36III.4 Import prohibitions, 2001 38III.5 Imports subject to state trading, 1997 and 2001 49III.6 Export prohibitions, 1997 and 2002 52III.7 Drawback and other concessional imports, 2001/02 55
III.8 Exports subject to state-trading, 1997 and 2002 59
III.9 Industries subject to compulsory industrial licensing in India, November 2001 65
III.10 Items reserved for the small-scale sector 66III.11 Incentives/concessions offered to small-scale industries (SSIs) 68III.12 Status of sick industry referred to the BIFR (Board for Industrial and Financial Reconstruction) 70III.13 Composition of Centre's gross tax revenues, 1992-03 72
III.14 Explicit (plan) subsidies (Budget 2001-2002) 76
III.15 Explicit (non-plan) subsidies, 1997/98 and 2001/02 78III.16 Budgetary support to public sector enterprises, 1997-02 83III.17 The number of patents granted and in force, 1995-00 90III.18 Estimated trade losses due to piracy and levels of piracy, 1995-00 95WT/TPR/S/100 Trade Policy Review
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Page
IV. TRADE POLICIES BY SELECTED SECTORIV.1 Quota allocation 114
IV.2 Telecommunication service operators and policy 129
APPENDIX TABLES
I. ECONOMIC ENVIRONMENT
AI.1 Central Government and overall public sector accounts, 1995-03 145
AI.2 Exports by group of products, 1997-01 146AI.3 Imports by group of products, 1997-01 147AI.4 Trade in services, 1995-01 148AI.5 Exports by destination, 1997-01 149
AI.6 Imports by origin, 1997-01 150
II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVESAII.1 Status of notification requirements to the WTO, January 1998–March 2002 151
AII.2 Disputes in which India has been involved as a complainant, 1998-01 153
AII.3 Disputes involving complaints against India, 1998-01 155
AII.4 Foreign investment requirements in India, as of May 2001 157
III. TRADE POLICIES AND PRACTICES BY MEASURE
AIII.1 Export restrictions, 1997 and 2001 160India WT/TPR/S/100
Page vii
SUMMARY OBSERVATIONS
(1) ECONOMIC ENVIRONMENT
1. The Indian economy has grown
rapidly over the past decade, with real GDP
growth averaging some 6% annually.  Despite
external shocks, such as the Asian economiccrisis and fluctuations in petroleum prices,
which resulted in a slowdown to 4.8% in
1997/98, the economy recovered to grow at
over 6% during the two subsequent years.
Social indicators, such as poverty and infantmortality have also improved during the last
ten years.  Higher growth during this period
is, in part, due to continued structural reform,
including trade liberalization, leading to
efficiency gains.  In order to achieve furthersignificant reductions in poverty, India is
currently targeting higher real GDP growth of
between 7% and 9% (compared with 5.4%
expected for 2001/02);  to meet this goal it will
be important, as stressed by the authorities, to
continue, and even accelerate, the reform
process and increase competition in theeconomy.
2. Recognizing the important linkages
between trade and economic growth, the
Government has simplified the tariff,
eliminated quantitative restrictions on imports,and reduced export restrictions.  It plans to
further simplify and reduce the tariff.  To help
counteract the anti-export bias, inherent in
import and other constraints, export
promotion measures have gained inimportance.  The Government has recently
announced a further increase in these
measures and pledged to reduce export
restrictions.  The policy has also suggested the
creation and strengthening of enclaves such asexport processing and special economic zones,
which would "immunize" exporters from the
constraints affecting the rest of the economy,
such as infrastructure and administrative
problems.  The Government estimates that
annual export growth of almost 12% is
required in order to raise India's share ofworld trade from its present level of 0.67% to
a target of 1% by 2007.3. The authorities are firm in their view
that improving the economic growth rate
requires further structural reform.  As
restrictions on trade and competition have
been reduced, constraints associated with
infrastructure and regulatory bottlenecks havebecome increasingly evident.  Investment also
appears to have been deterred by high real
rates of interest, which are in part due to
government borrowing to finance its fiscal
deficit, which remains high.  The CentralGovernment deficit has risen from 4.2% in
1995/96 to some 5.7% in 2001/02.  This is
compounded by the states' fiscal deficits;  it is
estimated that the combined central and state
fiscal deficit was over 10% of GDP in2000/01.
