Trade Law Reforms In India

Trade Law Reforms In India

International Trade Law & Regulation, March 1996

The “movement to liberalise economies” through open trade is evident In India. On-going reforms are adefinite pointer to this development. Being a dominant part of the “opportunities exciting Asia” has also helped. But to the unwary, pitfalls remain. Delay, uncertainty and hidden costs can be discouraging. This comment brings out the changes in trade law in the past four years – and what remains to be done – to become truly open and internationally competitive

The United Nations Industrial Development Organisation (UNIDO), in its Global Report 1995 on Industrial Development set the theme as “sustaining the growth impulse in a changing global environment”. There would be no better illustration of this theme than the urge to globalise that has moved (and to a considerable extent, marred) India. In the last four years, a wide canvas of changes has been brought about or suggested in the fields of intellectual property, arbitration, foreign investment, trade law, disinvestment in the public sector, reforms in the financial sector, easing of foreign-exchange controls, tax reforms and overall relaxation of regulations

As this comment shows, India has finally realised the importance of adopting a more open-market, export-oriented approach to development via liberal trade measures

To appreciate more fully, the current trade law changes since the liberalisation process began in mid-1992, the reader must keep the following in mind –

India is a signatory to the GATT and now, the WTO. It has also opened up its economy to financial services

India is a member of the Multilateral Investment Guarantee Agency (‘MIGA’) of the World Bank

India is a key player in the ongoing formation of the Indian Ocean Rim (comprised of Australia, India, Singapore, Oman, Kenya, South Africa and Mauritius) and a very active member of the South Asian Association for Regional Cooperation, “SAARC” (comprising India, Pakistan, Bangladesh, Sri Lanka, Myanmar, Nepal and Maldives)

India has, very recently, been promoted as a ‘Dialogue Partner’ from a ‘Sectoral Partner’ in the Association of the South East Asian Nations

beginning 1 January 1996, trade between members of the Asia Clearing Union Countries (comprised of India, Bangladesh, Iran, Myanmar, Nepal, Sri Lanka and Pakistan) is through ACU Dollar Accounts, doing away with the problem of settling transactions, either in the participants’ currencies or in Asian Monetary Unit (“AMU”)

a huge number of Trade Promotion and Investment Protection Bilateral Treaties and Double Taxation Avoidance Agreements have been signed and are in force between India and several countries of the world

wholly-owned subsidiaries of foreign corporations are permitted to operate in India, exclusively for exportor import-related activities and inward investments relating to various sectors of production or infrastructure development

In the last 45 years, India pursued an import-substitution, mixed, public sectoral, licensing economy. Major areas of steel, heavy engineering, infrastructure, telecommunications, power, basic chemicals and the like were reserved for the public sector. The avenues open to the private sector were tightly monitored through licences, quantitative and capacity restrictions, and a centrally planned structure. Obtaining licences in a particular industry was an achievement in itself, which through several unethical practices were then jealously guarded. Imports of any kind, including state-of-the-art technology, capital goods and raw materials needed a weird number of approvals and faced high import tariffs and stiff foreign-exchange controls. Restrictions on the amount of royalties, technology transfer fees, and other forms of repayments discouraged foreign investors from participating

Bureaucratic intervention and graft became omnipresent. The net result of all this – competition was stunted, products were inferior and overall quality, productivity, cost and efficiency of major industries suffered tremendously

The reform process began with a bang for Indians. Keeping in line with the ongoings in South East Asia and Eastern Europe, India started looking for competition, foreign participation and across-the-board trade liberalisation. Inducting these ‘aliens’ in a dazed economy would naturally require time. But pressures from within and without India have contributed considerably to result in the following

New Legislation for Trade Liberalism

1992 coincided with the Eighth Five Year Plan of 1992-1997. To ensure certainty, transparency and long-term stability, a new Export-Import Policy, for a five-year period, from 1992 to 1997 was announced (considering the National elections, in mid-1996, a new policy could be prematurely declared by the Commerce Ministry). The policy, propagating that India’s participation in international trade would require an atmosphere of freedom, eased listing of items from the previous onerous categories of “Banned”, “Negative”, “Limited Permissible” and “Canalised” lists and removed ad-hoc licensing and quantitative restrictions. Presently, the Negative List of imports has been pruned to three prohibited items, 65 restricted items and seven canalised items. Most other goods and commodities are covered by Special Import Licences and Open General Licences, which are very easy to obtain. “Replenishment Licences” and “Shopping Lists” (imports related to goods for exports) have become redundant. To a considerable extent, the “Licence Raj” has been given a silent burial through such delicensing

Liberal measures have also been pronounced in areas relating to goods for mass consumption, duty-free licensing schemes, private bonded warehouses, deemed exports (which are entitled to several export benefits), and value-based advance licence schemes. New aggressive measures are constantly adopted to promote exports (see Annexure below)

The policy thus provides a long-term framework with annual “fine tunings” in the yearly financial budgets

A further step has been the repealment of the Import-Export Control Act 1947 by the new Foreign Trade (Development and Regulation) Act 1992. The former exhorted its aim to prevent and control imports and exports, which covered virtually all items of trade. The latter states its object to provide for the development of foreign trade by facilitating imports into and enhancing exports out of India. While in 1989-90, a total of 116,094 import licences were issued, the number came down to 41,000 licences during 1993-4


