RESTRICTED
WORLD TRADE WT/BOP/R/32
18September 1997
ORGANIZATION(97-3759)
Committee onBalance-of-Payments Restrictions
REPORT ONTHE CONSULTATIONS WITH INDIA
1. TheCommittee resumed itsconsultations withIndiaon10-11 June1997. Following a"period
ofreflection" theCommittee reconvened on30Juneandtheconsultations ended on1July1997. The
consultationwasheldundertheChairmanshipofMr.PeterR.Jenkins(UnitedKingdom),inaccordance
withtheCommittee 'sterms ofreference, pursuant toArticle XVIII:12(b) ofGATT 1994 andthe
Understanding ontheBalance-of-Payments Provisions oftheGATT 1994. TheInternational Monetary
Fund wasinvited toparticipate intheconsultation inaccordance withArticle XV:2 ofGATT 1994.
2. TheChairman recalled thatthepurpose ofthecontinued consultations wastoconsider aplan
byIndia toeliminate themeasures notified under Article XVIII:B. TheCommittee hadbefore itthe
document WT/BOP/N/24, which, inAnnex III,setoutanine-year phase-out plan, consisting ofthree
three-year periods, beginning on1April 1997, during which quantitative restrictions from specified
products would beremoved. TheChairman observed thatIndia hadmetitscommitment toprovide
aplanthree weeks inadvance oftheresumption ofconsultations, afactthattheCommittee should
takenoteofappropriately.
3. TheopeningstatementbytherepresentativeofIndiaatthemeetingof10-11June1997isattached
asAnnex I.
Statement bytherepresentative oftheInternational Monetary Fund
4. Thestatement bytherepresentative oftheInternational Monetary Fund atthemeeting of
10-11 Juneisattached asAnnex IV.Inaddition, therepresentative noted thathisanswers tothe
questions posed during theJanuary 1997 consultations onIndia'sbalance-of-payments situation had
notchanged during theinterim period.
Discussion intheCommittee
5. Therepresentative oftheEuropean Union thanked thedelegation ofIndia forthestatement
made onliberalization measures thattheIndian Government wascontemplating forimplementation
inorder tobring India'sobligations, orsituation, intoconformity withundertakings intheWTO, and
theconsiderable work thathadbeenaccomplished insubmitting thisproposal intime. Healsothanked
therepresentative oftheInternational Monetary Fund forhisbrief, although veryuseful, statement
andparticularly theconcluding partwhich hadjustbeenpresented. Herecalled thatattheJanuary
consultations, theCommittee hadtaken noteoftheIMF'sstatement indicating thatmonetary reserves
inIndia wereappropriate andthattherewasnoserious threat ofanydecline inthatcountry 'smonetary
reserves; thisviewhadbeenconfirmed. TheECfeltthatonthisbasis, theCommittee hadinvited
theIndian Government toprepare aplanforthelifting ofquantitative restrictions placed onimports,
measures introduced byIndia under Article XVIII. Ithadbeenagreed thatconsultations would resume
totakealookatthisplan, andtoconclude theseconsultations inawaycompatible withtheappropriate
provisions onbalance ofpayments. TheEuropean Community welcomed these commitments andWT/BOP/R/32
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theefforts made byIndia topursue theliberalization process, aprocess which already hadbeenunder
way,notonlyforanumber ofyears following thenewtradeapproach adopted byIndia, butinparticular,
inthepastfewweeks when theIndian Government tooktheinitiative toliberalize some 300tariff
headings. Nevertheless, heexpressed severe disappointment withtheplansubmitted bytheIndian
authorities, aplantheECdidnotfindacceptable. There wasnolonger anyjustification forIndia's
measuresunderArticleXVIII:B.Underdiscussionforsometwoyearsnowwasatransitionaladjustment
period,afavourgrantedtotheIndianauthorities.Hisauthoritiesconsideredthatimmediatedisinvokation
ofArticle XVIII:B wasabsolutely fundamental andthatinview ofadjustment problems thatmight
befaced, duetoimbalances asaresult ofthelongperiod ofapplication ofthese measures, abrief
transitionperiodoftwoyearscouldbeconsideredreasonable.NotingthatIndiahadstateditswillingness
toengage inconstructive dialogue, theECwaswilling toreciprocate insofar astheIndian authorities
were willing tosubstantially reduce thetransitional period.
6. Therepresentative oftheUnited States expressed hisappreciation forthetimely and
comprehensive notification totheWTO Secretariat India'sproposed phase-out schedule ofthemeasures
justifiedpursuanttoGATTArticleXVIII:Bandrecognizedtheconsiderableeffortinvolvedinpreparing
suchaplan. Hisdelegation could notsupport India'splaninitscurrent formulation. Hereiterated
thattowaitsixtonineyears more toeliminate thevastmajority ofIndia'squantitative restrictions
purportedly justified bybalance-of-payments problems thatdidnotexist, wasneither credible nor
commensurate withIndia'sroleinthemultilateral trading system, particularly foracountry thathad,
untilveryrecently,enjoyedanumberofyearsofdouble-digitexportgrowthasaresultofitsparticipation
inthemultilateral system. Inhisopinion, theCommittee hadconcurred withthejudgement ofthe
IMFattheJanuary consultations thatIndia didnotfaceabalance-of-payments problem, aviewthat
hadbeenreconfirmed; inhisview, since January thefundamentals ofIndia'sexternal account had
improved. Theproposed phase-out period represented anunjustifiable delay. Nordidheconsider
itaresponsible action interms ofmaintaining thesystem ofrights andobligations intheWTO: to
disregard therules ofthesystem byembracing anunjustifiably longperiod forphase-out would not
sendaveryuseful message, forexample, tothose countries which wereseeking togainaccession to
theWTO. Heurged theGovernment ofIndiatoimmediately disinvoke coverage under Article XVIII:B
andtoreconsider itscurrent planandpropose aschedule moreconsistent withitsroleintheinternational
trading system. Headded thattheinability todosowould leadIndia'strading partners toexamine
other WTO means ofaddressing thismatter.
7. Therepresentative ofEgypt expressed thanks andappreciation tothedelegation ofIndia for
boththevaluable opening statement andtheveryuseful andcomprehensive documents before the
Committee. Theconclusion reached bytheCommittee inJanuary hadpresented abigchallenge to
India, notonly because oftheenormous number oftariff items tobeincluded initsplanfor
liberalization, butalsotheeconomic difficulties thatIndiastillfaced. Thebalance oftradehadwitnessed
adeficit in1996-97 ofabout US$5.4 billion, andthedeficit onthecurrent account remained chronic.
Therecent improvement inthebalance ofpayments derived fromportfolio inflows, short-term deposits
andremittances fromIndians residing overseas anddidnotconstitute asource bymeans ofwhich India
could maintain equilibrium initsbalance ofpayments onasound andlasting basis. Hisdelegation
believed thattheGovernment ofIndia should becommended foritshistoric andcourageous decision
togradually eliminate thequantitative restrictions onawiderange ofitems ending alongperiod of
protection. Inthiscontext, Egypt supported theGovernment ofIndia forthisimportant step. He
viewed thetimeframe fortheimplementation oftheliberalization planasappropriate inviewofthe
needforcautious andcareful monitoring ofdevelopments. Inorder toavoid anyset-backs tothereform
process, agradual liberalization planwasamust forsuchahuge consumer market, anecessity for
adjustment ofthedomestic industry andforcreating theappropriate atmosphere forpopular acceptance
oftheliberal reform. Hemade reference totheprovisions ofArticle XVIII, paragraphs 2,8,9and
11,which recognize thespecial needs ofdeveloping countries tomaintain quantitative restrictions underWT/BOP/R/32
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balance-of-payments cover inorder toensure thattheultimate objective ofeconomic development is
achieved, while maintaining economic stability andsatisfactory levels offoreign exchange reserves,
stressing alsotheprogressive relaxation oftheirrestrictions. Hebelieved thattheGovernment ofIndia
hadproved itswillingness tomeetitsobligations under themultilateral trading system andtherefore
recommended thattheCommittee agree onthephase-out planandconsider thatIndia hadfulfilled its
obligations under Article XVIII:B ofGATT 1994 andthe1994 Understanding.
8. Therepresentative ofJapan expressed hisGovernment 'sappreciation fortheconsiderable efforts
made byIndiatosubmit inatimely fashion acomprehensive plantophase-out quantitative restrictions,
which hadbeenmaintained formore than35years forbalance-of-payments reasons. HisGovernment
wasveryconscious ofthepolitically sensitive environment inwhich theefforts oftheIndian Government
hadbeenmade. However, hestated hisstrong disappointment thattheplanseemed tohavepaidlittle
attention toconcerns expressed byWTO trading partners ofIndia, aswellastotheitems ofinterest
toJapan which hadbeenindicated toIndia during bilateral discussions. Specifically, thephase-out
plandidnotrefertothedisinvokation oftherecourse toArticle XVIII:B provision which Japan had
requested asbeing essential. Itseemed onlylogical thatIndiaexpressly disinvoke thisprovision, given
thefactthatthere wasnolonger anyjustification forIndia tomaintain restrictions forbalance-of-
payments reasons. Secondly, thephase-out period ofnineyears wasfartoolongtobeacceptable;
although conscious ofthedifficulties which theGovernment ofIndia faced domestically, Japan was
oftheviewthatrestrictions onindustrial products should beeliminated inprincipal bytheendof1999.
Thirdly, import restrictions onmany items would continue tobemaintained onthebasisofArticle XX
andArticle XXIoftheGATT, instead ofArticle XVIII ofGATT 1994. Heexpressed concern regarding
thelegaljustification ofthese restrictions. Herequested India torevise theplanassoonaspossible,
taking intoconsideration theconcerns ofinterested Members, adding thatasuccessful settlement of
thislong-standing issuewasnotonlyimportant toIndia, oneofthekeyplayers oftheWTO, butalso
tothecredibility oftheOrganization.
9. Therepresentative ofThailand, speaking onbehalf ofASEAN, quoting paragraph 8of
Article XVIII:B oftheGATT 1994, pointed outthataMember withabalance-of-payments problem
caused bytheexpansion ofitsinternal markets intheprocess ofdevelopment andinstability initsterms
oftradeshould beabletomaintain import restrictions inorder tosafeguard itsexternal financial position.
Inhisview, India found itselfinsuchasituation. Since 1960, Indiahadfaced asevere financial crisis,
making itnecessary toinvoke thebalance-of-payments provisions; onlyinthe1990s didthesituation
allow boldeconomic reforms andawelcome liberalization process. Notuntilearlyin1997hadIndia's
financial situation been wellenough fortheIMFrepresentative, based oneconomic dataof1995-96,
toconcludethat"India'srecenteconomicdevelopmenthasbeenencouraging,thatreformandadjustment
efforts needtobesustained" withtherecommendation fortheremoval ofquantitative restrictions on
imports, particularly forconsumer products.
10. While herecognized thatsustainable economic growth wasbestobtained byallowing the
"invisible hand" ofthemarket force towork, almost 3,000 items hadbeenunder import protection
formore thanthreedecades andanyabrupt changes inthemarket might onlyresult inhavoc. ASEAN
hoped toseetheexisting quantitative restrictions abolished assoon aspossible, while remaining
sympathetic totheconcerns raised byIndia. Hehoped thatIndia would givedueconsideration toan
appropriate phase-out period thatwould neither undermine thecontinuation ofreforms norcause
unnecessary damage tothecommercial oreconomic interests ofother Members.
11. Therepresentative ofCanada appreciated thatacountry ofIndia'simportance intheWTO
hadembarked onreform. Recalling theconclusions ofthelastconsultation withIndia, hethanked
thedelegation forproviding theplanontime. While itremained Canada 'sview thatIndia didnot
faceanything close toabalance-of-payments problem, hisGovernment wassensitive tothepoliticalWT/BOP/R/32
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difficulties ofovernight adjustment. Still, thetiming andsubstance oftheproposed phase-out plan
were extremely disappointing andnineyears wasfartoolong. Canada hadstated repeatedly tothe
Indian authorities thatanacceptable period forphasing outquantitative restrictions would betwoyears,
i.e.byJuneof1999. Hereminded theCommittee thatthistime-period, ineffect, granted India atotal
ofalmost fouryears since theBalance-of-Payments Committee hadbegun thissetofconsultations in
1995. Apart fromthetotaltime-frame being proposed, Canada wasextremely disappointed thatthe
removal ofquantitative restrictions onmany oftheitems ofparticular interest toCanada, especially
agricultural products, wasproposed totakeplace inthesecond andthirdtranches oftheplan. Also
ofmajor concern wasthefactthattheIndian phase-out plandidnotgiveaclearcommitment thatIndia
would disinvoke itsrecourse toArticle XVIII:B. This, inhisview, wasanessential element ofany
phase-out plan. India, headded, wasanincreasingly important international trader. Ithadplayed,
andwould continue toplay, aleadership rolewithin theWorld Trade Organization. Accordingly,
howthisCommittee dealtwithIndia'sproposed phase-out planwould beverycarefully watched by
many WTO Members.
