Title Pages: Economics: Volume 2: India and The International Economy

Title Pages
Economics: Volume 2: India and the International

Economy
Jayati Ghosh
Print publication date: 2015

Print ISBN-13: 9780199458943
Published to Oxford Scholarship Online: September 2016
DOI: 10.1093/acprof:oso/9780199458943.001.0001
Title Pages
Volume 2: India and The International Economy (p.ii)
(p.i) Economics
(p.iii) ICSSR Research Surveys and Explorations
Economics
(p.iv)
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Page 2 of 2
Tables and Figures

Economy
Jayati Ghosh

Print ISBN-13: 9780199458943
DOI: 10.1093/acprof:oso/9780199458943.001.0001
(p.vii) Tables and Figures

Tables
1.1 Shares of World GDP: 1980–2010 13
1.2 Average Balance of Trade in Goods and Services: 2009–11 16
3.1 Sources of Export Growth (four-digit level): 2000–1 to 2007–8 and
2008–9 to 2011–12 79
3.2 Shares of Broad Categories of Imports (Select Items) 81
3.3 Growth in India’s Exports in Major Sectors 85
3.4 Decelerating Growth Rates of Major Agricultural Crops (compound
growth rates of production) 89
3A.1 Sources of Export Growth (four-digit level): 2000–1 to 2007–8 and
2008–9 to 2011–12 (in detail) 97
4.1 Growth in Sectoral and Overall Output at Factor Cost and Constant
Prices: 2002–9 121
4.2 Share of Sectors in Employment 125
4.3 Composition of Approved Outward FDI from India 138
4.4 H1B Admissions in USA by Country of Citizenship: Fiscal Years 2007–
9 142
4.5 L1 Admissions in USA by Country of Citizenship: Fiscal Years 2007–9
142
4.6 Indian trained Nurses Registered per Annum in UK for the period
1998–2004 143
4.7 FDI Restrictiveness Index 2010 147
(p.viii) 5.1 Sector-wise FDI Inflows to India (as a share of total FDI
inflows, 2000–12) 176
5.2 Evolution of Indian OFDI over the Years 184
5.3 Some Major Financial Crises since the 1990s 195
6.1 Total Domestic Support granted by the United States (1995–2007) 233
6.2 Shares of Components in US Domestic Support 233
Page 1 of 5
Tables and Figures
6.3 Domestic Support granted by the EC (1995–6 to 2009–10) 234

6.4 Shares of Components in EC Domestic Support 234
6.5 European Communities: Outlays on Export Subsidies 238
6.6 United States: Outlays on Export Subsidies 240
6.7 Food Aid provided by the United States 242
6.8 Agricultural Export and Food Aid Programmes of the United States
Authorized under the Farm Acts 244
6.9 Use of Non–Ad Valorem Tariffs by Select WTO Members 246
6.10 Comparison of Ad Valorem Equivalents of Non–Ad Valorem Tariffs
with Average Bound Tariffs 247
6.11 Evidence of High Ad Valorem Equivalents of Non–Ad Valorem Tariffs
Switzerland 248
6.12 Number of Applicable Tariff Quotas: 1995–2011 249
6.13 Total Number of Scheduled TRQs by Years and Members 249
6.14 Simple Average Fill Rates by Member: 2002–2011 250
6.15 US Product-specific Support and Proposed Caps 253
6.16 EC Product-specific Support and Proposed Caps 253
6.17 Reductions in Average Bound Duties Resulting from NAMA Chair’s
Proposals 261
6.18 Textual Proposals on Non-tariff Barriers 262
6.19 List of Tariff Sectoral Initiatives Proposed 265
7.1 Tariff Reduction Scenario in Major Sectors involved in India’s Two-
way Trade with ASEAN 302
8.1 Linear Correlation between Trade Ratios and Global Food Price Index
338
(p.ix) 8.2 Changes in Composition of Agricultural Exports: 1991–2 to
2009–10 339
8.3 Changes in Composition of Agricultural Imports: 1991–2 to 2009–10
339
8.4 Correlation between Domestic and World Prices of Select
Commodities 342
8.5 Trade and Price Policy during Different Phases of Global Prices 342
8.6 Foodgrain Production, Availability, and Instability 344
8.7 Frequency Distribution of Superiority of Trade vs Buffer Stock as
Stabilization Measures during Production being Higher or Lower than
Trend: 1974 to 2000 347
8A.1 Export, Import, and Trade Surplus of Agriculture Sector 353
8A.2 Ratio of Export to Value of Domestic Production of Agriculture
Sector 354
10A.1 Migration Statistics based on Census Data 430
10A.2 Migrants by Place of Last Residence, Indicating Migration Streams
430
10B.1 NSSO 64th Round: Reasons for Migration 431
Page 2 of 5
Tables and Figures
10B.2 NSSO 64th Round: Data on Migration (Household-level

characteristics) 431
10B.3 Number of Migrants per 1,000 of Each Social Group: All India 431
10C.1 Source Regions of Workers’ Remittances to India 432
11.1 Share of Various GHGs at Global Level in 2011 444
11.2 Top Ten GHG Emitters of the World in 2011 444
11.3 Top Ten Emitters of CO2 in 2012 445
11.4 Sector-wise Shares in GHG Emissions 447
11.5 India’s Sectoral Contribution to GDP in 1991 and 2007 447
11.6 Relative Per Capita GHG Emissions 448
11.7 Total Carbon Dioxide Emissions for India 449
11.8 Trend in Energy Intensity for India 458
11.9 CO2 Emissions/Total Primary Energy Supply 459
(p.x) Figures
1.1 Elements of Balance of Payments 7
1.2 Elements of Capital Account 8
1.3 Trade Indices 9
1.4 Share of World Merchandise Exports 13
1.5 Share of World Exports of Commercial Services 14
1.6 Balance on Goods and Services Trade 15
2.1 Composition of India’s Merchandise Exports 38
2.2 Employment in Organized Sectors—Public and Private 46
2.3 Composition of India’s Total Exports 48
2.4 Composition of India’s Services Exports 48
3.1 Annual Rate of Growth of Exports since the 1990s 69
3.2 Annual Rate of Growth of Imports since the 1990s 69
3.3 Ratio of Merchandise Trade to GDP 70
3.4 Exports, Imports, and Trade Balance: 1990–1 to 2011–12 70
3.5 Direction of India’s Exports 72
3.6 Composition of Principal Exports by Sectors 75
3.7 Composition of Principal Exports of Manufactured Goods by Sectors
76
3.8 Composition of Engineering Goods Exports 77
3.9 Engineering Goods Exports 78
3.10 Imports: Oil and Non-oil 80
3.11 Share of Various Components of Capital Goods Imports in Total
Imports 82
3.12 India’s Oil Exports 86
3.13 India’s Trade Deficit in Bulk Drugs 92
3.14 Auto Components Exports 93
3.15 Growing Trade Deficit in Auto Components 93
3.16 Movements in Real Effective Exchange Rate 95
Page 3 of 5
Tables and Figures
3B.1 Relationship between Relative Prices of Diesel and Export Volumes

102
3B.2 Relationship between Relative Prices of Petrol and Export Volume
102
(p.xi) 4.1 International Trade in Services for Different Economies 115
4.2 Restrictiveness of Services Trade Policies by GDP Per Capita: 2007
120
4.3 Compound Annual Growth Rate for Services and GDP in India: 1980s,
1990s, and 2000s 122
4.4 CAGR for Select Service Subsectors, 2000–9 123
4.5 Composition of GDP across Sectors 124
4.6 Average Growth Rate of Services Exports for Select Countries, 2000–
10 127
4.7 India’s Share in World Services Exports and Imports: 1980–2010 128
4.8 Average Annual Growth Rate of Goods and Services Exports: 1980–
2010 129
4.9 Share in World Exports of Goods and Services: 1980–2010 129
4.10 India’s Revealed Comparative Advantage in Services and Goods
Exports: 1980–2010 130
4.11a Composition of Services Exports: 2009 131
4.11b Composition of Services Exports: 2000 131
4.11c Composition of Services Exports: 1995 132
4.12 Net Export Earnings from Different Services: 2000, 2005, and 2008
133
4.13 India’s RCA for Select Categories of Services Exports: 2009 134
4.14 Annual FDI Inflows into Manufacturing and Services: 2008–9 and
2009–10 135
4.15a Composition of FDI Inflows in Services: 2009 136
4.15b Composition of FDI Inflows in Services: 2000–5 136
4.16 Trends in IT–BPO Revenue: 2000–10 139
4.17 Contribution of IT–BPO Revenues to GDP 140
4.18 Direct Employment in the IT–BPO Sector: 2007–10 141
4.19 Growth Rates of Value Added in Select Services in India in the 1990s
and Liberalization 150
5.1 Composition of Capital Flows to Emerging and Developing Countries:
1980–95 173
5.2 FDI Inflows to India 176
(p.xii) 5.3 FDI Inflow Figures for India 182
5.4 Foreign Portfolio Capital Inflows and FDI Inflows to India 188
6.1 Cost Price Comparison: US Wheat 236
6.2 Cost Price Comparison: US Rice 236
7.1 Average Applied MFN Tariffs (including AVEs) 297
7.2 India’s Shares in China’s and South Korea’s Exports and Imports 299
Page 4 of 5
Tables and Figures
7.3 India’s Shares in Indonesia, Thailand, and Vietnam’s Exports and

Imports 300
7.4 India’s Shares in Singapore and Malaysia’s Exports and Imports 301
7.5 ASEAN–India Trade Relationship: 1995–2010 307
7.6 Distribution of India’s Tariff Lines based on Tariff Bands (2009 and
2010) 309
8.1 Trade in Agri-food Products: 1981–2 to 2008–9 335
8.2 Ratio of Trade to Output of Agriculture Sector 336
8.3 Global Food Price Index: Base 2005 = 100 337
8.4 Annual Rate of Inflation in Wheat Prices, Month to Month 349
8.5 Annual Rate of Inflation in Rice Prices, Month to Month 349
11.1 Top Ten GHG Emitters of the World in 2011 445
11.2 Top Ten Emitters of CO2 in 2012 446
11.3 Trend in Co2 Emissions from India 449
Page 5 of 5
Abbreviations

Economy
Jayati Ghosh

Print ISBN-13: 9780199458943
DOI: 10.1093/acprof:oso/9780199458943.001.0001
(p.xiii) Abbreviations
ADR
American Depositary Receipts
AFTA
ASEAN Free Trade Area
AIFTA
ASEAN–India Free Trade Area
ASEAN
Association of Southeast Asian Nations
AVE
Ad Valorem Equivalent
CAT
Cap and Trade
CDM
Clean Development Mechanism
CECA
Comprehensive Economic Cooperation Agreement
CEPA
Comprehensive Economic Partnership Agreements
CER
Certified Emissions Reductions
CGE
Computable General Equilibrium
COP 3
Third Conference of the Parties
CTSH
Change in Tariff Sub-heading
DC
Designated Consumers
Page 1 of 4
Abbreviations
DIPP
Department of Industrial Policy & Promotion
DP
Depository Participants
DTAA
Double Taxation Avoidance Agreements
EQI
Employment Quality Index
FCVI
Foreign Venture Capital Firms
FDI
Foreign Direct Investment
FII
Foreign Institutional Investors
FIPB
Foreign Investment Promotion Board
FPI
Foreign Portfolio Investment
GDR
Global Depositary Receipts
(p.xiv) GHG
Green house Gases
GSTP
Global System of Trade Preferences
GTAP
Global Trade Analysis Project
GWP
Global Warming Potential
HOS
Heckscher–Ohlin–Samuelson
IPCC
Inter Governmental Panel on Climate Change
IRS
Increasing Returns to Scale
ITA
Information Technology Agreement
IT
Information Technology
JACIK
Japan, ASEAN, China, India, and South Korea
JI
Joint Implementation
KP
Kyoto Protocol
Page 2 of 4
Abbreviations
MMBtu
Million British Thermal Units
MOFCOM
Ministry of Commerce
MRA
Mutual Recognition Agreements
MRTP
Monopolies and Restrictive Trade Practices
MTOE
Metric Tons of Oil Equivalent
MSP
Minimum Support Prices
NAFTA
North American Free Trade Agreement
NAMA
Non-agricultural Market Access
NAPCC
National Action Plan on Climate Change
NBER
National Bureau of Economic Research
NELM
New Economics of Labour Migration
NMEEE
National Mission on Enhanced Energy Efficiency
OCB
Overseas Corporate Body
OFDI
Outward Foreign Direct Investment
PAT
Perform, Achieve and Trade
PIO
People of Indian Origin
PSU
Public Sector Units
PTA
Preferential Trading Agreements
QFI
Qualified Foreign Investor
RCA
Revealed Comparative Advantage
RTA
Regional Trade Agreement
SAPTA
South Asian Preferential Trade Agreement
Page 3 of 4
Abbreviations
SEBI
Securities and Exchange Board of India
SEC
Specific Energy Consumption
SEZ
Special Economic Zones
SIA
Secretariat for Industrial Assistance
SME
Small and Medium Enterprises
(p.xv) SPS
Sanitary and Phyto-sanitary
TBT
Technical Barriers to Trade
TRQ
Tariff Rate Quotas
UNCTAD
United Nations Conference on Trade and Development
VER
Voluntary Export Restraints
WIPS
World Investment Prospects Survey
WTO
World Trade Organization
(p.xvi)
Page 4 of 4
Preface

Economy
Jayati Ghosh

Print ISBN-13: 9780199458943
DOI: 10.1093/acprof:oso/9780199458943.001.0001
(p.xvii) Preface
Jayati Ghosh
India’s relations with the global economy have a long history spanning several
centuries and, even in the post-Independence period, there have been different
phases and degrees of integration. Yet, it is safe to say that economic
globalization has formed an important determining feature of the Indian
development experience, especially since the early 1990s, and that the current
conditions in the Indian economy cannot be understood without reference to the
nature and impact of processes of globalization specifically within India. This
volume contains a set of contributions that cover the aspects of India’s relations
with the global economy through trade, investment, and finance, as well as the
implications of these relations for various domestic processes and outcomes.
The chapters provide important insights on the unfolding of economic processes

by focusing on particular sectors and issues. Chapter 1 provides a broad
overview of India’s position in the global economy and the major changes in the
external sector. In Chapter 2, Ananya Ghosh Dastidar analyses the nature and
implications of the shift in Indian economic policies 1980s onwards, from a more
inward-oriented, import-substituting economic strategy to one that placed
greater emphasis on export promotion. Dastidar argues that economic reforms
in India concentrated on enhancing cost efficiency and international
competitiveness of domestic industry, with the assumption that this would
automatically contribute to improvement in export performance. However, there
was an absence of a clear-cut (p.xviii) strategy for growth based primarily on
exports, as in the East and Southeast Asian economies. Therefore, she suggests
that the recent Indian growth experience has been of an ‘export-induced’
growth, with the exports resulting from various factors, some of which could be
Page 1 of 6
Preface
exogenous to policy, rather than an ‘export-led’ growth through a conscious

State-driven strategy.
Malini Chakravarty (Chapter 3) examines recent patterns of trade in order to

assess whether, and to what extent, the surge in exports in the period after 2001
can be seen as ‘success’—either in general or of economic reform policies—as
well as whether such export expansion can be expected to be sustained over a
longer period of time. Chakravarty confirms Dastidar’s finding, and also notes
that there are concerns about the future sustainability of several exports that
have grown rapidly in recent years, including those of petroleum products. She
argues that the deteriorating trade balance raises serious concerns about
external viability as well as domestic production since this has been driven by
very large increases not just in oil imports (led by higher world oil prices) but
also non-oil imports, suggesting declining competitiveness in several tradable
sectors. The diversification of export markets in the first decade of the twenty-
first century was a source of strength, but some changes in the composition of
both exports and imports are potential sources of concern. In particular, the
trade balance in petroleum is a potential source of fragility, since increasing
exports have been driven by private refineries exploiting price differentials
between domestic and global markets without meeting the domestic demand,
even as petroleum products continue to be imported as well as exported. As
domestic oil prices rise with domestic deregulation of such prices, this
differential is likely to decline and to reduce private incentives for such exports.
Since this has been one of the more ‘dynamic’ export categories, this would also
affect total exports. Similarly, another dynamic export has been in the category
of foodgrains, which reflects a problem of domestic distribution (given the
pervasive incidence of hunger in the country) and is unlikely to be sustained in
future.
In the case of manufactured goods exports, Chakravarty observes that the

recent growth in certain categories—such as intermediate goods like iron and
steel, organic chemicals, transport equipment, paints, etc.—suggests that India
entered into wider production networks based in developing Asia, which is a
positive development. (p.xix) However, she points out that all of these
industries were developed and nurtured in the import-substituting phase of
India’s development, and that is what enabled them to take advantage of newer
opportunities. Development of high-technology production is less likely in the
current more open economic context because of import competition. Further,
certain areas of significant past success, such as pharmaceuticals, are more
likely to face future problems. In the case of bulk drugs, the trade balance
recently even turned negative because of trade liberalization measures that have
threatened the viability of domestic bulk drug production.
Page 2 of 6
Preface
Rupa Chanda provides a comprehensive review of trade in services in Chapter 4.

This sector necessitates special attention because services have been India’s
most dynamic exports over this period. She provides evidence of India’s growing
competitiveness in services relative to goods exports, as well as the
diversification that has made the services export basket more broad-based
(albeit with growing dependence on computer and information services). She
points out that this expansion, which occurred despite various internal and
external barriers, has been associated with liberalization of the service sector
that has yielded sector-specific as well as economy-wide gains in terms of
growth and export competitiveness. However, even with respect to this
successful exporting sector, Chanda notes that there are concerns about
sustainability, since sustained services growth requires an impetus from growing
internal demand (which, in turn, requires a vibrant manufacturing sector and
balanced growth) while more broad-based growth ‘within’ the service sector
would contribute to more equitable and employment-oriented growth, with
backward and forward linkages to the rest of the economy.
Parthapratim Pal (Chapter 5) analyses the changing policy approaches to capital

inflows over the entire period since Independence, in a thorough review of the
literature and the recent trends. He shows how policy attitudes towards capital
flows have come full circle, from early phases of planning, when foreign capital
was deemed important, to a more cautious and restrictive approach since the
1960s, until the phase after 1991, when India moved to a more open and
accommodating policy regime with respect to capital inflows. However, he notes
with concern that a large share of recent capital inflows comes in the form of
short-term, potentially volatile (p.xx) capital, which has increased fragility and
has squeezed the policy space for autonomous fiscal, monetary, and exchange
rate policies.
Obviously, the international regime within which external trade is conducted has
a significant role to play in determining both global and internal conditions. This
is particularly true of the period considered in this volume, since there were
momentous changes in the global trade regime following the Uruguay Round
and the setting up of the World Trade Organization (WTO). Since then, the WTO
regime has been crucial in affecting the global context of India’s trade and has
determined a number of domestic policies with respect to trade, intellectual
property rules, subsidies, and so on. In Chapter 6, which is devoted to analysing
the recent and ongoing multilateral trade negotiations, Biswajit Dhar and
Kasturi Das examine some of the contentious issues that are particularly
relevant for India. They provide a detailed discussion of the WTO rules relating
to agriculture, non-agricultural market access, trade in services, and intellectual
property rules, as well as the progress in the ongoing negotiations until 2011
and the concerns and implications of these for the Indian economy. They
describe specific concerns in the way that the negotiations have progressed,
with agriculture and non-agricultural market access being fast-tracked, while
Page 3 of 6
Preface
issues that are of more ‘offensive’ interest to India (in terms of desiring changes)
such as services and intellectual property are not subject to the same urgency.
However, they note a more fundamental challenge for the Doha Round of
negotiations in the WTO: the lack of interest of the largest economy, the US, and
the spread of that disinterest among other important players in world trade in
the aftermath of the global crisis.
One reason why the US and other major countries are less interested in the
multilateral trade negotiations is due to the proliferation and growing
significance of regional and bilateral trading agreements. These are considered
by Smitha Francis in Chapter 7, as she systematically analyses the various
Preferential Trading Agreements (PTAs) that India is already involved in and
considers the implications of others that the country is currently negotiating.
She argues that the dynamics of multilateral trade negotiations and the
apparent impasse of negotiations at the WTO, along with the proliferation of
PTAs initiated by the ASEAN and other trading partners, became important
catalysts that accelerated India’s trade policy shift towards greater engagement
with PTAs with other regions. Indian policymakers see (p.xxi) this as a
development strategy to exploit the potential of ‘efficiency-seeking’ industrial
restructuring and strengthen overall competitiveness. However, Francis notes
that this requires improving conditions for the development of domestic
technologies, and yet the PTAs, which India is increasingly involved in, tend to
erode the policy space required for promoting the domestic capabilities required
for meeting the emerging challenges under trade liberalization, as they move
into wider commitments involving investment, services, intellectual property,
etc.
In both multilateral and bilateral trade negotiations, agriculture has proved to

be a critical issue for India, although India’s policy of trade liberalization in this
area has been driven by both domestic considerations and attitudes as well as
such external requirements. In Chapter 8, Ramesh Chand and Sumedha Bajar
discuss how economic openness has affected agriculture. They note that
openness has been associated with a significant increase in agricultural trade
(both exports and imports) and much higher correlation between global and
domestic prices of agricultural commodities. The official strategy has been to
open up the economy and allow domestic prices to move with the trend in the
global prices, while insulating against sharp crests and troughs. They show how
the export performance of Indian agriculture has been critically dependent upon
the global price situation, with exports shrinking considerably when the global
price situation turns unfavourable, suggesting that India does not really have a
strong competitive edge in such exports. Interestingly, the much-hyped
horticulture sector showed slower export growth than the average for all
agricultural commodities. Overall, agricultural imports have grown faster than
exports since the early 1990s. A major concern relates to the impact on national
food security: Chand and Bajar argue that increase in such trade resulted in a
Page 4 of 6
Preface
net diversion of cereals to other countries and reduced per capita availability of
cereals by 2.5 kg per person per year after two decades of opening up. Price
volatility in pulses also increased while that of cereals decreased through the
impact of external trade. Meanwhile, increased imports of edible oils kept those
prices down. Chand and Bajar also point to how regional inequalities may have
been increased through grain trade liberalization, with the richer states
benefiting and the poorer states losing out. In terms of coping with internal and
external crises, especially sustained global price shocks, they assert that market
forces cannot provide adequate (p.xxii) safeguards, so regulation and
intervention by government are necessary, and this requires institutional
mechanisms that are permanent and not just temporary responses to particular
shocks.
In Chapter 9, Sumangala Damodaran provides a review of the theoretical

arguments with respect to trade and employment, and then considers the Indian
experience in this respect early 1990s onwards. Standard theory tends to
suggest a clear positive relationship between more open trade and employment
growth in labour-surplus economies like India, but Damodaran notes the limiting
assumptions of such theory and points to alternative arguments that do not
suggest such a necessary positive association. In the Indian case, the evidence is
at best ambiguous and in general trade liberalization has not provided a positive
break in terms of rates of employment generation in the economy. Such job
growth as has occurred has been largely in the informal sector, in keeping with
the larger process of informalization of the economy.
Chapter 10 is concerned with how greater external economic integration has

impacted the movement of labour within and outside the country. G. Vijay finds
mixed patterns of both internal and external migration, which cannot be
explained fully by any one stream in the literature that he surveys. He points out
that both the observation that migration leads to mobility and the evidence that
migration leads to unfreedom present two dimensions of the same empirical
reality. Vijay therefore links increased migration, including short-term and
temporary movement of labour, not only with the production chains and other
networks created by global economic integration but also with domestic and
local accumulation patterns and processes of economic and social
differentiation. He notes that it is important to draw a distinction between the
proposition that migration could cause mobility of workers and the proposition
that migration is an indicator of development.
In Chapter 11, Sangeeta Bansal takes up issues that have been insufficiently
studied in analysis of economic openness and globalization—those relating to
global commons and environmental concerns—and how they impact the Indian
economy. She provides an overview of the global and Indian scenarios with
respect to greenhouse gas (GHG) emissions, as well as assessments of the
economic and energy structures in India and the country’s vulnerability to
Page 5 of 6
Preface
climate change. This provides a context for considering India’s stand on climate
negotiations. (p.xxiii) She argues that India’s commitment in GHG mitigation
effort does not have to be at the cost of its economic development. Rather, the
country should explore policy options that enable it to meet both objectives, by
improving energy efficiency and reducing emissions per unit of energy
consumed. In particular, Bansal stresses that climate-related redistribution from
developed countries to developing countries should actually reach and benefit
poor people in India, and that GHG mitigation policies adopted at the domestic
level should not adversely affect the energy access of the poor.
Taken together, the chapters provide a comprehensive and multidimensional

perspective on different aspects of India’s relationship with the international
economy over the past three decades, and provide some ideas about future
tendencies and emerging areas of concern. The chapters in this volume consider
many different aspects of this: from examining the position of India in the global
economy, to considering the policy shift from import substitution
industrialization strategies to those based on more export promotion; to
considering the resultant patterns of trade in the past two decades; to examining
the pattern of capital flows in India. Some chapters deal with the impact on
specific sectors: agriculture, industry, and services; while others look at the
implications of greater openness for patterns of employment and labour
migration. The institutional context is explored through chapters that deal with
India’s engagement with the WTO and with several regional and bilateral trade
agreements. Issues relating to the global commons are also explored,
particularly in terms of climate change negotiations. The chapters together
provide multidimensional, nuanced, and yet definitive analyses of the
interactions of India with the international economy in a period when these were
both wide-ranging and rapidly changing.
These chapters were prepared and finalized some years before the final
publication. For this reason, some of the data does not refer to the most recent
period, but to a few years earlier. However, the basic analyses underlying the
arguments and their empirical elaboration have not changed, and so they still
remain extremely relevant for understanding the behaviour and performance of
the Indian economy both in the past and at present.
Jayati Ghosh (p.xxiv)
Page 6 of 6
India in the Changing Global Economy

Economy
Jayati Ghosh

Print ISBN-13: 9780199458943
DOI: 10.1093/acprof:oso/9780199458943.001.0001

Jayati Ghosh
DOI:10.1093/acprof:oso/9780199458943.003.0001
Abstract and Keywords

An overview of the changing nature of India’s interactions with the global
economy shows that over the past three decades, policies of economic reform
that included trade liberalization and easing of rules for capital inflows led to
substantial increases in the extent of economic ‘openness’ of India, which, in
turn, transformed some aspects of productive structures in the economy and had
other wide-ranging effects. Some of the outcomes may appear to be
contradictory: more rapid income growth yet poor employment generation;
significant increases in the ‘middle classes’ yet the persisting predominance of
low wage and informal workers in the population; dramatic expansion of both
exports and imports yet poor human development indicators and food insecurity.
These aspects are sought to be explained in terms of the implications of a
growth strategy based on using external trade and investment openness to
generate more investment and output, without adequate attention to the quality
and inclusiveness of such growth.
Keywords: India, international trade, international investment, structural change, production

structures, employment, economic globalization
The enhanced integration of the Indian economy with the global economy may
be seen as the most important stylized fact, even the defining feature, of India’s
recent economic evolution. From the mid-1980s, and even more sharply from the
early 1990s, policies of economic reform—including trade liberalization and
easing of rules for capital inflows—led to substantial increases in the extent of
Page 1 of 17
economic ‘openness’ of India, which, in turn, transformed some aspects of

productive structures in the economy and had other wide-ranging effects.
As with many other realities, there are different stories to be told about this
process, in terms of both patterns and consequences; these stories coexist even
though they may sometimes appear to be contradictory. One narrative sees the
liberalization of the external accounts and the accompanying internal
deregulation as the cause of the acceleration of income growth that the Indian
economy has experienced, beginning with the 1990s and then accelerating
sharply in the 2000s. In this view, India can be regarded (albeit to a lesser extent
than China) as one of the few economies in the developing world that have been
‘success stories’ of globalization, emerging into a giant economy of the twenty-
first century. Success is typically defined by the high and sustained rates of
growth of aggregate and per capita national income, driven not just by internal
demand but also by improved export performance in some key sectors; the
absence of major financial crises that have characterized a number of other
emerging markets; and substantial reduction in income poverty. These results, in
turn, are viewed as the consequences of the combination of a prudent yet
extensive programme of global economic integration and domestic deregulation
and sound macroeconomic management.
(p.2) Following is the position taken by the Government of India (GoI), as

evident from official documents:
The big story of the last decade for India has been its arrival on the global
scene. The Indian economy had broken free of the low-growth trap from
the early 1980s. By the mid-1990s, following the economic reforms of
1991–3, India began to appear as a player of some significance in the
global economy. Then, following the East Asian crisis of the late 1990s, and
from the first years of the first decade of the 21st century there was no
looking back. India’s exports began to climb, its foreign exchange reserves,
which for decades had hovered around 5 billion dollars, rose exponentially
after the economic reforms and in little more than a decade had risen to
300 billion dollars. Indian corporations that rarely ventured out of India
were suddenly investing all over the world and even in some industrialized
countries. When, in 2009, the Group of 20 (G-20) was raised to the level of
a forum for leaders, India was a significant member of this global policy
group. (GoI 2012: 337)
Much of this success is related, as in the aforementioned quotation, to the

economic reform policies of the early 1990s, which involved liberalizing both the
current and capital accounts of the balance of payments (BoP). Some of this
relates to the standard arguments of the benefits of more open trade, which
bring domestic relative prices more in line with those in world trade (whether or
not these reflect ‘efficient’ outcomes). The competitive pressure brought about
Page 2 of 17
by trade liberalization is argued to have forced domestic producers to

modernize, invest in superior technologies, and generally become more efficient,
while the ability to import inputs like raw materials and intermediate goods
allowed them to reduce costs. It is further argued that the policy focus on GDP
growth led by private investment provided incentives to corporations that had
two important results: it allowed them to invest within the country, thereby
raising domestic investment rates substantially; and it encouraged them to
acquire assets and invest outside the country as well, thereby creating a global
presence that is perceived as adding to the country’s economic clout.
This ‘upside’ view of the external economic integration of India can be

counterposed against another perspective that focuses more on the downside in
terms of consequences and risks. In this perspective, while the external
integration has indeed been associated with an acceleration of GDP growth,
such a process has not been (p.3) accompanied by the desired structural
change that would signify the diversification of the economy towards higher
value-added activities. In particular, the persistence of the greater majority of
the workforce in low-productivity activities in agriculture, low-grade
manufacturing, and petty services is identified as a fundamental failure of the
recent growth trajectory. So, contrary to the expectations created by standard
textbook theories, economic openness and trade liberalization have not
generated more employment in tradable sectors and productivity increases have
been confined to certain pockets only, without economy-wide ramifications.
Meanwhile, import competition has threatened the livelihood of small producers
and self-employed workers (who now constitute around half of the workforce
even in non-agricultural activities) while the dynamic sectors with rising
profitability simply do not generate enough jobs. Other negative outcomes
associated with recent economic processes are seen to be related to this
fundamental failure. These include: the persistence of widespread poverty; the
absence of basic food security for a significant proportion of the population; the
inability to ensure basic needs of housing, sanitation, and adequate healthcare
to the population as a whole; and accentuation of both vertical and horizontal
inequalities of assets and incomes. External economic liberalization, especially
in terms of the greater freedom accorded to volatile capital inflows, is also seen
as generating greater fragility of the BoP and vulnerability to external shocks, as
was witnessed in the aftermath of the global financial crisis and Great Recession
of 2007–8.
Policy Measures to Increase Economic Openness

The external integration of the Indian economy effectively became part of a
broader wave of globalization that brought together many parts of the world
economy that were earlier segregated in different ways, but this was very
definitely the outcome of domestic economic policies. The explicit aims of the
economic reform process adopted by the Government of India 1991 onwards
were: (i) to do away with or substantially reduce controls on capacity creation,
Page 3 of 17
production, and prices, and let market forces influence the investment and
operational decisions of domestic and foreign economic agents within the
domestic tariff area; (ii) to allow international competition and therefore
international relative prices to influence economic decisions; (iii) to (p.4)
reduce the presence of state agencies in production and trade; and (iv) to
liberalize the financial sector by reducing controls on the banking system,
allowing for the proliferation of financial institutions and instruments and
permitting foreign entry into the financial sector.
These policies were all based on the argument that greater freedom given to
private agents and market functioning would ensure more efficient and more
dynamic outcomes. The government’s aim was also to restructure production
towards areas of international ‘comparative advantage’ (defined in static rather
than dynamic terms). These areas were seen as inherently more labour
intensive, which led to the further prediction that, after an initial brief period of
net job loss, such a strategy of trade liberalization would actually create more
employment over time in more sustainable ways.
These aims translated into successive changes in the pattern of regulation in

different sectors as well as in aggregate macroeconomic policies. By the end of
the first decade of the twenty-first century, therefore, the Indian economy had
undergone the following policy changes:
• reduction in direct state control in terms of administered prices and

regulation of economic activity;
• privatization of many previously publicly held assets, often in controversial

circumstances;
• rationalization and reduction of both direct and indirect tax rates;
• attempts (often unsuccessful) to reduce fiscal deficits which usually involved

cutting back on public productive investment as well as certain types of social
expenditure, reducing subsidies to farmers and increasing user charges for
public services and utilities;
• trade liberalization involving shifts from quantitative restrictions to tariffs

and sharp reductions in the average rate of tariff protection, as well as
withdrawal of export subsidies;
• financial liberalization involving reductions in directed credit, freeing of

interest rate ceilings, and other measures which raised the real cost of
borrowing, including for the government, allowing greater activity of non-
residents in domestic asset markets;
• shift to market-determined exchange rates and liberalization of current

account transactions;
Page 4 of 17
(p.5) • some capital account liberalization, including easing of rules for

foreign direct investment (FDI), permission for non-residents to hold domestic
financial assets including portfolio holdings, easier access to external
commercial borrowing by domestic firms, and subsequently greater freedom
for domestic residents to hold limited foreign financial assets.
There was an explicitly declared shift in policy towards greater export

orientation, such that various export promotion schemes and incentives were
introduced. However, the focus of export promotion was still on price
competitiveness, which was sought to be achieved through exchange rate
management and input-subsidy-based and tax-holiday-based schemes. Non-price
factors, such as poor infrastructure, did not get adequate attention. This may
explain why export growth was more in primary products or in those
manufactured goods that had originally been nurtured in the previous import-
substituting regime.
Several policy measures that involved increased economic openness in terms of

both trade and capital flows were unilateral and driven by internal political
economy changes, as well as explicit shifts in the attitudes of important
economic policymakers. This holds true for liberalisation of trade in goods and
services as well as for the deregulation of the capital account. India’s
multilateral and bilateral/regional commitments did not really play the major
catalytic role in India’s trade liberalization process in most sectors. However,
there were some measures that were clearly driven by the unfolding of the
General Agreement on Tariffs and Trade (GATT) regime and the implications of
the formation of the World Trade Organization (WTO), which necessitated a
number of shifts in trade policy. For example, the shift from quantitative
restrictions of tariffs for agricultural commodities was very much driven by WTO
commitments. In many other tariff lines, actual tariffs were well below India’s
tariff binding commitments and also continued to decline beyond the
requirements imposed by WTO membership.
Trade liberalization affecting Indian agriculture and industry began in the early
1990s, with the progressive reduction or removal of trade restrictions of various
types. The rupee devaluation of mid-1991, which heralded the neoliberal
economic reform process, was followed by the removal of export subsidies on
agricultural goods and (p.6) some easing of import restrictions. The process
accelerated from the late 1990s, in tune with WTO agreements, and involved
liberalization of export controls, removal of quantitative controls on imports, and
decontrol of domestic trade. In agriculture, this meant that even as the
uncertainties related to international price movements became more directly
significant for farmers, progressive trade liberalization and tariff reduction in
these commodities made their involvement in market relations more
problematic. Government policy did try to adjust in ways that would make the
transition less volatile for agriculturalists in the case of extreme price changes.
Page 5 of 17
Even so farmers from India were not fully protected from international price
movements simply because the threat of external competition was sufficient to
impact on domestic prices. For non-agricultural goods, trade liberalization took
the form of removal of quantitative restrictions and reduction of tariffs, which
contributed to both rising imports and exports.
Increased dependence on foreign capital inflows was justified on the grounds

that they provided India the wherewithal to transform its economic structure
and redress its long-term weakness: poor export performance. It was argued
that capital flows would allow the country to liberalize trade and subject
domestic economic agents to efficiency-enhancing international competition;
permit Indian firms to access the foreign exchange needed to import the capital
and technology required to modernize their equipment and establish
internationally competitive capacities that would allow them to compete in
export markets; bring with them international producers intent on using India as
a base and source for production for the world market; and finance any ‘interim’
deficit that could result from an import surge that would follow trade
liberalization before India’s transformation into a successful exporter.
Trends in India’s Foreign Trade and Investment

One of the more striking features of India’s BoP 1980–1 onwards (see Figure 1.1)
is the relative stability of the major balances until the early 1990s, with very
small current account deficits that were mostly met through limited capital
inflows, and very little change in the levels of holding of foreign exchange
reserves. Indeed, even beyond the 1990s, there were relatively low levels of
external imbalances and slow rates of change in these variables, and it was only
in the early 2000s that (p.7)
there were significant changes, as

capital inflows picked up and the
trade balance deteriorated
sharply. Until just before the
outbreak of the global financial
crisis in 2008, the current account
balance was restrained despite the
worsening trade account because
of the role played by invisibles in
the form of remittance inflows and Figure 1.1 Elements of Balance of
software exports. But in the Payments (in US$ billion)
subsequent years, even large and Source: RBI online database.
growing remittance inflows could
not prevent a substantial
deterioration of the current account.
The change in foreign exchange reserves has largely mirrored the behaviour of
the capital account. So India’s growing external reserves were effectively
borrowed rather than earned, as they increased because of capital inflows that
Page 6 of 17
were dominated by portfolio inflows and external commercial borrowing. This is

confirmed by Figure 1.2, which shows that—especially in the period after 2005—
foreign investment and external commercial borrowing were dominantly
responsible for the inflows on capital account,. In this context, it is worth noting
another important feature of recent foreign investment inflows. In the past, it
made a lot of sense to separate portfolio inflows from FDI, on the grounds that
the former tend to be more short term in orientation. Portfolio capital is also
more likely to be volatile and therefore exit the country in periods of downswing.
However, the recent emergence of private equity firms that are engaged in
foreign direct investment has reduced such differences. Capital inflows by (p.8)
(p.9) private equity firms are

also essentially short term in
nature, seeking to make relatively
rapid capital gains on the
acquisition of domestic assets. In
the period since 2006, a
significant proportion of inward
FDI into India has been in the
form of private equity (as noted by
Dhar and Rao 2011), which is
therefore also effectively short
term in orientation, in the same Figure 1.2 Elements of Capital Account
manner as portfolio inflows. Very (in US$ billion)
recently, various debt-creating Source: RBI online database.
flows (including external
commercial borrowing as well as
banking capital flows) have become more important in financing the current account
deficit.
There was a significant acceleration in exports of both goods and services in the
2000s. However, attributing the improved export performance solely to the
economic reforms instituted 1991 onwards would be unwise, since a
combination of several factors were responsible, including favourable changes in
world market conditions. Figure 1.3 highlights that since 2000, the quantum
index for imports moved up much more rapidly than all the other indices.
Further, it does not seem to have been at all affected by the global crisis. Non-oil
imports grew much faster in value terms than oil imports, so it would be unwise
to blame high oil prices alone for the high and growing total import bill, as
Chakravarty also points out in Chapter 3. Rather, import liberalization resulted
in a significantly increased propensity
Page 7 of 17
(p.10) to import within the

economy. This had another
implication: the extent of import
penetration and its impact on
domestic output and employment
has been greater than would be
evident from just the total value of
imports, since the import values
have been associated with
significantly greater quantities of
imports entering the country. This
Figure 1.3 Trade Indices (Base 2000–01
has direct effects on import-
= 100).
competing activities, on
employment and livelihood Source: RBI online database.
particularly of small producers.
The slow growth of non-
agricultural employment despite rapid aggregate GDP growth may be at least partly
related to the impact of substantially increased import volumes of a wide range of
manufactured commodities, as noted by Damodaran in Chapter 9. This analysis
confirms the argument made by Veeramani (2012) of the relative lack of dynamism of
labour-intensive exports, which is another source of concern in terms of the potential
for employment generation.
In terms of direction of trade, the European Union (EU) remains an extremely
important destination for exports. The Organization of the Petroleum Exporting
Countries (OPEC) as a group have overtaken the EU in becoming the grouping
to receive the largest amount of India’s exports (in value terms) but China and
other developing countries in Asia have become increasingly significant as
export markets for India. In terms of imports, the global increases in oil prices
propelled OPEC countries dramatically to the top of the groupings in terms of
sources of imports in the second half of the decade. But once again, China and
other developing Asian countries have become major sources of imports,
exhibiting the fastest rate of growth for non-oil imports. India’s bilateral trade
with China is different in composition from its trade with the rest of the world
(Beretta and Lenti 2012). India’s comparative advantage is concentrated in
traditional exports like agricultural goods as well as raw materials like iron ore
and minerals and in some manufacturing sectors. China meanwhile has
specialized in mass exports of cheap goods, progressively becoming competitive
in exports of electronic goods. Further, within manufacturing, China’s exports of
manufactured goods encompass an increasing proportion of hi-tech goods and it
recently became the world’s largest exporter of hi-tech products, while Indian
exports (and production) of such goods has stagnated.
The Indian economy was not really chosen to be a favourite of international

financial markets until around 2003. Meanwhile, greater stability was imparted
to the BoP by the substantial inflows of workers’ (p.11) remittances from
temporary migrant workers in the Gulf and other regions, which amounted to
Page 8 of 17
more than all capital inflows put together and ensured that the current account
was characterized by either low deficits or even surpluses in most years until the
middle of the 2000s. Thereafter, even rising invisible payments (remittances and
software exports) were not sufficient to prevent the relatively rapid deterioration
of the current account, as the trade balance plummeted. The sharp depreciation
of the exchange rate first after 2008 and then again from early 2011, with
declines in the rupee’s value with respect to the US dollar and the euro, was
partly related to this and partly due to the instability and partial reversals of
capital flows.
What the long-term tendency in the merchandise trade deficit indicates is that
two decades after the programme of accelerated liberalization was adopted,
expectations of dramatic changes in economic structure have remained largely
unrealized. India has been successful as an exporter of workers who sent back
remittances and also as an exporter of services of various kinds, but has largely
failed in its original effort to become a hub for the export of manufactured
goods, since its manufacturing exports are still mostly concentrated in the
traditional sectors like gems and jewellery or in intermediate products. In fact,
the periods when the merchandise trade deficit was low were those in which low
growth or recessionary conditions resulted in curtailed imports rather than
years in which exports were booming. Indeed, the period after 2004–5, when
India moved on to a high growth trajectory of between 8 and 9 per cent per
annum, is a period when the merchandise trade deficit widened quite sharply. It
was only because of the country’s ‘invisible’ income from remittances and
services that the current account deficit remained low for much of this period.
Policy had a major role in the surge of capital inflows after 2003. Underlying the
surge in portfolio inflows was a continuous process of liberalization of the rules
governing such investment: its sources, its ambit, the caps it was subject to, and
the tax laws pertaining to it. Both stock market buoyancy and volatility became
phenomena typical of the post-liberalization years. The presence of foreign
institutional investors generated market volatility because of the structure of
India’s financial markets, which are relatively thin or shallow in at least three
senses. First, stocks of only a few companies are actively traded in the market.
Thus, the Bombay Stock Exchange (BSE) Sensex (p.12) includes only 30
companies out of more than 8,000 companies listed on the stock exchange.
Second, of these stocks there is only a small proportion that is routinely
available for trading, with the rest being held by promoters, the financial
institutions, and others interested in corporate control or influence. Third, the
number of players trading these stocks is also small. The net impact is that
speculation and volatility are essential features of such markets, and the
behaviour of a small number of foreign portfolio investors can have dramatic and
magnified effects on share prices.
Page 9 of 17
India’s Position in the Changing Global Economy

The global economy has certainly become much more important for India over
the past quarter of the century, but there is a widespread perception that the
Indian economy has also become more important for the rest of the world. This
is seen as part of a broader shift in global economic relations that is now
underway, with the growing significance of China, along with some other
formerly developing or transition economies that are now ‘emerging’ on to the
world stage as major players. This economic emergence is widely perceived to
have significant implications for existing trade structures and patterns, as well
as for global power expressed in other ways. Four developing countries are
usually marked out for their actual or potential significance in this regard:
China, India, Brazil, and South Africa, in addition to the transitional economy,
Russia, that was already recognized as an economic giant. All of these are seen
to be economies that have been increasing their share of global trade and
investment and are likely to become even more significant in future. They are
also countries that have experienced relatively rapid GDP growth in recent
times, and therefore with increasing shares of global GDP as indicated in Table
1.1. These countries have also become more assertive in terms of their
involvement in international negotiations, in groupings like G20 and in their
engagement with the Bretton Woods institutions, rightly demanding greater
voice in a world economy that has hitherto been mostly dominated by G3.
In terms of global trade shares, however, the picture is more differentiated

across these developing countries (Figure 1.4). Only China has experienced a
really dramatic increase in its share of global exports, particularly in the period
from 2003, such that by 2011 it accounted for more than 10 per cent of world
merchandise exports. (p.13)
Page 10 of 17
Table 1.1 Shares of World GDP: 1980–2010 (in per cent)
Year US EU Japan Brazil Russia India China South Africa
At nominal exchange rates
1980 26.0 34.1 10.0 1.5 NA 1.7 1.9 0.8
1990 26.1 31.7 13.8 2.3 NA 1.5 1.8 0.5
2000 30.9 26.4 14.5 2.0 0.8 1.5 3.7 0.4
2010 23.1 25.8 8.7 3.3 2.4 2.6 9.3 0.6
At PPP exchange rates
1980 69.0 24.6 8.6 3.9 NA 2.5 2.2 1.0
1990 69.2 24.7 9.9 3.3 NA 3.2 3.9 0.9
2000 62.8 23.5 7.6 2.9 2.7 3.7 7.1 0.7
2010 52.1 19.5 5.8 2.9 3.0 5.5 13.6 0.7

Source: GoI (2012: 340).
Page 11 of 17
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The other countries still remain

relatively minor players in terms
of aggregate world merchandise
exports. India’s trade share
increased and nearly tripled over
the entire period, but it still
remained well (p.14) below 2 per
cent, and the average for the three
years—2009 to 2011—was less
than 1.5 per cent.
Figure 1.5 presents data on the
share of these developing
countries in world exports of
commercial services. Despite Figure 1.4 Share of World Merchandise
the widespread perception that Exports (in per cent)
the largest service exporter in Source: WTO online database.
the developing world is India,
China’s exports of services have
been higher consistently than those of India throughout this period and both
countries seem to have increased their global shares at a similar pace. Until
recently this was largely because of the significance of transport services in
China’s services exports, and the growth of such services could be easily
explained by the rapid increases in merchandise exports from China. However,
in recent years, the picture has become more complex, with some other exports
such as travel and computer and information services increasing very rapidly.
Meanwhile, despite rapid though volatile growth in the period since 2003,
India’s share of global services exports is still only just above 3 per cent, while
that of China is around 4.5 per cent.
Figure 1.6 describes the aggregate balance of trade in merchandise and services
of these countries. (Note that this is not the same as the current account
balance, which also includes various invisibles payments such as factor incomes
and remittances.) Once again China is the significant outlier in terms of massive
trade surpluses
(p.15)
Page 12 of 17
particularly after 2003, which

have been followed by almost
equally sharp declines from 2009
onwards as the economy
rebalances to some extent. 2004
marks a definite break in trade
patterns with the tendencies
towards surpluses or deficits of
these countries becoming much
more marked. Indeed, India
experienced a sharp and even
alarming deterioration in total
trade balance. Since this was also Figure 1.6 Balance on Goods and
the period when there occurred a Services Trade (in US$ billion)
global surge in the cross-border
Source: WTO online database.
flows of capital, these ‘emerging
market’ deficit countries,
including India, were recipients of
large net capital flows that both financed the larger deficits as well as allowed the
accumulation of additional foreign exchange reserves.
Table 1.2 provides some sense Figure 1.5 Share of World Exports of
of the relative importance of Commercial Services (in per cent)
goods and services by
differentiating between
merchandise and services
balances in terms of the annual average for the three years—2009 to 2011.
China’s enormous merchandise trade surplus was slightly reduced by its
services deficit. Meanwhile, India’s relatively small services trade surplus was
scarecely enough to make much of a dent on its very large average merchandise
trade deficit. (p.16)
Table 1.2 Average Balance of Trade in Goods and Services: 2009–

11 (in US$ billion)
Country Merchandise trade Services trade Total trade

balance balance balance
Brazil 16.3 –27.9 –11.6
China 177.8 –35.2 142.6
India –124.7 10.8 –114.0
South –16.8 –4.0 –20.8

Africa
Page 13 of 17
Obviously, it is problematic if not downright misleading to club the other

countries into the same group as China, as if all of them experienced similar
recent trajectories. In fact it is really China that has exploded onto the world
trade scene and become one of the major economies, for a combination of
complex factors that cannot be adequately dealt with here. For the other
countries, shares of the global market are still relatively small for both goods
and services trade. Further, there are very evident fragilities expressed in the
large and growing external deficits of some countries, especially India. In terms
of outward investment as well, China clearly dominates over these other
countries. However, it is certainly true that India’s outward foreign investment
(driven largely by Indian firms engaged in the acquisition of productive assets
abroad in both developed and developing countries) has become a factor of some
significance, especially including in a number of relatively small developing
countries.
International Trade and Finance as Factors in India’s Economic Boom

While the economic boom of the 2000s has generally been attributed to
economic liberalization measures that led to greater global integration as well as
internal deregulation, the actual mechanisms through which this particular
strategy of liberalization generated growth were somewhat different from those
often mentioned. Recent economic growth in India—and particularly in the last
decade—was strongly related to internal and external liberalization measures
that generated booms in some domestic economic activities and caused India to
become a favoured destination for international (mainly financial) investors. It is
commonly perceived that this reflected the impact of (p.17) trade
liberalization, but in fact changes in finance were probably more significant.
India’s success as a global player has not been because of a current account
surplus resulting from its export performance. Rather, it has stemmed from
inflows of capital far exceeding its current account financing requirements. Not
only did India become a much-favoured destination for international investors,
especially financial investors, but this also enabled India’s foreign exchange
reserves situation to become much more comfortable, thereby further increasing
the perception of economic strength and resilience. Capital inflows in the form
especially of portfolio investment and external commercial borrowing sparked a
retail credit boom and this (combined with fiscal concessions) spurred
consumption among the richest sections of the population. This was combined
with strategies to allow private investors favoured access to natural resources in
a modern form of ‘primitive accumulation’. All this led to rapid increases in
aggregate GDP growth, even though compressed public spending on basic
needs, poor employment generation and persistent agrarian crisis reduced wage
shares in national income and kept mass consumption demand low.
Even as human development indicators remain abysmal, there was a substantial

rise in profit shares in the economy and the proliferation of financial activities.
As a result, by the end of the first decade of the twenty-first century, finance and
Page 14 of 17
real estate accounted for more than 15 per cent of GDP. This combined with
rising asset values to enable a credit-financed consumption splurge among the
rich and the middle classes, especially in urban areas. And this in turn generated
higher rates of investment and output over the upswing. The earlier emphasis on
public spending as the principal stimulus for growth in the Indian economy was
thus substituted in the 1990s with debt-financed housing investment and private
consumption of the elite and burgeoning middle classes.
Liquidity in the Indian economy, resulting from the capital surge, helped to
sustain a credit-financed, private-expenditure-based process of growth in the
economy. Credit-financed purchases of housing, automobiles, durables, and
ordinary goods and services caused GDP growth to accelerate to annual rates of
near 9 per cent in the latter part of the 2000s, barring the period of the Great
Recession. This diverted attention from certain disconcerting features of India’s
external payments position, such as the excessive reliance on remittance inflows
to keep the current account deficit within manageable limits; and the (p.18)
widening of that deficit on account of larger merchandise trade deficits and
recent declines in revenues from services.
The economic boom of the 2000s was fundamentally dependent upon greater
global integration, not just in trade of goods and service, but even more
significantly with respect to internationally mobile finance capital that chose to
make India one of its favoured destinations among emerging markets (Ghosh
and Chandrasekhar 2009). The dependence of GDP growth upon largely debt-
fuelled consumption of a relatively small segment of the population rather than
mass demand meant a more limited and ultimately more fragile domestic
market. Export growth in software, IT-enabled services, and some manufactured
goods was high but export-oriented employment was simply not large enough to
counter the effects of inadequate productive employment generation in domestic
sectors. High rates of investment continued to be driven by expectations of rapid
growth of the domestic market as well as very substantial fiscal standard
operating procedures (SOPs) in the form of tax incentives and implicit subsidies,
but these could not increase beyond a point. The problem of sustaining that
boom had become increasingly evident by 2012, since bubbles (whether they are
driven by inflows of foreign capital or by domestic credit expansion to chosen
sectors) are liable to burst, and the most adverse consequences are usually felt
by those who did not really gain much in the period of boom.
The growing presence of foreign portfolio investors further has a number of

macroeconomic implications. Most importantly, it forces the state to adopt a
fiscal stance designed to appease financial interests. Those interests are against
deficit-financed spending by the state, which is seen to increase the liquidity
overhang in the system, and therefore potentially inflationary. Inflation is
anathema to finance since it erodes the real value of financial assets. Since
government spending is ‘autonomous’ in character, the use of debt to finance
Page 15 of 17
such autonomous spending is seen as introducing into financial markets an

arbitrary player not driven by the profit motive, whose activities can render
interest rate differentials that determine financial profits more unpredictable. If
deficit spending leads to a substantial build-up of the state’s debt and interest
burden, it may intervene in financial markets to lower interest rates with
implications for financial returns. Financial interests wanting to guard against
that possibility tend to oppose deficit spending. Finally, the use of deficit
spending to support (p.19) autonomous expenditures by the state amounts to
an implicit legitimization of an interventionist state, and therefore, a
delegitimization of the market. Since global finance seeks to delegitimize the
state and legitimize the market, it strongly opposes deficit-financed, autonomous
state spending.
Efforts to curb the deficit inevitably involve a contraction of public expenditure,

especially expenditure on capital formation, which adversely affects growth and
employment; leads to a curtailment of social sector expenditures that sets back
the struggle against deprivation; impacts adversely on food and other subsidies
that benefit the poor; and sets off a scramble to privatize profit-earning public
assets, which renders the self-imposed fiscal straitjacket self-perpetuating.
The recent Indian growth story in its essentials was therefore not unlike the
story of speculative bubble-led expansion that marked the experience of several
other developed and developing countries in the same period. Both history and
comparative experience tell us that such a trajectory is inevitably marked by
instability, unevenness, and greater vulnerability to internally and externally
generated financial crises (Chandrasekhar and Ghosh 2013). This was already
evident in India by 2012, with indications of growth slowdown in important
sectors, increasing evidence of the extent to which the previous growth was
based on corrupt practices, and social and political tensions resulting from
increased inequality and material insecurity.
Given the continuing uncertainty in the global economy, and the likelihood that
the external impetus for dynamism may be more muted than in the recent past,
this suggests that future growth in the Indian economy, particularly if it is to be
more inclusive in terms of generating more productive employment
opportunities and providing basic needs to the population, must involve some
change in direction. This is also important in order to make the economy less
sensitive to external shocks through trade and capital flows. Fundamentally this
could involve a shift towards greater emphasis on the generation of domestic
demand that is not debt-created but based on rising incomes, including wage
incomes and remuneration from self-employment. If the generation of decent
work is seen not only as an end in itself but as a means to sustained growth, this
can result in strong positive multiplier effects that create virtuous cycles of
employment and productivity growth. This would allow for more stable economic
growth that is based on expanding the domestic market, but it does (p.20) not
Page 16 of 17
need to conflict with increasing exports. For this, an expanded role for direct
public investment in the creation of crucial physical and social infrastructure, as
well as greater controls on finance to reduce fragility and ensure financial
access of small producers and consumers, are also essential. These internal
policy measures are likely to have positive effects on the external sector as well,
by laying the basis for improved external competitiveness through aggregate
productivity growth (rather than only through cutting-edge new technologies in
some privileged sectors), thereby generating a ‘high road’ to industrialization
from below.
References
Bibliography references:
Beretta, Silvio and Renata Targetti Lenti. 2012. ‘“India and China” Trading with
the World and With Each Other’, Economic and Political Weekly, 47(44): 35–43.
Chandrasekhar, C.P. and Jayati Ghosh. 2013. ‘The Asian Financial Crisis,
Financial Restructuring and the Problem of Contagion’, in Martin H. Wolfson
and Gerald E. Epstein (eds), The Handbook of the Political Economy of Financial
Crises, pp. 311–25. New York: Oxford University Press.
Dhar, Biswajit and K.S. Chalapati Rao. 2011. ‘Foreign Direct Investment Caps in
India and Corporate Control Mechanisms’, Economic and Political Weekly,
46(14): 66–70.
Ghosh, Jayati and C.P. Chandrasekhar. 2009. ‘The Costs of Coupling: The Global
Crisis and the Indian Economy’, Cambridge Journal of Economics, 33(4): 725–39.
Government of India (GoI). 2012. Economic Survey 2011–12. Ministry of

Finance, Government of India.
Reserve Bank of India (RBI). RBI Online Database. Available at https://

www.rbi.org.in/Scripts/Statistics.aspx, last accessed on 6 January 2012.
Seshadri, V.S. 2009. ‘The Changing Face of India’s External Trade’, Economic
and Political Weekly, 44(35): 43–9.
Veeramani, C. 2012. ‘Anatomy of India’s Merchandise Export Growth, 1993–94 to

2010–11’, Economic and Political Weekly, 48(1): 94–104.
World Trade Organization (WTO). WTO Online Database. Available at http://

stat.wto.org/Home/WSDBHome.aspx?Language=E, last accessed on 20
December 2012.
Page 17 of 17
India’s Experience with Export-led Growth

Economy
Jayati Ghosh

Print ISBN-13: 9780199458943
DOI: 10.1093/acprof:oso/9780199458943.001.0001

Ananya Ghosh Dastidar
DOI:10.1093/acprof:oso/9780199458943.003.0002

This chapter examines the role of export-led growth in the Indian context,
placing it in context of overall industrialization strategy and trade policy, as it
underscores key elements affecting India’s export performance in the pre- and
post-reform periods. It reviews a large body of literature and identifies the key
aspects of trade and industrial policy that have affected growth and employment
creation in the manufacturing sector and in this context analyses India’s
performance with respect to exports of manufactures, highlighting some of the
problems faced by Indian exports and the ways these can be addressed by
policymakers. Alongside it discusses conceptual issues related to export-led
growth, outlines analytical frameworks that may be used to study its
implications and reviews evidence on the empirical validity of the ‘export-led
growth hypothesis’, in the Indian context.
Keywords: causality, domestic market, employment, export performance, export-led growth, foreign
direct investment (FDI), Indian exports, industrialization, merchandise exports, reforms, trade
liberalization
The primary objective in this chapter is to analyse the evolution of India’s policy
of trade openness in context of the country’s overall strategy of development. We
especially focus on industrialization strategy and trade policy, underscoring the
elements that have helped or perhaps hindered growth of Indian exports, as we
examine the role of export-led growth in the Indian context.
The term ‘export-led’ growth is most commonly used to describe the growth
experience of the East Asian economies of Hong Kong, Taiwan, Singapore, and
South Korea. Led by growth in exports of light manufactured goods, the
Page 1 of 42
development pattern in these economies had significant influence on trade and

industrialization policies and hence growth patterns across the developing
world. In fact, emphasis on export of low-skilled, labour-intensive goods has
proved to be an effective growth strategy in small countries such as Malaysia,
Indonesia, Thailand, as well as in large economies like China.
Several lessons emerge from the East and Southeast Asian economies’
experience with export-led growth (Amsden 1989; Wade 1990; (p.22) World
Bank 1993). At the first instance these countries’ experiences seem to
demonstrate the success of outward orientation per se. Further analysis reveals
that strategic State intervention was an extremely important factor underlying
their stellar economic performance. The State played a critical role by
regulating markets and strategically intervening to shape industrial and trade
policies in these nations. The main strength of these policies was that they fully
exploited the opportunity presented by the abundant availability of labour with
at least ‘basic’ level of education (Wood 1994), thereby combining growth in
exports and output, with growth in employment.
The State has played a critical role in mobilization and intersectoral allocation of
resources in India as well. However, the Indian experience has been qualitatively
different from that of these other Asian economies, with respect to the nature of
State intervention, pattern of export growth and the overall growth experience.
In particular, two distinct policy regimes can be identified in India—before and
since the 1980s—involving a transition from an inward-oriented mixed economy
to a more open market-oriented one.
Since the mid-1950s, India adopted a State-controlled industrialization strategy,

with emphasis on capital-intensive heavy industries, rather than on labour-
intensive goods. The development strategy was based on inward orientation,
with trade barriers granting a high degree of protection to domestic industry.
This regime was characterized by ‘export pessimism’, in sharp contrast to the
East Asian case.
From the 1980s, a distinct change was discernible, with respect to trade
policies, as well as with regard to the role of the State. Initially, in the early
1980s, trade liberalization was introduced in gradual steps, especially for
enhancing competitiveness of Indian exports; this was followed, since the
mid-1980s, by policies of privatization and deregulation, initiating the process of
reduction in state control. Thereafter, in response to a severe balance of
payments (BoP) crisis in 1991, more sweeping policy changes were introduced,
further accentuating the departure from the earlier policy stance. Since the
decade of the 1990s, systematic economic reforms have made way for the freer
play of market forces and for much greater integration of the domestic with the
Page 2 of 42
world economy. Yet this did not really trigger a boom in India’s manufactured
exports.
In this chapter we review the existing literature and try to identify key aspects of
trade and industrial policy that have affected growth (p.23) and employment
creation in the manufacturing sector and in this context analyse India’s
performance with respect to exports of manufactured goods in the pre- and post-
reform periods. We also highlight some of the problems faced by Indian exports
and exporters and the ways in which these can be addressed by policymakers.
Our analysis is not exhaustive in terms of laying out specific details of trade and
industrial policies; rather, we try to highlight relevant features of these policies
with a bearing on India’s export performance and analyse the Indian experience
in the light of the East Asian model of export-led growth.
In the first section, ‘Analytical Issues’ we first discuss a few conceptual issues
related to export-led growth and outline analytical frameworks that may be used
to study its implications; alongside we highlight the importance of promoting
manufactured exports and role of the state in this context. In the second section
‘Export-led Growth—Empirical Evidence for India’, we review evidence from a
growing body of recent studies, on the empirical validity of the ‘export-led
growth hypothesis’, in the Indian context. Thereafter, we discuss India’s export
performance in the pre- and post-reform periods, placing this in context of the
broader policy framework. We outline contours of trade and industrial policies,
examine performance of key variables and analyse their implications for growth
in aggregate output, employment, and exports in ‘Trade and Industrial Policies
in the Pre-Reform Period (1950–79)’ and ‘Trade Openness and Industrialization
in the Post-Reform Era (1980 onwards)’. In the light of this discussion we finally
lay out the main conclusions that emerge from our analysis in the last section.
Analytical Issues
Basic Concept
Export-led growth may be defined as a strategy of growth, consciously adopted
by the State, with export promotion at its heart, wherein a virtuous cycle
between investment and exports is seen as the primary strategy for moving to a
higher steady state-growth path. With the State backing a strategy of growth
based on the external market, the investment function is likely to respond
positively to growth in exports. Therefore, a boom in exports is likely to trigger
off further increases in (p.24) levels of investment; and in the absence of
supply constraints, export growth would not only have first round–multiplier
effects, but also sizeable second round effects through induced increases in
investments. This definition is based on the actual experience of the East Asian
nations (especially Hong Kong, Singapore, South Korea, and Taiwan) that
experienced such growth.
Page 3 of 42
Export promotion strategy in these East Asian economies was accompanied by

domestic resource mobilization on a massive scale, with the economies
achieving extremely high savings and investment ratios by sacrificing current
consumption for prospects of future growth (Krugman 1994; Patnaik and
Chandrasekhar 1997). It has been stressed that the role of the State was a
crucial factor behind the economic success in East Asia (Amsden 1989; Wade
1990). Indeed, there is no theoretical basis for expecting a boom in exports to
‘inevitably’ lead to an investment boom. For instance, the experiences of Taiwan
and the Republic of Korea, which had simultaneous booms in investments and
exports, differ from those of other countries such as Turkey and Chile, where
such a positive link between export performance and investment was missing
(Rodrik 1995). As such, for policy advocacy based on the East Asian model of
export-led growth, the role of the State must be clearly understood.
In particular export-led growth is conceptually distinct from export-induced

growth.1 The latter refers to growth in aggregate output caused by an increase
in exports, where such increase in exports is not directly policy induced (for
example, exports may increase due to any exogenous development in the world
economy or, a random shock in real exchange rates, etc.). Thus the main
difference between these two concepts is that export-induced growth is policy-
neutral; in contrast export-led growth is essentially policy-led. We adopt this
definition in our analysis of India’s experience with export-led growth.
Another conceptual point worth noting is that export-led growth need not
necessarily imply export-surplus-led growth and it may well go together with a
trade deficit. In practice, East Asian countries like Korea that experienced
export-led growth also ran trade deficits (Cho and Kim 1995; Yoo 2004). This
might happen, for instance, when the role of domestic resource mobilization
assumes importance and exports induce a significant increase in domestic
investments.
(p.25) Theoretical Framework

The rationale behind export-led growth must be understood in context of the
theoretical implications of exports for economic growth and resource allocation
in an emerging market economy like India. This issue has been analysed using
both micro-theoretic as well as macro-theoretic frameworks. The following
discussion attempts to give a flavour of select theoretical frameworks2 that may
be used to analyse the implications of exports, in the context of developing
economies.
Micro-theoretic Framework:
In the context of theoretical studies on India’s export performance, the analysis

by Marjit and Raychaudhuri (1997) underscores the importance and relevance of
adopting a micro-theoretic approach. The authors construct several micro-
theoretic models of international trade especially suitable for analysing sectoral
Page 4 of 42
policy issues under alternate assumptions regarding goods and factor markets
and the policy environment. For instance, they show that if import duties on
intermediates and final goods are reduced at a differential rate (reduction in
import duty being higher for intermediates), such a policy may end up
benefitting the import competing sector more than the export sector when both
sectors use the same imported input. While specific theoretical results follow
from the underlying assumptions of the models, such exercises can provide
important insights for formulating appropriate policy especially for particular
sectors where the assumptions apply.
In a micro-theoretic, neoclassical framework, the Heckscher-Ohlin-Samuelson