4. In order to redress the fiscal
imbalance, steps are being taken to rein in
expenditure and to improve tax collection.
One recent measure is the introduction in
Parliament of the Fiscal Responsibility and
Budget Management (FRBM) Bill;  the Billaims to reduce the deficit by at least 0.5% per
year with a view to reaching a deficit of not
more than 2% of GDP by 2005/2006.
Expenditure reductions are also being
pursued, notably through reform of the foodsubsidy (public distribution system) and
administered prices for petroleum.  Steps are
also being taken to reduce government stakes
in state-owned enterprises, which remain a
drain on government resources and a cause ofinefficiency.  To improve the revenue base,
attempts are being made to reform the internal
tax system.  However, these attempts have met
with limited success, especially with respect to
state taxes.  Moreover, with customs revenuestill a relatively high share of fiscal receipts,
further planned reductions in tariffs will
probably require reform of the tax system.
(2) T
RADE AND INVESTMENT POLICY
FRAMEWORK
5. There have been no major changes in
India's trade and investment policyformulation since its previous Review in 1998.
Trade policies are formulated and
implemented by the Ministry of Commerce andWT/TPR/S/100 Trade Policy Review
Page viii
Industry in consultation with other relevant
ministries.  In this, it is assisted by several
autonomous bodies based in the Ministry as
well as through regular consultations with
trade and industry groups.  Advice is also
solicited from other government bodies suchas the Prime Minister's Council on Trade and
Industry and the ostensibly autonomous Tariff
Commission, based in the Department of
Industrial Policy and Promotion (Ministry of
Commerce and Industry), as well asindependent ad hoc groups appointed by the
Government from time to time.  In addition,
the Planning Commission, in preparing goals
for India's Five Year Plans, sets up task forces
to examine trade and related policies.
6. India provides at least MFN treatment
to all WTO Members.  It has been a strong
advocate of multilateral, rather than regional,
trade initiatives and is party to few regional
trading agreements.  Efforts are nevertheless
being made to strengthen regional agreements
to which it is party, such as the South AsianAssociation for Regional Cooperation
(SAARC) and the Bangkok Agreement.  Under
the South Asian Preferential Trade Agreement
(SAPTA), the members of the SAARC have
completed three rounds of trade negotiationsand expect to complete the SAPTA in 2002.  In
addition, India maintains bilateral trade
agreements with several of its neighbours,
including Bangladesh and Nepal;  under a
free-trade agreement with Sri Lanka, in effectsince 1 March 2000, India grants duty-free
access for over 1,000 tariff lines and a 50%
margin of preference for the rest of the tariff,
except for a negative list.  Negotiations to
conclude bilateral trade agreements withseveral other trading partners are presently
under way.
7. India's foreign direct investment (FDI)
policy has been liberalized since its previous
Review.  Investment is not only allowed in a
greater number of sectors, but a larger
number of sectors than before are eligible forautomatic investment procedures, involving
registration with the Reserve Bank; permission
from the Government is still required for
investment in some sectors, while foreigninvestment is not permitted in a few sensitive
sectors.  Despite liberalization, India's record
in attracting investment remains
disappointing, with FDI accounting for some
1% of GDP;  and there appears to be no
significant improvement in FDI inflows sincethe last Review, suggesting perhaps that the
policy and infrastructural environment are
still constraints.