12. SincethecomingintoforceoftheWTO,theBalance-of-PaymentsCommitteehadbeensuccessful
inensuring amuch higher standard ofadherence totheWTO rulesandcould notafford nowtoapply
adifferent standard toIndia. Aconsistent application oftherules wasevenmore important today
forallWTO Members when oneconsidered thatoverthecourse ofthenextfewyears, anumber of
significant newMembers might bebrought intotheWTO through theaccession process. Canada was
convinced thatIndia could domuch better thanithadinitsproposed phase-out plan. Worries about
potential future balance-of-payments problems could notdetermine present policy when there wasno
existing balance-of-payments problem. Future import problems, iftheydidoccur, would needtobe
dealtwithonacase-by-case basis. Depending onthenature ofsuchpossible import surges, provisions
other thanthose related tobalance-of-payments could wellbethemostappropriate wayofdealing with
suchproblems, forinstance Article XIXonproduct safeguards orArticle IX:3 oftheMarrakesh
Agreement dealing withwaivers. Under thecircumstances, heconcluded thatCanada could notaccept
theproposed phase-out planasfulfilling therequirements ofArticle XVIII andlooked totheIndian
delegation toproduce aplanwhich would beacceptable.
13. Therepresentative ofSriLanka expressed hisdelegation 'sdeepappreciation totheGovernment
ofIndia fortheefforts made inpresenting acomprehensive phase-out planforprogressive elimination
ofquantitative restrictions maintained forbalance-of-payments reasons inresponse todeliberations
andconclusions oftheprevious session heldinJanuary. These efforts wereindicative ofIndia'sstrong
commitment tothemultilateral trading system anditslong-term disciplines andhecommended the
Indian Government forthecontinuation ofitseconomic reforms anditsdetermination tomaintain a
liberal andopentrading system. There wasnodoubt thatbypresenting aboldandcredible planwhich
envisaged elimination ofquantitative restrictions inthree phases, stretching overnineyears, the
Government ofIndiahadfulfilled anessential condition inachieving lasting improvements intheIndian
balance-of-payments position andcompleting itstransition started intheearly1990s. Withacarefully
designed plantogradually phase-out quantitative restrictions asanintegral partoftheprocess of
economic reforms, India appeared tohavetaken another major stepinadapting itstrade policies to
theneeds ofliberalization andopenness totheworld outside. Inhisopinion, whatwasimportant
wasthefactthatthepresent plantoeliminate quantitative restrictions hadbeenannounced atatime
when theIndian economy wasexperiencing unsatisfactory export growth resulting inanincreased trade
deficit. Inspiteofthisunfavourable situation, theunwavering commitment oftheIndian Government,
asreflected inthedocument WT/BOP/N/24, topursue anopen, liberal andmarket-oriented tradepolicy,
wasindeed commendable. Being aneighbouring country having substantial trade interest withIndia,
SriLanka viewed theproposal under discussion inthisCommittee asapositive development. His
Government wasparticularly pleased tonotethedesire ofIndia toinclude agricultural products on
which Indiahadbound tariffs atverylowlevels. Hewentontosaythattheeffectiveness andviabilityWT/BOP/R/32
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ofproposals withsocial andpolitical repercussions formany sectors oftheeconomy would depend
upontheconsensus onsuchproposals amongst allconcerned. particularly foracountry likeIndiagiven
itssizeanddiversity. Hisdelegation appreciated thecautious andpragmatic approach followed in
drawing uptheproposed phase-out plan,recognizing theuncertainty andfragility inIndia'sbalance-of-
payments situation andwithaview toensuring itsbroad acceptance. Theefficacy oftheproposal
could beenhanced byextending necessary support andencouragement tosustain themomentum of
theprocess. HisGovernment accepted theproposed phase-out planandwasready toextend whatever
support wasneeded foritssuccessful implementation.
14. Therepresentative ofAustralia stated thatamore openandtransparent import regime based
ontariffs would, inthelongterm, beintheinterests ofbothIndia anditstrading partners. Australia
supported thetrade liberalization provisions ofIndia'srecently announced Export-Import policy, but
expressed serious concerns withthetabled phase-out plan. Likeothers before him,heconsidered
thephase-out period ofuptonineyears asfartoolong, especially inviewoftheimprovement inIndia's
balance-of-payments andforeign-reserves position, indicating thattherewerenolonger WTO grounds
forthemaintenance ofquantitative restrictions. Australia 'sviewwasthatitshould bepossible to
phase-out allquantitative restrictions by1January 2000. While heunderstood thatIndia didhave
politicallysensitivesectors,heemphasisedthatArticleXVIIIwasneverintendedtoprovidefordomestic
protection. There wasnojustification foranexcessively delayed phase-out since most oftheitems
received considerable tariffprotection. IfIndiawasconcerned about theimpact onparticular industries,
other WTO provisions might bemore appropriate. Secondly, Australia wasconcerned about the
extraordinary protection given toagriculture. Most agricultural rawmaterials andprocessed foods
would continue toremain under quantitative restrictions foranother sixyears untilthestartofthethird
stage ofIndia'sphase-out plan. India hadmade itabundantly clear thatthedelayed phase-out for
agriculture wasnotforfearofbalance-of-payments problems buttoprotect theagricultural sector.
Thiswasunacceptable toAustralia. Thirdly, hesawaneedforaclearcommitment ondisinvokation
ofArticle XVIII:B, given theabsence ofabalance-of-payments problem forIndia. Indiawasnotentitled
toArticle XVIII:B cover anddisinvokation wastheonlymeans toprovide certainty toIndia'strading
partners. Australia strongly urged India toimprove itsproposal, adding thatitwould beamistake
forIndia tounderestimate thetrade interests andconcerns ofAustralia.
15. Therepresentative ofSouth Africa commended theGovernment ofIndia fortherelaxation
oftherestrictions already implemented andfordemonstrating itscommitment tofurther liberalization
tobeproperly managed inatransparent manner. Heappreciated thattheperiod oftimeproposed
forthephase-out ofitsremaining restrictions wasamatter ofgreatsensitivity toIndiaandsimply wished
toencourage Indiatoaccelerate theprocess ofliberalization asitsoverall balance-of-payments situation
would permit.
16. Therepresentative ofHungary feltthattheplandemonstrated thattheGovernment ofIndia
wasfirmly committed totheprogressive liberalization ofimports. Thephase-out planwastransparent,
balanced andcomprehensive, covering allrestricted sectors. Hungary believed thattherapid removal
ofquantitative restrictions would undermine theexternal andeconomic stability ofthecountry; after
many years ofrestrictions, agradual phase-out ofquantitative restrictions seemed tobemorereasonable,
bothfromthepolitical andtheeconomic point ofview. TheGovernment ofHungary wasconvinced
thattheGovernmentofIndiacouldbestdeterminetheappropriatephase-outprogrammefortheremaining
restrictions, taking intoaccount thedevelopment needs ofthecountry andensuring thelevelofreserves
adequate forimplementation ofitsprogramme ofeconomic development.
17. Therepresentative ofPerunoted thatoverthelastyeartherehadbeenasubstantial fallinIndia's
exportsandreservescoveredonlysixmonthsofimports.Thus,hebelievedthatthebalance-of-payments
situation wasstillfragile, justifying thesubmission ofaprogressive phase-out planoveranine-yearWT/BOP/R/32
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period. Itwasimportant thatthephasing outofquantitative restrictions inIndiabeaccomplished without
sacrificing thegrowth oftheIndian economy orcreating abalance-of-payments problem. Assuch,
theplansubmitted byIndia provided agood basis forreaching anagreement within theCommittee.
18. TherepresentativeofNorwayfirstaskedifitwouldbepossibleforIndiatoproduceabreakdown
ofthe100percentincrease inimports overthelastfiveyears between investment goods andconsumer
goods. Herecalled thatinJanuary theCommittee hadtaken noteoftheIMF'sstatement thatIndia's
current monetary reserves werenotinadequate andthere wasnothreat ofaserious decline inIndia's
monetary reserves. TheIMFhadstated, interalia,thatquantitative restrictions should beremoved
overarelatively short period andhadrepeated thisviewtoday. InJanuary hisdelegation hadadopted
theposition thataperiod oftwoyears would bereasonable forphasing outthequantitative restrictions.
Consequently hisGovernment noted withconsiderable regret anddisappointment thatthetimetable
provided bytheIndian authorities foraphase-out period would notbecompleted until31March 2006.
Intheview ofhisdelegation, thephase-out planpresented byIndia contained some serious flaws.
First, theplandidnotcontain anyreference totheelimination oftherestrictions. According to
Article XVIII:B, paragraph 11,acontracting party shalleliminate therestrictions when conditions
nolonger justify theirmaintenance. Norcould aphasing-out period ofnineyears beconsidered as
areasonable period forrestrictions onimports notwarranted under balance-of-payments provisions.
Asubstantial reduction ofthistimewastherefore amatter ofthehighest priority. Inconclusion, he
stated thatthenine-year phase-out planproposed byIndia wasnotacceptable, aviewjustified bya
combination ofsystemic concerns andtheobjective, economic andfinancial, criteria ofthecase.
19. TherepresentativeofBrazilexpressedfirmconvictionthatthesuccessoftheon-goingeconomic
reforms inIndia waspositive forIndia andforthemultilateral trading system. Before commenting
onthephase-out, theBrazilian delegation repeated itsviewthatIndia'sbalance-of-payments position,
although nowmuch healthier thanatthebeginning ofthedecade, wasbynomeans securely stable
andcertainly notirreversible. Thebalance-of-payments datapresented lastJanuary certainly reflected,
toalarge extent, thepositive effects oftheliberalization programme carried outbytheIndian
Government. Thestatement oftheIMFrepresentative hadbeen veryillustrative inthisregard.
Nonetheless, itwastheGovernment ofIndiawhich could bestgauge theuncertainties anddestabilizing
forces intheIndian economy. TheCommittee hadreceived clearindications thatsuch forces existed
inthateconomic trends inIndiainthepastmonths warranted caution. Helisted afewoftheserecalling
thesharp deceleration ofexports in1996: thegrowth ratewasonethird thatoftheprevious year;
the85percentincrease inimports from1991/1992 to1995/1996, especially thecrude-oil bill,which
hadrisen byover40percentbetween April andNovember 1996; thewidening trade deficit from
$1.5billion in1991/92 to$4.5billion in1995/96; thewidening ofthecurrent account deficit to
1.7percentofGDP in1995/96 against 0.9percentintheprevious year; andabove all,thehigh
incidence ofvolatile capital inflows inshort-term liabilities onIndia'sexternal account. Asof6June,
thetotalamount ofreserves was$24.6 billion, yetportfolio investments lastMarch accounted for
$7.5billion andshort-term outstanding debtamounted to$4.03 billion. Furthermore, theoutstanding
balance onthedifferent non-resident deposits schemes wasat$20.8 billion. Globalization ofprivate
capital haddangerous implications, mostobviously highvolatility which should becarefully monitored,
bothinIndia andother hostcountries. Henoted that,in1996, 73percentofallprivate investment
indeveloping economies went toonly12countries. These points, hefelt,underlined thefactthat
theIndian balance-of-payments situation wascomplex anddeserved tobetreated assuch. Withregard
tothephase-out plan,hisdelegation thanked theIndian delegation foritsextensive andcompetent work
inpresenting thecomprehensive documentation, which clearly reiterated India'scommitment toproceed
withtheconsultations inahighdegree oftransparency. Hewaspleased tonotice thatAnnex 3
encompassed allareas subject toquantitative restrictions, including agriculture. While recognizing
thesensitivity ofagriculture tothedeveloping economies, itsprogressive opening totheworld market
wasanimportant steptoamore efficient, competitive andfunctionally stable economy. Insum, hisWT/BOP/R/32
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delegation feltthatthepresent phase-out planshould beevaluated inflexible terms, bearing inmind
theveryencouraging efforts undertaken byIndiainthedirection ofeconomic liberalization. Hewarned
thatanypremature decisions thatmight jeopardize theseefforts andtheprogress achieved sofarshould
beavoided.
20. Therepresentative ofSwitzerland stated that,ashadbeenclearly demonstrated bytheexpertise
andthestatement oftheIMF, Indianolonger faced balance-of-payments difficulties andithadadequate
monetary reserves. Consequently, India hadnojustification inmaintaining trade restrictions under
Article XVIII:B ofGATT 1994 andthustherestrictions maintained byIndia should beimmediately
dismantled. Aware, however, ofthestructural adjustment difficulties thatanovernight elimination
could engender, hisGovernment waswilling toconsider atransitional period ofsome twotothree
years asafavour granted inorder totakeintoaccount arather particular economic situation. Healso
considered theproposal asmuch toolongaperiod andregretted thatIndia didnotintend toexplicitly
renounce recourse toArticle XVIII:B. Consequently, India'sproposals were notacceptable to
Switzerland. Heenjoined Indiatosignificantly improve itsplanandtorenounce, without concessions,
anyinvocation ofexception forbalance-of-payments reasons. Theoutcome ofthisconsultation would
undoubtedly serve asanexample forthemultilateral trading system particularly given thatcountries
withconsiderable economic potential were inthecourse ofaccession totheWTO. Therefore,
Switzerland sincerely hoped thattheCommittee would reach conclusions thatwereinconformity with
thespirit andtheletter oftheWorld Trade Organization Agreement.