(HOS) model of international trade is widely used to analyse the implications of
exports for unskilled-labour–abundant developing economies engaged in
international trade with skilled-labour–abundant developed nations. In this
framework, relative factor abundance forms the basis of countries’ comparative
advantage and trade patterns, with countries specializing in the production and
export of goods that use their abundant factor intensively. For developing
countries, export of unskilled-labour-intensive products is expected to lead to
beneficial distributional outcomes by improving relative returns to the abundant
factor. Free trade is welfare maximizing in this framework under the standard
set of assumptions of small open economy, perfectly competitive markets and
flexible factor (p.26) prices that lead to full employment of factors of
production. In fact, in a neoclassical set-up, the main rationale for State
intervention stems from existence of externalities and market imperfections; in
general, policies such as trade restrictions are seen as diverting resources from
optimal use and thereby creating distortions. However, it is also well recognized
that in the presence of market imperfections, the standard HOS results would
not hold. For instance, it can be shown that under certain circumstances, a
policy of trade liberalization may actually lead to a decrease in exports3 (Marjit
and Raychaudhuri 1997).
The HOS framework has been widely criticized as being inappropriate for
countries like India which face myriad structural rigidities, distortions, and
market imperfections (see, for instance, Dutt 1995) under which standard HOS
results need not apply. Nevertheless, neoclassical general equilibrium models in
the tradition of Jones (1965, 1971) based on the standard HOS framework or
Jones’s specific factor framework can be useful analytical tools for studying the
implications of trade policy in developing countries. In particular, these models
may be used to analyse the effects of various market imperfections under
alternate assumptions, such as existence of unemployment, factor immobility
between sectors, rural–urban migration, existence of an informal sector, etc.,
that capture many aspects of reality in developing countries. For instance, Marjit
and Acharyya (2003) provide many examples of micro-theory based applications
Page 5 of 42
for analysing open economy issues using such two- and three-sector general
equilibrium models in the context of developing economies.
Recent trends like a rise in skill-intensity of exports of developing countries,

rising skilled–unskilled wage gap observed in both developed and developing
countries, rising volume of trade among developing countries with similar factor
endowments, etc., run counter to the predictions of the HOS theory,
underscoring the need for an alternate framework of analysis. Newer vintages of
trade theory explicitly take into account the existence of market imperfections
and scale economies as it explains observed trade patterns and practices (such
as, intra-industry and inter-industry trade; reciprocal dumping, etc.) and
analyses the strategic role of policy in this context.4 Bhattacharjea (2004)
provides a critical analysis of application of theoretical results from this
literature in analysing issues relating to international trade in developing
economies. Application of the theoretical results from this literature in analysing
export policy issues for India as yet remains (p.27) a relatively unexplored
area, providing ample scope for future research in this area.
Macro-theoretic Framework:
A number of alternate macro-theoretic approaches may be adopted for studying

open economy issues in developing economies (for example, see Dutt [1995];
Stiglitz et al. [2006] for a discussion). For instance, Dutt (1995) analyses
essential features of two-gap models, Keynesian demand constrained models,
structuralist models in the tradition of Kalecki and variants thereof as well as
models of North-South trade, with a view to their applicability in the context of a
developing country like India.
The importance of exports for an economy emerges clearly from Keynesian-

Kaleckian analysis where, in the presence of excess capacity, any increase in
world demand for domestic goods, ceteris paribus, leads to increase in
aggregate income via the export multiplier. However, structuralist models can be
used to show that in the presence of capacity constraints, exports may actually
have negative consequences for long-run growth, under certain assumptions
(namely, when export expansion occurs at the cost of lowering investment). In
particular, Structuralist macro models can accommodate salient structural
rigidities and distributional characteristics of developing economies and help in
modelling the effects of demand constraints, capacity constraints,
infrastructural, and foreign exchange constraints to growth (see Dutt and Ros
2003). Taylor (1983, 1991) provides an extensive discussion on theoretical issues
related to structuralist macro models and for applications in the Indian context
see, for instance, Patnaik (2007) and Rakshit (1982 and 2009).
The results from different models in the Structuralist tradition are obviously
driven by the specific assumptions made in each case; the important point to
note is these models can be useful tools for analysing different channels through
Page 6 of 42
which exports affect growth in a developing nation facing various constraints

and for exploring policy options in such situations. For instance, certain sectors
of a low-income economy may face demand constraints leading to excess
capacity, while there may be supply bottlenecks in others due to infrastructural
constraints. In this case expansionary government policies and infrastructure
expansion could unleash a cumulative process wherein output expansion leads to
enhanced capacity utilization, productivity growth, and simultaneous growth in
exports and output.
(p.28) Macro models also emphasize the importance of exports in relieving

foreign exchange constraints on growth. For instance, using a simple model of
economic growth, Thirlwall (2011)5 brings out the importance of exports and
shows that the long-run rate of growth of output of any country (facing a
constant terms of trade) is equal to the growth rate of the volume of exports
divided by the income elasticity of demand for imports. This result underscores
the importance of the BoP constraint by emphasizing that long-run growth rate
in a country has to be commensurate with BoP equilibrium, as in general it
would be difficult to finance the ever-widening current account deficits. This
result has formed the basis of many empirical models that tried to find evidence
for export-led growth (for an empirical application on India, see Razmi 2005).
Future research on theoretical issues could focus further on identifying specific

channels through which aggregate exports lead to growth and on assessing their
relative importance, under alternate macroeconomic scenarios. In addition,
sector-specific analyses especially using appropriate micro-theoretic models to
capture existing market imperfections, would be useful for designing sector-
specific, non-distortionary policy interventions especially for addressing factors
inhibiting growth in exports from the sector. Further, analytical pieces on
specific World Trade Organization (WTO) provisions and their implications for
exports at the sectoral level, can provide important insights for strategic policy
intervention.
Export Promotion Strategy: Key Issues

Sectoral Composition of Exports:
Exports of manufactured goods have always been considered especially

important for developing nations, including countries with a comparative
advantage in agricultural and natural-resource-based goods. The underlying
economic arguments are well known. Terms of trade are likely to move against
primary exporters in the long run owing to low-income elasticity of demand for
primary goods (the Prebisch-Singer hypothesis), while the demand for
manufactured goods rises with economic growth. In this context, recent
empirical work shows that primary-product-exporting countries in Africa and
Latin America failed to benefit from policies of globalization (see McMillan and
Rodrik 2011). According to McMillan and Rodrik (2011), the main drawback for
Page 7 of 42
countries (p.29) specializing in primary product exports is that these sectors do

not generate substantial employment and face smaller scope for productivity-
enhancing structural change.
The importance of manufactured exports has been emphasized in early work by

Kaldor (1967, 1968, 1970) as specialization in manufactured goods leads to
enhanced productivity growth through static scale economies as well as dynamic
learning effects (‘Verdoorn’s Law’), creating conditions for cumulative positive
growth effects led by exports. The success of the Asian economies’ models of
growth based on manufacturing exports also bears out its importance. In this
context, recent analyses of growth experience of East Asian and Latin American
exporters of manufactured products reveals, rather than only quantum of
exports, what really matters is the quality of exports, in determining whether
export growth translates into GDP growth (Palma 2006). High-quality exports
tend to be relatively more demand dynamic (that is, demand for such products is
growing in OECD countries), more technology-intensive and have greater
spillover effects that enhance growth in productivity and in aggregate output.
However, despite the growing share of manufactured goods in exports of the

South, there has been continuous deterioration in the commodity terms of trade
of developing countries in the South vis-à-vis the developed North (Sarkar 2004).
Sarkar (2004) conjectures that the growing dominance of multinational
enterprises in intra-firm trade flows may be an important factor underlying this
phenomenon, given the prevalence of transfer pricing and similar strategies
adopted by such entities. This would be difficult to establish though, given the
paucity of quality data on firm level activities.
In recent years, impressive growth in services output and exports in developing

countries has drawn attention to the relative importance of the services vis-à-vis
manufacturing sectors as primary engine of growth.6 Exports played a very
important role in growth of the service sector and services exports provided
crucial BoP support across Asian and Latin American nations in the era of
globalization. Advances in technology (especially information technology [IT])
played a critical role in enhancing tradability of services across international
boundaries; while globalization acted as a catalyst, spurring growth in off-
shoring and business process outsourcing activities of firms in developed
countries. It appears that exogenous developments (p.30) and conditions
prevalent in the world economy in the late 1990s and in the early decades of
2000s played an important role in fuelling the boom in services export from
developing countries while the States essentially played a supportive role.
The prospects of ‘service-led growth’ is promising, especially in view of positive

linkage effects from the services to the manufacturing sector, high-income
elasticity of services, and relatively high growth of productivity in the services
sector. However there has been little employment growth in the services sector
Page 8 of 42
during this high-growth phase. Further, services exports essentially generated

demand for skilled workers, creating relatively fewer jobs for unskilled labour
that is abundant in developing countries.
Role of the State:
As explained earlier the role of policy has to be carefully examined in a

developing country. Clearly, promoting growth of labour-intensive manufactured
goods must be a priority especially for generating employment and policy should
be geared to exploit opportunities presented by the domestic as well as external
markets in achieving it. In particular, enhancing competitiveness and product
quality must be priorities for the manufacturing sector, for these would be
crucial for growth in manufacturing exports, given the high degree of
integration between domestic and external markets in today’s globalized world.
At the same time the State has to support services growth, focusing especially
on supply-side issues (such as availability of skilled workers through an
appropriate education and training policy) so that supply bottlenecks may not
prevent growth of the sector in response to external demand.
Policies for attracting foreign direct investment (FDI) have been considered very
important for promoting exports in the context of developing countries. In fact
FDI played an important role in successful Asian exporters like Singapore,
Malaysia, Indonesia, Thailand, China, etc. However, in the context of large
economies like India, liberalizing foreign investment inflows may not inevitably
enhance export performance, as the country’s ‘large middle class market’ also
provides a powerful incentive for entry of foreign capital. Moreover, available
evidence indicates that the link between FDI and improved export performance
holds only for specific geographic locations (for example, a small group of Asian
nations) and is an exception, rather (p.31) than a rule in the context of
developing countries (Chandrasekhar 1997).
In the Indian context, the literature on this issue is primarily based on empirical
studies and the findings are mixed, with a lack of robust evidence on the
importance of FDI for improved export performance. For instance, Pant (1993)
found no significant difference in the export performance of domestic and
foreign firms in India during the period 1985–90. For the post-liberalization
period covering the late 1990s, Aggarwal (2002) finds only weak support for the
hypothesis that multinational enterprise (MNE) affiliates in India perform
distinctly better than their local counterparts in export markets. Some studies
do bear out the importance of FDI for exports (see, for instance, Banga 2003;
Pradhan and Abraham 2005; Prasanna 2010), while others find that foreign
investment did not have a significant impact on export performance (Sharma
2000). Further, there is evidence to indicate that India has attracted domestic-
market-seeking FDI rather than export-oriented FDI (Joseph and Reddy 2009). In
the Indian context, therefore, the role of FDI in promoting exports is still unclear
Page 9 of 42
—a point to be kept in mind while evaluating policies aimed at encouraging FDI

inflows.
While evaluating the role of the State in this context, it is important to

appreciate the constraints imposed by the rules and regulations of the current
multilateral trading framework. Under WTO commitments, developing countries’
access to export markets is tied to import liberalization and the opening up of
the domestic market (Sen 1997). In developing countries like India, this
seriously limits the role of strategic protection by the State, which played an
important role for the successful East Asian exporters who had ‘access without
reciprocity’ to the US market for exports (Chandra 2009). Further, developing
countries as a group can use a strategy of export-led growth strategy to build a
current account surplus only if developed countries are willing to run a
corresponding external sector deficit. Moreover, given the importance of
exchange rate policy for fostering export growth,7 a few developing countries
maintaining depreciated real exchange rates, would impose a ‘growth penalty’
on other developing nations whose traded goods sector is likely to shrink in the
face of such competition (Rodrik 2008).
Ultimately the role of the State must be analysed in context of the findings from
a vast literature on the determinants of countries’ export performance that
highlights both external and internal factors. (p.32) Among external factors,
growth slowdown and rise in protectionism especially in industrial countries as
well as competition from other developing countries exporting similar products
impose constraints on growth in exports. Myriad other factors including supply
bottlenecks, internal demand pressures, overvalued exchange rates can also
constrain growth in exports in a developing country.8 As far as possible,
transparent and rule-based measures should be designed to address these as
discretionary policies tend to create further distortions.
Export-led Growth: Empirical Evidence for India

The literature examining the empirical validity of the export-led growth
hypothesis does not differentiate between the notions of export ‘led’ and export
‘induced’ growth defined in the section ‘Analytical Issues’. As such any positive
linkage running from exports to growth is seen as evidence of export ‘led’
growth and the role of the State in creating conditions for export growth is not
explicitly addressed.
The empirical evidence on the relation between growth in countries’ aggregate

exports and economic growth is mixed and provides rather an ambiguous verdict
on this issue. A substantial number of early studies, mainly cross-country
analyses, found evidence of a positive correlation between exports and growth,
and for a long time this was used to emphasize the merits of outward orientation
and support the validity of the ‘export-led growth hypothesis’. More recent
studies, based on time series data for individual countries, make extensive use of
Page 10 of 42
more sophisticated econometric techniques and cast doubts on the positive

effects of exports on growth in the long run. In case of India as well, evidence
supporting ‘the export-led growth hypothesis’ is by no means conclusive.
Bhagwati (1978), Krueger (1978), and Michaely (1977) figure prominently

among the influential early studies that used correlation analysis in a cross-
country format to illustrate the benefits of export-promotion strategies. These
studies did not address the issue of ‘causality’ between export and income
growth; also their empirical investigations often lacked a sound theoretical
basis. Another set of early empirical studies (for example, Balassa 1978, 1985;
Feder 1983; Ram 1985, 1987) also found a positive link between exports and
growth. These conclusions were mostly based on cross-country (p.33)
regression models that estimated variants of a neoclassical production function,
with exports included along with labour and capital, in a somewhat ad hoc
manner.9
The more recent empirical literature mostly uses time series data in
cointegration and error correction models to examine the causal relation
between export and economic growth.10 In these studies, causality running from
exports to output growth is seen as evidence supporting the export-led growth
hypothesis, while causality in the reverse direction supports the case for growth-
led exports. Findings from such studies are mixed, with the results depending
largely on the sample of countries included, the time period of the study and the
specific nature of the model being estimated.11
Studies on India’s experience with export-led growth fail to present a clear

verdict on this issue. Early studies focusing exclusively on the pre-reform period
failed to detect any causality between exports and economic growth (for
example, Dodaro 1993; Jung and Marshall 1985). Later studies, covering the pre-
and post-reform periods, do find causality, but little support for export-led
growth. Most results for India support either a two-way relation between income
and export growth (for example, Chandra 2002, 2003; Dhawan and Biswal 1999;
Ekanayake 1999; Love and Chandra 2004) or they find causality running from
income to export growth (for example, Mallick 1996; Marjit and Raychaudhuri
1997; Nain and Ahmad 2010). A few studies (for example, Anwar and Sampath
2000; Shirazi and Manap 2005) find absence of any causal relation between
export and income growth.12
Dash (2009) and Paul and Das (2012) report evidence in support of export-led
growth in post-reform India. Dash uses quarterly data for the period 1992 to
2007, while Paul and Das’s study is based on quarterly data from 1996 to 2010.
However a study by Nain and Ahmad (2010), also using quarterly data from the
post-reform period (1996 to 2009) finds support for growth-led exports rather
than export-led growth. The studies use multivariate models (though model
specifications are not identical) and similar econometric techniques. Pradhan
Page 11 of 42
(2010) also finds evidence of export-led growth for India and no ‘reverse
causation’ from GDP growth to exports. However, both the model specification
and the period covered in this study (1970–1 to 2009–10) differ from the ones
above. Clearly, evidence in support of export-led growth in the Indian context is
neither conclusive nor (p.34) robust, and tends to be extremely sensitive to
model specification and choice of study period.
At this point, two issues are worth noting. First, the empirical literature provides
some support for causation running from output growth to growth in exports in
the Indian case. This result indicates that the Keynesian export multiplier may
be of limited importance for the Indian economy. Rather, it points to the
continuing importance of supply constraints that are relaxed when growth picks
up, allowing growth in exports. However, these results apply to aggregate
exports. Sector- and industry-level analyses of export performance are needed to
identify the nature of constraints faced by specific sectors and industries.
Second, the various avenues through which export growth can enhance
economic growth receive scant attention in the literature discussed above. This
is a glaring lacuna in this empirical literature. It practically ignores the role of
factors such as credit availability, targeted investment packages, FDI,
government expenditure on infrastructure, etc., which may act as important
channels linking growth in export and output.13 It is often difficult to incorporate
all such variables in a time series framework, owing to data-related problems.
Nevertheless, the possibilities of carrying out rigorous empirical analyses on the
relative importance of such factors in the Indian context need to be explored. In
fact there is also a serious dearth of rigorous studies analysing the relative
importance of factors (for example, price and non-price factors) contributing to
India’s export performance. Detailed sector-specific and/or industry-level studies
might add valuable insights into some of these issues and problems.
In what follows, we examine the policies and performance in the pre- and post-
reform periods and try to analyse the nature of export-income linkages that have
prevailed in the Indian context.
Trade and Industrial Policies in the Pre-reform Period (1950–79)14

Policies
The import-substituting industrialization (ISI) model lay at the core of industrial
and trade strategy from the inception of planned development in India in the
mid-1950s until early in the 1980s. It fostered (p.35) growth of a diversified
manufacturing production structure, with extensive government controls
directing allocation of resources and trade barriers insulating producers from
international competition.
The Second Five Year Plan, based on the Mahalanobis Growth Model, envisaged
investment growth led by large-scale public investment in the domestic capital
goods sector, as India’s ability to earn foreign exchange (and hence capacity to
Page 12 of 42
import capital goods) was perceived to be limited. ‘Export pessimism’

characterized the country’s approach towards trade openness at the inception of
the planning process, largely stemming from an apprehension that export of
primary products would result in long term decline in terms of trade. While
industrialization was seen as an essential precondition for creating a
manufactured goods export base.
Greater policy emphasis on export promotion became apparent especially after

the massive devaluation of the rupee in 1966 and with the emergence of a
binding foreign exchange constraint from the mid-1960s onwards. Various
export-promotion schemes were introduced, essentially involving tax exemptions
and provision of input subsidies to exporters, especially via access to imported
inputs.
A system of import licensing was in place for rationing scarce foreign exchange
and protecting domestic industry from foreign competition by restricting
imports. Imports of consumer goods were totally banned and goods for which
domestic substitutes were being produced could only be imported by obtaining
import licenses. Strict restrictions were also in place on foreign capital inflows.
As such external policy was essentially geared to provide industry with
protection from foreign competition and strategic access to imports for
industrialization.
The industrialization process aimed at creating capacity in the capital goods

sector, perceived to be the most important constraint for sustainable growth.
State-owned public enterprises dominated the capital- and technology-intensive
capital goods sector, with strategic sectors like iron and steel, coal, power, arms
and ammunition, etc., reserved solely for the public sector. The private sector
was to play a key role in provision of consumer goods, especially in the ‘small
scale’ sector.
A system of industrial licensing was the main instrument for controlling private
investments and directing resources towards ‘priority’ sectors for optimal
utilization of scarce resources. The Monopolies (p.36) and Restrictive Trade
Practices (MRTP) Act was in place for preventing emergence of monopolies and
for regulating anti-competitive behaviour of firms, given the natural tendency for
such practices in a protected market. In keeping with the requirements of this
law, large firms that held assets above a certain threshold and dominant firms
with a large market share had to be registered with the government. Such firms
needed permission from the government for activities such as substantial
capacity expansion, setting up new ventures, mergers and acquisitions, and so
on.
Given the capital intensive nature of the heavy industrialization programme, the
production of relatively labour-intensive consumer goods (almost 800 items) was
Page 13 of 42
reserved for small scale production—this was the primary strategy for
employment creation, while the capital goods sector was to be the engine of
growth. Small-scale production had an important role to play, especially at the
initial stages of the industrialization process, given the flexible production
structures of small firms and their capacity to produce diversified products.
More importantly, it was to provide a safety net, promoting equity with growth
by absorbing surplus labour and nurturing entrepreneurial talent. In India, the
small-scale sector has accounted for the bulk of employment and manufactured
exports mainly consisting of labour-intensive manufactured goods (like gems and
jewellery, handlooms, leather and footwear, handicrafts).
The banking sector was geared to provide financial support for the
industrialization process, with interest rates and sectoral allocation of funds
being controlled by the government. Thus, the Indian industry was domestically
financed with limited reliance on foreign capital—financial institutions provided
long-term finance at concessional rates and public-sector commercial banks
provided working capital. The stock market played a relatively small role,
especially for small and medium enterprises, which relied entirely on bank credit
for investment.
Reliance on the domestic market lay at the heart of the development model
adopted by the Indian planners, which largely ignored specializing in production
along lines of comparative advantage and the growth opportunities presented by
the international market. Since India was a low-income country with nearly
three-quarters of its workforce in agriculture, the success of this growth
strategy was crucially dependent on the pace of growth in agricultural
productivity (p.37) and incomes. By providing wage goods and raw materials
for industry and a market for the final product, agricultural growth was to
provide critical inputs for industrialization, while industrial expansion was to
lead the process of structural transformation by absorbing surplus labour from
the agricultural sector and raising productivity growth in the sector.
Performance
From the 1950s up to the end of the 1970s, the economy grew at what has come
to be known as, the ‘Hindu rate of growth’. Over this period, output grew at
about 3.5 per cent per annum on average and growth in per capita income was
barely 1.5 per cent per annum.
Industrial growth occurred at 5.5 per cent per annum over this period, growth
being especially rapid till the mid-1960s, at almost 7 per cent per annum.
Thereafter, owing to a number of factors including crop failures, border
conflicts, freezing of foreign aid from the US, massive currency devaluation, and
major oil price shocks in the 1970s, there was deceleration, with industry
growing at an average of 4 to 4.5 per cent between 1966 and 1980.
Page 14 of 42
Merchandise exports grew only at about 5 per cent from 1950 till 1980, while
world exports expanded at almost double this rate. As such, India’s share in
global non-oil exports declined from 2.3 per cent in 1950 to 0.6 per cent by 1980
(Athukorala 2008). The composition of merchandise exports changed over this
period—almost 44 per cent of India’s exports comprised agricultural goods in
1960, which had declined to just over 30 per cent by 1980, while the share of
manufactured exports grew from about 45 to 60 per cent over the same period
(Figure 2.1). By the end of the 1970s, services accounted for only about 15 per
cent of total exports.
An important trend in the pre-reform period was the relatively high growth in
employment of 2.8 per cent per annum, given GDP growth of just about 3.5 per
cent. The resulting employment elasticity (measured as the ratio of employment
growth rate to GDP growth rate) of 0.61 was the highest achieved ever since.
However, the labour absorption capacity of the organized manufacturing sector
was limited—nearly 60 per cent of the workforce was self-employed, over a
quarter (nearly 27 per cent) was casual wage workers and less than 15 per cent
held quality jobs as regular salaried workers. As such, by (p.38)
1977–8, over 70 per cent of the

workforce were still employed in
the agricultural sector, with
industry creating jobs for only
about 12 per cent and the
remaining absorbed by services.
Implications
India had built a diversified
manufacturing base under the
ISI regime, but it was high cost,
inefficient, and not
internationally competitive. A Figure 2.1 Composition of India’s
number of factors contributed Merchandise Exports (in per cent)
to this. Source: Author’s calculations based on
data from Economic Survey of India
India’s choice of
2012–13, available at http://
industrialization strategy based
indiabudget.nic.in/survey.asp.
on capital-intensive industries,
contrary to its natural
comparative advantage, was bound to create a high-cost production structure,
capital being a scarce and expensive resource. In practice, the system of
industrial licensing created severe inefficiencies in the industrial structure,
limiting competition in the domestic market and creating an oligopolistic market
structure. The Licence Raj largely failed to achieve the objectives of ensuring
optimal allocation of investment, curbing monopoly, and reducing regional
concentration. The extensive administrative controls and their sheer complexity
Page 15 of 42
raised transaction costs and in (p.39) general hampered inter-sectoral mobility

of productive resources. The MRTP Act also hindered industrial growth by
imposing constraints on firm size and market share per se, rather than focusing
on anti-competitive behaviour.
Import licences were generally not given in cases where domestic production
capacity was already in place, effectively eliminating international competition,
and adding to inefficiencies in the production structure by limiting access to
imported inputs and technology.
A succinct account of the problems with the licensing regime emerges from the
following:
[A] few business houses…monopolised Indian industry. With their

organisational features, their diversified structure, their dominance of
virtually every sphere of manufacturing and their control over finance,
they were able to manoeuvre the regulatory system, especially the
licensing system, in their favour…. [They] were in a position to garner
more than a fair share of licences…. [T]hey merely held on to them as a
means to prevent the entry by others into areas which they already
dominated…. This meant that the licensing system, meant to ensure that
actual investments were in keeping with planned inter-sectoral allocations,
and expected to curb monopoly and prevent excessive regional
concentration, failed to realise these very goals. Rather, it served as a
barrier to entry that protected the traditional bases of monopoly power of
the business groups that had historically dominated India’s industrial
scene. Combined with tariff and non-tariff protection against competition
from imports, this barrier to entry ensured that these groups continued to
flourish even though they spread their investments thin, invested in
uneconomic plants even in areas where there were substantial economies
to be gained from increases in scale, and saddled themselves and the
economy with high costs of production relative to that in the world
economy. (Chandrasekhar 2002)
Anti-export bias was inherent in the regime, as it implicitly ‘taxed’ exports by

diverting scarce resources to the production of import substitutes. High-import
tariffs on final and intermediate goods made imported capital goods, technology,
and raw materials expensive, raising costs for potential exporters. The
overvalued exchange rate supporting the import-intensive industrialization
programme lowered the cost of imports, but worked against export
competitiveness. In general, restrictions on international trade and capital flows
reduced (p.40) international competition and allowed domestic prices of
manufactured goods to remain higher than competitive prices, accentuating the
bias against exports (Wolf 1982).
Page 16 of 42
A number of export promotion schemes were in place, essentially based on

provision of various input subsidies to exporters. However, access to such
benefits was governed by a complex regulatory system. In most cases, lack of
transparency and absence of simple, clear-cut guidelines on eligibility for export
promotion schemes raised transaction costs and limited the effectiveness of such
policies. Further, the extent to which such schemes actually contributed to
quality enhancement of exports is quite unclear, for concerns about product
quality have been perhaps the most serious problem faced by Indian exports in
international markets (Nayyar 1988). On the supply side, constraints related to
basic infrastructure like connectivity to ports, inadequate storage and
transportation facilities raised costs, created delays and uncertainty, affecting
export performance (Marjit 1998; Marjit and Raychaudhuri 1997).
The limits to export orientation in the Indian industry were defined in part by
sector-specific government policies and in part by the profit incentives
presented by a protected domestic market (see Nayyar [1976, 1988]; Wolf [1982]
for detailed analyses). In many cases exports became a residual or a secondary
concern, with production mostly geared for sale in the protected domestic
market. For instance, Reliance Industries set up world class production
capacities, not for exports, but primarily for taking on existing players in the
oligopolistic domestic market with high profit margins (Chandrasekhar 2002). In
certain industries like tea, textiles, steel, export orientation actually declined
under the ISI regime (Roy 2008).
Reserving certain activities permanently for the small-scale sector in effect

created certain problems, for instance, by imposing restrictions on the organic
growth of firms. It also affected India’s export performance. Many of the
reserved items, such as garments, shoes, and toys, had high export potential and
countries like China achieved remarkable success in penetrating world markets
in these areas, stimulating rapid growth of employment in manufacturing. It has
been argued that in the Indian context, this policy prevented realization of
economies of scale, inhibited technology upgradation in these sectors, resulting
in high costs and restricted competitiveness in the international market
(Ahluwalia 2002; Gang 1995; Morris and Basant 2008).
(p.41) Our analysis on the interface between export promotion and industrial
strategies highlights the elements of industrial policy that contributed to the
development of an impressive manufacturing base, yet failed to create an
efficient production structure that could serve as a platform for export of
manufactured goods in the pre-reform period. It appears that export growth was
expected to follow growth in industry rather than lead industrial growth.
However, the inefficiencies inherent in the state-controlled ISI regime added to
costs, thereby undermining firms’ ability to compete in international markets.
Meanwhile, high returns ensured by a protected domestic market further
Page 17 of 42
undermined the incentive of domestic firms to strive for a share of the world
market.
In the absence of a significant export thrust, the role of the domestic market was
of paramount importance for industrialization. However, the slow pace of growth
in agricultural productivity (only 1.28 per cent per annum, between 1967–8 and
1980–1) held back expansion of the domestic market. This in turn constrained
the possibilities of exploitation of economies of scale by domestic industry,
thereby contributing to the prevalence of a high cost industrial structure.
Trade Openness and Industrialization in the Post-reform Era (1980

Onwards)15
Economic reforms, seen as a necessary strategy for addressing the inefficiencies
bred in a closed economy with extensive government controls, were introduced
in gradual steps since the 1980s and intensified 1990s onwards, in the aftermath
of the BoP crisis in 1991. The reforms package was in part shaped by India’s
commitment to the General Agreement on Tariffs and Trade (GATT) and later
WTO-related multilateral trade agreements; nevertheless it served to address
some of the felt problems associated with the earlier regime.
Policies
Trade liberalization measures involving easing of restrictions on imports of
capital goods and intermediates and rationalization of exchange rates, were
introduced early 1980s onwards, especially for improving the competitiveness of
Indian exports. Along with this, policies of deregulation and privatization were
introduced gradually (p.42) from the mid-1980s, with the policy package
seeking to enhance the role of the market and private enterprise, while reducing
the extent of government control on economic activities. The importance of the
1980s reforms has subsequently been emphasized in the literature, as they
marked the beginning of a complete departure from the earlier policy paradigm
of planned economic development.
In the 1980s, trade policy was increasingly responsive to the needs of exporters
as it provided them with freer access to imports, while exchange rate
management focused on avoiding a real appreciation of export effective real
exchange rate. By the latter half of the 1980s, the process of replacing
quantitative restrictions with tariffs had begun and import access for exporters
had been liberalized substantially. Further, exchange rate management had
brought about a gradual but significant real depreciation of the rupee. In fact it
has been argued that this first phase of reforms served to unleash forces that
would later put the economy permanently on a higher growth trajectory (Rodrik
and Subramanian 2005; Subramanian 2008).
Economic growth picked up in the 1980s, fuelled by policy changes, by a fiscal

stimulus and was supported by fairly robust growth in the agricultural sector.
However, growth in exports failed to keep pace with burgeoning imports and the
Page 18 of 42
nation relied heavily on short-term borrowings from the international market to

finance burgeoning fiscal and current account deficits. As such, economic
growth came to a grinding halt in 1991 with the onset of a severe external
payments crisis. The Gulf War acted as a trigger, while the mode of financing the
internal and external deficits was a prime underlying factor leading to the
payments crisis. Neoliberal economic reforms were introduced with a view to
address the underlying macroeconomic imbalances and distortions created by
the earlier regime of state controlled planned economic development. While the
jury is still out on the issue of whether the policies have successfully achieved
their stated objectives, the government is all set to launch ‘second generation
reforms’ that envisage further deepening and widening of the liberalization
process for reviving and sustaining economic growth.
The systematic and market-oriented reforms that were introduced since 1991
broadly concentrated on three thrust areas. First, the reforms involved the
greater role of private enterprise and enhanced market orientation, with gradual
withdrawal of the State from most areas16 along with sustained efforts to
contain fiscal deficit within ‘reasonable (p.43) limits’. Greater flexibility for the
private sector was introduced partly in response to the disappointing growth
performance and the perceived inefficiencies of the public sector. There was a
distinct change in policy with reduction in the size of the public sector and a
perceptible change in its role. The tendency to nationalize loss-making public
sector units arising out of employment-related concerns, gave way to substantial
disinvestment, especially in non-priority sectors. Also there was little pressure to
expand public investment in areas where private investment was forthcoming
and the number of industries reserved solely for the public sector was drastically
reduced to only 3 from 18, earlier on. A number of items were removed from the
list of industries reserved for small-scale production, including garments, shoes,
toys, auto components, all of which were potentially important for exports.
Second, greater integration of the domestic with the world economy was sought
to be achieved by lowering barriers to international trade and capital flows,
especially with a view to enhance competition and efficiency of domestic
enterprise. Import licences were abolished across a wide range of products,
beginning with capital goods and intermediates. Import liberalization was taken
further, in gradual steps—initially import licences were abolished for most goods
other than consumer goods. Thereafter, 2001 onwards, all quantitative
restrictions on imports of manufactured consumer goods and agricultural
products were finally phased out over a three-year period. Further, quantitative
restrictions were totally replaced by tariffs, and tariff rates have since been
brought down continuously, in line with the trend across the developing world.
Rules on FDI were liberalized, primarily driven by the belief that this would
increase the total volume of investment in the economy, improve production
technology, and increase the access to world markets. The policy now allows 100
Page 19 of 42
per cent foreign ownership in a large number of industries and majority

ownership in all except a few sectors like banking and insurance.
Third, a set of institutional reforms were initiated to regulate financial markets,

to regulate competition and in general, to address the evolving requirements of
the transition process, from a planned to a more market-oriented economy. For
instance, major financial reforms were initiated involving banking sector
reforms, as well as measures for effective regulation of stock markets (such as
strengthening the Securities and Exchange Board of India [SEBI]). Steps were
taken for (p.44) formulation of a Competition Act as the MRTP Act was
dismantled in 1991, and so on. The process of institutional reforms is still
underway, with the competition policy being introduced only recently, in 2010. In
fact, the need for institutional reforms ushering in better governance and
greater transparency in public life is being widely felt and strongly articulated at
the current conjuncture.
Regarding exports, the thrust on providing exporters easy access to imported

inputs remained, along with emphasis on tax holidays and myriad incentives for
export-oriented units. However, these programmes might have lost some
significance due to the falling tariff and tax rates in general. Rationalization of
rules and administrative procedures was also undertaken. In addition, special
incentives (such as tax relief) were in place for promoting services exports
especially, software-related services. However, majority of the export-promotion
schemes measured export success almost solely in terms of total value of
exports; innovative schemes, rewarding exporters for enhanced value added in
exports or for quality improvements or for successful brand building, were
largely missing from policy focus.
Special economic zones (SEZs) were given special importance for their role in
attracting foreign investment and export-oriented business in India. The policy
also concentrated on promoting labour-intensive exports expected to draw
benefits from enhanced market access in developed country markets under the
WTO rules. These included core areas such as agriculture and labour-intensive
manufactured goods like handicrafts, handlooms, gems and jewellery, and
leather and leather goods.
Performance
There was a growth turnaround in the Indian economy from the 1980s, when
industrial growth rate accelerated to over 7 per cent per annum with
improvement in public expenditure on infrastructure and in agricultural growth.
Under the Sixth and Seventh Five Year Plans, for the first time, aggregate output
grew at over 5 per cent per annum while growth in per capita income doubled to
about 4 per cent. Industrial growth picked up further in the 1990s and was at an
unprecedented high of nearly 15 per cent in 1995–6. However the Asian
financial crisis triggered a downturn and the industrial growth rate dropped to
Page 20 of 42
7.7 per cent in 1996–7 and further to 3.8 per cent in 1997–8. Signs of recovery
(p.45) became apparent only around 2004–5, with industrial growth touching
nearly 9 per cent in that year. Output growth accelerated thereafter with the
rate averaging 7 per cent per annum under the Tenth Plan (2002–7) and almost
9 per cent during the Eleventh Plan period.17
However, since 2007–8, a global commodity price shock led by oil prices and the
global financial crisis, led to a slowdown in industrial growth especially by
affecting availability of external credit to the industrial sector. A turnaround
seemed apparent from 2009–10, but it was short-lived. As crises gripped the
eurozone and the global recession deepened, GDP growth slowed down sharply
from 2011 to 2012. It hit a four-year low of 4.4 per cent in the first quarter of
2013–14 with the manufacturing sector actually contracting by 1.2 per cent.18 It
was expected that India would not be much affected by the global recession and
even spearhead recovery along with China, largely based on the strength of the
domestic market (GoI 2011). However, in 2015, even as the economy faced a
‘benign’ external environment (with falling global crude oil prices, sharp
reduction in current account deficits and buoyant capital flows) and moderate
inflation created space for lower interest rates, a turnaround in growth
remained elusive and slowdown in manufacturing persisted.
Despite significant growth in real GDP, employment growth slowed down in the
1990s, with total employment growing at 1 per cent and employment elasticity
of growth hitting a low of 0.15 between 1993–4 and 1999–2000. In the1970s,
when GDP was growing at just 3.5 per cent, employment growth had been
higher at 2.8 per cent. There is a close link between growth in total employment
and agricultural growth, given that nearly 60 per cent of the workforce is still
employed in the primary sector. Total employment grew at 2.4 per cent between
1987 and 1993 when agricultural employment was growing at 2.39 per cent. In
the post-reform period, the agricultural sector stagnated, mainly owing to falling
public investments in the sector, registering employment growth of just about
0.06 per cent between 1993–4 and 1999–2000.
Another disturbing trend on the employment front was the slow pace of job
creation in the organized manufacturing sector which experienced practically
‘jobless’ growth in the post-reform period. Employment growth in the organized
sector, comprising public and private sector enterprises, was only about 1.6 per
cent between 1995 and 2000. In fact, between 2000 and 2004, organized sector
employment (p.46) declined in absolute terms, especially due to the slowdown
in job creation in the public sector (Figure 2.2). Along with this, available
indicators point to a deterioration in the quality of employment—of all the new
jobs created between 1994 and 2000, only 4 per cent were in the organized
sector and the remaining in the unorganized sector. In fact, the share of regular
wage for salaried workers was lower in 1999–2000 (13.9 per cent) than in 1972–
Page 21 of 42
3 (15 per cent), while the share of casual wage workers recorded a steady
increase (Papola 2008).
On a positive note, recent evidence indicates a turnaround in employment in the

registered manufacturing sector (Goldar 2011a, 2011b). While factory
employment (most of which comes under registered manufacturing) fell by about
13 per cent between 1995–6 and 2003–4, it increased by 44 per cent between
2003–4 and 2008–9, growing at a rate of 7.5 per cent per annum. Latest
available data from the Economic Survey corroborates this pick up in
employment growth in the private sector (Figure 2.2). This is a welcome trend,
yet it has also been pointed out that the scale of new jobs created falls way short
of what is needed, given the rates of growth in the workforce. Also trend rate of
employment growth (at 0.8 per cent) in the factory sector has been much lower
than rates of growth of output (6.9 per cent) and fixed investment (4.5 per cent)
(Nagaraj 2011). Slowdown in manufacturing growth rates in 2013–14 is likely to
affect employment creation in the factory sector; although total employment
growth may not be dismal in view of a revival of sorts in the agricultural sector
which grew at 2.7 per cent in the first quarter of the year.
On the external front, trade liberalization policies seem to have gradually

reduced bias against exports in the Indian context. The
(p.47) growth of merchandise

exports picked up, registering 8
per cent per annum during the
1980s and over 12 per cent from
1991 to 2007. Total exports,
including merchandise and
services, grew even faster at over
Figure 2.2 Employment in Organized
14 per cent after 1991, reflecting
Sectors—Public and Private (in lakh
the higher rate of growth of
services exports in the post-reform persons)
period. There was a small increase Source: Economic Survey of India, 2012–
in India’s share in total world 13, available at http://indiabudget.nic.in/.
merchandise trade which
increased from 0.5 per cent in the
mid-1980s to 1 per cent in 2005. However, despite this gain in market share India’s
share in developing country exports has not registered any significant increase. This
indicates limited gains with respect to export competitiveness vis-à-vis other
developing nations (Athukorala 2008).
Merchandise exports account for the bulk (over 60 per cent) of India’s exports
(Figure 2.3). The composition of merchandise exports has undergone substantial
change—manufactured goods accounted for almost 70 per cent of total
merchandise exports in 2009–10, up from just about 45 per cent in 1960–1
(Figure 2.1). Yet, within manufacturing the share of labour intensive, low-
technology industries exports decreased steadily (from 52 per cent to 38 per
cent), with a rise in the shares of medium- (from 21 to 34 per cent) and high-
Page 22 of 42
technology exports (from 6 to 10 per cent, between 2002–3 and 2006–7) (IIFT
2008).
The reforms triggered remarkable growth in export of services, as the share of

services in the export basket rose steadily in the post reform period19 (Figure
2.3). Services were the fastest growing component of exports—during the 1990s,
India experienced highest growth of services exports among all economies, with
an average annual growth rate of 17.3 per cent (World Bank 2004). This was led
by phenomenal growth in export earnings from software services and business
process outsourcing (BPO) which experienced growth rates of over 50 per cent
in the second half of the 1990s. In fact, the composition of India’s services
exports has undergone substantial change in the post-reform period. The decline
in the share of traditional services such as travel and transportation was offset
by a rise in the share of software and emerging services (including a wide
variety of business services like accountancy, advertising, engineering, and
health services), which together accounted for over three-quarters of total
services exports by 2010 (Figure 2.4).
Foreign exchange earnings through service exports provided critical support to

India’s BoP by helping to finance a burgeoning trade (p.48)
Figure 2.3 Composition of India’s Total

Exports (in per cent)
Source: United Nations Service Trade
Statistics Database, available at http://
unstats.un.org/unsd/servicetrade, and
World Integrated Trade Solution (WITS),
available at http://wits.worldbank.org/
wits.
Page 23 of 42
deficit.20 Yet, growth in services

exports was concentrated chiefly
in the technology-intensive sectors
which experienced high growth in
labour productivity and created
jobs primarily for the skilled
workforce. Labour-intensive
services such as trade, hotels and Figure 2.4 Composition of India’s
restaurants, construction services, Services Exports (in per cent)
community, social and personal
Source: United Nations Service Trade
services, etc., which have high
Statistics Database, available at http://
employment elasticity did not
unstats.un.org/unsd/servicetrade.
experience a significant rise in
exports (Banga 2008).
A sharp slowdown in export
growth was evident 2008 onwards, due to the impact of the global recession led
by the trade collapse (p.49) in the US. Slowdown in employment creation,
especially in export-oriented sectors, was also apparent (Ghosh and
Chandrasekhar 2009). Although a recovery has been underway since the end of
2009, robust growth in exports may only follow recovery in the global economy,
given the importance of developed country markets especially for India’s
services exports.
Implications
In this section, first we briefly analyse the implications of the economic reforms
at the broad sectoral level, taking up industry, services, and agriculture in turn,
before looking at some specific issues related to the export sector, in light of the
aforementioned performance indicators.
One of the most important features of industrial growth in the post-reform

period has been the limited growth in employment in the sector, especially
mid-1990s onwards. Several factors have been held responsible for this trend.
Trade liberalization policies have contributed to this pattern in at least two ways
—by enhancing import penetration and encouraging export of capital intensive
products—as evident in the changing composition of India’s manufacturing
exports.
Import liberalization measures and fewer restrictions on entry of foreign capital

led to rising import penetration and gave foreign producers access to domestic
markets on an unprecedented scale. In a bid to remain competitive, domestic
firms were forced to adopt capital-intensive technologies, inappropriate in the
context of a labour-surplus economy like India, which has adversely affected
employment creation in the manufacturing sector (Ghosh 2004). Import
competition induced domestic firms to reduce scales of production and
essentially move up the downward sloping arm of their cost curves, thereby
Page 24 of 42
raising unit costs and reducing average output as well as factor absorption
(Barua et al. 2010).
Employment creation in the small-scale consumer goods sector is likely to have

been especially affected. These firms, accounting for the bulk of employment in
the manufacturing sector, produce most of the consumer goods that now face
substantial competition from imports. Further, with financial sector reforms and
subsequent cutback in priority sector lending by public sector banks, small-scale
firms faced a credit squeeze which no doubt had further adverse effects on
employment creation in this sector. Moreover, with interest rate deregulation
(p.50) and with the Reserve Bank of India (RBI) frequently relying on interest
rate hikes as the primary tool for targeting inflation, credit rationing is the most
likely outcome with adverse consequences for the supply of credit to small and
medium enterprises (SMEs) which account for the bulk of employment in the
organized manufacturing sector. Bigger firms with established reputation
manage to get the credit they need, while SMEs with higher perceived risk of
default are denied access to funds, effectively facing a borrowing constraint in
the credit market (Chandra 2010; Morris and Basant 2008; Nagaraj 2003). This
situation has only been aggravated in the aftermath of the global recession, with
even informal credit sources drying up.
It has also been argued that failure to introduce labour-market reforms has held
back employment creation in the Indian context (World Bank 2010). In the post-
reform period, firms have been exposed to greater competition in the product
market, which calls for greater flexibility in their responses; however,
restrictions on hiring and firing impose serious constraints on their ability to
adjust to the changing scenario. The ‘irreversibility’ of employment under
existing labour laws has been held responsible for the tendency of firms to
employ part-time and ‘casual’ workers, rather than hire ‘regular’ workers who
cannot be fired easily. While this argument has some merit, it must equally be
stressed that greater labour market flexibility can only be given serious
consideration once safety nets (such as, unemployment benefits or similar social
security arrangements for labour) are put in place.
The government, in its preoccupation with enhancing competitiveness and

efficiency of the domestic industrial sector, seems to have abandoned the critical
issue of creation of essential capabilities of the industrial sector, especially for
absorbing labour. This would only jeopardize achievement of the government’s
stated objective of ‘inclusive growth’. Creation of quality jobs, especially for the
low and semi-skilled workforce is of essence, especially in view of the widening
gap in opportunities being created for skilled and semi-skilled workers in the
current process of growth.
Page 25 of 42
Services have been the fastest growing sector since the 1990s, led by growth in
modern, technology-intensive sectors such as business and communication
services. As such, employment growth in services has lagged behind growth in
output and it even declined during the 1990s. This trend has been associated
with low growth and deceleration in (p.51) traditional, employment-intensive
services such as trade and distribution, tourism, construction, and railways that
have large backward and forward linkages (Banga 2008).
The educated labour force, especially the segment with access to higher
education made the service-led growth feasible and, in turn, drew maximum
benefit from this process. The nature of services growth and the opportunities
being created for high-skilled labour in the process certainly brings to the fore
the importance of investing in education at the current conjuncture. Education is
fast becoming an important tool for individuals to acquire skills that are in
greater demand for improving chances of moving up the income ladder.
Growth in agricultural output and employment has stagnated in the post-reform

period, largely owing to stagnation, even decline in public investment in the
sector. Private investment in the sector has picked up, but this may not be
sustainable without adequate public investment in rural infrastructure. Trade
liberalization has affected the agricultural sector, creating new profit
opportunities in the farm sector especially related to production of commercial
and high-value products for sale in the international market. At the same time it
also exposed farmers to volatility in international commodity prices, even before
developing necessary institutions and instruments for hedging associated risks.
In fact, the inability to bear risks and prospects of facing a debt trap have been
held among the prime causes for the alarming rise in farmer suicides in recent
years. Agricultural exports registered impressive growth in the first half of the
1990s; thereafter, the initial growth momentum petered out, largely owing to the
downward trend in global commodity prices that led to a narrowing down of the
domestic and international price differential in agricultural products (Chand
2010).
In fact an area on which there is immense scope and need for research is on the
implications of agricultural trade liberalization for domestic food availability and
food prices. The overall implications of food exports are still unclear in the
Indian context, with over a quarter of the population still below poverty line and
with the poor being net buyers of food. Further, inequities in land-holding
patterns and the preponderance of small and marginal holders in agriculture has
implications on the supply side that need to be thoroughly explored. Important
research questions in this context include role of agricultural trade reforms on
diversion of land from production of food to non-food crops and the related issue
of diversion of production from (p.52) sale in domestic to export markets.
There is need for rigorous empirical research on how changes in relative prices
and in the incentive structure have affected land use patterns, food production
Page 26 of 42
and availability in the Indian context, for informing policy on these critical
issues. Further, in recent years competing claims on rural land have emerged
owing to the importance given to industrialization based on SEZs and also to
skyrocketing prices in the real estate sector. These are emerging issues on
which there is ample scope and urgent need for research.
On the external front, despite broadening of the export base and diversification
of trading partners, India’s export performance has lagged behind that of China
and other Asian countries with its share of world exports remaining low. Unlike
in China and Southeast Asia, FDI in India has not played an important role in
export penetration and is instead oriented mainly towards the domestic market.
In certain sectors, it did play an important role. For instance, in case of services,
opening up the telecommunication sector to FDI played an important role in
export of IT and BPO services. However, overall its role has been limited,
especially with regard to the manufacturing exports sector. It has been argued
that even with substantial import liberalization, tariff rates in India are highest
among developing nations, making it a relatively high-cost producer and thus
less attractive as a base for export production (Ahluwalia 2002).
A number of non-price factors that continue to hold back export performance

need immediate policy attention. On the supply side, there are problems related
to high transaction costs owing to complexities in rules and regulations, which
persist despite significant rationalization till date, as do problems related to
infrastructure bottlenecks that continue to add to operating costs, adversely
affecting export performance. Service exports are also constrained by myriad
factors related to infrastructure, credit, and regulations. Further, immigration
and labour-market regulations in host countries continue to impose constraints
on on-site service delivery by Indian workers, while backlash against
outsourcing in developed country markets, especially in aftermath of the global
financial crisis and the deep ensuing recession, is also having a negative effect
on the BPO sector.
An important non-price factor that has affected India’s export performance is the
poor quality perception of Indian products abroad (Nayyar 1988). In fact, quality
concerns have consistently plagued Indian exports and the fragmented industry
structure characterized by (p.53) a large number of small producers for major
export categories, such as textiles and leather, is likely to have aggravated this
problem. Product quality of export products is typically not observed by buyers
before actual consumption and highly fragmented industrial structures tend to
generate negative informational externality regarding ‘average’ industry quality,
inducing even better producers to offer lower qualities. To overcome these
problems, decentralized production by large fragmented firms can be brought
under centralized management and marketing, with industry-specific export
promotion councils playing an important role in this respect. This model was
successful in Italy, one of the largest leather exporters, which had similar
Page 27 of 42
decentralized production and marketing structure. As such, export promotion

efforts should seriously explore ways of improving in-house R&D by firms, for
quality improvement and quality certification (for example, via ISO-9000-type
schemes) for improving quality perceptions among foreign buyers (Acharyya
2006).
A number of opportunities and challenges lie ahead for India’s exports. For
instance, the phasing out of Multi-fibre Agreement (MFA) restrictions on textile
imports from 2005 presents new opportunities for the textile exports, which
constitute almost a third of India’s manufactured exports (Verma 2010). Given
the labour-intensive nature of the textiles sector, this should result in significant
positive spinoffs for employment. At the same time, this means there is likely to
be greater emphasis on non-tariff barriers (for instance, through imposition of
‘labour standards’ or ‘environmental standards’) in developed country export
markets (Mehta 2006). In anticipation, India needs to enhance preparedness to
deal with such situations swiftly and effectively, compiling necessary research
and database for the purpose with the help of the concerned exporters’
associations. In fact ensuring actual access to export markets in developing
nations under WTO rules will be a major challenge for India in the near future,
given the newly emerging forms of protectionism in the developed countries
under the garb of anti-dumping measures and imposition of environmental and
labour standards.
While India may not be among the major exporters in the world economy today,
it is definitely emerging as a major market. In fact this has been a significant
contrast of the Indian experience with that of countries like China. Available
evidence indicates that import content of domestic consumption in China is far
lower compared to import (p.54) content of Chinese exports (Nayyar 2011).
The reverse appears to be the case for India, as domestic manufactured goods
and services provide the chief platform for India’s exports, while import content
of domestic consumption is on the rise. In this context, detailed studies on the
import-intensity and net foreign exchange earning potential of specific industries
can provide valuable insights and go a long way towards informing trade and
industrial policy in India.
Over the past few decades, India made a significant transition from an
essentially closed economy to a much more open economy, eliminating barriers
to international trade and capital flows, opening up the domestic market and
exposing domestic firms to foreign competition. In this chapter, we tried to
analyse the implications of this policy change for economic growth and
employment creation, focusing especially on the role played by exports in this
process. We would finally like to underscore a few issues that emerge from the
foregoing analysis.
Page 28 of 42
Under the ISI regime, growth in manufacturing exports failed to take off despite
impressive achievements made in setting up a diversified manufacturing sector.
In fact, even after two decades of market-oriented economic reforms and
comprehensive trade liberalization, growth in export of manufactured goods, on
the scale witnessed in the East and Southeast Asian economies has largely
eluded India.
Export growth accelerated significantly in the post-reform period, primarily led

by phenomenal growth in export of services. Growth of GDP during this period
has also been impressive. Can it be said therefore, that India has been
experiencing export-led growth? The empirical literature that examines causality
between exports and GDP certainly provides a mixed verdict on this issue.
Our analysis indicates it may be hard to attribute export performance in the

reform era, solely to any specific element inherent in India’s overall policy
towards exports. Over the past decade or so, exports have grown rapidly due to
a combination of several factors. Some were policy related but changes in world
market conditions also played a critical role in India’s export experience.21 In
fact Indian exports are known to be pro-cyclical—India’s export–GDP (p.55)
ratio rose sharply from 14 per cent in 2002 to 25 per cent in 2009 as world trade
grew at 16.5 per cent annually between 2003 and 2008 (Nagaraj 2013).
Export promotion assumed especial importance in the post-reform period,

particularly to improve the current account situation in an era of liberalized
imports. To this end a number of new export promotion schemes and incentives
were introduced. However, no major changes could be detected in the basic
orientation of export policy. It remained focused on exchange rate management
and on input-subsidy and tax-holiday based schemes for promoting exports,
reflecting policy preoccupation with price-competitiveness of exports. Non-price
factors affecting India’s export performance received little policy attention even
during the reforms era. A number of problems faced by exporters, especially
related to basic infrastructural constraints, remained unaddressed.
Reforms in India concentrated on enhancing cost efficiency and international

competitiveness of domestic industry, with the assumption that this would
automatically contribute to improvement in export performance. In this sense,
for India, there is absence of a clear cut strategy for growth, based primarily on
exports, as in the East and Southeast Asian economies. As such, it would
perhaps be fair to classify the Indian experience as being one of export
‘induced’, rather than export-‘led’ growth.22
Yet there are elements of ‘export-led growth’ in the Indian experience as well.
Policy has contributed to export growth indirectly, with the overall reforms
package reducing ‘bias’ against exports and affecting incentive structure of
producers. Also exchange rate management has focused on avoiding prolonged
Page 29 of 42
episodes of appreciation of the real effective exchange rate. Further, high shares
of investment and savings in GDP in the post-reform era are comparable to those
in successful Asian exporters; however, the nature of the link between export
and investment growth in the Indian context needs to be examined thoroughly.
A detailed analysis of the exact factors affecting India’s export performance is

not undertaken here, given the limited scope of the present chapter. This
exercise may be taken up for rigorous analysis in light of the above arguments,
to examine the case for ‘export-induced’ versus ‘export-led’ growth in the Indian
context.
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Page 39 of 42
Notes:
(*) I am extremely grateful to Amiya Bagchi, Nirmal Chandra, C.P.
Chandrasekhar, Jayati Ghosh, and Prabhat Patnaik for a number of valuable
comments. I am thankful to the anonymous referees for their comments and
suggestions which helped in improving the analysis in this chapter. I would
especially like to thank Krishnakumar S. and participants at the ICSSR Research
Surveys Workshop in Economics (May 2011) for many helpful suggestions. I
would also like to thank Rittwik Chatterjee and Rakhi Chatterjee for excellent
research assistance. All errors and omissions are my own.
(1.) I would like to thank Amiya Bagchi for pointing out the distinction between
export-induced and export-led growth and for clarifying related concepts.
(2.) Given the vast theoretical literature in this area, a comprehensive review
lies beyond the scope of this chapter; perforce a selective approach is adopted
with an emphasis on literature relevant to developing countries.
(3.) This result holds in case the export good is produced by a monopolist who
takes advantage of a protected home market and practices price discrimination,
thereby exporting a product without truly having a cost advantage. In this case
post-liberalization fall in product prices reduce his profits.
(4.) For an introductory coverage of these models, see Krugman and Obstfeld
(2009). The textbook by Bhagwati et al. (1998) provides a more detailed
discussion on these models.
(5.) Previously published as Thirlwall (1979).
(6.) The discussion in this section is based on Dasgupta and Singh (2005a,
2005b), Eichengreen and Gupta (2010), Gordon and Gupta (2004), and Singh
(2006).
(7.) The importance of real exchange rate depreciation or maintaining low levels
of the exchange rate in fostering export growth in developing countries in East
Asia and elsewhere is well recognized.
(8.) A discussion of price and non-price factors affecting export performance in

the Indian context appears later in the sections ‘Trade and Industrial Policies in
the Pre-Reform Period (1950–79)’ and ‘Trade Openness and Industrialization in
the Post-Reform Era (1980 Onwards)’.
(9.) The underlying idea seemed to be that production for exports had associated
efficiency gains with positive effects on the growth path of aggregate output.
(10.) For details on these methodologies and for a standard treatment of time
series econometrics, see Enders (2004). For a non-technical, intuitive discussion
on these methodologies, refer to Kennedy (2008).
Page 40 of 42
(11.) See Medina-Smith (2001) for a useful classification (by findings,

methodology used, etc.) of the fairly voluminous empirical literature that
examined the export led growth hypothesis for various countries in the 1980s
and 1990s.
(12.) Some studies use a bivariate framework (Ekanayake 1999; Mallick 1996;
Marjit and Raychaudhuri 1997), while others estimate multivariate models
(Chandra 2002, 2003; Dash 2009; Dhawan and Biswal 1999; Love and Chandra
2004; Nain and Ahmed 2010; Pradhan 2010); most are based on data from both
pre- and post-reform periods, while a few recent studies focus solely on the post-
reform period (for example, Dash 2009; Nain and Ahmed 2010). Paul and Das
(2012) examine the relation between exports and output from 1960 to 2009 and
also work with quarterly data for the period 1996 (Q2) to 2010 (Q4).
(13.) As a result questions such as ‘currently, is credit, or infrastructure, the

main binding constraint on India’s export performance?’ remain unanswered.
(14.) The discussion in this section draws extensively on Basu (2008),

Chakravarty (1987), Joshi and Little (1994), and on Government of India (GoI)
(various issues).
(15.) The discussion in this section draws extensively on Basu (2008),

Chandrasekhar and Ghosh (2000), Joshi and Little (1994), Nayyar (1994, 1997)
and on Government of India (various issues).
(16.) Even for provision of public goods, such as health, education,

infrastructure, delivery of services via the public-private partnership (PPP)
model is being actively explored.
(17.) The numbers cited in this section are based on the GDP series with 2004–5
base year; as such they would differ from figures based on the GDP series with
2011–12 as base year.
(18.) Estimates of GDP for the First Quarter (April–June) of 2013–14, released on
30th August 2013 by the Central Statistics Office (CSO), Ministry of Statistics
and Programme Implementation.
(19.) A change in this trend was evident only since 2008, with the onset of
recessionary conditions in the global economy.
(20.) For instance, October to December, 2008 while India's trade deficit was
12.6 per cent of GDP, current account deficit was much lower at 5.1 per cent of
GDP.
(21.) For instance, growth in India's merchandise exports, especially in sectors

such as garments, chemicals, and pharmaceuticals, can be mainly attributed to
dynamism in the global market, while exports of metals and engineering goods
Page 41 of 42
grew mainly due to increased demand from China since 2002 (Ghosh and
Chandrasekhar 2009).
(22.) These concepts and the distinction between them were discussed earlier, in
the section ‘Analytical Issues’.
Page 42 of 42
India’s Foreign Trade

Economy
Jayati Ghosh

Print ISBN-13: 9780199458943
DOI: 10.1093/acprof:oso/9780199458943.001.0001

Recent Patterns, Challenges, and Prospects
Malini Chakravarty
DOI:10.1093/acprof:oso/9780199458943.003.0003

This chapter examines the recent pattern of India’s merchandise trade and tries
to understand whether, and to what extent, the surge in trade, in particular
exports, in the recent period can be seen as ‘success’ either in general or of
reform policies. A related issue that is considered is whether there are enough
reasons to believe that the expansion in exports witnessed thus far can be
expected to be sustained over a longer period of time. An analysis of the product
categories that have been the major drivers of merchandise exports in the 2000s
and the conditions, including domestic ones, that have made this possible, give
reasons to believe that the increase in India’s exports is a reflection of the
success of the reform policies might be too hasty.
Keywords: foreign trade, merchandise exports, economic reforms, merchandise trade deficit,
agricultural exports, petroleum product exports, private refineries, pharmaceutical exports, auto
component exports, foreign direct investment (FDI)
A dominant view regarding the process of economic reforms India initiated since
the 1990s is that, of all the reform measures undertaken in this period, those
related to the external sector have been the most successful. India’s
performance on the external trade front, in particular the fact that in the 1990s,
the export–GDP ratio increased more than the import–GDP ratio and current
account deficits have not ballooned in the first decade after the implementation
of the reforms, are cited as some of the reflections of the success of such
reforms (Virmani 2003).1
Page 1 of 45
However, to say that these trends are reflections of the ‘success’ of external
reforms may not be justified, given that in over much of the 1990s, growth in
India’s exports was not very encouraging. In fact, barring a couple of years in
the 1990s, the rates of export expansion were not very different from those
achieved in the past, with the exception of the services sector.2 However, there
was much change (p.66) in India’s trade performance in the 2000s, with rapid
and sustained increase in India’s exports after 2000–1. While services exports
had performed well even in the 1990s, even merchandise exports had
consistently posted high rates of growth in this period. Imports too had picked
up significantly, with growth in imports outpacing growth in exports for most
parts of the 2000s. Consequently, the trade deficit too had widened significantly,
causing significant strains on India’s Balance of Payments (BoP), especially in
the recent past. With the increase in exports—and even faster increase in
imports—the trade–GDP ratio (which did not go beyond 15–18 per cent
throughout the 1980s) nearly doubled to reach 34 per cent in 2007–8. Since the
rapid expansion of trade was accompanied by high growth of the economy,
India’s share in global output and trade also increased.3
The view that most of these developments, especially those related to exports,
are reflections of the success of the reform process and benefits brought on by
globalization is widespread.4 In fact it is also argued that the rapid, sustained
expansion in exports and the changes in the structure of exports in the recent
years point to the potential for further expansion in the coming years (Seshadri
2009).
However, it can be argued that drawing the conclusion that the increase in
India’s exports is a reflection of the success of the reform policies might be too
hasty, especially since buoyant world demand can result in increase in exports.
In this context, it is important to understand what factors within the domestic
economy have led to the surge in exports. Further, it may be useful to explore
whether in certain cases, liberalization policies (including trade liberalization)
themselves can turn out to be barriers to the sustainability of exports.
In this context, this chapter examines the recent pattern of merchandise trade
(exports and imports) and tries to understand whether and to what extent the
surge in trade, in particular exports, in the recent period can be seen as
‘success’ either in general or of reform policies. A related issue that is
considered is whether there are enough reasons to believe that the expansion in
exports witnessed thus far can be expected to be sustained over a longer period
of time. In this context, it needs to be mentioned that our analysis focuses on the
trends and patterns of merchandise trade in India in the recent period and does
not deal with trade theory or theoretical underpinnings of export-led strategy of
growth in India, which have been discussed in the Chapter 2.
Page 2 of 45
(p.67) The rest of the chapter is organized as follows. Following a short

description of the trade liberalization measures adopted since the 1990s and
their impact on broad indicators of trade, the next section presents an overview
of the recent trends in India’s foreign trade and changes in the direction of
India’s export and imports. In order to understand which sectors have been
driving growth in merchandise exports and imports in the period since 2000–1,
the third section focuses on examining in greater detail the changes in the
composition of exports and imports. The fourth section is devoted to exploring
the set of conditions within the domestic economy that could have given rise to
increase in exports in non-manufacturing sectors witnessing high exports
growth. In the next section, the trend in exports and imports of select
manufactured goods exports in which India is considered to be a success is
explored, in order to assess how policies of liberalization have impacted these
sectors. The final section contains some brief observations about the
implications of increase in foreign investment inflow for India’s exports in
addition to overall conclusion.
Trade Liberalization Measures and Recent Trends in Exports and Imports

As is known, radical changes in economic policies, including those concerning
the external sector, were initiated in the early 1990s. While a gradual process of
opening up of the Indian economy began in the mid-1980s, external sector
liberalization gathered increased momentum with the initiation of economic
reforms in 1991. As part of trade liberalization measures, the abolition of import
licensing and removal of quantitative restrictions were accompanied by the
continuous lowering of import tariffs. In the 1990s, reductions in tariffs were
mainly concentrated in the manufacturing sector and within that on capital and
intermediate goods. By the end of the 1990s and early 2000s, tariffs on
manufactured consumer goods imports were also reduced considerably.
As measures to boost exports, along with the continuance of policies initiated in

the 1980s to provide exporters easy access to imported inputs and capital goods,
new measures such as tax holidays and various incentives for export-oriented
units (EOU) were put in place during this period. Special economic zones (SEZs)
were also set up and various incentives were provided in order to attract foreign
investment and promote export-oriented business in India.
(p.68) In the agricultural sector, following the rupee devaluation of 1991, a

series of policy measures such as withdrawal of export subsidies for certain
commercial crops, phasing out of export controls on most crops were introduced
to liberalize trade in agriculture. The process gained further impetus in the early
2000s when quantitative restrictions on imports of a number of agricultural
commodities such as rice, pulses, wheat and wheat products, groundnut oil, and
pulses were removed. Following the removal of quotas, tariffs became the
primary instrument for regulating trade and subsequently, tariffs on most
agricultural imports too were brought down significantly. On the whole, with
Page 3 of 45
reduction in import tariffs, the weighted average rate of tariffs in the Indian
economy had fallen from about 130 per cent in 1991–2 to around 20 per cent by
2004, that is, much below the tariff bindings allowed under the World Trade
Organization (WTO) regime (Ghosh 2005).
Despite a spate of such trade liberalization measures initiated since the early
1990s, the export performance of the Indian economy during the first decade of
liberalization was at best a mixed one. No doubt, exports posted double-digit
growth in the period over 1993–4 to 1995–6, but there was then a sharp
deceleration in export growth from 1995–6, even turning negative in 1998–9
before recovering somewhat in 1999–2000. The period of the 1990s was
therefore associated with significantly increased volatility of Indian exports. On
the other hand, for most of the years since 1990, imports exceeded exports,
resulting in significant deterioration of the trade balance, particularly after
1997. However, because of large inflow of remittances during this period, the
deterioration in the trade balance did not result in large current account
deficits.
The first seven years of the decade of the 2000s, on the other hand, were
marked by relatively rapid increases in exports. In fact, since 2002–3 and prior
to the global crisis, the annual rate of growth in the dollar value of merchandise
exports (BoP basis) exceeded 20 per cent per annum (Figure 3.1). In effect then,
since the beginning of reform, this was the first sign of rapid and sustained
growth of India’s merchandise exports.
Between 2000–1 and 2007–8, India’s total merchandise exports increased from
US$ 45 billion to US$ 167 billion. India’s imports grew even faster (Figure 3.2),
increasing (in value terms) from US$ 51 billion in 2000–1 to US$ 258 billion in
2007–8. This resulted in significant (p.69)
Figure 3.1 Annual Rate of Growth of

Exports since the 1990s (in US$ million,
BoP basis)
Page 4 of 45
(p.70) increases in the trade– Source: Government of India (GoI)

GDP ratio (Figure 3.3).
(various issues).5
Meanwhile, the trade deficit
Note: Data for 2012–13 is for April–
reached extraordinarily high
levels, increasing more than
January.
sevenfold from US$ 13 billion to
US$ 92 billion in 2007–8 in just
four years (Figure 3.4).
Figure 3.2 Annual Rate of Growth of

Imports since the 1990s (in US$ million,
BoP basis)
Source: GoI (various issues).
Note: Data for 2012–13 is for April–
January.
Figure 3.3 Ratio of Merchandise Trade to