(3) T
RADE AND TRADE -RELATED
REFORMS
8. Since the previous Trade Policy
Review of India, trade and related reforms
have been pursued although more gradually
than during the early 1990s.  However, a
major change since the early 1990s appears tobe the acceptance of the need for continued
reforms in order to raise economic growth and
reduce poverty.  In this context, barriers to
trade have been reduced and internal
structural reform has been pursued.
9. A major development since the
previous Review was the removal of all importrestrictions maintained  for balance-of-
payments reasons.  As a result, the customs
tariff has become the main form of border
protection.  There have been significant recent
efforts to rationalize the tariff, but withnumerous exemptions based on end-use, it
remains complex.  Tariffs are relatively high,
but the average applied MFN rate fell from
35.3% to 32.3% between 1997/98 and 2001/02
and is expected to fall further, to 29% in2002/03, as the "peak" rate of tariff is reduced
from 35% to 30%.  The tariff shows
substantial escalation in some sectors,
especially for paper and printing, textiles and
clothing, and food, beverages and tobacco.The Government announced recently that it
intends to simplify and lower the tariff to two
tiers by 2004/05;  10% for raw materials,
intermediates and components, and 20% for
final products.  In addition to the tariff,
importers must pay additional and special
duties on a number of products.
10. As a result of additional bindings
taken by India in the WTO, the share of tariffIndia WT/TPR/S/100
Page ix
lines that are bound has increased since the
previous Review, from 67% to 72%;  new
bindings were made primarily in textiles and
clothing;  India also renegotiated bindings in
some agricultural items.  The average (final)
bound rate is 50.6%, higher than the appliedMFN rate;  this gap provided ample scope for
applied rates to be raised recently on a few
agricultural products.
11. While import licensing and tariff
restrictions are generally declining, thereappears to have been an increase in other
import measures.  India has become one of the
major users of anti-dumping measures, with
some 250 cases initiated since 1995.  Certain
imports, such as automobiles and naturalrubber, may enter only through specified
ports.  Similar restrictions relating to entry
through certain ports have been removed on
300 sensitive items previously subject to
import restrictions;  imports of these products
continue to be monitored.
12. As part of its policy to encourage
exports, the Government is planning to confine
export restrictions to a few sensitive items, as
announced by the Export and Import Policy
2002-2007.  Export and import prohibitions
are maintained mainly for health and securityreasons.
(4) O
THER MEASURES AFFECTING TRADE
13. Internal reforms have concentrated on
improving efficiency and competition in the
economy.  Thus, while industrial policyremains important, its scope seems to have
been reduced significantly.  Compulsory
licensing now appears to be required mainly
for environmental, safety, and strategic
reasons.  In addition, since the previousReview, the number of activities reserved for
the public sector has been reduced from six to
three and the number of sectors reserved for
the small-scale industry has been reduced
from 821 to 799;  another 50 items are
expected to be removed from the list of items
reserved for the small-scale sector.  Pricecontrols are maintained on several products,
including fertilizers, petroleum products, andsome agricultural products;  some of these,
including on petroleum and fertilizers, are
gradually being phased out.
14. The need for increased competition is
being addressed by gradually reducing the
degree of direct government involvement ineconomic activities, including through a
programme to privatize state-owned
companies.  State-owned companies, which
were used to implement industrial and
development goals, are a drain on governmentresources.  Attempts have been made since the
early 1990s to restructure those that are loss-
making and, in some instances, to privatize
them, although, until recently, the
privatization programme has met with limitedsuccess;  annual targets are not often met.
The Government has redefined its
privatization strategy recently and is willing to
privatize all non-strategic companies;  in
strategic companies, including those involved
in the arms and ammunition, defence, atomic
energy and railway transport sectors, theGovernment will reduce its equity to 26%, or
lower in some cases.
15. Efforts are also under way to
modernize India's laws dealing with
competition and industrial "sickness", whilenew measures have been taken to strengthen
corporate governance.  A new Competition
Bill, which would replace the current
Monopolies and Restrictive Trade Practices
(MRTP) Act, is currently being examined inParliament.  The Bill aims, inter alia, to check
the abuse of dominant positions and establish
procedures dealing with mergers and
acquisitions.  When enacted, the Bill will also
establish a new Competition Commission.Amendments were also made in 1999 and
2000 to the Companies Act, to improve
corporate governance.