21. TherepresentativeofCubaconsideredthatIndiahadcompliedwithallofitsobligationsprovided
forinArticle XVIII ofGATT 1994 andwiththe1994 Understanding. ThisArticle recognizes the
needfordevelopingcountriestoadoptmeasuresforbalance-of-paymentspurposes.Inviewofagrowing
trade deficit andareduction inthegrowth ofIndia'sexports, these werejustified byArticle XVIII:B.
Measures taken since 1991 (such astheprogressive reduction inrestrictions onimports bysome
75percent) were testimony toIndia'sefforts. Atthepastmeeting ofthisCommittee, ithadbeen
requested thatrestrictions stillinplace forbalance-of-payments reasons benotified andthishadbeen
done. India hadsubmitted athree-phase planforthephasing-out ofmeasures notified pursuant to
Article XVIII:B andthushadcomplied withitsobligations under paragraph 1oftherelevant GATT
provisions. Cuba considered thatIndia hadcomplied withitsobligations under Article XVIII:B and
the1994Understandingandsinceitcontinuedtofacedifficulties,India'splanwastransparent,reasonable
andacceptable andhopefully thiswould betheconclusion reached bytheCommittee.
22. Therepresentative ofPoland recognized thesubstantial effort andgood willoftheIndian
delegation insubmitting thecomprehensive notification ofrestrictions inadvance oftheCommittee
meeting andinlinewithpastrecommendations. Heexpressed gratitude fortheleveloftransparency
demonstrated bytheIndian delegation during theinformal contacts onaplurilateral basis. Hewas
happy tolearn about thegradual, butconstant, improvement inthemacroeconomic equilibrium of
India andappreciated theliberalization effected sofarbyIndia. Henoted thevisible improvement
inthebalance ofpayments ofIndia which didnotcause, asargued bytheIMF, animmediate danger
toitsreserves. Thisdidnotmean thatPoland didnotrecognize theproblem ofthetrade deficit and
thefragility ofthebalance-of-payments situation, aswellaspolitical problems related tomaintaining
restrictions inIndia. Heunderstood thatthelong-standing application ofrestrictive measures created
persesome difficult political andsocial problems. Balance-of-payments problems werelikeadisease
andthreatened many countries facing radical changes intheirmacroeconomic andtrade policy. In
hisview, every case, likeadisease, should betreated inanindividual way,although themedicaments
should bethose asdefined andviable inareliable diagnosis. Asfarasthedisinvokation ofArticle XVIII
wasconcerned, hesawsome possible ambiguity intheinterpretation ofparagraph 13ofthe
Understanding. Hewished, however toappeal totheIndian delegation toconsider thisproblem in
thespirit ofcommon responsibility forthesystem, thesystem inwhich eachcaseshould bejudgedWT/BOP/R/32
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onitsownmerits. Hewasconvinced thattheWTO provisions enabled countries totakerecourse to
themwhen abalance-of-payments situation wasdeemed indisequilibrium. Poland andhermajor trading
partners intheregion hadtheirownrecord ofusing thebalance-of-payments provisions. Hebelieved
thatthetypeoftreatment should beadequate forthetypeoftheproblem. Thephase-out proposal
presented byIndia wasaveryprudent onebuthewasnotconvinced thatthenine-year period was
notanexcessively longone. Hedrew attention tothepossible demonstration effect oftheproposal,
given thecrucial position ofIndia intheWTO system.
23. TherepresentativeofPakistanbelievedthatthephase-outplandemonstratedIndia'scommitment
regarding itsobligations totheWTO. Hesuggested thattheCommittee should keepinmind the
following points: economic development wastheprimary objective ofdeveloping countries, including
India. Thisobjective waswell-covered bytheprovisions ofArticle XVIII:B; policies andactions
inother areas bydeveloping countries wereofteninthecontext offacilitating thisprocess ofeconomic
development. Gradual phase-out wasintheinterest ofnotonlythecountry invoking balance-of-
paymentsrestrictionsbutalsoitstradingpartners.Asuddenshockresultingfromanimmediatephase-out
could becounter-productive; disruptions resulting fromasudden phase-out could leadtobalance-of-
payments problems inthenearfuture andnecessitate thereimposition ofquantitative restrictions, which
would notbeadesirable outcome. Price-based measures might notbeaperfect substitute duetothe
prevalence ofconspicuous consumption inmany developing countries. Hebelieved thatthemanagement
ofthephase-out planshould beseenagainst thebackground ofthesizeoftheeconomy, itspopulation,
thesizeofagrowingmiddleclassofpotentialconsumers,developmentobjectivesandtheneedtoachieve
economic reforms onthebasis ofpolitical consensus. InIndia'scase, therecent trends, adramatic
fallinexport growth, andanincrease inthetradedeficit, should bekeptinmind. These trends, coupled
withthecomposition ofIndian reserves, demonstrated theinherent instability anduncertainty inthe
balance-of-payments position. Hetherefore expressed hisGovernment 'ssupport forIndia andurged
Committee Members toshow understanding andsympathy fortheIndian position, particularly inview
ofitsgood intentions, theon-going process ofeconomic liberalization anditspolitical situation.
24. Therepresentative ofNewZealand welcomed thefactthatIndia hadnowtabled aproposed
planforthephasing outofquantitative restrictions under GATT Article XVIII:B andappreciated India's
considerable efforts indrawing upthisplan. However, heexpressed hissevere disappointment with
thephase-out planwhich fellfarshort ofmeeting theexpectations ofIndia'smajor trading partners.
NewZealand urged Indiatotablefurther proposals sothatprogress could bemade intheconsultations.
HisGovernment hadtwoprincipal concerns, bothwiththeperiod ofnineyears which NewZealand
didnotbelieve wasrealistic orjustified inthecontext ofIndia'simproved balance-of-payments situation.
While noting India'scontinued anxiety about thecurrent account situation, itwasclearthatwhile export
growth might notbemeeting expectations, theoverall external position hadcontinued tostrengthen.
Itwasclearalsothatinternational confidence inIndia'seconomic performance hadimproved, precisely
because ofthereform process andliberalization. Herecognized thatthere wasacontinued needfor
structural adjustment intheIndian economy, buthedidnotbelieve thatsuchadjustment could continue
totakeplace under GATT Article XVIII:B. NewZealand wished, onceagain, tourgetheIndian
Government togiveconsideration toashortphase-out period assuggested bytheInternational Monetary
Fund andbyIndia'strading partners. Healsowished toreiterate apoint made earlier byAustralia,
i.e.thatevenintheabsence ofquantitative restrictions Indiahadconsiderable tariffprotection available
toit.Secondly, hisGovernment wasdisappointed withtheproposal tomaintain quantitative restrictions
onmany agricultural items, possibly untiltheyear2006. NewZealand hadastrong interest inthe
agriculture sector andthishadbeenreflected inthelistsubmitted earlier toIndia. While welcoming
theliberalization ofsome oftheproducts contained inthatlistintherecently announced Export and
Import policy, mostofthekeyagricultural items ofinterest toNewZealand hadnotbeenscheduled
forliberalization intheproposed planuntiltheendofthephase-out period. Inaddition, some were
subject totheadded uncertainty ofrenegotiation under Article XXVIII. These items hadbeensubjectWT/BOP/R/32
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tobansforaverylongtimeandforNew Zealand tohave towaituptonineyears fortheirfull
liberalization along withtheexpectation ofconsiderable tariff uncertainty would notrepresent afair
andbalanced outcome tothisprocess. Inconclusion, hepointed outthatfurther trade liberalization
could onlybenefit theIndian economy. Hebelieved, speaking from experience, thattheprocess of
reform would notbeserved byextending theuseofsuchhighly trade-distortive measures asquantitative
restrictions farintothefuture. ItwasNewZealand 'sview thatIndia should takeadvantage ofthe
overall improvement initsbalance-of-payments situation todisinvoke GATT Article XVIII:B cover
andquickly phase outitsremaining quantitative restrictions.
25. Therepresentative oftheRepublic ofKorea recalled thattheIndian Government had
implemented economic reforms overthecourse ofthelastfiveyears. These reforms hadachieved
successful results interms ofGDP growth, employment, reduction ofpoverty, export increases and
lowered inflation. Considering theoverall sizeoftheIndian economy, anditspotential contribution
totherestoftheworld, those achievements wereveryencouraging. Hedidnotconsider nineyears
tobeashort phase-out period. Since India hadusedthebalance-of-payments provisions foralong
time, itseconomy hadbecome accustomed tothatsituation. Hecould, therefore, understand thatIndia
needed some timeinwhich allplayers intheeconomy could availthemselves ofafreermarket.
26. Therepresentative ofNigeria believed thatthephase-out proposal wasapositive development
which theCommittee should recognize andsupported India'stime-frame forthephase out. Where
anumber ofdelegations hadreferred toIndia'sphase-out proposal asincomplete sinceitdidnotcontain
anexplicit undertaking todisinvoke Article XVIII:B, hisdelegation wasoftheviewthatthisCommittee
should lookatIndia'sproposal within apositive context, particularly inIndia'spresentation ofadetailed
programme forphase-out inlinewiththe1994 Understanding. Withregard tocallsforanimmediate
phase-out overatwo-year period, Nigeria believed thattheCommittee should takeintoaccount the
political andsocial implications ofsuchadrastic decision. Alonger time-frame forphase-out would
enable therelevant authorities totakefar-reaching economic decisions while avoiding thepossibility
ofpolitical andsocial disruption.
27. Therepresentative ofHong Kong saidthathehadbeenveryimpressed bythetransparency
shown byIndia. Obviously, great carehadbeentaken topresent aclearpicture andtofullyinform
Members. Hewelcomed theliberalization andpublic policy initiatives currently being pursued by
India. Hong Kong, known foritsfreetrade policy andpractice, hadgeneral systemic concerns about
theuseofArticle XVIII:B which might gobeyond purebalance-of-payments needs. Hedidnot
underestimate theproblems faced byIndia inreviewing andphasing-out thequantitative restrictions
currently inplace, butfeltthatwithin thespirit ofArticle XVIII these should bephased outasquickly
asispossible.
28. Therepresentative ofElSalvador (Observer) considered thatIndiahaddischarged itsobligation
under Article XVIII oftheGATT of1994andtheprovisions oftheUnderstanding. InElSalvador 's
view, thegrowing tradedeficit andthefallinexports inIndiajustified itsrecourse toArticle XVIII:B,
which, inparagraph 8recognizes difficulties which maystemfrom suchinstability intheterms of
trade ofadeveloping country. Since theeconomic reform programme of1991 hadbegun India had
aligned itself withtheHarmonized System andlowered itsimport restrictions. India haddischarged
itsobligations innotifying itsBOPrestrictions inWT/BOP/N/11 andCorr. 1andinresponding to
theinvitation tosubmit athree-stage plantophase-out measures (WT/BOP/N/24), aplancovering
allsectors currently under restriction. Inevaluating theplan, thedevelopment goals ofIndia should
bekeptinmind aswellasthefactthattheplanwasanintegral partoftheeconomic reform planbased
onnational political consensus. Thisshould beborne inmind intheCommittee 'sdeliberations. The
representative added thatIndia hadbeen absolutely candid about notifying itsprogramme tothe
Committee andhadgiven dueconsideration inabalanced waytotheMembers oftheWTO. OnthisWT/BOP/R/32
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basis, theCommittee should conclude thatIndia haddischarged itsobligations under Article XVIII
oftheGATT andunder the1994 Understanding.
Replies from India
29. Therepresentative stated thatIndia hadapproached theprocess ofconsultation withaview
toachieving results which would satisfy everybody. Hewaspleased thatalargenumber ofdelegations
representing developing countries empathized withtheproblems India faced. Heresponded tothe
points made intwoparts. First, where specific clarification hadbeensought and,secondly, ontwo
orthree important areas. Headdressed aquestion regarding details oftherestrictions maintained for
other thanbalance-of-payments purposes which hadbeenthesubject ofinformal discussions withall
thetrading partners. Most oftheitems listed, more than95percent,werepermitted forimport subject
totheconditions indicated inthenotification; forexample, imports ofaircraft andhelicopters were
subject toacertification issued bytheDirector-General ofCivilAviation. Hewould behappy toprovide
anyfurther clarification onthemeasures notified under Article XXorXXIrestrictions. Withrespect
tothequestion astowhether thetradedataincluded services exports, exports thatwentthrough customs
were reflected, i.e.most services exports were included inthedataprovided, butnotdataontrade
conducted through electronic means. Regarding thebreakdown ofimports between investment goods
andconsumer goods, heoffered toprovide thisinformation separately. With respect toAustralia 's
comment thatIndiashould notunderestimate Australia 'stradeinterest, thishadnever beentheintention.