GDP (in per cent)
Source: GoI (various issues).
Note: Data for 2010–11 is partially
revised and data for 2011–12 is for
April–September 2011.
Page 5 of 45
(p.71) Following the 2008–9

global crisis, India’s export
growth slowed down
significantly. While exports
growth recovered from 2010–11
(crossing the US$ 200 billion
mark in value terms for the first
time), it declined sharply in the
most recent period due to the
Figure 3.4 Exports, Imports, and Trade
continuing recession in the US
Balance: 1990–1 to 2011–12 (in US$
and the Eurozone crisis (Figure
million)
3.1). India’s imports, on the
Source: Estimated from RBI, Handbook of
other hand, have continued to
Statistics on Indian Economy, 2011–12.
rise, going up sharply from US$
Notes:
370 billion in 2010–11 to US$
489 billion in 2011–12, with no (1.) Data for 2011–12 is
sign of reversal in the first nine provisional.
months of 2012–13. As a result, (2.) The right hand axis measures
the trade deficit has increased the trade deficit and the left hand
further rising from US$ 118.6 axis shows value of exports and
billion in 2010–11 to US$ 183.4 imports.
billion in 2011–12
(Chandrasekhar and Ghosh
2013a).
Direction of Trade: Exports and Imports

The obvious question that arises is what explains the rise in exports in this
period, especially in the period prior to the global financial crisis of 2008. In the
literature there is considerable debate on whether the exchange rate has played
a significant role in determining growth in exports. Srinivasan (1998) has argued
that the price competitiveness of India’s exports is an important determinant of
exports. Ghosh (1990), Sarkar (1994) on the other hand have noted that export
growth is significantly affected by changes in the real variables such as domestic
output and world trade growth and is not always very responsive to relative
price changes. More recent literature examining the sources of India’s export
growth in the 1990s and 2000s also argues that the increase in exports in the
2000s is largely because of growth in world trade and India’s increased
integration with the relatively fast growing international markets rather than
changes in India’s competiveness per se (Veeramani 2007).6,7
In this context, it is worth noting that since 2002 and until the global crisis of
2008–9, world trade has been expanding very rapidly, with both merchandise
exports and service exports registering more or less similar rates of growth.
Another very important development, which originated much earlier but has got
further consolidated in the 1990s and 2000s, is the change in international
Page 6 of 45
pattern of trade, whereby there has been a pronounced shift in the export
structure of developing countries, away from primary commodities and towards
manufactured goods. This new pattern has been largely driven by the FDI-driven
export-led growth strategy followed by the bigger Southeast Asian economies
since the mid-1980s. By the mid-1990s, China also became a part of these East
Asia-wide production networks, and of (p.72) late China has become the
fulcrum of such fragmented production networks of trade. It is widely
recognized that most of these countries’ buoyant growth performance has been
closely linked with increasing intra-regional specialization and production
sharing, with China especially and many Association of Southeast Asian Nations
(ASEAN) countries growing faster than the developed countries.8 This has also
meant that world trade has undergone dramatic changes with trade between
developing countries and intra-regional trade dominating and also growing the
fastest.
Examination of the direction of India’s exports reveals that, by and large, India
too has been following this global pattern insofar its increased trade integration
with the developing countries is concerned. In the 1990s, more than half of
India’s exports were accounted for by exports to Organisation for Economic Co-
operation and Development (OECD) markets, with 28 per cent directed to
European Union (EU) markets and around 15 per cent to the US. Russia was
another dominant export market in the early 1990s, while the share of
developing countries (with Asian markets being the dominant destination) in
India’s exports increased gradually, reaching 29 per cent in the mid-1990s
(UNCTAD 2009).
Figure 3.5 shows that between the late 1990s and the four years ending in 2007–
8, there were significant shifts in the direction of India’s
(p.73) exports. The share of the

US came down substantially and
even the EU became less
significant. Within the developing
world, the biggest increase in
India’s exports was to other
developing countries in Asia, but
Africa and Latin America also
became relatively more important
as export markets. These trends
have continued after the global
crisis, so that even while the share Figure 3.5 Direction of India’s Exports
of other developing countries in (in per cent)
Asia has declined somewhat in the
Source: Estimated from RBI (various
period over 2008–9 to 2011–12, it
continues to remain a significant issues).
export market.
Page 7 of 45
There has, thus, been considerable diversification in India’s direction of exports

since the late 1990s. This is most apparent in the case of developing Asia, with
China becoming the largest market within the region while Singapore’s share
also increased particularly from 2004–5. Nearly 22 per cent of India’s growth of
exports during the high-export growth period, 2003–4 to 2007–8, was accounted
for by six countries of this region, namely China, Singapore, South Korea, Hong
Kong, Indonesia, and Thailand. Certain countries in West Asia (classified under
Organization of the Petroleum Exporting Countries [OPEC]) also became major
export destinations for India, with UAE being the major market followed by
Saudi Arabia.
The shifts in the geographical composition of India’s imports also show the
changing pattern of India’s trade. China has become the most important source
of India’s imports, especially since 2004–5, displacing the US. By 2007–8, China
accounted for nearly 11 per cent of total Indian imports. A number of other
Asian economies also became more important as sources of imports: not only for
oil-exporting West Asian countries like Saudi Arabia and UAE, but also several
Southeast Asian economies such as Singapore, Malaysia, and Republic of Korea
(Chandrasekhar and Ghosh 2012; International Development Economics
Associates [IDEAs] 20099).
To an extent, such a process of trade integration was aided by strategic efforts

at strengthening trade relations through India’s ‘Look East Policy’ which started
taking shape in the 2000s.10 To some extent, this also holds for India’s increased
trade with countries in Africa and in South Asia.11 As has been noted by several
observers, it is likely that greater trade with countries that have been involved in
the fragmented-production network of trade also signifies India’s increasing
involvement in such pattern of trade (see Asian Development Bank [ADB] 2008).
More importantly, what it does suggest is that even though the US remained the
single largest market for India’s exports (p.74) until 2007–8, it was able to
foray into alternate markets and reduce its overwhelming reliance on the EU
and the US for its exports. The period after the global crisis has further
intensified that trend, with China and UAE emerging as the most important
trading partners for both exports and imports.
Whether this can be seen as ‘success’ of trade liberalization and whether this
export growth is sustainable depends not just on the diversification of export
markets but also on the composition of exports. Therefore it is important to
analyse which products have been driving the rapid expansion of exports and
whether this points towards a new pattern of India’s export that can be
sustained over a longer period.
Changing Structure of Exports and Imports
Page 8 of 45
Composition of Exports
Over the 1990s, the commodity composition of exports at a broad level of
aggregation underwent only minor changes. The share of manufactured goods in
total merchandise exports remained at around 75 per cent in the period from
1993–4 to 1999–2000. Within manufactured goods, product groups such as
chemicals and allied products and engineering goods witnessed more rapid
growth than the average of all merchandise exports. Exports of drugs,
pharmaceuticals, and fine chemicals within the former product category and
automobiles and auto parts within the latter category registered notable growth
in the mid-1990s. Traditional labour-intensive exports, such as readymade
garments and textiles, yarn, fabrics, and made-ups and leather goods, on the
other hand, registered less impressive growth (Panagariya 2004).12
However, there was considerable churning in the composition of India’s overall

merchandise exports during the years of export recovery from 2002–3 to 2007–8.
There was a quantum jump in exports of petroleum products, driven mainly by
increase in exports of refined petroleum—a significant change given that earlier
India was only a small exporter of unrefined oil (and importer of petroleum
products). The share of ores and minerals in aggregate merchandise exports
also increased substantially during this period. Significantly, the share of exports
of manufactured goods actually came down for the first time (p.75) since the
initiation of reforms. In the period since 2008–9, the share of exports of
manufactured goods has come down even further and that of petroleum
products has gone up sharply. Overall, therefore, there was a shift away from
manufacturing and agriculture towards petroleum products and ores and
minerals (mainly till 2007–8) in India’s exports in the 2000s. (See Figure 3.6.)
What this suggests is that exports of manufactured goods played a relatively

smaller role in contributing to the changes in the overall composition of India’s
exports during this period. This, however, does not mean that exports of
manufactured goods did not increase. Indeed, certain manufactured products
fared even better, such as engineering goods. As the shift in the composition of
exports of manufactured goods of India reveals, the trend of declining share of
traditional labour-intensive exports like textiles and textile products, gems and
jewellery, and leather goods got more pronounced in the period from 2003–4,
although there has been some rise in the share of gems and jewellery exports
after 2007–8. What is particularly noticeable is that the share of textiles, which
was earlier the predominant sector in the export basket, declined continuously
and accounted for less than 12 per cent of India’s total exports in 2007–8 and
even less thereafter. On the other hand, exports of engineering goods,
representing a very
Page 9 of 45
(p.76) broad category, increased

at a rapid pace to account for the
highest share in India’s export
basket. The share of chemicals
and chemical products too
increased in the period up to
2007–8, albeit marginally.
Therefore, for most part of the
2000s, growth in exports of
manufactured goods was heavily
weighted towards engineering
goods followed by chemical and Figure 3.6 Composition of Principal
chemical products. (See Figure
Exports by Sectors (in per cent)
3.7.)
The product groups that fared Source: Estimated using data from RBI
better within the engineering (various issues).
goods sector between the
mid-1990s and 2003–4 to 2007–
8 were iron and steel, machinery and instruments, manufacture of metals, and
transport equipments, the shares of which in total exports increased. The share
of electronics in total exports, on the other hand, reduced substantially over the
same period. Although the increase in the shares of these goods in the
engineering sector exports for most part of the 2000s was not spectacular when
compared to the short period in the 1990s when India’s exports grew at high
rates (Chandrasekhar and Ghosh 2006a) as shown in Figure 3.8, nonetheless,
the shares of these
(p.77)
Figure 3.7 Composition of Principal

Exports of Manufactured Goods by
Sectors (in per cent)
Source: Estimated using data from RBI
(various issues).
Page 10 of 45
product groups in total exports

have increased as per Figure 3.9.
The period since 2008–9 has been
marked by a decline in the share
of various categories of
engineering goods exports, other
than that of transport equipment
and electronic goods.
Looking at the contribution of
various product groups (at the
four-digit level of
disaggregation) to the increase Figure 3.8 Composition of Engineering
in exports during 2000–1 to Goods Exports (in per cent)
2007–8 and thereafter, throws Source: Computed using data from RBI
up some interesting trends that (various issues).
are somewhat at variance with Note: The shares of various
the picture suggested by the engineering goods exports are with
trends in broad categories of respect to total engineering goods
exports. This is particularly exports.
apparent in the case of
agricultural exports.
Examination of the various
product groups that accounted
for at least 0.5 per cent of the increase in India’s global exports for the period
beginning from 2000–1 to 2007–8 shows that 22 sectors taken together
contributed nearly 65 per cent of the total increase in India’s exports. Of these,
petroleum products alone (mainly high-speed diesel, aviation turbine fuel, motor
spirits, etc.) contributed more than one-fifth of the total increase in exports.
Another nearly 10.4 per cent was on account of exports of primary products
such as iron ore, rice (basmati and non-basmati), raw cotton, oil cake residues
from soya bean oil and corn (Tables 3.1 and 3A.1). The trend (p.78)
(p.79)
Figure 3.9 Engineering Goods Exports

(in US$ million)
Source: Computed using data from RBI
(various issues).
Page 11 of 45
Table 3.1 Sources of Export Growth (four-digit level), 2000–1 to

2007–8 and 2008–9 to 2011–12
Product Group Contribution 2000–1 Contribution 2008–9 to

to 2007–8 (%) 2011–12 (%)
I. Petroleum and 22.20 23.50

petroleum products
II. Primary products 10.41 9.70
Agriculture and allied 5.90 9.70

products
Iron ore 4.61 –
III. Manufactured products
A. Engineering goods 11.72 10.20
B. Gems and jewellery 10.10 17.10
C. Organic chemicals, 4.88 4.40

pharmaceuticals
D. Textile and textile 2.22 3.15

products
E. Leather and leather goods 0.64 –
IV. Miscellaneous articles 1.70 1.40
V. Special transactions 1.03 6.40

and commodities not
classified according to
kind
Total 64.30 75.90

Source: Estimated using four-digit trade data, used from the
Department of Commerce, Government of India website,
available at http://commerce.nic.in/, Directorate General of
Commercial Intelligence and Statistics.
of increased contribution of agricultural exports has continued even in the most recent
period. Thus, even though the share of agricultural exports in the aggregate declined
considerably during the 2000s, exports of certain agricultural products actually
increased during this period, thereby making significant contribution to the total
increase in exports over the period.
These shifts in the composition of exports were largely driven by demand
emanating from different parts of the developing world, Asia in particular. This
is evident from the fact that several products registering high growth in exports
were largely directed towards these markets. The increasing importance of ores
Page 12 of 45
and minerals in India’s exports, for instance, was to a large extent explained by
enhanced demand from countries such as China (Bhat et al. 2008). Similarly,
West Asia increasingly has become an important destination of cereal exports
from India, although such exports show high volatility. Other agricultural goods,
specifically raw cotton, were largely destined (p.80) for three Asian countries,
namely, China, Pakistan, and Bangladesh (Seshadri 2009). The rise in the
exports of iron and steel and metal goods was also the result of the recent surge
in demand for steel worldwide, in particular China,13 as well as in several East
Asian countries and some West Asian countries. Similarly, in the case of
petroleum product exports three countries in the Asian region (Singapore, UAE,
and Sri Lanka) formed the largest markets for India’s exports.
Composition of Imports
India’s oil imports have usually been the largest component of imports, therefore
changes in international prices of oil affect the total value of imports
significantly. However, unlike what is usually portrayed (Economic Survey 2007–
08), the increase in import values in the 2000s cannot be explained by rise in
prices of oil and hence oil imports alone. Figure 3.10 shows that while oil
imports increased substantially, non-oil imports rose even more rapidly.14
Within the non-oil imports category, there were significant changes in the
composition of imports. Table 3.2 shows that over the first two sub-periods, the
share of iron and steel and metalliferous ores increased, with the former
registering considerable rise in share in the second sub-period. Among the
categories classified as non-bulk
(p.81)
Figure 3.10 Imports: Oil and Non-oil (in

US$ million)
Source: RBI (2011–12).
Page 13 of 45
Table 3.2 Shares of Broad Categories of Imports (select Items) (in per cent)
Product Group Item Share (avg.) 1999–2000 Share (avg.) 2003–4 to Share (avg.) 2008–9 to
to 2002–3 2007–8 2011–12
Bulk imports Petroleum, crude and 28.1 29.8 30.5

products
Metalliferrous ores, metal 1.8 3.1 2.7

scrap, etc.
Iron and steel 1.6 3.1 2.8
Non-bulk imports Capital goods 19.4 25.5 21.8
Mainly export- related 16.8 11.2 11.8

items
Others 23.9 20.7 22.8
Of which, gold 7.6 7.0 10.1

Source: Computed using data from RBI (various issues).
Page 14 of 45
imports, the share of capital goods increased by nearly 6 percentage points, while that
of other items declined in the period between 1999–2000 to 2002–3 and 2003–4 to
2007–8 (Table 3.2). However, in the period since 2008–9, the share of capital goods in
total imports has dipped sharply, signalling the slowdown in domestic industrial
activity. At the same time, the share of other imports has increased by more than 2
percentage points over the same period. In fact, the sharp rise in other imports has
been on account of jump in imports of gold, which has become the second largest
commodity in India’s import after crude oil imports since 2009–10.
The main driver of increase in capital goods imports in the period 2001–2 to
2007–8 was transport equipment, which after declining somewhat in the late
1990s with the short-lived industrial boom coming to an end (Chandrasekhar
1996), picked up significantly after the early 2000s. On the other hand, from a
high share of more than 6 per cent of total imports in the early 1990s, the share
of project goods imports declined consistently and by 2007–8 these accounted
for less than 1 per cent of total imports.15 In the most recent period, however,
there has been a reversal in this trend, with the share of transport equipment
falling consistently and that of project goods rising. The (p.82) other major
components of capital goods imports were electronic goods and non-electrical
machinery, although the share of the former fell from the peak reached in 2003–
4 (Figure 3.11).
As in the case of exports, the changes in the structure of imports in the 2000s
were accompanied by changes in the sources of these commodities. In several
commodity groups such as non-electrical machinery, electronic goods, iron and
steel, transport equipments, organic chemicals, several developing Asian
countries became major sources of imports, substituting, in part, the traditional
suppliers or emerging as new and additional suppliers of India’s import
requirements. China, Korea, Singapore, and several other ASEAN countries in
particular became the new and sometimes the dominant sources of certain
imports.16
Clearly then, both the direction and the composition of India’s exports and
imports have undergone significant changes. These changes brought in new
developments such as parallel increase in exports as well as imports of product
groups like machinery and
Page 15 of 45
(p.83) equipment, including

transport equipment, chemicals,
iron and steel. New product
categories such as refined
petroleum products entered the
list of exports, in some of which
India even turned from being an
importer into a net exporter.
These developments indicate that
India increasingly got engaged in
intra-industry trade as well as
made its entry into global and
regional production networks in
sectors that have been the prime Figure 3.11 Share of Various
movers of export dynamism in the
Components of Capital Goods Imports in
export-oriented economies in East
Total Imports (in per cent)
Asia (Kumar 2007).
At the same time, not all of the Source: Computed using data from RBI
developments on the export (various issues).
front have been as positive as
appears on first sight, especially
with regard to India’s composition of exports to its fastest growing markets in
the developing world. Exports were extremely concentrated, with a handful of
product categories accounting for a large share of exports to these countries.
This was particularly true for three of India’s biggest non-OECD markets—
China, UAE, and Singapore. In the case of China, in 2007–8, more than two-
thirds of India’s exports were accounted for by iron ores and raw cotton,
whereas in the case of UAE, two commodity groups, petroleum and gems and
jewellery accounted for nearly 60 per cent of total exports to the country.
Similarly, in the case of Singapore, one single item, petroleum products
accounted for more than 50 per cent of India’s exports to the country in 2007–8.
However, the composition of imports, at least in the cases of China and
Singapore, shows that a much wider variety of goods was imported into India.
This is perhaps an important indicator that even though India’s exports showed
an upward trend in the first decade of the present century, it was based on a
small number of product categories, implying that the much needed
diversification in the commodity basket essential for sustainability of exports had
not yet come about in important markets in the developing world.
Further, what can be seen as one of the most significant development in India’s
foreign trade performance in the 2000s is that because of higher growth in
imports relative to that of exports, the merchandise trade deficit shot up. Even
the manufacturing trade balance, which showed a surplus prior to 2000–1,
deteriorated thereafter and turned into deficit by 2006–7 (see Chaudhuri 2010).
What is equally significant is that unlike India’s exports, which are sensitive to
global income declines, India’s imports have been far less responsive to the
Page 16 of 45
slowdown in income growth. While India’s oil imports are known to be not very
responsive to slowdown in economic growth, in the (p.84) decade of 2000s gold
imports have become an additional factor that makes imports unresponsive to
slowdown in GDP growth. This obviously has significant negative implications
for the trade balance.
In the case of imports, a combination of factors within the domestic sphere,

including further liberalization of trade, acceleration of economic growth from
2002–3 until the slowdown since the late 2000s, and the pattern of demand
explain the quantum jump in imports and the composition of imports. As P.
Patnaik (2006) notes, liberalization of trade (and investment) is often associated
with rising income inequality, so that the pattern of demand shifts towards goods
demanded by the affluent sections whose tastes and preferences are strongly
influenced by lifestyles in the developed countries (see P. Patnaik 2006). This in
turn is likely to influence the composition of imports as well.17 This, along with
declining tariffs, may explain the jump in import of transport equipment,
electronic goods, etc., in the period up to 2007–8.18 To some extent, the trend as
well as the structure of imports can also be explained by the pattern of exports,
given that many imports are ultimately exported after processing within the
domestic economy (for example, petroleum product exports).
Domestic Factors Influencing the Increase in Exports

As noted earlier, in the years since 2000–1, India’s performance on the
merchandise exports front improved significantly. However, the composition of
exports does not indicate that all of these can be seen as ‘achievements’ of
liberalization policies. Also, it is also not clear whether the improved
performance is based on expansion of exports with long-run growth prospects.
Table 3.3 shows that certain categories of exports such as agricultural

commodities, iron ore, and petroleum products, played a major role in driving
the rapid expansion in exports in the period over 2003–4 to 2007–8. Even in the
most recent period, exports of agricultural commodities and petroleum products
have been major drivers of export growth. This may indicate that such export
growth is unlikely to be sustained over the longer term.
The most interesting case of voluminous rise in exports relates to the peculiar
set of conditions that have led to the extraordinary growth in petroleum product
exports in the new millennium, particularly (p.85)
Table 3.3 Growth in India’s Exports in Major Sectors
Product Group CAGR 2003–4 Product Group CAGR 2008–9

to 2007–8 (%) to 2011–2 (%)
Petroleum and 67.9 Agriculture and 28.7

related products allied products
Page 17 of 45
Product Group CAGR 2003–4 Product Group CAGR 2008–9

to 2007–8 (%) to 2011–2 (%)
Ores and minerals 40.1 Petroleum and 26.4

related products
Engineering goods 31.7 Others (all 21.6

commodities)
Agriculture and 25.1 Gems and jewellery 18.8

allied products
Chemicals and 22.4 Chemicals and 17.9

related products related products
Others (all 20.8 Engineering goods 12.4

commodities)
Gems and jewellery 16.8 Textile and textile 11.8

products
Leather and leather 12.8 Leather and leather 10.4

products products
Textile and textile 11.0 Ores and minerals 1.5

products
Total exports 26.4 Total exports 18.0
since 2004–5. Following the opening up of the petroleum sector to private players,
there has been a rapid expansion in India’s domestic refining capacity, driven mainly
by the significant expansion in private sector refining capacity.19 No doubt, the rapid
increase in India’s domestic refining capacity is one of the reasons behind the surge in
exports of refined petroleum products witnessed in this period. At the same time, the
change in the structure of India’s refinery capacity, in particular the increase in private
sector refining capacity, seems to have played an equally significant role in facilitating
exports of these products. This is reflected in the fact that the bulk of the increase in
exports has been accounted for by private refining companies, mainly Reliance
Petrochemicals,20 and public sector refineries have relatively less presence in the
export market as these have mainly catered to the growing domestic demand.21
However, what is significant is that the rapid increase in exports occurred
mainly since 2004–5 (and not before, even though one of the private companies
had enough exportable surplus22), precisely when the world demand conditions
started changing and international oil prices started rising rapidly, after a lull till
about 2003–4 (Figure 3.12). (p.86)
Page 18 of 45
Whether the extraordinary rise

in exports can be seen as
‘success’ of reform policies is
open to question, especially
since the jump in exports have
occurred when world demand
(and prices) have been rising
rapidly. In other words, the rise
in exports may well be
explained by exogenous
developments in the world Figure 3.12 India’s Oil Exports (in US$
economy, rather than as a result million)
of trade liberalization policies Source: Computed using data from RBI,
per se. There are additional Handbook of Statistics on Indian
reasons to question the Economy, various issues.
‘success’ of such exports. For Note: Data for 2009–10 are
one, it is well recognized that provisional.
following the rise in
international oil prices from the
end of 2003 and less than
commensurate rise in domestic
retail prices, the private refineries stopped selling in the domestic retail
market23 and altered their direction of sales into the international market. In
effect, the sharp rise in exports of refined petroleum products (both in terms of
volume and value of exports) since 2004–5, is at least in part, a reflection of
diversion of sale from the domestic market to the more profitable export market.
What this suggests is that the increasing presence of private refineries in the
domestic refinery space and the fact that they are not obliged to sell in the
domestic market, created distorted incentives to export the products24 in a
situation where the rise in international oil prices outpaced that in domestic
prices. (p.87) Therefore, whether the increase in exports can be seen as
‘success’ of reform policies is open to question, especially since the main
objective of increasing domestic refining capacity has been to ensure that over
time India’s growing refined product demand is met at affordable prices. The
policy of encouraging private sector participation in such strategic sectors,
which is a part and parcel of economic reforms, has meant that even though
refining capacity has increased, because much of it has been generated by
private investment it has not proved to be either a consistent or an affordable
source of fuel needed to meet domestic demand.25
Given that the jump in exports of these products is largely a reflection of the
growing presence of private refineries and the distorted incentive created by the
widening margin between international and domestic oil prices, it means that
the same set of policies geared to encourage private participation can
Page 19 of 45
significantly alter India’s future prospects of exports of refined petroleum

products, if and when developments in the international market and within the
domestic market change the balance in favour of selling in the domestic market.
Whether or not petroleum product exports from India can continue to grow at
the same pace, of course, depends on a whole lot of complex interrelated factors.
Demand conditions in the world market relative to the domestic market, pricing
of petroleum products in the domestic market and the pace of investment in
refining capacity in different parts of the developing world, movements in the
exchange rate, as well refining capacity addition within the domestic market are
some factors that could act as important determinants. Therefore, to predict
which of these would become the dominant factor and hence which way India’s
petroleum products exports would go is difficult.
However, certain developments taking place both in the world market and within
the domestic space indicate that India’s export growth in petroleum products is
unlikely to be sustained at the same pace, at least in the near future. The first
development relates to the large excess capacity that has built up in different
parts of the Asian region.26 The ensuing market oversupply, in turn, is likely to
bring about stiff competition in the international export market for refiners and
also reduce the refining margins significantly (Clarke and Graczyk 2010).
Second, within the domestic market, the pace of capacity addition in refining is
expected to slow down with the removal of the income tax (p.88) holiday on
private sector refinery projects commissioned after 2012.27 This means that the
combination of excess capacity in the overseas market, sluggish domestic
capacity addition along with strong growth in domestic demand, are likely to
make exports a less remunerative option as compared to selling within the
domestic market.28
The additional factor that is likely to affect such exports relates to the policy of
further liberalizing domestic oil prices to bring it in line with international
prices.29 With further deregulation of petroleum product prices in the domestic
market (especially of diesel, liquefied petroleum gas [LPG], and kerosene) which
has the effect of narrowing down the domestic and international price
differential, the rate of export expansion witnessed in the recent years might not
be sustained.30 As and when developments in the international and the domestic
market change the balance in favour of selling in the domestic market,
petroleum product exports may come down significantly.
Increasing exports of agricultural goods, specifically foodgrains, are also not

indicative of the ‘success’ of liberalization policies. Rather, they are actually a
reflection of the distortionary effects caused by such policies that have resulted
in India’s composition of trade reflecting patterns similar to colonial pattern of
trade. Following the removal of certain restrictions on exports, India’s exports of
Page 20 of 45
agricultural commodities shot up sharply till 1996–7. Although imports too went
up, the trade balance remained positive. The situation changed drastically in the
period after 1996–7 when the value of such exports declined as international
prices of agricultural commodities fell. However, since imports continued to
increase owing to further liberalization of agricultural trade and attractiveness
of cheaper imports, the surplus on agricultural trade balance also reduced
significantly (Chand 2004). For most of the period since reforms, exports of
agricultural commodities, especially wheat, non-basmati rice, cotton showed
wide year-to-year fluctuations, whereas imports of food and related items
showed near-consistent rise. Significantly, the increase in agricultural exports
took place precisely at the time when the agricultural sector experienced
slowdown in output growth.
It is known that domestic agricultural growth has slowed down substantially

since the period of reforms. Compared to the pre-reform period, in the 1990s,
the rate of output growth (of both foodgrain and non-foodgrain) had almost
halved, and in fact fallen below the population (p.89) growth rate (U. Patnaik
2008). This was partly related to the decline in public investment in agriculture
and agricultural research and development expenditure, which only started
reviving from 2005–6. The move to liberalize trade in agricultural goods,
involving shifting from quantitative restrictions to tariffs and then massive
reductions of tariff on agricultural goods and freeing of both exports and
imports, further aggravated the problem of declining foodgrain output (see U.
Patnaik 1996, 2008 for details).
The combination of deflationary policies and liberalization of agricultural trade

not only resulted in severe reduction in agricultural output but also in sharp fall
in foodgrain absorption,31 so much so that foodgrain absorption in India declined
to historically low levels in the post-reform period (U. Patnaik 2008).32 And it
was this decline in per capita absorption arising from fall in effective demand
among a large section of the population that aided the massive increase in
foodgrain exports.33 Therefore, rather than being a manifestation of ‘success’ of
trade liberalization, much of the increase in exports in foodgrain was actually a
reflection of distress sale carried out to dispose of massive stocks of foodgrain
that have accumulated with the government agencies (Chand 2001; U. Patnaik
2008). The same set of reasons may lie behind the increased foodgrain exports
that continued into the decade of 2000s, since there was further deceleration of
production of major foodgrains in the 2000s (Table 3.4), while the foodgrain
stocks held by the government increased continuously since 2004–5.34
It is also worth noting that the Indian government periodically had to restrict
exports of several agricultural commodities in order to stabilize domestic prices.
Since 2007–8, with the rise in food prices in international markets and growing
Page 21 of 45
inflationary pressures in the domestic market, cases of ban on export of several

agricultural products have increased significantly.35
Table 3.4 Decelerating Growth Rates of Major Agricultural Crops

(compound growth rates of production)
Period Rice Wheat Sugarcane
1980–1 to 1989–90 3.6 3.6 2.7
1990–1 to 1999–2000 2.0 3.6 2.7
2000–1 to 2007–8 1.9 1.4 2.2

Source: GoI (2008–9).
(p.90) While exports of non-basmati rice, wheat, and maize have shot up with
the lifting of bans on such exports since 2011 (Chandrasekhar and Ghosh
2013b), whether exports of foodgrains can continue at the same pace as before
is open to question. This is because while deflationary policies have the effect of
compressing demand in the first instance, by reducing the viability of small
holder cultivation they also undermine supply potential in the long run (P.
Patnaik 2008). In such a scenario, it is unlikely that growth in exports of
foodgrains can be sustained over the longer term without compressing demand
even further and therefore increasing the possibility of social unrest. So not only
can exports of foodgrains not be seen as a sign of ‘success’, such exports are
unlikely to continue to increase at the same pace as before.
Manufactured Exports and Imports: Trends in Select Product Groups

Certain product groups within the chemical and engineering goods sectors, such
as transport equipments and parts, pharmaceuticals have contributed
significantly to the increase in exports since the early 2000s. Several of these
manufactured goods exports may be considered as indicating success, as
qualitative evidence suggests that many of these product groups, such as
intermediate goods like iron and steel, organic chemicals, transport equipment,
paints, etc., were entering into the East Asia based fragmented production
network (for details, see Kumar 2007). However, in this context, it should be also
noted that in the literature there is little consensus on how much of India’s
increase in trade in this period is accounted for by intra-industry trade, more
specifically how much of it shows increasing participation in ASEAN-centred
fragmented production. Some studies analysing the share of intra-industry trade
in India’s total trade show that although almost one-third of India’s trade with
the countries in the Asian region is intra-industry trade, its share increased only
marginally in the 2000s (Burange and Chaddha 2008).36
While increase in intra-industry trade is a positive development and can

contribute to sustaining exports in the longer run, whether it is mainly an
outcome of liberalization (including trade liberalization) policies is difficult to
Page 22 of 45
establish. This is because most of these industries that witnessed high exports
growth were set up and nurtured in the era of import-substituting
industrialization. If they could develop and (p.91) become sources of exports, it
is because of active state intervention and the fact that they were protected from
the unfair competition enforced by policies of free trade.37 As pointed out by
Chaudhuri (2009), this is further reinforced by the fact that in the era of
economic reforms, India has failed to develop new industries of advanced
technology products in a significant way and therefore its exports of such
products have been low. Instead, imports of such products have been going up
manifold in the new millennium, closing the opportunity of developing such
industries within the domestic territory.
What is more, even some of the industries in which India is believed to have
achieved success on the export front in the 1990s are beginning to show signs of
decelerating exports and are being outcompeted in the domestic market by
imports. In others, such as advanced technology products like pharmaceuticals,
the balance of trade in certain categories of pharmaceutical exports has been
turning negative. As is known, the Indian pharmaceutical industry performed
extremely well on the export front in the decade of 2000s, driven primarily by
the export growth in the value-added segment of formulations. However, the
other segment of pharmaceutical products, bulk drugs, lost export
competitiveness.38 The rate of growth of domestic bulk drug production also
declined in the post-liberalization period.39 On the other hand, owing to trade
liberalization policies such as reduction in import duties40 and the removal of
the ratio parameters linking the production of formulations to domestic
production of bulk drugs, imports of bulk drug went up sharply41 (Joseph 2011).
What is more, India’s import dependence got increasingly skewed, such that one
single country (China) became the major source, accounting for more than half
of India’s total imports of bulk drugs. In fact, the increasing dependence on
imports and that too on one single source has had the effect of threatening the
existence and viability of domestic bulk drug manufacturing units in the recent
past (Joseph 2011).42
In short, while the export performance of pharmaceuticals in the 2000s was

noteworthy, it is precisely because of increasing export orientation (with
formulations being the focus of exports) that the industry has been becoming
increasingly dependent on imports of bulk drugs, intermediates, and other raw
materials.43 In fact, the dependence on imports increased to the extent that the
balance of trade in the bulk drug category ran into deficits in most years since
2005 (Figure 3.13). (p.92)
Page 23 of 45
Automobile component exports

are seen to have become one of
the major successes on the
export front, but these too seem
to be facing increasing
challenges. While exports in the
sector increased at a fast rate of
about 30 per cent or more per
annum till 2005–6, it slowed
Figure 3.13 India’s Trade Deficit in Bulk
down to mere 16 per cent in the
Drugs (in US$ million)
following year (that is, before
the onset of the global financial Source: Joseph (2011).
crisis). Although export growth
did pick up in the most recent
period, it has been short-lived (Figure 3.14). At the same time, all through the
period imports grew at a much faster rate so that the balance of trade in the
sector, which was rising positively till 2004–5 (Chaudhuri 2010) turned negative
thereafter (Figure 3.15).
This is largely a fallout of trade liberalization policies. Tariff rates on auto

component imports were brought down continuously in the 1990s, from 85 per
cent in 1993–4 to 35 per cent in 1999–2000. They were further reduced in the
next decade, to reach only 10 per cent by 2007–8 (Indian Council for Research
on International Economic Relations [ICRIER] 2008). As a result, more and more
domestically manufactured cars and other automobiles have been using
imported components (GoI 2008).
Another manifestation of the impact of liberalization policies, in this case that of

bilateral free trade agreements (FTAs), on the exports of auto components is
provided by the trend in India’s exports (and imports) with Thailand following
the India–Thailand FTA that came (p.93)
Figure 3.14 Auto Components Exports
Page 24 of 45
into force since 2004. Studies Source: Available at http://acma.in/pdf/

show that in the period after this
Status_Indian_Auto_Industry.pdf.
FTA was operationalized, India’s
exports of several auto component
products to Thailand declined
sharply. Barring a few products in
which India’s exports increased,
all others lost out.44 This has
several implications (p.94) for
sustainability of India’s exports,
as, instead of diversifying, exports
are likely to get concentrated with
few product categories doing well
on the export front. Thus it would
Figure 3.15 Growing Trade Deficit in
perhaps not be completely wrong
to say that instead of having a Auto Components
positive impact, policies of Source: Available at http://acma.in/pdf/
liberalization themselves can turn Status_Indian_Auto_Industry.pdf.
out to be barriers to sustainability
of exports.
It is evident that some manufactured exports, especially those which have been
seen as star performers on the export front in the 1990s, witnessed declining
trends in the 2000s. In others, the trade balance of certain categories of
products has been turning negative. This occurred even when world trade in
these sectors was buoyant. This suggests that future sustainability of such
exports, at least in some cases like auto components, may come under serious
strain in the future, as world trade conditions become more difficult.
It is often argued that FDI inflows are important contributors to export growth
and the fact that India’s exports did not perform well in the 1990s is due to the
fact that it had not been able to attract sufficient foreign investment. In the new
millennium there has been significant increase in FDI inflows after the
government further liberalized regulations on foreign investment in 2001.
However, as several studies have pointed out, increased inflow of FDI has not
resulted in increase in exports. A part of the reason for FDI having little impact
on the export of India is that a substantial proportion of FDI has gone into non-
tradable services and infrastructure sectors.45 Thus, even though a large amount
of foreign investment came into India, the positive impact that it was supposed
to have on exports was largely unrealized. But the impact on exports does not
stop here. As is well known, in a system with flexible exchange rates, large
capital inflows (as have occurred in India in the period since 2002) may actually
have a negative impact on exports if they result in significant appreciation of the
currency (see P. Patnaik 2003). This negatively impacts export competitiveness
and therefore can even harm India’s export potential.46 Ironically, what this also
shows is that liberalization policies related to the external sector are inherently
Page 25 of 45
contradictory as liberalization of foreign capital flows has the tendency to

impede increase in exports and export competitiveness.
(p.95) Further, exchange rate appreciation (owing to inflows of foreign capital)

has the effect of cheapening ‘foreign goods relative to the domestic goods in
both domestic and foreign markets’ (P. Patnaik 2003) and thereby increasing the
trade (and current account) deficit. Indeed, the sharp rise in capital inflows in
the 2000s in general and in the second half and prior to the global crisis in
particular47 was associated with some appreciation of the real effective
exchange rate (REER), especially in 2007–8 (Figure 3.16). However, since India’s
build-up of foreign exchange reserves was based mainly on short-term capital
inflows, a reversal of situation, as it happened at the time of the global crisis,
also led to a sharp depreciation of the currency subsequently. Clearly then,
liberalization policies—such as the move towards market-determined exchange
rate and the freeing of inflow and outflow of foreign capital brought in with them
significant volatility in exchange rate movements, which are not conducive for
exports growth.
Overall, the analysis of the recent pattern of India’s trade shows that it may be
too hasty to ascribe the increase in India’s exports as ‘success’ of the economic
reform process initiated since the 1990s and further strengthened in the 2000s.
Analysis of the trend and direction of trade shows that India has more or less
followed the global pattern of
(p.96) trade with regard to its

increasing integration with other
developing countries and has also
diversified its markets for its
exports. However, owing to the
fact that imports have grown
much faster than exports, the
trade deficit has worsened
considerably in this period.
While the structure of exports
as well as imports has
Figure 3.16 Movements in Real Effective
undergone considerable
Exchange Rate
change, the shifts in the former
Source: Based on Chandrasekhar and
have not been in conformity
Ghosh (2012).
with what has been the
dominant pattern of trade in
much of the Asian region. While
the export structure of many developing countries, especially most of those in
the East Asian region, has been moving away from primary commodities and
towards manufactured goods, in the case of India, the contribution made by
manufactured goods exports to the increase in exports has become somewhat
muted. Instead, non-manufacturing products, including commodities such as
Page 26 of 45
petroleum products, have contributed in a significant way to the recent increase

in exports. Further, these commodities have played a significant role in
expanding exports to some newly significant markets, and in some cases have
been the dominant sources of expansion of exports.
A closer look to analyse the conditions within the domestic economy that have
led to high growth of exports of certain non-manufactured commodities confirms
that neither can these be seen as a positive outcome of liberalization policies nor
perhaps can they be expected to show strong potential to grow in the future.
This is more clearly borne out in the case of agricultural products like foodgrain.
In the case of petroleum products a more complex set of factors is likely to
operate in determining whether or not such exports can be expected to become
the basis for sustained export growth in the future. At the same time, going by
indications both on the domestic policy front as well as developments in the
international market, it is perhaps more likely that such exports cannot be
sustained, at least in the near future. The examples of some manufactured goods
indicate how liberalization policies have had a negative impact even on those
sectors which are usually considered to be star performers among products that
comprise India’s export basket. The sharp rise in imports that have resulted
from the successive bouts of tariff reduction in the case of the auto component
industry have meant that while exports have grown, higher growth in imports
are increasingly replacing domestic component output. This implies that even
those industries which have been able to otherwise withstand foreign
competition are getting weakened. This obviously has implications for future
export potential.
(p.97) In sum, it seems that in addition to growth in world trade, a specific set
of conditions has contributed to India’s export growth in the recent years. The
high growth in export in some sectors seems to have occurred on a fragile basis
and therefore is unlikely to be sustained at the same pace. On the other hand,
greater openness has brought in greater imports from partners who are
generally known to be more competitive, thus resulting in deficit in overall as
well as manufactured trade balance. In fact, not only has the trade balance been
turning negative, it has progressively worsened over the decade (Chandrasekhar
and Ghosh 2012), implying that rising import dependence, not just for oil but in
almost all sectors of the economy, has become a near-permanent malaise for the
country. The fact that India’s trade balance witnessed significant deterioration
precisely when there was unprecedented and sustained growth in exports,
shows that India is yet to achieve the avowed position whereby it can claim to
have ‘earned’ its foreign exchange reserves. On the contrary, given that India’s
journey in the era of economic reforms has been associated with ephemeral
growth in exports and increasing dependence on imports, it does not give much
hope to believe that India can even begin to ‘earn’ its foreign exchange any time
soon.
Page 27 of 45
Table 3A.1 Sources of Export Growth (four-digit level), 2000–1 to

2007–8 and 2008–9 to 2011–12 (in detail)
Product groups Contribution Contribution Contribution

(2000–1 to (2003–4 to (2008–9 to
2007–8)* 2007–8)* 2011–12)*
Petroleum and products 22.2 24.8 23.5
Petroleum oils and oils 22.2 24.8 23.5

obtained from bitumen
Gems and jewellery 10.1 8.9 17.1
Diamonds whether or not 6.78 5.96 10.1

worked but not mounted/set
Articles of jewellery and 3.32 2.94 5.1

parts thereof; of precious
metal/of metal clad with
precious metal
Coin 1.9
Agriculture and allied 5.9 6.2 9.7
Rice (basmati and non- 1.93 2.04 2.06

basmati)
(p.98) Cotton, not carded 1.82 2.02 3.01

or combed
Oil-cake and other solid 1.06 1.04

residue, etc., from soyabean
oil extraction
Meat of bovine animals, 0.53 0.55 1.4

frozen
Maize (corn) 0.51 0.54
Vegetable saps and 2.59

extracts
Groundnuts, not roasted 0.68

or otherwise cooked,
whether or not shelled or
broken
Organic/inorganic 4.88 4.43 4.4

chemicals including
pharmaceuticals
Page 28 of 45

(2000–1 to (2003–4 to (2008–9 to
2007–8)* 2007–8)* 2011–12)*
Medicaments for 2.19 2.04 2.7

therapeutic/prophylactic
uses, etc., in measured
doses or in packaging for
retail sale
Other organic compounds 1.43 1.17
Cyclic hydrocarbons 1.26 1.22 0.9
Polymers of propylene or 0.8

of other olefins, in primary
forms
Ores and minerals 4.61 4.73
Iron ores and concentrates 4.61 4.73

including roasted iron
pyrites
Iron and steel 3.11 3.47
Flat-rolled products of 1.0 1.2

iron/non-alloy steel of width
>=600 mm, clad, plated/
coated
Ferro-alloys 0.86 1.04
Flat-rolled products of 0.70 0.65

iron/non-alloy-steel of width
of >=600mm, hot-rolled, not
clad, plated/coated
Other bars and rods of 0.55 0.58

stainless steel; angles,
shapes and sections of
stainless steel
(p.99) Textile and textile 2.22 2.52 3.15

products
T-shirts, singlets and other 0.99 0.73

vests, knitted/crocheted
Page 29 of 45

(2000–1 to (2003–4 to (2008–9 to
2007–8)* 2007–8)* 2011–12)*
Cotton yarn (other than 0.64 0.89 1.25

sewing thread) containing
85% or more by weight of
cotton not put up for retail
sale
Women's/girls' suits, 0.59 0.90 0.5

ensembles, jackets, dresses,
skirts, trousers, bib and
brace overalls, shorts, etc.
(except swimwear)
Synthetic filament yarn 0.6

(other than sewing thread)
not put up for retail sale
including synthetic
monofilament of less than
67 decitex
Bed linen, table linen, 0.8

toilet linen and kitchen linen
Transport equipment 2.05 1.80 3.5
Motor cars and other 1.08 0.83 1.1

motor vehicles for transport
of persons, including racing
cars, etc.
Parts and accessories of 0.97 0.97 1.1

the motor vehicles
Motorcycles (including 0.7

modeps) and cycles fitted
with an auxiliary motor, with
or without side cars
Motor vehicles for the 0.6

transport of goods
Manufacture of metals, 2.06 2.17 0.9

mainly non-ferrous
metals (copper and
articles thereof)
Page 30 of 45

(2000–1 to (2003–4 to (2008–9 to
2007–8)* 2007–8)* 2011–12)*
Refined copper and 1.33 1.44 0.9

copper alloys, unwrought
Copper wire 0.73 0.73
(p.100) Iron and steel 2.11 2.82

products
Other tubes and pipes 1.07 1.25

(e.g., welded, riveted, etc.),
having circular cross-
section, the external
diameter of which exceeds
406.4 mm, of iron/steel
Other bars and rods of 0.55 0.5

stainless steel; angles,
shapes and sections of
stainless steel
Tubes, pipes and hollow 0.5 0.57

profiles, seamless, of iron
(other than cast iron) or
steel
Structures and parts, e.g., 0.5

bridges roofs doors tubes,
etc., used in structures of
iron and steel
Ships, boats, etc. 1.27 1.46 4.7
Light-vessels, fire-floats, 0.71 0.85 4.0

dredgers; floating docks;
floating platform
Cruise ships, excursion 0.56 0.61

boats, ferry-boats, cargo
ships, barges and similar
vessels for transport of
persons or goods
Tugs and pusher craft 0.7
Aircraft and parts 0.53 0.56
Page 31 of 45

(2000–1 to (2003–4 to (2008–9 to
2007–8)* 2007–8)* 2011–12)*
Parts of goods of 0.53 0.56

helicopters, hang gliders,
etc.
Electrical machinery and 0.59 1.13 1.1

equipment
Electrical transformers, 0.59 0.63

static converters (e.g.,
rectifiers) and inductors
Electricity generating sets 0.5

and rotary converters
Electrical apparatus for 1.11

line telephony/telegraphy,
incl. telephone sets with
cordless handset
(p.101) Miscellaneous 1.7 1.7 1.4

articles
Footwear with outer soles 0.64 0.61

of rubber, plastics, leather
and uppers of leather
Cane/beet sugar 1.06 1.09 0.7
New pneumatic tyres, 0.7

tyres of rubber
Special transactions and 1.03 0.9 6.4

commodities not
classified according to
kind
Total 64.4 67.6 75.6

Source: Estimated using trade data available in the website of the
Department of Commerce of Government of India, available at
http://commerce.nic.in/, Directorate General of Commercial
Intelligence and Statistics.
Note: *Sectoral contribution has been calculated as the change in exports of
the sector as a percentage of the change in total manufactured exports over
the periods 2000–1 to 2007–8, 2003–4 to 2007–8 and 2008–9 to 2011–12.
Page 32 of 45
The following scatter diagrams show that there is a strong positive association
between relative prices (international to domestic retail prices) and export
volumes in the case of both diesel and petrol. These observations lend further
credence to the argument that the movement in international prices relative to
domestic retail prices has played a significant role in determining exports of
petroleum products. The stronger positive association in the case of diesel too
further strengthens the argument as diesel has the highest share in exports
(both in terms of volume and value) and the price differential between
international prices and domestic retail prices has been increasing since 2005–6
much more sharply than that between petroleum. (p.102)
Figure 3B.1 Relationship between

Relative Prices of Diesel and Export
Volumes
Sources: Rohit (2011) and Petroleum
Planning & Analysis Cell, Ministry of
Petroleum & Natural Gas, Government of
India.
Notes:
(1.) Prices are Rs/ltr after

adjusting for the exchange rate
taken from the US Federal
Reserve.
(2.) Price of diesel (0.5 per cent
sulphur) is for the Arab Gulf
market.
(3.) Data pertains to the period:
2002–3 to 2008–9.
Page 33 of 45
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Notes:
(*) I am extremely grateful to Jayati Ghosh, for her valuable inputs and
interventions on an earlier draft of this chapter which have significantly
improved the chapter. I am also grateful to Prabhat Patnaik and Amiya Bagchi
for their valuable comments and suggestions. I thank Reji K. Joseph for giving
me permission to use the findings of his unpublished PhD thesis regarding trade
in pharmaceutical sector. I would like to thank the participants at the ICSSR
Page 39 of 45
Research Surveys Workshop in Economics (May 2011) for several useful

suggestions. I would also like to thank Surendra Rana for research assistance.
The errors and other shortcomings that may still remain in the chapter are solely
mine.
(1.) As pointed out by Chandrasekhar and Ghosh (2006a), although India’s

imports and current account deficit in the 1990s did not increase much as
compared to the late 1980s, the reasons for that lie elsewhere and cannot be
necessarily seen as a success of reforms.
(2.) Although, compared to the 1980s, exports performed better in the 1990s, it
did not match up to the growth achieved in the 1970s.
(3.) In this context it is important to point out that although India’s share in
global exports have gone up from about 0.75 per cent in 2000 to around 1.5 per
cent recently, India has not made much progress in terms of competitiveness vis-
à-vis other developing countries (Athukorala 2008).
(4.) For example, Banik 2007; De 2009.
(5.) In this context, it needs to be noted that the trade flows recorded by the
Reserve Bank of India (RBI) differ from the customs-based data provided by the
Directorate General of Commercial Intelligence and Statistics (DGCI&S) as data
provided by the RBI includes other exports and imports (such as government
imports) that do not pass through customs.
(6.) Using Leamer and Stern methodology, Veeramani decomposes the sources of
export growth into market distribution effect, overall growth in world trade,
commodity composition effect, and competitiveness effect and shows that in the
period from 2002 to 2005, 78 per cent of the total increase in India’s exports is
explained by the world trade effect, 12 per cent because of being directed to
markets (regions) that were growing faster than the world average and that the
competitiveness effect has not been the major factor behind the acceleration of
India’s export growth in this period. In this context, the author also points out
that because of the appreciation of the real effective exchange rate (REER),
there have been some erosion of (price) competitiveness of India’s exports. For a
recent review of literature on price competiveness and India’s exports, see Sinha
(2009). Also see Banik (2007) and Veeramani (2008).
(7.) As mentioned earlier, although India’s share in global exports has gone up in
this period, the rate of growth of India’s exports was much lower than those
experienced by several developing countries in Asia, such as China, Singapore,
and Thailand, except in the very recent past
(8.) One of the important features of growing trade in these countries has been
the increasing participation in fragmented-production network, which has
Page 40 of 45
boosted intra-industry trade particularly in machinery, electrical goods and

electronic parts and components. Intra-industry trade in these countries is
largely driven by trade in intermediate goods or more specifically parts and
components. In fact, share of parts and components trade (PCT) in total manufacturing
trade is highest in ASEAN countries, having risen from an average of 35 per cent
of manufacturing trade in 1996 to 43 per cent in 2006 (ADB 2008).
(9.) For details, see ‘India and Developing Asia: Nature, Pattern and Extent of
Integration’ in IDEAs (2009).
(10.) India, for instance, entered into a bilateral free trade agreement (FTA)
with Thailand in 2004. With Singapore too, India entered into the bilateral
Comprehensive Economic Cooperation Agreement (CECA) in 2005. Sub-regional
cooperation between India and some of the South-East Asian economies such as
Vietnam, Thailand, Myanmar, and Laos has also accelerated in this period. As
part of its efforts to intensify economic relations with ASEAN as an overall
regional grouping, a Framework Agreement on establishing a Free Trade Area
between ASEAN and India was initiated in 2003. The first phase of the
agreement began with the formal signing of the Trade in Goods (TIG) agreement
in 2009 and has been implemented in January 2010. See Mehta and Narayanan
(2006) and IDEAs (2009).
(11.) Other than the regional trade agreement South Asia, South Asian Free
Trade Agreement (SAFTA), involving all SAARC members, India has also got into
bilateral trade agreements with various South Asian countries. India–Nepal
Treaty of Trade, in operation since 1991, Indo-Sri Lanka FTA initiated since
2000, India–Afghanistan Preferential Trade Agreement, in force since 2003,
Bhutan-India FTA, signed in 2006, are some of the examples of that.
(12.) The discussion regarding the commodity composition of exports in the

1990s draws extensively on Panagariya (2004).
(13) For details, see Bhat et al. (2008): 70–3.
(14.) In fact, as argued by Chandrasekhar and Ghosh (2012), data till 2010–11
shows that in the recent past, non-oil imports have been growing much faster in
value terms than oil imports.
(15.) Chandrasekhar and Ghosh, (2006c) argue that the declining tariffs on all
other capital, which in effect reduced the differential duty advantage that
project goods imports had in the past, is one probable factor that explains the
fall in project goods imports in this period.
(16.) For details, see ‘India and Developing Asia: Nature, Pattern and Extent of
Integration’ in IDEAs (2009).
Page 41 of 45
(17.) Chandrasekhar (2013) argues that other than the rise in the demand for
gold as an investment, ‘consumption driven by growing inequality also seems to
have played a role’ in causing the steep rise in gold imports in the 2000s.
(18.) As mentioned earlier, among capital goods, the import shares of all items,
including transport equipment and electronic goods, fell, because of the
slowdown in economic growth and slowdown in industrial activity.
(19.) According to one estimate, the domestic production of petroleum products,

which has been driven mainly by the increase in private sector refining capacity,
rose from about 85 million tonnes in 1998–9 to 116.07 million tonnes in 2003–4
(EPW 2004). The Ministry of Petroleum and Natural Gas notes that domestic
refining capacity has further increased to 215.066 million metric tonne per
annum during 2012–3 (GoI April 2013). Also see Clarke and Graczyk (2010) for
details about the increase in refining capacity of both public sector oil marketing
companies and private refineries.
(20.) Essar Oil Limited is the other Indian private refinery that has also started
exporting such products, however, its export volumes are much lower than that
of Reliance India Limited (RIL). Shell, the Indian arm of Royal Dutch Shell Plc, is
the only foreign operator present in the domestic fuel retail business.
(21.) While the public sector units (PSUs) are fairly big exporters of Naptha,
among all the petroleum products, Reliance too had joined in exporting Naptha
since mid-2000s.
(22.) In the early 2000s, Reliance Petrochemicals wanted to sell its surplus
diesel production in the domestic market rather than in the international market
owing to the situation of oversupply in the world market then. In the case of
petrol, on the other hand, the refinery was able to sell its products in the US
market at remunerative prices. Refer The Hindu Business Line (2001).
(23.) As the Parikh Committee Report (2010) notes, during this period ‘private
sector oil marketing companies, viz. Reliance Industries, Essar Oil and Shell
India…closed down their retail marketing business across the country’.
(24.) Some have also argued that these exports are a reflection of the nature of
incentives inherent in the regulated oil price regime followed in India. See, for
example, Clarke and Graczyk (2010), Kumar and Palit (2007).
(25.) This is because while Reliance sells refined products wholesale to public
sector oil marketing companies from the refinery gate, it is at import parity-
prices while being a EOU it imports crude oil at low duty but sells it at much
higher prices to public-sector companies. See Clarke and Graczyk (2010) for
details.
Page 42 of 45
(26.) According to reports, China is believed to have added new refining capacity
in 2009, while South Korea, due to structurally declining refined product
demand and the large domestic refinery industries, is expected to face growing
excess capacity. Similarly, smaller refiners such as Thailand and Taiwan are also
likely to face increasing surplus capacity from 2009. Even in West Asia, which
currently faces a deficit of key transport fuels, large-scale refinery projects are
scheduled to come online after 2014. See Clarke and Graczyk (2010) for details.
(27.) It is argued that this signals that for the government increasing refinery
capacity is less of a key commercial priority than what it was in the Eleventh
Plan Period or before. Clarke and Graczyk (2010).
(28.) Clarke and Graczyk (2010: 49) argue that reduction in domestic excess
capacity after 2015 in the face of growing domestic demand would lower
product export volumes.
(29.) Following the recommendations of the Parikh Committee report on pricing

of petroleum products, in May 2010 the government of India more than doubled
the prices of natural gas sold by state-run Oil and Natural Gas Corporation and
Oil India Ltd (Katakey 2010).
(30.) In fact, the process of reorienting sales towards the domestic market began
to be felt in 2009, when with the rapidly falling international product demand in
the wake of the global economic slowdown and the growing attractiveness of
selling within the domestic market, private refineries reopened some of their
retail outlets. In the case of RIL, with the commissioning of a new refinery in late
2008, it had also requested for removal of EOU designation of its older refinery
in order to cater to the domestic market (Clarke and Graczyk 2010). While it can
be argued that with increase in refining capacity (in the case of Essar Oil, the
increased refinery output has been driven by better capacity utilization) the
private refineries can continue to serve the export market as well as the
domestic retail market, evidence suggests that owing to less than commensurate
increase in prices of certain petroleum products (for example, diesel, LPG, etc.)
in the domestic market, domestic retail sales by private refineries are still to
pick up substantially (see The Economic Times 2010 and Pathak 2011). The
hardening of crude and petroleum product prices in the international market
from 2010–11 (which once again rendered sales in the international markets
relatively more attractive) meant that increase in refining capacity has resulted
in increased exports.
(31.) Utsa Patnaik argues that the decline in state rural development
expenditure and the severe decline in agricultural growth have resulted in rising
unemployment in rural areas. The resultant fall in purchasing power of the large
proportion of the population dependent on agriculture have been further
exacerbated by trade liberalization at a time when primary product prices
Page 43 of 45
started falling. In addition, cutback in subsidies for crucial agricultural inputs as

well as rise in cost of credit because of financial liberalization have meant that
cultivators were faced with rising cost of cultivation on one hand and falling/
fluctuating remuneration owing to exposure to global price fluctuation on the
other hand. Due to the consequent decline in purchasing power on part of the
large chunk of the rural population per capita food absorption has gone down
drastically. See U. Patnaik (1996, 2003 and 2004) for details.
(32.) According to Utsa Patnaik, availability/absorption of foodgrains, defined as

net output plus net imports and minus net additions to public stocks, has fallen
by four times as much as output in the 1990s.
(33.) Even during the year of severe drought in 2002 that resulted in massive
decline in grain output, several million tonnes of foodgrains were exported
between June 2002 and November 2003 (U. Patnaik 2008).
(34.) While the reduction in stocks of rice and wheat following the drought in
2002 prompted the government to stop fresh allocation of these items for export
in late 2003, since then there has been steady increase in foodgrains stocks
largely on account of relatively lower offtake. See GoI (2008–9).
(35.) From a high of 5.65 million metric tonnes in 2003, wheat exports from
India declined to mere 0.2 million metric tonnes in 2006. Due to the ban
imposed on export of wheat since 2007, wheat exports have been almost non-
existent in 2007 and 2008 (Mitra and Josling 2009). According to newspaper
reports, in 2009 the government had been contemplating lifting the ban on
wheat exports on account of ‘comfortable’ stock holdings, but the steep hike in
food prices has stopped the government from lifting the ban on export of wheat.
(36.) The paper by Burange and Chaddha (2008) analyses India’s intra-industry
trade for a continuous time series over 19 years up to 2005–6. Other studies
measuring the extent of increase in India’s intra-industry trade have mainly
revolved around certain sections of goods and on particular points of time. See
Burange and Chaddha (2008). Also see ADB (2008) and Athukorala (2008).
(37.) Chaudhuri (2009) argues that the negative effects of withdrawal of the
state intervention and lack of industrial policies are some of the crucial reasons
that explain India’s lagging performance in exports of advanced technology
products. See Chaudhuri (2009) for details.
(38.) According to Joseph (2011), the analysis of the revealed comparative

advantage (RCA) suggests that bulk drug exports have been losing their
comparative advantage since 2001.
Page 44 of 45
(39.) According to Joseph (2011), the implementation of good manufacturing

practice (GMP) is one reason behind the decline in domestic production as it led
to the closure of a number of small scale units of bulk drug manufacturers.
(40.) Import duty of organic chemicals including bulk drugs has declined from
120 per cent in 1990–1 to 7.5 in 2007–8 (Joseph 2011).
(41.) A part of the reason for surge in imports lies in the fact that in the post
liberalisation period, the rate of growth of domestic bulk drug production has
declined.
(42.) In 2008, cutback in supply of bulk drugs from China and rise in prices, as
many as 50 bulk drug manufacturing units in India had closed down, while
others reduced manufacturing of loss-making drugs (Joseph 2009, 2011).
(43.) Joseph (2011), argues that this view is further strengthened by the fact that
that there is a positive association between exports and imports of raw
materials.
(44.) Consequent to this FTA, India’s exports of helical springs, pumps, ball
bearings, and lighting equipment to Thailand have declined sharply over the
years. On the other hand, India’s imports from Thailand have increased in all
these product categories over the years. See ICRIER (2008) for details.
(45.) See Bhat et al. (2008). Also see Chandrasekhar and Ghosh (2010).
(46.) In fact, in order to prevent appreciation of the rupee, the RBI had been
buying foreign currency and building up foreign currency reserves, see
Chandrasekhar and Ghosh (2010).
(47.) There was sharp increase in FDI inflows, especially from 2004–5 until
2007–8 (Chandrasekhar and Ghosh 2010) and substantial decline thereafter.
(48.) Discussions with Surajit Das have been extremely helpful in preparing the
scatter diagrams showing the correlation between petroleum product exports
and their relative prices.
Page 45 of 45
Trade in Services and the Indian Economy

Economy
Jayati Ghosh

Print ISBN-13: 9780199458943
DOI: 10.1093/acprof:oso/9780199458943.001.0001

Rupa Chanda
DOI:10.1093/acprof:oso/9780199458943.003.0004

Services have been a growth driver in the Indian economy in the post-1991
period. Their share in India’s GDP has grown considerably. They have played an
important role in India’s integration with world markets through trade and
investment flows. This chapter outlines the trends in India’s service sector
output, trade and foreign direct investment (FDI) as well as its opportunities and
constraints in services. It discusses the nature of India’s services liberalization
and reforms and the associated concerns and challenges, the latest state of play
in selected services, and the outcome of reforms in various services. It also
discusses India’s negotiating stance in services in multilateral and preferential
trade agreements to highlight its interests and sensitivities in this sector. The
discussion concludes by highlighting the need for more broad-based growth in
the service sector, with increased linkages to the rest of the economy for a
services-led growth pattern to be sustainable.
Keywords: services, liberalization, reforms, regulation, trade, foreign direct investment,

competitiveness, multilateral, regional, growth
Services have become increasingly important in international trade and

investment flows and global output. Across all regions of the world, services
have come to occupy a growing share of economies, constituting 74 per cent of
GDP in the developed countries and around 50–60 per cent in low income
countries. This marked shift in value added towards services reflects growing
intermediate and final demand for services and changes in trade and production
patterns around the world. According to the World Trade Organization (WTO),
global services exports accounted for around one-fourth of world exports of
Page 1 of 54
goods and services or US$ 4.7 trillion in 2013. The latter is, however, an
underestimate given the huge indirect and direct value added contribution of
services to trade in goods and other global transactions and the sales of foreign
affiliates of multinational firms which are not captured by conventional balance
of payments (BoP) data.1
The Indian economy has witnessed similar trends in its service sector especially
since the initiation of macroeconomic and structural reforms in 1991. Economic
liberalization has put India on a higher growth trajectory, with the compound
annual growth rate (CAGR) rising from 5.8 per cent during the 1990s to 7.3 per
cent in the 2000–9 period.2 India has emerged as one of the fastest growing
economies in the past two decades. The country’s external sector performance
has also improved post-liberalization, with an increase in India’s share in world
trade as well as in foreign direct investments (FDI) flows over (p.113) the past
decade. The service sector has played a critical role in shaping these trends.
Services have been a growth driver in the Indian economy during the post-
reform period. The sector’s share in India’s GDP has grown considerably.
Services have also facilitated India’s integration with the world economy
through trade and investment flows. India’s services exports have grown
manifold from a mere US$ 6.8 billion in 1995 to US$ 116.3 billion in 2010,
raising India’s share in global services exports from a mere 0.5 per cent in 1995
to well over 3 per cent in 2010.3 Today, services account for around 35 per cent
of India’s exports and are expected to constitute as much as 50 per cent in the
coming years.4 The phenomenal growth and export performance witnessed in
services like information technology (IT) and business process outsourcing
(BPO) have placed India on the global map. Services also account for a growing
share of India’s FDI inflows and in several subsectors, India has witnessed FDI
outflows to other countries. Evidence also suggests that the growing integration
of India’s service sector with world markets has contributed positively to
productivity, efficiency, and overall competitiveness both within the service
sector as well as in other sectors of the economy.
To a large extent, the dynamism exhibited by India’s service sector is a reflection

of the liberalization and reforms carried out in services and in the wider
economy since the 1990s. The service sector has been integral to India’s
liberalization and structural reform programme that started in the 1980s and
took off after 1991. Erstwhile government monopoly sectors such as insurance
and telecommunication services have been opened up to domestic private sector
as well as FDI participation. New regulatory frameworks have been established
in many services to support this liberalization process as well as address various
public policy objectives.
Page 2 of 54
The growing significance of India’s service sector in the country’s overall

economy and in its trade and investment flows has, however, raised many issues
and concerns that have to be addressed domestically in consultation with
relevant stakeholders as well as externally, in consultation with key trade and
investment partners. It is well-recognized that numerous domestic and external
constraints have to be addressed if India is to realize its true export and
investment potential in services, and to make growth in this sector sustainable
and a contributor to larger socio-economic and development goals.
Liberalization of services in (p.114) India has also been fraught with domestic
debate regarding the implications for equity, employment, prices, and various
public policy objectives and has therefore not always been a smooth process.
This chapter provides an overview of trends in India’s services trade and

investment flows and regulations, and their implications for the Indian economy.
The second section provides a brief review of the literature on services trade
and investment to outline select issues and to take stock of the existing analysis
and discussion in this area. The third section discusses the services context in
India by outlining recent trends in India’s service sector growth and its
contribution to the economy. The fourth section highlights the trade and FDI
performance of India’s service sector. It also discusses trends in India’s IT and
BPO services sector, which has been the most successful area of India’s
integration in world markets, as well as India’s exports of services through the
movement of service providers. The section highlights the main internal and
external challenges to India’s services exports. The fifth section discusses the
nature of India’s services liberalization and reforms, highlighting the extent to
which unilateral liberalization has been undertaken, the concerns and
challenges that have arisen in this process, the latest state of play in specific
services, and the outcome of reforms. The sixth section discusses India’s
negotiating stance in services in the context of the WTO negotiations in services
and under various bilateral and regional agreements encompassing services to
highlight India’s key interests and sensitivities in services trade and investment.
The last section concludes the chapter by highlighting the main issues that
emerge from India’s experience with services reform and its integration with
world services markets.
Literature on Services Trade: Review of Select Issues

Although services constitute a growing share of the world economy in terms of
output, trade, and investment flows, the economic literature on growth and
development has not paid much attention to the significance of services. This is
because services were seen as largely non-tradable and perishable. However,
since 1990, there has been significant increase in international trade flows in
services, rising from less than US$ 0.8 trillion in 1990 to around US$ 4.7 trillion
in 2013, the bulk accounted for by developed countries, as shown in Figure 4.1.
This growth reflects both changes in final demand (p.115)
Page 3 of 54
(p.116) for services and changes

in production technology, as well
as the evolving role of services in
the production process within and
across economies.
The growing globalization of
services has been accompanied
by a growing literature on
services trade and investment
flows, particularly with the
signing of WTO’s General
Agreement on Trade in Services Figure 4.1 International Trade in
(GATS) and several bilateral Services for Different Economies (US$
and regional trade and million)
cooperation agreements which Source: Based on UNCTAD 2011.
encompass services that have
come into existence. Today,
there is a significant body of literature on the characteristics and determinants
of services trade and growing policy recognition of the importance of this sector
in the overall development and competitiveness of countries.
The literature on services globalization includes studies on four important

dimensions. These include studies on: (a) the determinants of services trade and
investment and the distinctive features of such trade compared to trade in
goods; (b) the implications of services growth and liberalization for welfare,
employment, competitiveness and productivity, including evidence on individual
country experiences with service sector liberalization; (c) identification and
measurement of domestic and external barriers affecting trade in services; and
(d) multilateral and regional/bilateral agreements on services and their
implications for services trade and investment. The following discussion
provides a brief overview of the main features characterizing services trade, the
existing evidence on the role of services in economies, and trade policies
affecting services.
Characterizing Services Trade