16. In view of the need to curb the fiscal
deficit, tax reforms are being pursued.
Complexities in the excise tariff structure have
gradually been reduced, with a view to movingto a standard rate of 16% and ultimately to a
value-added tax system.  However, attempts to
convert the state sales tax into a value-addedWT/TPR/S/100 Trade Policy Review
Page x
tax have had less success;  this has been
postponed twice since the original deadline of
1 April 2001.  Efforts are also being made to
reduce explicit subsidies, which account for
some 1.2% of GDP in 2001/02 (explicit and
implicit subsidies, however, are likely to beconsiderably higher, estimated at some 14.5%
of GDP at the time of the previous Review of
India).
17. Since its previous Review, India has
introduced amending laws on intellectualproperty rights, including for trade marks, and
industrial designs;  legislation to amend the
Patents Act and on Biological Diversity is
currently in Parliament.  Steps are being taken
to educate the public on the importance ofcompliance with intellectual property rights
laws, although enforcement seems relatively
weak.
(5) S
ECTORAL POLICIES
(a) Agriculture and allied industries
18. Policy in the agriculture sector has
been guided by domestic supply and self-sufficiency considerations.  Thus, the sector is
shielded through import and export controls,
including tariffs, state trading, export
restrictions and, until recently, import
restrictions.  With the removal of importrestrictions, tariffs on several agricultural
products have been raised;  as a result, the
overall average MFN tariff for agriculture has
risen from 35% in 1997/98 to 41% in 2001/02,
but is expected to fall to around 37.5% in2002/03 with the passage of the Budget for
2002/03.  To encourage exports of agricultural
products, the Government has set up
agricultural export processing zones.
19. Internally, despite some recent
reforms, the sector remains subject to a wide
range of price and distribution controls.  Price
controls are maintained for staples to ensure
remunerative prices for farmers.  The
Government also procures and subsidizes the
sale of certain commodities through the public
distribution system (PDS), which is targeted atlow-income families.  The products currentlysupplied through the PDS include wheat, rice,
sugar, and edible oils.  Over the years the PDS
has become more targeted, while procurement
by Government agencies has continued to
increase (in part due to a rise in minimum
support prices).  The result has been asubstantial increase in stocks, which greatly
exceed the levels considered necessary to
ensure food security, and in the costs
associated with maintaining these stocks.
Short-term measures, such as selling excessgrain below economic cost, have been
undertaken, but longer-term policy changes
would seem necessary.
(b) Manufacturing
20. In manufacturing, which is dominated
by textiles and clothing, there has been a
decline in the use of industrial policy,
including industrial licensing and small-scale-
sector reservations.  In addition, the removal
of import restrictions in 2001 has further
opened the market to international
competition.  Tariffs remain high, averaging32.5% in 2001/02.
21. Textiles and clothing accounts for
around 30% of India's total merchandise
exports.  Exports go mainly to the European
Union and the United States, both of whichmaintain restrictions under the Agreement on
Textiles and Clothing (ATC).  In preparation
for the removal of such restrictions, and to
improve the sector's competitiveness, a
number of measures have been taken recently.These include removal of some textiles and
clothing products from the list of items
reserved for the small-scale sector, and
removal of foreign equity restrictions (with a
small number of exceptions).  The new TextilePolicy also acknowledges the need to
restructure, or close down, non-viable units,
while ensuring adequate compensation for
displaced workers.
(c) Services
22. Significant reforms have been pursued
since the previous Review, especially intelecommunications, financial services and, toIndia WT/TPR/S/100
Page xi
some extent, in infrastructure services, such as
power and transport.  Liberalization in the
telecommunications sector began in the early
1990s, with licences being issued to private
investors for cellular telephone services.