India hadmetfrequently withevery delegation, toensure thattheirinterests andconcerns weretaken
intoconsideration. Nonetheless, ifhecould havefullysatisfied therequests andconcerns ofallIndia's
trading partners, there would nothavebeenanyneedforconsultations. While reference hadbeen
made tosome other WTO provisions, such assafeguards, hesuggested thatIndia hadlittleexperience
inusing these provisions: e.g.while India could argue against textiles quotas, forIndia todesign a
textiles quota would bedifficult. Itwould taketimetodevelop thecapabilities required tousesome
oftheWTO provisions which some partners hadadvised. While pleased tohearthatIndia should
nothavesuchalongphase-out period because itwassuchanimportant Member oftheWTO, and
thusshould playaleadership role,hepreferred tobeconsidered anactive Member. India hadtaken
anactive interest where issues hadsystemic implications, buttheargument thatIndiaplayed aleadership
roleshould notbeusedtodenyIndia itslegitimate expectations. Itseemed thatIndia'sphase-out plan
wasunder scrutiny inthecontext of"impending events". Asanactive Member oftheWTO foralmost
50years, hebelieved thattheproposed phase-out should beviewed independently andshould notbe
linked withfuture events notrelated toIndia. Turning tothetime-frame, herecalled thatin1989the
Committee onBalance-of-Payments Restrictions gaveafairly longphase-out period -close tonine
years -toanother Asian country which hadmaintained fewer restrictions. Headded thattheagricultural
andtextiles sectors wereextremely sensitive because ofthehighruralemployment involved andthe
inability ofIndia'seconomy, atleastintheforeseeable future, toofferalternative employment. With
regard todisinvokation, itwasIndia'sintention todoeverything interms oftheWTO Agreements.
Once theCommittee andtheGeneral Council hadapproved India'sphase-out plan, andIndia
implemented thephase-out planasagreed, itstrading partners would havelegalcertainty, aswould
Indiaasfarasinsurance against possible other WTO actions wereconcerned. Hequoted paragraph 13
oftheUnderstanding: ..."in those cases inwhich atimeschedule hasbeenpresented fortheremoval
forrestrictive measures, taken forbalance-of-payments purposes, theGeneral Council mayrecommend
thatinadhering tosuchatime-schedule theMember shallbedeemed tobeincompliance withhis
GATT 1994obligations. Whenever theGeneral Council hasmade specific recommendations, therights
andobligations ofMembers shallbeassessed inthelightofsuchrecommendations ...". Heasserted
thatthisprovided legalcertainty tobothsides, byensuring thatoncethephase-out planwasagreed,
India would adhere tosuchaphase-out planwhich would provide certainty foritstrading partners
andwhich, forIndia, would offerinsurance against certain actions byitstrading partners. Helooked
forward toaconstructive dialogue andsuccessful conclusions intheconsultations. While someWT/BOP/R/32
Page11
delegations hadstated thatthephase-out period wasafavour being granted toIndia, India viewed the
process ofconsultations inaspirit ofpartnership andexpected thatothers would alsoseetheprocess
inthesame spirit sothatasolution could befound.
30. Following informal andbilateral meetings, atwhich thelength ofthephase-out planwas
discussed, theChairman sawnoprospect ofarriving ataconsensus inthetimeavailable, despite the
flexibility andconstructive spirit demonstrated byallparties concerned, andasignificant narrowing
ofthegapbetween Members 'positions. Hetherefore proposed aperiod ofreflection andthatthe
Committee reassemble on30June.
31. When theCommittee reassembled, andaftertheChairman hadopened thediscussion, the
representative ofIndia made thestatement attached asAnnex II.
32. Therepresentative oftheEuropean Union appreciated theeffort byIndia totryandbridge
thegap,butconsidered thatitwasonlyafirststep. While recognizing thatthefundamental orientation
ofIndian trade policy wasliberalization offoreign trade, there werelimits toflexibility: thescenario
three, plusthree, plusoneseemed stilltobefarfromwhathadbeenexpected fromIndia. TheEuropean
Union wasnowwilling toaccept thetransitional period offiveyears achieved afterverydifficult internal
negotiations andre-evaluation ofthesituation. Theelimination ofrestrictions should havetaken place
twoyears agoand,ifnotnow, afterabrief transition period. Although fiveyears could notbe
considered abrieftransition period, theEuropean Union would bewilling toconsider thissatisfactory.
With regard tothequestion oflegalcover, theEuropean Union could beflexible inorder toarrive
atasuccessful conclusion. Itwasinthelightofthearguments regarding development policy thatthe
European Union could condone aphase-out period offiveyears, although hethought thattheCommittee
wasnottheplace todiscuss economic anddevelopment policy. Heinvited theIndian delegation to
review itsposition.
33. Therepresentative oftheUnited States acknowledged thattherevised proposal suggested a
shorter timeperiod butadded thatitwould come asnosurprise toanyone thattheUnited States found
theplanunsatisfactory. Essentially, theCommittee found itself attheendofatwo-year process. As
noted bytheEuropean Union, theconsultations began twoyears ago; atthattimetherepresentative
oftheIMFsawnoreason whythemeasures could notbeeliminated within twoyears. Twoyears
latertheCommittee wasstilldiscussing atransition period. TheU.S.hadtriedtoshow flexibility
andtounderstand theconcerns ofIndia andhadhoped thatthisprocess would result inasatisfactory
outcome. TheUnited States hadhoped thatthedelegation ofIndia would haveusedthethree-week
recess period toreflect ontheimplications ofnoagreement andpresent aplanthatwould beacceptable -
areasonable plan. Certainly liberalization wasalways abitter pill,butonecould notescape thefact
thattherewasnobalance-of-payments cover forthese measures. There hadbeenasignificant increase
inreserves in1996 and1997 ofalmost US$6 billion. TheIMFhadconfirmed inJanuary thatthere
wasnothreat tothebalance-of-payments situation andthree weeks earlier, theIMFreiterated thatits
answers tothequestions posed inJanuary would nothavechanged. Under thecircumstances, seven
years wasnotareasonable period forthephasing-out ofmeasures inconsistent withtheWTO. Therefore
hisdelegation hadnochoice buttoreserve itsrights.
34. Therepresentative ofAustralia deemed thatthegapbetween India anditstrading partners had
narrowed andthatitwould beapityiftheremaining gapcould notbebridged. Australia hadshown
flexibility initsapproach tothisissue andencouraged India todolikewise. Asothers hadnoted,
itwasindisputable thatIndia'sbalance-of-payments andreserve position hadimproved tosuchanextent
thatthere could nolonger beanyWTO grounds forthemaintenance ofquantitative restrictions. The
current offer ofseven years byIndia, although awelcome improvement ontheoriginal offer atthe
lastCommittee meeting, wasstillunacceptably long. Many oftheitems ofparticular significance toWT/BOP/R/32
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Australia would presumably fallintheseventh year. Australia wasprepared totakeaflexible approach
tothephase-out timetable andcould consider fiveyears, provided thatagricultural items received more
equitable treatment inthephase-out package. And, although notstrictly relevant tothepresent
discussion, Australia would needtoseeanagreement onasatisfactory basistohandle theArticle XXVIII
negotiations. Insum, hestrongly urged India toimprove itsofferandrepeated thatIndia should not
underestimate Australia 'strade interests inthismatter.
35. Therepresentative ofNewZealand, while appreciative oftheefforts thatIndia hadmade and
theflexibility shown, didnotseemuch improvement intheproposal. Flexibility depended ona
comprehensive approach: agricultural items, stillsubject toArticle XXVIII negotiations, should be
incorporated intothesame timeframe: afive-year period. Fiveyears wasnotahasty liberalization,
butaverygenerous period oftimeforremoving themeasures thatNewZealand considered inconsistent
withWTO provisions. Hehoped thatIndiawould reconsider itsproposal inthelightoftheconsiderable
flexibility thatitstrading partners hadshown.
36. Therepresentative ofSwitzerland viewed thenewproposals asanimprovement compared to
theplanpresented during thelastmeeting, butemphasised thathisGovernment 'sview ofthe
balance-of-payments situation inIndiahadnotchanged. Heagreed withtheIMF'sopinion according
towhich restrictions applied byIndiaforreasons ofbalance-of-payments difficulties -difficulties which
didnotexist, asthestatistics hadshown -could bedismantled overashortperiod oftwotothreeyears.
Aspreviously indicated, Switzerland wasready totakeintoaccount thespecial situation ofIndia and
envisage additional flexibility toagree onaperiod offourorfiveyears, which would constitute afavour,
given thatthemeasures hadnobasisinWTO Agreements. Heurged theIndian delegation tocontinue
along thispathinorder toreach atimeframe acceptable tohisdelegation. ThefactthattheIndian
measures hadnobasis inWTO Agreements, headded, should bestated clearly intheconclusions of
theCommittee.
37. Therepresentative ofEgypt expressed hisappreciation forthespirit offlexibility shown by
India concerning theshortening oftheperiod ofimplementation ofthephase-out plan. Hebelieved
thatgiving thisreasonable period oftimewould ensure thefullimplementation oftheplanandwould
helptoavoid anyunforeseen setbacks.
38. Therepresentative ofTunisia appreciated theefforts undertaken byIndia inorder toshorten
theperiod ofthephase-out plan. Astheprocess ofdismantling required aperiod ofadjustment, he
supported therequest made byIndia.
39. TherepresentativeofHungaryconsideredtheproposedphase-outprogrammereasonable,taking
intoaccount thefragility inIndia'sbalance-of-payments situation, itsdevelopment needs andobjectives
andtheachievement ofitseconomic reform. Hungary supported theproposed phase-out programme
fortheelimination ofbalance-of-payments-related quantitative restrictions.
40. Therepresentative ofSriLanka feltthattwoweeks ofsoul-searching appeared tohavehad
positive results. Therevised phase-out plansignificantly reduced thephase-out period ofIndia'scurrent
quantitative restrictions toeffectively asix-year period asopposed tonineyears. Itappeared thatIndia
hadbrought forward anumber ofitems under thethirdstage ofitsearlier plantothesecond stage,
while keeping amarginal number ofitems, currently subject tolowlevels oftariffs, toanextra year.
Thelatestphase-out planhadbeendrawn upinasystematic manner allowing Indiatomanage itsbalance-
of-payments restrictions without having toseekrecourse tointensification ofrestrictive measures during
thephase-out period. Thenewplanwasbothabalanced andaconstructive one,inkeeping withthe
development needs oftheIndian economy inthelongterm. Henoted theIndian delegation 'sreference
totheserious political andsocial ramifications which could result fromfurther liberalization ofitstradeWT/BOP/R/32
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regime, considering these measures byacoalition government, acourageous steponthepartofIndia.
Hisdelegation wasoftheviewthatthemodified Indian phase-out planwasreasonable andfulfilled
India'sobligations.
41. Therepresentative ofVenezuela wished tobeassociated withtheexpressions ofrecognition
foralltheefforts made byIndia throughout theconsultations andinparticular withitslatest proposal.
Inconnection withthelatter, headded thattheguarantees given byIndia thattheimport restrictions
would beeliminated inamaximum ofsixtoseven years demonstrated theflexibility ofthisGovernment,
which Venezuela could accept ingood faith. Hewassatisfied thatthedismantling oftheimport
restrictions would notbeconcentrated inthelastyears oftheperiod butrather thatitwould bedone
gradually andwould cover alltheproducts ineachoneofthesesectors foreachphase ofthedismantling
ofthese restrictions. Healsoconsidered thatwiththecomplete elimination onthepartofIndia of
theserestrictions, theywould havefulfilled theobligations ofparagraph 13ofthe1994 Understanding.
Finally, heexpressed theview thatnon-recourse tothese provisions would severely unbalance the
equilibrium ofrights andobligations fordeveloping countries intheWTO.
42. TherepresentativeofCubajoinedintheviewthatIndiahadfulfilledallitscommitmentsvis-à-vis
theCommittee byreducing theperiod fortheelimination ofquantitative restrictions inatimespan
thatwasnecessary andlogical, given thatprecipitate action could cause unforeseen difficulties.
43. TherepresentativeofNorwayrecalledthatduringthelastroundofconsultations,hisGovernment
hadcalled forsubstantial reductions ofthenine-year phase outplanthatwasthenpresented, having
reviewed theIMFanalyses thoroughly andfound thatthebasisformaintaining quantitative restrictions
wasmeagre atbest. Henoted thattheIMFcalled foraremoval ofquantitative restrictions during
arelatively short period; hisdelegation didnotconsider aphase-out planofseven years tobejustified
andwould haveproblems inaccepting thisastheresult ofthese consultations. Hetherefore appealed
toIndia toreconsider itscurrent position.
44. Therepresentative ofPerupointed outthatthegapbetween themostrecent proposal byIndia
andthedemand forafive-year phase-out didnotconstitute amajor difference. Inhisview, thebalance-
of-payments situation showed fragility suggesting thataperiod ofsixtoseven years wasappropriate.
Withrespect tothequestion ofdisinvocation, headded thatithadrather serious systemic implications.
45. Therepresentative oftheRepublic ofKorea stated thatIndia needed some period oftimeto
phase outallrestrictions during which itseconomy could adapt toamore openmarket andhoped that
theCommittee could finalize thislongconsultation.
46. Therepresentative ofJapan, while grateful forIndia'sefforts inimproving itsoffer, feltthat
afive-year period wasnotashort period andurged India tomade additional efforts tofurther narrow
thegap.