Unlike the case of goods trade, services, due to their non-storable and intangible
nature, are characterized by the proximity burden. Services delivery requires
the proximity of supplier and consumer. Either suppliers must move to the
location of the consumers of the service or the reverse should happen. This
implies that distance, culture, and regulations influence the delivery of certain
services (Hill 1977). Advances in information and communication technology,
however, have made it possible to disembody or splinter services and to deliver
them remotely (Bhagwati 1984). This has led to greater fragmentation of
production processes and outsourcing of activities to lower cost countries, which
is in part reflected in the rising share of intermediate (p.117) services in total
Page 4 of 54
services trade and the growing tradability of services erstwhile thought to be

non-tradable. The emergence of new technologies and new forms of business
transactions, which have in turn enabled greater specialization and division of
labour across countries, have contributed to the rise in global services trade
(Francois and Hoekman 2010; Grossman and Rossi-Hansberg 2008; Robert-
Nicoud 2008). Studies have identified several determinants of services trade,
including infrastructure availability, domestic regulations, FDI policies,
preferential trade agreements, skill and human capital in addition to traditional
macroeconomic variables such as market size, growth, inflation, and real
effective exchange rates (Freund and Weinhold 2002; Goswami et al. 2012;
Grunfeld and Moxnes 2003; Kimura and Lee 2006; Lennon et al. 2008; Shingal
2010). The literature further notes that the concept of trade based on
comparative costs continues to be applicable to services though these
determinants are found to vary across different segments of services (Deardorff
1985; Hindley and Smith 1984).
Much of the literature has focused on understanding the peculiar characteristics

of service delivery in international trade, that is, its modal breakdown. As
outlined in Sampson and Snape (1985), further modified in Sapir and Winter
(1994) and later reflected in the GATS, trade in services unlike trade in goods
occurs through different modes of delivery. These include: mode 1—cross-border
trade in services where the service crosses borders but neither the provider nor
the consumer moves; mode 2—the movement of customers to the country where
the service provider is located; mode 3—commercial presence involving the
movement of firms to another market to sell services through an offshore
affiliate or branch or subsidiary; and mode 4—the temporary movement of
natural persons of all skill levels to provide services. These modes are not
necessarily independent from each other. They may work as complements or
substitutes to each other (Chanda 2006). For example, due to the need for
proximity between suppliers and consumers in services, the complementary
presence of inputs and of suppliers and consumers may be needed to enable
exchange of services across borders (Francois and Hoekman 2010). So,
temporary movement of business visitors and intra-corporate transferees (mode
4) may be needed to complement offshore outsourcing of services to understand
client requirements and transfer processes to the offshore delivery centre. On
the other hand, cross-border trade in IT-enabled (p.118) through the internet
can substitute for mode 4–based delivery of the same service. Likewise, mode 3
imports of health services by a country can facilitate its medical value travel or
mode 2–based exports of health services. Hence, policies affecting one mode are
likely to affect the feasibility of services trade through other modes.
Contribution of Services
An important area of research on services has been to understand their
contribution to economic growth. Evidence from Organisation for Economic Co-
operation and Development (OECD) and developing countries suggests that
Page 5 of 54
certain services such as telecommunications and transport services play an

important role in enabling productivity growth by facilitating transactions.
Others such as information technology and energy services serve as direct
inputs to other activities while services such as health, education, and research
and development contribute to growth by enhancing the fundamental factors of
production. Studies also note the spillover effects of services growth on
manufacturing and the rest of the economy. Studies for select OECD countries
find that intermediate services account for differences in aggregate productivity
levels and growth rates in manufacturing and that total factor productivity (TFP)
growth is in large part attributable to variations in business services
performance across OECD countries (Inklaar et al. 2007, 2008; Triplett and
Bosworth 2004). Evidence also indicates that services can be an engine of export
growth for countries and are an important determinant of competitiveness
(Bosworth and Collins 2008). The impact of services on growth occurs through
various channels. These include skill and technology spillovers to other areas of
the economy, increased product variety, reduction in infrastructural and
logistical bottlenecks, and greater specialization made possible through
offshoring and breakdown of the production process.
Policies Affecting Services Trade

Policies which affect international services transactions tend to be complex and
non-transparent in nature. These are mainly in the form of regulatory barriers.
These include border-level regulations such as restrictions on FDI participation,
quotas on entry of foreign service suppliers, and licensing and qualification
requirements, as well as (p.119) ‘behind the border’ domestic regulations,
which are often discriminatory in nature, such as authorization requirements,
economic needs tests, labour market tests, government procurement policies,
subsidies, and taxes. Thus, trade policies in services are more complex than in
the case of goods and involve measures which are difficult to quantify and are
non-transparent. Although they may be warranted on efficiency and public policy
grounds such as ensuring standards, consumer protection, equity, and other
non-economic objectives, they may lead to higher operating and entry costs for
foreign service providers due to their content and the manner in which they are
administered.5
Quantification of policies affecting international services transactions is difficult

given the complex mode-wise nature of services delivery. The literature has
taken two approaches to assessing the incidence and impact of policy barriers to
services trade. These approaches involve (a) collecting information on applied
policies and converting these into coverage/frequency indicators and using these
indices to explain price-cost margins in services, or (b) using price-cost margin
estimates to find the difference between potential and actual trade and treating
the latter as a tariff equivalent of policies affecting services trade. Studies by the
Australian Productivity Commission, OECD, the World Bank, and other
researchers find that barriers to services trade can be substantial, especially for
Page 6 of 54
modes 3 and 4 and that the extent of restrictiveness as measured by the price or
cost effects tends to be higher in developing countries, and is also generally
higher than in the case of goods trade (Deardorff and Stern 2008; Findlay and
Warren 2000).
Figure 4.2 presents findings on the restrictiveness of services trade policies for
32 developing countries and 24 OECD countries for five key services, namely,
financial, telecommunications, retail, transport, and professional services in
relation to the level of development. They are based on survey data on applied
trade policies in services (Gootiiz and Mattoo 2009a, 2009b). The most relevant
modes are covered in each sector and the survey results are then summarized in
the form of an index of services trade restrictiveness (services trade
restrictiveness index or STRI) which ranges from 0 to 1, 0 being open and 1
being most restrictive, with intermediate levels of restrictiveness set at 0, 0.25,
0.5, and 0.75. The sector results are then aggregated across the modes of supply
using weights that reflect the relative importance of each mode for that sector.
The policy indices in each sector estimate the incidence (p.120)
of restrictiveness for two sets of

measures; those which are applied
on the entry or establishment of
foreign firms (market access) and
those which differentiate between
domestic and foreign firms
(national treatment). The overall
STRI for a country is then
calculated by aggregating the
sectoral STRIs using sectoral GDP
shares as weights.6
Figure 4.2 Restrictiveness of Services
It is evident that there is a
Trade Policies by GDP Per Capita: 2007
negative correlation between
the restictiveness of services Source: Reproduced from Francois and
trade and the standard of living. Hoekman (2010: 660), Figure 2.
Higher income per capita
countries such as the OECD
nations tend to be more open to services trade than lower income per capita
countries such as India, Sri Lanka, or Kenya. As per these findings, developing
regions such as South Asia and Sub-Saharan Africa tend to have much higher
incidence of trade restrictions on services compared to the OECD countries.
Across all regions, professional services and mode 4 tend to be the most
restricted.
The empirical literature on services restrictions also finds that openness in

various producer services has positive implications for export competitiveness in
high-technology manufacturing sectors and a significant positive relationship
between FDI in services and performance in manufacturing (Fink et al., 2005;
Page 7 of 54
Francois et al. 2009). Thus, services trade and investment have positive
spillovers for the rest of the economy. However, the nature and extent of this
contribution (p.121) is shaped by various factors, chief among which is the
country’s openness to trade and investment, in addition to others such as the
market structure and the overall regulatory environment (Francois and Woerz
2008; Nicoletti 2001; Nicoletti and Scarpetta 2003).
Following this brief review of the salient aspects of the existing literature on
services trade, the next section turns to examining India’s experience with
services growth and liberalization. It highlights the key aspects of the sector’s
growth and globalization in the Indian context and its long-term growth and
development implications for the economy as a whole.
Services Growth in India7

The service sector has been a major contributor to the high growth rates
experienced by the Indian economy in recent years. Its average annual growth
rate rose from 7 per cent during the 1988–98 period to 9.2 per cent during the
2002–9 period, exceeding overall GDP growth of 7.5 per cent in this period. The
service sector has also performed better than both industry and agriculture,
which registered average growth rates of 2.2 per cent and 7.7 per cent,
respectively, during the 2002–9 period. Table 4.1 provides the overall as well as
sectoral growth rates in India in recent years and the superior performance of
services compared to the rest of the economy.
Page 8 of 54
Table 4.1 Growth in Sectoral and Overall Output at Factor Cost and Constant Prices: 2002–9 (%)
Sector Growth Rate
2002 2003 2004 2005 2006 2007 2008 2009 Average

2002 to
2009
Agriculture −7.3 9.8 0.2 5.3 3.7 4.7 1.6 −1.0 2.2
and allied
activities
Industry 4.9 6.1 9.3 8.7 13.3 9.2 3.2 7.2 7.7
Services 7.1 8.6 9.9 11.4 10.3 10.4 9.2 6.7 9.2
GDP at 3.3 8.3 7.8 9.6 9.7 9.2 6.7 5.6 7.5
factor cost
Source: Based on UN National Accounts Statistical Database, available at http://unstats.un.org/unsd/snaama/
resQuery.asp.
Page 9 of 54
(p.122) Services in India have also exhibited an upward trend in growth over
the past few decades, registering a CAGR of 8.95 per cent over the 2000–9
period, up from 6.3 per cent in the 1980s and 7.5 per cent in the 1990s, and
exceeding the CAGR of 7.3 per cent for total GDP for the 2000–9 period. Figure
4.3 illustrates the superior performance of the services sector and its role in
pulling up overall economic growth in India during the past three decades.
Growth performance within the service sector has, however, been uneven. The
driving segments have been communication, banking and insurance,
construction, and trade and distribution services, which have grown at over 7
per cent in CAGR terms during the 2000–9 period, while services such as
railways and public administration services have grown at less than 4 per cent.
These subsectoral trends reflect differences in policy and regulatory trends
across different services and the role of rising incomes and domestic demand in
driving
(p.123) growth in some service

segments. Communication
services have been the fastest
growing service segment,
reflecting the significant
liberalization and deregulation in
this sector since the 1990s. Figure
4.4 illustrates the differences in
growth performance for select
subsectors within the service
sector over the 2000–9 period.
The high growth rate of
services has contributed to its
rising share in the overall
economy. Between 1950 and Figure 4.3 Compound Annual Growth
1990, agriculture’s share in Rate for Services and GDP in India:
GDP declined by around 25 per 1980s, 1990s, and 2000s (in per cent)
cent with the corresponding Source: Based on UN National Accounts
increase in the share of services Statistical Database, available at http://
and industry being distributed unstats.un.org/unsd/snaama/
almost evenly. However, the resQuery.asp.
average share of industry in
overall GDP has declined from
around 22 per cent in 1990–4 to 20 per cent in 2005–9 and the share of
agriculture has declined from around 30 per cent to about 18 per cent of GDP
over this same period. This has been matched by a corresponding rise in the
share of services in the economy. In 2009, services constituted around 64 per
cent of GDP, up from an average
Page 10 of 54
Figure 4.4 CAGR for Select Service

Subsectors: 2000–9 (in per cent)
Source: Based on UN National Accounts
Statistical Database, available at http://
unstats.un.org/unsd/snaama/
resQuery.asp.
(p.124) share of 49 per cent of GDP in the 1990–4 period. This is in contrast to many
other developing economies, where the decline in the share of agriculture in GDP has
been followed by a corresponding rise in the share of industry, in particular
manufacturing, and later in services. Thus, there has been a leapfrogging of the
economy from dependence on the primary sector to the tertiary sector. Figure 4.5
shows the relative contributions of the primary, secondary, and tertiary sectors in
India’s GDP and the steady shift in this composition between 1980 and 2009 towards
services.
Although the service sector’s contribution to overall employment has risen, this
has not been commensurate to the sector’s contribution to output.8 According to
the 2001 Indian census statistics, the service sector’s share in employment rose
from 20.8 per cent to 25.1 per cent between 1991 and 2001 while during the
same period, its share in GDP increased by over 10 per cent, thus implying a low
employment elasticity in this sector. According to the latest Economic Survey,
the
Page 11 of 54
(p.125) tertiary sector’s share of

employment has increased rather
modestly, from 21.2 per cent in
1993–4 to 24.8 per cent in 2004–5
and to 25.4 per cent in 2007–8
while its contribution to GDP has
increased from less than 50 per
cent to around 60 per cent.
Meanwhile, the share of
employment in the primary sector
has declined more slowly from
64.5 per cent in 1993–4 to 55.9 in
2007–8 while its contribution to
GDP has fallen considerably over Figure 4.5 Composition of GDP across
this period, to less than 20 per
Sectors (in per cent)
cent, indicating falling
productivity in the agricultural Source: Based on UN National Accounts
sector. Statistical Database, available at http://
According to recent labour unstats.un.org/unsd/snaama/
surveys, the bulk of services resQuery.asp.
employment is concentrated in
trade and distribution,
construction, hotel and restaurants, and community and personal services
segments. The employment trends further reveal that very rapidly growing
service segments such as communication and financial services have had
relatively lower employment elasticity, indicating that their growth has mainly
been based on productivity gains and technological improvements. Hence, there
have been concerns about the implications of a services-led growth paradigm in
India, where several of the high growth segments within the service sector are
not highly employment-intensive and have also experienced high labour
productivity growth, which has enabled their expansion without commensurate
employment growth. Table 4.2 shows the trends in employment across the
primary, secondary, and tertiary sectors of the economy during the 1993–2008
period.
It is worth noting, however, that Indian data on services output and employment
are subject to problems of data collection, classification, and inadequate
coverage. Unlike the Annual Survey of Industries (ASI) which collects data from
manufacturing and certain other categories of units, at present there is no well-
organized mechanism for data collection from service sector units having a large
number of workers or those with large annual turnover. A key problem is non-
availability of the sample frame for such units. An additional problem is that
Table 4.2 Share of Sectors in Employment (in per cent)
Page 12 of 54
Year Primary Secondary Tertiary
1993–4 64.5 14.3 21.2
2004–5 57.0 18.2 24.8
2007–8 55.9 18.7 25.4

Source: GoI, Economic Survey 2010–11 (Table 10.1: 238).
(p.126) there are a large number of unorganized units in the service sector and a
constantly changing composition of units, with entry, exit, and emergence of new
service areas.9 There is also underestimation of the number of workers due to the
under listing of enterprises in the Economic Census compounded by problems arising
from differences in definition of workers and different approaches taken for counting
workers. These methodological problems must be kept in mind when analysing data on
services output and employment.10 It is thus likely that the share of services in the
Indian economy, as reflected by official numbers understates their true contribution.
Notwithstanding such data limitations, however, one can infer that although services
account for a growing share of output, especially in organized segments such as
communications, banking and insurance, their contribution to formal sector
employment remains much lower.
Services Trade and FDI in India
Services growth in India, as highlighted earlier, has been uneven across service
subsectors. This is also evident in India’s services trade and investment trends.
Much of the growth seen in the high performing segments of India’s service
sector stems from trade and FDI performance, particularly in areas such as IT
services. Both trade and FDI flows have played an important role in shaping the
growing contribution of services to the Indian economy and have also facilitated
India’s integration with world markets.
Trends in India’s Services Trade11

Exports of services in India have substantially increased from a mere US$ 2.9
billion in 1980 to US$ 16.7 billion in 2000 and further to US$ 116.3 billion in
2010. Imports of services have also risen considerably, from US$ 2.9 billion in
1980 to US$ 19.2 billion in 2000 and further to US$ 108.6 billion in 2010. India
has thus moved to a slight services trade surplus over the years, which has in
part helped offset its otherwise persistent and growing trade deficit in goods.
Services export growth has been particularly rapid, with an average annual
growth rate of 19.5 per cent in the 1995–9 period to 25.2 per cent in the 2000–8
period. Moreover, the CAGR for services exports stood at 18.4 per cent between
2000 and 2009, far exceeding the CAGR for (p.127) services output during this
period, highlighting the export-oriented nature of services growth in the Indian
economy. Owing to such trends, the contribution of services to India’s trade has
grown significantly over the past decade. The share of services in India’s total
exports has risen from 18.1 per cent in 1995 to over 34.9 per cent in 2010.
Page 13 of 54
India’s services export growth performance has also been superior to that in
other economies, including China. During the 1990s, India had the highest
growth of services exports among all economies, with an average annual growth
rate of 17.3 per cent, compared to China at 15.8 per cent and a world average of
5.6 per cent. In the recent decade, India’s services exports have accelerated
further, posting an average annual growth rate of 22.2 per cent in the 2000–10
period, outperforming all other economies. Figure 4.6 highlights India’s superior
services export performance during the 2000–10 period.
Rapid growth in services trade has led to India’s increased penetration of the
world services market over the past two decades, reflecting
(p.128) India’s growing

competitiveness in the world
services market, especially in the
post-2000 period. India’s share in
world services exports has risen
from less than 1 per cent in the
1980s and 1990s to 2.6 per cent in
2009 and further to 3.1 per cent in
2010. Its share in world services
imports has similarly increased
from 0.7 per cent in 1990 to 2.5
per cent in 2009 and further to 3.1
per cent in 2010 (Figure 4.7). Figure 4.6 Average Growth Rate of
It is worth noting that India’s Services Exports for Select Countries:
services exports have in general 2000–10 (in per cent)
grown much more rapidly than
Source: Based on UNCTAD Handbook of
its merchandise exports in the
Statistics.
post-2000 period. Further,
India’s penetration of the world
services markets has not only exceeded that for goods but has also increased
more rapidly, particularly in the latest decade. Figures 4.8 and 4.9 illustrate the
relatively superior performance of services exports compared to merchandise
exports.
Page 14 of 54
(p.129)
Figure 4.7 India’s Share in World

Services Exports and Imports: 1980–2010
(in per cent)
Statistics.
Figure 4.8 Average Annual Growth Rate

of Goods and Services Exports: 1980–
2010 (in per cent)
Statistics.
Page 15 of 54
(p.130) Thus, the evidence

clearly indicates India’s
growing competitiveness in
services relative to goods. This
is also supported by estimates
of India’s revealed comparative
advantage (RCA) in services
versus goods, which show that
between 1990 and 2010, the
RCA for services increased by Figure 4.9 Share in World Exports of
67 per cent while that for goods Goods and Services: 1980–2010 (in per
actually declined by around 11 cent)
per cent over this same
period.12 Figure 4.10 illustrates
Statistics.
the trends in India’s RCA for
services relative to goods.
There has been a shift in the structure of India’s services exports away from
traditional services such as transport and travel towards emerging areas such as
business services, with computer and information services constituting the
predominant segment. As shown in Figures 4.11a to 4.11c, the contribution of
transport and travel services to total exports declined from over 50 per cent in
1995 to around 30 per cent in 2000 and further to around 12 per cent in 2009.
In contrast, software services increased their contribution from zero in 1995 to
28 per cent in 2000 and to 51.5 per cent in 2009, reflecting the segment’s
phenomenal growth over the past decade. There has also been
Page 16 of 54
(p.131)
Figure 4.10 India’s Revealed

Comparative Advantage in Services and
Goods Exports: 1980–2010 (in per cent)
Statistics.
Figure 4.11a Composition of Services

Exports: 2009 (in per cent)
Statistics.
Page 17 of 54
(p.132) a diversification of the

services export basket with the
emergence of segments such as
financial, insurance,
communication, and construction
services. Notwithstanding
problems of coverage,
classification, and dissagregation
that characterize services trade
data, the trends clearly reveal that
India’s services exports have
become more broad-based over
the last decade, though there is
growing dependence on computer
and information services in the Figure 4.11b Composition of Services
export basket.13 Exports: 2000 (in per cent)
The disaggregated estimates for Source: Based on UNCTAD Handbook of
export growth of different Statistics.
service subsectors explain this
shift in the composition of
India’s services exports. The
fastest-growing segment has
been IT and BPO services which
has registered double-digit
growth rates annually in the
past decade, resulting in its
rapidly growing share in India’s
services exports. These shifts in
India’s services trade
composition are also reflected
in net foreign exchange
earnings, as shown in Figure
4.12. The category of computer
and information services (which Figure 4.11c Composition of Services
is a part of ‘other services’), has Exports: 1995 (in per cent)
emerged as the most important
net foreign exchange earner
Statistics.
within India’s service sector.
(‘Other services’ (p.133)
Page 18 of 54
includes all services excluding

travel, commercial, transport, and
computer and information
services.) The surplus in this
category has grown in the
post-2000 period while other
segments within ‘other services’
exhibit a small trade deficit. In
contrast, a traditional segment
such as transport services has
experienced a growing trade
deficit.
Estimates of RCA for different
service segments similarly Figure 4.12 Net Export Earnings from
reveal India’s competitiveness Different Services: 2000, 2005, and 2008
in the software services (US$ million)
segment compared to all other
Source: http://unctadstat.unctad.org/
service subsectors, as shown in
TableViewer/tableView.aspx.
Figure 4.13. This characteristic
also holds if one takes a time
series trend for RCA for the 2001–9 period, thus reflecting the sustained
competitiveness and highly export-oriented nature of India’s software services
sector.14
Trends in Services FDI15

The service sector has also experienced a sharp increase in FDI inflows over the
past decade, in large part reflecting the liberalization (p.134)
of many erstwhile government

monopoly services during the
1990s. Service sector FDI
registered a CAGR of 36 per cent
between 1992–3 and 2001–2 and a
CAGR of 36.7 per cent between
2006 and 2009. There has also
been a structural shift in FDI flows
towards the service sector, with
more rapid growth in services FDI
compared to that in
manufacturing (see World Bank Figure 4.13 India’s RCA for Select
[2004: 9, Figure 1] for trends in Categories of Services Exports: 2009
FDI in services versus FDI in
goods). The average share of
Statistics.
services in total FDI rose from
10.5 per cent for the 1990–4
period to 28.3 per cent during the
1995–9 period. During 2009–10, about 77 per cent of FDI was channelled into the
service sector, the key segments being construction, financial, and real estate services.
Page 19 of 54
Cumulative FDI inflows into services for the January 2000–May 2010 period stood at
US$ 76.9 billion or 63.6 per cent of total cumulative FDI inflows for this entire period.
Figure 4.14 illustrates the significance of the service sector as a destination for
investment in India and the relative importance of different segments within the
service sector with regard to FDI inflows in recent years.
Figures 4.15a and 4.15b provide the composition of FDI inflows in India’s service
sector for 2009 and 2000–5, respectively. They indicate that the range of service
subsectors attracting FDI has expanded over time, as reflected in the growing
share of ‘other services’ (which (p.135)
include business, financial,

consulting, and miscellaneous
services) in total FDI inflows.
Certain services such as
telecommunications and
construction have remained
important throughout the period,
while some such as housing and
real estate services have become
more attractive destinations for
FDI flows in recent years. The
importance of segments such as
telecommunications and real
estate services reflect India’s
internal growth and liberalization
Figure 4.14 Annual FDI Inflows into
dynamics which have driven the
Manufacturing and Services: 2008–9 and
expansion of these services. The
2009–10 (US$ billion)
decline in the share of computer
services in part reflects the impact Source: Reproduced from RBI Annual
of the recent global economic Report, Chart II.63, p. 70.
slowdown and the saturation of
this subsector.
Services also account for a growing share of outward FDI flows from the Indian
economy. Services accounted for over 50 per cent of total FDI outflows for the
1999–2008 period, with non-financial services such as communication, software,
and business services constituting the main segments. In areas like software and
health services, (p.136)
Page 20 of 54
(p.137) Indian firms are

increasingly emerging as
exporters of capital, setting up
overseas establishments in
developing and developed
economies (See Table 4.3).
The trends in both services
trade and FDI data clearly
highlight the important role
that services are playing in
facilitating India’s integration
with the world economy, both in
terms of enabling India’s
penetration of world markets as
well as the opening up of the
Indian economy to international
capital flows. Figure 4.15a Composition of FDI Inflows
in Services: 2009 (in per cent)
Significance of Select Services:
Case of IT–BPO Services Source: http://www.indiastat.com.
As highlighted in the preceding
discussion, ‘other’ services, in
particular computer and
information services, constitute
an important and growing
segment in India’s services
trade and investment flows.
They have been a key growth
driver for India’s services
exports, changing export
structure, and in its FDI
outflows, thus meriting
separate discussion.
India’s IT and BPO services

exports have risen from a mere
value of US$ 754 million in Figure 4.15b Composition of FDI Inflows
1995–6 to US$ 9.6 billion in in Services: 2000–5 (in per cent)
2002–3, to US$ 47.5 billion in
Source: http://www.indiastat.com.
2009, with the industry’s total
turnover reaching US$ 70
billion or 6 per cent of GDP in 2009. The IT sector’s share in India’s total export
increased from less than 4 per cent in 1998 to around 26 per cent in 2010 (see
Figure 4.16). Within the industry, IT services alone accounted for over half of
export earnings (US$ 27.3 billion) in 2010, BPO services for another 25 per cent
Page 21 of 54
(US$ 12.4 billion), and engineering services and software products for another
20 per cent of export earnings in this industry (NASSCOM Strategic Report
2010: 58–9).
India’s IT–BPO exports cover a variety of verticals, including the banking and
financial services industry (BFSI), telecom, manufacturing, retail, healthcare,
and travel and tourism. While BFSI remains the most important,
notwithstanding the financial crisis of 2008, segments such as healthcare and
retail have shown rapid growth in recent years. There has also been a gradual
movement up the value chain, with a growing number of offshore R&D centres
being established in India and a shift towards higher-end services such as
business analytics, equity research, and market research. Both multinational
firms operating in the Indian market through captive subsidiaries and offshore
development centres as well as large, small, and medium-sized Indian firms are
engaged in IT–BPO services exports. (p.138)
Page 22 of 54
Table 4.3 Composition of Approved Outward FDI from India (in per cent)
Category 1999–2000 2000–1 2001–2 2002–3 2003–4 2004–5 2005–6 2006–7 2007–8 1999–2008
Manufactu 31.2 26.8 73.1 71.9 52.8 72.3 59.9 24.9 43.7 42.7
ring
Financial 0.2 1.2 1.6 0.1 2.4 0.3 5.9 0.2 0.2 0.7
services
Non- 65.1 63.4 18.7 19.1 30.2 19.5 24.8 54.7 12.1 30.3
financial
services
Trading 3.3 6.5 4.6 4.8 5.3 2.5 4.7 8.3 3.2 5.1
Other 0.1 2.1 2.0 4.2 9.2 5.4 4.7 12.0 40.7 21.3
Total (per 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
cent)
Total (US$ 1,767 1,406 3,051 1,464 1,430 2,781 2,866 15,053 22,480 52,299
million)
Source: Reproduced from Athukorala (2009, Table 3: 136) (based on RBI Annual Report, various years).
Note: Data are on the basis of the Indian financial year.
Page 23 of 54
(p.139)
The US has been the most
important market for India’s IT–
BPO exports, with a projected
share of 61 per cent in 2010
followed by the UK (18 per
cent). The high dependence on
a few developed country
markets has, however, made
this industry susceptible to
business cycles and trade
policies in these markets. In
Figure 4.16 Trends in IT–BPO Revenue:
recent years, there has thus
2000–10 (US$ billion)
been a concerted effort by the
industry to diversify its export Source: NASSCOM Strategic Review,
markets and new export various years.
markets have emerged in the Note: E represents estimates.
Asia-Pacific and the Middle
East. In the past few years,
some Indian companies have
started to reverse outsource by offshoring part of their operations to other
countries.
India’s IT–BPO services exports take the form of onsite delivery through the
temporary movement of software professionals to other markets, as well as
offshore delivery of services through data, voice, and information flows over the
internet and phone. With increased possibilities for IT-enabled services delivery,
there has been a gradual shift from a predominantly onsite mode of delivery to a
primarily offshore mode of delivery in order to further leverage India’s labour
cost advantage. The onsite–offshore mix declined from 57 per cent (p.140) and
43 per cent, respectively in 2000 to 30 per cent and 70 per cent, respectively, in
2005. The current offshore–onsite mix stands at 85:15.16 As per a recent RBI
Survey on software services exports, mode 1 accounted for the majority of
India’s IT services exports in value terms, or 56 per cent in 2008–9, followed by
mode 4 and mode 3–based exports at 27 per cent and 17 per cent, respectively.17
According to the A.T. Kearney Offshore Location Attractiveness Index (2004),
India has consistently ranked highest among offshoring destinations, due to the
combination of its skill availability, favourable business environment, and low
cost.18 Today, India accounts for 51 per cent of the offshore IT–BPO market and
is expected to remain an important part of the global outsourcing market in
future, notwithstanding emerging competition from other developing countries
and regions (NASSCOM Strategic Review 2010: 9). Between the third quarters
of 2008 and 2009, India and the Philippines accounted for 40 per cent of all new
Page 24 of 54
delivery centres set up globally, with much of this increase occurring in tier 2
and tier 3 Indian cities (NASSCOM Strategic Review 2010: 50).
Growth in outsourcing and establishment of offshore development centres in

India has had important spillover effects on the Indian economy. This is reflected
in the sector’s contribution to GDP, which has increased from 0.72 per cent in
1997–98 to 1.8 per cent in 2000 and to an estimated 6.1 per cent of GDP in 2010
(see Figure 4.17).
(p.141) Another important

contribution of the growth in
IT–BPO exports and of the
industry in general has been the
creation of direct and indirect
employment (including the
creation of employment
opportunities for women).
Employment in this sector has
increased from less than a few Figure 4.17 Contribution of IT–BPO
hundred thousand persons to Revenues to GDP (in per cent)
over a million by 2010 (see
Source: NASSCOM Strategic Review,
Figure 4.18). The industry is
various years.
projected to directly employ 2.3
million people in 2010 and
another 8.2 million indirectly in support services such as training, transport, real
estate, etc. (NASSCOM Strategic Review 2010: 58). However, it is worth noting
that the sector’s overall contribution to employment still remains much smaller
than that of traditional industries such as textiles and clothing. Moreover,
concerns have also been voiced about the cost and equity implications of this
sector’s rapid growth given its skill-intensive nature and the rapid increase in
wages (10–15 per cent per annum) experienced in this industry given its
growing demand for skilled workers due to increased export opportunities.
Significance of Select Modes: Case of Mode 4

Given India’s comparative advantage in labour-based service delivery, cross-
border labour mobility or mode 4 is important for India’s
Page 25 of 54
(p.142) services exports. This is

reflected in the large volume of
remittances received by India,
amounting to nearly US$ 50
billion in 2008 or over 4 per cent
of GDP. India is a major exporter
of low and semi-skilled manpower
to the Middle East to provide
construction, transport operations,
domestic help, nursing, and
paramedical services.19 Mode 4
Figure 4.18 Direct Employment in the
has also played a critical role in
IT–BPO Sector: 2007–10 (ʹ000s)
India’s successful export
performance in ‘other’ services. In Source: NASSCOM Strategic Review
2009, temporary admissions from 2009 and 2010.
India constituted 36.3 per cent
(123,002) of all H-1B or specialty
occupation admissions (339,243) and for a little over 16 per cent of all L1 or intra-
corporate transferee admissions in the US (Tables 4.4 and 4.5). India
Page 26 of 54
Table 4.4 H1B Admissions in USA by Country of Citizenship: Fiscal Years 2007–9
Country of 2007 2008 2009

citizenship
Number Per cent Number Per cent Number Per cent
India 157,613 34.1 154,726 37.8 123,002 36.3
Canada 26,209 5.7 23,312 5.7 22,156 6.5
United Kingdom 25,507 5.5 19,209 4.7 14,610 4.3
Mexico 18,165 3.9 16,382 4.0 14,352 4.2
China 16,628 3.6 13,828 3.4 12,922 3.8
Other 216,343 46.9 181,073 44.2 150,887 44.5
Unknown 1,265 0.3 1,089 0.3 1,314 0.4
Total 461,730 100.0 409,619 100.0 339,243 100.0

Source: Non-immigrant Admissions to the United States: 2009, US Department of Homeland Security.
Page 27 of 54
Table 4.5 L1 Admissions in USA by Country of Citizenship: Fiscal Years 2007–9
Country of 2007 2008 2009

citizenship
Number Per cent Number Per cent Number Per cent
India 51,469 14.2 63,156 16.5 54,556 16.4
United Kingdom 53,948 14.8 52,687 13.8 44,033 13.2
Japan 36,008 9.9 37,507 9.8 32,860 9.9
Mexico 21,178 5.8 21,714 5.7 20,253 6.1
France 20,141 5.5 21,858 5.7 18,779 5.6
Other 180,211 49.6 185,255 48.4 161,693 48.5
Unknown 581 0.2 599 0.2 1,212 0.4
Total 363,536 100.0 382,776 100.0 333,386 100.0

Source: Non-immigrant Admissions to the United States: 2009, US Department of Homeland Security.
Page 28 of 54
(p.143) has consistently been among the top five source countries for temporary
skilled workers admitted into the US across a variety of professional services,
including healthcare, architecture, engineering, and education services.20 The
software services industry has accounted for the majority of these visas, reflecting its
growing importance in India’s services exports. Indian computer professionals
accounted for 68 per cent and 63 per cent of all H1-B visas granted in the US in 2001
and 2002, respectively.
Another service where India has significant mode 4–based exports is nursing.
India ranks second to the Philippines as a source of foreign born nurses in the
US and has also seen a steady increase in the number of trained nurses
registered in the UK as shown in Table 4.6.
It is worth noting that there are concerns about the brain drain implications of
mode 4–based services exports. Although India’s position in this regard has been
to stress temporary, short-term mobility of its service providers so as to derive
benefits of foreign exchange earnings, technology, and knowledge transfer
without loss of its skilled professionals, such a distinction between mode 4 or
temporary movement and long-term permanent movement is difficult to
establish given existing immigration regimes.
Challenges to India’s Services Exports

India’s services exports are currently constrained by domestic and external
barriers. One of the main external barriers is in the form of immigration
regulations, such as visa requirements and procedures.
Table 4.6 Indian Trained Nurses Registered Per Annum in UK for

the Period 1998–2004
Year No. of Indian Trained Nurses Registered in the UK
1998–9 30
1999–2000 96
2000–1 289
2001–2 994
2002–3 1,833
2003–4 3,073
2004–5 3,690
Source: Nursing and Midwifery Council (NMC), UK (2008).
(p.144) The latter can be quite restrictive, cumbersome, and costly. The software
services sector is one area where such barriers have come under considerable focus,
given the sector’s dependence on movement of software professionals to provide on-
site services to clients in overseas markets. There are numerical ceilings on visas and
work permits in major host countries such as the US. Industry associations such as
Page 29 of 54
NASSCOM have argued that Indian software professionals have been subjected to time
consuming and burdensome procedural requirements for obtaining work permits and
visas. Employers filing for such work documents on behalf of foreign workers must
meet certain preconditions, such as providing evidence of an extensive search for a
local person before hiring a foreign national, meeting stringent advertising
requirements and search specifications, and demonstrating the infeasibility of training
a local person. There may also be additional conditions such as wage parity
requirements which can delay the labour certification process and issuance of the visa/
work permit. There may also be commercial presence requirements associated with
mode 4 exports. Following the 2008 recession, Indian services exports have faced
increased protectionism with respect to entry of its service providers in major
developed country host markets, in the form of hikes in fees for specialty occupation
visas (H1B), proposals to curb the use of intra-corporate transferee visas (L1s), and
phasing out of the Highly Skilled Migrant Programme in the UK.
Lack of recognition of qualifications, skills, or experience is another major
barrier affecting mode 4–based exports from India across a variety of
professional services. As India does not have mutual recognition agreements
(MRAs) in professional services (health, accountancy, legal, nursing) with key
developed country host markets such as the US and the UK, in certain licensed
professions, its service providers are required to take host country examinations
and undergo tests of competence in order to qualify for practice. There may also
be procedural requirements such as registration with local bodies or
associations in order to be able to practice, and multiple layers of certification
with professional bodies in the host market.
Although the global outsourcing market is relatively open, there have been
periodic backlashes against outsourcing which pose a challenge to India’s
services exports through mode 1. In 2009 and 2010 following the global
economic crisis, several protectionist bills were introduced in some US states to
ban outsourcing of government (p.145) contracts to third countries like India.
IT-enabled and BPO services exports have also been affected by overseas data
protection laws, data security, and certification requirements, liability laws, and
opposition from overseas regulatory bodies and associations.
India’s services exports have also been constrained by domestic barriers which
take the form of infrastructural, financial, regulatory, technical, and standard-
related constraints. For example, one of the main constraints to mode 4 exports
has been the lack of uniform standards and absence of occupational certification
within India. Likewise, absence of national data protection legislation or
inefficiencies in the legal system, constrain India’s prospects for IT-enabled
services delivery in different areas such as financial and health services.
Prospects in areas such as tourism services are constrained by infrastructural
inadequacies and lack of integrated tourism policies. Hence, as highlighted in
the services trade literature, the prevailing regulatory environment and market
Page 30 of 54
structure in India and in key markets have an important bearing on India’s

prospects in services exports.
Services Liberalization and Reform

A critical part of the overall economic reform and liberalization process in India
has involved the opening up of key services such as telecommunications,
banking, insurance, and energy as well as the introduction of regulatory reforms
and institution of regulatory bodies in many services. The aim has been to
attract much needed foreign capital and technology and to encourage
competition and efficiency with positive externalities for the rest of the economy,
while also addressing various public policy objectives such as equity, universal
access, and consumer welfare. Many services, including, construction, housing
and townships, hospitals and diagnostics, wholesale cash and carry trade, and
computer related services, for instance, have been put on automatic approval
route for FDI and have been fully liberalized while others have been partially
liberalized, subject to various entry and operating conditions and regulatory
requirements. The growing importance of services in India’s FDI inflows as well
as the changing sub-sectoral composition of this inward FDI towards certain
services, as outlined earlier, reflects this liberalization and reform process.
(p.146) The most significant feature of service sector liberalization in India has
been the elimination of government monopoly and the establishment of
independent regulators in critical services. Telecommunication services have
experienced the most liberalization and regulatory reforms in the past decade.
Today, fully owned foreign firms are allowed in some segments of the telecom
sector. Government monopoly in long distance telephony and internet has been
eliminated. FDI has been permitted in most segments with a ceiling of 74 per
cent foreign equity participation and even 100 per cent in the case of other
service providers engaged in call centres and BPO. An independent regulator,
the Telecom Regulatory Authority of India (TRAI) has also been established.
Similarly, government monopoly in the insurance services sector has been
eliminated and the sector has been opened up to private players, with foreign
equity ceiling of 26 per cent on an automatic route basis. Further liberalization
of this sector is under consideration. An independent regulator, the Insurance
Regulatory Development Authority (IRDA) has been set up. Banking services
have been liberalized with foreign equity participation (including by Foreign
Institutional Investors) permitted up to 74 per cent in private banks and up to 20
per cent in public sector banks, though conditions continue to apply in terms of
restrictions on voting rights, licensing requirements, approvals from regulatory
authorities, and the form of establishment permitted. Alongside the liberalization
of capital markets and the banking system, the role of financial sector regulators
has been enhanced to ensure prudential management and ensure
macroeconomic stability.
Page 31 of 54
Table 4.7 presents the findings from an OECD study on trade restrictions in
services for select countries and country groupings, including India. The indices
show that India is more restrictive than the OECD and non-OECD countries for
several services. There is also considerable variation in the extent of openness
across different services, with liberal policies in the case of segments such as
construction and hospitality services, and restrictive policies in the case of
segments such as business and distribution services.
Services liberalization and associated regulatory reforms have proceeded at

different paces and to different extents across various service subsectors, as is
evident from the huge variability in openness indices shown in Table 4.7. This in
part reflects the fact that services liberalization and reform process has not been
smooth. It has been (p.147)
Page 32 of 54
Table 4.7 FDI Restrictiveness Index 2010
All countries US OECD Non-OECD China India
Business services 0.102 0 0.067 0.167 0.138 0.5
Telecom services 0.121 0.023 0.092 0.174 0.8 0.425
Real estate 0.281 0 0.283 0.277 0.275 0
Construction 0.057 0 0.055 0.055 0.265 0
Distribution 0.062 0 0.029 0.12 0.238 0.42
Hotels and 0.047 0 0.03 0.077 0.25 0

restaurants
Transport 0.249 0.553 0.227 0.289 0.665 0.174
Electricity 0.123 0.247 0.123 0.125 0.608 0

distribution
Manufacturing 0.04 0 0.03 0.059 0.252 0.026
Overall (goods 0.117 0.116 0.095 0.157 0.457 0.22

and services)
Source: Kalinova et al. (2010, Table III-2: 21–2).
Note: Indices range from 0 = open to 1 = closed.
Page 33 of 54
fraught with debate and controversy over the desired pace, extent, and implications,
and has been part of a wider social and political debate over issues of privatization, the
role of the public versus the private sector, and FDI and the implications for equity,
standards, consumer welfare employment, and other such public policy concerns.
While some services have been liberalized rapidly and extensively for both domestic
and foreign players, other services still have only limited private participation or have
been opened up mainly for domestic players and remain closed to the presence of
foreign establishments. In some other services, although there has been considerable
liberalization and regulatory reform over the past decade or more, the process has
been slow and halting, often taking many years to pass key pieces of legislation owing
to domestic stakeholder sensitivities, lack of political will and consensus, and a variety
of social and economic concerns. The design and contours of reforms and regulatory
frameworks in various services have also been subject to much debate and have often
involved a difficult learning process for policymakers, regulators, and providers.
Examples from selected services highlight the issues that have characterized the
opening up of some sensitive services. One such subsector is retail services,
which to date remains only partially open to FDI in the single brand (not multi-
brand) segment. Owing (p.148) to strong trader lobby opposition and concerns
about displacement of small retailers by multinational retail chains, further
opening up of this segment to multi-brand retailing and further increase in the
FDI ceiling in single brand retailing remains on hold. Likewise, legal services
remain closed to foreign firms and service providers due to resistance from the
concerned regulatory body, the Bar Council of India due to concerns over
displacement of local firms by large foreign law firms in the domestic market
and the absence of a level playing field between domestic and foreign law firms
arising from a variety of regulations on domestic players. Another service sector
where there has been much debate recently is higher education. Legislation has
been proposed to permit foreign education providers to set up campuses and
grant degrees in India, subject to certain conditions. This bill has been subject to
considerable national debate over the likely implications for domestic standards,
consumer protection, required governance structures, and the likely impact on
public sector institutions due to internal brain drain and competition from
foreign providers.
Overall, the debate concerning services liberalization has centred on issues of

equity-efficiency tradeoffs and impact on domestic players. Several important
issues are also highlighted by India’s liberalization and reform experience in
services:
First, the delays in introducing new legislation in many services and failure to
pass pending legislation in some services reflects the lack of political will and
the political economy dynamics which have driven services trade and investment
liberalization in India.
Page 34 of 54
Second, in several services, the process has been an evolving one and one of
learning by doing. Regulatory frameworks have evolved, the roles of regulators
have been defined and redefined, legislation has been amended and policies
have been changed in the course of opening up some sectors due to unforeseen
outcomes. In many ways, the phasing in of liberalization through the step-by-
step relaxation of FDI ceilings has also reflected the gradualist and sometimes
hesitant approach to liberalization, first getting evidence on the benefits and
challenges following partial liberalization before liberalizing further.
Third, the liberalization experience in services reflects conflicts of interest

among different stakeholders, be it government versus private players,
government versus independent regulators, public sector entities versus private
players, large versus small private domestic players, (p.149) large domestic
versus large foreign players, and regulatory bodies/professional councils versus
government or versus foreign players. Each sector has been characterized by its
own turfs of conflict and actors, which have often caused the delays in pushing
ahead with reforms.
A fourth issue highlighted by the services liberalization experience in India is

that the market structure and domestic policies and frameworks have shaped
the pace and extent of liberalization across different services. The presence of
fragmented market structures with a large number of small unorganized players
and related concerns about displacement and market concentration following
liberalization have tended to hinder liberalization (for example, accountancy,
legal, and retail services). In some other services, the dominance of public sector
entities and the government’s reluctance to give up control have been the main
stumbling blocks (for example, telecommunications and financial services). Yet
in other services, inadequacies in the regulatory framework and regulatory
capacity have constituted the main challenge (for example, education services).
A fifth important issue highlighted by the opening up of the service sector is the
difficulty in balancing equity and efficiency concerns, balancing public and
private interests, and in ensuring the right balance between institutional
autonomy and regulation so that players are not burdened with onerous
regulations but at the same time do not function in ways that go against the
larger public interest.
And finally, the reform experience in services highlights the fact that instituting
appropriate regulatory bodies, clearly defining their roles, and improving
governance, are just as important as pursuing liberalization. Liberalization has
to be supported by regulatory and legislative reforms, as well as strengthening
of regulatory and enforcement capacity if the gains from liberalization are to be
realized and potential adverse effects mitigated.
Page 35 of 54
Implications of Services Liberalization

There is evidence to suggest that services liberalization has yielded efficiency
gains to the Indian economy. A 2004 study by the World Bank found a positive
correlation between the degree of liberalization in a service subsector in terms
of trade and FDI policies and access to external markets, and growth in output
and employment opportunities in that subsector, as shown in Figure 4.19. The
study (p.150)
highlighted that segments such as

IT and communication services,
which have been significantly
liberalized, have exhibited higher
growth rates, with wider efficiency
and growth benefits to the rest of
the economy while services where
there has been limited opening
have grown much more slowly.
As is evident, during the 1990s,
the highest growth segments
were IT and communication
services while segments such as
postal, railways, and storage
services, which were the ‘non-
Figure 4.19 Growth Rates of Value Added
liberalized’ services, registered
in Select Services in India in the 1990s
the lowest growth rates. There
and Liberalization
are also several services which
Source: Reproduced from Ghani and
have experienced moderate
Ahmed (2009: 185, Figure 7.4).
growth rates and have also
undergone ‘moderate’
liberalization. Some segments
such as distribution services have, however, registered reasonably high growth
rates, despite their limited liberalization, probably reflecting domestic growth
dynamics. But overall, service subsectors with some degree (p.151) of
liberalization have tended to perform better than those which remained closed.
Productivity estimates also corroborate the efficiency gains arising from

competition and integration with global markets in the service sector. Estimates
by McKinsey indicate that telecommunications and software services have much
higher productivity levels than other service sectors in India, owing to factors
such as global and domestic competition and changes in ownership structure,
which have enabled technological externalities, knowledge spillovers, improved
management practices, and technology diffusion (see discussion in World Bank
2004). Liberalization in certain services has also impacted positively on export
opportunities. The liberalization of segments such as telecommunications has
had a positive impact on export opportunities in IT and BPO services. Some
Page 36 of 54
studies also indicate increased usage of services in manufacturing and resulting

productivity gains in India’s manufacturing sector (Banga and Goldar 2004).
Hence, liberalization of the service sector in India has yielded sector-specific as
well as economy-wide gains in terms of growth, export, efficiency, and
competitiveness, corresponding to the findings of various studies on services
trade highlighted earlier.
Recent studies on international trade in services in India confirm these findings

and argue that liberalization along with complementary policy reforms in India’s
service sector can generate sectoral and economy-wide gains in efficiency and
welfare. However, they stress the need for an overall road map and subsectoral
strategies to ensure that services growth in India is pro-poor, inclusive, and well-
regulated, and that it does not exacerbate inequality (see Nayyar 2012;
Raychaudhuri and De 2012).
India’s Multilateral and Bilateral Engagements in Services21

Services have been an integral part of India’s negotiating agenda in the WTO.
While India has strong offensive interests in many services such as software and
various professional services, it is also undergrowing pressure from key member
countries to lock in, at a minimum, the unilateral liberalization it has undertaken
thus far in the service sector, and where possible to extend this liberalization
with commitments that go beyond the status quo. As with its unilateral (p.152)
liberalization, India’s multilateral commitment and offer strategy has varied
across services depending on the stakeholder sensitivities and concerns
involved. India is also increasingly engaging in discussions on services in the
context of its bilateral and regional initiatives, as there is growing recognition of
the role such agreements can play in enhancing India’s export interests in the
service sector while also helping induce much-needed FDI and technology
transfer in key services such as telecom, transport, logistics, and construction,
among others.
India’s Multilateral Commitments and Offers under the GATS22

India has been actively involved in the WTO services negotiations. It has taken a
proactive position in the services negotiations on temporary cross-border
movement of service providers (mode 4) and cross-border supply of services
(mode 1) under the GATS. In 2004, India made a joint submission along with
several other developing countries for a Service Provider Visa under the GATS,
with the aim of expanding and ensuring more predictable and transparent
market access for intra-company transferees, contractual service suppliers, and
independent professionals. India also submitted a joint proposal on mode 1 in
2004 to secure market access in outsourcing across a wide range of services, so
as to pre-empt potential protectionism in this area.23
In the Doha Round request-offer process, there has been pressure on India from
key WTO member countries to make binding and more liberal commitments on
Page 37 of 54
commercial presence (GATS mode 3) across a wide range of services. India has
received requests from several developed countries to multilaterally bind in the
liberalization it has undertaken autonomously in sectors such as banking,
insurance, and telecommunications, where India’s commitments fall short of the
existing levels of liberalization. India has also received requests to open up other
services such as retail, higher education, legal, and accountancy services to
foreign commercial presence. India has largely taken a quid pro quo approach to
the services negotiations, that is, exchanging commitments on foreign
commercial presence in return for market access in modes 1 and 4. In its August
2005 revised services offer, India significantly improved upon its earlier
commitments on commercial presence, aligning its offer more closely with its
autonomous liberalization initiatives in the service sector. However, the extent to
which (p.153) this offer will be converted into legally binding commitments
remains unclear, given the stalemate in the Doha Round.
India has been an important player in the GATS negotiations. In the Uruguay
Round, India made very limited commitments. It did not schedule many sectors
such as energy, distribution, education, and environmental services, to name a
few, and even when it did table important sectors such as financial and telecom
services, key subsectors and activities such as insurance or international long-
distance telephony were not committed. Moreover, the commitments typically
bound less than the status quo creating a gap between existing market access
conditions and the level committed under the WTO. For the most part, mode 1
(cross-border delivery) was unbound, mode 2 (consumption abroad) was also
unbound, mode 3 (commercial presence) was subject to an FDI ceiling of 49 per
cent or lower even where existing FDI regulations permitted a higher ceiling,
and mode 4 (movement of natural persons) was unbound except for a few
categories of service providers (as also committed by other member countries).
Thus, India’s multilateral commitments in services reflected a conservative
approach and no additional market access opportunities for trading partners.
In the ensuing Doha Round services negotiations which were based on bilateral
requests and offers, India received requests in almost all service sectors from all
the major WTO member countries. These requests centred on the expansion of
India’s commitments to include more service sectors and activities within the
already scheduled sectors and to liberalize its commitments across all modes,
especially in mode 3. The sectors where India received the bulk of requests and
the most extensive pressure for tabling new subsectors and activities as well as
deepening existing liberalization commitments include financial, telecom, retail,
legal, and accountancy services, among others. In most cases, major players
such as the US and the EU requested binding in of the existing FDI regime in
areas like financial and telecom services, further removal of all existing barriers
to foreign commercial presence, and greater transparency in regulations.
Page 38 of 54
In response to these requests, India submitted its initial offer in January 2004.
This offer, however, did not substantially improve upon its earlier Uruguay
Round commitment, mainly because there was little progress in the
commitments by other member countries in the modes and sectors of interest to
India. But in its revised offer (p.154) of August 2005, India significantly
improved upon its Uruguay Round commitment by tabling several new service
sectors and subsectors and signalling that it was willing to remove commercial
presence restrictions in key areas which it had autonomously liberalized since
the Uruguay Round. Its revised offer covered 11 sectors and 94 sub-sectors as
opposed to 7 sectors and 47 sub-sectors in its initial conditional offer. Some of
the new areas included education, distribution, accountancy, and environmental
services. The change in stance reflected a change in India’s negotiating
approach, of offering to bind in its autonomous liberalization, especially in areas
where it was a recipient of many requests, in the hope of receiving improved
revised offers in modes 1 and 4, where there had been little progress.
The commitment strategy and how this relates to unilateral liberalization has
varied across different services. In sectors such as telecom and financial
services where India has faced considerable pressure to open up, India’s revised
offer clearly indicates that it is willing to move its multilateral commitment
closer to its autonomously liberalized regime and thus bind in its policy
environment. For instance, the unilateral liberalization that has been undertaken
in basic, cellular, and data and message transmission services since 1994 has
now been followed by progressive improvements in the offers placed in telecom
services, either at the existing levels or at higher levels but still less than the
status quo.
Similarly, in financial services, India has moved from unbound entries in life and
non-life insurance services to allowing FDI participation of up to 26 per cent,
raised the ceiling on the number of foreign bank branches from 12 to 20, and
relaxed restrictions on the form of foreign commercial presence permitted in the
banking sector. Thus, there has again been an expansion in the scope of India’s
potential commitments in this sector and a furthering of its liberalization offer
but as with telecom services, the multilateral position generally falls short of the
existing policy environment (for example, 49 per cent proposed in the revised
offer for banking services compared to 74 per cent permitted currently).
Thus, India has reduced the wedge that has existed between its autonomous and
multilateral liberalization but has still retained some policy space for locking in
the current policy regime if its own interests are addressed in the GATS
negotiations or of reversing its autonomous liberalization in future. It has not
fully acceded to the requests (p.155) it has received in such high-demand
sectors by holding back on full offers in modes 1, 2, and 3. It has also not made
substantive changes in its offers on national treatment either relative to the
Uruguay Round commitments and thus has also not responded fully to the
Page 39 of 54
requests for increased transparency and fairness in application of regulations to

foreign service providers, despite instituting significant unilaterally initiated
regulatory reforms in some of these services.
India’s negotiating strategy in sectors such as higher education and distribution

services has undergone a huge change. From not scheduling these services in
the Uruguay Round and not tabling these services in its initial conditional offer,
India has changed its stance by tabling these services in its revised offer,
indicating a willingness to at least partially meet requests by key partners. In
higher education services, India’s revised offer proposes full opening up of
modes 1, 2, and 3, the last being subject to certain regulatory conditions on
standards and fees. In distribution services, India’s revised offer includes two
segments, namely commission agents’ services and wholesale trade services and
is in line with existing policies, with some regulatory approval–related
conditions. However, retail services have not been included in the revised offer,
although this segment has recently been opened up partially to single-brand
products. In both education and distribution services, the tabling of these
sectors appears to be part of a negotiating tactic to elicit improved offers in
India’s own sectors and modes of interest from key players like the US by
signalling a willingness to negotiate while maintaining some room to improve
further in subsequent negotiations and come closer to the requests placed by
key trading partners.
Thus, certain services appear to be part of a quid pro quo negotiating strategy,
where improvements in mode 3 commitments in particular are to be traded off
against improved offers by major players like the US and the EU. But it is
interesting to note that in both these services, the revised offer still does not
include the more sensitive and controversial areas, where the implications of
liberalization are still under debate, where there is no clear consensus on the
right approach for liberalization and there are continued concerns about the
lack of regulatory frameworks. Such exclusion has two possible explanations,
one that the government wants to keep some negotiating space for future
improvement in its revised offer, depending on the progress of the negotiations,
and two, that the government is not (p.156) in a position to offer it yet given
domestic sensitivities and political realities.
Finally, in sensitive sectors such as accountancy and legal services, the

multilateral approach remains conservative. While accountancy services have
been tabled in the revised offer, only the less contentious modes, modes 1 and 2
have been offered but the key mode, mode 3 remains unbound, also reflecting
the closed existing policy regime. Legal services remain untabled. Thus, where
there is no domestic consensus and stiff opposition from key stakeholders, offers
have not been made by India.
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There are other services which despite considerable reform at home, have not
been tabled in the GATS. For instance, energy services have not been tabled for
negotiation although some segments of this sector have been liberalized for
foreign equity participation. FDI is permitted up to 100 per cent through
automatic route for exploration and production for the oil and gas segment
(excepting natural gas) and the same is permitted for companies undertaking
power projects including electricity generation, transmission, and distribution
subject to a cap of US$ 300 million and some restrictions on production
conditions. Although India has received requests in this sector, and has also
liberalized on its own and initiated power sector reforms, it is not willing to offer
it for negotiations, possibly for two reasons. The first reason is that this is still a
sector where there are difficult regulatory issues to be resolved and thus a need
to retain discretion for policy reversal. The second reason could be that this is a
sector, which India plans to negotiate in future when the timing is more
conducive and reciprocal gains in other areas are more likely.
Even in some other areas which are not high demand sectors and where there is
no major domestic opposition, India has not bound its autonomous liberalization
under the GATS and has also attached various conditions on foreign entry and
operations. For instance, in health services, it has replaced its unbound entries
with offers of full commitment in modes 1 and 2 and has raised the FDI ceiling to
74 per cent in mode 3. While this improvement reflects the unilateral
liberalization undertaken in this sector since 2000, as noted earlier and possibly
also a recognition of the potential gains to be realized from the entry of foreign
players in this sector, the FDI ceiling falls short of the 100 per cent FDI
permitted in this sector on an automatic basis. Social concerns have been
reflected in the various conditions that have been (p.157) attached to this offer,
including conditions on appropriate technology, consumer protection, quality
and reliability of healthcare providers.
Overall, the general approach has been to first initiate unilateral liberalization
and then over time bind this multilaterally, either to the full extent or below the
autonomous level, reflecting a cautious, gradualist, and conservative stance.
There is clearly a learning-by-doing approach that has been followed.
Furthermore, political economy considerations have been a major determinant
of the multilateral negotiating strategy.
India’s Bilateral and Regional Initiatives in Services24

India has meanwhile been pursuing its interests in the service sector through
bilateral and regional agreements. In recent years, India has entered into broad-
ranging trade negotiations which go beyond goods to cover services, investment,
labour mobility, and other issues which have a bearing on services trade. Some
of these include the India–Singapore Comprehensive Economic Cooperation
Agreement (CECA), the India–Korea Comprehensive Economic Partnership
Agreement (CEPA), and the India–Malaysia CECA signed in 2005, 2009, and
Page 41 of 54
2011, respectively. Several agreements are at different stages of negotiation,

including with the EU and Australia. In all these agreements, India’s aim is to
facilitate investments in various services from its partner countries in return for
securing its interests in sectors such as IT–BPO, engineering, healthcare, and
other professional services and easier access for Indian service suppliers to
these markets. There is a clear recognition in these comprehensive agreements
that India’s main interest and competitive advantage lies in the service sector
and that concessions it makes on goods can be traded off against concessions it
can secure from partner countries in areas such as software services and on key
issues such as mode 4 and mode 1.
India–Singapore CECA: A Benchmark Agreement

The India–Singapore CECA is an important agreement as it sets a benchmark for
cooperation on services, investment issues, and labour mobility. The agreement
came into force in August 2005 and is the first comprehensive trade agreement
that India signed with any trade partner. It has also undergone one review as per
schedule.25
(p.158) The India–Singapore CECA reflects India’s relative stance in regional

and bilateral agreements compared to its unilateral liberalization and compared
to its negotiating stance in the WTO. Liberalization commitments under the
CECA have gone beyond those under the GATS. Both India and Singapore have
bound their autonomous levels of liberalization in most service sectors under the
CECA while their commitments fall short of the existing regime under the GATS.
For instance, in the medical and dental services sector and in hospital services,
India has completely opened up mode 3, which is its autonomous liberalization
level in this sector, but under the GATS it has made a revised offer of 74 per
cent, which is less than the status quo. There are other areas such as technical
testing, biotechnology testing, and advertising services, housing, construction,
and infrastructure, which are not listed in India’s GATS schedules but which
have been liberalized under the CECA. There is also a financial sector carve-out
in the CECA. Both countries have accorded national treatment to three banks
from the other country. Several financial services such as asset management and
mutual funds have been given more liberal treatment for Singaporean
investments compared to investments from other countries. Also, the extent of
investment permitted to Temasek and Singapore Government Investment
Corporation in India exceeds that allowed for other foreign institutional
investors. However, there remain sectors such as legal services, where the
approach remains protectionist both under the CECA and under the GATS, and
others such as computer and related services in which, given India’s highly
competitive position in this sector, there is a full commitment to full complete
opening under modes 1, 2, and 3 under both the GATS and the CECA. Thus,
while there has generally been a greater willingness to schedule sectors and to
commit more within the scheduled sectors under the CECA relative to the GATS,
Page 42 of 54
factors such as the degree of competitiveness and stakeholder sensitivities have

again influenced the extent of liberalization under the CECA.
Another important feature of the India–Singapore CECA is that it addresses the

issue of cross-border labour mobility, which has been one of India’s main export
interests in international negotiations on services. Many of the issues India has
proposed in the GATS, such as easing visa regulations for certain categories of
personnel, mutual recognition of qualifications, and removal of wage parity
conditions, have been addressed in this agreement. Under the CECA, both
countries (p.159) have committed to providing access to each other’s service
suppliers without recourse to quantitative restrictions on the number of
suppliers. Furthermore, national treatment has also been provided to each
other’s service suppliers. The CECA has eased visa restrictions for professionals
in 127 occupations (for example, IT, medicine, engineering, nursing,
accountancy, and university lecturers) by allowing them to apply for a visa
period of up to one year. Short-term service suppliers who provide a specific
service are allowed to stay up to three months with possible extension of another
three months. The aim of these provisions is to facilitate the movement of
business visitors and professionals between the two countries. Another
regulatory issue that has been addressed is that of wage parity. There is a
provision whereby the salaries of Indian professionals will be calculated by
including allowances paid in India and Singapore to the basic pay in order to
meet the benchmark criterion of equivalent wages, which would facilitate the
entry of Indian professionals into Singapore. Earlier, failure to demonstrate
equivalence of salary with professionals based in Singapore had led to denial of
visas.
The CECA also includes a provision to conclude mutual recognition agreements

(MRAs) between India and Singapore for select categories of professionals. The
five initial sectors where these MRAs are to be concluded include accounting
and auditing, architecture, medicine, dentistry, and nursing. Under these MRAs,
educational and professional qualifications and licensing criteria are to be
mutually assessed and recognized by authorities of both countries, thus enabling
professionals from each country to practice in the other. Professional bodies
such as the Institute of Chartered Accountants of India or the Medical Council of
India are expected to work out the details for achieving mutual recognition.26 To
date, however, progress on MRAs has been slow.27
Overall, the India–Singapore CECA provides a useful benchmark for India’s more
recent as well as its prospective bilateral agreements, especially with regard to
mode 4 interests. The recently signed India–Korea CEPA similarly contains a
separate chapter on movement of natural persons (MNP) and also facilitates
access for contractual service suppliers, business visitors, intra-corporate
transferees, and independent professionals in each other’s markets, and
similarly identifies select professions for easier entry as in the India–Singapore
Page 43 of 54
CECA.28 India has thus been moving towards broad-based bilateral agreements
(p.160) encompassing services and various cross-cutting issues such as
investment, recognition, and cooperation which are pertinent to services trade.
India is increasingly leveraging these bilateral agreements to obtain greater
market access for its skilled service providers against commitments to further
open up its service sector, particularly with regard to commercial presence.
Services have not only outperformed other sectors of the Indian economy, but
have also played an important role in India’s integration with world trade and
capital markets. India’s liberalization of services has been a challenging process
in several subsectors but clearly those services where integration through trade
and FDI has gone further are also the ones that have exhibited more rapid
growth along with positive spillovers on the rest of the economy.
The analysis of India’s own liberalization strategy vis-à-vis its multilateral or

regional/bilateral commitments shows that the latter have not really played a
catalytic role in India’s liberalization process. Liberalization of services has been
undertaken as part of India’s general economic reform programme and has been
shaped by domestic compulsions. Where opening has not been possible, the
sector has not figured in the multilateral negotiations or has figured only in a
limited manner. Multilateral commitments and offers have typically lagged
behind the autonomous liberalization process and there are few occasions of
pre-commitment. Also, multilateral commitments and offers have largely been
less than the status quo, indicating an overall conservatism in the negotiating
strategy and a strategy of keeping room for future leveraging of the negotiations
in certain services. While regional or bilateral commitments have on occasion
been more liberal than those made multilaterally, autonomous and non-binding
reforms have led the way in almost all services.
Finally, even though services trade has contributed to the economy’s growth
prospects, an issue worth considering is whether the current pattern of services
growth, which largely stems from exports of skill-based services such as IT and
BPO can be sustainable. For services growth to be sustained there must also be
an impetus from growing internal demand, for which a vibrant manufacturing
sector and thus a balanced growth pattern is required. In addition, more broad-
based (p.161) growth within the service sector is required to ensure balanced,
equitable, and employment-oriented growth, with backward and forward
linkages to the rest of the economy. In this regard, further infrastructural and
regulatory reforms and FDI liberalization in services can help diversify the
sources of growth within India’s service sector and provide the required
momentum.
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Notes:
(*) The author is grateful to Shahana Mukherjee and Kirthiga Balasubramaniam
for their excellent research assistance.
(1.) The share of services in global trade flows rises to almost 50 per cent if one
also accounts for the services component of transactions in terms of direct and
indirect value added. The value of services trade is even greater if one adds to
this the sales of services by foreign affiliates of multinational firms, which for 15
Organisation for Economic Co-operation and Development (OECD) countries
alone amounted to US$ 1.5 trillion in 2007 (WTO 2009). Thus, services trade is
substantial.
(2.) Based on Central Statistical Organization (various years).
(3.) Based on WTO (2012).
(4.) Based on UNCTAD (2011).
(5.) For instance, regulations may be required to restrict entry in infrastructure

services characterized by natural monopoly or problems of asymmetric
information regarding the quality of service providers.
(6.) There is ongoing work on the quantification of services trade restrictions by

the World Bank, OECD, the Australian Productivity Commission and attempts to
assess the impact on prices, costs, and overall trade and investment flows in
services.
(7.) Most of the statistics provided in this section are based on the UN National
Accounts Statistical Database, unless otherwise mentioned.
(8.) See Banga (2006: 29–31) for a discussion on employment trends in India’s
service sector and their implications.
(9.) The informal sector issue is particularly complex in the case of services.
Unlike in the case of manufacturing where firms are required to register under
the Factories Act if they employ 10 or more workers, services firms are not
required to register under this act unless they are also engaged in
Page 52 of 54
manufacturing activity. Hence, most private sector service enterprises, whether

large or small, are in the unorganized sector.
(10.) In view of these methodological issues, it has been recommended that the
database for the service sector be improved by devising a proper classification of
services, assessing the quality of survey estimates, finding ways to collect data
for emerging areas, introducing a survey for larger non-manufacturing units,
and conducting follow-up enterprise surveys of the Economic Census.
(11.) Most of the statistics in this section are based on UNCTAD Handbook of
Statistics online, unless otherwise mentioned.
(12.) RCA is an index which reflects a country’s relative advantage or

disadvantage in certain goods or services and is based on the concept of
comparative advantage. It is calculated as: RCA = (Eij/Eit)/(Enj/Ent) where: E
refers to exports, i to the country index, n to the set of countries, j to the
commodity index and t to the set of commodities. RCA equals the proportion of a
country’s exports for a certain product or group of products as a ratio to the
world’s exports of that product or group of products relative to total world
exports. An RCA >1 reveals comparative advantage and an RCA < 1 reveals
comparative disadvantage in a commodity or industry.
(13.) The methodological problems associated with services output data were
highlighted earlier. Similar methodological problems also affect collection of
services trade data. There are problems of classifying services into distinct
categories due to overlaps across activities, emergence of new tradable services,
problems of valuation, and difficulties in capturing all the modes of services
delivery and thus likely underestimation of services trade.
(14.) Based on UNCTAD (2008 online version), International Trade in Services,

Handbook of Statistics. Also, see World Bank (2004, Figure 3: 11) for trends in
India’s revealed comparative advantage.
(15.) Data and estimates in this section are mostly based on http://
www.indiastat.com, unless otherwise mentioned.
(16.) See, ‘No major reversal in onsite–offshore recruitment mix: Infosys CEO’,
http://www.thehindubusinessline.com/2010/09/09/stories/
2010090953150700.htm.
(17.) See, RBI Survey on Software & Information Technology Services Exports:
2008–9.
(18.) http://www.atkearney.com/index.php/News-media/geography-of-offshoring-
is-shifting.html?q=offshoring+india.
(19.) World Development Indicators 2010 (online database).
Page 53 of 54
(20.) http://www.migrationinformation.org/USfocus/display.cfm?id=801#22 and

http://www.dhs.gov/files/statistics/publications/YrBk09NI.shtm.
(21.) Much of the discussion in this section is based on Chanda and Sasidaran
(2007).
(22.) The discussion on multilateral commitments is largely based on an analysis

of India’s Uruguay Round schedules of commitments and its initial conditional
and revised offers under the Doha Round services negotiations.
(23.) Discussion of India’s strategic interests in the WTO negotiations on

services and proposals submitted is based on Chanda (2005).
(24.) Much of the discussion in this section is based on Kulkarni and Choudhary
(2006).
(25.) See, Singapore: http://www.fta.gov.sg/ceca/ceca_india_infokit.pdf.
(26.) Under the CECA, India has also pushed for the recognition of qualifications
of capable professionals from second-grade Indian institutions, in reciprocity for
its concessions on goods. Its objective is to leverage its advantage as a source of
English speaking qualified workers for export to Singapore.
(27.) This is mainly because the CECA does not set a deadline for concluding the
MRAs and does not deem failure or delay in this regard as a breach of
obligations under the agreement. Professional bodies have also not been very
pro-active about MRA negotiations.
(28.) See, http://commerce.nic.in/trade/INDIA%20KOREA%20CEPA%202009.pdf.