In the past, India could claim the unenvious privilege of having very high import tariffs. Beginning 1991, this regime has crumbled. The peak tariff rate was brought down from over 300 per cent to 150 per cent in 1991- This was further reduced to no per cent in 1992. The present rates, on the basis of the annual budget, March 1995 is 50 per cent. An expert committee on Tariff Rationalisation has recommended further reduction of the peak tariff rate to 25 per cent

The average tariff collection rate of all imports which stood at 47 per cent in 1990-1 came down to 44 per cent in 1992-3, 37 per cent in i993-4 and 30 per cent in 1994-5

In the SAARC, India has even suggested a Zero-Tariff regime. Liberal movement of goods, due to very low tariffs, could also come to stay in the ASEAN and the Indian Ocean Rim

Import and Export of Goods

The system of issuing advance duty-free licences to facilitate export production using imported inputs of raw materials has been made easier. The Export Promotion Capital Goods Scheme (EPCC) which permitted import of capital goods at a concessional duty rate of 15 per cent on fulfilment of certain export obligations has now been amended to permit import of capital goods at zero duty rate, if the cif value of such goods is in excess of Indian Rupees 200 million. Export of capital goods for purposes like testing, repairs, quality improvement or upgradation of technology have now been made permissible without a licence

The Negative list of exports is now comprised of very few items under the Prohibited, Licensable and Canalised lists. The office of the Chief Controller of Imports and Exports has been replaced by the Office of the Director General of Foreign Trade. The role of state trading corporations, formerly involved in routing canalised items, has been reoriented towards export promotion. Similarly, the role of the official Export Inspection Agency (EIA) to inspect goods for export has watered down with private inspection arrangements between the seller and buyer being permitted. Export subsidies in the form of Cash Compensatory Support schemes COGS’), which enhanced budget deficit, have become non-existent. Green-channel facilities are given to traders to prevent procedural delays in clearing their goods. Again, singlewindow clearances are given to companies setting up joint ventures or subsidiaries abroad. Trade documentation and electronic trading concepts have become considerably simplified

Harmonised Classification

Complying with its obligation as a contracting party to the International Convention on Harmonised Commodity Description and Coding System, India has aligned its commodity classification with the Harmonised System used worldwide with effect from 1 January 1996

Export-oriented Units (EOUs)

The scheme relating to EOUs and Export Processing Zones (EPZs) have been placed on par with the scheme relating to Electronic Hardware Technology Parks (EHTPs) and Software Technology Parks (STPs) insofar as value addition and DTA (sales to Indian markets) are concerned. Due to permission to set up private bonded warehouses, EPZs and other units shall be able to import and warehouse their capital goods and raw materials without payment of duty (it being paid only on their removal)

Convertibility of the Indian Rupee

From a non-convertible currency, the Indian rupee has, in two stages, been made partially convertible. It only now remains to be made convertible on the capital account

Administrative Changes

There has been tremendous growth in general awareness to trade internationally. Seminars, conferences, visits by foreign trade delegations and workshops have become all too common. All concerned are dissecting the GATT and understanding the impact of the new WTO. Over 30 fairs on trade promotion were organised in 1993-4. There is an upsurge in journals and publications on trade and trade-related activities. To monitor the trade performance closely, there is quick collection and reporting of statistics. The reforms are undertaken in close conjunction between the Commerce and Finance Ministries. There is considerable computerisation and easy settlement of disputes and grievances due to geographical decentralisation

The above have brought some immediate gains for India. Exports have grown at the rate of 20 per cent in dollar terms in 1994- Imports have increased at an even faster rate. Because of an attitudinal change, the cumulative budget deficit of about $3.0 billion has not bothered the government

Some typical pitfalls however remain. The past looms on India – there is more ideology and less work. The new antidumping legislation promulgated on 1 January 1995 will have to be overhauled, as suggested by the WTO. Similarly, the Patents Law has remained as a Bill on account of increasing political uncertainty. The Arbitration Act, to which major amendments have been suggested on the lines of the UNCITRAL model, has yet not been enacted. Easy import of consumer goods still is a mirage. The Indian rupee has buckled under market pressure, depreciated in the last three months vis-a-vis the dollar by about 15 per cent and is likely to go down further. Considerable corruption and time lags still hamper smooth and hassle-free flow of trade. Several steps in line with the new WTO world order have yet not been taken. 1996 being the election year, fears are expressed that liberalisation will take a back seat to political warfare. Though a party to regional trade areas, India has not benefited as much as countries which form NAFTA or the EU. Inflation, high interest rates and deficient infrastructure hamper export growth. Finally, going by the bench-mark of attracting foreign investment, China and the emerging markets of South Asia for the moment seem to hold more promise for the industrialised nations


New Export Measures

A recent short-term strategy has been a “15 by 15” matrix – a measure aimed at promoting 15 “effective” products in 15 importing countries, through a brand equity fund to meet the promotional expenses. Each product is targeted to a country which is its highest importer

The new export strategy is –

India should concentrate on markets with a per capita income of over $20,000

efforts should be made to increase the country’s share in markets where it already has a presence

if one product can be sold in a market, it should be possible to sell other products also

if one product can be sold in a particular market, it should be possible to sell the product in the neighbouring countries also

if there is resistance in a market to a particular product, the real reason for this should be detected: non-tariff barriers, visible and invisible, may be the barricades