47. Therepresentative ofThailand, speaking onbehalf ofASEAN, symphathized withIndia on
itsattempt tosatisfy allrequests ofMembers andsupported thephase-out planthatIndia hadtabled,
given theuncertainty India faced initseconomic situation aswellasitspolitical setting.
48. Therepresentative ofBrazil reiterated theBrazilian pointofviewthatthebalance-of-payments
situation ofIndia wasnotirreversible, thatitwasactually quite complex anddeserved tobetreated
assuch. Healsobelieved thattheapproach towards India'ssituation should beflexible, particularly
inlightoftheliberalizing efforts undertaken bytheIndian Government. India hadshown good will
andaconstructive spirit. Hesawthatthere wasasignificant gapbetween theIndian proposal andWT/BOP/R/32
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theposition ortheaspirations ofsome Members, buthoped thatitwasnotunsurmountable andthat
common ground could befound leading toafavourable outcome oftheconsultations.
49. Therepresentative ofCanada thanked theIndian delegation forthework performed overthe
pastfewweeks intrying tocome upwithaproposal thatmight meetothers 'concerns. While recognizing
thattherehadbeensome shiftforward intheproducts ofmajor interest toCanada, agricultural products
remained inthefinaltranche ofwhat wasaseven-year period. Intheview oftheIMF, thebody
legally responsible formaking thedetermination, therewasnoserious threat ofadecline inthemonetary
reserves oftheIndian Government. Thus, evenatwo-orathree-year phase-out planwould notbe
given inrecognition thatIndiawasfacing abalance-of-payments problem, butbecause therewassupport
fortheprocess ofliberalization byIndia, notbecause there wasalegalobligation todoso.Canada
wasprepared toconsider something along thelinesof4½tofiveyears ifthere wereconsensus, but
would havetoseewhatproduct coverage shifts there might be.Regarding disinvocation, hefound
curious andincomprehensible theremark made earlier thatforIndia tostateexplicitly thatitwould
nolonger haverecourse toArticle XVIII would beupsetting thebalance ofrights andobligations of
WTO Members. Should Indiafacearealbalance-of-payments problem, itwould always havetheright
toinvoke again Article XVIII. Meanwhile, allparties required some kindoflegalcertainty, inhis
viewthrough some formofawaiver procedure. Inconclusion, hesaidthatCanada fullyrecognized
thattherewereenormous domestic political sensitivities which iswhyCanada wasprepared togoalong
with aphase-out period, even though India didnotfaceabalance-of-payments problem. He
acknowledged thethreat ofstructural adjustment andensuing social problems, butrecognizing that
Indiacould always reinvoke balance-of-payments provisions oruseother mechanisms toprotect itself,
considered thataphase-out offourtofiveyears would beappropriate.
50. Therepresentative ofNigeria believed thatthethree, plusthree, plusoneproposal would give
Indiasufficient room forphase-out ofthequantitative restrictions and,atthesametime, avoid political
andsocial disruption ofthestatus quo.Inconsidering India'srevised plan,thepriorities ofdevelopment
objectives andtheneedtomeetthebasic needs ofthepeople andtheprocess ofstructural adjustment
ofdeveloping economies should bekeptinmind. India'seconomy wasundergoing arigorous process
ofreform andadjustment andtheWTO should beseentobesupportive ofsuchboldmeasures. He
believedthattheCommitteeshoulddemonstrateflexibilitybyaccommodatingIndia'sproposalforphase-
outoveraseven-year period.
51. Therepresentative ofIndia pointed outthatAnnex 2ofWT/BOP/N/24 documented allthe
liberalization measures undertaken sinceDecember 1995tothepresent, evidence that,inparallel with
theconsultation begun inDecember 1995, India hadbeenliberalizing products. Since January 1997,
400products hadbeenliberalized; irrespective ofwhatwashappening intheCommittee, theprocess
ofliberalization wascontinuing. Asfarashewasconcerned, onceaphase-out planwasagreed and
implemented, legalcertainty wasprovided forbothIndia anditstrading partners inparagraph 13of
theUnderstanding. India, hecontinued, hadshown considerable flexibility inrevising itsnine-year
plantoaseven-year plan, inwhich theseventh yearwould contain aminimum number ofproducts.
Flexibility should notbeone-sided, andIndia haddone itsbit.While heappreciated theconcerns
expressed bycertain Members, thissituation required thattheWTO besupportive oftheprocess of
liberalization undertaken bycountries likeIndia. Byshowing some extra flexibility orconsideration,
theWTO could sendasignal toIndia and,inaway, toalldeveloping countries thattheWTO was
appreciative oftheproblems faced bydeveloping countries, andthatwhen theyfaced special situations
ordifficulties, theWTO would provide thenecessary support rather thancreate anyproblem. He
appealed tothose whowerenotcompletely satisfied withtheseven-year phase-out plantoappreciate
India'senormous difficulties andtoshow additional flexibility sothattheCommittee might arrive at
aconsensus decision.WT/BOP/R/32
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52. Therepresentative oftheEuropean Union believed thattheEuropean Community hadshown
great flexibility towards India andnowhadreached itslimits. Heproposed thattheEuropean Union
could giveupitsinitial request oftwoyears (ontopofthetwoyears thathadelapsed) andcould go
asfarasfiveyears, provided thatthestructure forelimination ofquantitative restrictions wasacceptable.
During thisperiod offiveyears, measures should becovered bytheappropriate legalprovisions, i.e.
awaiver under which Indiashould notinvoke Article XVIII:B. Ifthiswasnotacceptable, hesuggested
thattheconsultations terminate andMembers seekother ways tosolve thisproblem.
53. Therepresentative oftheUnited States seconded theviewthatflexibility hadnotbeenaone-way
street. Allthemajor participants hadmade theeffort toarrive atacompromise, butthelimits of
flexibility hadbeenreached. Allsides hadshown flexibility butasignificant gapremained: there
wasnoconsensus.
54. Therepresentative ofAustralia sought clarification astowhether theIndian delegation could
reacttothefive-year proposal towhich therepresentative ofIndia responded thatIndia'sreaction was
thesame asAustralia 'sreaction totheseven-year plan.
55. Following asuspension ofthemeeting toallow informal exchanges, theChairman reported
totheCommittee thathehadconcluded thatitwould notbepossible toclosetheremaining gapbetween
delegations 'positions. Hetherefore noted thatintheabsence ofspecific proposals forrecommendation
bytheGeneral Council, theCommittee 'sconclusion should record thedifferent views expressed in
theCommittee asrequired byparagraph 13oftheUnderstanding.
56. Therepresentative ofIndia delivered hisclosing statement (Annex III).
57. Therepresentative oftheEuropean Union stated thattheEUhadbeenready towork onthe
basisofaninformal proposal bytheChairman andregretted thatthepolitical willtoreach adefinitive
result hadbeenlacking. Referring tothepoint made byIndia thatGovernments werethebestjudge
astowhether thelevelofreserves wasappropriate ornot,herecalled thatArticle XV,paragraph 2
oftheGeneral Agreement states that"inreaching afinaldecision incases involving thecriteria set
forthinparagraph2(a)ofArticleXIIintheparagraph9ofArticleXVIII:B,CONTRACTINGPARTIES
shallaccept thedetermination oftheFund astowhatconstitutes aserious decline inthecontracting
party'smonetary reserves, averylowlevel ofitsmonetary reserves orreasonable rateofincrease
inthemonetary reserves, andastothefinancial aspect ofother matters covered inconsultation insuch
cases". Nordidheshare, aspreviously stated, theinterpretation bytheIndian delegation ofthe
Understanding inconnection withArticle XVIII:B. Inconclusion, heobserved thattheCommunity
wasavailable atanytimefordiscussion withtheIndian authorities inorder tofindasatisfactory solution
onthebasis ofconsensus.
58. Therepresentative ofCanada joined theEuropean Community inreferring toArticle XV:2,
"thattheCONTRACTING PARTIES shallaccept thedetermination oftheFund aswhatconstitutes
aserious decline inthecontracting party'smonetary reserves ...". Canada hadmade itclear that,
intheirview, India didnotfaceabalance-of-payments problem. Rather, inorder tosupport India's
trade liberalization efforts, which would beinIndia'sownbestinterests, Canada hadgone beyond
whatwasrequired under theWTO. Hestated clearly that,inCanada 'sview, thequantitative measures
inplace were inconsistent withArticle XVIII:B oftheGATT.
59. Therepresentative oftheUnited States aligned himself withtheviews taken onArticle XV:2
noting thattheconclusions intheJanuary consultations hadspecifically indicated thattheCommittee
tooknoteoftheIMFstatement thatIndia'scurrent monetary reserves were notinadequate andthat
therewasnothreat ofserious decline inIndia'smonetary reserves. TheCommittee thusplaced quiteWT/BOP/R/32
Page16
ahighvalue ontheIMF'sviews onthese matters. Itwasclear tomany thatthere wasnolonger a
balance-of-payments problem justifying further invocation ofArticle XVIII:B, nordidherecall the
Indian delegation denying this. Nothing intheUnderstanding, inparticular paragraph 13,changed
therights andobligations ofMembers withrespect toArticle XVIII, which, inparagraph 11states
thatmeasures beeliminated when conditions nolonger justify their maintenance. Under the
circumstances, headded thatallrights werereserved, andagreed withtheChairman 'sproposal that
theconsultations beconcluded onthebasis ofareport reflecting thedifferent views ofMembers.
60. Therepresentative oftheRepublic ofKorea expressed great disappointment toseethatno
agreement hadbeenreached, andasked which, ifany,phase-out planwould beimplemented.
61. Therepresentative ofJapan explained that,inspiteofmaximum flexibility, hecould notaccept
theIndian proposal. Aphasing-out period ofseven years could notbeseenasshort.
62. TherepresentativeofAustraliaassociatedhisdelegationwiththecommentsmadebytheEuropean
Union, theUnited States, Canada andJapan.
63. Therepresentative ofBrazil addressed thequestion ofdisinvocation ofArticle XVIII. He
understood thattheapproval ofaphase-out planrecognizes thataMember faced aserious balance-of-
payments situation andunderlines thatthecountry cannot immediately doaway withallrestrictions
without serious implications toitsbalance ofpayments. Brazil subscribed fully totheview that
GATT 1994 provisions ortheUnderstanding donotrequire Members todisinvoke Article XVIII:B.
With regard toArticle XV:2 ofGATT 1994, herecognized thattheIMFplayed animportant role
intheconsultations, butabalance-of-payments situation dealtinvarious shades ofgrey, inwhich a
single statistic oropinion should notbedecisive. TheCommittee 'spurpose was,inhisopinion, to
evaluate allcircumstances pertaining tothebalance-of-payments situation, many ofwhich clearly went
beyond theparameters setoutinArticle XV:2 concerning theIMF'sroleintheconsultations.
64. TherepresentativeofSwitzerlandalsoassociatedhimselfwiththecommentsbytheCommunities,
theUnited States, Canada andAustralia concerning thesubstance andinterpretation ofArticles XV:2
andXVIII:B.
65. Therepresentative ofNewZealand alsoassociated hisdelegation withtheviews expressed
bytheEuropean Union, theUnited States, Australia, Japan andothers whodidnotbelieve thatIndia's
balance-of-payments restrictions were justified byArticle XVIII:B.
66. Therepresentative ofPerustated fortherecord thathisGovernment agreed withBrazil on
thequestion ofdisinvocation andtheother points made byBrazil.
67. Therepresentative ofPakistan regretted thattheproblems ofadeveloping country likeIndia
hadnotbeenassessed intherightperspective and,likePeru, joined Brazil intheviews expressed.
68. Inresponse tothequestion regarding thecurrent status ofthephase-out plan,therepresentative
ofIndiasaidthathewould consult withhisGovernment andinform theGeneral Council ofthedecision.
Hereserved hisGovernment 'sposition.
69. TheChairman, noting thattheSecretariat would produce arecord ofviews expressed, ashe
hadalready proposed, closed themeeting.WT/BOP/R/32
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ANNEX I
Statement bytheRepresentative ofIndia attheMeeting of10-11 June
Mr.Chairman, distinguished Members oftheCommittee, distinguished representative ofthe
IMF, andfriends fromtheSecretariat, Iamindeed veryhappy tobehereforthisimportant meeting
oftheBalance ofPayments Committee formaking theseopening remarks onbehalf oftheGovernment
ofIndia.
Inthelastmeeting oftheCommittee on20January 1997, itwasdecided toresume consultations
inJune1997. Fortheresumed consultations, India wasinvited topresent aplantoeliminate the
measures notified under Article XVIII:B, andtoconclude theconsultations consistently withallrelevant
WTO balance ofpayments provisions. Indrawing upitsplan, India wastogivedueconsideration
totheinterests ofWTO Members inabalanced manner.