The India–Korea CECA enables access by Indian contractual service suppliers
and independent professionals in the Korean market for up to one year,
admission for two years for ICTs without any numerical quotas or labour market
tests, stay of up to three months for business visitors, and work permit and
authorization for dependents of professionals, contractual service suppliers, and
ICTs. This agreement identifies a list of 163 professions, mostly involving IT
professionals, engineers across a range of sectors (construction, automobile,
marine, telecommunications, etc.), consultants in various fields, and English
language teachers who would qualify for easier entry into each other’s markets.
The agreement also calls for regulatory transparency and regular exchange of
information and establishment of enquiry points regarding MNP-related policies
and establishes dispute settlement procedures.
Page 54 of 54
The Management and Impact of Cross-border Capital Flows in India

Economy
Jayati Ghosh

Print ISBN-13: 9780199458943
DOI: 10.1093/acprof:oso/9780199458943.001.0001
The Management and Impact of Cross-border

Capital Flows in India
Parthapratim Pal
DOI:10.1093/acprof:oso/9780199458943.003.0005

This chapter reviews the academic work on the changing nature of foreign
capital flows to India in the post-liberalization period. The discussion shows that
India has almost moved full circle in its approach towards capital flows. During
the early phases of planning, foreign capital was deemed important. But
gradually India developed a cautious approach about it since the 1960s. India
opened up in 1991 and since then the government has gradually moved towards
a more open and accommodating policy regime regarding foreign capital. The
review of literature indicates that there has been significant increase in capital
flows to India over the last two decades and India no longer faces a major
foreign exchange constraint. While the literature is divided about the extent of
benefits brought about by the inflow of foreign capital, it clearly establishes the
policy constraints and threat increased inflow of foreign capital has introduced
in the Indian economy.
Keywords: foreign direct investment (FDI), portfolio capital flows, current account, capital account,
foreign institutional investor (FII), capital control, India
The impact of mobile capital flows and the management of such flows have been
important topics of academic and policy discussion throughout the post-
Independence period in India. The nature and focus of the discussion have
shifted directions quite a few times over the years, as the pattern of capital flows
to India has gone through significant changes. The changing nature of capital
flows to India can be partly attributed to the different constraints and policy
regimes the country has experienced over the years. But equally importantly, it
Page 1 of 53
also reflects the changes in international economic environment and the

perceived importance of India in the international economy.
This chapter reviews the academic work on the changing nature of foreign
capital flows to India. It focuses more on the post-liberalization period, as the
role of foreign capital became much more important in the Indian economy
during this period. The chapter is organized as follows. The next section briefly
describes how the nature and importance of foreign capital flows to India have
gone through numerous changes over the years. The third section focuses on the
various types of capital inflows during the post-reform period in India, and also
reviews the literature on regulatory management of the major types of foreign
investment to India. In the fourth section, the literature on macroeconomic
management of capital flows is reviewed. The final section summarizes the study
and makes some observations about the literature on capital flows. It is to be
noted that this chapter concentrates on the research on capital flows which has
been undertaken within India, but there is also some mention of relevant studies
originating outside the country.
(p.170) Changing Nature of Capital Flows to India

In the Indian context, the discussion on the management of capital flows can be
broadly categorized into four different periods. The first period covers the first
three Five Year Plans when access to foreign capital was scarce and
policymakers took fairly liberal positions on foreign direct investment (FDI) in
India. During this period, the discussion on capital flows focused primarily on
how inflow of foreign capital could ease the saving and foreign exchange
constraints faced by India. India had a persistent trade deficit and apart from a
few years during the First Five Year Plan, it generally had a negative current
account balance. Therefore, access to foreign capital was important for bridging
the shortfall in the current account. Moreover, India was facing a saving
constraint and foreign capital was deemed useful for rapid industrial
development of the country. For example, the First Five Year Plan says: ‘In
securing rapid industrial development under present conditions, foreign capital
has an important part to play. A free flow of foreign capital should be welcome
because it will ensure the supply of capital goods and of technical know-how’.1
But it was also recognized in the First Five Year Plan that private capital may not
flow into India in significant amounts, as the rate of return to capital in some of
the industrially advanced countries was higher than what was obtainable in
India at that time. Therefore, the government tried to ensure that foreign
investors get ‘a fairly good return’ along with ‘certainty of fair and equitable
treatment’.
During the Second Five Year Plan, a number of steps were taken to make the
FDI regime even friendlier. Along with the measures announced in the First Five
Year Plan, these policies ensured that foreign enterprises coming to India would
be treated at par with Indian enterprises and that they would have freedom for
Page 2 of 53
current remittances and capital repatriation subject to the foreign exchange

consideration, and guarantee of compensation in case of nationalization. The
government also offered inducements to foreign enterprises in the form of tax
exemptions and a guarantee of exchange facilities for the remittance of profits,
repatriation of capital (including capital appreciation, if any) and import of
essential inputs. An excellent exposition of the evolving approach of the state
towards foreign capital during the planning period can be found in Dhar (1988).
He noted that the Industrial Policy Resolution of 1956 ensured that foreign
investments were not (p.171) subject to any statutory obligations and were
allowed to operate in any sphere of activity within the overall framework of
planned development which was laid down by the Five Year Plans.
In spite of the fairly liberal policy regime during this period, the amount of
foreign capital that came into the country was small. Data from Reserve Bank of
India (RBI) show that India received only about US$ 108 million worth of foreign
investment for the period 1950–1 to 1956–7. Lockwood (1958) argued that apart
from high tax rates, other factors such as limited market, shortages of foreign
exchange, fears of nationalization or harassment, arduous licensing procedures,
inexperienced labour, complex labour laws, and misgivings concerning political
unity and lack of economic stability were the other factors that affected India’s
chances of receiving more foreign capital.
The second policy shift occurred in the 1960s. The government adopted a more
restrictive attitude towards FDI in the late 1960s as the local base of machinery
manufacturing capability and local entrepreneurship developed and as the
outflow on account of remittances of dividends, profits, royalties, and technical
fees, etc., abroad on account of servicing of FDI and technology imports grew
sharply (Kumar 2005).
The third major policy shift regarding capital flows came in the early 1970s.
Chandra (1991) noted that three major policies restricted the growth of foreign
firms in India during the 1970s. These were the Monopolies and Restrictive
Trade Practices (MRTP) Act, 1969; the Indian Patents Act, 1970; and Foreign
Exchange and Regulation Act (FERA), 1973. According to Chandra, the last two
acts were particularly effective in reducing the monopolistic powers of
transnational companies and forced them to dilute foreign equity. One famous
example of this is related to the Coca Cola Corporation. In 1977, using the FERA
rules, the government asked Coca Cola Corporation to reduce its shareholding in
its subsidiary to 40 per cent. Coca Cola did not comply and it left India. It is
worth mentioning here that though FERA (along with the other two acts
mentioned earlier) did manage to reduce the extent of foreign equity in
transnational corporations (TNCs), questions have been raised as to whether it
led to meaningful reduction in foreign control across these firms. Chaudhuri
(1979q) argues that FERA did not result in any slackening of foreign control
Page 3 of 53
over the TNCs, although it managed to widen the shareholder base among
Indians.
Restrictions on FDI flows were gradually removed from the late 1970s and early
1980s. After the second oil price shock of the late (p.172) 1970s, concerns
were growing among policymakers about the low international competitiveness
of India’s manufacturing sector. It was believed that restrictions on trade and
capital flows and strict internal regulations like the MRTP Act and Industries
(Development and Regulation) Act, 1951, created an industrial system where
local manufacturers produced poor quality goods and services and thrived on
rent seeking behaviour. The highly protected local market led to growing
technological obsolescence, inferior product quality, limited range, and high cost
which eroded India’s competitiveness in international markets (Ahluwalia 1985).
It was believed that opening up the domestic market to foreign competition
would force domestic industries to become efficient and this would improve
India’s overall competitiveness. During this period, India was also experiencing
significant trade deficits. It was expected that improved efficiency in the Indian
manufacturing sector would help to reduce the trade imbalance of the economy.
While some of these arguments regarding lack of efficiency of Indian industries

may be correct, many authors have pointed out that the protection given to the
domestic industry in the form of trade barriers and restrictions to capital flows
were not without merit. There is a significant body of literature which has
evaluated the pros and cons of India’s experience with infant industry
protection. For example, Nagaraj (2003) cited a number of studies that showed
that regulated industrial policies did help some Indian industries by reducing the
costs of technology imports (Subramaniam 1991) and promoting export of goods
in relatively stable technology industries like commercial vehicles and heavy
electrical equipments2 (Lall 1982). The success of Indian pharmaceutical firms
can also be attributed to the regulatory and promotional policies and the patent
laws of the 1970s (Chaudhuri 1999).
Regardless of these success stories, the preference for a more liberalized and
open FDI regime was quite marked among policymakers since the 1980s and
restrictions on FDI flows were gradually being removed. A good summary of
changes in state regulations regarding FDI of this period can be found in Dhar
(1988) and Kumar (1995). Also, internationally this was a period when capital
flows to developing countries were going through a phase change. With the
decline of official capital flows to developing countries, private capital flows in
the form of FDI and foreign portfolio investment became the (p.173)
Page 4 of 53
dominant form of capital flows to

these countries (Figure 5.1). Singh
(2009) describes this changing
nature of capital flows to India,
which showed a structural shift in
the 1980s from the dominance of
external assistance to the primacy
of private capital flows.
The government also introduced
a number of administrative Figure 5.1 Composition of Capital Flows
changes to facilitate and to Emerging and Developing Countries:
expedite flows of foreign capital 1980–95 (US$ billion)
to India. For example, a ‘fast
Source: International Monetary Fund
channel’ was set up in 1988 to
(IMF) 2013.
speed up clearances of FDI
proposals from Japan, Germany,
USA, and UK. More drastic changes in FDI policy came in 1991 when a broad
range of policy reforms were initiated in India. There is vast literature on the
causes and nature of these reforms. Chandrasekhar and Ghosh (2002) provide a
comprehensive analysis of the contours of these reforms and the political
economy behind it. Some other notable works on the policy reforms introduced
in 1991 are by Ahluwalia (2002), Bhaduri and Nayyar (1996), Joshi and Little
(1996), and Nayyar (1995).
Regulatory Management of Capital Flows

Foreign Direct Investment Inflows
In the context of managing capital flows to India, 1991 is a pivotal year. It was
the start of a regime when policies towards FDI and other (p.174) capital
inflows changed from being restrictive to accommodative. Licensing was
abolished in most sectors and fiscal sops and incentives were promised to attract
foreign investors to the domestic market. An outline of these new policies can be
found in the ‘Statement on Industrial Policy’ published in July 1991 (Department
of Industrial Policy & Promotion [DIPP] 1991). In this policy statement it was
announced that automatic approval will be given for FDI up to 51 per cent
foreign equity in high priority industries. The automatic approval route was
allowed for 35 industries, while for a handful of industries, licensing was
compulsory. A few sectors were kept reserved for public sector. Over the years
the number of industries with automatic FDI approval has increased and the cap
on foreign equity has been increased up to 100 per cent for many industries. In
cases where the automatic route is not available, proposals for FDI need to get
clearance from the Foreign Investment Promotion Board (FIPB) of India. An
early discussion on foreign investment approval process and its implementation
can be found in Institute for Studies in Industrial Development (ISID) (1995). It
is important to mention here that since the liberalization, rules regarding
sectoral caps and automatic routes have been changed quite frequently. The
Page 5 of 53
‘Consolidated FDI Policy Report’ published by the government contains the

latest rules and regulations regarding FDI and it is available at the website of
DIPP.3
The evolution of India’s FDI policy since liberalization has been discussed and
analysed in Bajpai and Sachs (2000), Kumar (2005), Morris (1994), Nagaraj
(2003), Palit (2009), Pant (1995), and Rao and Dhar (2011a, 2011b). An official
summary of the changes in rules and regulations regarding FDI and the
justifications for sectoral caps can be found in DIPP (2011). A snapshot of the
present policy regime can be found in Rao and Dhar (2011a) who have pointed
out that these days cap on FDI is mostly in the services sector including air
transport services, ground-handling services, asset reconstruction companies,
private sector banking, broadcasting, commodity exchanges, credit information
companies, insurance, print media, telecommunications and satellites, and
defense production. Recently, the government has allowed entry of FDI in multi-
brand retail in India.
These gradual relaxations of policies and the high growth rate of GDP have
made India an attractive destination for foreign direct investors. An added bonus
was provided by the Government of India through its Double Taxation Avoidance
Agreements (DTAAs) with a (p.175) number of countries including Mauritius. A
DTAA allows profits or capital gains to be taxed either in the home or in the host
country. As tax rates in Mauritius are much lower (it has no tax on capital gains)
than India, the tax treaty between India and Mauritius allows very low tax
obligations for firms that invest in India through Mauritius. Consequently,
Mauritius has emerged as the most important source of FDI in India. Many
companies, which are located elsewhere, have opened front-offices in Mauritius
and are investing in India through these offices. According to the statistics on
FDI released by DIPP on March 2013, more than 38 per cent of total FDI that
has come to India since the liberalization has come through Mauritius. Another
5.5 per cent of FDI inflow has come from tax havens like Cyprus, Cayman
Islands, and British Virginia. To put these numbers in perspective, second and
third biggest investors in India are Singapore and USA with shares of 10 per
cent and 9 per cent, respectively, (DIPP 2013).
FDI-friendly policies, the growth potential of India, and other favourable factors
have made India an attractive destination for foreign direct investors. UNCTAD
publishes the World Investment Prospects Survey (WIPS) which is based on an
annual survey of a sample of company executives selected among the largest
non-financial transnational corporations. This survey provides insights into FDI
patterns over the subsequent three years. According to these surveys, India has
been among the top three most attractive destinations for foreign direct
investors since the survey was first published in 2007.4 Similarly, A.T. Kearney
(2005) publishes Foreign Direct Investment Confidence Index5 for a subjective
ranking of the top FDI destinations of the world and India has ranked
Page 6 of 53
consistently among the top three most favourable destinations for FDI for the
last few years. Similar ratings published by PricewaterhouseCoopers also show
India as a favourite FDI destination among the CEOs of multinational
corporations (MNCs).
Since 1991, India has received more than US$ 268 billion worth of FDI. There is
a perceptible jump in the volume of FDI flows after 2005–6 (Figure 5.2). Detailed
data of FDI from DIPP shows that a very high percentage of FDI has gone into
the services sector (Table 5.1); mergers and acquisitions are becoming an
important mode of FDI in India, and there is strong regional bias (Assam,
Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Tripura, Bihar,
and Jharkhand together have received 0.1 per cent of the cumulative FDI flows
during the post-liberalization period). (p.176)
Figure 5.2 FDI Inflows to India (US$

million)
Source: Handbook of Statistics on Indian
Economy 2011–12, RBI.
Table 5.1 Sector-wise FDI Inflows to India (as a share of total FDI
inflows, 2000–12)
Manufacturing Share Non-manufacturing Share

(%) (%)
Drugs and 5.2 Services sector* 19.3

pharmaceuticals
Chemicals (other than 4.6 Construction sector 12.7

fertilizers)
Automobile industry 4.1 Energy (power, petroleum and 8.1

gas, coal, non-conventional
energy)
Metallurgical industries 3.9 Telecommunications 6.7
Electrical equipment 1.6 Computer software and hardware 6.2
Page 7 of 53
Manufacturing Share Non-manufacturing Share

(%) (%)
Cement and gypsum 1.4 Hotels and tourism 3.5

products
Miscellaneous 1.2 Trade 2.0

mechanical and
engineering industries
Industrial machinery 1.2 Transport (sea transport, ports, 1.8

air transport, and railways)
Information and broadcasting 1.6

(including print media)
Consultancy services 1.1
Construction (infrastructure) 1.1

activities
Source: DIPP website, last accessed on 10 October 2014.
Note: * finance, banking, insurance, non-financial/business, outsourcing, R&D,
courier, testing and analysis, other.
Only sectors that received more than 1 per cent of total FDI are shown here.
Investment in ‘Computer software and hardware’ has been predominantly in

the software segment.
(p.177) Quite a few papers have analysed the trends and patterns of FDI since
the economic reforms. Kumar (1998) and Rao et al. (1999) provide detailed
analyses of FDI inflows to India during the 1990s. This chapter analyses the data
on FDI as reported by the Secretariat for Industrial Assistance (SIA), Indian
Investment Centre, and other official agencies. The chapter provides a broad
picture of the flow of FDI and indicates the possible factors influencing these
FDI flows. The Planning Commission (2002) has studied FDI flows to India and
compared it to FDI flows to other developing countries. This study noted that
FDI flows to India till 2002 were low compared to other developing countries
and suggested some policy measures to increase FDI flows to India. Nagaraj
(2003) analysed FDI inflow data for the period 1990 to 2000 and found that
while FDI inflows experienced a substantial jump over the 1980s, they were still
modest compared to many other growing Asian economies and miniscule
compared to China. During that period, the bulk of the approved FDI went for
infrastructure and the telecom sector and into consumer durables and
automobile sectors. Nagaraj also finds that most of the FDIs in India are market
seeking in nature. Kumar (2003) studied trends and patterns in FDI inflows to
India after 1991. Kumar pointed out that since the FDI flows were liberalized in
Page 8 of 53
the 1990s, the sectoral composition of India’s FDI flows has changed. FDI flows
to extractive industries and the manufacturing sector have gone down whereas
it has increased in infrastructure (mostly energy generation) and services
sectors. Within the manufacturing sector, most investments have gone to
automobile and consumer durables and very little FDI has been in the capital
goods sector. After studying the type of FDI India received during the 1990s, the
author also apprehended that technological spillovers of these FDI would be
minimal. A more recent and detailed statistical analysis of India’s FDI data was
carried out by NCAER sponsored by DIPP (NCAER 2009). This study found that
FDI-enabled manufacturing firms account for 12 per cent of total exports by
FDI-enabled and domestically invested manufacturing firms taken together. The
report also showed that about 13 per cent of total sales by FDI-enabled firms are
exported. This result further indicates that most FDI-enabled firms in India are
more focused on the domestic market. Rao and Dhar (2011a) have also
extensively studied the data on FDI flows to India. A regular annual commentary
on the pattern and nature (p.178) of FDI flows is published in the ‘External
Economy’ section of the Annual Reports of RBI.
As mentioned before, FDI flows to India have been significantly lower than what
China received since the early 1990s. Until around 2004–5, the volume of FDI
going to China was more than 10 times the FDI flows India was receiving.6 This
discrepancy generated interest among academics and quite a few studies tried
to reconcile why, despite the apparent attractiveness of India as FDI destination
among the CEOs, actual FDI inflows to India have been so much lower than to
China. Three sets of reasons have been put forward to explain this apparent
anomaly. The first set of studies argues that the main reason behind this
differential performance is the fact that China is simply much more attractive as
an FDI destination than India. China has a bigger domestic market, better trade
linkages with the big markets in developed countries, and much better incentive
schemes for FDI firms (Srinivasan 2006; Wei 2005). Moreover, these studies
reckon that the infrastructure and investment policy regime in China is better
than those in India. Additional policy flexibilities and privileges given to foreign
investors through special economic zones (SEZs) are also considered important
in this respect. For example, Srinivasan (2006: 15) says:
A significant part of FDI inflows to China are from the Chinese Diaspora
(including residents of Hong Kong and Taiwan) in contrast to India. Also,
China’s policy of creating special economic zones (SEZs) to attract foreign
investment by exempting investors from regulations applicable elsewhere
in China (particularly relating to hiring and firing and foreign ownership)
and also providing excellent infrastructure (power and communications)
was highly successful. India is only now creating SEZs like China’s. But
limits to foreign ownership apply to different entrants in different sectors
and restrictive labour laws continue. Lastly, China’s FDI was export
oriented and also directed in part to investment in infrastructure. Given
Page 9 of 53
the significantly larger shares compared to India’s of private capital flows

in China’s GDP and investment and its tilt towards exports and growth
promoting infrastructure, it is clear that greater integration of China in
world capital flows contributed to its faster growth and at the same time,
their export orientation increased integration in goods markets as well.
It is important to highlight here that there is a major difference between the

nature of FDI received by China and India. China has (p.179) received both
horizontal (market-seeking) and vertical or efficiency-seeking FDI in significant
volumes. Vertical FDI takes place when a company’s production chain is broken
up, and parts of the production processes are transferred to a foreign location.
The objective of vertical FDI is to take advantage of lower production costs in
the foreign country. Unlike horizontal or market-seeking FDI, vertical FDI is not
primarily or even necessarily aimed at production for sale in the host country
market. The high volume of vertical investment received by China has resulted
in FDI-driven export boom in China since the 1990s. Presently, according to the
Ministry of Commerce (MOFCOM) of China, foreign-invested enterprises
account for over half of China’s exports and imports.7 India, on the other hand
has received mostly market-seeking FDI. Consequently, FDI in India has stayed
out of SEZs. Apart from a few foreign companies which operate in the services
sector, SEZs have not attracted FDI in any significant volume in India. This is
largely due to the fact that companies operating within SEZs face some trade
barriers while selling their products in domestic tariff areas (DTAs).
Many authors have also flagged the lack of regulatory reforms in India as an
important factor for low FDI inflows in a number of other studies (Bajpai and
Sachs 2000; Ghosh 2005; Planning Commission 2002; Sachs et al. 2000; Sahoo
2006). Predictably, these studies recommend more liberalization of policies,
including labour market reforms, to attract FDI. Ghosh (2005) argued that while
China has developed an ideal model for attracting FDI which is suitable for its
economy, India is finding it difficult to address the policy shortcomings as there
is less political consensus in this country. Balasubramanyam and Mahambare
(2003) contend that Chinese laws are not always more flexible than those in
India but the Chinese have better institutions and less product, factor and labour
‘market distortions’ as compared to India. However, the authors argue that
China may not be the best role model for India to follow as far as FDI is
concerned. They say ‘the optimum level of FDI a country should aspire for is
conditioned by its history and the stage of its industrialization, the sources of
FDI it has ease of access to, and its endowments of cooperant factors and the
sort of institutions it possesses to facilitate and monitor the operations of foreign
affiliates’. They further argue that unless India reaches a stage of development
(p.180) to take advantage of increased FDI flow, liberalizing policies merely to
increase FDI volume will not be beneficial for the country.
Page 10 of 53
In discussing India’s performance regarding FDI flows, the issue of optimum

level of FDI has become important. Some studies argue that because of
structural differences between Indian and Chinese economies, the amount of
FDI India needs is less than that of China. Balasubramanyam and Sapsford
(2007) are of the opinion that the structure and composition of India’s
manufacturing and services industry imply that the spillover of FDI in the case
of India is higher than in China. According to them, India’s manufacturing sector
consists of a high proportion of science-based and capital-intensive industries.
This is unlike China, where a large percentage of industry is labour intensive.
Also, there is a big part of the services sector in India, which is essentially
knowledge driven. The spillover effects in these sectors are high and the
optimum level of investment for India is lower than that of China. This optimism,
however, is not very well supported by the literature. The studies on spillover
effects of FDI in India are not unequivocal in their verdict (see Kathuria 1996,
2000, 2002; Pant and Mondal 2010; Sasidharan and Ramanathan 2007). On a
related note but in a somewhat different take on India’s structural differences
with China and volume of FDI, it is argued elsewhere that China receives FDI
mostly in manufacturing and logistics sectors. These are capital-intensive
sectors with huge initial requirement for capital. But in the case of India, most
FDI has come in the knowledge-driven services sector where the requirement of
capital is relatively less. Thus differences in economic structures and different
specialization paths adopted by China and India may have aggravated the
difference in the volume of FDI that go to these countries respectively (Kearney
2005).
Apart from these reasons, which are largely governed by economic and
regulatory factors, most of the studies have also pointed out that India and
China use different definitions for measuring FDI and hence the data may not be
really comparable. Analysing the Chinese FDI data, Wei (2005) shows that
Chinese FDI data may be inflated due to two factors. Chinese FDI inflow data
may be overestimated due to various accounting practices including
overvaluation of capital equipment which ‘contributed to joint ventures by
foreign investors (the value of which is translated into equity investment and
recorded as FDI)’ and because of ‘round-tripping’. China allows preferential tax
(p.181) treatment for foreigners and to take advantage of such preferences,
Chinese money is allegedly routed through Hong Kong to be brought back in
China as FDI. While round-tripping is also quite significant in case of India,
there was serious mismatch between Indian and Chinese accounting practices
regarding FDI till about 2004–5. RBI (2002) points out that at that time, India
reported FDI inflows only on the basis of investments received from non-
residents on equity and preference share capital under the FDI scheme. But
contrary to the international norms, it did not include reinvested earnings and
other capital (this covers the borrowing and lending of funds, including debt
securities and suppliers’ credits between direct investors and subsidiaries,
Page 11 of 53
branches and associates). Bajpai and Dasgupta (2004a, 2004b) also have
discussed these differences in the context of comparing FDI flows to India and
China. They pointed out that India defined the term FDI rather narrowly and
therefore, Indian and Chinese data on FDI were not comparable. Presently, India
has aligned its definition to international norms and the current FDI figures
include retained profit and other capital apart from equity investments.
Srivastava (2003) contended that if officially published figures are incorrect then
it contributes to flawed perceptions about India attracting ‘too little’ FDI among
the foreign investors. And given the herd mentality of investors, this may
dampen their confidence in the country. Subsequently, the Government of India
changed the reporting practice regarding FDI inflows and presently the Ministry
of Commerce (DIPP) tries to report FDI data as per the international norms. This
change in methodology has contributed to the increased FDI inflow figures for
India (Figure 5.3).
However, this new methodology may have introduced some other problems. A
study by Rao and Dhar (2011a, 2011b) has made a startling claim. According to
the authors, as per international convention, equity investment by an economic
agent is considered to be FDI if it is associated with voting power (a proxy of
stake holding8) of at least 10 per cent of an enterprise. However, in India’s case,
‘all equity investments which are not coming through the foreign institutional
investor (FII) route are being treated as FDI irrespective of the proportion of
shares held abroad and the extent of influence of the foreign investor’. This
indicates that funds coming through private equity funds, hedge funds, and
venture capital are counted as part of FDI. The authors argue that most of these
investments are actually (p.182)
portfolio investment. By doing a

case-by-case analysis of top 2,748
individual inflows reported by the
government of India over the
period 2004 to 2009, the authors
estimate that about 27 per cent of
recorded FDI flows to India can be
attributed to private equity funds,
hedge funds, and venture capitals.
Also increasingly round-tripping of
Indian funds constitutes a large
part of Indian FDI. The same
exercise carried out by Rao and
Dhar (2011a) also shows that Figure 5.3 FDI Inflow Figures for India
about 10 per cent of recorded FDI (US$ million)
flows are of a round-tripping Source: DIPP website, last accessed on
nature. The authors conclude that 10 October 2014.
including these data in FDI flows
may have boosted the FDI inflow volumes coming to India but a significant percentage
Page 12 of 53
of these flows are actually portfolio in nature and they do not bring the benefits
generally associated with FDI to the nation.
Overall, one may conclude that Note: Other capital covers the
since liberalization, there has borrowing and lending of funds,
been significant inflow of FDI to including debt securities and
India. Increased FDI flows have suppliers’ credits between direct
helped India to offset its current investors and subsidiaries, branches
account deficit and allowed and associates.
foreign investors to increase
their presence in the Indian
domestic market. (p.183) But
studies on FDI have shown that other supposed benefits of FDI like increased
exports, employment generation, technological spillover, and development of
ancillary industries have been very modest in India.
Outward Foreign Direct Investment from India

Increasing outward FDI (OFDI) from developing countries has been one of the
more interesting developments in the international economics of the last few
years. Developing countries like China, South Africa, Brazil, and Singapore are
investing heavily in other countries. India has also joined this new phenomenon
though in a scale which is much lower than that of China.
Since the 1990s Indian companies have started investing abroad. Initially,
India’s share in the world’s total FDI outflows was low compared to other
developing countries such as China, Brazil, South Africa, and Mexico. However
in subsequent years India’s share increased. In 1990, India’s share in world total
FDI outflows was 0.01 per cent compared to the shares of China (0.34 per cent),
Brazil (0.26 per cent), Mexico (0.09 per cent), and South Africa (0.01 per cent).
In 2010, India’s share was 1.11 per cent; this was lower than that China (5.14
per cent), but larger than those of Brazil (0.87 per cent) and South Africa (0.03
per cent).
Data from the Reserve Bank of India (RBI) for India’s OFDI for the period 2006–
7 to 2010–11 shows that Indian companies had OFDI worth US$ 57 billion
during this period. Of this, around US$ 23 billion has gone into the
manufacturing sector and around US$ 5 billion has been invested in agriculture
and allied sectors. The rest of the investment has gone into various services
sectors.
Looking at the destination countries for Indian OFDI, about 48 per cent of
India’s total OFDI has gone to Singapore and small island tax havens such as
Mauritius, Cayman Islands, and British Virgin Islands. Other major recipients of
Indian OFDI are developed countries from the EU and the US. Given the high
volume of OFDI that is going to tax havens, it raises a possibility that some of
Page 13 of 53
these investments may actually get round-tripped to India through these tax
havens.
A number of studies have analysed India’s OFDI since the early 1990s. Using
firm-level data for the 1990s, Pradhan (2004) has concluded that along with
market-seeking motivation, in many cases Indian OFDI (p.184) was induced for
trade supporting reasons. Pradhan finds that Indian firms with past export
experience are likely to undertake more OFDI activities than Indian firms that
are not exporting or have just recently entered into export activities. Kumar
(2007) divides the OFDI flows from India into three separate ‘waves’ and
indicates that the latest wave of OFDI is different in nature. He points out that
the OFDI from India since 2000 is mostly seeking strategic assets and natural
resources in foreign countries. He also highlights that acquisitions have become
the major mode of entry of Indian firms since 2000 (see Table 5.2).
Gopinath (2007) and various authors in Pradhan and Sauvant (2010) have also
highlighted some of the possible drivers for the outward investment by the
Indian firms. They argue that by undertaking overseas acquisition transactions,
Indian corporates are gaining entry into regulated market of developed
countries. The best example is pharmaceutical industry, where Indian corporate
companies equipped with USFDA-approved facilities are looking for acquisition
in the regulated market for ease of registration processes. The manufacturing
activities will still be in India entailing low-cost advantage. Secondly, overseas
acquisitions may help Indian firms gain access to
Table 5.2 Evolution of Indian OFDI over the Years
First Wave, Second Wave, Third Wave, 2000

Pre-1990s 1990s onwards
Motivations Market seeking Trade supporting Strategic assets and

natural resource
seeking
Sectors Low technology: IT services, Metals,

light engineering., pharmaceuticals, pharmaceuticals,
palm oil refining, etc. automobiles
rayon, paper
Magnitudes Small Moderate Large
Entry Greenfield Greenfield Acquisitions

modes
Page 14 of 53
First Wave, Second Wave, Third Wave, 2000

Pre-1990s 1990s onwards
Destinations Asian and African Similar to exports Resource-rich and

low-income strategic resource-
countries rich countries, e.g.,
UK, USA, Russia, S.
Korea, and Singapore
Source: Kumar (2007).
(p.185) certain technologies. Manufacture of certain products may require

technology that may not be available to the Indian companies. By acquiring companies
abroad, they also acquire advanced manufacturing technologies that further help
reduction in the cost of production. In a very similar way, acquisition of foreign firms
may allow Indian companies acquire products that will otherwise require huge
investments and a long time to manufacture indigenously. Another possible reason
behind OFDI can be the requirement to be present in a certain location. Certain
industries which have their presence in some regions across the globe through their
subsidiaries may need to be present in those regions to cater to business there. The
acquisitions made by these companies are primarily for value addition for their
products and services. Finally, many Indian companies are making outward FDI to
secure availability of, and access to, key resources and inputs for continuing economic
expansion.
However, there is some debate about whether OFDI from a capital-scarce
developing country such as India is beneficial for the country. It is argued that if
OFDI is taking place at the cost of onshore investment, then it is harming the
country’s employment and growth prospects. While it is acknowledged that
OFDI may help Indian companies acquire strategic resources, expand their
market base and leverage new technologies, these benefits may be weighed
against the drawbacks associated with OFDI.
Foreign Portfolio Capital Flows

Along with FDI, India has also been receiving significant amount of portfolio
capital flows. As mentioned in the previous lines, there are some grey areas
regarding the classification of private capital flows. As per UNCTAD (1999),
foreign portfolio investment (FPI) includes foreign capital inflows and outflows
involving a variety of instruments which are traded (or tradable) in organized
and other financial markets. It may include bonds, equities, and money market
instruments. The International Monetary Fund (IMF) Balance of Payment
Manual version 6 defines it as ‘Portfolio investment is defined as cross-border
transactions and positions involving debt or equity securities,9 other than those
included in direct investment or reserve assets’. According to this IMF
methodology, FPI is defined as non-FDI investment by foreign investors in the
tradable financial assets of a country. This (p.186) implies that a portfolio
investor should not own 10 per cent or more of a company’s ordinary shares and
the investor should not have a significant degree of control or a lasting interest
Page 15 of 53
in an enterprise of another country. FPI can include foreign investors’

investment in a variety of instruments which are traded (or tradable) in
organized and other financial markets, like bonds, equities, and money market
instruments. The IMF also includes derivatives or secondary instruments, such
as options, in the category of FPI. The channels of cross-border investments can
be through securities acquired and sold by retail investors, commercial banks,
and investment trusts (mutual funds, country and regional funds, pension funds,
and hedge funds).
The economic crisis faced by India in 1991 opened up the way for foreign
portfolio capital flows to India. A High Level Committee on Balance of Payments
chaired by C. Rangarajan recommended, among other things, liberalization of
current account transactions leading to current account convertibility;
compositional shift in capital flows away from debt to non-debt creating flows;
strict regulation of external commercial borrowings, especially short-term debt;
discouragement of volatile elements of flows from non-resident Indians; gradual
liberalization of outflows; and disintermediation of the government in the flow of
external assistance. Together with the recommendations10 by the Narasimham
Committee on Financial Systems, this paved the way for the entry of FPI in
India. In September 1992, the Government of India announced the opening up of
the country’s stock markets to direct participation by FPI.
India does not have full convertibility in the capital account so foreigners are not
free to invest in Indian assets including Indian securities. Only foreign investors
who are registered with the Securities and Exchange Board of India (SEBI) are
allowed to invest in Indian security markets. These investors are called the
Foreign Institutional Investors (FIIs). FIIs include asset management companies,
pension funds, mutual funds, incorporated/institutional portfolio managers or
their power of attorney holders, university funds, endowment foundations,
charitable trusts, and charitable societies. FIIs need to comply with certain
foreign exchange regulations laid down by RBI. The initial registration is valid
for five years and is renewable for similar five year periods. RBI’s general
permission granted under FERA enables the registered FII to buy, sell, and
realize capital gains on investments made through the initial corpus remitted to
India, (p.187) subscribe/renounce rights offerings of shares, invest on all
recognized stock exchanges through a designated bank branch, and appoint a
custodian for custody of investments held. The investments by FIIs enjoy full
capital account convertibility. Till March 2010, SEBI had more than 1,700
registered FIIs.
Indian laws also allow non-resident Indians (NRIs) and persons of Indian origin
(PIOs) to invest in the Indian capital markets subject to certain restrictions.
Foreign venture capital investors (FVCIs) or firms are also allowed to invest
subject to certain ceilings. These rules and regulations have been discussed in
detail in Ministry of Finance (MoF) (2010), National Stock Exchange (NSE)
Page 16 of 53
(2011) and Rao and Dhar (2011a). As mentioned before, there are a few
definitional issues about how to classify foreign investment by NRIs, PIOs, and
venture capital firms. As per Rao and Dhar (2011a), only the investment coming
through FIIs and funds raised through American Depositary Receipts (ADRs) and
Global Depositary Receipts (GDRs) are considered to be part of FPI. Reserve
Bank of India and SEBI websites also contain up-to-date information about rules
and regulations applicable for FPIs.11
The regulatory authority SEBI imposes some restrictions on FII activities. The
laws stipulate that total shareholding of each FII/sub-account shall not exceed
10 per cent of the total paid-up capital or 10 per cent of the paid-up value of
each series of convertible debentures issued by the Indian company. Secondly,
total holdings of all FIIs/sub-accounts put together is not allowed to exceed 24
per cent of the paid-up capital or paid-up value of each series of convertible
debentures. This limit of 24 per cent can be increased to the sectoral cap/
statutory limit, by passing a resolution of the Board of Directors followed by a
special resolution to that effect by the General Body. However, the objective of
having FII-specific ceilings seems to have been bypassed, as FII registration
details from SEBI indicate that a large number of FIIs are under common
control. An analysis by Rao et al. (1999) showed that a single firm has registered
multiple FIIs with SEBI with different names but with same addresses and
telephone numbers. A look at the SEBI registration details for FIIs showed that
similar registration pattern could be observed for a number of FIIs even in
mid-2011.
Over the years there have been significant inflows of foreign portfolio capital to
India. From 1991–2 to 2011–12, India has received more than US$ 159 billion as
portfolio flows. This figure is lower than the total FDI inflow India received
during the same period (about (p.188)
US$ 269 billion) but there have

been quite a few years when India
received more portfolio capital
than FDI (Figure 5.4). The figure
shows that India experienced net
outflow of portfolio capital only in
two years, namely, 1998–9 and
2008–9. These two years
correspond to the Asian financial Figure 5.4 Foreign Portfolio Capital
crisis and the global financial
Inflows and FDI Inflows to India (US$
crisis which emanated from the
million)
US sub-prime housing sector.
Another issue which has Source: RBI 2012.
created debate relates to the
use of ‘Participatory
Notes’ (PNs) by the FIIs. The objective of the SEBI registration process for FIIs
Page 17 of 53
was to ensure that only genuine investors are to invest in India. This was
necessary to protect the Indian capital market from unscrupulous elements and
fly-by night operators. However, it has been alleged that there is a big loophole
in the SEBI guidelines which allows virtually any foreign investor to invest in the
Indian capital market through the FII route. It has been pointed out that under
the PN or sub-account mechanism, an FII issues a PN, to which any foreign
investor may subscribe. That investor need not necessarily be an FII. It could be
an overseas corporate body (OCB) or an individual in any country. That money
would be invested in India as an FII investment. The foreign investor will be
treated as a sub-account of the FII and will get all the benefits that FII
investment enjoys. Under such a mechanism a foreign investor who would have
been denied permission to invest in India if s/he had come in his own name is
allowed to invest as an FII. In other words, the FII is merely a front-end for that
foreign investor. There used to be no guidelines for (p.189) disclosure of PN
transactions, which helped FII sub-account holders using the PNs to misuse
their financial clout in the stock market to rig prices. In its bid to bring in
greater transparency in FII investments, SEBI has suggested that FII sub-
accounts should report all their PNs transactions to it on a regular basis. A
report published by NSE (2011) shows that total value of PNs, as a percentage of
assets under management of FIIs, was around 18 per cent in September 2010.
Detailed discussion on PNs can be found in Singh (2007) and SEBI (2007).
PNs have become a source of concern as they raise the threat of volatility. In
recent years there also have been apprehensions about terrorist money, drug
money, and black money from India being re-routed through tax havens to India
via the PN route. Reserve Bank of India has been arguing for blocking this route
of capital inflow to India. For example, RBI (2006: 121) says:
In the case of Participatory Notes (PNs), the nature of the beneficial

ownership or the identity is not known unlike in the case of FIIs. These
PNs are freely transferable and trading of these instruments makes it all
the more difficult to know the identity of the owner. It is also not possible
to prevent trading in PNs as the entities subscribing to the PNs cannot be
restrained from issuing securities on the strength of the PNs held by them.
The Committee is, therefore, of the view that FIIs should be prohibited
from investing fresh money raised through PNs. Existing PN-holders may
be provided an exit route and phased out completely within one year.
At least until early 2012, the government has proved to be reluctant to take
strong measures against PNs. Regulations on PNs have been implemented
mostly through the ‘Know Your Customer’ (KYC) norms (see MoF 2005, 2010).
However, as RBI (2009) points out, the KYC norms are easy to flout as PNs are
tradable in international financial markets. RBI (2009, Volume II: 356) says:
Page 18 of 53
The Government is of the opinion that as FIIs maintain records of identity

of the entity they issue PNs to and SEBI can obtain this information from
the FIIs, there does not appear to be any cause of concern from the KYC
angle. Further, PNs can be issued or transferred only to persons who are
regulated by an appropriate foreign regulatory authority. The Reserve
Bank’s concern is that as PNs are tradable instruments overseas, this could
lead to multi-layering which will make it difficult to identify the ultimate
holders of PNs. Furthermore, the transactions of FIIs with the PNs are
outside the real-time surveillance mechanism of SEBI.
(p.190) Another allegation against the FIIs is that they are misusing India’s
DTAA with Mauritius. According to the DTAA, any company registered in
Mauritius need not pay taxes in India. There are a number of FIIs registered in
Mauritius. These include Aberdeen Asset Management, Citigroup Global, CLSA
Merchant Bankers, Deutsche Securities, Emerging Markets Management LLC,
Fidelity Assets Management, Golden Sachs Investments, HSBC Global
Investment, JP Morgan Fleming Asset Management, Merrill Lynch Investment
Managers, and UBS Securities Asia. Estimates suggest that about 20 per cent of
all FII money comes to India through Mauritius (Shah 2011). These FIIs take
advantage of the DTAA and do not pay any capital gains tax in India. As
Mauritius has no tax on capital gains, therefore, the FIIs who channel their
investment through this Mauritius route need not pay any income tax on the
capital gains made in the Indian stock markets. Chandrasekhar and Pal (2006)
estimated that tax forgone due to the DTAA is likely to be at least Rs 8,000 crore
for the year 2004–5. There are also allegations about illegal Indian money being
routed through the Mauritius route, often through the PN route, for avoiding
capital gains taxes and to take advantage of rupee appreciation (Lokeshwari
2011; Ram Mohan 2005, 2006b).
Over the years, the government has tried to encourage more portfolio flows in
the domestic market. Three committees were formed by the government since
2004 to suggest strategies for further liberalizing inflow of portfolio capital to
India. A committee was set up under the chairmanship of Ashok K. Lahiri to
examine relaxation of investment limits for FIIs from the sectoral limits on FDI.
This committee submitted its report in 2004 (MoF 2004). In 2005, another
‘Expert Group’ published its report on ‘Encouraging FII Flows and Checking the
Vulnerability of Capital Markets to Speculative flows’ (MoF 2005). This Expert
Group was also headed by Ashok K. Lahiri. These two reports are also
sometimes referred to as Lahiri Committee Report 1 and 2, respectively. These
two committee reports saw FIIs as beneficial for the economy and suggested a
number of policies to facilitate and encourage more portfolio flows to the
country. These two reports, taken together, recommended relaxation of sectoral
ceilings for FIIs, continuation of PNs with better disclosure, and allowing FIIs to
invest more in debt instruments by relaxing ceilings on such investments. MoF
(2005) also suggested easier entry of hedge funds in the Indian market by
Page 19 of 53
aligning Indian rules to the ones in developed (p.191) markets of Europe and
USA. Interestingly, one of the recommendations of MoF (2005) was
disinvestment of Public Sector Units (PSUs) on the grounds that it would offer
good quality equities to FIIs. It observed ‘[n]on-availability of good quality
equities in adequate volume appears to impede FII flows’ and to correct this
‘problem’ it recommended disinvestment of PSUs.
The recommendations of the two Lahiri Committees have drawn widespread

criticism. Even one of the members of the Expert committee, the representative
of RBI in the second Lahiri Committee (MoF 2005), wrote a strong note of
dissent on the recommendations of the Expert Group. The note of dissent
pointed out that RBI is against continuation of PNs, and argued against hedge
funds and allowing FIIs to trade in debt instruments including government
securities. In the academic world the MoF reports (2004, 2005) were not
received well. These reports were criticized quite strongly by Chandrasekhar
(2006), Rakshit (2006), Sen (2006a), and Vasudevan (2006), who questioned the
academic quality of the report. Chandrasekhar (2006: 94) noted:
If the gravity of its content is the yardstick to go by, there would be no

reason to take note of this report. Filled with assertions, it reads more like
a pamphlet advocating financial liberalisation than the report of a group of
experts. And where there are indications of expertise, these amount to no
more than an excessively selective review of related literature, which is
often not even woven into the flow of the report’s argument.
These studies also question the basic premise of the report that portfolio
investment is good for an economy like India. Similarly, Rakshit (2006) did not
agree that portfolio flows help capital formation and growth, arguing that
‘[t]here is something seriously amiss in setting up a committee to suggest
measures for “encouraging FII flows” on the presumption that when their
volatility is contained such flows invariably boost domestic capital formation and
growth. The presumption is supported by neither economic logic nor empirical
evidence.’
These are valid criticisms as the Lahiri Committee seems to have overlooked the
literature that contradicts many of its assertions. The Lahiri Committee argued
that portfolio investment can be helpful for the economy as it can supplement
domestic savings and augment domestic investment without increasing the
foreign debt of the country; it leads to higher stock prices, which in turn lowers
cost of equity capital and encourage investment by Indian firms and inflow (p.
192) of foreign investors can improve the market design of the securities
markets and help strengthen corporate governance.
Sen (2006) questioned the claim that portfolio flows are non-debt creating. He
pointed out that if a country is running a current account deficit and if the gap is
Page 20 of 53
being funded by private capital flows, the liability of the country is increasing.
He also found numerous inconsistencies in the macroeconomic logic used in the
paper.
There are also doubts about whether portfolio investment can lead to higher
domestic investment. Cross-country empirical studies show that among various
forms of foreign investment, foreign portfolio investment is the least effective in
promoting domestic investment and growth. These empirical studies reveal that
contribution of portfolio investment in domestic investment is lowest, among the
different types of capital inflow (see Bosworth and Collins 1999; World Bank
2001). This is not surprising because the argument forwarded by Lahiri
Committee implicitly assumes that a vibrant secondary market will boost the
primary market, which, in turn, will reduce cost of capital and help the
corporate sector to mobilize resources. However, Khanna (2002) showed that the
cost of capital did not decline steadily for Indian firms with the increase in FII
inflows. Using a sample of over 300 companies for the period 1990–2001,
Khanna found that the cost of capital to Indian firms declined initially and
bottomed out in 1994, and since then increased gradually. During 1999–2001,
the cost of capital for the sample firms was as high as it was in 1991. An
increase in the cost of capital coupled with a decline in the rate of interest
changed the relative cost of debt and equity capital in India and made borrowing
a more attractive financing choice for many firms.
Pal (2010) has shown that activities in the secondary segment of the stock
market have not resulted in increased resource mobilization from the primary
market. Also, as Rakshit (2002) points out, efficiency gains from short-term
capital movements are crucially dependent on the absence of herd behaviour
and moral hazard and on constant endeavour on the part of the investors in
tracking changes in economic fundamentals rather than in beating the gun by
outguessing the psychology of the market. But according to Rakshit, it is
increasingly becoming evident that short-term capital inflows do not operate
under such ideal conditions. The telecommunication revolution has drastically
decreased the time and cost of transferring funds from one (p.193) market to
the other in the recent years. The increasing ease of transferring funds between
markets reduces the incentive for the investors to devote resources for assessing
the health of enterprises and hence, leads to serious moral hazard problems.12
The third point mentioned by the Lahiri Committee, that FII inflows can improve
market design and strengthen corporate governance, has proved to be illusory,
as the financial crash of 2006–8 has clearly indicated that the pressure from a
stock-market-based financial system may actually push companies to use
questionable means and fraudulent policies to make money. The wave of
accounting frauds that has surfaced recently in the developed countries also
Page 21 of 53
shows that overdependence on short-term financial indicators can increase the

fragility of the entire financial sector.
The literature on FIIs and their impact on Indian stock markets has not
supported the assertions made by Lahiri Committee. But on the other hand,
quite a few studies have shown that FIIs have become market movers in the
Indian stock markets. These studies show that over the years FIIs have become
the dominant investor group in Indian stock markets and this contributes to the
volatility of the stock market. These studies have observed that investments by
FIIs and the movements of the Sensex are quite closely correlated in India and
that the FIIs wield a significant influence on the movement of the Indian stock
market (Coondoo and Mukherjee 2004; NSE 2001; Pal 2005; Ram Mohan 2005;
Samal 1997). For example, Pal (2005) showed that FIIs have become major
players in the domestic stock market and their influence on the domestic
markets is also growing. Data on the trading activity of FIIs and domestic stock
market turnover suggest that FIIs are becoming more important at the margin,
as an increasingly higher share of stock market turnover is accounted for by FII
trading. Moreover, the findings of this study also indicate that the FIIs have
emerged as the most dominant investor group in the domestic stock market.
Particularly in the companies that constitute the Sensex, FIIs control more
tradable shares than any other investor groups. In most of the Sensex
companies, FII holding is more than the RBI prescribed ceiling limit of 24 per
cent. Ram Mohan (2005) also showed that FIIs have displaced domestic mutual
funds in importance in the equity market and the shareholding of FIIs in the
Sensex companies is large enough for them to be able to move the market. NSE
(2001) observed that in the Indian stock markets FIIs have a disproportionately
high (p.194) level of influence on market sentiments and price trends. This is
so because other market participants perceive the FIIs to be infallible in their
assessment of the market and tend to follow the decisions taken by FIIs. This
‘herd instinct’ displayed by other market participants amplifies the importance
of FIIs in the domestic stock market in India. In this context, Coondoo and
Mukherjee (2004) showed that FII and stock market returns in India exhibit
quite high volatility in terms of both extent and duration. More importantly, they
also find evidence that their volatility is interrelated. A somewhat different view
was expressed by Ram Mohan (2006a, 2006b), who argued that many FIIs
actually have longer time horizons and may not contribute to the volatility. He
felt that only a small portion of FIIs, like the hedge funds, are involved in short-
term trading in the stock market. Therefore, it is important to keep tabs on the
different types of players among FIIs and to ensure that long-term players
dominate. The possible problems with hedge funds and the need to check them
have also been highlighted by Chandrasekhar (2008) and Ghosh (2005b).
Chandrasekhar (2008: 20) argued: ‘The case for vulnerability to speculative
attacks is strengthened because of the growing presence in India of institutions
Page 22 of 53
like hedge funds, which are not regulated in their home countries and resort to
speculation in search of quick and large returns.’
In spite of the widespread criticism received by the Lahiri Committee, most of

the recommendations of the committee were implemented. Presently, FIIs are
allowed to invest in government securities up to US$ 10 billion and in corporate
bonds up to US$ 20 billion. Hedge funds have been allowed to operate in the
Indian capital market and PNs have not been cancelled. Moreover, FIIs are now
allowed to participate in the derivatives market.
In 2010, another government committee published a report titled Report of the

Working Group on Foreign Investment (MoF 2010) under the chairmanship of
U.K. Sinha. The objective of this report is to analyse the regulatory issues ruling
non-FDI capital flows to India and recommend policies to reconcile any
incompatibilities. The report notes that there are different regulations for
different sub-class of portfolio investors (or non-FDI investors) in India. FIIs are
guided by a set of rules whereas separate sets of rules govern FVCIs, private
equity firms and non-resident Indians. The report recommends abolition of these
classes and introduction of a single investor class called the qualified foreign
investor (QFI). These QFIs will invest in (p.195) India through depository
participants (DPs). DPs will be financial intermediaries with global presence and
they will be registered with SEBI. DPs will ensure the fulfilment of KYC norms
for the QFIs. These recommendations have so far not been implemented. If
implemented, these recommendations are likely to make portfolio investment
easier for foreign investors across investing classes. As the beneficial aspects of
portfolio flows are far from being clearly established, it is not clear if these
recommendations would help the economy. On the contrary, the relevant
literature seems to indicate that the risk and uncertainty associated with these
investments will make macroeconomic management of capital flows even more
difficult.13
Macroeconomic Management of Capital Flows

Macroeconomic management of capital flows has become a key concern for
policymakers since the liberalization of capital flows in the early 1990s. Large
inflows of foreign capital to the Indian economy have not only increased its risk
quotient but it has also imposed a number of constraints on domestic
macroeconomic policies. Though India has not faced a major financial crisis, it
has suffered from sporadic and volatile movement of foreign capital. Since the
opening up in 1991–2, there have been two major financial crises of global
magnitude which saw significant outflows of foreign capital from India. Over the
years, certain domestic developments have also led to sudden surges of capital
outflow from this country.
The experience of other developing countries indicates that a more open

economic regime and highly volatile capital flows have increased vulnerability of
Page 23 of 53
these countries. The risk of contagion and speed and spread of such a contagion
have also increased significantly (see Table 5.3 for a list of crises since 1990). In
the light of these
Table 5.3 Some Major Financial Crises since the 1990s
1991 UK (Collapse of the European Exchange Rate mechanism in 1992)
1994 Mexican crisis
1997 East Asian crisis
1998 Crisis in Russia
2000 Problems due to the dot-com bubble burst
2001 Argentina
2006 Global financial crisis

onwards
(p.196) developments, globally one of the key objectives of macroeconomic

management of capital flows has become to insulate a country from volatile capital
flows.
Numerous studies have discussed how capital flows to India have affected
different macroeconomic aspects. Analysis of patterns of capital flows to India
can be found in Chakraborty (2006), D'Souza (2008), Kohli (2001a, 2001b,
2001c, 2003), Mazumdar (2005), Mohan (2008), Rangarajan (2000), and Sikdar
(2006). The literature on patterns of capital flows has fairly strong convergence
of views. Most of these authors have pointed out that volatile portfolio capital
flows have dominated total capital inflows to India for a fairly long period of
time.
Consequently, since its opening up in 1991, managing the volatility of capital

flows and taking precautionary measures against the threat of volatility have
become the two most important policy goals for India. As volatility of capital
flows affects the exchange rate and monetary policy of the country, this leads to
the infamous problem of the ‘impossible trinity’ of international economics—the
difficulties and tradeoffs policymakers face in an open economy with
management of free mobility of capital, a stable exchange rate, and an
independent monetary policy. Discussion on impossible trinity and Indian
policymaking can be found in Joshi (2003), Mohan and Kapur (2009), and Patnaik
and Shah (2010). This problem has implications for exchange rate management,
management of money supply, and foreign exchange reserves. To manage the
impossible trinity, the Indian government has so far adopted a middle path
solution which involves a fairly independent monetary policy, a managed but
flexible exchange rate and selective restrictions on capital movement.
Page 24 of 53
Since the opening up of the Indian economy, there have been many academic
papers discussing the impact of capital flows on the Indian economy. These
papers are quite diverse in their approach and cover a very wide spectrum of
views on this issue. There is a set of papers using macroeconomic modelling
techniques to examine the impact of capital flows on various macroeconomic
indicators. Lal and Joshi (1994) used an Australian BoP model which specifies a
small open economy which integrates the real and monetary aspects in a simple
general equilibrium framework. The authors applied this framework to analyse
macroeconomic balance of the Indian economy in the context of a large increase
in capital flows. Using a similar model Lal et al. (2003) investigated the
relationship between capital flows, (p.197) real exchange rates and fiscal
deficits (this model is also known as the Lal–Bery–Pant or LBP model in the
literature). They concluded that high reserves and low domestic inflation of India
provide an opportunity to fully open its capital account, make the rupee fully
convertible and allow it to float freely. Given the policy recommendations of the
model, it is not surprising that it received strong criticism. Sen (2004), for
example, points out some major shortcomings of the model. He argued that a
static model is used to analyse the dynamic impact of capital flows. Secondly, all
capital flows in the LBP model directly add to the productive capacity of the
country. Given the high percentage of portfolio capital flows and ever-growing
instances of mergers and acquisitions, this may not be a good assumption.
Thirdly, the asset market in the model is less developed and consequently, the
impact of capital flows, reserve accumulation, and sterilization on interest rates
cannot be properly traced in the model. Finally, the LBP model is a market-
clearing model which assumes full employment. Sen questioned the policy
suggestions of the model saying that allowing free movement of capital without
intervention from RBI may potentially hamper the Indian traded goods sector
and replicate the problems faced by Brazil in the 1990s. The LBP model was also
criticized by Singh and Srinivasan (2004) on the grounds that the real and
monetary sectors of the model are not well integrated. Joshi and Sanyal (2004)
also strongly criticized the LBP model saying that their ‘argument is deeply
flawed, indeed wholly incorrect’ and like Sen (2004) they felt that the policy
recommendations of the LBP model could be dangerous for India. According to
them, the authorities were prudent to maintain capital controls and a managed
float of exchange rates. Joshi and Sanyal (2004: 149) argued that:
In principle, a clean float of the exchange rate can enable a country to do

without reserves. But the price to be paid is the possibility of a highly
unstable or inappropriate exchange rate. India’s policymakers were wise to
reject this regime and opt for managed floating combined with selective
controls on capital flows. It is relevant also that India’s float was managed
so as to keep the rupee mildly undervalued in real effective terms. There is
plenty of empirical evidence that undervaluation boosts growth of GDP
Page 25 of 53
through growth of exports, though the exact mechanism is imperfectly

understood.
The debate regarding the LBP model and its policy recommendations went on
for some more time as Lal et al. (2005) made some (p.198) corrections to their
estimates and defended their model against the criticisms it faced. Though some
changes were made in their estimates, the broad conclusions of Lal et al. 2005
remained the same as Lal et al. 2003, and also strongly argued in favour of
capital account liberalization. In the later paper, LBP suggested: ‘As such, we
would still advocate rapid progress toward capital account convertibility and a
free float of the rupee, as the “fear of floating”…is based on the usual unwonted
dirigiste assumption of the omniscience of bureaucrats and the irrationality or
ignorance of private agents’ (1652). Lal et al. (2005) drew less attention among
academics as only a few papers including Singh and Srinivasan (2005a, 2005b)
reacted to this paper.
One possible reason for the lack of attention received by Lal et al. (2005) could
be the global financial crisis which set in from late 2006. The financial crisis
seems to have tilted the debate in favour of greater capital control and
convinced at least one of the authors of LBP to be in favour of intervention by
the RBI. Bery (2011: 11) claimed that changed global and domestic economic
scenarios have led to reconsideration of these issues: ‘Given India’s success in
protecting its financial system through the deft use of its reserves in the recent
crisis, together with flexibility in the nominal exchange rate, I am now more
persuaded of the protective value to India of a relatively large stock of reserves’.
Apart from these papers which used macroeconomic modelling to judge the
impact of capital flows, there is a large body of theoretical and empirical work
since the early 1990s which has recommended a much more guarded approach
towards management of capital flows in India. For example, Patnaik (1994a)
argued that when an economy like India opens up to receive capital flows, such
‘internationalization’ does not necessarily mean that the role of state in the
economy is becoming less important. Patnaik pointed out that among developing
countries, the real success stories of growth in the context of
internationalization of capital have been countries which have vigorously
pursued policies of economic nationalism and active state intervention. He cited
the example of Southeast Asian countries which have successfully used policies
of economic nationalism and active state intervention to harness the advantages
of ‘internationalization’. He noted that the Southeast Asian nations pursued
policies which included stringent restrictions on the possibility of capital flight
coupled with an ability to draw capital from the outside on the strength of their
(p.199) export drive, remarkably high rates of investment maintained on the
basis of this capital inflow together with high rates of domestic savings and a
paternalist–authoritarian state that imposed discipline upon the capitalists, and
intervened at the micro level to channel investment into areas considered
Page 26 of 53
promising in the context of the international product cycle. Patnaik argued that
such tight control over capital flows and state-driven strategic economic policies
allowed these countries to take full advantage of internationalization without
facing much negative impact of the process of economic liberalization. On the
other hand, most Latin American countries have relied mostly on liberal
economic policies for their economic development and these countries also
suffered more from the uncertainties of international capital flows. Patnaik
concludes that India should adopt policies similar to the ones practiced by the
Southeast Asian countries to manage high international capital flows.
In another paper Patnaik (1994b) elaborated the macroeconomic problems a

country like India is likely to face when it removes restrictions on capital flows
to cover its current account deficits. He argued that once controls on capital
flows are lifted, to attract foreign capital, an economy needs to pitch its interest
rate at a level which would make it attractive to foreign investors. This implies
that the risk-adjusted return to foreign investors from this economy should
favourably compare with risk-adjusted returns available elsewhere. As the
economy gets more liberalized, such considerations will imply that its entire
interest rate structure is determined by extraneous considerations. If at that
interest rate foreign capital inflows are higher than what is required on the
capital account for the given exchange rate, then there will be reserve
accumulation. This situation is likely to bring a few policy challenges for the
government. The government will find it difficult to lower interest rates as it may
trigger a capital outflow and it will be reluctant to let the exchange rate
appreciate as it may lead to domestic deindustrialization. One possible solution
can be to try to expand domestic demand at prevailing the exchange rate and
interest rate. Patnaik suggested that the best way to achieve this is to increase
public investment in areas of social priority. But he also felt that a ‘market-
friendly’ regime is unlikely to do so. According to Patnaik, if such a regime goes
for enlarged fiscal deficit, it will do through reduced taxes and by stepping up
unproductive expenditure. However, he is apprehensive that the IMF’s
disapproval of high fiscal deficits may (p.200) prevent an economy from
running high fiscal deficits. On the other hand, if the government chooses to do
nothing regarding the pile up of reserves then it will increase the fiscal costs
associated with accumulating these reserves. Secondly, steady inflows of foreign
capital may lead to an asset price boom. Patnaik suggested that given a fixed
interest rate, such a boom may not lead to a rise in real investment. He argued
that government inaction regarding reserves may lead to a cumulative cycle of
more capital flows and higher reserve accumulation, which may eventually
culminate in loss of confidence in that economy.
As was indicated in these two papers, freeing up of capital flows and the need to
keep exchange rate within a certain band meant giving up significant amount of
flexibility in the conduct of monetary policy in India. The concern with reining in
the fiscal deficit added to the constraints for policymakers in India.
Page 27 of 53
Consequently, the country faced numerous problems in managing its key

macroeconomic variables. Lack of policy options on the part of the government
was exploited by speculators. During the second half of 1995–6, India witnessed
periodic speculative pressures on the exchange rate of the rupee. This episode
has been documented by Ghosh et al. (1996) who highlighted the problems faced
by the Indian policymakers regarding management of exchange rate in India.
They pointed out numerous sources of instability in the foreign exchange market
of India and argued that the policy mix adopted by the government regarding
capital movement effectively tied its hands and made the external economic
policy of the government a prisoner of speculative forces.
In spite of the large body of academic work which indicated the problems
associated with the freeing up of capital account, the government was
contemplating liberalizing the capital account even more. The Union Finance
Minister said in his 1997–8 budget speech:
I also believe that the time has come for preparatory work towards capital
account convertibility. This is a cherished goal. It is also a matter of great
sensitivity. Hence, I shall not make any commitment. For the present, I am
asking RBI to appoint a group of experts to lay out the road map towards
capital account convertibility, prescribe the economic parameters which
have to be achieved at each milestone and work out a detailed time table
for achieving the goal. I believe the appointment of such a group will send
a powerful signal to the world about our determination to join the ranks of
frontline nations. (MoF 1997: Part-A, Paragraph 41)
(p.201) Consequently, the RBI constituted a ‘Committee on Capital Account