Since then, private investment has beenallowed in all telecommunication services.
The resulting increased competition from
private service providers , as well as efforts by
the regulator to rationalize tariffs and reduce
cross-subsidization between local andinternational rates, has contributed to a
significant improvement in India's
telecommunications service network and to a
reduction in tariffs.
23. The reduction in telecommunication
tariffs is  likely to benefit the software sector,
one of the major success stories in recent
years.  This success is in part due to India's
abundant supply of relatively high-skilled and
low-cost labour;  compared with other sectors,
software has also been relatively free of
barriers to trade and investment.  TheGovernment does, however, provide support to
the sector, including through tax and tariff
exemptions, and software technology parks.
Recognizing the linkages between software
and telecommunications, the Governmentrecently merged the Ministries of Information
Technology and Communications and has
introduced a new Communications
Convergence Bill in Parliament.
24. The banking sector has been subject to
gradual reform since the early 1990s.  The
most recent developments include measures to
reduce the level of non-performing loans,
especially in public-sector banks, and to
restructure three public-sector banks.  TheReserve Bank of India, which regulates the
banking sector has also strengthened
prudential requirements, including raising
minimum capital and capital adequacy ratios.
Supervision of banking and non-bank financial
companies is based on both on-site and off-site
monitoring on a regular basis.  Key challengescontinue to be the high level of non-
performing loans and the restructuring of
weaker public-sector banks.  The insurance
industry has recently been opened tocompetition from the private sector and new
licences have been issued to private
companies;  foreign equity is restricted to 26%
of the total.  The role of the regulator, the
Insurance Regulatory and Development
Authority (IRDA), has been enhanced.
25. Infrastructure remains a major
constraint on economic activity in India.
Major shortages in the supply of electricity
have resulted in the use of captive generation.
The main suppliers of electricity, the stateelectricity boards (SEBs), have run losses,
estimated in 2000 at around 1% of GDP,
partly as a result of subsidized tariffs to the
agriculture sector.  Recent reforms have
concentrated on addressing the issue of cross-subsidization of tariffs, through the
establishment of regulators and reform of the
SEBs;  in addition, foreign investment
restrictions in transmission were removed.  In
transportation services, the current Railway
Budget has revised the tariff structure,
reducing the cross-subsidy between freightand passenger transport;  investment by the
private sector has also been allowed.  The
private sector has also been encouraged to
invest in the development and operation of
national highways.
(6) O
UTLOOK
26. India's economic reform programme
resulted in strong economic growth
throughout the 1990s despite external shocks.
The recent slowdown, although partly due tothe overall slowdown in the world economy,
also demonstrates the necessity of continuing
these reform efforts.  In its recent annual
Economic Survey, the Indian Government
acknowledges the importance of "providingthe right environment" for Indian industry to
compete internationally and to raise annual
real economic growth rates.  The approach
paper for the Tenth Five Year Plan (2002-
2007) argues that the scope for efficiency
improvement is large, but can only be realized
if "policies are adopted which ensure suchimprovement".WT/TPR/S/100 Trade Policy Review
Page xii
27. While the process of dismantling some
of India's complex system of trade and
domestic controls has already yielded
considerable results, there is a need for
domestic structural reforms to be deepened
and completed.  In particular, difficultdecisions are required to redress the fiscal
imbalance, by reducing subsidies, completing
the process of tariff and tax reform, and
stepping-up privatization of state-owned
enterprises.  A reduced fiscal deficit is alsolikely to improve the investment climate and
free resources for private and publicinvestment, particularly in infrastructure
services, which have become a major
bottleneck to economic growth.  Important
steps have already been taken recently,
including the introduction in Parliament of
legislation on competition policy, changes inthe Companies Act, and a decision to
introduce changes in labour laws.  Continued
efforts to open the economy to international
competition are likely to result in higher
economic growth and a further rise in percapita incomes.