India haspresented, Mr.Chairman, wellontime, aphase-out planwhich hasbeencirculated
among allMembers. Thephase-out planpresented byusforelimination ofmeasures notified under
Article XVIII:B iscomprehensive, andexpresses ourcommitment toremove allquantitative restrictions
progressively. Perhaps, thephase-out planisverydetailed, butthisreflects ourobjective tobedirect,
fullytransparent andunambiguous. Iwillalsoliketogoonrecord that, before drawing upthisplan,
wegavedueconsideration totheinterests ofWTO Members inabalanced manner.
Asabackgrounder, letmeinform thatamong thesignificant developments onthepolicy front
since wemetlaston20January 1997istheUnion Budget, which waspresented on28February 1997,
andwasimmediately acclaimed bythefinancial community asa"landmark" budget. TheBudget
announced thattheprocess offiscal consolidation, which hadbeenunder wayin1996-97, willcontinue
in1997-98. Italsoannounced anendtotheautomatic monetisation ofdeficit through thesystem of
adhoctreasury bills. Budget 1997-98, yetagain, demonstrated theGovernment ’sabiding commitment
tomeasures aimed atachievement andmaintenance ofmacroeconomic stability.
Inaboldanddetermined bid,theBudget lowered ratesofdirect taxacross-the-board onpersonal
income, bringing thepeakratedown from40percentto30percent. Thisisexpected tosignificantly
enhance disposable incomes. Dividends fromdomestic companies, withtaxdeducted atsource, were
fullyexempted from personal income tax.Theeffective rateofcorporate taxonIndian companies
wasslashed from 43percentto35percent--amove thatisexpected togiveafillip tothesupply
sideoftheeconomy.
Mr.Chairman, letmetouch uponthepolicy aspects regarding tradeliberalisation. Thisyear,
theBudgetcontainedsignificantmeasuresforexternalliberalisationoftheeconomy.Therateofcustoms
dutyoncapital goods wasbrought down from 25percentto20percent, andthose onmany items
reduced significantly. Ihopeourtrading partners willviewthese dutyreductions withconsiderable
satisfaction.
Since wemetlastinJanuary, wehavecontinued withourpolicy ofprogressive withdrawal
ofquantitative restrictions. Infact,since February 1997, wehaveremoved quantitative restrictions
on400tarifflinesinjustfourmonths. Iwould liketoaddthatevenbefore theJanuary 1997meeting,
wehadremoved during 1996quantitative restrictions onaround 200tariff lines. Thisaction onour
partisample proof, ifrequired, ofourcommitment toprogressively withdraw quantitative restrictions.
Thus, evenbefore weformally presented thephase-out plan, wehadeliminated, autonomously,WT/BOP/R/32
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inthelastoneyear, quantitative restrictions inrespect ofaround 600items. Thisdoesnotinclude
theintermediate liberalisation effected through thespecial import liberalisation route.
Thephase-out plannowpresented isbased ontheconfidence thatifwecalibrate thewithdrawal
ofquantitative restrictions carefully, itshould bepossible tomanage ourbalance ofpayments position
without having totakerecourse tointensification ofrestrictive measures during thephase-out period.
Theneedforcaution arises because ofthedifficult external trade environment. Trade liberalisation
measures undertaken since 1991-92 haveresulted inasurge inimports bynearly 100percentduring
thelastfiveyears; inthesame period, exports havegoneupbyonly86percent. Ourtrade deficit
hasbeenwidening every year, andislarge asaproportion ofourtotalexport turnover. Thetrade
deficit hasfurther widened during thecurrent financial yearstarting April 1997. Thetrade deficit
wasover halfabillion USdollars onanexport turnover ofjustUS$2.5 billion inApril 1997. The
difficult external tradescenario isduetomany factors, including adeceleration inthegrowth ofworld
trade andmarket access difficulties. However, thisisnottheoccasion toelaborate onthisaspect.
Thecomponents ofthebalance ofpayments indicate adegree offragility, andpoint totheneed
forclosemonitoring. Themajor reason forthisfragility, aspointed outearlier, istheexport situation;
export growth hasdecelerated sharply during thelastoneyear. After asustained growth of18-20
percent ineachoftheprevious three years, inUS.dollar terms, thegrowth declined to4percent
in1996-97. When weconsider onamonth-over-same-month-a-year-ago basis, thepicture iseven
more worrisome: after0.2percentgrowth inFebruary 1997, exports actually declined by8.5per
centinMarch 1997, andbyover10percentinApril 1997. Unfortunately, thefactors which have
caused theexport decline, including thedeceleration inworld trade growth maycontinue toconstrain
ourexports inthenearfuture aswell. Themarket access constraints appear tocontinue, ifnotworsen.
Second, therecent improvements intheoverall balance ofpayments areprincipally duetoinward
remittances fromIndians residing overseas, NRIdeposits andportfolio investment. Asthehistory
ofthelasttenyears demonstrates, these arenotsecure sources ofbalance ofpayments financing.
Third, there hasbeenarapid reduction incustoms tariffs onalarge number ofitems inthelastsix
years ofreform. Theweighted average tariff rate,according toWorld Bank calculations, hascome
down from87percentin1990-91 to20.3percentaftertherecent Budget. Thisreduction incustoms
duty, combined withtheremoval ofquantitative restrictions onmore than75percentofthetarifflines,
haveimparted anupward thrust toimports, which ismanifest intheimport growth ofthelastfew
years. Thus, inApril 1997, thelatest month forwhich trade dataareavailable, relative tothesame
month ayearago,exports declined byover10percentwhile non-petroleum imports grew byover
6percent. Fourth, ourself-reliance index forpetroleum, which measures theproportion ofour
petroleum requirements thatismetthrough domestic production ofcrude, hasdeclined from 55per
centin1991-92 to40percentin1996-97. Theincreased dependence onimported crude coupled with
increasing international priceofoilresulted inaburgeoning oilimport billinthelastfewyears. Import
ofpetroleum andpetroleum products for9consecutive months ending December 1996 grew byover
41percentonaverage. Lastbutnottheleast, letusnotforget thatdespite therecent improvements
inourdebtprofile, wecontinue tobeamoderately indebted country bytheWorld Bank'sclassification.
Recent indicators ofeconomic performance havefallen somewhat short ofourexpectations.
Weended theyear1996-97 withanestimated GDPgrowth ofalittleabove 6percent,andanaverage
annual inflation rateofbelow 7percent. Although agriculture rebounded from itslowof1995-96,
there aresigns ofaslowdown intheindustrial sector in1996-97. Inthefirsttenmonths
(i.e.April-January) ofthefinancial year1996-97, theindex ofindustrial production grew byonly
7.6percentoverthesame period ayearago. Inthefirsttenmonths oftheprevious year,i.e.,
1995-96, thecorresponding growth ratewas11.7percent.WT/BOP/R/32
Page19
Iwould liketoalsoaddthatthecurrent foreign exchange reserves position should beviewed
inthecontext offuture development needs. Ithasbeenestimated thatIndia requires $115billion
to$130 billion tomeetinfrastructure development costs until 2000-2001, andanother $215 billion
during thenextfiveyears, inorder toachieve reasonable ratesofgrowth envisaged byustosustain
thereform process. Thisimplies alarge increase inimports andcurrent account deficit inyears to
come. Itmaybementioned herethatArticle XVIII:B isclosely related todevelopment needs asit
provides forthemaintenance ofquantitative restrictions forbalance ofpayments purposes “inamanner
whichtakesfullaccountofthecontinuedhighlevelofimportslikelytobegeneratedbytheirprogrammes
ofeconomic development ”.
Thephase-out planthatwehavepresented tothisCommittee balances thetwinconsiderations
ofprogressive removal ofquantitative restrictions onimports, andavoidance ofundue risks tothe
balance ofpayments within ouroverall programme foreconomic development. Onthefirstaspect,
wehaveconsistently maintained thatwearecommitted toremove theremaining quantitative restrictions
onimports andthephase-out planpresented istheconfirmation ofourcommitment. While Ihave
already pointed outwhythebalance ofpayments situation needs careful monitoring, allow metoexplain
thelatter consideration. Thebalance ofpayments crisis of1990-91, aswellasthereserve lossof
US$3 billion in1995-96, arestillfresh inpublic memory. Wedonotwanttoriskanyprecipitate
decline inourreserves triggering abalance ofpayments crisis. TheIndian reform process hasbeen
based onthesolidfoundation ofpopular consensus andanyintensification ofbalance ofpayments crisis
willbeasetback tothisreform process andtrade liberalisation.
India'sproposal foraphase-out period ofnineyears should beviewed inthecontext of
flexibility given todeveloping countries formaintaining quantitative restrictions under Article XVIII:B
andthesensitivity andsignificance ofagriculture andtextiles sectors. Itisaknown factthatover180
million ofIndia'slabour force depend onagriculture fortheirlivelihood withlowaverage earnings.
Likewise, about 40million people areemployed inthetextiles sector which isalsomostly inthe
unorganised sector. Import flows unless carefully monitored andcalibrated could affect thedomestic
agricultural price structure andfoodsecurity ofthecountry apart from causing unemployment and
balance ofpayments problems.
AsIhadmentioned earlier, thephase-out planpresented byusiscomprehensive asitcovers
allsectors ofindustry including textiles, andagriculture. Itiswellknown thatwehavehistorically
bound some ofouragricultural tariffs atverylowratesandthatwedidnot,atthetimeofUruguay
Round negotiations, increase these bindings. Wehaveinitiated necessary action forincreasing the
bindings ofthoseagricultural items which arebound atverylowlevels. Inthelaststageofourphase-out
plan, wehaveincluded eventhose agricultural products which arebound atverylowlevels. This
isanactoffaith. Members would appreciate thatitwould notbepossible forIndia toremove
quantitative restrictions onsuchitems before increasing thebindings toacceptable levels. Aswehad
indicatedinourcommunicationforwardingthedocumentationforcurrentconsultations,wehaveincluded
these products inthephase-out plansubject toasatisfactory conclusion ofArticle XXVIII negotiations
atanearly date.
Mr.Chairman, ItrusttheMembers oftheCommittee would appreciate thatbypresenting a
phase-out plan, India hasundertaken amomentous stepforward forprogressive elimination ofall
quantitative restrictions overareasonable period oftime. Itwould beseenthatourphase-out plan
iscomprehensive, balanced andnotback-loaded. Iwould alsoliketomention inthiscontext thatwithin
thethree yearperiod ineachphase there willbeliberalisation every year. Itisnosecret thatwehad
presented thisphase-out planafterconsiderable amount ofinternal debate within thevarious systems
inourcountry; hence, weareconfident ofbuilding upthenecessary consensus forthephase-out
planthatyouhavebefore you. AsMembers areaware, India hasbeenconsistently onthepathofWT/BOP/R/32
Page20
reformsandliberalisationsince1991,andthephase-outplanpresentedtotheCommitteetodayrepresents
another major milestone inIndia'sliberalisation programme. Wedorecognise thatsome ofourtrading
partners might feelthattheperiod ofphase-out programme, from theirperspective, isalittlelong.
However, Iamsurethateventhesetrading partners would appreciate theneedtoensure thatthegeneral
perception inIndiaabout theliberalisation programmes becomes increasingly positive. Thisobjective
canbehelped byadopting agradual process ofremoval ofquantitative restrictions andavoiding
precipitate action involving avoidable risks. Furthermore, wehavebeenattracting foreign investment
onthebasisofourpolicy reforms, andahealthy balance ofpayments situation iscritical tothecontinued
confidence ofinternational investors inourcountry.
Mr.Chairman, before concluding, Iwould liketoemphasise thatIndia hascomplied withits
obligations under Article XVIII:B andfulfilled theexpectations oftheCommittee. Thephase outplan
iscomprehensive, complete andtransparent.
AsMembers arefullyaware, Indiareposes strong faithinthemultilateral trading system which
theWTO represents. Members would recall thatonanumber ofoccasions theIndian delegation has
stressed theimportance ofthemultilateral trading system providing asupportive environment to
developing countries undertaking liberalisation measures. TheCommittee hasanopportunity today
todemonstrate totheoutside world thatitiscapable ofbeing sensitive totheconcerns ofcountries
likeIndia andthatitalsohastheresilience tofindequitable solutions toproblems. Welookforward
toaconstructive dialogue andthesuccessful conclusion ofthese consultations.
Thank you.WT/BOP/R/32
Page21
ANNEX II
Statement made bytheRepresentative ofIndia attheMeeting of30June-1 July1997
Mr.Chairman,
Youwould recall that,when youadjourned themeeting oftheCommittee intheafternoon
ofthe11thJune1997, youhadproposed aperiod ofreflection andhadsuggested thatweshould pick
uptoday where weleftoffonthe11th. Mr.Chairman, inthelightofyouradvice, wehavecarried
out,atalllevels, are-evaluation ofourposition. Wehave, extensively re-examined thelistofitems
underquantitativerestrictionsforbalanceofpaymentspurposes.Subsequently,wehavealsoheldseveral
meetings withourtrading partners andexplained therationale andjustification forthephase-out period
sought byus.Wefeelthatourtrading partners haveshown understanding oftheIndian position.