Convertibility’ under the chairmanship of S.S. Tarapore (the Tarapore
committee) to move towards capital account convertibility (CAC) (First Report of
the Tarapore Comittee, RBI 1997). The Tarapore committee report highlighted
several benefits of CAC and recommended gradual move towards full capital
account convertibility. The benefits of an open capital account, as suggested by
the Tarapore Committee are:
1. Availability of a larger capital stock to supplement domestic resources

and thereby higher growth, reduction in the cost of capital, and improved
access to international financial markets.
2. Open capital account leads to gains from trade in international
financial assets as CAC allows residents to hold an internationally
diversified portfolio which reduces the vulnerability of income streams
and wealth to domestic shocks. This also enables lower funding costs for
borrowers and allows savers prospects of higher yields.
3. An associated gain from CAC is the dynamic gains from financial
integration. Competition is intensified among financial intermediaries and
as margins are reduced, there is more efficient intermediation. The
Page 28 of 53
quality of financial assets improves as a result of greater liquidity and

deeper markets. Freer capital flows enable the realization of efficiency
gains created by specialization in financial services. Allocative efficiency
improves as a result and this can stimulate innovation and improve
productivity.
4. CAC enables an alignment of domestic financial prices with
international levels and this provides the impetus to the domestic tax
regimes to rationalize and converge to international tax structures to
avoid inducements for domestic agents towards evasion and capital flight.
As it will be discussed in more detail, many of the so-called benefits of an open

capital account are theoretically questionable and often not verified empirically.
The Tarapore committee also mentioned a fifth set of ‘benefits’ which are—as
the report calls them—‘the disciplining influence’ of CAC on domestic policies.
These so-called ‘benefits’ are essentially the policy constraints imposed by a free
capital account (p.202) and these have been discussed by other economists
including Patnaik (1994a, 1994b) and Ghosh et al. (1996).14
The Tarapore committee report concluded that overall capital account

convertibility is good for India and it drew up a road map for freeing up the
capital account over the period 1997–8 to 1999–2000. The Tarapore committee
report suggested that consolidation of the financial sector, a cutback in fiscal
deficit, and moderation of inflation constitute the essential preconditions which
should be met for full capital account convertibility of the rupee.
The first Tarapore committee report has its fair share of critiques. EPWRF
(1997) did a detailed discussion on the Tarapore committee report and found
that the recommendations made in the report pushed India prematurely towards
CAC and felt that the recommendations of the CAC report would give a great
boost to short-term, speculative, and volatile assets without providing any
enduring push to domestic saving and investment. Similarly Rao (1997) analysed
the interactions between money, inflation, reserves, interest rates, and growth
within the context of financial openness in India and evaluated some of the
recommendations of the Tarapore committee. Rao concluded there is an urgent
need to slowdown the pace of CAC as well as to re-compute the preconditions
for CAC. Similar conclusions were also arrived at by Rao and Singh (1998).
The recommendations of the first Tarapore committee report were not

implemented as the Southeast Asian crisis happened in the same year (July
1997) and the problems of an open capital account became apparent. While a
financial crisis swept almost all Southeast Asian and some East Asian countries,
India and China were among the least affected countries. It is widely
acknowledged that presence of capital controls was instrumental in protecting
India and China from the financial contagion that spread among Asian countries.
Some excellent analysis of the East Asian Crisis and its implications for India can
Page 29 of 53
be found in Dua and Sinha (2007), Ghosh and Chandrasekhar (2001), Jomo
(1998), Rakshit (2002),15 and Reddy (2000). The key implication of the Southeast
Asian crisis on developing countries like India was summarized by Ghosh and
Chandrasekhar (2001: 118) as:
There is at least one overarching implication of this analysis of the

Southeast Asian crisis for other developing countries: the threat of
economic deflation driven by a financial crisis is real. It also appears (p.
203) that susceptibility to financial crisis is fairly general among
developing countries with open capital account, and can even occur in
economies that otherwise appear healthy by the usual norms.
The financial crisis and its contagion-like spread raised serious concerns about
the destabilizing roles played by an open capital account. Some prominent
economists who are otherwise known for their pro-liberalization stance came out
strongly against complete abolition of capital controls. Jagdish Bhagwati, in an
influential article in Foreign Affairs, highlighted that the claims of enormous
benefits from free capital mobility are not persuasive (Bhagwati 1998). While
substantial gains have been asserted (refer to the gains mentioned by the
Tarapore committee described above), these gains have not demonstrated
through studies. But on the other hand, Bhagwati argued, there are some strong
downsides of free capital mobility. Capital flows, as famously noted by
Kindleberger, are prone to manias, panics, and crashes. And when a country
experiences capital outflow, it tries to do everything possible to bring back the
money. This typically means raising interest rates and having to sell domestic
assets in a fire sale to foreign buyers with better access to funds. Bhagwati
argued that in such a scenario, the affected countries not only suffer from these
economic setbacks but also lose the political independence to run their
economic policies as they deem fit. Bhagwati pointed out that these countries do
not lose their independence directly to foreign nations but to IMF, which, he
argued, is ‘increasingly extending its agenda, at the behest of the US’.
Bhagwati accused the nexus of the powerful global institutions such as the Wall
Street, the Treasury Department, the State Department, the IMF, and the World
Bank (which he called the Wall Street-Treasury complex) for pushing the myth of
CAC on to developing countries. As Wall Street’s financial firms have obvious
self-interest in a world of free capital mobility, they invest in powerful political
lobbying in Washington to steer the US Treasury and the multilateral institutions
to pry open financial markets in developing countries. He suggested that the
Wall Street Treasury complex is unable to look beyond the interest of Wall Street
and if certain policies like free movement of capital do benefit Wall Street, the
‘power elites’ will have no qualms imposing those policies on developing
countries, which may be harmful for those countries (Bhagwati 1998, 2004).
Similar views about (p.204) the influence of US treasury in trying to open up
capital accounts of other countries have also been expressed by Williamson
Page 30 of 53
(2006) who pointed out that since the late 1990s, the main pressure for
liberalizing capital flows has come from the US Treasury. When countries
wanted to negotiate bilateral free trade agreements with the US, the Treasury
insisted that US negotiators demand that the partner country should commit
itself to never re-imposing effective capital controls for any length of time.
The period that followed the Southeast Asian crisis saw two important
developments. The first was the reestablishment of the view that capital controls
can be effective instruments towards legitimate developmental goals. During
this period, there was a convergence of views among economists that
unrestricted capital flows played a major part in propagating the East Asian
crisis. Regarding the negative role played by free movement of capital in
Southeast Asia and its impact on the crisis of 1997, Jomo (2007: 73) says:
[I]t also exacerbated systemic instability and reduced the scope for the
government interventions responsible for the region’s economic miracle.
Foreign capital inflows adversely affected factor payment outflows, export
and import propensities, and the terms of trade, and thus, the balance of
payments. In particular, increased foreign capital inflows reduced foreign
exchange constraints, allowing the financing of additional imports, but
thereby also resulting in reducing current account surpluses, if not
generating deficits. This created the conditions for the loss of investor
confidence that resulted in the capital reversals from mid-1997.
It was also observed that restrictions on the movement of capital flows played an
important role is protecting countries like China and India from the contagion
effect that affected almost all East and Southeast Asian countries in 1997.
Discussing India’s experience during the Asian financial crisis, Nayyar (2002)
highlighted three important lessons emerging from it. He suggested that it
should be recognized that capital account liberalization is a means and not an
end in itself. Secondly, capital account restrictions should provide for
safeguards, not only to protect the BoP but also to manage the macroeconomic
vulnerability associated with cross-border capital movements. Finally, it should
incorporate development as an objective. There are vast differences in levels of
development between countries and capital controls may allow a country to
pursue its own strategies (p.205) of development. Kohli (2001b, 2001c) pointed
out that in the aftermath of currency crises, capital controls have re-emerged as
a useful set of policy instruments for safeguarding against heavy capital surge
pressures. Similar views were also expressed by Patil (1999).
The Asian crisis provided a strong and irrefutable case against fully liberalizing
the capital account. Consequently, in India it temporarily stalled the move
towards CAC and most of the recommendations of the first report of the
Tarapore committee were not implemented immediately. Although it is quite
likely that the decision to not implement these recommendations was more of an
Page 31 of 53
ex post reaction to the Asian financial crisis rather an ex ante move to shield
India from a possible contagion, Indian central bankers were not averse to
claiming the credit.16 But in spite of overwhelming opinion against CAC, move
towards a fully liberalized capital account was not abandoned. After a brief
pause, India started treading a path of gradual capital account liberalization (see
EPWRF 2002; Nachane 2007). The steps taken towards opening up of the capital
account during this period are summarized in the second Tarapore committee
report (RBI 2006) report discussed in the following lines. Nachane (2007) while
discussing the two Tarapore reports indicated that most of the recommendations
of the first Tarapore report were either followed or even exceeded by the time
the second Tarapore committee report was submitted in 2006.
The second important development that happened after the Asian financial crisis
is that most developing countries started building up foreign exchange reserves
to counter speculative attacks on their currencies. As some of these countries,
especially some Asian countries, were also intervening in their foreign exchange
market to keep their currency competitive, it resulted in huge build-up of foreign
exchange reserves. Among policymakers, accumulation of foreign exchange
reserves gained popularity as a multifunctional device to manage current and
capital account flows. Central bankers perceive that a sufficiently large pool of
foreign exchange reserve will not only allow central bank a cushion to cover
temporary trade imbalances, it also gives them a tool to maintain confidence in
monetary and exchange rate policies; enhance capacity to intervene in foreign
exchange markets; limit external vulnerability by maintaining foreign currency
liquidity to absorb shocks during times of crisis including national disasters or
emergencies and prove confidence to the markets especially (p.206) (Reddy
2002, 2006). However, there are skeptics who point out that the foreign
exchange reserve of India will not be able to protect the economy if there is a
sudden and significant outflow of short-term volatile capital (Chandra 2008;
Ghosh and Chandrasekhar 2009).
Moreover, as pointed out by a number of authors, accumulating foreign

exchange reserves is not an unqualified blessing. Rakshit (2003) and Rodrik
(2006) have shown that there are serious fiscal and social costs of holding
foreign exchange reserves. In India, reserve accumulation that occurred as net
inflow of foreign capital in India’s capital account was more than what was
required to cover its current account deficit. Rakshit (2003) argued that such
capital inflows may have a deleterious impact on the economy in the presence of
demand deficiency, if the central bank does not mop up the inflows. If the central
bank does not intervene in the foreign exchange market, the rupee would
appreciate, which can potentially worsen the country’s current account deficit.
On the other hand, if the RBI intervenes in the foreign exchange market, then it
builds up foreign exchange reserves and there is likely to be a need to sterilize
the foreign exchange market intervention. Such interventions have a fiscal cost
and the cost can be measured as the difference between the interest rate on
Page 32 of 53
domestic securities and the rate of return earned on the foreign exchange
reserves adjusted for any exchange rate change (also see Ghosh [2004] and Kohli
[2001b, 2001c] for discussion on how capital surge can affect domestic
macroeconomic management through its impact on money supply and interest
rates). Policymakers and central bankers also recognize this cost but argue that
the benefits arising out of holding foreign exchange reserves outweighs these
costs.
For a country with a large holding of foreign exchange reserves, there is also
another set of costs involved. Rakshit (2003) pointed out that given adequate
foreign exchange reserves and an output gap, use of external funds by
corporates or the government for financing domestic investment involves a net
loss to the economy. Subsequently, other authors have also raised questions
about the economic rationale and cost of external commercial borrowing by the
private sector and the consequent macroeconomic management of such short
term debts through sterilization and reserve accumulation by the central banks
(Chandra 2008; Rodrik 2006).
In spite of these criticisms, there is an opinion among the bureaucracy and

policymakers in India that the country has accumulated (p.207) sufficient
foreign exchange reserves and has gained the confidence of the ‘market’. There
are suggestions that India should use some of its foreign exchange reserves
either to finance infrastructure or to create ‘sovereign wealth funds’ (SWFs) to
get higher return. Newspaper reports indicate that the government and the
Planning Commission are seriously considering the possibility of creating an
SWF drawing out of India’s foreign exchange reserves. This move has been
opposed by the RBI so far. Most economists (see Bery 2010; Sen 2005b; Singh
2005) also have expressed strong reservations about these ideas. It has been
repeatedly highlighted that India’s foreign exchange reserve is entirely out of its
capital account inflows and thus should be considered as a liability. This
situation is unlike China, where a sizeable part of foreign exchange reserve is a
result of current account surplus and hence can be considered as assets. Given
this fundamental difference, it will not be prudent for India to follow China and
park the money is less liquid investment. In the words of Sen (2005b: 2019):
‘The foreign exchange reserves are not ours to spend—if there is a reversal of
flows, we could be caught with our pants down’.
After the Asian crisis and till about 2006, there was an apparently stable global
economic environment in which India managed to grow at about 8 per cent per
annum and also attracted sufficient FDI and portfolio capital flows. This once
again prompted the government to hasten its move towards capital account
convertibility. A second committee under the Chairmanship of S.S. Tarapore was
formed ‘with many notable “champions” of CAC as members’.17 The committee
submitted its report Fuller Capital Account Convertibility in July 2006 (RBI
2006). This report is popularly referred to as Tarapore 2 in the literature.
Page 33 of 53
Tarapore 2 also prepared a roadmap towards ‘fuller’ capital account

convertibility, the term ‘fuller’ signifying the recognition that most countries
keep some amount of capital control even when they open up their capital
account.
The constitution of the second Tarapore committee renewed the debate on the
desirability of CAC for India. There was a flurry of papers published between
2006 and 2008 which discussed the merits and demerits of India’s move towards
CAC. Most of these papers were of the opinion that India was trying to move
towards CAC prematurely and with undue haste. These papers also analysed the
relative costs and benefits of CAC and argued against opening up of capital
account. For example, Nachane (2007) reviewed the two Tarapore reports and
(p.208) found the second report (Tarapore 2) to be far more ambitious in the
scope of its recommendations, intended to take India quite a bit further along
the road to full (or almost full) CAC. However, Nachane did not find too much
support for the recommendation of Tarapore 2 in the literature. After surveying
the literature on the impact of CAC on developing countries for a range of
macroeconomic issues, Nachne found little evidence that CAC helps a
developing country like India. Rather, it is evident from his literature survey that
there are major risks involved with CAC. In this context, Nachane pointed out
that the Tarapore 2 report has virtually nothing to say on instruments designed
to insulate financial markets and the macroeconomy from the destabilizing
consequences of capital inflows.
Similarly, Dutt (2006) pointed out that the process of gradual opening up of
capital account in the period after the Asian crisis has mostly increased the flow
of portfolio capital to India. This implies that freeing up of capital restrictions is
likely to draw in more portfolio flows. This may not be helpful to the economy as
the contribution of portfolio flows on the real economy is minimal. Secondly, he
asked if India and China manage to grow faster than the rest of the world while
maintaining capital controls, then where is the need to adopt a policy like CAC,
whose beneficial aspects are suspect. Sen (2006) suggested that a country with a
less developed banking and financial sector should be very careful about capital
account liberalization because an open capital account increases the risk
perception of such an economy. An open capital account increases vulnerability
of financial institutions and increases the systemic risk18 inherent in any
financial system. As India’s financial and banking system is presently not ready
to bear the pressure of an open capital account, Sen concluded that the move
towards a convertible capital account is fraught with danger. Similarly,
Williamson (2006) also suggested that at the present stage, full capital account
liberalization promises no large benefits for India but it increases the risk. Short-
term capital behaves in a pro-cyclical manner and given a convertible capital
account, this may exacerbate the economic stresses India may face. Williamson
pointed out that it takes about 30 years from when a country starts the process
of liberalization and financial integration before it makes sense to move to CAC.
Page 34 of 53
This made Williamson comment that the first Tarapore report’s proposals were
about 30 years premature for India. Singh (2006) also argued that India, at that
(p.209) point in time, was not ready for CAC but felt that India can be made
ready for CAC. Interestingly, in his paper, Williamson (2006) also echoes
Bhagwati’s views that the drive towards capital account convertibility is largely
driven by the US treasury and countries should be careful not to fall for this.
Some other papers have pointed out another major lacuna in the two Tarapore
reports. Both Tarapore 1 and Tarapore 2 have not discussed in detail how the
RBI will conduct exchange rate management when the country moves towards
fuller CAC. Subramanian (2007), for example, found it striking and shocking to
find very little discussion of exchange rates and the potential problems in
managing exchange rates in a world of greater capital movements. Similarly,
Rajwade (2007) argued that there is a strong case for managed exchange rates
in developing countries as most of their traded goods and services are price
elastic. He was of the opinion that managing exchange rates have paid rich
dividends to many developing economies and have helped them achieve
spectacular growth rates. China is a good example of this. But the law of
‘impossible trinity’ tells that to manage exchange rates in an orderly manner and
to simultaneously maintain autonomy of monetary policy, some amount of capital
control is necessary. The Tarapore 2 report’s somewhat hands-off approach to
maintain the real effective exchange rate broadly within a +/– 5 per cent band
around a neutral level may not be effective enough to manage the exchange rate
for the real economy. Rajwade’s concerns may become even more serious with
both USA and China indulging in heavy exchange rate management to keep their
currencies from appreciating. The Tarapore committee recommendations were
not implemented as the world was hit by a financial crisis in 2007.
The global financial crisis, which originated in the real estate sector of US, saw
significant outflow of foreign capital from developing countries. However, after a
short period of capital flight, these economies have subsequently faced a surge
in capital inflows. During this period it became clear that these capital flows
were not driven by domestic economic factors of developing countries but were
reacting to the changing economic situation in developed countries. This
revelation made an even more compelling case for stronger capital controls in
developing countries. The merits of capital controls during the post-crisis period
are discussed in Mohan and Kapur (2010) and Ocampo (2012). In an apparent
change of position, the IMF, (p.210) which has been the main proponent of
capital account convertibility, published a paper outlining the situations where
capital control can be useful for developing countries (Ostry et al. 2010). In the
Staff Position Note (SPN) the IMF suggested that there are ‘circumstances in
which capital controls can be a legitimate component of the policy response to
surges in capital flows. A follow up paper from IMF was published in 2011 (Ostry
Page 35 of 53
et al. 2011) which analysed various tools to manage capital flows. These papers
gave an impression that IMF has reversed or at least revised its position on CAC.
Not surprisingly, these papers from IMF generated lot of curiosity among
analysts and researchers and were reported and analysed globally by the
financial press. Also, quite a few academic researchers commented on these
papers (see Chandrasekhar 2010; Gallagher 2011; Grabel 2011; Ocampo 2011;
and Subramanian 2012). Chandrasekhar (2010) and Subramanian (2012)
highlight that careful reading of Ostry et al. (2010, 2011) showed that there has
been no fundamental policy shift by IMF regarding CAC. Through these papers
IMF is trying to suggest that capital controls are still an inferior set of policy
instruments and they should be used only temporarily and only under some very
special circumstances. They highlight that Ostry et al. (2010) suggested that
developing countries should use capital controls only when the economy is
operating near potential, if the level of reserves is adequate, exchange rate is
undervalued, and the flows are likely to be transitory. It is fairly evident from
this that the IMF is trying to introduce difficult—if not impossible—eligibility
criteria for imposing capital controls. Chandrasekhar also argued that by
supporting capital controls in some very special circumstances, IMF is hedging
its position and trying to avoid the backlash it received during the Asian crisis.
However, by boxing in the situation where such controls are warranted, it is
encouraging developing countries not to use capital controls on a permanent
basis. In sum, these papers from IMF do not show a fundamental shift of IMF’s
position, rather it reflects a tactical move by IMF to deflect criticism and to
maintain its relevance in the post-crisis world.
However, as Nachane (2010) pointed out, the pronounced swing of opinion

against unfettered capital account liberalization seems to have bypassed Indian
policymakers. The global financial crisis and the resultant volatility of capital
flows did not allow Indian policymakers to immediately implement the
recommendations of Tarapore 2. (p.211) Nevertheless, this has not deterred
the government from slowly introducing a number of measures which have
taken India closer to CAC. Nachane argues that as India is not introducing
stricter capital controls, it is suffering loss of autonomy of monetary policy, a
reduction in available fiscal space, and bouts of volatility in foreign exchange
and equity markets. These episodes of volatility often create uncertainty around
investment decisions, especially in the tradable sector. Kohli (2009), however,
argued that India so far has imperfect financial integration, which allows India
to have an eclectic monetary and exchange rate regime.
This chapter reviewed the literature on capital flows and its effects on Indian
economy. The objective of the chapter was to focus mainly on the Indian
literature on these issues. The discussion shows that India has almost moved full
circle in its approach towards capital flows. During the early phases of planning,
foreign capital was deemed important. However, India gradually developed a
Page 36 of 53
cautious approach about it since the 1960s and numerous restrictions were
imposed on capital flows. But India opened up in 1991 and since then the
government has gradually moved towards a more open and accommodating
policy regime regarding foreign capital. The review of the literature also
indicates that there has been significant increase in capital flows to India over
the last two decades and India no longer faces a major foreign exchange
constraint. However, a big share of capital flows received by India is in the form
of short-term and volatile capital flows. These have increased the threat quotient
of the economy and forced policymakers to adopt policies to safeguard against
potential reversals of capital flows. These policies have squeezed the policy
space available for monetary and exchange rate policies of the country. Fiscal
sops given to foreign investors have affected government revenue and they have
also opened up avenues for diverting dubious funds to the Indian economy
through various tax havens.
On the other hand, the literature on the benefits of foreign capital flows has not
unambiguously established its benefits for the Indian economy. The share of FDI
in India’s gross domestic capital formation (GDCF) was less than 5 per cent till
2005–6. After the reclassification of FDI, it has reached only about 8 per cent of
GDCF. This figure (p.212) is not very high and as discussed in the chapter, the
reclassification of FDI inflates the FDI volume in the country by including
different types of capital flows which are generally not treated as FDI. In the
literature there seems to be a convergence of opinion that foreign portfolio flows
are even less useful for the country. The contribution of portfolio capital flows to
the real economy is insignificant but it imposes significant costs. Repeated
occurrences of financial crises across the globe have highlighted the problems
associated with short-term flows like portfolio capital. In particular, the Asian
crisis and the latest global financial crisis have led many countries to re-impose
restrictions on capital account. India managed to avoid these crises as it had a
relatively closed capital account. However, the evidence suggests that Indian
policymakers are moving towards a more open capital account. So far, no study
on the Indian economy has clearly established that such a move will be
beneficial for the country. On the contrary, most academic literature has advised
policymakers strongly against such a move.
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(1.) First Five Year Plan, Chapter 29, paragraph 37, available at http://
planningcommission.nic.in/plans/planrel/fiveyr/1st/1planch29.html
(2.) As illustrated by successful firms like TELCO and BHEL in these two
industries, respectively.
(3.) The website address is: http://dipp.nic.in/English/Investor/FDI_Policies/

FDI_policy.aspx.
(4.) http://www.unctad.org/Templates/StartPage.asp?intItemID=4376&lang=1
(5.) The Foreign Direct Investment Confidence Index is a regular survey of

global executives conducted by A.T. Kearney. The Index is seen as a proxy for
present and future prospects for international investment flows. Companies
participating in the survey account for more than US$ 2 trillion in annual global
revenue (http://www.atkearney.com/index.php/Publications/foreign-direct-
investment-confidence-index.html).
(6.) For discussion on FDI to China, see Chandra (1999), Huang (2002).
(7.) World Bank (2010). Available at: http://www.worldbank.org/en/news/feature/

2010/07/16/foreign-direct-investment-china-story.
(8.) Strictly speaking this definition of direct investment is not limited to equity
investment but also relates to reinvested earnings and inter-company debt. Debt
instruments include marketable securities such as bonds, debentures,
commercial paper, promissory notes, non-participating preference shares and
other tradable non-equity securities as well as loans, deposits, trade credit and
other accounts payable/receivable. All cross-border positions and transactions
related to these instruments, between enterprises covered by an FDI
relationship other than between related financial intermediaries are included in
FDI.
(9.) IMF defines securities as:
Securities are debt and equity instruments that have the characteristic
feature of negotiability. That is, their legal ownership is readily capable of
being transferred from one unit to another unit by delivery or
endorsement. While any financial instrument can potentially be traded,
Page 51 of 53
securities are designed to be traded, usually on organized exchanges or

‘over the counter’. [The over-the-counter market involves parties
negotiating directly with one another, rather than on a public exchange.]
Negotiability is a matter of the legal form of the instrument. Some
securities may be legally negotiable, but there is not, in fact, a liquid
market where they can be readily bought or sold. Listed financial
derivatives, such as warrants, are sometimes considered to be securities.
(IMF 2010: Chapter 5, paragraph 5.15 Balance of Payment Manual)
(10.) ‘The Committee would also suggest that the capital market should be
gradually opened up to foreign portfolio investments and simultaneously efforts
should be initiated to improve the depth of the market by facilitating issue of
new types of equities and innovative debt instruments’. (Narasimham Committee
Report, MoF 1991: 121).
(11.) Information about registration procedure for FIIs are available here: http://
investor.sebi.gov.in/faq/foreign%20institutional%20investor.html.
(12.) The situation in the Indian stock markets reminds us of the famous quote
by Keynes where he says: ‘when the capital development of a country becomes a
by-product of the activities of a casino, the job is likely to be ill-done’(Keynes).
(13.) For example, Chandrasekhar (2008: 21) says, ‘under pressure when
seeking to prevent backdoor entry by speculative entities like the hedge funds,
SEBI seems to have diluted its original policy of preventing entities that were
lightly regulated in their home countries from registering themselves as FIIs in
India. This only paves the way for increased speculation’.
(14.) As per RBI (1997: paragraph 1.26):
CAC has a disciplining influence on domestic policies. While CAC does not
eliminate the effectiveness of monetary policy, it does not permit monetary
policy to take on an excessive burden of the adjustment. Imperfect asset
substitutability continues to allow monetary policy to operate on interest
differentials brought about by risk premia and targeting the interest rate
enhances the effectiveness of monetary policy. Moreover, the conduct of
monetary policy is strengthened by the pursuit of a realistic and
appropriate exchange rate policy which reflects fundamentals and is
flexible enough to equilibrate the balance of payments. Furthermore, CAC
enhances the effectiveness of fiscal policy by (i) reducing real interest
rates applicable to public sector borrowing, (ii) bringing about an optimal
combination of taxes through a reduction of the inflation tax and in the
rates of other taxes to international levels with beneficial effects for tax
revenues and, (iii) reducine [sic], crowding out effects in the access to
funds. In fact, prudent fiscal policy can play a major role in channelising
capital flows into productive investments. An unsatisfactory fiscal policy
Page 52 of 53
can, however, erode credibility and create conditions for capital flight. In
the ultimate analysis, consistent and coordinated macro economic policies
can contribute substantially towards reaping the benefits of CAC.
(15.) Rakshit (2002) is a valuable resource as it is a compilation of the author’s

numerous papers on this topic which were published in the journal Money and
Finance over 1997 to 1999. To reduce clutter, these individual papers are not
mentioned separately here.
(16.) Jalan (2007: 9) says:
We have managed our capital account to ensure growth with stability,

while consistently adding to our foreign currency reserves. Like several
other developing countries, we also experienced, and managed, phases of
excessive capital movements. There were periods of capital surge during
1993–95, and also two major episodes of volatility in flows in the second
half of 1995–96 and again during 1997–98. During periods of exchange
rate volatility in the wake of the East Asian crisis, there were major
imponderables involved, both externally and internally, and contagion and
herd behaviour had to be guarded against. In these situations, a co-
ordinated policy framework and careful calibration of policy instruments
resulted in an effective management of capital flows without intolerable
shocks on the performance of the economy. (http://rbidocs.rbi.org.in/rdocs/
Speeches/PDFs/8573.pdf)
(17.) Nachane (2007: 3639, Endnote 8) notes: ‘As a matter of fact,

notwithstanding the fact that the committee chairman was a highly respected
senior central banker, well known for his independent views, the general feeling
was that the composition of the committee was loaded heavily in favour of the
officially desired result—a stratagem increasingly resorted to by Indian
governments in the past two decades’.
(18.) Financial markets are characterized by a complex and dynamic network of

inter-relations among major intermediaries like banks, financial institutions and
securities markets. Also, a large number of borrowers and lenders are
dependent on the financial system. Consequently a shock in one segment of the
financial system tends to get amplified and spreads over the entire financial
system and even in the real sectors of the economy. This transmission and
amplification of a shock is something very special to the financial market. This is
known as ‘systemic risk’.
Page 53 of 53
Negotiations in the Doha Round

Economy
Jayati Ghosh

Print ISBN-13: 9780199458943
DOI: 10.1093/acprof:oso/9780199458943.001.0001

Critical Issues for India
Biswajit Dhar
Kasturi Das
DOI:10.1093/acprof:oso/9780199458943.003.0006

Members of the World Trade Organization (WTO) launched the Doha Round of
negotiations in 2001 amid pressures by the developing countries to make the
WTO more development friendly. The focus of the negotiations was on the
agreements covering four key areas, namely, agriculture, the non-agricultural
market access, services, and intellectual property rights. The major
distinguishing feature of the Doha Round was the strong presence of the
developing countries on the negotiating table. For the first time in the history of
the multilateral trading system, these countries had formed coalitions, both
formal and informal, in order to articulate their interests. The proposals made by
these countries had the potential of fundamentally altering the dynamics of the
global trading system by providing the developing countries a much larger share
in the trade volumes. And, this was to happen, keeping in view the development
priorities of the developing countries.
Keywords: trade and development, World Trade Organization, multilateral trading system, Doha
Round, global trade, developing countries
The Doha Round negotiations of the World Trade Organization (WTO) have
entered their tenth year. The time that has elapsed since these negotiations
commenced is an eloquent testimony to the fact that the Doha Round has been
the most vexatious among all the negotiating rounds that the multilateral
trading system has witnessed since it was established in 1948. Hindsight would
Page 1 of 74
perhaps suggest that this state of impasse was not entirely unexpected since the
developing and the developed countries had widely differing perceptions on the
future agenda of the WTO, which was primarily responsible for the failed
Ministerial Conference in Seattle in 1999. The developing countries were
essentially focused on two sets of issues: one, rebalancing the Uruguay Round
Agreements to make them more development friendly, and two, ensuring that
these Agreements were effectively implemented. On the other hand, the
developed countries, in particular, the United States (US) and the European
Union (EU), were keen to launch a new round of negotiations and expanding the
scope of the WTO by introducing contentious issues like labour standards.
The agreement among the WTO members to launch the Doha Round was a
compromise between the positions held by the developing and the developed
countries. This was reflected in the negotiating mandate which had three
prominent dimensions: (i) comprehensive review of the Uruguay Round
Agreements as well as the dispute settlement mechanism of the WTO; (ii) review
of implementation (p.226) of the Uruguay Round Agreements;1 and (iii)
expansion of the negotiating mandate of the WTO. The review of the existing
agreements had, in turn, two components: one, deepening the level of
commitments of the WTO Members to unshackle their domestic markets, and
two, rebalancing the agreements keeping in view the needs of the developing
countries.
The needs of the developing countries were sought to be addressed by including

the so-called ‘development dimension’2 in most of the key areas. Thus, while
laying down the mandate on agriculture, WTO members agreed that
special and differential treatment for developing countries shall be an

integral part of all elements of the negotiations and shall be embodied in
the Schedules of concessions and commitments and as appropriate in the
rules and disciplines to be negotiated, so as to be operationally effective
and to enable developing countries to effectively take account of their
development needs, including food security and rural development
(emphasis added) (WTO 2001: 3).
The negotiating mandate on market access of non-agricultural products was ‘to

reduce or as appropriate eliminate tariffs, including the reduction or elimination
of tariff peaks, high tariffs, and tariff escalation, as well as non-tariff barriers in
particular on products of export interest to developing countries’ (WTO 2001: 4).
Furthermore, the negotiations were expected to ‘take fully into account the
special needs and interests of developing and least developed country
participants, including through less than full reciprocity in reduction
commitments…’ (WTO 2001: 4). In the services negotiating mandate, it was
emphasized that the negotiations would be conducted with a view to promote
‘the development of developing and least-developed countries’ (WTO 2001: 3).
Page 2 of 74
And, finally, in the area of intellectual property (IP) rights in which developing
countries had voiced their concerns regarding the impact of the patent regime
introduced by the Agreement on Trade Related Aspects of Intellectual Property
Rights (TRIPS) on access to medicines at affordable prices, the Doha Ministerial
Conference adopted a declaration on TRIPS Agreement and Public Health that
introduced flexibilities in the agreement to help realize the public health
concerns.
The expansion in the scope of the WTO took three forms. First, trade and
environment issues were mainstreamed through the inclusion of two specific
issues in the negotiating mandate: (a) the (p.227) relationship between existing
WTO rules and specific trade obligations set out in multilateral environmental
agreements; and (b) the reduction or, as appropriate, elimination of tariff
barriers and non-tariff barriers (NTBs) faced by environmental goods and
services.
Second, the four ‘Singapore Issues’, namely, investment, competition policy,

trade facilitation, and transparency in government procurement3 were included
in the post–Doha Round work programme, but the decision on whether
negotiations would be conducted on these issues was deferred until the next
ministerial conference. However, in a decision taken in 2004, WTO members
agreed to hold negotiations on trade facilitation, while excluding the other three
issues from the negotiations in the Doha Round (WTO 2004).
And, finally, working groups were established on trade, debt and finance, and
trade and transfer of technology to better understand the contribution that the
WTO can make to effectively address the issues being dealt within each of these
areas.
An oft-ignored aspect of the Doha Round is that its architects had envisioned
that negotiations in all the mandated areas would conclude simultaneously. This
was reflected in their agreement that the outcome of the negotiations would be
treated as parts of a ‘single undertaking’,4 which really meant that the ‘Doha
Deal’ can only be done when agreements were concluded in all areas. In
practical terms this approach was extremely significant since it sought to curb
the tendencies of the more dominant countries to conclude agreements in areas
that suited their interests best (euphemistically called ‘cherry picking’) and to go
slow (or even ignore) in areas in which they had to make concessions. Countries
can engage in inter-sectoral trade-offs, thus contributing to the overall balance
of the negotiations.
In terms of the negotiating dynamics, however, parallel movement in the

negotiating areas has not been in evidence. The negotiations have witnessed
considerable movement in the areas of agriculture and market access of non-
agricultural products, while negotiations in most other areas, including services,
Page 3 of 74
in which many developing countries have proactive agenda, has been on the
back-burner. Even in the areas of agriculture and non-agricultural market
access, the trade-offs that have been proposed do not seem to be favouring
developing countries like India. Prominent among the other areas where
negotiations have virtually been on a stand-still includes the area of IP rights in
which developing countries have several critical concerns.
(p.228) This chapter is an attempt to assess the progress of the Doha Round
negotiations in four key areas. These are agriculture, market access for non-
agricultural products, services and IP rights. An exercise of this nature is
important in our view, since it helps in analysing the issues on which agreement
has eluded the WTO members. Thus, if the Doha Round is to be brought to an
early conclusion the disagreements between the key players involved in the
negotiations must receive focused attention. There is no gainsaying that the
global economic recovery, which is on a knife-edge, would need the backing of a
resilient multilateral trading system to get onto a more sustainable path.
Agriculture in the WTO

One of the aberrations of the multilateral trading system that functioned under
the aegis of the General Agreement on Tariffs and Trade (GATT), the
predecessor organization of the WTO, was the exclusion of agriculture since the
mid-1950s. The trigger for excluding agriculture was a decision taken by the
GATT Contracting Parties (GATT 1955)5 waiving the obligations of the US under
the provisions of Articles II and XI6 of the GATT. The US had requested for the
grant of this waiver to enable it to maintain its policies of import restrictions
included in Section 22 of its Farm Act (Agricultural Adjustment Act of 1933, as
amended).7 GATT granted the waiver in perpetuity, which implied that
agriculture was effectively excluded from its jurisdiction.
It was in the Uruguay Round of negotiations that the GATT Contracting Parties
agreed to introduce disciplines in agriculture while laying down the negotiating
mandate on agriculture, the ministers of these countries agreed that there was
‘an urgent need to bring more discipline and predictability to world agricultural
trade by correcting and preventing restrictions and distortions…so as to reduce
the uncertainty, imbalances and instability in world agricultural markets’ (GATT
1986). Furthermore, in the mid-term review of the Uruguay Round of
negotiations conducted in 1988, GATT Contracting Parties agreed that the long-
term objective of the discipline ‘is to establish a fair and market-oriented
agricultural trading’, which required ‘that a reform process should be initiated
through the negotiation of commitments on support and protection and through
the establishment of strengthened and more operationally effective GATT rules
and (p.229) disciplines’.8 It was further indicated that the long-term objective
was to achieve ‘substantial progressive reductions in agricultural support and
Page 4 of 74
protection sustained over an agreed period of time, resulting in correcting and

preventing restrictions and distortions in world agricultural markets’.
The Agreement on Agriculture (AoA) adopted at the conclusion of the Uruguay

Round of negotiations provides a structure of disciplines which seeks to meet
the aforesaid objectives.
An Overview of the Disciplines Introduced by Agreement on Agriculture

AoA introduces disciplines covering three broad areas, better known as the
three ‘pillars’ of the Agreement. These are: (a) domestic support, (b) export
competition, and (c) market access. The following discussion critically reviews
the discipline that the AoA has introduced.
Domestic Support Discipline

The discipline on domestic support is aimed at regulating the production-related
subsidies granted by WTO members. In their use of domestic support measures,
governments have relied on two classes of subsidies: (a) market price support
and (b) budgetary support. While price support distorts markets by providing
perverse incentives, budgetary support can be market distorting or market
neutral depending on the programmes that are being financed. Thus, while input
subsidies have adverse effect on markets, there are a plethora of measures
supported by the government and its agencies that are not likely to affect
production and/or prices, at least in the short run.
In the AoA, domestic support measures have been divided into three categories.
Price support and input subsidies are included in the ‘Amber Box’; production-
limiting payments are included in the ‘Blue Box’;9 and the ‘Green Box’ includes
payments on several measures, the more prominent of which are agricultural
extension, rural infrastructure, domestic food aid, public stockholding for food
security, disaster payments, and income support.
The domestic support disciplines agreed to at the end of the Uruguay Round
required that Amber Box subsidies had to be reduced, and since subsidies under
the other two categories, that is, Green Box (p.230) and Blue Box, were
considered less market distorting, they were not expected to be reduced.
The classification of subsidies used by the AoA into market distorting or

otherwise is questionable. Several forms of subsidies that are classified as non-
market distorting do impact prices and production. For instance, the production-
limiting Blue Box support is provided with an explicit intent to influence market
prices. Yet another form of subsidies that is included in exempt category of
Green Box measures is income support. The form of support is provided on the
basis of the production and yield in a historically given base year and is hence
notionally ‘decoupled’ from current production. Justifying the inclusion of
income support in the Green Box, the US has argued that the direct payments
are determined on past production and yields, and therefore, this form of
Page 5 of 74
support has no effect on current production decisions of the producers. There

are some doubts about the veracity of the arguments since direct payments have
risk reducing effects which can influence farmers’ decisions in the current
period. One of the more apparent manifestations of this can be seen in the
ability of the US farm producers to fix farm gate prices of products that are
considerably below their economic costs. This aspect of domestic support would
be discussed in greater detail in a later section.
Discipline on Export Competition

The discipline on export competition in the AoA has two components. The first
includes a clearly defined discipline on export subsidies and the second, a not-
so-well articulated discipline on food aid and export credit. The latter was
introduced to address the problem that arose because of the use of food aid for
surplus disposal by some WTO member countries and the use of export credit as
instruments to provide unfair advantage to exporters.
The export subsidy discipline required member countries to decrease the

budgetary outlays on export subsidies as well as the volume of subsidized
exports. An important provision included in the export subsidies’ discipline was
that countries not using any subsidies in base period are prohibited from using
export subsidies under the new dispensation. The introduction of this provision
meant that most developing countries, which were not using any form of export
subsidy during the period 1986–8, did not have the right to use export (p.231)
subsidies in the new dispensation. However, developing countries were allowed
to provide subsidies to reduce the costs of marketing exports of agricultural
products including handling, upgrading, and other processing costs, costs of
international transport and freight, and to meet the costs of internal transport
and freight charges on export shipments.
Market Access Disciplines

The market access provisions contained in the AoA comprised three main
elements. These are: (a) tariffication of NTBs that were in place before the AoA
was enforced; (b) reduction of existing levels of tariff protection; and (c)
establishment of tariff rate quotas.
The conversion of NTBs into tariffs meant that quotas, variable levies, minimum
import prices, discriminatory licensing, state trading measures, voluntary
restraint agreements, and such similar border measures, had to be removed and
converted into an equivalent tariff (either in the form of ad valorem or specific
duties). The tariffication of NTBs, it was assumed, would give rise to the problem
of high tariffs and to circumvent this problem the AoA included a specific
instrument. Minimum access opportunities for imports of primary commodities
were required to be established. This clause, contained in Annex 5 of the AoA,
provided that if the imports of primary agricultural product and their worked
and/or prepared products were less than 3 per cent of domestic consumption,
Page 6 of 74
minimum access opportunities of specified orders would have to be provided

through tariff rate quotas (TRQs). The TRQs were thus expected to provide a
‘tunnel through the tariff wall’, or in other words, to provide effective market
access to agricultural commodities in a world where countries were generally
protecting their domestic markets. This was sought to be achieved by imposing
lower tariffs for in-quota imports than the most favoured nation (MFN) rate.
Another provision ostensibly aimed at persuading countries to undertake market

access reforms was provided in the form of ‘Special Safeguards’. Article 5 of the
AoA provides that countries which had tariffied their NTBs and had offered
improved market access opportunities in their Uruguay Round commitments
could take recourse to the Special Safeguard (SSG) provisions for preventing
import surge. The feature of an SSG is that this instrument gets automatically
(p.232) triggered if the import price falls below the agreed threshold (price
trigger) or quantity of imports increases beyond the threshold agreed to
between the WTO Members (volume trigger).10
Implementation of the Commitments

The discussion in the foregoing indicates that the AoA provided at the very best
a framework for partial liberalization of agricultural trade. On the one hand, the
so-called distortions in the market caused by the various forms of support were
sought to be decreased by introducing the disciplines, while on the other hand,
possibilities of market access were increased by the removal of NTBs through
the tariffication route.
The implementation of the commitments made by the WTO members, which is

attempted in the following sections, would focus on the disciplines introduced in
each of the three ‘pillars’ of the AoA, namely, domestic support, export subsidies,
and market access. The implementation of the commitments under domestic
support has been particularly contentious for the WTO members who have
traditionally granted large volumes of farm subsidies, as the US and the EU
members have restructured their domestic subsidies in such a manner that the
subsidies discipline under the AoA has had little impact on them. The inability of
the subsidies discipline to rein in farm subsidies contributed to the volatility of
the prices of major agricultural commodities, as would be indicated in the
following discussion.
Domestic Support Commitments

The implementation of the discipline on domestic support has to be seen largely
from the perspective of the US and the EU, two of the larger players in the
market for agricultural commodities. The subsidies granted by these members of
the WTO were the focus of the agricultural discipline not only since the
organization was established in 1995, but also during the Uruguay Round of
negotiations.
Page 7 of 74
Data provided by the US and the EU in their notifications to the Committee on

Agriculture shows that domestic support extended by these two members of the
WTO to their agricultural sector remained the highest among all members of the
organization since the AoA was implemented (see Tables 6.1 to 6.4). (p.233)
Page 8 of 74
Table 6.1 Total Domestic Support granted by the United States (1995–2007) (in US$ billion)
Subsid 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
ies/
Produ
cts
Green 46.0 51.8 51.3 49.8 49.7 50.1 50.7 58.3 64.062 67.425 72.328 76.035 76.162 86.2 103.2 120.5
Box
Blue 7.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Box
Amber 7.7 7.1 7.1 15.2 24.5 24.4 21.5 16.3 10.2 18.1 18.9 11.3 8.5 15.6 11.5 9.8
Box of
which:
Prod 6.3 6.0 6.5 10.6 17.1 17.1 14.7 11.2 7.4 12.3 13.1 7.9 6.5 6.4 5.5 4.4
uct
Specifi
c
Non- 1.4 1.1 0.6 4.6 7.4 7.3 6.8 5.1 2.8 5.8 5.9 3.4 2.0 9.3 6.1 5.4
produ
ct
Specifi
c
Total 60.8 58.9 58.3 65.0 74.2 74.5 72.2 74.6 74.2 85.5 91.2 87.4 84.7 101.9 114.7 130.3
Subsid
ies
Page 9 of 74
Source: Author’s calculations from the notifications submitted by WTO member countries.
Page 10 of 74
Table 6.2 Shares of Components in US Domestic Support (in per cent)
Subsid 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
ies
Green 75.8 88.0 87.9 76.6 67.0 67.2 70.2 78.1 86.3 78.8 79.3 87.0 89.9 84.6 90.0 92.5
Box
Blue 11.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Box
Amber 12.7 12.0 12.1 23.3 32.8 32.5 29.8 21.9 13.7 21.2 20.7 13.0 10.1 15.4 10.0 7.5
Box of
which
Prod 10.4 10.1 11.1 16.2 22.8 22.7 20.4 15.0 9.9 14.4 14.3 9.1 7.7 6.3 4.8 3.4
uct
Specifi
c
Non- 2.3 1.9 1.0 7.1 10.0 9.8 9.5 6.8 3.8 6.8 6.4 3.9 2.4 9.1 5.3 4.1
Produ
ct
Specifi
c
Page 11 of 74
(p.234)
Page 12 of 74
Table 6.3 Domestic Support granted by the EC (1995–6 to 2009–10) (in US$ billion)
Subsidi 1995–6 1996–7 1997–8 1998–9 1999– 2000–1 2001–2 2002–3 2003–4 2004–5 2005–6 2006–7 2007–8 2008–9 2009–
es/ 2000 10
Produc
ts
Green 24.6 30.0 20.6 21.5 21.2 20.1 18.5 19.2 24.9 30.3 50.1 70.9 85.7 92.0 88.6
Box
Blue 27.3 27.3 23.2 23.0 21.1 20.5 21.2 23.3 28.0 33.8 16.7 7.1 7.0 7.8 7.4
Box
Amber 65.2 64.6 56.7 52.0 50.8 39.9 35.0 26.5 28.3 37.4 33.3 34.0 19.0 17.7 13.3
Box of
which:
Prod 1.0 0.9 0.6 0.4 0.3 0.5 0.5 0.9 1.2 1.3 1.3 1.8 1.2 1.2 0.8
uct
Specifi
c
Non- 66.2 65.5 57.3 52.4 51.1 40.4 35.5 27.4 29.4 38.7 34.6 35.8 20.3 18.9 14.2
produc
t
Specifi
c
Total 118.1 122.7 101.1 96.9 93.4 81.0 75.2 69.8 82.3 102.8 101.4 113.8 112.9 118.7 110.2
Subsidi
es
Page 13 of 74
Page 14 of 74
Table 6.4 Shares of Components in EC Domestic Support (in per cent)
Subsidi 1995–6 1996–7 1997–8 1998–9 1999– 2000–1 2001–2 2002–3 2003–4 2004–5 2005–6 2006–7 2007–8 2008–9 2009–
es/ 2000 10
Produc
ts
Green 20.8 24.4 20.4 22.2 22.7 24.8 24.6 27.5 30.3 29.5 49.4 62.3 75.9 77.5 80.5
Box
Blue 23.1 22.2 22.9 23.7 22.6 25.3 28.2 33.3 34.0 32.9 16.5 6.3 6.2 6.5 6.7
Box
Amber 56.1 53.4 56.7 54.1 54.7 49.9 47.2 39.2 35.8 37.7 34.1 31.4 17.9 15.9 12.9
Box of
which:
Prod 55.2 52.6 56.1 53.7 54.4 49.3 46.5 37.9 34.3 36.3 32.8 29.9 16.8 14.9 12.1
uct
Specifi
c
Non- 0.9 0.7 0.5 0.4 0.3 0.6 0.7 1.3 1.4 1.3 1.3 1.6 1.1 1.0 0.8
produc
t
Specifi
c
Page 15 of 74
(p.235) The US has been the largest provider of domestic support among all
WTO members. In 2010, domestic support spending of the US had exceeded
US$ 130 billion.11 This was more than twice the magnitude of subsidies that it
had provided in 1995. The EU, on the other hand, maintained its subsidy levels
at about the same level in dollar terms as between 1995–6 and 2009–10,
although in terms of its euro, domestic support provided by the EU had declined
by about 12 per cent. This shows that the EU was able to rein in its subsidies.
Yet another evidence of this phenomenon is that while in 1995, the EU had a
membership of 15, in 2009–10 its membership had increased to 27.
The difference in the overall trends in providing domestic support

notwithstanding, the allocation of subsidies of the US and the EU appears quite
similar. In both cases, the increase in the spending on the subsidies exempt from
reduction commitments, namely, Green Box and Blue Box measures are quite
discernible. The share of the Green Box in total spending on domestic support by
the US increased from about 67 per cent in 1999 to nearly 93 per cent in 2010.
In case of the EU, the share of the Green Box measures in domestic support
went up nearly to 81 per cent in 2005–6 from less than 21 per cent in 1995. This,
in other words, implies that both the US and the EU had considerable flexibility
in their use of production-related subsidies in the WTO because of the high
proportion of the subsidies that are not subjected to reduction commitments. In
other words, these members of the WTO were engaged in box-shifting, thus
making the domestic support discipline almost irrelevant.
In case of the EU, product-specific support was at high levels for a range of
products, which included sugar, butter, and wheat, ever since the AoA discipline
was introduced. Domestic support for sugar registered steep increase in the
middle of the last decade. In case of the former, it increased to over US$ 8
billion in 2006–7 (close to twice the value of sugar produced in the EU), while
that for butter was over US$ 5 billion in 2005–6. However, in the more recent
years, although support for both these products had declined considerably, they
remained over US$ 2.5 billion. In contrast, domestic support for common wheat
and milk (including skimmed milk powder) had increased.
It may be worth dwelling on the consequences of the increases in subsidies.

Available data show that in the US, producers have been able to sell their
produce well below the economic costs of production as well as the international
prices. Figures 6.1 and 6.2 capture the trends (p.236)
Page 16 of 74
(p.237) in cost of production and

prices for two of the main
products exported by the US,
namely, wheat and corn. The
subsidies have thus provided the
US producers two sets of benefits.
First, with US domestic prices
staying below the international
prices for the subsidized crops,
the US producers have been
provided protection from the
competitors who would be selling
only at the international prices, in Figure 6.1 Cost Price Comparison: US
other words, farm subsidies must Wheat
be viewed as implicit tariffs.
Source: Author’s calculations from the
Second, US producers could
dispose of their produce at prices notifications submitted by WTO member
lower than the international countries.
prices, thus gaining unfair
advantage over their competitors.
The implications of targeted use
of subsidies by the US and the
EU have been felt by several
countries, including some of the
poorest. For instance, subsidies
granted by the US and the EU
to the cotton growers worsened
the economic prospects of some
of the West and Central African
countries,12 while US rice
subsidies have had
ramifications for some of the Figure 6.2 Cost Price Comparison: US
relatively more competitive Rice
producers in the Asia-Pacific Source: Author’s calculations from the
region such as Thailand, notifications submitted by WTO member
Vietnam, and India. In the latter countries.
case it has been argued that the
US was able to maintain its
level of exports by the use of subsidies even when the international prices were
on a decline during the later 1990s, thus shifting the burden of adjustment to
low prices on the more competitive producers. These producers had to cope with
low demand for their produce arising from their inability to off-load their stocks
at the ruling international prices, and were consequently saddled with massive
accumulated stocks (Gulati and Narayanan 2002).
Page 17 of 74
Given these tendencies displayed by the US and the EU in the grant of domestic
support, it was imperative that the negotiations in the Doha Round provide the
roadmap for effectively reducing this egregious form of market distortion in
agriculture. This expectation from the proposals is not likely to be realized, as
further discussion would indicate.
Analysis of the Implementation of Commitments on Export Competition

Data on export subsidies presented in Tables 6.5 and 6.6 for the two largest
players in the global agricultural trade show that the EU has used export
subsidies relatively more extensively to gain additional market access in
agricultural commodities as compared to the US. Data provided in the tables
show that while the EU was using export (p.238)
Page 18 of 74
Table 6.5 European Communities: Outlays on Export Subsidies (in million euros)
Produ 1995– 1996– 1997– 1998– 1999– 2000– 2001– 2002– 2003– 2004– 2005– 2006– 2007– 2008– 2009– 2010–
cts 6 7 8 9 2000 1 2 3 4 5 6 7 8 9 10 11
Wheat 1187 3175 177.7 500.3 509.3 108.3 8.5 141.2 0 50.4 107.7 50.4 0 0 0 0
and
wheat
flour
Coars 3034 3890 273.2 764.1 730.2 191.5 112.8 167 82.1 180.9 98.6 46 0 0 0 0
e
grains
Rice 303 722 32.6 25.6 26.4 32.3 30.3 24.9 21.8 1.4 0 0 0 0 0 0
Olive 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
oil
Sugar 621 390 7.8 0 0 0 0 0 0 0 0 0 0 0 0 0

(5)
Butter 3790 5,250 779 794.8 470.1 372.7 482.8 292.5 325.9 466.9 442.8 470.1 441.3 0 0 0
and
butter
oil
Skimm 2562 5,518 310.5 285.7 333.4 337.9 324.9 545.1 618.4 519.2 292.3 239.2 0 54.3 42.1 0
ed
milk
powde
r
Page 19 of 74
Produ 1995– 1996– 1997– 1998– 1999– 2000– 2001– 2002– 2003– 2004– 2005– 2006– 2007– 2008– 2009– 2010–
cts 6 7 8 9 2000 1 2 3 4 5 6 7 8 9 10 11
Chees 1409 1701 116.4 191.7 337.8 26.2 36.7 163 143.2 66 14.6 0 0 25.8 32.3 0
e
Other 4376 2713 176 149.1 235.8 238 188.6 267.7 239.1 157.1 142.6 108.8 0 24.7 23.9 0
milk
produ
cts
Beef 7276 7320 756.4 758.9 905.4 410.1 402.2 596.2 630.8 408.8 278.4 130.3 2 96.1 97.3 0
Pig 15065 1.5267 840.7 642.9 726.1 383.3 388.4 285.1 274.1 240 121 54.1 31.5 29.2 30.5 66.5
meat
Poultr 100 711 74.4 356.1 243 33.8 20 14.6 43.9 18.6 19.5 18.3 125.7 39.9 17 19
y meat
Eggs 1159 730 76.1 89.7 75.1 56.8 60.2 90.5 87.7 90.3 58.9 96.7 96.9 88.2 98.8 74.6
Wine 129 69 13 17.3 14.1 8.1 6 5.1 3.4 6.4 6.3 4.5 4.4 2.8 1.9 3.4
Fruit 511 596 37.2 29.3 26.2 23.7 22.9 17.9 15 20.7 17.8 17.9 14.6 0 0 0
and
vegeta
bles,
fresh
Page 20 of 74
Produ 1995– 1996– 1997– 1998– 1999– 2000– 2001– 2002– 2003– 2004– 2005– 2006– 2007– 2008– 2009– 2010–
cts 6 7 8 9 2000 1 2 3 4 5 6 7 8 9 10 11
(p. 704 618 26 31.6 37.2 27 20.8 15.3 15.7 13.4 20.2 14.5 4.4 0 0 0
239)
Raw
tobacc
o
Alcoho 113 102 5.7 4.5 5.5 3.9 3.6 3.1 3.9 3.6 3.9 4.4 2.4 0 0 0
l
Incorp 182 34 0 0 0 0 0 0 0 0 0 0 0 0 0 0
orated
produ
cts
Total 47944. 40384. 4361.3 5336.2 5613.7 2763.2 2573.1 3133.2 2961.6 2632.9 1920.5 1462 849.9 450.8 376.4 173.8
export 0 5
subsid
ies
Page 21 of 74
(p.240)
Page 22 of 74
Table 6.6 United States: Outlays on Export Subsidies (in US$ million)
Produ 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
cts
Coars 0.0 0.0 1.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
e
grains
Butter 0.0 0.0 8.9 0.5 7.3 0.0 0.0 15.5 0.0 0.0 0.0 0.0 0.0 11.3 2.1 0.0
&
Butter
oil
Skimm 0.0 0.1 88.8 133.3 45.3 6.7 53.7 14.8 1.8 0.0 0.0 0.0 0.0 7.2 0.0 0.0
ed
milk
powde
r
Chees 0.0 0.0 3.9 4.2 5.6 1.8 0.9 1.2 0.9 0.0 0.0 0.0 0.0 0.3 0.2 0.0
e
Other 0.0 0.0 8.6 7.4 20.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
milk
produ
cts
Poultr 0.0 0.0 0.9 1.4 1.6 6.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
y meat
Page 23 of 74
Produ 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
cts
Uplan 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 203.6 276.5 266.9 9.4 0.0 0.0 0.0 0.0
d
cotton
Page 24 of 74
(p.241) subsidies to dispose of its surplus, the US was using food aid for the same
purpose.
Use of export subsidies by the EU has decreased drastically during the period
for which data have been provided by this WTO member. In 1995, export
subsidies provided by the EU totalled €48 billion (nearly US$ 63 billion). Beef
exporters were the largest beneficiaries of these subsidies. Within a period of
five years, EU export subsidies were reduced to less than €3 billion (US$ 2.5
billion). In 2009–10, the latest year for which data on export subsidies have been
provided by the EU, export subsidies were €0.17 billion (US$ 0.2 billion). This
implies that member states of the EU were no longer using export subsidies as a
major instrument of agricultural policy.
Surplus disposal had become an easy option for the WTO members in the
absence of an effective discipline on food aid. Data presented in Table 6.7 shows
the extent to which the US has used food aid as an instrument for disposing of
its farm output. Food aid in the form of wheat, rice, and vegetable oils increased
substantially during the period 1995 to 1999. Although, food aid in form of
wheat decreased in subsequent years, aid in the form of coarse grains and rice
increased.
Authorization for food aid programmes of the US have historically been given by
the Farm Acts. These programmes are primarily funded through the US
Department of Agriculture (USDA) and are administered either by the Foreign
Agricultural Service (FAS) of the USDA or by the US Agency for International
Development (USAID).
Besides, the food aid programmes, the Farm Act also includes provisions for
export credit guarantee for commercial financing of US agricultural exports.
These programmes, supported by the Commodity Credit Corporation (CCC),
encourage exporters to buyers in countries where credit is necessary to
maintain or increase US sales, but where financing may not be available without
CCC guarantees.
Table 6.8 provides data on the extent of support provided under the above
mentioned programmes. Support for the food aid programmes peaked in 1999 at
about US$ 3.5 billion and has remained below US$ 3 billion in the period
thereafter. The export enhancement programmes, which largely comprise of
export credit programmes, fell to less than US$ 1.5 billion in 2007, but have
increased steeply thereafter to US$ 5.4 billion in 2012.
What is clear from the above discussion on export competition is that the Doha
Round would have to put in place effective disciplines (p.242)
Page 25 of 74
Table 6.7 Food Aid Provided by the United States
Produ Food Aid (ʹ000 tonnes)

cts
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Wheat 1531.3 14491. 1075.2 3202.2 5315.1 2364.7 3158.9 891.4 1971.5 2429.2 1478.9 1254.7 1007.0 1273.2 1228.2 98.9
4
Coars 73.6 129.5 116.2 111.7 78.2 45.3 104.4 71.7 259.6 392.8 481.4 416.1 832.9 830.9 510.0 0.5
e
grains
Rice 149.7 188.5 111.3 382.7 935.6 303.3 255.9 414.6 205.5 186.0 89.0 97.1 118.9 63.8 198.0 25.4
Vegeta 173.6 175.1 157.3 0.0 1440.4 365.3 416.1 356.5 246.3 285.6 244.8 220.3 191.1 178.6 191.7 3.2
ble
oils
Page 26 of 74
(p.243) on export credit. The significance of export subsidies and food aid seems to
have decreased over time for the major users of these policy instruments, namely, the
US and the EU.
Market Access Commitments
Although the Uruguay Round of negotiations took a major step to rein in the
tariffs, it remains only as the first small step. Two issues can be identified for the
relatively slow progress that has been seen in market access reform. The first is
that tariffs in agricultural sector have remained at relatively high levels in many
WTO Members, even after the enforcement of the AoA discipline. The second
factor relates to the tardy implementation of the tariff rate quotas, which has
been a problem area as far as the AoA discipline is concerned.
Tariffs:
Three sets of concerns regarding the tariff structures that have emerged after
the Uruguay Round of negotiations need to be flagged. The first is problem of
tariff peaks and high tariffs, and the second is use of non–ad valorem (NAV)
tariffs, that is, specific and mixed tariffs, as opposed to ad valorem tariffs, which
makes the tariff regime less transparent. The third problem relates to the
existence of tariff escalation, particularly on products of export interest to
developing countries. The following discussion provides the details.
High tariffs and tariff peaks arose from the manner in which tariffication of
NTBs was carried out at the end of the Uruguay Round. In this process, WTO
members overestimated the levels of protection provided by NTBs in order to
increase their applicable tariff rate resulting from tariffication. The extent of the
problems caused by such ‘dirty tariffication’ is captured in the discussion as
follows.
Tariff peaks are usually defined as tariffs that are above 20 per cent by the
World Bank and the OECD.13 Among WTO members, Japan used high tariffs to
protect rice; Switzerland uses them for protecting livestock, Iceland for foliage,
and Norway for flour products. Tariff peaks in the EU and US are substantially
lower than those maintained by countries referred (ICTSD 2009)earlier.
However, the US maintains tariff peaks in tobacco (350 per cent), groundnuts
(192 per cent), and sugar (50 per cent)—products of significant export interest
to developing countries. The EU, on the other hand, has tariff peaks (p.244)
Page 27 of 74
Table 6.8 Agricultural Export and Food Aid Programmes of the United States Authorized under the Farm Acts (US$
million)
Progr 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
amme
s
Expor 339 5 0 2 1 2 7 0 0 0 0 0 0
t
Enha
ncem
ent
Progr
amme
Dairy 140 20 121 110 145 78 8 55 32 3 0 0 0

Expor
t
Incen
tive
Mark 110 90 90 90 90 90 90 100 110 125 140 200 200 200 200 200 200 200
et
Acces
s
Progr
amme
Page 28 of 74
Progr 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
amme
s
Forei 0 0 0 0 28 28 28 34 34 34 34 34 34 34 34 34 34 34
gn
Mark
et
Devel
opme
nt
Progr
amme
Emer 10 10 10 4 10 10 9 10 10
ging
Mark
et
Progr
amme
CCC 2,921 3,230 3,876 4,037 3,045 3,082 3,227 3,388 3,223 3,716 2,625 1,363 1,445 3,115 5,357 3,090 4,123 5,400
Expor
t
Credi
t
Guar
antee
s
Page 29 of 74
Progr 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
amme
s
P.L. 1.286 1.207 1.054 1.138 1.808 1.293 1.086 1.270 1,960 1,809 2,115 1,829 1,787
480
Food
Aid
Inter 0 0 0 0 0 0 0 0 100 50 90 97 99
natio
nal
Food
for
Educ
ation
and
Child
Nutri
tion
Progr
amme
Secti 4 84 2 0 1,297 1,130 1,103 773 213 173 76 20 0

on
416(b
)1
Page 30 of 74
Progr 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
amme
s
Food 146 84 91 111 101 108 104 126 137 138 122 131 147
for
Progr
ess
Forei 159 167 191 209 178 183 201 198 195 197 206 246 0
gn
Agric
ultura
l
Servi
ce
Qualit 2 2 2 1 1.4 2 2 2 3
y
Samp
les
Progr
amme
Page 31 of 74
Progr 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
amme
s
Techn 2 2 2 1 4 7 8 9 9
ical
Assist
ance
for
Speci
alty
Crops
Progr
amme
Total 5,105 4,887 5,425 5,697 6,693 5,994 5,854 5,944 6,004 6,259 5,422 3,934 3,718 3,364 5,610 3,343 4,378 5,656
.4
Note: This programme provides for overseas donations of surplus commodities acquired by the Commodity Credit Corporation (CCC).
Source: Hanrahan (2009).
Page 32 of 74
(p.245) (p.246) on tobacco (75 per cent), preparations of vegetables, fruit and nuts
(34 per cent), and processed fish (25 per cent), which are again products in which
developing countries have export interests.14
The problem of tariff peaks and high tariffs seems to have been largely
understated since tariffs on a large number of tariff lines in some of the more
prominent countries are expressed in NAV tariffs. Table 6.9 shows that
Switzerland, Norway, EU members, and the US have relatively high shares of
NAV tariffs in their bound tariffs. In case of Switzerland the share of NAVs is as
high as 89 per cent. Thailand, which has almost 44 per cent of its bound tariffs
in the forms of NAVs, is the only exception among the developing countries.
NAV tariffs give rise to two sets of problems. First, NAVs often conceal levels of
high tariff protection that WHO members have provided. And secondly, NAVs
introduce an element of uncertainty in the tariff regime as the rates of duties are
dependent on the prices of the products in question.
The extent to which NAV tariffs have concealed the actual level of protection is
indicated in Table 6.10 where data on the ad valorem
Table 6.9 Use of Non–Ad Valorem Tariffs by Select WTO Members
Member Total number of tariff lines Of which: Non–ad

valorem
Total number Percentage
Australia 725 14 1.9
Canada 1,341 404 30.1
EC(15) 2,205 1,010 45.8
Iceland 1,604 363 22.6
India 697 2 0.3
Japan 1,344 247 18.4
Korea, Republic of 1,500 68 4.5
Malaysia 1,320 346 26.2
Mexico 1,083 83 7.7
New Zealand 1,004 10 1.0
Norway 1,060 722 68.1
Switzerland 2,179 1,940 89.0
Thailand 774 339 43.8
United State 1,777 755 42.5
Page 33 of 74
Member Total number of tariff lines Of which: Non–ad

valorem
Total number Percentage
TOTAL (for all WTO 38,897 7,977 20.5

Members)
Source: Author’s calculations from the notifications submitted by
WTO member countries.
(p.247)
Table 6.10 Comparison of Ad Valorem Equivalents of Non–Ad

Valorem Tariffs with Average Bound Tariffs
WTO Members Average AVEs of NAV Tariffs Average Bound Tariffs
Switzerland 124.0 57.2
US 14.4 4.8
EU 15.9 41.3
equivalents (AVEs) of the NAVs for the US, Switzerland, and the members of the EU
are provided. The table shows that for each of these three countries, the average AVEs
of NAV tariffs is substantially higher than average of the bound tariffs for all
agricultural products taken together. While for the US and the EU, the average AVEs of
NAV tariffs is nearly three times higher than the average bound tariffs, in case of
Switzerland, the average AVEs of NAVs was estimated at 124 per cent in 2007, which
is the highest for all WHO members. Table 6.11 provides examples of products in which
AVEs of NAV tariffs were found to be very high for the previously mentioned three
countries.
A study conducted by UNCTAD Secretariat reported that among the developed
countries, the EU and Japan, for example, have steep tariff escalation in coffee,
tea and spices, and for fruits and vegetables. In these two markets, the tariffs
increase from averages of 1.6 per cent and 0.1 per cent for the raw materials to
20 per cent and 8 per cent for the final product in the case of coffee, tea and
spices, and from 7.1 per cent and 8.1 per cent to 17.9 per cent and 19.2 per cent
in the case of fruit and vegetables. The study reports that tariff structure shows
a bias against products exported by developing countries, which are often
commodity-based items (UNCTAD 2002).
Besides high tariffs and tariff peaks, agricultural markets are protected using
tariff rate quotas. This instrument was introduced to improve market access
possibilities when it was realized that countries that were converting their NTBs
into tariffs were putting exceptionally high levels of tariffs as elucidated.
Page 34 of 74
Tariff Rate Quotas (TRQs):
Tables 6.12 to 6.14 provide data on the use of tariff rate quotas by individual
countries. Thirty-six members (p.248)
Table 6.11 Evidence of High Ad Valorem Equivalents of Non–Ad

Valorem Tariffs
Products Tariffs (%)
Switzerland
Asses, mules and hinnies 11327
Sheep 3395
Cuts and offal, frozen 1473
Cuts and offal, frozen 1421
Other, frozen 1308
Carrots and turnips 1237
Grape juice (including grape must) 668
Dairy spreads 661
Butter 583
Rye 415
Wheat or meslin flour 378
Rape or colza seeds, whether or not broken 240
Copra 214
United States
Tobacco refuse 439.9
Sour cream, 139.1
Butter substitute dairy spreads 121.8
Modified whey 111.7
Fats and oils derived from milk 109.4
Cocoa powder 104.4
Dairy products of nat. milk constituents (except protein conc.) 98.9
European Union
Fresh or chilled edible offal of bovine animals 407.8
Buttermilk 264.3
Page 35 of 74
Products Tariffs (%)
Raw cane sugar (excl. added flavouring or colouring) 229.9
Raw beet sugar (excl. added flavouring or colouring) 229.9
Grape juice 199.2
Frozen bovine cuts 146.4
Rice in the husk 84.6

(EU-27 taken as a single entity) included a total of 1,434 individual tariff quotas in
their schedules of commitments in 1995, which came down to less than 1,100 in 2011.
EU and Norway were the two largest users of this instrument.
As mentioned earlier, TRQs were expected to enhance market access prospects
in agriculture by providing a ‘tunnel through the (p.249)
Table 6.12 Number of Applicable Tariff Quotas, 1995–2011
Years Total Number of Scheduled Tariff Quotas
1995 1,259
1996 1,273
1997 1,367
1998 1,364
1999 1,376
2000 1,380
2001 1,394
2002 1,430
2003 1,434
2004 1,434
2005 1,174
2006 1,171
2007 1,089
2008 1,090
2009 1,093
2010 1,093
Page 36 of 74
Years Total Number of Scheduled Tariff Quotas
2011 1,094
Sources: Author’s calculations from the notifications submitted
by WTO member countries.
Page 37 of 74
Table 6.13 Total Number of Scheduled TRQs by Year and Member
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Norway 232 232 232 232 232 232 232 232 232 232
European 416 420 420 165 165 92 92 92 92 92

Union
Iceland 90 90 90 90 90 90 90 90 90 90
Colombia 67 67 67 67 67 67 67 67 67 67
Korea 63 63 63 63 63 63 63 63 63 63
Venezuela 62 62 62 62 62 62 62 62 62 62
USA 54 54 54 54 54 54 54 54 54 54
South 53 53 53 53 53 53 53 53 53 53
Africa
Barbados 36 36 36 36 36 36 36 36 36 36
Switzerlan 28 28 28 28 28 28 28 28 28 28
d
Sources: Author’s calculations from the notifications submitted by WTO member countries.
Page 38 of 74
tariff wall’. Implementation of the TRQs threw up two sets of issues, which, when read
together, meant that the objective of introducing TRQs was not realized. The first was
that the number of applicable tariff quotas increased by almost 14 per cent between
within a decade (p.250)
Page 39 of 74
Table 6.14 Simple Average Fill Rates by Member, 2002–11 (in per cent)
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Norway 54 54 54 56 62 55 60 59 59 67
European 52 52 51 41 45 43 37 64 N.A. N.A.