Mr.Chairman, wehadpresented on19thMayaplan, fortheelimination ofquantitative
restrictions maintained under theprovisions ofArticle XVIII:B, spanning nineyears inthree phases
ofthree years each. During thedeliberations oftheCommittee onJune10thand11th1997, youwill
recall thatalltheMembers hadappreciated India’scommitment toeliminate quantitative restrictions
overaperiod oftime. Members hadalsovoiced theirappreciation ofthecomprehensiveness ofthe
planaswellasitstransparency. However, some Members hadexpressed some concern about the
length ofthetimeperiod overwhich residual restrictions would beeliminated. Taking intoaccount
theviews expressed bysome ofourtrading partners andtherequests made bythem, Iampleased
tosaythatwehavedecided toconsiderably modify theschedule. Effectively, mostoftheitems now
under quantitative restrictions forBalance ofPayments purposes willbeeliminated intwophases, each
ofthree years. Theduration ofthethirdphase willbereduced tojustoneyearandonlyaverysmall
number ofitems ofhighsensitivity andthose items which arebound atzeroorlowrateswillberetained
forelimination inthetruncated thirdphase. Iamsurethatallourtrading partners would appreciate
thesincere effort wehavemade totakeonboard theirsuggestions andpresent aplancovering ashorter
timeperiod. While preparing thisplanfortheelimination ofquantitative restrictions, wehavegiven
dueconsideration totheinterests ofWTO Members inabalanced manner.
Iamsurethat,withthese significant changes, theCommittee willappreciate theenormity of
efforts putinbyIndia andbring toconclusion thisconsultation. Iwould particularly urgeourtrading
partners toappreciate theseveral important considerations which hadweighed withuswhile preparing
theplan. Repeatedly inthepast,Ihavedrawn attention tothefactthatbalance ofpayments problems
areunpredictable, andthatbalance ofpayments haveinbuilt pressures arising outofdevelopment needs
ofcountries likeIndia, pressures thatGATT negotiators hadtheforesight topredict andrecognize.
Weconsider thatadvance liberalisation schedules, oreven“standard ”timeframes forremoval of
quantitative restrictions maybemeaningless forcountries inthisprocess ofdevelopment.
Iwould liketoagain emphasise thatinkeeping withtheprovisions ofArticle XVIII:B, India
hasbeenremoving BOPrelated quantitative restrictions gradually. Ihavealready expressed before
thisCommittee ourcommitment toremoval ofquantitative restrictions imposed forbalance ofpayments
purposesasquicklyaspossibleintandemwiththeimprovementofourreservespositionanddevelopment
needs. Wehavetangibly demonstrated ourcommitment byremoving quantitative restrictions ona
large number ofHSlines since 1991. Itisalsowellknown that wehave removed quantitative
restrictions on400tariff linessince January 1997.WT/BOP/R/32
Page22
Inalarge country likeIndia, withahugeconsumer market, wehavetoapproach thetaskof
phasing outquantitative restrictions inameasured, cautious manner. There isapprehension thathasty
removalofquantitativerestrictionscouldleadtoanotherbalanceofpaymentscrisiswithsevereproblems
inthefuture. Itisfeared thatinflow ofimported goods, unless calibrated, mayadversely impact on
domestic production capacity duetotheinstability intheterms oftrade andduetotheinability of
productioninIndiatocompetewithcapital-intensivelargescaleproductionoverseaswhichhaveattendant
advantages ofeconomies ofscale. Itisawellknown factthatasubstantial portion ofourproduction
andasizeable number ofjobsintheindustrial sector areaccounted forbysmall scale units. The
predominance ofsmall andmarginal holdings inagriculture, withverysmall marketable surpluses,
make thevastmajority ofIndian farmers andthehuge mass ofagricultural labourers vulnerable to
evensmall shifts inthemarket situation. Thismayleadtowidespread unemployment, fallinincomes,
reduced production andgreater imports leading tobalance ofpayments crises intheshortandmedium
term.
Iwould liketorecall atthispoint oftimethattherewasclearrecognition onthepartofGATT
negotiators ofthestrong interface between theimport regime andeconomic development inthecase
ofdeveloping countries. Inmyview, paragraphs 2,8,9and11ofArticle XVIII clearly bring out
thefactthatthedevelopment needs ofadeveloping country havetobetaken fullyintoaccount while
assessing theadequacy orotherwise offoreign exchange reserves. Thestrength ofthebalance of
payments position ofadeveloping country cannot berelated tothetotalvalue ofimports during the
pasttwoorthreeyears alone. Norwould itbecorrect toproject thegrowth offoreign exchange reserves
onthebasisofrecent trends. TheCommittee musttakeintoaccount theenormous resources required
tobuild theinfrastructure forfuture rapid economic growth. Anyassessment thatdoesnottakeinto
account thisimportant element ofthegrowth process isobviously inadequate.
During ourdiscussions, wehavebeentoldbysome Members thatmacro-economic instruments
andprice-based measures canbeusedtostabilise thebalance ofpayments andthat,forsome ofthe
highly sensitive products, protective tariffs canreplace quantitative restrictions toavert
balance-of-payments-related problems. Wehavealsobeentoldthatifbalance ofpayments difficulties
ariseinfuture, wecanreimpose Article XVIII:B measures. Ourtrading partners would surely prefer
astable economic regime inIndia, notonethathastoresort tofurther restrictions andcertainly not
onethatswings from onecrisis toanother. Members areaware thatprice-based measures arenot
thepanacea forallillsthatbeset balance ofpayments indeveloping countries. Price-based measures
canhaveadelayed impact andinflationary effects, andmaynotpermit theefficient allocation ofscarce
resources inacountry likeIndia where income distribution isskewed. Further, macro-economic
instruments maynothelpineconomies which aredependent onexports ofprimary commodities because
demand maybeinelastic forsuchproducts. Thedemand forimports indeveloping countries likeIndia
isalsotypically inelastic astheimport basket isheavy withbasic inputs forindustry andessential
consumer goods.
Many trading partners have alsoreferred tothepossibility ofemploying other defence
mechanisms inplace ofquantitative restrictions onbalance ofpayments considerations. Ourlawswill
needtobeamended andinstitutions willhavetobecreated toputsuchprotective measures inplace.
Imayalsopoint outthat,evennowanumber ofbarriers existinvarious forms todeny access to
products ofdeveloping countries. Onseveral occasions inthepast,inthissame body, concerns have
beenvoiced against suchdenial ofaccess. While weopenourmarkets, wewould alsorequest our
friends inthedeveloped world, whoarebetter positioned economically, toensure improved access
totheirmarkets fortheproducts ofdeveloping countries.
Mr.Chairman, itisnotmyintention toelaborate thepoints Ihadalready made inmystatement
on10thJune, since thisisreally acontinuation ofthatmeeting. Iwould request youtorecall that,WT/BOP/R/32
Page23
attheJanuary 1997 meeting oftheCommittee, wehadbeeninvited topresent aplan, toeliminate
quantitative restrictions maintained onimports forsafeguarding ourbalance ofpayments, giving due
consideration totheinterests ofWTO Members inabalanced manner. InMay1997, wepresented
asetofdocuments, which were recognised byalldelegations ascomplete, comprehensive and
transparent. Thedocuments included aplanforphasing outbalance-of-payments-related quantitative
restrictions overnineyears. Ourtrading partners thenrequested ustocurtail theperiod under this
planasbestwecan. Wehavenowcurtailed thetimeperiod toseven years; theperiod iseffectively
sixyears, asonlyaverylimited number ofitems areincluded inthefinalyear. Wehave, therefore,
fulfilled ourcommitments byshowing asmuch flexibility aswepossibly could. Wewould nowrequest
ourtrading partners tomake positive contribution towards successful conclusion oftheseconsultations,
justaswehavedone.
Thank you,Mr.ChairmanWT/BOP/R/32
Page24
ANNEX III
Closing Statement bytheRepresentative ofIndia
MrChairman,
Itiswithdeepregret thatIwishtomake these remarks onbehalf ofmydelegation atthis
meeting. India hasconsulted regularly withthisCommittee onitsmeasures maintained under the
provisions ofArticle XVIII:B ofGATT 1994, andhasalways participated constructively inthe
discussionsinthisCommittee,inorderforallofus,asMembersofthismultilateraltradingorganisation,
toarrive atconsensus recommendations.
MrChairman, theWorld Trade Organisation, likeitspredecessor theGATT, wasfounded
topromote theobjectives oftrade liberalisation keeping inmind thediversity ofitsmembership. We
cannot wishaway thefactthatbecause ofhistorical reasons, some ofusareatlower stages ofeconomic
development thanothers. Ithasbeentheobjective ofthefounders ofGATT toenable thelessdeveloped
Members toparticipate more effectively inthefunctioning ofthemultilateral trading system.
Tothisend,more thanthirty years ago,wejointly decided thatweshould demonstrate anew
andmore positive approach toeconomic development, since economic development isintegral tothe
objectives ofGATT. Wedecided toenable developing countries totakemeasures, which would be
related totheirrequirements ofeconomic development, andwhich would contribute inapositive manner
tothegrowth oftheireconomies asawhole. Wedecided toprovide themeans toresolve transitional
problems which mayarisefromtheimplementation oftheprogrammes ofeconomic development of
developing countries, andformulated specific provisions totakecareofbalance ofpayments difficulties
which aregenerated bythedemands ofdevelopment itself. Werecognised thattheproblem ofadequate
reserves istheadequacy ofreserves inrelation totheprogrammes ofeconomic development of
developing countries. Werecognised thatthese reserves should havetobeadequate toenable such
developing countries overaperiod oftimetocontrol thegeneral levelofimports .Wealsorecognised
thatdeveloping countries needed tomaintain thelevelofthesereserves notonlytomeetcurrent import
requirements, butalsotopayforimports astheprogress ofdevelopment programmes creates new
demands. Thiscommon vision thatweallagreed to,andformulated, iscontained intheprovisions
ofArticle XVIII:B.
Ever since ourcurrent consultations began inDecember 1995, wehave been aware that,
consciously orunconsciously, some ofourmajor trading partners havetended tolosesightofthese
provisions. Instead ofproviding asupportive approach toourliberalisation efforts, which havebenefitted
notonlyIndia, butalsoourtrading partners, andstrengthened themultilateral trading system, we
havebeensubjected totheapplication ofadifferent setofstandards, reminiscent oftheprovisions
ofother Articles ofGATT, butnotofArticle XVIII:B.
Wehavebeencalledupontoacknowledgethatwenolongerhaveabalanceofpaymentsproblem.
However, Article XVIII:B doesnotdealwithbalance ofpayments problems inthenarrow perspective
oftradepolicy alone.In ourview,technical advice tothisCommittee should belimited tothefindings
ofstatistical andother factsspecifically mentioned inArticle XV.2 ofGATT. Theviews andopinions
oftechnical experts onmatters related toourdomestic programmes ofeconomic development cannot
however bebinding onthisCommittee. Governments ofdeveloping countries mustbethebestjudges
ofthelevelofreserves theyneedtoassist theprogrammes ofeconomic development. Article XVIII,
asitsverytitledemonstrates, deals withgovernmental assistance toeconomic development. Howcan
weinthiscontext, MrChairman, acknowledge thatwepossess adequate reserves tosafely projectWT/BOP/R/32
Page25
thatallourdevelopmental needs andobjectives willbemetbythelevelofreserves wecurrently have,
constituting barely 6months ofimport cover, thattooreckoned onthebasis ofthelevelofimports
during thepasttwotothree years?
Weneedreserves notonlyforourtrade, butalsoforoureconomic development programmes.
While wehavenodoubt made great progress inoureconomic programmes, westillhavetoconfront
thefactthatover400million Indians arestillinneed ofthebasic necessities oflife,thatour
infrastructure iswoefully inneedoffunds fordevelopment ,thatasignificant portion ofourreserves
isofavolatile nature, which wecannot count onasapermanent source offunds forpurposes of
economic development. Wetherefore cannot agree withtheassessment ofsome ofourtrading partners
withregard toourreserves.
However, Iwillnotgointosuchdetails today, especially since ourstatements made atallthe
threemeetings ofthese consultations substantiate mypoint amply. Iwould onlyreiterate thatwehave
fulfilled ourobligations under Article XVIII:B.
MrChairman, Iwould liketomention oneissuewhich hasimportant legalimplications, and
which hasbeenraised during thismeeting. Weallbelong toanorganisation inwhich commitments,
oncegiven, areadhered to.Otherwise, thecredibility oftherules-based system which isthefoundation
stoneoftheWTOwouldbeseriouslyundermined,andtherewouldbenopredictabilityinthemultilateral
trading system. India hasconsistently metallitsobligations made tothisCommittee, andwewould
liketoemphasise thispoint. Wehavenever agreed withtheinterpretation being given bysome of
ourtrading partners thatweareinviolation ofourobligations under Article XVIII:B. Infact,the
obligation weundertook inJanuary thisyeartopresent aphase outplanwasbased ontheprovisions
ofthe1994 Understanding onBalance ofPayments Provisions. Aview hasbeenexpressed inthis
consultation thattheUnderstanding relates onlytothose Members whoarefacing balance ofpayments
problems, andstillwishtophase outtheirimport restrictive measures. Inmyview, MrChairman,
thisistotally untenable.