Union
Iceland 73 72 75 76 75 78 75 77 75 73
Colombia 82 77 80 76 79 86 85 87 83 N.A.
Korea 62 65 69 62 64 61 56 51 N.A. N.A.
Venezuela N.A. N.A. N.A. 53 53 55 56 N.A. N.A. N.A.
USA 63 62 61 58 56 54 53 55 46 46
South 68 78 75 76 81 78 78 N.A. N.A. N.A.

Africa
Barbados N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A.
Switzerlan 89 90 89 91 92 93 95 95 93 90
d
Page 40 of 74
of the implementation of AoA (WTO 2006). And, the second, TRQs had low fill rates. In
other words, a sizeable proportion of the quotas remained unfilled. For all commodities
taken together, the average fill rate was 66 per cent in 1995 and in 2010 it had fallen
to 60 per cent. Among the major countries using TRQs, the fill rates had deteriorated
sharply for the EU and the US, although the former had recorded considerable
improvement for 2009, the most recent year for which data are available.
It would appear that TRQs were used by the WHO members to justify the use of
higher tariff protection for commodities in which they had strong domestic
interests. And, while they obtained the rights to use higher tariffs in these
commodities, they did not provide the market access they were required to
provide through in-quota imports by leaving large unfilled quotas.
The foregoing clearly points to the fact that the AoA has had two inherent
limitations. In the first instance, the agreement provided a set of disciplines that
addressed only partially the problem of distortions prevalent in the markets for
agricultural commodities, arising from the use of subsides and high tariffs.
Secondly, and perhaps the more important dimension was the tardy
implementation of their commitments by the larger players like the US and the
EU. Both these dimensions have been focused during the negotiations for the
review of the AoA, as would be elaborated further.
(p.251) Doha Negotiations on Agriculture: Rebalancing the AoA

The mandate for agriculture negotiations in the Doha Round as spelt out in the
Ministerial Declaration has the following elements: (a) substantial improvements
in market access; (b) reductions of, with a view to phasing out, all forms of
export subsidies; and (c) substantial reductions in trade-distorting domestic
support. It was further indicated that special and differential treatment for
developing countries would be an integral part of all elements of the
negotiations and would be embodied in the schedules of concessions and
commitments and as appropriate in the rules and disciplines to be negotiated, so
as to be operationally effective and to enable developing countries to effectively
take account of their development needs, including food security and rural
development.
Although the mandate for the review of the AoA seems quite comprehensive,
there are two sets of lacunae that ought to be pointed out. First, the review of
the subsidies discipline would be made from the point of view of removing only
the so-called ‘trade-distorting’ forms of domestic support. As was pointed out in
an earlier discussion, the distinction between the ‘trade-distorting’ and the ‘non-
trade distorting’ forms of domestic support that the AoA has made are not based
on sound economic reasoning. As a result, some forms of support that have the
potential of causing market distortions are allowed to be used in an unbridled
manner. The negotiations therefore needed to address this problem before
considering the quantum of reduction of domestic support.
Page 41 of 74
The second lacuna in the mandate arises in respect of market access, which does
not take on board the problem of growing incidence of NTBs in agricultural
trade.15 This lacuna is particularly galling in light of the fact that the Doha
mandate provides that negotiations on market access for non-agricultural
products would include NTBs. How critical this omission can be from the point
of view of reforming agricultural markets would be indicated in a later section.
Role of Developing Country Coalitions in the Agriculture Negotiations

One of the features of the negotiations on agriculture has been the strong
coalition building between the developing countries. Faced (p.252) with a
situation where the two dominant players in the global agricultural markets,
namely the US and the EU, were reluctant to reform their domestic policies that
provided high subsidies to their farm sector, major developing countries led by
Brazil and India formed the G-20 coalition16 that played a determining role in
the negotiating dynamics. The base paper, which marked the emergence of G-20
(WTO 2003c), emphasized that the negotiations in the Doha Round should
establish a fair and market-oriented trading system through fundamental
reforms in agriculture. The interventions made by this group have had two
substantive dimensions. One, the market distortions created by the subsidies’
regime in some of the more prominent members of the WTO has to be reduced
and eventually removed, and two, special and differential treatment for
developing countries should be an integral part of the negotiations, and that
non-trade concerns should be taken into account.
The latter element, in view of the G-20, was to be addressed in the revised AoA
through two mechanisms. First, products that are critical for realizing the
objectives of food security, rural livelihoods and rural development, the so-called
Special Products (SPs), would not be subjected to any tariff cuts. Second,
introduction of a Special Safeguard Mechanism (SSM) aimed at allowing
developing countries to counter anticipated or actual import surges. The SPs
and the SSM were seen by the developing countries as measures that would help
them in addressing the twin problems of food security and livelihood concerns in
the face of mounting pressures to lower agricultural tariffs.
Support for the SPs and SSM was lent by another group of developing countries,
the G-33,17 which has focused solely on the need to include these two
mechanisms in the AoA. The G-33 argued that developing countries must have
the right to designate as SPs ‘at least 20 per cent of its agricultural tariff lines’
guided by an ‘illustrative, non-exhaustive, non-prescriptive, and non-cumulative
list of indicators’ (WTO 2006d). The treatment of the SPs was spelt out as
follows: (a) at least 50 per cent of the tariff lines designated as SPs by any
developing country member would not be subject to any tariff reduction
commitment; (b) 25 per cent of the tariff lines designated as SPs would be
subjected to 5 per cent reduction on bound import tariff rates; and (c) the
remaining tariff lines would be subjected to reduction on bound import tariff
Page 42 of 74
rates of not more than 10 per cent. As regards SSM, both G-20 and G-33 argued
that developing countries must have the right to (p.253)
Table 6.15 US Product-specific Support and Proposed Caps (in

US$ billion)
Products Subsidies Granted in
2006 2007 Average 1995–2004
Dairy 5044.1 5016.5 4828.0
Sugar 1279.6 1235.8 1137.1
Cotton 1365.2 207.9 1150.9
Corn 18.6 17.4 1189.0
Wool 7.4 6.7 10.2
Soybeans 64.8 5.2 1200.6
Rice 2.9 3.6 321.2
Peanuts 18.3 2.6 257.0
Mohair 1.0 0.8 3.2
Honey 0.1 0.1 3.2
Barley 9.5 0 30.4
Sorghum 4.6 0 46.0
Oats 0 0 10.6
Wheat 2.3 0 279.6

Table 6.16 EC Product-specific Support and Proposed Caps (in

euro billion)
2004/05 2005/06 Average 1995–2000
Common wheat 1,842.4 1,707.1 2783.6
Barley 2,081.4 1,800.1 2509.1
Maize 499.7 478.2 904.9
Rice 18.7 17.9 463.7
Dried fodder 223.2 150.1 304.7
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2004/05 2005/06 Average 1995–2000
Sugar 6,969.1 6,673.6 5852.0
Olive oil 2,555.5 1909.9
Skimmed milk powder 1,215.7 995.5 1561.5
Butter 4,084.1 4,077.3 4287.6
Beef −1,114.3 −1,066.5 13154.8
Tobacco 917.4 811.0 962.4
Apples 2,769.3 2,614.2 2155.0
Pears 658.7 637.4 622.2
Peaches/nectarines 550.1 558.1 439.5
Cucumbers 748.2 720.4 567.7
Tomatoes 1642.9 1865.8 3563.0
Wine 773.7 960.0 1711.1
Cotton 725.4 739.5 749.0

(p.254) impose additional duty for guarding against actual or potential surges in
imports in respect of any agricultural product.
The two coalitions of developing countries have had a substantial impact on the
negotiating dynamics. Their key proposals, particularly in respect of the SPs and
SSM, have become integral part of the negotiations, although there is
considerable disagreement among WHO members as to how the SSM is to be
designed.
Agricultural negotiations have made very slow progress given the wide range of
differences between the major protagonists. However, the successive Chairs of
the Committee on Agriculture have tried to steer the negotiations so as to broker
a deal. The latest in this process was the draft modalities that were tabled by
then Chairman of the Committee on Agriculture, Crawford Falconer in July 2008.
A revised version of these modalities is currently being considered by the WHO
members for sealing a deal on agriculture (WTO 2008d).
Key Elements of the Falconer Modalities

The Falconer modalities provide a comprehensive framework for revising the
AoA. However, the modalities seem to be falling short of realizing the overall
Page 44 of 74
objectives of the agriculture negotiations, as set out in the negotiating mandate

in the Doha Ministerial Conference, as we shall indicate.
Two sets of views can be expressed in response to the disciplines on farm

support proposed in the framework text. The first is that the proposed discipline
on domestic support and export competition would be able to rein in the
subsidies to a considerable extent on two counts. One, the proposed discipline
on domestic support not only seeks substantial reduction in the Amber Box
subsidies, but also extends the discipline to cover the Blue Box measures that
were hitherto left outside the AoA discipline. Two, there has been an agreement
on the need to eliminate export subsidies and some forms of export credit, which
is a major step forward given that the EU has been refusing to do so thus far.
The second, which is the critical view on the proposed disciplines on farm
support, is that the framework would not be effective in reining in the subsidies.
The lack of discipline in respect of the Green Box measures, which contain
several elements that can distort markets, would render the proposed domestic
support discipline largely ineffective. We had indicated earlier that the Green
Box measures account (p.255) for nearly 90 per cent of US domestic support
spending, while in case of the EU, the corresponding figure is nearly 50 per cent.
In the area of market access, both developing and developed countries are
required to reduce their current bound tariffs using a tiered formula. For the
developing countries, Falconer proposed a 10-year period over which tariffs
would have to be reduced, while for the developed countries, the period
available would be 5 years. Following this approach, the overall minimum
average cut of developed and developing country bound tariffs would be 54 per
cent and 36 per cent, respectively.
In an earlier discussion, we had indicated that tariff escalation was a problem

that was affecting the export interests of developing countries. Falconer’s
proposals address this issue by proposing that instead of taking the cut that
would otherwise apply to final bound tariffs in the band to which a processed
product belongs, the processed product would take the cut that would,
according to the tiered formula, otherwise be applicable to the tariffs that fall in
the next highest band. This formula would be applicable to an identified list of
products (WTO 2008d).
Falconer has allowed developed countries to provide additional dose of

protection to their ‘sensitive products’. No criteria has been proposed for
identifying these sensitive products, which, according to the proposals, can be
up to 4 per cent of agricultural tariff lines of the developed country members.
Tariff reduction on the ‘sensitive products’ would be lower than for the other
products, and the extent of deviation of the cuts can be between one-third and
two-thirds of that for the other products. Developing countries can also
designate up to 5.3 per cent of their agricultural tariff lines as ‘sensitive’.
Page 45 of 74
However, for these products, there has to be ‘substantial improvement’ in

market access, and so the smaller tariff cuts would have to be compensated by
providing tariff quotas for improving market access prospects.
According to the Falconer proposals, developing countries would be able to ‘self

designate’ 12 per cent of agricultural tariff lines as SPs guided by indicators
based on the criteria of food security, livelihood security, and rural development.
The average tariff cut on SPs is proposed as 11 per cent, including 5 per cent of
total tariff lines at zero cuts. This proposal falls short of the expectations of the
major developing country groupings like the G-33, which had insisted that they
should be able to ‘self designate’ a minimum of 20 per cent of tariff lines as SPs,
with at least half of these being subjected to zero tariff cuts.
(p.256) SSM has been among the most contentious issues in the agriculture
negotiations with almost every aspect of the mechanism being put under intense
scanner. Discussions on the design of an SSM have focused on three issues: (a)
coverage of products; (b) the trigger, that is, when the mechanism would be
applicable; (c) the size of the remedy, that is, the magnitude of safeguard duties
to be allowed; and (d) duration of the remedy and whether safeguard duties
could be applied in consecutive years.
Falconer’s proposals suggested that all agricultural products can be covered

under the SSM. This proposal is in line with the position held by the G-20 and
G-33 countries, as mentioned in an earlier discussion. The coverage of products
under SSM has divided the membership not only because developed and the
developing countries have differed, but because some of the developing
countries have also differed with the proposal to include all agricultural
products (WTO 2010).
Way Forward
The focus of the agriculture negotiations has been on the issues on which
developing countries have sought an added dose of protection for the vulnerable
sections of the farming communities in view of the uncertainties prevailing in
the global markets for agricultural commodities. That developing countries have
steadfastly stood by their position has a strong basis. The post–Uruguay Round
experience showed that the AoA was unable to reduce policy distortions: in fact,
the farm subsidies granted by some of the large subsidisers had increased and
market access opportunities remained stymied because of high levels of tariffs.
It would be interesting to note here that agriculture negotiations were mandated

to provide a fillip to the process of reforms of global agricultural markets by
reducing the trade distorting support and improving market access
opportunities. However, the negotiating dynamics that have been captured in
this chapter have shown that the reform of farm subsidies has been rendered a
non-starter as the largest provider of farm subsidies, namely, the US, would
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remain untouched if the Falconer proposals are accepted. Thus, like the Uruguay
Round, the Doha Round is also likely to provide an ineffective framework on
agricultural subsidies.
(p.257) Non-agricultural Market Access

Non-agricultural market access (NAMA) covers the areas which were the
traditional remit of GATT. As the term suggests, NAMA includes all products not
figuring as agricultural items. As mentioned earlier, ‘agriculture’ excludes
several tropical products like rubber and jute. These products and marine
products, besides industrial products, are included as NAMA.
Assessment of Tariff Reductions on Non-agricultural Products in the Uruguay Round

One of the features of the Uruguay Round of multilateral trade negotiations
(MTNs) was the comprehensive tariff negotiations that were conducted for the
first time under the GATT. This was in keeping with the negotiating mandate
adopted at the commencement of the negotiations which laid emphasis on
‘expansion of the scope of tariff concessions among all participants’(emphasis
added).
Although the Uruguay Round of negotiations were aimed at reducing the level of
tariffs in the negotiating countries by about a third of those existing in the pre–
Uruguay Round phase, the tariff offers made by countries display wide
differences. These differences had risen due to several factors. First, countries
had widely varying levels of tariffs bindings at the commencement of the
Uruguay Round of negotiations. In this respect there was considerable
difference between the tariff structure of developed and developing countries. In
the ultimate tariff offers, the previously mentioned initial conditions played an
important role in determining the commitments of tariff reductions which
individual countries had agreed to undertake.
Assessments made by the WTO Secretariat (WTO 2001a) show that the Uruguay
Round of negotiations produced significant improvements in market access for
non-agricultural products. This happened on account of several factors. In the
first place, both developing and developed countries agreed to significantly
increase the share of their imports of industrial products whose tariff rates are
bound. For developed countries, the share of non-agricultural tariff lines that
were bound increased from 78 per cent to 99 per cent. In case of developing
countries, the increase in coverage was significantly more; it rose from 21 per
cent to 73 per cent.
(p.258) Second, the average tariff on developed countries’ imports of non-

agricultural products was brought down by 40 per cent on imports from all
sources and by 37 per cent on imports from developing countries. For
developing countries, the reductions averaged 25 per cent on non-agricultural
products imported from developed countries, and 21 per cent on non-
agricultural products imported from developing countries. These tariff
Page 47 of 74
reductions, it should be noted, were negotiated line by line, rather than through
the use of a formula approach. Third, substantial progress was made with regard
to NTBs. Voluntary export restraints (VERs) are now prohibited and the
Multifibre Arrangement was phased out by 2005 (WTO 2001a).
Non-agricultural Market Access in the Doha Round

The Doha negotiations in the area of NAMA are being conducted with the
mandate to ‘reduce or as appropriate eliminate tariffs, including the reduction
or elimination of tariff peaks, high tariffs, and tariff escalation, as well as NTBs,
in particular on products of export interest to developing countries’.
Furthermore, WHO members had agreed that the negotiations would ‘take fully
into account the special needs and interests of developing and least developed
country participants, including through less than full reciprocity in reduction
commitments…’ (WTO 2001d).
In 2003, India, along with nine developing countries proposed an approach to

tariff cuts in keeping with the Doha mandate (WTO 2003a). These countries
proposed that a linear formula prescribing a higher percentage reduction for
individual tariff lines in respect of developed countries and a lower percentage
average reduction set for developing countries with minimum cuts on individual
tariff lines would be the most appropriate. Additionally, they proposed that
developing countries may also be given some flexibility to decide on the level of
binding of individual tariff lines, on the understanding that the overall
percentage reduction as stipulated for them is achieved.
In the period since, market access negotiations involving non-agricultural

products have witnessed a gradual softening of the developing country positions
in the face of a strident postion taken by the US, Canada, and the EU. These
countries set very high ambitions for tariff reduction across all countries, with
the exception of the least developed countries (LDCs). The approach of these
countries (p.259) (also called the ‘tariff harmonization’ approach) was to
ensure that tariffs on non-agricultural products are brought below a particular
threshold (better known as the ‘coefficient’) using the ‘Swiss Formula’. In
addition, they had argued for reducing the flexibilities available for developing
countries.
In 2004, an agreement was reached among the WHO members as a part of the
‘July framework’ regarding the adoption of a non-linear approach for reducing
tariff cuts in non-agricultural products. Although the ‘July framework’ said
nothing definitive about the tariff reduction formula, it was significant in that
the developing countries were agreeable to effect steeper cuts in their tariffs.
But these countries could argue that they were able to get a commitment from
the WHO membership for the inclusion of two sets of flexibilities (the so-called
Paragraph 8 flexibilities) concerning special and differential treatment for
developing countries. One, developing countries could apply less than formula
Page 48 of 74
cuts to up to 10 per cent of the tariff lines, provided that these tariff lines did not
exceed 10 per cent of their respective import value. And, two, developing
countries could keep up to 5 per cent of their tariff lines unbound, subject to the
condition that these tariff lines did not exceed 5 per cent of their respective
import value.
In April 2005, India, along with Argentina and Brazil proposed that the basis for
tariff reduction should be a non-linear formula, which would be dependent on
the average of the final bound tariffs of each of the WHO members (the so-called
ABI proposal). The extent of reduction of the tariffs would be contingent upon a
coefficient that was to be agreed upon during the negotiations. Subsequently,
however, a large number of developing countries, including Pakistan, have
proposed that a simple ‘Swiss Formula’ with distinct coefficients for the
developing and the developed countries be adopted as the basis for tariff
reductions.
By the time the Hong Kong Ministerial Conference was convened, the
preference for the ‘Swiss formula’ among a large cross-section of the WHO
membership was becoming quite evident. This was reflected in the Ministerial
Declaration which reported the agreement among the WHO members to adopt ‘a
Swiss Formula with coefficients’, which, among other things, ‘would take fully
into account the special needs and interests of developing countries, including
through less than full reciprocity in reduction commitments’. However,
according to India the language adopted in respect of the tariff reduction
approach (p.260) preserved ‘all the proposals on the table, including the one
submitted by Argentina, Brazil, and India (ABI)’.
This apparent convergence on the tariff reduction approach in the NAMA

negotiations notwithstanding, there remain some differences among the WHO
members on the approach to tariff reductions. These differences have been
articulated by the Chairman of the NAMA, Don Stephenson, in the draft
modalities that he has submitted on 22 June. As regards the formula for tariff
reductions, the Stephenson draft states, ‘there are two Swiss formula options on
the table’: ‘the simple Swiss formula with two coefficients (one for developed
and one for developing country Members) and the so-called ABI formula’. More
importantly, however, the Chairman adds, ‘there is broader and stronger support
for the simple Swiss formula with two coefficients and that the discussions
should focus on this structure as the one more likely to attract a consensus’. This
statement by the NAMA Chairman puts serious doubts about the future of the
ABI formula.
An important development in the negotiations on NAMA is the formation of the

NAMA-11 group of developing countries before the Hong Kong Ministerial
Conference. These countries have emphasized the need to ‘achieve fair,
Page 49 of 74
balanced and development friendly modalities in NAMA’ (WTO 2006e). The key
issues for the NAMA-11, as articulated in the submission include:
1. The development objectives of the round should be at the centre of the

negotiations. In reducing tariffs, the need for policy space to advance the
industrial development of developing countries should be respected.
2. The principles of less than full reciprocity and special and differential
treatment should be respected.
3. The flexibilities needed by developing countries to manage their
adjustment process must be fully provided for in the modalities.
The issues raised by the NAMA-11 group imply that they are faced with two sets
of challenges. In the first place, they would have to ensure that the modalities
that are agreed on must reflect the ambitions that they have set for themselves.
The critical element in this regard is the choice of an appropriate tariff reduction
formula that provides developing countries the policy space for pursuing their
development objectives. Second, these countries would have to negotiate
adequate (p.261) levels of flexibilities so as to reflect the broad consensus that
seems to have emerged on the Paragraph 8 flexibilities.
In 2008, the Chairman of the NAMA, Luzius Wasescha, made a series of

proposals for lowering of tariffs on non-agricultural products (WTO 2008c).
Three coefficients, namely, 20, 22, and 25, were offered to developing countries,
while for the developed countries, the coefficient offered was 8. Importantly, for
developing countries, a link between tariff reductions and flexibilities to keep
tariff lines unbound was established.
The implications of tariff cuts proposed by the NAMA Chairman on India and
Brazil are provided in Table 6.17. The table shows that if the lowest coefficient
was adopted, the overall decrease in the bound tariffs of both countries would be
relatively steep. In case of India, the reduction of bound duties by 65 per cent
would bring average bound tariffs to 12 per cent from about 34 per cent at
present. It may be argued that India can absorb this level of reduction given that
the average of India’s applied tariffs is currently around 11 per cent.
Non-tariff Barriers
Approaches to Address the Problem of NTBs
Currently, seven proposals on addressing the problem of NTBs are under active
consideration. These proposals can be divided into ‘horizontal proposals’ (having
cross-sectoral implications) and vertical or sectoral proposals. A list of these
proposals is provided in Table 6.18.
India, along with the NAMA-11 group of developing countries18 and members of
the EC had initiated the proposal which argued that the NTB issue can be
addressed by setting up an ‘NTB
Page 50 of 74
Table 6.17 Reductions in Average Bound Duties Resulting from

NAMA Chair’s Proposals (in per cent)
Coefficient India Brazil
20 64.9 60.8
22 60.4 58.6
25 57.3 55.5
Source: RIS database.
(p.262)
Table 6.18 Textual Proposals on Non-tariff Barriers
Proposal Member(s) supporting the

proposal
Negotiating Proposal on Non-tariff Barriers in Argentina

the Chemical Products and Substances Sector
Understanding on the Interpretation of the China

Agreement on Technical Barriers to Trade as
Applied to Trade in Fireworks
Understanding on the Interpretation of the China

Applied to Trade in Lighter Products
Decision on the Elimination of Non-tariff Cuba

Barriers Imposed as Unilateral Trade Measures
Understanding on the Interpretation of the EU

Applied to Trade in Electronics
Revised Submission on Export Taxes EU
Understanding on the Interpretation of the European Communities,

Agreement on Technical Barriers to Trade with Sri Lanka, and the United
respect to the Labelling of Textiles, Clothing, States
Footwear, and Travel Goods
Protocol on Transparency in Export Licensing to Japan; the Separate

the General Agreement on Tariffs and Trade Customs Territory of
1994 Taiwan, Penghu, Kinmen
and Matsu, and the United
States
Decision on Non-tariff Barriers Affecting New Zealand

Forestry Products used in Building Construction
Page 51 of 74
Proposal Member(s) supporting the

proposal
Agreement on Non-tariff Barriers Pertaining to United States

the Electrical Safety and Electromagnetic
Compatibility (Emc) of Electronic Goods
Agreement on Non-tariff Barriers Pertaining to United States

Standards, Technical Regulations, and
Conformity Assessment Procedures for
Automotive Products
Source: WTO (2008), Fourth Revision of Draft Modalities for Non-
Agricultural Market Access, Negotiating Group on Market
Access, TN/MA/W/103/Rev.3, 6 December, Annex 5.
Resolution Mechanism’ (WTO 2006b, 2006c). An expanded form of this proposal was
submitted in 2008 underlining procedures for the facilitation of solutions to NTBs
(WTO 2008b) by a larger group of countries.19
(p.263) Countries supporting this proposal have argued that the ‘NTB
Resolution Mechanism’ would be
guided by the principle of ‘good faith’ and conciliatory negotiations

wherein every member would make a concerted effort to resolve the NTB
at hand, under the guidance of a mutually agreed ‘facilitator’. Members
would be required to engage with the intention of arriving at a solution to
the NTB. It would be informal, low-key and less adversarial than the
Dispute Settlement Understanding (DSU), and without prejudice to the
rights of members under the DSU. (WTO 2006c: 2)
The key objective of the mechanism, as visualized by the NAMA-11 group would
be to find pragmatic solutions to trade effects by using expert facilitators to find
the ‘solution’. An NTB (which could include sectoral/plurilateral elements)
submitted to the resolution mechanism would require the facilitator to provide
recommendations on the solution after establishment of facts and trade effects.
It was further provided that procedure adopted would be flexible and the
‘facilitator’ would be free to choose the preferred method. The ‘facilitator’ would
consult the involved members, either individually or collectively, the WTO
Secretariat, affected industries and other experts, including from industry and
non-governmental organizations.
The US has initiated a horizontal proposal for enhancing market access

opportunities for remanufactured products. Remanufactured products, which
the US argues as being ‘as good as new’ products, are considered by several
countries, including India, as a variant of second hand goods (GoI 2009). For
Page 52 of 74
instance, India’s Foreign Trade Policy allows import of remanufactured goods

only against a licence.
The vertical proposals cover a wide range of products, including chemicals,

fireworks, lighter products, electronics, textiles and clothing, footwear, and
travel goods, forestry products, and automobile products. Besides, two proposals
have been made for clarifying the GATT/WTO rules on export licensing and
export taxes.
Sectoral Negotiations
One issue that could introduce a significant element of uncertainty in the NAMA
negotiations is the issue of sectoral zero-for-zero. This issue was included in the
negotiating process through the so-called ‘July Framework’ (WTO 2004) that
helped to put the Doha Round on track in 2004 after the failed Ministerial
Conference in Cancun.
(p.264) The sectoral negotiations were introduced as a measure that would

allow developing countries get better market access in the developed country
markets. While introducing them, WHO members agreed that the ‘sectorial [sic]
tariff component, aiming at elimination or harmonization is another key element
to achieving the objectives of paragraph 16 of the Doha Ministerial Declaration
with regard to the reduction or elimination of tariffs, in particular on products of
export interest to developing countries’ (emphasis added). Recognizing that
participation by all participants will be important in this regard, WHO members
agreed ‘to pursue its discussions…with a view to defining product coverage,
participation, and adequate provisions of flexibility for developing-country
participants’.
The Hong Kong Ministerial Conference, however, changed the entire focus of the
sectoral negotiations. While the focus was on developing countries when the
idea of sectoral negotiations was initiated, the Ministerial Declaration stated
that WHO members had agreed to ‘review proposals with a view to identifying
those which could garner sufficient participation to be realized’. In other words,
the focus of the sectorals had changed from being developed oriented to one
that looked purely at market access prospects. Of course, the agreement was to
leave the participation in such a process ‘non-mandatory’.
The process that has unfolded in the period since, the sectoral initiative has
involved identification of sectors by WHO member states in which they are
pushing for elimination of tariffs by a certain date. In December 2008, 14 sectors
were listed by WHO members for inclusion in the sectoral initiative (Table 6.19).
Proponents of the sectorals have justified the initiative on the ground that it
would help realize the NAMA negotiating mandate that emphasizes the need to
‘reduce or as appropriate eliminate tariffs’. On the other hand, several
developing country members have opposed the initiative arguing that they
Page 53 of 74
would end up taking commitments for tariff cuts much more than their
developed country partners. There does seem to be a justification in the point
made by the developing countries, as the Doha mandate also indicated that
these countries were to take commitments less than those taken by their
developed country partners. (p.265)
Table 6.19 List of Tariff Sectoral Initiatives Proposed
Sectoral Initiative Participants
Automotives and Japan

related parts
Bicycle and related Singapore, Switzerland, Chinese Taipei, and Thailand

parts
Chemicals Canada, the European Communities, Japan, Norway,

Singapore, Switzerland, Chinese Taipei, and the United
States
Electronics/ Hong Kong, China, Japan, Korea, Singapore, Thailand,

electrical products and the United States
Fish and fish Canada, Hong Kong, China, Iceland, New Zealand,
products Norway, Oman, Singapore, Thailand, and Uruguay
Forest products Canada, Hong Kong, China, New Zealand, Singapore,

Switzerland, Thailand, and the United States
Gems and jewellery Canada, the European Communities, Hong Kong,

China, Japan, Norway, Singapore, Switzerland, Chinese
Taipei, Thailand, and the United States
Hand tools Chinese Taipei
Open access to Singapore, Switzerland, Chinese Taipei, and the United

enhanced States
healthcare
Raw materials United Arab Emirates
Industrial Canada, the European Communities, Japan, Norway,

machinery Singapore, Switzerland, Chinese Taipei, and the United
States
Sports equipment Norway, Singapore, Switzerland, Chinese Taipei, and

the United States
Textiles, clothing European Communities

and footwear
Toys Hong Kong, China, and Chinese Taipei
Page 54 of 74
Source: WTO (2008), Fourth Revision of Draft Modalities for Non-

agricultural Market Access, TN/MA/W/103/Rev.3, 6 December,
Annex 7.
Way forward
Negotiations on non-agricultural market access have reached a broad consensus
on the tariff-cutting formula. After their initial hesitation to accept the Swiss
formula, developing countries have accepted this approach for reducing their
bound tariffs.
(p.266) The introduction of sectoral zero-for-zero in the NAMA negotiations

has added a new dynamics. While protagonists of this approach have insisted
that this element must form a part of the outcome of the Doha Round, most
WHO members have shown their reluctance to move forward.
Finding a solution to address the problem of NTBs has been equally divisive with
a sizeable number of countries putting forth their proposals for horizontal as
well as vertical approaches. The proposal supported by India on procedures for
the facilitation of solutions to NTBs has the support of a large number of
members and can form the basis for the way forward to address an issue the
solution of which has eluded the multilateral trading system thus far.
General Agreement on Trade in Services (GATS) Negotiations

Emergence of the GATS
Unlike goods, trade liberalization in services through multilateral negotiations is
a relatively new phenomenon. The Uruguay Round was instrumental in bringing
this ‘new’ area within the ambit of the MTNs for the first time, notwithstanding
the opposition posed by a number of developing countries including India. By the
time the Uruguay Round of negotiations were launched, the services sector had
already begun to represent a large proportion of the gross domestic product
(GDP) of many an industrialized countries of the world. Some of the service
providers from these countries were also exploring the possibility of expanding
their business in other countries. However, in their endeavour, these service
providers from the ‘North’ often came across various protectionist measures
undertaken by the respective governments of the destination countries, with the
aim of preserving businesses for domestic service providers in the latter group
of countries. Hence, the service sector lobbies of the developed countries began
to urge an international cooperative mechanism that would develop rules
against such protectionist tendencies (Jackson 1997).
The outcome of the Uruguay Round of negotiations on services was the GATS, a
framework agreement of sorts that entered into force (along with all other WTO
agreements) on 1 January 1995, with a set of binding rules and disciplines to
govern the services trade. The (p.267) GATS brought into its purview the
entire gamut of the services trade, as classified into 161 service activities under
12 broad sector heads in the GATS Sectoral Classification List (W/120).
Page 55 of 74
However, this breadth of coverage was achieved at the cost of certain

flexibilities, which aimed at taking on board some of the concerns of developing
countries regarding the implications of bringing the services trade under the
purview of the multilateral negotiations. These flexibilities made the GATS one
of the ‘more’ development-friendly agreements under the WTO. One of the key
flexibilities embedded in the GATS is the discretion that a member country of the
WTO enjoys in deciding which of the services sectors it wants to schedule for
undertaking liberalization commitments under the GATS rules. This is often
termed a ‘positive list’ approach or a ‘bottom-up’ approach.
The GATS Architecture

Four Modes
In order to capture the complex nature and diverse forms of international
transactions in services, the GATS adopted a novel approach of classifying the
entire range of services trade into four ‘modes’:
• Mode 1 (cross-border supply) refers to delivery of services across countries,

that is, without the physical proximity of the service provider and the
consumer. Business process outsourcing (BPO) and services provided across
countries through telecom network are classic examples of cross-border
supply of services.
• Mode 2 (consumption abroad) covers services that involve the physical

movement of the service consumer to the territory of the service provider,
such as in the case of tourism services.
• Mode 3 (commercial presence) embraces supply of services by a service

provider of one country through commercial presence in the territory of
another country. In other words, it involves the establishment of
representative offices, branches, subsidiaries, joint ventures, and
partnerships in the overseas market, which is analogous to Foreign Direct
Investment (FDI) in services.
(p.268) • Mode 4 (movement of natural persons) refers to the temporary

movement of service providers either in an individual capacity or as part of an
establishment to provide the service overseas.
General Provisions
The GATS, among other elements, consists of a series of ‘General Provisions’
that largely applies across the board to all measures affecting trade in services.
However, it also includes a set of ‘specific commitments’ that applies only to
service sectors that are enlisted in a member’s GATS schedule as explained
further.
The general provisions include provisions pertaining to the MFN treatment, and
transparency, among others. Under the MFN clause, which is a fundamental
principle of the GATT/WTO agreements, a WHO member is obliged to provide to
Page 56 of 74
another member, treatment which is no less favourable than what it accords to

any other country, irrespective of whether the latter country is a WHO member.
Although MFN is a general obligation under the GATS, the agreement contains
an annex allowing the member countries to invoke exemptions to MFN. The
coverage of MFN for each GATS member is therefore determined by a so-called
‘negative list’. Importantly, such exemptions from unconditional MFN treatment
do not exist under the GATT. The MFN exemptions under the GATS may only be
made once–upon the entry into force of the agreement.20
Under the transparency provision—another ‘General Provision’ of the GATS—the

WHO members are required to provide information on all relevant rules and
measures having some bearing on the operation of the GATS, in general, or the
Specific Commitments undertaken by the members under this agreement, in
particular. There is also a requirement for establishing enquiry points to supply
specific information to other members and to provide prompt response to any
requests for information on relevant rules and regulations affecting the services
trade.
Specific Commitments
The provisions pertaining to the specific commitments lay down the framework
following which the member countries are supposed to (p.269) commit
themselves to liberalizing trade in services. Importantly, a member is free to
decide which service sectors are to be scheduled for undertaking liberalization
commitments under the GATS rules. This is often dubbed as a ‘positive list’
approach or a ‘bottom-up’ approach. The bottom-up approach adopted by the
GATS leaves sufficient room for the WHO member countries to undertake trade
liberalization in services at their own terms and pace. At least in strict legal
terms, there is no compulsion on a member country to open up a particular
sector or a particular mode of supply if there are domestic sensitivities and
concerns surrounding the potential impact of such an opening-up. In this regard,
the GATS attempts to strike a balance between commercial interests on the one
hand and regulatory concerns and public policy objectives of the member
countries on the other.
Two main pillars of the specific commitments are obligations regarding ‘national
treatment’ and the provisions pertaining to market access. The provisions
included under these two categories are aimed at creating transparency vis-à-vis
the barriers that foreign service providers may face in a member country of the
WTO. ‘National Treatment’ is defined under the GATS as treatment no less
favourable than that accorded to ‘like’ domestic services and service providers.
The National Treatment clause is however, applicable only for those services
sectors that are inscribed by a member in its schedule of GATS commitments.
Furthermore, National Treatment is also subject to the conditions and
qualifications listed by a Member in its schedule. According to the market access
provisions, access (for each mode of supply) is to be no less favourable than
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what is specified in a member’s schedule. However, a member may impose one

or more of the six categories of restrictions specified, as long as it specifies them
in its schedule of GATS commitments. These market access limitations relate to:
the number of foreign service suppliers allowed; the value of transactions or
assets; the total quantity of services output; the number of natural persons who
may be employed; the type of legal entity through which a service supplier is
permitted to supply a service and the extent of foreign capital participation.
Thus, it is possible for the members not to grant full market access and deny
national treatment by inscribing such conditions and qualifications in its
schedule of GATS commitments.
For each specific sector scheduled by it, a member makes commitments on

market access and national treatment, for each mode (p.270) of services trade,
under what are known as ‘sectoral schedules of commitments’. Members also
make market access and national treatment commitments across the board for
all the sectors included in its schedule with respect to each mode of services in
what are known as ‘horizontal schedules of commitments’. The horizontal
commitments could complement, override, or qualify the sector-specific
commitments. Hence, both sectoral and horizontal schedules have to be read
together to understand the extent and the nature of commitments undertaken in
a particular sector.
GATS Negotiations on Market Access

As per the guidelines, market access negotiations on services initially proceeded
on the basis of the bilateral request-offer approach.21 The Doha Declaration also
set out two important timelines for the negotiations: submission of initial
requests by the members by 30 June 2002, and initial offers by 31 March 2003.
Subsequently, the July 2004 Framework Agreement stipulated May 2005 as the
deadline for the submission of the revised offers, while urging the members to
submit the outstanding initial offers as soon as possible.
Due to various reasons, some technical and some political, the bilateral
approach failed to generate sufficient momentum in the GATS 2000 negotiations.
In this backdrop, the Hong Kong Ministerial Declaration of December 2005
mandated the adoption of a plurilateral request-offer approach22 as a
complementary method of negotiations with the aim of expediting the market
access negotiations on services. The Hong Kong Ministerial Declaration called
for plurilateral requests to be submitted by 28 February 2006. Accordingly,
around 20 plurilateral groups had been formed in 2006, with the involvement of
only around 35 countries out of the then 149 member countries of the WTO (now
151). This clearly reflects the fact that only the major players in the services
trade have come forward to participate in the plurilateral negotiations on
services.
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GATS Negotiations on Domestic Regulation

Disciplining Domestic Regulation (DR) comprises one of the most critical areas
of the rules of negotiations under the GATS. The GATS explicitly recognizes the
right of the members to regulate and to (p.271) introduce new regulations on
the supply of services within their territories in order to meet their national
policy objectives. Article VI: 4 of the GATS mandates the members to develop
disciplines aimed at ensuring that domestic regulatory measures do not
constitute unnecessary barriers to trade in services. This mandate covers the
following issues: (i) qualification requirements and procedures (QRP); (ii)
licensing requirements and procedures (LRP); and (iii) technical standards (TS).
Given the relatively advanced level of discussions on this issue, the Hong Kong
Ministerial Declaration instructed the members to finalize the disciplines on DR
before the end of the Doha Round and as part of the single undertaking.
Disciplining DR can go a long way in complementing market access particularly

in the areas of interest to India. Challenges for enhancing market access in the
developed countries under both cross-border services trade (Mode 1) and
movement of natural persons (Mode 4) lie in the range of state-imposed
regulatory barriers, including burdensome visa formalities, registration and
licensing requirements, fee structure, stringent quotas and qualification
requirements, discriminatory taxes, levies, and standards faced by the service
providers from developing countries. However, a counter concern of many WHO
member countries, including in particular developing countries, in the area
relates to the issue of regulatory autonomy. It is widely apprehended that
disciplines on DR under the GATS may encroach upon the sovereignty of the
member countries by requiring the trade considerations to supersede the
legitimate domestic policy objectives. Given this backdrop, all the submissions
stress the need to strike a balance between respecting a member’s right to
regulate, and curbing regulatory measures that could potentially undermine
market access.
On DR, India supports the need for reaching an agreement on disciplines on DR

in the interest of enhancing market access in services, in particular in modes 1
and 4, where India’s offensive interests lie.
GATS Negotiations on Rule Making

At the end of the Uruguay Round, the set of rules composing the GATS
agreement remained incomplete with regard to certain important aspects, such
as emergency safeguard measures, government procurement, and subsidies. The
future shape of the GATS will be determined by these rules to a great extent.
Rules also assume significance in (p.272) determining the effectiveness of the
market access commitments undertaken by a member country. A member’s
choice of domestic reforms is also likely to get influenced by rules. The
negotiations on rules, however, have progressed quite slowly so far. This is partly
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due to the divergent views of the members in different areas of rules and partly
due to technical and conceptual difficulties involved in each aspect of rules.
State of Play
During the July 2008 Mini-Ministerial that ended in a failure, alongside the
mainstream negations on agriculture and NAMA, a ‘signalling exercise’ was held
on services with the participation of around 30 member countries. At the
signalling exercise, participating ministers were to indicate how they might
improve their services offers. The purpose of the signalling exercise was to
provide comfort to members regarding progress in the request/offer
negotiations in services, while awaiting the actual revised offers. So it was a
rather informal exercise. Since then the GATS negotiations have not progressed
much, according to the state-of-play reports released by the WTO Director-
General Pascal Lamy on 21 April 2011.
On the market access track, apparently, there are still significant gaps between
offers and requests and between offers and applied regimes. Some countries
appear unwilling to discuss further liberalization on the basis of the potential
concessions they had conditionally outlined in July 2008. Many offers are well
below even the existing levels of market opening. Apparently, one of the main
reasons behind the lack of progress is a widely held view among developing
countries that the developed countries seek a level of ambition in the services
negotiations that exceeds their own concessions in the Mode 4 as well as the
agricultural market access negotiations. The developing countries that are
proponents of market access under the Mode 4 consider the extent to which the
Mode 4 request is met as an ‘indicator of the fulfilment of the development
dimension of the round’. A positive outcome on this issue will be important to
achieve a balance in market access negotiations in services, they argue (ICTSD
2011).
The report also indicates only incremental progress being made in the
development of new disciplines for domestic regulation, and shows next to no
progress in the rules negotiations.
(p.273) TRIPS Negotiations

In the ongoing Doha negotiations, there are three IP issues on the table: (a)
public health concerns arising from the implementation of the TRIPS agreement;
(b) the relationship between the WTO TRIPS agreement and the UN Convention
on Biological Diversity (CBD); (c) extension of the higher level of (Article 23-
type) protection, currently available only for geographical indications (GIs) of
wines and spirits, to all GIs; and (iv) multilateral register for wines and spirits
GIs. Deliberations on the three issues have followed two separate tracks. The
multilateral system of notification and registration for wines and spirits is
discussed in a Special Session of the Council for TRIPS, while the other two
issues are part of the Implementation Issues of the Doha Round.
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TRIPS and Public Health

Access to medicines has been a major concern in developing countries as these
countries have been engaged in implementing their commitments taken under
the WTO Agreement on TRIPS. The two main issues that have been raised while
articulating this concern are adequate availability and affordability of these
medicines in the poorer regions of the world.
Ever since this debate was initiated several years ago, commentators have
looked at the possibilities of using the flexibilities that were seen to have existed
in the Agreement on TRIPS in order that developing countries could realize the
objective of access to essential medicines. The most important dimension of this
debate was the possibility of using compulsory licences in keeping with the
provisions of the TRIPS agreement.
This debate was put at rest at the end of the Doha Ministerial Conference of the
WTO, which saw the adoption of the Declaration on the TRIPS Agreement and
Public Health (henceforth, Doha Declaration on Public Health). The declaration
made several critical points. In the first instance, it emphasized that the ‘TRIPS
Agreement does not and should not prevent Members from taking measures to
protect public health’ and that ‘the Agreement can and should be implemented
in a manner supportive of WTO Members’ right to protect public health and, in
particular, to promote access to medicines (p.274) for all’. Second, the
declaration pointed out that ‘each provision of the TRIPS Agreement shall be
read in light of the object and purpose of the Agreement as expressed, in
particular, in its objectives and principles’, which have been defined in Articles 7
and 8. Third, it clarified that ‘[E]ach Member has the right to grant compulsory
licences and the freedom to determine the grounds upon which such licences
are granted’. Fourth, each member would be free to establish its own regime for
exhaustion of IP rights without challenge, subject to the MFN and national
treatment provisions contained in Articles 3 and 4 of the Agreement. And finally,
the declaration recognized that ‘WTO members with insufficient or no
manufacturing capacities in the pharmaceutical sector could face difficulties in
making effective use of compulsory licensing under the TRIPS Agreement’ and
while doing so it instructed the TRIPS Council to find an expeditious solution to
this problem.
The singular contribution made by the Doha Declaration on Public Health is that
it opens up a range of options that the developing countries can explore for
fulfilling their need for access to medicines taking into consideration their
commitments under the agreement on TRIPS. The present chapter is an attempt
to identify the options that the developing countries have for effectively
implementing the Doha Declaration on Public Health and thus ensure access to
medicines in the emerging regime of IP protection.
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The spirit of the Doha Declaration on TRIPS and Public Health has, however,
evaporated in the subsequent phase of negotiations. Even implementation of the
provisions of Paragraph 6, which, as indicated earlier, would have addressed the
problems of access to medicines of some poorest countries, has been mired in
controversies. Four years of intense negotiations led to a system that these
disadvantaged countries could use to import affordable medicines. But it was so
fraught with problems that it was used only once since it was established.
TRIPS–CBD
Among the three IP issues, the relationship between the WTO TRIPS and the UN
CBD is high on the agenda of India alongside a host of other developing
countries. Underlying the negotiations is an attempt by developing countries,
with India as a frontrunner, and resisted in varying degrees by developed
countries—to address the problem (p.275) of biopiracy and misappropriation of
traditional knowledge (TK). Developing countries have consistently been
pointing out that implementation of the two key elements of the CBD, namely,
the sovereign rights that the states have over their biodiversity and protection of
TK have been undermined by the TRIPS agreement. In recognition of the rights
of the sovereign states over their biodiversity, the CBD provides that the users of
biological material must seek prior informed consent (PIC) from the designated
authority identified by each member state of the convention. Furthermore, the
users are expected to enter into fair and equitable benefit-sharing arrangements
arising out of the utilization of genetic resources. The negotiations are underway
in the CBD since 2004 to develop an international regime on access and benefit
sharing (ABS). In that forum also, India and other developing countries are
vouching for a legally binding system, again amidst strong opposition from
developed countries.
In the WTO, developing countries have argued that while the patent regime
introduced by the TRIPS Agreement affords protection to technologies that have
been developed using biological material, the rights of countries providing the
material, as recognized by the CBD are completely ignored. With the aim of
rectifying the aforesaid lacuna of TRIPS and ensuring implementation of both
TRIPS and CBD in a mutually supportive manner, India, alongside a host of like-
minded developing countries (for example, Brazil, Pakistan, Thailand, and Peru,
among others) have been demanding an amendment of TRIPS over the past
several years. The original proposal calls for an amendment establishing an
obligation for WHO members to require patent applicants to meet the following
conditions: (a) disclose the origin of biological resources and/or associated TK;
(b) provide evidence of prior informed consent; and (c) provide evidence of
benefit sharing (Dhar and Anuradha 2004: 597–639). The proposal further
suggests that in cases where insufficient, wrongful, or lack of disclosure would
be discovered after the grant of a patent, the legal regime would include
provisions for revocation of the patent in question. However, strong opposition
has been posed by developed countries, including the United States, Canada,
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Australia, Korea, and Japan, among others. This group has argued that
disclosure is not the most effective way to address bio-piracy, which can be done
through alternative routes, such as establishment of improved databases on TK
under the aegis of the World Intellectual Property Organization (WIPO) and (p.
276) contractual arrangements under national ABS laws. They have also argued
that the additional conditions imposed on the patent applicant would introduce
significant administrative burden on the patent offices.
Geographical Indications
Geographical indications (GIs) identify a good as originating from a particular
geographical territory, where a given quality, reputation, or other characteristic
of the good is essentially attributable to its geographical origin. Much like
trademarks, the economic rationale of GI is based on the ‘information
asymmetry’ between buyers and sellers in the market and role of reputation,
conveyed through distinctive signs, in tackling such asymmetry. Thus GI acts as
a signalling device that helps the producers to differentiate their products from
competing products in the market and enable them to build a reputation and
goodwill around their products, which often fetch a premium price. Given its
commercial potential, the legal protection of GI assumes enormous significance.
Without such protection, competitors not having legitimate right on a GI might
ride free on its reputation. Such unfair business practices result in loss of
revenue for the genuine right holders of the GI and also misleads the consumers.
Moreover, such practices may eventually hamper the goodwill and reputation
associated with the GI.
The protection of GIs has, over the years, emerged as one of the most
contentious IP issues in the realm of the WTO. Interestingly, while the Uruguay
Round (1986–94) negotiations were witness to a major north-south divide
regarding the inclusion of IP issues, in general, in the agenda, GIs was the lone
IP issue on which there was a significant north-north divide all through the
Uruguay Round of negotiations. In fact, the torch-bearers of the IP agenda in the
round, namely, the United States and the European Communities (EC) were on
the loggerheads on this particular issue (Das 2010: 448). While the EC was
aggressively pushing for a full-proof protection for GIs, particularly for those
pertaining to wines and spirits, the United States was strictly opposed to even
recognizing GIs as a separate category of IP, arguing instead for its inclusion
only as a part of the Trademarks field. Divides also existed among other
developed countries and among developing countries, exacerbating the
difficulties of the negotiations further. The eventual framework of the TRIPS
provisions on GIs reflected a very (p.277) sensitive compromise reached during
the Uruguay Round in which a higher level of protection was granted for wines
and spirits23 compared to all other categories of GIs, ostensibly for the political
reason of persuading the EC to join consensus on the Uruguay Round package,
despite strong opposition on the part of many other countries. The higher
protection for wines and spirits, however, was subject to certain prior use
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exceptions that were granted clearly to take care of the concerns raised by the
United States and Australia, among others, at least to an extent. The final text of
the agreement also left room for future negotiations, clearly reflecting the
difficulties encountered during the Uruguay Round in arriving at an agreed
outcome on some of the important issues.
After the Uruguay Round, negotiations on GIs have focused on two hotly debated
issues: creation of a multilateral system of notification and registration of GIs;
and ‘extension’ of the higher level of protection presently accorded to wines and
spirits to all other categories of GIs (henceforth extension).
Extension of Higher Level of Protection for All GIs

TRIPS stipulates a hierarchical system of protection in which a basic protection
is granted for all GIs under Article 22 whereas an additional protection is
afforded to GIs designating wines and spirits under Article 23. In respect of
these goods, the use of GIs is to be prohibited per se, without the need to apply
the test of deception. Thus, the GIs pertaining to wines/spirits cannot be allowed
to be used on the same category of products (that is, wines/spirits) even if the
true origin of goods is indicated, or the GI is used in translation or accompanied
by expressions such as ‘kind’, ‘type’, ‘style’, ‘imitation’ or the like. Similarly,
registration of trademarks containing or consisting of a GI has to be refused in
respect of goods not originating in the territory indicated. The crucial point of
difference in the two levels of protection is that there is no requirement for
proving deception or ‘unfair competition’ in the case of wines and spirits. To give
an example, under the higher standards applicable to wines and spirits it would
not be permissible to allow Indian manufacturers to label sparkling wines
produced in Punjab as ‘Indian Champagne’. A requirement for proving deception
is not a prerequisite for the right holder to counter misuse of the GIs associated
with wines and spirits. On the other hand, under the basic standard of protection
(p.278) (applicable to all other categories of goods), a right holder of a GI may
find it difficult to pass the ‘misleading test’ if the good allegedly misusing the GI
contains information about its true geographical origin on its label. For instance,
a producer not belonging to Switzerland may use the GI ‘Swiss-made’
prominently on the face of a watch, and engrave the true origin somewhere on
the back of it in a rather illegible manner. While doing so may actually allow the
producer to free-ride on the renown of a famous GI, chances are there that s/he
can get away from any legal action against such an unscrupulous business
practice by claiming that such a use is not misleading the consumer, since the
true place of origin is mentioned on the back of the watch. The requirement of
the ‘misleading test’ also leads to legal uncertainty regarding the protection and
enforcement of a GI at the international level. This is because it is up to the
national courts and national administrative authorities to decide whether the
public is being misled by a particular misuse of a GI. Since, such decisions are
bound to differ from one country to another, the very provision of the
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‘misleading test’ leaves room for legal uncertainty (see WTI 2001b: paragraph
13).
Extension of Article 23 armour to all GIs can go a long way towards ensuring
better protection for the GIs belonging to the countries of the South. However,
reaping commercial benefits from GIs in the global market would require multi-
pronged initiatives and efforts on the part of these countries. Apart from
effective enforcement of GIs in the relevant markets (domestic and export),
success of a GI is contingent, in a large measure, upon appropriate marketing
and promotion of the product—tasks that are not only resource-intensive but
also challenging to execute for many stakeholders from a developing country
like India. Another tricky issue is how to ensure that a fair share of the benefits
(if any) accruing from the GI status of a product percolates down to the actual
producers/artisans. This assumes importance in view of the fact that GI is
regarded as an important tool for promoting rural development (Das 2010).
Multilateral Register for Wines and Spirits GIs

The establishment of a multilateral register for wines and spirits is essentially an
EU agenda, originally supported mainly by Switzerland. Developing countries do
not have much stakes in this respect. Even after years of negotiations, members
have not been able to reach a (p.279) consensus on this contentious issue. The
core issues have turned out to be the following two: (a) the consequences or
legal effects, if any, of registration of a GI in the multilateral system; and (b)
nature of participation in the system (that is, voluntary or mandatory, and if it is
voluntary, to what extent the effects of registration would apply to the non-
participating members). In addition, there are various other elements including
notification and registration; fees, costs, and administrative burdens,
particularly as they impact developing and least developed country members;
special and differential treatment; duration of registrations and procedures for
their modification and withdrawal; and arrangements for review. There are
mainly three key positions pertaining to this debate as contained in three formal
proposals.24 On the one end of the spectrum, there is the EC—the prime
proponent of the proposed multilateral register—demanding a mandatory system
with strong legal effect. At the other end, there is the so-called ‘joint proposal
group’ (Argentina, Australia, Canada, Chile, Costa Rica, Dominican Republic,
Ecuador, El Salvador, Honduras, Mexico, New Zealand, Nicaragua, Paraguay,
Chinese Taipei, and the United States, among others), which is in favour of a
voluntary system with very little legal effect. A middle ground is put forward by
Hong Kong–China, that proposes a voluntary system with some legal effects,
though more limited than those espoused by the EC.
State of Play and Way Forward

The three IP issues got clubbed together in the run up to the July 2008 Mini
Ministerial as a result of formation of a strategic coalition among some 110
WHO members, including India and the EU. On 18 July 2008, just prior to the
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Mini Ministerial, the coalition, which is demanding parallelism among the three
IP issues, submitted to the WTO a joint ‘Draft Modalities on TRIPS Related
Issues’ (W/52) that included the draft modality texts sponsored by them on each
of the three IP issues (WTO 2008a). It needs to be underscored that the alliance
was reached at the cost of a significant compromise on the TRIPS/CBD front on
the part of the proponents of this crucial issue, including India. While originally
they were demanding a strong legal effect in the disclosure proposal tabled by
them, the modality text included in W/52 did not include this important element
of the disclosure proposal. Whether such compromises were worth making for
some of the developing (p.280) countries that evidently have a higher stake in
getting a better deal on TRIPS/CBD than on GIs remains an open question.
Out of the three issues, the multilateral register appears to be in a more

promising stand in terms of progress made compared to the earlier prevailing
stalemate. For the first time a consolidated text could be released though it still
contains numerous square brackets indicating lack of consensus. On the other
two IP issues, the gaps persist and progress continues to be elusive (ICTSD
2011).
The strategic alliance is certainly a positive development from the EU’s angle, as
far as the multilateral register is concerned. While earlier it was only the EU and
Switzerland backing a register with strong legal effects, now the camp has the
backing of more than two-thirds of the WHO membership. It remains to be seen
whether the coalition also becomes helpful in pushing the agenda on the GI-
extension to some extent. While the issue of multilateral register saw at least
some movements over the recent past, uncertain future continues to loom large
over the issue of extension. While the co-sponsors of W/52 continue to insist that
the negotiations on the GI register are to be seen as part of a framework
including all three IP issues, among them extension still remains the most
difficult to crack even after so many years of sustained efforts on the part of its
proponents.
It needs to be underscored that the alliance was reached at the cost of a

significant compromise on the TRIPS/CBD front on the part of the proponents of
this crucial issue, including India. While originally they were demanding a
strong legal effect in the disclosure proposal tabled by them, the modality text
included in W/52 did not include this important element of the disclosure
proposal. Even on the issues of prior informed consent and access and benefit
sharing, W/52 only mentioned that ‘Members agree to define the nature and
extent of a reference to Prior Informed Consent and Access and Benefit
Sharing’. This was again a significant departure from the original proposal put
forward by the proponents of the disclosure requirement. Whether such
compromises were worth making for some of the developing countries that
evidently have a higher stake in getting a better deal on TRIPS/CBD than on GIs
remains an open question. In our view, proponents of the GI agenda from the
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South need to weigh the costs and benefits among various issues of interest to
them before taking any particular stance on the IP front. Such cost-benefit
analysis may turn out to be even more significant in the future course of
negotiations on (p.281) Doha Round, if the proponents succeed in making all
the TRIPS issues a part of the single undertaking. Because, even developing
countries succeed in getting a good deal on GIs, it is likely to be a quid-pro-quo
for concessions to be granted elsewhere.
Negotiations in the Doha Round face formidable challenges going forward. The
challenges, in our view are twofold. In the first instance, the negotiating process
has considerable problems for it has not effectively taken on board several key
issues in the negotiating mandate. As was indicated in this chapter, negotiations
in agriculture and NAMA have been fast-tracked, while critical areas like
services and IP rights have remained in the back-burner. And, although
agriculture and NAMA negotiations have shown some progress, the impetus for
concluding the negotiations seems to be eluding the negotiators since the major
players are still in disagreement over some of the most critical issues.
The absence of parallel movement on the key areas in the negotiating mandate
of the Doha Round being of considerable concern as this, in our view, can cause
an imbalance in the negotiating outcome. The architects of the Doha mandate
had envisioned the ‘Doha Deal’ as a ‘single undertaking’, which, as stated in the
outset, implies that the Doha Deal can be done only when there is agreement in
all the areas. It was also mentioned that the ‘single undertaking’ approach
allows countries to engage in inter-sectoral trade-offs and this was seen as a big
step towards ensuring a balanced outcome. However, given the current focus of
the negotiations, such a possibility seems to be some distance away.
The second challenge that the Doha Round faces is from the virtual non-
participation of the largest economy, namely the US, particularly since the
economic downturn. It was expected the US would get actively engaged in the
negotiations after the Obama Administration took over. But despite being well
into the second year, the Obama Administration has not been able to obtain the
necessary mandate from the US Congress to negotiate trade deals. The Trade
Promotion Authority (TPA), without which the US trade negotiators would be
unable to participate in the Doha Round, has not yet been considered by the
Congress. This implies that the position that the US would eventually take in the
negotiations remains a matter of conjecture and therefore the future of the Doha
Round seem to be really hanging in balance.
Box 6A.1 Cotton Subsidies and their Impact on Livelihoods in West

and Central Africa
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Cotton subsidies granted by the US and the EU have undermined the

economic prospects, in particular the export earnings of the West and
Central African (WCA) countries, most of which are significantly more
efficient producers of cotton as compared to their larger trading countries.
With the livelihoods of their farming communities being seriously
threatened, these countries find themselves sinking deeper into the morass
of poverty.
Cotton plays a key role in determining the fortunes of WCA countries. In

Benin, Burkina Faso, Chad, Mali and Togo, cotton production accounts for
between 5 and 10 per cent of the GDP. Furthermore, cotton accounts for
around 30 per cent of their total export earnings and over 60 per cent of
their earnings from agricultural exports.
More importantly, cotton supports a significant number of farming

households. In Burkina Faso, for instance, more than 2 million people depend
on cotton production and over half of these farmers live below the poverty
line.
Between 1995 and 2001, when the subsidies granted by the US to its cotton
growers went up from US$ 32 million to US$ 2.8 billion (Table 14), world
prices for cotton declined by 56 per cent in dollar terms. This slump in cotton
prices resulted in substantial losses for the African cotton exporters.
Available estimates indicate that Burkina Faso lost 1% of GDP and 12 per
cent of export earnings, Mali lost 1.7 per cent of GDP and 8 per cent of
export earnings and Benin lost 1.4 per cent of GDP and 9 per cent of export
earnings.
It is pertinent to note that trade losses suffered by these countries on

account of slumping cotton prices outweigh financial transfers through
USAID programmes. For instance, Mali received US$ 37.7m from the US in
aid during 2001, but lost US$ 43m as a result of cotton subsidies, while in
case of Mali, the US$ 33m losses that it sustained as a result of US subsidies
represent twice its level of aid provision. In fact, for three of the WCA
countries, viz. Benin, Burkina Faso, and Chad, which belong to the group of
Heavily Indebted Poor Countries (HIPC) Initiative, the export revenue losses
they have suffered have been more than what they have received as debt
relief.
Sources: ((i) WTO 2003, (ii) Oxfam 2002, (iii) Goreux 2003.
References
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Das, Kasturi. 2010. ‘Prospects and Challenges of Geographical Indications in

India’, Journal of World Intellectual Property [Special Issue on Geographical
Indications], Blackwell Publishing, 13(2): 148.
———. 2010. ‘Unresolved Issues on Geographical Indications in the WTO’, in

Carlos M. Correa (ed.), Research Handbook on the Protection of Intellectual
Property under WTO Rules, Research Handbooks on the WTO Series, p. 448.
Cheltenham, UK: Edward Elgar Publishing.
Dhar, Biswajit and R.V. Anuradha. 2004. ‘Access, Benefit Sharing and Intellectual
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September.
———. 1991. ‘Stocktaking of the Uruguay Round Negotiations by the Chairman

of the Trade Negotiations Committee at Official Level, Trade Negotiations
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Commerce, New Delhi, p. 21.
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Poverty’, MSSD Discussion Paper No. 51, International Food Policy Research
Institute, Washington, DC.
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Congressional Research Service Issue Brief, Washington, DC, May.
———. 2009. ‘Agricultural Export and Food Aid Programmes’, Congressional

Research Service Issue Brief, Washington, DC, January.
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‘Capping Unusually High Tariffs: The WTO Doha Round and “Tariff Peaks”’,
Information Note No. 9, November. Available at http://ictsd.org/downloads/
2009/11/tariffpeaks6small.pdf, last accessed on 14 April 2015.
———. 2011. ‘TRIPS Council Report’, Bridges Weekly Trade News Digest,
15(15): 9. Available at http://www.ictsd.org/bridges-news/bridges/news/
summary-trips-council-report, last accessed on 14 April 2015.
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Jackson, John H. 1997. The World Trading System: Law and Policy of
International Economic Relations, Second Edition. The MIT Press.
Louis Goreux. 2003. ‘Reforming the Cotton Sector in Sub-Saharan Africa’, Africa
Region Working Paper Series No. 62, World Bank, Washington, DC, November.
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Briefing Paper #30, Oxfam.
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http://www.unctad.org/en/docs/c1d54_en.pdf, last accessed on 14 April 2015.
WTO. 2001a. ‘Market Access: Unfinished Business -Post-Uruguay Round

inventory and issues”, Geneva, p. 7.
———. 2001b. ‘Implementation-Related Issues and Concerns: Decision of 14

November 2001’, WT/MIN(01)/17, 20 November.
———. 2001c. ‘Ministerial Declaration: Adopted on 14 November 2001’, WT/

MIN(01)/DEC/1, 20 November, paragraph 2.
———. 2001d. ‘Ministerial Declaration: Adopted on 14 November 2001’, WT/

MIN(01)/DEC/1, 20 November, paragraph 16.
———. 2003a. ‘Market Access for Non–agricultural Products: Communication

from Egypt, India, Indonesia, Kenya, Malaysia, Mauritius, Nigeria, Tanzania,
Uganda and Zimbabwe’, Negotiating Group on Market Access, TN/MA/W/31, 25
March.
———. 2003b. ‘Poverty Reduction: Sectoral Initiative in Favour of Cotton’,

Committee on Agriculture, Joint Proposal by Benin, Burkina Faso, Chad and
Mali, 16 May 2003 (TN/AG/GEN/4)
(p.286) WTO. 2003c. ‘Agriculture—Framework Proposal’, JOB(03)/162/Rev.1,

29 August.
———. 2004. ‘Doha Work Programme: Decision Adopted by the General Council
on 1 August 2004’, WT/L/579, 2 August.
———. 2005a. ‘Geographical Indications: Communication from the European

Communities’, 14 June, TN/IP/W/11.
Page 70 of 74
———. 2005b. ‘Proposed Draft TRIPS Council Decision on the Establishment of a

Multilateral System of Notification and Registration of Geographical Indications
for Wines And Spirits: Submission by Argentina, Australia, Canada, Chile,
Dominican Republic, Ecuador, El Salvador, Honduras, Mexico, New Zealand,
Chinese Taipei and the United States, TN/IP/W/10, 1 April.
———. 2006a. ‘Tariff Quota Administration Methods and Tariff Quota Fill: ’, Note
by the Secretariat, TN/AG/S/22, 27 April, p. 5.
———. 2006b. ‘Negotiating proposal on WTO means to reduce the risk of future
NTBs and to facilitate their resolution: Communication from the European
Communities—Addendum’, Negotiating Group on Market Access, TN/MA/W/11/
Add.8, 1 May.
———. 2006c. ‘Resolution of NTBs through a Facilitative Mechanism:

Submission by NAMA 11 Group of Developing Countries—Addendum’.
Negotiating Group on Market Access, TN/MA/W/68/Add., 8 May.
———. 2006d. ‘G-33: Contribution on the Modalities for the Designation and
Treatment of any Agricultural Product as a Special Product (SP) by any
Developing Country Member’, JOB(06)/173, 7 June.
———. 2006e. ‘NAMA 11 Ministerial Communiqué’: 29 June 2006, Geneva,