ThechapeauoftheUnderstandingclearlysetsouttheobjectandIquote:“Members,recognising
theprovisions ofArticles XIIandXVIII:B ofGATT 1994andoftheDeclaration ofTrade Measures
taken forBalance ofPayments Purposes, adopted on28November 1979, andinorder toclarify such
provisions, hereby agree asfollows. ”Aninterpretation oftheUnderstanding thatitisconfined only
tosituations inwhich aMember hasabalance ofpayments problem andstillprefers toannounce a
phase outschedule isclearly inconceivable. Such aninterpretation would make theUnderstanding
redundant andsuperfluous. Itisverydifficult toimagine thatnegotiators would havesattogether and
worked outanelaborate Understanding justtocover cases inwhich Members announce phase out
schedulesevenwhentheyhavebalanceofpaymentsproblems.Itisthereforeunfairtodenytheprotection
given toallMembers byparagraph 13oftheUnderstanding.
Wearetherefore surprised thatthephase outplan,presented byusinthelightoftheprovisions
ofArticle XVIII:B andthe1994 Understanding, andonwhich there hasbeensomuch divergence
ofopinion intheCommittee, should havebeenusedtoproject theviewthatIndia nolonger fulfils
theconditions ofArticle XVIII:B. Thephase outplanisverymuch partoftheprovisions oftheWTO ’s
Balance ofPayments provisions, andwecannot agree withthose whowould question itslegalbasis.
Inourview, theCommittee could onlydiscuss thephase outplanifitispresented under thebalance
ofpayments provisions oftheWTO. Otherwise, theCommittee would nothavethecompetence to
haveanydiscussions onanon-balance ofpayments related issue.
MrChairman, before IcloseIwould liketorepeat whatwehadstated inouropening statement.
Wehadcomplied withtheinvitation oftheCommittee topresent aplanforelimination ofquantitativeWT/BOP/R/32
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restrictions maintained forbalance ofpayments purposes, giving dueconsideration totheinterests of
WTO Members inabalanced manner. Wehaveshown flexibility bycurtailing thephase outperiod
from 9years to7years. Wehaveshown further flexibility bymaking thephase outplaneffectively
a6yearplanbyincluding onlyalimited number ofitems intheseventh year. Itisamatter ofdeep
regret forusthatsome ofthedeveloped country delegations havenotbeen, inourjudgement, able
torespond toourefforts towards agreed conclusions inapositive manner.
Inconclusion, MrChairman, Iwould liketorequest thatthereport ofthismeeting contain
thedifferent views onthisissue bytheMembers ofthisCommittee, asstipulated inparagraph 13of
the1994 Understanding, intheabsence ofanyagreed conclusions. This, inourview, would bethe
most equitable andtransparent manner ofdealing withthisunfortunate situation.WT/BOP/R/32
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ANNEX IV
Statement bytheRepresentative oftheInternational Monetary Fund
1. TheFund’soverall assessment ofIndian economic performance remains broadly asitwasat
thelastmeeting oftheCommittee onBalance ofPayments Restrictions withIndia inJanuary 1997.
Recent political developments arenotexpected toaffect themain thrust ofeconomic policies, which
willcontinue tobedirected towards consolidating thegainsfrommorethanfiveyears ofreform designed
tomove theeconomy ontoasustained highgrowth path.Inthisconnection, themainpolicy challenges
remain tobring down thestillhighfiscal deficit andtopushthrough further structural reform. In
addition, while theoverall performance oftheeconomy continues tobequitefavourable, thereremains
some uncertainty about theshort-term outlook thatwillplace apremium oncareful macroeconomic
management during thecoming months.
2. RealGDPgrowth was6¾percentin1996/97 (thefiscal yearisApril 1-March 31).Theimpact
ofaslowdown ininvestment andindustrial production linked tohighrealinterest ratesandinfrastructure
constraints (especially power shortages andportbottlenecks) wascompensated byanincrease in
agricultural output following agood monsoon. Theauthorities anticipate thatin1997/98 investment
andindustrial production willbegiven aboost bythebudget taxcutsandtheeasing ofcredit conditions
latein1996/97. However, ifinfrastructure constraints tighten further, thecostoflong-term borrowing
remainshigh,orheightenedpoliticaluncertaintypersists,growthin1997/98couldfallbelowtheexpected
7percent.
3. There wasapickup ininflation during 1996/97, fuelled byanincrease inadministered petroleum
prices andrising grain prices. Wholesale price inflation —theprincipal price indicator usedbythe
authorities —ended 1996/97 atabout 7½percent,slightly above the6-7percenttarget. Inflation has
sincefallen to6½percent,andtheaimistobring itdown tocloseto6percentbytheendof1997/98.
4. With thefiscal deficit stillhigh, monetary policy continues tocarry themain burden of
stabilization. Inresponse toconcern about weakening industrial demand, monetary conditions were
progressively eased during 1996/97 —through aphased 4percentage point cutinthecashreserve ratio
thatwasonlypartly offset byawelcome consolidation ofvarious rediscount facilities. Nevertheless,
growth inbank credit totheprivate sector remained weak—inpartreflecting theimpact oftighter
prudential regulations onbanks ’willingness tolend—andbroad money growth stayed within the
authorities ’15½-16percenttarget range during mostoftheyear.Reflecting theinjection ofliquidity,
short-term interest ratesfellfrom13percentto8percent,long-term ratesdeclined onlyslightly and
theyield curve steepened significantly.
5. Therecent semi-annual monetary policy statement bytheReserve Bank ofIndia announced
atarget forbroad money growth of15-15½percentfor1997/98, broadly consistent with7percent
realGDPgrowth and6percentinflation. Steps werealsotaken toliberalize restrictions onbanklending
totheprivate sector, tolower theceiling onbankdeposit rates, andtofoster development ofthemoney,
foreign exchange, andgovernment securities markets. Banks andnon-bank financial companies
subsequently announced reductions inprime lending rates, andinterest ratesongovernment securities
alsodeclined. Itwillbeimportant, however, toensure amonetary policy stance consistent withachieving
theinflation goal, andariseinshort-term interest ratesmaywellbewarranted intheperiod ahead
tokeepthemonetary program ontrack.
6. Thecentral government deficit isestimated tohavecome down from 5½percentofGDP
in1995/96 to5percentofGDP in1996/97, inlinewiththebudget target. Asubstantial shortfallWT/BOP/R/32
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indivestment receipts andincreased defense spending wereoffset bybudgetary savings from funds
provided tocover thecostoftheFifthPayCommission award (which waspostponed until1997/98)
andfrom cutsinplanspending. However, theoverall public sector deficit (which covers thecentral
government, theoilpoolaccount, stategovernments, andcentral public enterprises) remained around
9percentofGDP asthereduction inthecentral government deficit wasmore thanoutweighed by
asharp increase intheoilpooldeficit, aconsequence ofasharp increase inoilimports andarisein
international oilprices thatwasnotpassed through todomestic petroleum prices.
7. The1997/98 budget aimstolower thecentral government deficit to4½percentofGDP. The
budget provides forsharp cutsinincome taxratesaswellasreductions incustoms duties. Thesizable
revenue lossfrom taxcutsisassumed bytheauthorities tobecompensated mainly byimproved tax
compliance. Ontheexpenditure side,provision ismade toimplement theFifthPayCommission award
andanewtargeted public distribution system, while grants tostates arelowered. Thebudget also
announced thereplacement ofautomatic RBIfinancing ofthedeficit byasystem oflimited ways and
means advances, which should impose greater discipline ongovernment finances andenhance the
autonomy oftheReserve Bank ofIndia. Theprincipal riskentailed bythebudget isthat,withonly
limited stepstaken tobroaden thetaxbase,therecould beasignificant revenue shortfall iftaxcompliance
doesnotimprove asexpected. Itistherefore important thatcontingency measures beidentified which
could beimplemented should emerging revenue trends beweaker thanprojected.
8. Thegovernment aimstoreduce thecentral government deficit to3percentofGDP bythe
turnofthecentury. Achieving thisobjective willrequire fundamental reforms tobroaden thetaxbase,
toreprioritize government expenditure, andtopushahead withcivilservice reform. Fiscal adjustment
alsohastoextend beyond thecentral government level. Petroleum price increases toeliminate theoil
pooldeficit andtopavethewayformore general petroleum price liberalization areapriority. State
governments mustalsocontribute tothefiscal consolidation process. There aresigns thatafewstates
arebeginning tostrengthen theirfinances through improved costrecovery, curtailing unproductive
spending andstate-level taxreform. Thecentral government could bolster theseefforts bylinking central
transfers more closely tostrong fiscal performance andbygiving states greater discretion toraise
financing fromthemarket. Asregards public enterprises, privatization would notonlybenefit thebudget
butwould alsoyieldsignificant efficiency gains. Therecent proposals bytheDisinvestment Commission
forsalesofmajority shares inanumber ofenterprises arethuswelcome. Increasing enterprise autonomy
andstrengthening management willalsobeimportant.
9. India’sbalance ofpayments recorded asizable surplus in1996/97 while thecurrent account
deficit remained around 1½percentofGDP. Asharp slowdown inexport growth reflected weakening
demand inpartner countries, sector specific developments thattemporarily dampened exports ofgems
andjewellery, leather, andaquaculture products, andthediminishing impact oftrade reform earlier
inthe1990s. However, import growth alsoslowed significantly despite higher oilimports. Meanwhile,
there werestrong inflows ofprivate capital, bothportfolio investment anddirect foreign investment.
Gross official reserves increased bymore than$5billion tonearly $22½ billion (sixmonths ofimports)
inMarch 1997.
10. For1997/98, thebalance ofpayments isexpected toregister another sizable surplus. Exports
arelikely torebound onlymoderately while imports should increase asinvestment picksup.Thecurrent
account deficit isprojected towiden toabout 2¼percentofGDP. Strong private capital inflows are
likely tocontinue, withanumber ofinternational equity issues inthepipeline andfurther liberalization
ofportfolio flows. External commercial borrowing limits havealsobeenraised andborrowing norms
eased. Gross official reserves areexpected toincrease byafurther $5billion toover$27billion (six
andahalfmonths ofimports). Thecurrent level oftheexchange ratewould appear tobebroadly
consistent withcurrent andcapital account trends. However, aflexible approach toexchange rateWT/BOP/R/32
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management should bemaintained, especially inviewofthepotential foranevenstronger-than-projected
out-turn forcapital inflows.
11. Overthemedium term, thecurrent account deficit islikely tocontinue towiden asinfrastructure
investmentaccelerates,evenifexportgrowthrespondspositivelytotradeliberalizationmeasures.Further
capital account liberalization —aspartofaphased transition tofullconvertibility —should encourage
private capital inflows, andtheemphasis should beplaced onpromoting further portfolio investment
andforeigndirectinvestment.Withcontinuedprudentmacroeconomicpolicies—andespeciallysignificant
fiscal adjustment —acurrent account deficit rising to3-4percentofGDP would beconsistent with
theauthorities ’target ofmaintaining adebtservice ratiobelow 20percent.
12 Thegovernment hastaken anumber ofstructural reform initiatives inrecent months inaddition
tothetaxratereductions inthe1997/98 budget andthemarket reforms announced intherecent monetary
policy statement. There havebeenstepstoliberalize foreign investment regulations, thefinancial sector,
andtheindustrial policy regime, mainly withaviewtorevitalizing aweakcapital market andtoboosting
business confidence andinvestment. While thepressing needisforaboldsecond wave ofstructural
reform inareaswhere progress hassofarlagged —agriculture, public enterprises, andlabour markets —a
more incremental approach islikely under current political circumstances. Thepriorities from a
macroeconomic perspective should include: further trade liberalization; financial sector reforms that
would reduce credit costsandbolster thesoundness ofthebanking system; aphased approach tocapital
account liberalization which would linktheremoval ofcapital controls toprogress withstrengthening
domestic financial institutions, fiscal consolidation andtrade liberalization; andputting inplace an
effective exitpolicy forbothpublic andprivate firms topromote efficient resource deployment.
13. Some further progress hasalsobeenmade withtrade liberalization inrecent months. With
thelowering ofimport duties inthe1997/98 budget, thepeakdutyrateisnow40percentandthe
average (import-weighted) dutyrateisslightly above 20percent. However, the2percentimport
surcharge isstillinplace, while dutyratesstillremain highbyEastAsian standards. Moreover, while
therecent Export-Import Policy for1997-2002 moved about onesixth oftheremaining number of
items offtherestricted import list,quantitative restrictions (QRs) stillcover asignificant partofthe
consumer goods sector. Atime-bound program foreliminating theremaining QRswould reduce
distortions toinvestment andpromote anefficient, export-oriented consumer goods industry.
Complementary measures would include scaling backreservations ofcertain sectors forsmall-scale
industry andpushing ahead withagricultural reforms. Itremains theFund’sview thattheexternal
situation canbewellmanaged using macroeconomic policy instruments alone; QRsarenotneeded
forbalance ofpayments adjustment andshould beremoved overarelatively short timeperiod. The
tariffs applied topreviously restricted consumer good imports could initially bekeptclose tothetop
oftheexisting tariff structure, butshould begradually scaled backaccording toapre-set timetable.