Negotiating Group on Market Access, TN/MA/W/79, 29 June 2006, Geneva.
———. 2006f. ‘Doha Work Programme – The Outstanding Implementation Issue

on the Relationship between the TRIPS Agreement and the Convention on
Biological Diversity: Communication from Brazil, China, Colombia, Cuba, India,
Pakistan, Peru, Thailand and Tanzania’, WT/GC/W/564/Rev.2, 5 July.
———. 2008a. ‘Draft Modalities for TRIPS Related Issues: Communication from
Albania, Brazil, China, Colombia, Ecuador, the European Communities, Iceland,
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the ACP Group and the African Group’, TN/C/W/52, 19 July
———. 2008b. ‘Ministerial Decision on Procedures for the Facilitation of

Solutions to Non-Tariff Barriers’, Negotiating Group on Market Access, TN/MA/
W/106, 9 May 2008.
———. 2008c. ‘Fourth Revision of Draft Modalities for Non-Agricultural Market

Access’, TN/MA/W/103/Rev.3, 6 December, paragraph 5.
———. 2008d. ‘Revised Draft Modalities for Agriculture’, Committee on

Agriculture Special Session, TN/AG/W/4/Rev.4., 6 December, Annex D.
Page 71 of 74
———. 2010. ‘The Special Safeguard Mechanism (SSM): A Contribution Toward

a Balanced Debate, Communication by Costa Rica’, JOB/AG/13, September.
Notes:
(1.) As mandated by the ‘Decision on Implementation-Related Issues and
Concerns’. See WTO (2001c).
(2.) The ministers agreed ‘to make positive efforts designed to ensure that
developing countries, and especially the least-developed among them, secure a
share in the growth of world trade commensurate with the needs of their
economic development’ (WTO 2001d).
(3.) These issues were included as ‘Singapore Issues’ since a work programme to
examine the justification for bringing them under the WTO disciplines was
initiated in the First Ministerial Conference of the WTO held in Singapore in
1996.
(4.) It was not the first time that the multilateral trading system had specified
that the outcome of the negotiations would be in the nature of a ‘single
undertaking’. It was the Uruguay Round which was the trendsetter in this
regard.
(5.) See also Trebilcock and Howse (1999: 322).
(6.) Article II of the GATT required contracting parties to make binding

commitments in respect of import duties they would impose, while Article XI
prohibited the use of quantitative restrictions on imports.
(7.) The amendment read as follows: ‘No trade agreement or other international
agreement heretofore or hereinafter entered into by the United States shall be
applied in a manner inconsistent with the requirements of Section 22’ (P.L. 82–
50, 16 June 1951).
(8.) Preamble to the WTO Agreement on Agriculture.
(9.) The ‘Blue Box’ support measures were expected to encourage producers to
limit their production and to thus avoid creating conditions of glut in the market
for agricultural commodities.
(10.) Articles 5.4 and 5.5 of the AoA.
(11.) As of 2013, this is the latest year for which US data are available.
(12.) See Box 6A.1 for details.
(13.) According to the WTO, tariff peaks for industrialized countries are tariffs in
excess of 15 per cent.
Page 72 of 74
(14.) Figures are authors’ calculations for 2005.
(15.) The rise in non-tariff barriers can be gauged from the fact that while in
1995, the WTO Members had issued less than 200 notifications on sanitary and
phytosanitary measures, in 2009, this figure had exceeded 1,000.
(16.) Current membership of G-20: Argentina, Bolivia, Brazil, Chile, China, Cuba,
Ecuador, Egypt, Guatemala, India, Indonesia, Mexico, Nigeria, Pakistan,
Paraguay, Peru, Philippines, South Africa, Tanzania, Thailand, Uruguay,
Venezuela, and Zimbabwe.
(17.) Current Membership of G-33: Antigua & Barbuda, Barbados, Belize, Benin,
Bolivia, Botswana, China, Congo, Côte d’Ivoire, Cuba, Dominica, Dominican
Republic, El Salvador, Grenada, Guatemala, Guyana, Haiti, Honduras, India,
Indonesia, Jamaica, Kenya, Republic of Korea, Madagascar, Mauritius, Mongolia,
Mozambique, Nicaragua, Nigeria, Pakistan, Panama, Peru, Philippines, St Kitts
& Nevis, St Lucia, St Vincent & the Grenadines, Senegal, Sri Lanka, Suriname,
Tanzania, Trinidad & Tobago, Turkey, Uganda, Venezuela, Zambia, and
Zimbabwe.
(18.) The following WTO members made the submission on behalf of the
NAMA-11 group: Argentina, Venezuela, Brazil, Egypt, India, Indonesia, Namibia,
the Philippines, South Africa, and Tunisia.
(19.) The African Group, Canada, European Communities, LDC Group,

NAMA-11, Group of Developing Countries, New Zealand, Norway, Pakistan, and
Switzerland.
(20.) In principle, the MFN exemptions are to continue for no more than 10
years and are subject to review in future rounds of negations.
(21.) In the bilateral approach, a country requests other countries to undertake

commitments in sectors and modes of commercial interest. The process
continues with a view to submitting revised requests and subsequent offers by
all the members until the commitments can be adopted as final schedules.
Hence, the bilateral ‘request-offer’ approach involves a process of repeated
reiteration—offer, negotiation, revision, and resubmission.
(22.) In the plurilateral request-offer approach, a group of WTO Members (called

demandeurs) may place a collective request directly on a country, which is the
target of that request. A plurilateral request may be focused on a specific sector
or a particular mode. As per the Hong Kong Ministerial Declaration (2005), a
recipient country of a plurilateral request is ‘obliged’ to ‘consider’ that request
while submitting a new round of ‘revised offers’. However, the offer emanating
from a plurilateral request is to be given on a MFN basis to all the WTO
Members and not only to the demandeurs of that particular request.
Page 73 of 74
(23.) The addition of spirits occurred at the end of the negotiations. See GATT
(1991).
(24.) The formal proposals on the three positions are contained in the following
three WTO documents: WTO (2005a); WTO (2005b); and WTO (2003b). The key
points of these three formal proposals have been compiled and put side by side
in WTO (2005c).
Page 74 of 74
Preferential Trade Agreements

Economy
Jayati Ghosh

Print ISBN-13: 9780199458943
DOI: 10.1093/acprof:oso/9780199458943.001.0001

An Exploration into Emerging Issues in India’s Changing Trade Policy Landscape
Smitha Francis
DOI:10.1093/acprof:oso/9780199458943.003.0007

In the context of the comprehensive preferential trade agreements (PTAs) signed
by India since the mid-2000s, which include liberalization commitments in
agriculture, services, and investments, in addition to trade in goods, this chapter
provides a critical survey of the available literature and methodologies for
analysing trade agreements. The nature of most current analyses prevents an
understanding of the economy-wide implications of this shift in India’s trade
policy of engaging in multiple PTAs with overlapping commitments. Therefore,
going beyond the analysis of tariff liberalization, the chapter attempts to provide
an analytical framework for examining the systemic and developmental
implications of PTAs. It is argued that the legally binding policy commitments in
India’s recent PTAs can have serious repercussions on financial stability, food
security, and industrial development.
Keywords: India’s free trade agreements, preferential trade, foreign direct investment (FDI), export
performance, industrial policy, capital controls, investments, services, agriculture trade liberalization,
production networks
One of the most striking aspects of India’s changing trade policy strategy is her
increased engagement in preferential trade agreements (PTAs). Until the 1990s,
India’s trade liberalization was mostly at the most favoured nation (MFN) level,
by which trade barriers were lowered under the multilateral trading system. The
exceptions were two bilateral and two plurilateral PTAs. The India–Nepal Treaty
of Trade signed in 1950 and the Agreement on Trade and Commerce between
Page 1 of 42
India and Bhutan concluded in 1972 mostly involved non-reciprocal preferential

treatment by India to its least developed country (LDC) neighbours in South
Asia. The third one, the Bangkok Agreement, which came into force way back in
1976 involving India, Bangladesh, Sri Lanka, South Korea, and Laos, was Asia’s
oldest regional trade agreement (RTA) aimed at trade expansion through the
adoption of reciprocal trade liberalization measures. The fourth PTA that India
was involved in was the Global System of Trade Preferences (GSTP), which has
exchanged trade preferences among the G-77 member countries since 1989. The
only new agreement in the 1990s was the South Asian Preferential Trade
Agreement (SAPTA).
(p.288) But currently, there are 18 PTAs in force involving India. Since 2000,
India has gone beyond its South Asian neighbours to incorporate most countries
in Southeast Asia, East Asia, as well as Latin America, into its preferential
arrangements. Thus, apart from the India–Sri Lanka Free Trade Agreement
(2001) and the India–Afghanistan Preferential Trade Agreement (2003), these
include the India–Thailand Free Trade Agreement (2004), India–Mercosur1
Preferential Trade Agreement (2003), the Preferential Trade Agreement
between the Republic of India and the Republic of Chile (2009), the
Comprehensive Economic Cooperation Agreement (CECA) between India and
Singapore (2005), the ASEAN2–India FTA (2010), the India–South Korea
Comprehensive Economic Partnership Agreement (CEPA) (2010), the India–
Japan CEPA (2011), and the India–Malaysia CECA (2011). This reflects a clear
break from the past when India undertook multilateral trade liberalization and
reflects India’s immersion in the ‘noodle bowl’.3
The majority of India’s PTAs involving both developed and developing countries
(Singapore, South Korea, Japan, ASEAN, and Malaysia) since the mid-2000s are
CECAs or CEPAs, which go beyond manufactured goods trade liberalization to
cover liberalization commitments in agriculture, services, investments, and
intellectual property.4 Other areas that receive coverage are government
procurement, competition policies, and labour mobility.
While India’s PTAs have been including deeper and wider commitments in non-
goods areas that go beyond her WTO commitments, much of the existing
literature related to India’s older and more recent economic integration
agreements involves attempts to assess the gains and losses of tariff
liberalization commitments under individual PTAs at the sectoral level, using
different methods.5
By definition, the difference between the MFN rate6 and the preferential tariff
rate (margin of preference) is believed to give a comparative cost advantage to
an RTA member over both non-member producers as well as domestic
producers, leading to market access advantages in partner countries.7
Page 2 of 42
According to mainstream theory, the greater efficiency in resource allocation

that accompanies the ensuing trade creation8 is expected to give rise to
increased productivity, efficiency gains and competitiveness on the production
front, and consequently, welfare gains for all members. On the other hand, trade
diversion effect9 is considered to reflect the impact of a particular PTA on non-
member countries’ (p.289) welfare. Overall, the mainstream theory posits that
the removal of trade barriers under a PTA is beneficial and welfare effects are
maximized, when trade creation exceeds trade diversion. The higher the margin
of preference and greater the substitutability of products of non-member
economies with those of the PTA members, the greater are the chances of trade
creation. Trade creation from a PTA is also enhanced when a PTA member faces
high tariffs from the rest of the world for products with decreasing production
costs, or when, due to the small domestic market size, the scale of production is
too small to yield economies of scale. Trade creation is expected to be greater
also if the pre-integration economic structures are competitive, but are
potentially complementary after integration.
At the empirical level, the net impact of the trade creation and trade diversion
effects of tariff liberalization within a PTA depends on the specific conditions and
trading patterns of each PTA, and therefore, no unambiguous conclusions can be
drawn on their welfare effects. Further, it becomes impossible to predict if the
PTA will be trade creating or trade diverting, once we move beyond static
efficiency gains and consider the potential dynamic effects. There is emerging
consensus that PTAs having overlapping members with multiple and often
conflicting rules, tend to fragment markets and increase production and trade
costs thus affecting welfare, rather than the other way as predicted by
mainstream theory (Ali and Perez 2006; Baldwin 2006; ESCAP 2005). The net
effect of a PTA must also consider the potential impact of trade (and investment)
liberalization on member countries’ tariff revenues, which is too often neglected
even in dynamic analyses.
Typically, dynamic effects resulting from the restructuring of member and non-
member economies associated with the creation of a PTA are considered to be
gains from greater inter- and intra-industry specialization and economies of
scale. There is also the trade modification effect, which is based on the
assumption of complementarity rather than perfect substitutability of trade
flows between PTA member countries and non-member countries. When
liberalization under a PTA stimulates trade between its partners, it can also
positively affect trade with third countries (countries other than the partners), if
such trade mostly contains products that are complementary to the intra-PTA
production and trade.
Another segment of the mainstream approach to analysing PTAs’ potential

dynamic effects focuses on the effects of capital mobility, as (p.290) suggested
by Ali and Perez (2006). This approach argues that a PTA can increase economic
Page 3 of 42
growth rate through its effects on total factor productivity, and most important,
on factor accumulation (investments). This is the theoretical corner piece that
justifies the introduction of free capital mobility into free trade agreements
(FTAs).10
Ironically, the benefits purported by the models based on comparative advantage

underlying free trade theory and regional integration theory, in its static or
dynamic form, follow logically from a set of premises that guarantee from the
start full employment and welfare improvement independently of the initial
conditions of the trading partners (such as their size, stage of development, or
the range of goods that are domestically produced), the degree of trade
linkages, or the trajectory followed. Clearly, this does not mean that comparative
advantage is welfare improving in a world more akin to the real world.11
In the Indian context, SAPTA, SAFTA, the India–Sri Lanka Free Trade Agreement
and the ASEAN–India FTA have been the most studied PTAs until now. In the
case of South Asia, extensive quantitative studies using techniques such as
Computable General Equilibrium (CGE) and gravity models have generated
numbers related to very large ‘welfare gains’ and a three or four times increase
in intra-regional trade. Bandara (2009) undertakes a critical evaluation of the
estimates derived in these studies on South Asian integration. He found that
given the significant variation and inconsistency in the direction and magnitude
of the results of trade creation and diversion effects across different gravity
model studies, the results of these studies cannot be used as specific policy
guidance. While gravity modelling is an econometric and partial equilibrium
approach, as Bandara (2009) discusses, in recent years CGE models based on
the Global Trade Analysis Project (GTAP) database have assumed greater
importance in the quantitative evaluations of RTAs because of their apparent
ability to capture region-wide and country-wide effects. But CGE models are also
subject to criticism on several grounds,12 the most crucial of which relate to
their inherently weak theoretical and empirical foundations. These include the
assumption of full employment, guess values of elasticities and parameters, as
well as low levels of transparency of the results.13
Much of the other existing empirical literature is tied up with the dominant
orthodoxy that free trade is the panacea for India’s development problems
(seemingly oblivious to the existence of her large (p.291) domestic market). As
a result, much analyses on the impact of PTAs involves description of existing
trade patterns between India and the respective trade partner/s and then looks
at revealed comparative advantage (RCA) indices to examine the prospects for
trade creation and trade diversion. Given that RCA indices are based on a
country’s existing export shares for particular products in world trade, their use
as a measure of trade specialization at a particular point in time is justified.
However, studies that use RCA indices as a measure of international
competitiveness to examine the impact of PTAs typically argue that if India has
Page 4 of 42
high or rising RCA indices in some products, these have higher potential to
benefit from trade liberalization. This assumes that export shares (as captured in
RCA indices) reflect the competitive capability of an economy, wherein importing
country tariffs are the sole determinant of the export performance of a particular
product.
This is a reductionist and partial approach for analysing the impact of PTAs.
Importing country tariff is only one among several factors determining export
performance, in which technological capabilities of the exporting country as well
as investments, including foreign direct investment (FDI) (especially in the
context of increasingly integrated global production platforms) play major roles.
Export performance of a country also depends on the initial conditions of the
trading partners, the degree of trade linkages, and the trajectory followed, as
mentioned earlier. The export performance of a particular industry is thus
dependent on a large number of varied factors including trade and financial
policies, as well as industrial and technology policies, none of which are
considered in analyses using RCA indices.
Some studies discuss how increased preferential market access for intermediate
products would increase the competitiveness of India’s final goods exports
(Joseph 2010; Katti et al. 2010; Pal and Dasgupta 2009). However, in general,
they fail to link these findings to existing patterns of FDI and two-way/intra-
industry trade in Indian industries14 and assess the wider impacts of changes in
import penetration and export orientation in particular sectors on the economy.
Given that trade policy has a direct bearing on domestic economic conditions
facing the people of the country, there should be synchronization between the
formulation of trade policies and other national development policies. As such,
going beyond market access prospects in goods and services, there is a critical
need for policy coherence (p.292) between the FTA commitments made by a
country in areas such as investment, trade, and intellectual property across
agriculture, industry, and services. While there are some papers that discuss the
expanding coverage of India’s recent PTAs beyond goods market access to
include liberalization in agricultural and services trade, investment disciplines,
intellectual property protection (Francis 2011; IDEAs 2009; Kumar 2007a; Pal
2011), the attendant issues have not been analysed in a comprehensive
manner.15 Analytical challenges also arise from the inter-linkages between
India’s liberalization commitments under the WTO and those under PTAs, given
the tendency to make WTO-plus commitments in the latter and the
interrelatedness of commitments made under various PTAs.
The lack of analysis of economy-wide impacts prevents understanding the

economy-wide implications of this shift in India’s trade policy of engaging in
multiple PTAs with overlapping commitments. Going beyond the traditional
debate on whether PTAs create or divert trade, this chapter therefore presents
Page 5 of 42
the broader issues that should inform any discussion of the systemic and
developmental implications of PTAs. We argue that it is essential to understand
the increasing trend in India’s trade agreements to go beyond goods trade
liberalization, as this trend stands to exacerbate the growing disconnect(s)
between India’s trade policy and industrial policy.
Following this introductory section and literature review, the second section
presents a brief overview of the rationale and impact of India’s PTAs focusing on
tariff liberalization. Given the weaknesses in the mainstream approaches, this
section assesses the market access scenario for India in relation to its PTAs
using simple analytical tools. The third section provides an explanation on the
emergence of comprehensive agreements that involve liberalization
commitments in agriculture, services, investment, and others. The fourth section
develops the broader analytical framework linking these to policy issues. The
last section makes concluding points.
Rationale and Impact of India’s PTAs

Understanding the Rise in India’s PTAs
The rise in India’s involvement in PTAs has been a part of the shift that has
occurred in the focus of trade liberalization globally. The literature (p.293) on
the rationale for the surge in India’s PTAs thus mirror those found in the wider
literature on explanations behind the increased drive towards PTAs across
countries, which are inter-linked aspects in the canvas of new regionalism.
Some of these describe the successful experiences with regional economic

integration in the industrialized countries since the mid-1980s, namely, the
European Union (EU) and the North American Free Trade Agreement (NAFTA),
as having prompted South-East and South Asian countries to adopt or accelerate
economic integration strategies during the 1990s. This discussion ignores the
severe problems faced by the East European developing economies in their rapid
FDI-led industrial restructuring strategies during and after the integration with
the EU, or Mexico in the case of the NAFTA.16 This explanation also ignores the
fact that (unlike popularly perceived and argued in sections of the literature) de
facto regional integration was already relatively high in East and Southeast Asia
due to their involvement in multinational-corporation driven, or MNC-driven,
production networks in several industries by the late 1980s.17 Government-led
initiatives for regional integration centred on ASEAN in the 1990s are more
appropriately analysed as a defensive strategy aimed at consolidating the
existing regional trade-investment links and competing with the diversion of
export-oriented foreign investments to other countries/regions in the wake of
NAFTA and the liberalization of China’s FDI policies.18 ASEAN’s regional trade
integration and investment liberalization initiatives pushed these economies
further along the trajectory traced by MNCs. Further, ASEAN’s investment
initiatives focused only on investment liberalization, unlike the recent PTAs
which have begun disciplining national investment/industrial policies. Thus the
Page 6 of 42
successful countries among them had utilized effective industrial policies to

build up their domestic industrial and technological capabilities, with important
implications for the subsequent industrial development trajectories in these
countries.
In the Indian case, while the Look East policy announced by the Indian
government in 1992 is acknowledged to have played a role in India’s move
towards East Asian regionalism, both multilateral and regional factors became
important catalysts that accelerated India’s trade policy shift involving PTAs
across regions. The prolonged delay and seeming impasse in the WTO
multilateral negotiations since the late 1990s has been the single most important
push factor behind the (p.294) rise in PTAs worldwide. When the US began
pursuing bilateral agreements with willing countries after the collapse of the
WTO Seattle Ministerial Conference in 1999, it led to the drive by the other
developed countries to initiate FTA strategies. The pull factors in the Asian
region, including for India, include perceptions of heightened competition
brought about by ASEAN and China’s export success. The initiation of the
negotiations for China’s entry into the WTO drove ASEAN members, many of
which feared competition with China in third-country markets on MFN basis, to
pursue various bilateral FTA initiatives at the individual and the bloc levels
concurrently, in order to seek preferential access to their major markets.
As more and more countries become members of multiple RTAs, the desire of the
Indian government to avoid the perceived negative effects in terms of
marginalization in the export markets has played an important role, as the
country does not want to be excluded from a share in the perceived benefits of
belonging to the RTAs.19 With the ASEAN–China Free Trade Area (ACFTA)
coming into being in 2004, increasingly, competitive regionalism20 has also
played a role. These factors intertwine with growing recognition of the
importance of pan-Asian cooperation and integration for generating growth
impulses from within the region in the wake of the East Asian crisis.21
By the mid-2000s, several scholars had begun to argue that while the sub-
regional or bilateral regional cooperation initiatives by India under the
framework of South Asian Association for Regional Cooperation (SAARC) are
desirable, they are unlikely to exploit the full potential of regional economic
integration given the limited extent of complementarities at the sub-regional
level due to similar factor endowments and economic structures in the
neighbourhood. On the other hand, the wider diversities in the levels of
economic development at the broader Asian level are argued to offer more
extensive and mutually beneficial linkages through dynamic industrial
restructuring within the region. The formation of a broader economic community
in East Asia that brings together the emerging web of FTAs linking Japan,
ASEAN, China, India, and South Korea (or JACIK) into a region-wide RTA has
been argued to be the core of such an arrangement, which could be eventually
Page 7 of 42
expanded to cover other Asian countries in an Asian Economic Community

(Batra 2006; Das 2009; Francois et al. 2009; Kumar 2004; Mikic 2008).
(p.295) The common thread in these strands of explanations for the rationale
behind the increased drive towards PTAs is the accelerated export promotion
trade policy that has been adopted by successive Indian governments since the
1991 economic reforms. In its strategy paper on doubling exports by 2014, the
Commerce Ministry ‘sees FTAs as “building blocks” towards the overall objective
of trade liberalization and these should complement the multilateral trading
system. FTAs have become an important tool globally for achieving economic
objectives and increased market access.’
The following section examines the impact of the PTAs in force from the point of
view of tariff liberalization.
Assessing the Impact of India’s Preferential Tariff Liberalization

At the preliminary level, examining the ‘potential’ gains from preferential tariff
liberalization involves the estimation—for each of the PTAs—of the margin of
preference that India gained compared to the applied MFN rates of the partner
country/countries. These preference margins have to be analysed in relation to
India’s and her competitors’ existing market shares (and their growth rates) in
the PTA members’ and non-members’ markets, as well as the margin of
preference that competitors might have in those markets under other PTAs. To
come to an assessment about India’s potential net market access gains from the
PTA, its market access gains in PTA member country/countries have to be
compared with the market access gains that they would obtain in India under
the PTA.22
A second method is to examine whether India has consistently gained market

shares in the countries with which it has signed PTAs. This method gives us the
‘actual’ market access gained, given that tariffs are not the sole factor, but only
one among several factors determining the export performance of a particular
product, as discussed earlier. In this chapter, we adopt the second method,
supplementing it with the first method wherever possible.
At the disaggregated level,23 the distribution of India’s exports during 1995–

2012 clearly shows that with the exception of China, none of India’s existing
preferential trade partners accounted for even a 5 per cent share in India’s total
exports in the recent years.
The share of India’s exports going to Singapore did register a jump between
2002 and 2004 and increased to 5 per cent in 2005 coinciding (p.296) with the
signing of the CECA. Subsequently, it showed a decline until 2009. The increase
in Singapore’s share in Indian exports after that could be related to India’s
greater integration into the production networks under the impact of the
ASEAN–India PTA in 2010 as well as Singapore’s regional headquarter position.
Page 8 of 42
On the other hand, the share of India’s exports going to Thailand declined after
2002 and has hovered around 1 per cent, despite the coming into force of the
Early Harvest Program (EHP) of the India–Thailand FTA in 2004 and the India–
ASEAN FTA in 2010. Similarly, despite ASEAN PTA (APTA), SAPTA/SAFTA,
India–Sri Lanka FTA and Bay of Bengal Initiative for Multi-sectoral Technical and
Economic Cooperation (BIMSTEC), exports to South Asia remain low. The shares
of Indian exports going to Sri Lanka and Bangladesh were also less than 2 per
cent each in India’s total exports.
China joined the WTO as well as the APTA in 2001. Given that the initial jump in
the share of Indian exports going to China happened in 2002, it is difficult to
attribute this increased market access solely to tariff liberalization under APTA.
But under APTA’s Third Round tariff reduction launched in 2004, India was able
to get an average margin of preference of nearly 27 per cent on 1,796 HS 6-digit
product lines in the Chinese market. While this seems to have helped increase
Indian exports to China in 2005 with the share going up to 7.2 per cent, the
latter has fluctuated considerably since then and stood at 5.1 per cent in 2012.
From 2004, under APTA, India enjoyed an average margin of preference of about
35 per cent on 1,367 product lines in the South Korean market also. However,
the share of Indian exports going to South Korea, which peaked at about 2 per
cent in 2009, shows a drop to 1.4 per cent in 2012 even though the CECA with
South Korea came into force in 2010. The share of India’s exports going to
Japan, which has been on a secular decline since 1995 (7 per cent), has hovered
around 2 per cent since 2007, although the CEPA came into force in 2010.
Thus no significant and consistent positive correlation is observable between a

country’s membership in India’s PTAs and its share in India’s exports.
At the same time, among India’s PTA partners, East and Southeast Asian
countries gained the most in terms of share in India’s total trade. Given that the
trend in India’s increased trade with East Asia began some years before the
ASEAN–India FTA or the India–South Korea CEPA came into force in January
2010, it is pertinent to examine if (p.297) the EHP with Thailand (2004) and
the CECA with Singapore (2005) had offered significant margins of preference
to these countries in the Indian market.
It should be remembered that under India’s trade liberalization in accordance

with its WTO commitments, simple average ad valorem tariffs on manufactures
had decreased sharply from 89 per cent in 1989–90 to 31 per cent by 1997–8,
and further to 17 per cent by 2005–6. On the other hand, tariffs on agricultural
products had decreased from 84 per cent in 1989–90 to 30 per cent in 1997–8,
before increasing again to 43 per cent in 2005–6 (ADB 2008). But even at these
levels, India’s MFN tariffs in the mid-2000s were significantly higher when
compared to Singapore’s (which is a laissez-faire economy) and Thailand’s
(which had liberalized trade to a greater extent than India) (Figure 7.1). Thus
Page 9 of 42
the margin of preference these countries would obtain from signing a PTA with
India was quite significant.
For example, under the India–Singapore CECA, India offered tariff concessions
on 5,115 tariff lines (at the 8-digit level). Of these, 506 products had become
duty-free immediately upon entry into force of the CECA in 2005; and by April
2009, India had eliminated
(p.298) tariffs on 2,202 products

and granted a 50 per cent margin
of preference on another 2,407
products.
Similarly, the EHP agreed under
the framework agreement to
establish the Thailand–India
FTA signed in October 2003
reduced tariffs on 84
agricultural and industrial items
(at the HS 6-digit level) by 50
per cent immediately in the first
Figure 7.1 Average Applied MFN Tariffs
year in September 2004 and by
(including AVEs)
75 per cent in the second year,
with tariffs eliminated Source: Based on WTO Tariff Profile.
completely by 1 September
2006. The 84 items under the
EHP included, for example, fruits, fishery products, electrical appliances
(window/wall air-conditioners, colour TVs, ball bearings), precious metal and
jewellery, polycarbonates, and more.
Even though the number of tariff lines liberalized by India under APTA and Indo-
Thailand EHP was relatively small, the margins of preference offered by India in
the scheduled product lines were significant and contributed to growing imports
from these countries.24 This is reflected in the fact that while India had
continuously maintained trade surplus vis-à-vis Thailand during 1995–2004, with
the higher growth in Thailand’s exports to India, this has turned into a trade
deficit since 2005.
On the other hand, up to the Third Round APTA tariff reduction schedule, the
average margin of preference offered by India to China and South Korea was 24
per cent on 570 tariff lines (Katti et al. 2010).
India also obtained preferential access to the partners’ markets under these
PTAs. But in general, it is observed that even though India’s share in some of
these countries’ imports has also been growing, in most cases the share of their
Page 10 of 42
exports destined for India increased faster than India’s shares in their imports
(Figures 7.2, 7.3, and 7.4).
As a result, except in the case of the Philippines, Singapore, and Vietnam, India
has a negative trade balance with all the major PTA partners25 in these regions.
That is, the preferential access they obtained to the Indian market has led to
greater effective market access for them than what India could gain in their
markets.
We juxtapose these trends in India’s trade with its PTA partners within an
analysis of the changing sectoral composition of India’s global trade, which
points to a significant increase in two-way trade in several sectors. Francis
(2011a) showed that in 2007 petroleum and products topped the list of sectors
with significant two-way trade,26 and gems and jewellery continued to be the
most significant non-oil sector with two-way trade. But additionally, organic
chemicals, (p.299)
electrical machinery, ores, slag

and ash, and articles of iron and
steel have shown significant
increases in two-way trade.
Similarly, two-way trade remains
significant in non-electrical
machinery, iron and steel,
automobiles, as well as plastics
and plastic products. This seems
to reflect the gradual integration
of India into the production
networks driven by MNCs from
India and abroad, following the
progressive liberalization of FDI Figure 7.2 India’s Shares in China’s and
policies and tariff liberalization. South Korea’s Exports and Imports (as
It is well established in the percentage of respective partner country
literature that given that total)
production sharing by MNCs Source: Calculation based on
between countries typically UNComtrade Database.
involves the import of inputs for
assembly or additional
processing as well as the export of intermediate goods for assembly or additional
processing by third countries, there is an expansion in two-way trade between
countries involved in such production networks, and in particular, in two-way
trade in intermediate goods.27
It can be observed that the rising share of East Asia in India’s total trade and the
rapid increase in two-way trade observed in India’s trade with Southeast and
East Asia (especially in intermediate products) (p.300)
Page 11 of 42
point towards India’s growing

integration into the regional and
global production networks
centred on ASEAN and China.
Francis (2011a) showed that
already between 1995 and 2008,
two-way trade between India and
Indonesia, Malaysia, Thailand, and
Singapore also increased in as
many as 13 sectors. In addition to
the 10 sectors mentioned earlier,
these also included miscellaneous
chemical products; rubber and
rubber products; and optical,
Figure 7.3 India’s Shares in Indonesia,
photo, technical, medical
Thailand, and Vietnam’s Exports and
apparatuses.
Imports (as percentage of respective
Given the evidence of firm-level
partner country total)
restructuring of production
operations in the region, it can Source: Calculation based on
be argued that these trade UNComtrade Database.
trends are associated with
(Asia-wide) industrial
restructuring being undertaken by MNCs, with the increase in PTAs in the
region. This was corroborated by the study analysing India’s increased trade and
investment integration with Thailand in IDEAs (2009). Kumar (2007c) had
pointed out that the implementation of the Indo-Thai bilateral FTA in terms of
the EHP led to significant industrial restructuring in the operations of not only
Japanese corporations, but also South Korean and Indian MNCs (p.301)
in some sectors such as

machinery, chemicals, and
automobiles. Based on the pattern
of trade and FDI between the two
countries, IDEAs (2009)
established that production
network–driven trade integration
was emerging between India and
Thailand in these sectors.28 The
increase in the share of India’s
exports going to Singapore can
also be linked to the dynamics of
intra-industry trade in the region
driven by MNCs, particularly in Figure 7.4 India’s Shares in Singapore
the electrical machinery sector,
and Malaysia’s Exports and Imports (As
despite the fact that India did not
percentage of respective partner country
gain significant additional goods
total)
market access under the CECA,
Page 12 of 42
but had given increased access to Singaporean firms for investments in Indian
industries (discussed in the next section).
An analysis of tariff preferences Source: Calculation based on
under the ASEAN–India FTA UNComtrade Database.
(AIFTA) in goods (Table 7.1) and
the relevant market shares in
Francis (2011a) showed that emerging production network–driven trade
restructuring between India and East Asia is likely to intensify with the entry
into force of this FTA. Given that significant two-way trade has already been
observed in sectors like transport equipment, (p.302)
Page 13 of 42
Table 7.1 Tariff Reduction Scenario in Major Sectors involved in India’s Two-way Trade with ASEAN
Sector Normal Track-1 products Normal Track-2 products
Avg. 2007 MFN Avg. Pref. Tariff in Avg. Pref. Tariff in Avg. 2007 MFN Avg. Pref. Tariff in Avg. Pref. Tariff in
2010 2013 2010 2013
Mineral fuels, 8.5 6.4 0 – – –

oils, distillation
products, etc.
Organic 7.1 4.9 0 7.5 5.0 2.0

chemicals
Miscellaneous 8.8 6.3 0 10.0 7.5 3.0

chemical products
Plastics and 7.5 5.0 0 8.5 6.2 2.5

articles thereof
Rubber and 9.4 7.1 0 10.0 7.5 3.0

articles thereof
Pearls, precious 9.2 6.9 0 – – –

stones, metals,
coins, etc.
Iron and steel 10.0 7.5 0 – – –
Articles of iron or 10.0 7.5 0 – – –

steel
Page 14 of 42
Sector Normal Track-1 products Normal Track-2 products
Avg. 2007 MFN Avg. Pref. Tariff in Avg. Pref. Tariff in Avg. 2007 MFN Avg. Pref. Tariff in Avg. Pref. Tariff in
2010 2013 2010 2013
Copper and 6.5 5.0 0 7.5 5.8 2.5

articles thereof
Nuclear reactors, 7.0 4.8 0 7.5 5.0 2.0

boilers,
machinery
Electrical, 6.1 4.4 0 9.2 6.7 2.7

electronic
equipment
Vehicles other 17.0 9.1 0 10.0 7.5 3.0

than railway,
tramway
Optical, photo, 7.3 5.1 0 8.0 5.5 2.2

technical, medical
and other
apparatus
Source: Author’s calculation based on India’s AIFTA Tariff Reduction Schedule to ASEAN-5 + CLMV.
Note: A (–) denotes that there were no products listed under that category (NT-2) in those particular sectors.
Page 15 of 42
(p.303) machinery, and chemicals, it is envisaged that AIFTA will lead to India’s
deeper integration into production networks.29
The analysis of the tariff reduction schedule for India under the India–South
Korea CEPA which came into force in 2010, points to similar trends (Kallummal
2011a). While there was no immediate impact of tariff reductions in 2010,
sectors such as industrial machinery, auto parts, textiles and clothing as well as
electronics and electrical machinery would face the greatest impact from tariff
liberalization by 2017. It should be noted that South Korea is already one of the
top 10 investing countries in India. The main sectors attracting FDI from South
Korea are transportation industry accounting for over one-third of the total, fuels
(power and oil refinery), electrical equipment (computer software and
electronics), chemicals (other than fertilizer) and commercial, office and
household equipment. With significant tariff reduction by 2017 under the India–
Korea CEPA, some of these sectors are likely to experience greater production
restructuring by MNCs.
In the India–Japan CECA, it is seen that products under textiles, clothing, and
footwear will face the immediate effect of the tariff elimination in 2011, followed
by the electronic and electrical machinery sector. However, by 2021, the
majority of products in sectors such as chemicals, industrial machinery, forest
products, electronics and electrical machinery as well as gems and jewellery
would also face tariff elimination (Kallummal 2011b).
The above observations point to the scenario that the recent PTAs will accelerate
India’s integration into the production networks centred on ASEAN and China,
and will lead to a further increase in two-way trade between India, Southeast
Asia, and East Asia.
As noted earlier, it has been argued in the context of pan-Asian integration

initiatives that the wide diversities in the levels of economic development,
economic structure, and capabilities at the broader Asian level offer
opportunities for dynamic industrial restructuring within the region and that
India would also benefit from being a part of such region-wide restructuring.
However, apart from relative labour costs, availability of natural resources, as
well as other domestic economic factors such as the level of domestic
investments, the state of infrastructure, macroeconomic stability and the
predictability of the regulatory environment, and the MNCs’ location decisions
are crucially influenced by the industrial and technological capabilities of (p.
304) the host country for the particular production process that they plan to
relocate.
It is also important to understand that while strict rules of origin in a bilateral or

regional PTA can force localization of certain parts of production within the
older PTA members, broader region-wide trade liberalization removes the need
for MNCs to maintain horizontal national operations and this impacts the
Page 16 of 42
production and trade structures resulting from regional restructuring. Broader

PTAs with cumulative rules of origin enhance the possibility of sourcing inputs
from the larger region at preferential rates or duty-free, which allows MNCs to
locate different segments of the production process for a particular product in
different countries (with competition now spread across a wider set of
countries), and export to or import from those countries. A combination of
broader and overlapping FTAs can also lead to the scenario that an MNC can
locate the entire production process for a particular product in a single country
that it considers the most suitable and import tariff-free into all other markets in
the region. The associated production restructuring experienced in particular
sectors may lead to a reconfiguration of two-way trade from intra-industry to
inter-industry in those sectors, apart from a change in the geographic
composition of India’s trade flows.
Consider the changes observed in Japanese electronics firms’ production

location decisions, subsequent to the formulation of the series of new FTAs
covering Southeast and South Asia. Under the rules of origin criteria of AIFTA, a
product is eligible for preferential market access if it follows two criteria:
1. the AIFTA content is not less than 35 per cent of the free-on-board
(FOB) value; and
2. the non-originating materials have undergone at least a change in tariff
sub-heading (CTSH) level of the Harmonized System (HS) classification.
A Japan External Trade Organization (JETRO) survey of Japanese firms in Asia

(Sukegawa 2009 quoted in Francis 2011a) established that Japanese firms
intended to use Thailand as a production base to export to the Indian market
utilizing the AIFTA given that the procurement ratio of Japanese firms in ASEAN
exceeds 40 per cent. It was observed that after Thailand started the Indo-Thai
FTA’s EHP with India in 2005, Japanese manufacturers had shifted production
base to (p.305) Thailand for exporting to India, especially for air conditioners,
televisions and other machinery equipment. For example, Sony, which had
television factories in both countries, stopped production in India and started
exporting to India from Thailand. But in November 2009, Sony announced that it
would cease TV production in Thailand also as it became certain that the AIFTA
would come into effect in January 2010. It was planned that Malaysia would now
be Sony’s only global production base for television.
Thus the logic of production sharing through regional and global production
networks can mean any of the following under liberalized trade (Francis 2011b):
• output and job creation in India as the country is chosen for the production
of a particular product line;
• output and job losses, because foreign facilities are closed in India in
conjunction with new investment in other preferred host countries; or/and
Page 17 of 42
• output and job losses, because of closures by domestic companies that

cannot survive the increased foreign competition.
To the extent that such region-wide industrial restructuring due to the PTAs
means closing of factories in India in favour of production in a partner country,
the latter would involve output and employment losses in India.30
Similarly, even as there might be a rapid increase in intra-industry trade

involving Indian firms, the country could experience decline in local value
addition, if Indian firms lag behind in dynamic competitiveness. The experience
of ASEAN-5 countries empirically established by Kuroiwa (2009) is illustrative.
We know that integration in global production networks is the manner in which
most ASEAN-5 countries have achieved export-led growth. Production networks
established by MNCs have been identified as lying at the heart of the growth in
intra-industry trade among East Asian countries over the last two decades now.
Kuroiwa (2009) found that closely related to the geographical spread of
production networks in the region between 1990 and 2000, many industries in
ASEAN-5 exhibited declines in local content such that it went below the
threshold of 40 per cent to be eligible for preferential treatment under the
ASEAN Free Trade Area (AFTA). In contrast, for each ASEAN country, there was
increase in the proportion of intermediate inputs supplied by the neighbouring
(p.306) ASEAN countries, South Korea and China, and Japan to a lesser extent.
This most aptly described the dynamics particularly in the electronics industry.
In this case, even as each of the ASEAN-5 countries involved in production
networks experienced a decline in local content, the cumulative rules of origin
under ASEAN–Korea and ASEAN–Japan FTAs have played a significant role in
promoting tariff-free trade in the region (to benefit the MNCs).
Similarly, if the level of India’s technological capability is not constantly

upgraded, we would find that the proportion of local value added generated by
Indian industries would decline despite a rapid increase in her exports. The
ensuing investment, production, and trade patterns have implications for India’s
future industrial and technology development trajectories. Figure 7.5 reveals
that even as the number of items exported by India to ASEAN countries has
been consistently greater than what she imports from them, there has been a
distinct sharp increase in the value of India’s imports from ASEAN as compared
to her exports around 2005 onwards.
Integration into global production and marketing networks without continuously

building and upgrading domestic capabilities will make a country’s production
and consumption lines dependent on other countries’ production systems and
make them highly vulnerable to external economic conditions. Further, instead
of importing to meet domestic supply-demand mismatch, countries may get into
a model of importing most products for consumption (and production), with
serious adverse implications for domestic industrial capabilities, with
Page 18 of 42
consequent negative effects on employment, balance of payments (BoP),31 and

eventually, on the country’s development.
Arguably, India is moving along this path supported by rapid tariff liberalization
under PTAs. An analysis of the products kept by India in its negative lists under
the PTAs with ASEAN, South Korea, and Japan (at 6-digit-level HS classification)
shows that India has already committed to reducing tariffs significantly in most
sectors and industries. These include not just consumer goods, but nearly the
entire range of capital goods and intermediate goods. Although a significant part
of the elimination/reduction in tariffs in the electrical and non-electrical
machinery industries (covering especially HS chapters 84, 85, and 90) is related
to the commitments under the WTO’s Information Technology Agreement (ITA),
the low (or zero) percentage of total tariff lines belonging to organic and
inorganic chemicals, metal and (p.307)
metal products, and others, in the

negative lists of the FTAs points to
drastic trade liberalization in
these intermediary industries,
which have a significant presence
of small and medium enterprises
(SMEs) too. The only sectors that
retain some level of protection
through the negative lists are the
primary product-related sectors
(such as edible vegetables and
roots). On the other hand, in the
case of some sectors such as
textiles and clothing (HS 54, 55,
59, and 60); plastic and plastic Figure 7.5 ASEAN–India Trade
products; rubber and rubber Relationship: 1995–2010
products; cotton; silk; copper and
Source: Based on DGCIS data, Kallummal
copper products; and glass and
(2011c).
glassware, there seem to be no
consistent policy given that these
product lines are kept in the
negative lists of the PTAs with Korea and Japan, while most of them have already been
liberalized under the FTA with ASEAN. Given that ASEAN economies are highly
integrated with Japan and Korea through production-sharing arrangements such that
firms from these countries can utilize the AIFTA for gaining market access in India,
keeping such sectors in the negative lists of the India–Korea and India–Japan CEPAs
become rather meaningless.
(p.308) It has been already shown that India predominantly imports a basket of
goods with high technological and productivity content, and exports products
that embody a relatively low level of technology and productivity (Alessandrini et
al. 2009). Joseph and Reddy (2009) also established that India’s exports are still
labour intensive in nature. These trade trends do not bode well in the context of
Page 19 of 42
India’s growing integration into production networks through FDI and trade
liberalization as well as the emergence of comprehensive PTAs, as we discuss in
the following two sections.
Emergence of Comprehensive PTAs

The fact that India has been undertaking voluntary tariff liberalization at the
MFN level over the last decade means that the margin of preference that
partner countries would obtain under a PTA with India (which influences firm-
level decisions on location) has reduced in significance. Figure 7.6 shows that by
2009, India’s MFN tariffs on as much as 91 per cent of non-agricultural products
had been brought down to the 5–10 per cent range or below (including zero
duty).
On the other hand, close to 70 per cent of India’s agricultural tariff lines were
still in the tariff range of 25–50 per cent in 2009. This is why recent PTAs such
as the AIFTA have included agricultural products in order to obtain preferential
treatment in agricultural trade.
Trade liberalization impacts the agricultural sector adversely through a fall in

demand for domestic food and non-food agricultural products.32 For example, in
the case of AIFTA, several studies have argued that tariff reduction and
elimination will not only directly disrupt farmers’ domestic markets, but reduce
farmers’ bargaining power and lead to a fall in domestic prices also because of
the increased supply of agricultural and related semi-processed (and processed)
products.33
Experiences from other countries too point to the fact that adjustment of
farmers to trade liberalization has had a negative impact on their livelihoods and
income levels. It is believed that agricultural trade liberalization will help boost
international agricultural trade and automatically pressure farmers and
entrepreneurs to adjust themselves more efficiently to international competition.
But as argued in the case of Thailand, adjustment often means continuing to
grow the same crops at a disadvantage because they are a part of farmers’ lives
(p.309)
Page 20 of 42
(p.310) and these very crops

provided them and their families
with basic needs and some level of
luxury for years. For other
farmers, adjustment means joining
companies in contract farming.
Livelihood concerns could drive
them towards becoming a part of
vertically integrated agri-
commodity value chains through
contract farming. Contract
farming may be favourable for
farmers if contracts are negotiated
on equal footing and there is a
mechanism to regulate and control
unfair practices. But experiences
in developed and developing
countries have shown that farmers
are usually put in a
disadvantageous position on both
the production and marketing
sides (Ghosh 2003; Prachason
2009 quoted in Francis 2011a). Figure 7.6 Distribution of India’s Tariff
Further, as argued in Francis Lines based on Tariff Bands (2009 and
and Kallummal (2009b), 2010) (Percentage Share)
financial liberalization has
Source: Based on India’s tariff profile
already been impacting the
given by the WTO’s Tariff Profiles,
agricultural sector in
extracted on 20 February 2011 and 19
developing countries through
June 2013.
three different channels—the
direct channel through cost of
bank credit and its availability for farmers; the macroeconomic channel through
deflationary policies, and the indirect channel through the impact of financial
liberalization on the various links in the agri-product value chain. The adverse
impacts of domestic financial deregulation and the overall reduced role of
government financing (Ramachandran and Swaminathan 2005) gets further
vitiated by the constraints imposed by external financial liberalization, through
its interactions with monetary and fiscal policies as well as through the
liberalization of FDI and foreign portfolio investment policies. The liberalization
of FDI norms, which brings MNCs into the value chain of food products
(including distribution services),34 serve to exacerbate the difficulties faced by
small farmers in developing countries. It has been observed that foreign
investment and trade liberalization together with technological changes have led
to MNCs becoming dominant in the entire chain of agricultural production and
distribution comprising farmers, fuel companies, fertilizers and chemical
companies, seed companies, machinery companies, grain companies, packers
Page 21 of 42
and processors, and retailers. In this process, the balance of market power
between farmers and corporations is the primary determinant of the distribution
of profits within the agri-food production chain. This leads to a disconnect
between the gross farm revenue and net farm income. The various channels of
interaction between financial liberalization and trade liberalization in the
agricultural sector and the current trends in change of ownership patterns in
farm input industries and related service sectors such (p.311) as wholesale and
retail distribution, combined with the drift towards heightened integration in the
agricultural products value chain, could lead to significant loss of income for the
farmers as well as a decline in their food security.
The integration of India’s urban and even small town food markets, which are
already linked to the international economy through the ongoing process of
MNC (global or regional) penetration with the liberalization of the multi-brand
retail sector, will increase further with trade liberalization under PTAs such as
AIFTA. This will be enabled by the processes of consolidation and
multinationalization occurring in the case of fast-food chains as well as in
second-stage processing (defined as processed food products for final consumers
such as yogurts and cheese, breads, and noodles), facilitated through liberalized
trade in food products through ASEAN countries. It is important to note that
apart from being integrated especially with Japanese and American food-
producing MNCs by hosting their production facilities, ASEAN has also signed
FTAs with Australia and New Zealand, who are major producers and exporters of
milk products. Thus AIFTA and other PTAs involving agricultural trade
liberalization will push India into getting deeply integrated into the international
food production and marketing chains. Drawing from experiences in other
countries (Francis and Kallummal, 2009b), this portends adverse consequences
for many segments of the Indian farming community.
Meanwhile, given that the ongoing Doha Round trade negotiations aim to reduce
and harmonize the MFN-bound rates significantly, the present tariff preference
margins will become less significant in determining market access as and when
the schedules are finalized. As pointed out by Chandrasehkar and Ghosh (2010),
once average tariff rates are relatively low, even small changes in nominal
exchange rates can have very significant effects on the extent of competitive
pressure faced by domestic producers and therefore on the pattern and
structure of trade.
With the drop in MFN tariffs, the significance of non-tariff barriers (NTBs) in
determining competitiveness and market access has also increased. The use of
non-tariff measures like Technical Barriers to Trade (TBTs) and Sanitary and
Phyto-sanitary (SPS) measures have been increasing steadily across developed
and developing countries. Addressing the NTBs put up across industries by
different trading (p.312) partners involve dealing with complicated technical
aspects in each area. This not only takes considerable time, but also involves
Page 22 of 42
acquisition of the higher technological production processes required to meet

these standards (Kallummal 2006, 2012). While Mutual Recognition Agreements
(MRAs) can allow Indian firms to take advantage of these agreements to
overcome SPS and TBT measures in the partner countries, in specific sectors
MRAs could involve the process of raising our production standards to another
level. In sectors with a high foreign firm presence, the process of signing MRAs
may even get accelerated because MNCs have an obvious advantage in following
similar production processes across borders. However, this will negatively affect
domestic SMEs, given that the principle of national treatment has to be applied.
Given the technology lag faced by India in many sectors, the increasing presence
of TBT and SPS measures, with or without MRAs, will also lead to higher
technology imports (such as licensing and patents) in agricultural and non-
agricultural sectors.
With India’s multilateral trade liberalization under the WTO leading to PTAs
being less preferential in effect, preference erosion is one of the reasons for the
increasing tendency for including non-trade areas such as investment and
competition in the recent PTAs. The increasing integration of the Indian
manufacturing sector into production networks and the importance of the
services sector in the Indian economy offer the other part of the explanation for
the increased interest to include investment, services, and other non-goods
areas under recent PTAs.
We already saw that given the trade policy shift towards export orientation, FDI
is increasingly perceived by India as a key channel to establish linkages with
regional or global production and distribution networks for improving their
international competitiveness. It can be seen that the emergence of India’s
export interests and increased number of Indian outward investors in particular
sectors (for instance, in chemicals, iron and steel, or automobiles; or services
like hospitality, healthcare, education, and information-technology-driven
services) have meant that the interests of such Indian firms have also come to
dominate India’s negotiating position in its PTAs. In other words, India is no
longer seeing itself as a destination. With the prospect of increased market
access for exports, or increased FDI, or both from PTA partners, India is
therefore seen to be making WTO-plus binding liberalization commitments in its
PTAs in investment and services.
(p.313) The investment liberalization objective has meant that in addition to

national treatment and MFN treatment for investors, investment provisions in
FTAs have also come to include ‘market access’ (which is essentially a trade
concept). Guaranteeing market access in investment in a sector simply means
giving up host country policy flexibility to regulate entry of foreign investments
in that sector.
Page 23 of 42
In the CECA with Singapore, the sectors in which India made investment-related
commitments include: manufacture of food products; textiles and wearing
apparel; dressing and dying of fur; beverages; manufacture of paper and paper
products; manufacture of chemicals and chemical products; manufacture of
radio, television and communication equipment and apparatus; manufacture of
motor vehicles; development of township, housing, built-up infrastructure and
construction development projects; among others. The investment chapters in
the agreements with South Korea and Japan too include market access for
industries.
Will region-wide investment liberalization being achieved through PTAs facilitate

greater FDI flows into India? Given that the investment decisions are driven in
the first place not by lack of policies for protecting foreign investment, but
because the country does not fit into the value chain for a particular product,
sustaining increased levels of FDI inflows will ultimately require greater national
investments in industrial and technological capabilities. But while the country’s
positioning in the division of labour in production networks is determined by its
domestic industrial and technological capabilities, the policy space to implement
many of the industrial policy tools for building and upgrading such domestic
capabilities are increasingly being undermined in the recent PTAs.
Going Beyond Tariff Liberalization: Emerging Policy Issues

It has been seen that historically all developed countries, and in the more recent
past newly industrializing countries also had used appropriate industrial policy
instruments to help improve domestic capabilities and to create the conditions
for the development of technologies. In this section, we attempt to develop a
conceptual framework for examining the impact of the commitments being
undertaken by the Indian government in the investment and services chapters in
various (p.314) recent PTAs on the policy space that is necessary for the
country to sustain her existing competitiveness in particular industries/sectors
and develop new competitive sectors.
While Indian FDI policy was quite restrictive until 1991, there has been a
marked change in India’s official perception towards FDI since then with
attendant liberalization measures. In addition, by being a party to 72 bilateral
investment promotion and protection agreements (BIPAs; these are more
typically called bilateral investment treaties or BITs), India has also been
undertaking internationally binding obligations on foreign investments
originating from these partner countries (while some more are under
negotiation). The purpose of these treaties—since the first one signed with the
UK in 1994—has been to ‘promote and protect’ investment, based on the
assumption that offering treaty-based protection to foreign investments will
boost investor confidence and translate into greater investment inflows.
Page 24 of 42
BITs contain investment promotion clauses like national treatment (that is, not
discriminating between foreign and domestic investments), MFN treatment (that
is, not discriminating between foreign investments from different countries), fair
and equitable treatment,35 free transfer/repatriation of profits and other
investment-related funds. Treaty-based protection includes the commitment by
the state of not expropriating or nationalizing foreign investment unless there is
a public purpose, which is accompanied by provisions for compensation against
expropriation and investor-state dispute settlement system. The latter includes a
right to enforce arbitral awards at international arbitral forums.
Among India’s existing PTA partners with whom there are commitments on
investments, only South Korea had a BIT with India 1996 onwards. The
provisions in India’s present CECAs and CEPAs are BITs-plus in that they are far
more intricate and extensive than those in her model Bilateral Investment
Promotion Agreement (BIPA) that is applied across many BITs or the modified
ones as in the BIT with South Korea. That is, even as the evidence to confirm any
direct relationship between a country signing BITs and foreign investment
inflows into that country remains inconclusive at the global or Indian level
(Ranjan 2010a), most recent FTAs involve more detailed provisions to liberalize
and protect all kinds of ‘investments’ as well as conditions on the ‘treatment of
investments’, which make them BITs-minus in terms of policy space.
(p.315) The major features of the investment provisions under the India–
Singapore, India–South Korea and India–Japan CEPAs include:36
• market access (through the scope of application);
• national treatment;
• MFN treatment;
• safeguards against expropriation;
• compensation for losses;
• unrestricted transfer of capital; and
• settlement of disputes.
The scope of application of the investment disciplines in PTAs is covered by the

definitions of ‘investment’ and ‘investors’ as well as policy measures of the host
parties affected by the agreement. The overall implications have to take into
account the interactions of the definition provisions with the operative
provisions (all provisions except those relating to scope of application) as well as
the interaction between investment provisions across different FTAs.37
Most FTAs emulate BITs and include ‘broad’ definitions of investment wherein,
besides FDI and various other forms of capital flows are included under
investment. A broad or open-ended definition of ‘investment’ is asset based and
Page 25 of 42
typically states that ‘investment means every kind of assets’. Such a definition
covers equities, securities, loans, derivatives, sovereign debt, as well as a broad
range of intangible assets. The latter includes: traditional intellectual property
rights (IPRs) such as patents, copyrights, and know-how; management and
consultancy rights; claims to money and titles to performance; business
concessions including concessions relating to natural resource scoping,
extraction; and similar other rights.
It is most essential that intangible assets on IPRs should not be included in the
definition so as to retain the hard-won flexibilities under the WTO Agreement on
Trade Related Intellectual Property Rights (TRIPS). The current Indian Patent
Act contains all the TRIPS flexibilities and can be used for ensuring availability
of patented medicines at affordable prices with further fine-tuning of the
relevant provisions, institutional capacity building, among others.38 However,
the inclusion of IPR into the definition of investment in FTAs will eliminate the
scope for all these. As argued by Gopakumar (2010), inclusion of IPRs in the
category of assets covered under ‘investment’ also creates confusion among the
generic pharmaceutical industry to (p.316) develop a long-term strategy on the
basis of the flexibilities available in the Patent Act. Therefore a broad open-
ended definition, which commits a host country to granting additional protection
to IPRs, will not be consistent with the country’s socio-economic development
needs.
Similarly, broad definitions including portfolio and other financial assets in the
definition of investment are highly problematic not only from the point of view of
the ability to attract ownership-based FDI,39 but also for ensuring financial and
macroeconomic stability in the country. The latter has adverse impact on
productive sector investments as well.40 Due to the investment protection
provisions, broad definitions of investment could also lead to situations where
host country governments can be sued even by investors in financial assets and
instruments, by deeming legitimate regulatory policies as expropriation.
National treatment clauses under PTAs grant equality of treatment between

foreign and domestic enterprises once they are established in the host country.
This means that a host party cannot impose extra regulations or requirements
on foreign investors over and above those faced by domestic firms. This affects
the government’s ability to regulate multinationals so as to maximize the
benefits of foreign investment.
It is sometimes argued that selective liberalization of entry and establishment in

specific activities or industries (that is, ‘pre-establishment’ national treatment
using a positive list) will take care of developmental concerns about full
liberalization. National treatment commitments on the pre-establishment stage
of investment question the host governments’ right to regulate entry of FDI and
legally bind the degree of investment liberalization. Thus granting pre-
Page 26 of 42
establishment national treatment even based on a positive-list basis is

undesirable since the host party will be bound by these sectoral commitments
when economic conditions warrant policy changes. Given that procedures to
screen investments enable the host country to assess its potential impact before
granting permission to invest, maintaining the right for prior approval is crucial.
For India, with its large agricultural sector and significant SME segment in the
agro-processing industries (for example, frozen fruit and vegetables, milk
products, bottled and canned soft drinks, and prepared fresh and frozen fish
industries), it is important to exclude (p.317) such industries/activities from
the coverage of investment. Allowing FDI into these small-scale industries can
destroy domestic jobs and livelihoods, with domestic SMEs unable to compete
with the large and capital-intensive production by multinational agribusiness
corporations. FDI into agribusiness-related activities can be problematic not just
from the point of view of such industrial employment that will be affected, but
also from the point of view of food security and farm livelihoods. When the very
logic of export-oriented food production is questioned given the lack of evidence
of increase in farm incomes, the need for FDI into agricultural production to
increase exports or domestic supply is even more questionable. It should be kept
in mind that the services chapter also offers liberalization in market access in
various services sectors.41 Thus in the context of agriculture, trade and
investment commitments in liberalizing agriculture have to recognize all these
inter-linkages, the interdependence between agricultural development and
industrial development (by providing a basis for industrial development,
diversification and growth) as well as the national imperative to support
domestic agriculture production for ensuring food security and reduce
environmental consequences.
When it comes to investments in services, it is true that some Indian service

providers from hospitality, healthcare, education, information technology, or IT-
driven services may stand to gain substantially by obtaining improved market
access to developed and also other developing countries’ markets. But in that
process, governments should not trade-off their social sector commitments
which are basic to the human development needs of the majority of their
populations against increased market access for sectors or segments that could
do without the additional market access they would gain through such trade-
offs. Existing experiences with privatization of public services have shown that
government monopolies in social sectors (such as water and sanitation services,
healthcare, and education) are crucial in meeting the development rights of the
economically and socially deprived.
Often under PTAs, while liberalization of existing regulatory regimes takes place
when host parties agree to remove ‘market access’ measures currently in place,
they also often give away policy space for putting regulations in place in future
when they commit not to introduce such measures in the future. These are all
Page 27 of 42
measures that have been part of the FDI regulatory framework to guide and
influence (p.318) the impact of FDI on domestic service sectors and the
economy as a whole.
Even if India has made autonomous service sector liberalization going beyond its
commitments under the WTO’s General Agreement on Trade in Services (GATS),
India should not undertake GATS-plus commitments through FTAs, because once
they are bound under the investment agreement (or the services chapter), it will
take away government flexibility to change policies to suit changing priorities.
By doing the latter, the additional preferential treatment that India extends to
bilateral or regional trading partners can be in terms of access to national
industrial policy measures such as subsidies for research and development
(R&D), regional development or environmental technology application, or tax
exemptions, and subsidized bank credit. It is known that such preferential
treatment offered to PTA members will have to be extended to all other WTO
member countries as well, if these become the benchmark in the future for
extending liberalization in multilateral negotiations.42 By taking a ‘GATS-plus’
approach in PTAs, India is not only giving up policy space vis-à-vis a particular
trading partner, but also undermining the bargaining leverage it could have used
when negotiating for liberalization with countries that have more restrictive
regimes.
In particular, opening up the financial services sector and allowing the entry of
foreign financial service providers increase fragility and magnify the problem of
financial instability that trade in new financial services generate. This is critical
because, as the 2008–9 crisis showed, given the extent of financial
entanglement, all countries with open financial sectors are affected by the
volatile functioning of unregulated financial markets elsewhere. All these mean
that government should have the ability to frame regulations as and when
required depending on changing financial sector dynamics (Francis 2011b). For
instance, many of the measures or procedures implemented by the Reserve Bank
of India during 2003–8 under a financial precautionary principle for new
financial products would not have been possible if India had committed financial
services under the GATS.43
MFN treatment means that a host country must extend to investors from a
contracting party, the same treatment or treatment ‘no less favourable’ than it
accords, ‘in like circumstances’, to investors from any other country. MFN
provisions should explicitly establish exceptions to their application. National
treatment and unqualified MFN (p.319) combine to offer particularly strong
protection to international investors since any derogation from national
treatment (for example, for national security purposes) still leaves MFN, which
guarantees that foreign investors from contracting parties to a PTA will be
granted the same treatment as that for other foreign investors in that market.
Therefore, MFN treatment and privileges that one of the parties grants to
Page 28 of 42
investors from other States owing to their membership in a free-trade area,

customs union, or regional agreement—whether already in existence or to be
signed in the future—should be excluded. This is because MFN clauses in
bilateral and regional agreements mean that the highest standards in one of
them are extended to parties to the other agreements. Since a number of
important countries are members of various regional agreements, unqualified
MFN clauses will facilitate cross-regional harmonization covering more and
more countries and regions, defeating the original purpose of South–South FTAs
and establishing a level playing field for foreign investors (Francis 2011b).
Prohibition on performance requirements is a third element in the treatment of

investments. By prohibiting such performance requirements for investments
originating in FTA partner countries, these provisions seek to liberalize the
conditions for investment. Performance requirements are already dealt within
the Agreement on Trade-Related Investment Measures (TRIMs) at the WTO,
which seeks to eliminate a few types of performance requirements such as local
content regulations and requirements limiting imports. The latter have been part
of the FDI regulatory framework precisely because the contributions of FDI that
enable faster catching-up by countries do not occur automatically. In order to
retain this policy space which is crucial for meeting the development objectives
from FDI, India should avoid expanding the list of prohibited investment
measures in her FTAs beyond those included in TRIMs.
Given that PTA’s provisions on investment protection provide for fair and
equitable treatment to foreign investors in the event of an expropriation, it is
also crucial to define the terms of coverage of expropriation to include only
direct expropriation. Direct expropriation refers to the nationalization, transfer
of title or seizure of private property by the host government. Listing the
conditions that can be treated as expropriation is important given that private
companies can file suits against governments of partner countries for seeking
compensation. (p.320) This should necessarily exclude non-discriminatory
expropriation for public purpose (including prevention of financial, public health
and environmental risks). State’s capacity to provide certain basic services for
meeting such public purpose should also be explicitly exempted.
In the context of the proliferation of comprehensive PTAs signed by India from

around the mid-2000s, this chapter undertook a critical survey of the available
literature and methodologies for analysing the impact of trade agreements.
Going beyond tariff liberalization, it attempted to provide an analytical
framework for examining the emerging issues related to India’s changing trade
policy landscape.
In both North–South and South–South FTAs, the perception of increased market

access from the PTA partners (for exports or outward FDI or both) for a few
sectors of export interest and outward investments by Indian firms is leading the
Page 29 of 42
country to undertake binding deep liberalization commitments, particularly in

investment and services. Even though the margins of preference under India’s
PTAs have become less significant in general because the MFN levels have come
down across many manufacturing industries, there could be increased
production and trade integration between India and East and Southeast Asia
because of cumulative rules of origin in overlapping PTAs and the production
restructuring being undertaken by MNCs from India and abroad in response to
these trade and investment liberalization commitments undertaken by India
under the PTAs.
But even as the promise of increased access to markets through preferential

tariffs may become increasingly less significant in most cases, recent PTAs—by
locking in a wide range of policies and instruments—come with significant costs
associated with loss of industrial policy space. This is because the policy space
required for promoting the domestic capabilities required for meeting the
emerging challenges under trade liberalization (preferential or otherwise) is
increasingly getting eroded.
It is therefore argued that the increasing trend in India’s trade agreements to go

beyond goods trade to cover issues of liberalization in agriculture, services, and
investment stands to exacerbate the growing disconnect(s) between India’s
trade policy and its industrial policy, (p.321) with implications for its growth
plans in the medium and long terms. India has to put all its bilateral and
regional deals together to get the whole picture. Countries should not approach
FTAs on a piecemeal basis or change fundamental positions according to the
negotiating partners in different FTAs. These policy inconsistencies can have
serious repercussions on financial stability, food security, and national
development. Given the significant complexity these bring into evaluating the
systemic and developmental impact of India’s PTAs, all of these issues open up
challenging areas for further analysis and research.
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Page 37 of 42
Notes:
(*) The author is grateful to Jayati Ghosh, Prabhat Patnaik, Amiya Bagchi, and
Murali Kallummal as well as the participants at the ICSSR seminar for their
comments and suggestions. However, the author is solely responsible for the
remaining errors and omissions.
(1.) Mercosur is a trading bloc in Latin America, comprising Brazil, Argentina,

Uruguay, Paraguay, and Venezuela.
(2.) Association of Southeast Asian Nations.
(3.) This term has been used to reflect the situation of multiple and simultaneous
participation by countries in RTAs at different levels and of a differentiated
nature. See Baldwin (2006) and ESCAP (2005).
(4.) See also Francis and Kallummal (2013).
(5.) See Batra (2006), Francis (2011a), Harilal (2010), Kelegama and Mukherji
(2007), Kumar (2004), Pal and Dasgupta (2009), Raju (2010), Ratna and Sidhu
(2007), Singh and Sengupta (2009), and Sumalatha and Roy (2010), as well as
Nagoor and Kumar (2010), Raina (2010), and several other papers presented at
the 2010 National Seminar on ASEAN–India FTA at CDS, Thiruvanathapuram.
(6.) MFN rate is the general tariff rate applied by countries as committed under
the WTO.
(7.) Note that typically the discussion on market access is in the context of tariff
liberalization only and does not address non-tariff barriers (NTBs).
(8.) A preferential agreement leads to trade creation when its members import
more from lower cost producers in their PTA partners instead of from higher
cost domestic producers.
(9.) Trade diversion takes place when PTA members switch imports from low-
cost producers in the rest of the world to increased imports from higher cost
producers belonging to the PTA due to the preferential tariff.
(10.) It is argued that since greater levels of investment can permanently raise
the levels of GDP per capita (according to the logic of the neoclassical
production function), a PTA can improve the living standard of its members’
population (Ali and Perez 2006).
(11.) For a detailed exposition and an alternative approach to analysing RTAs

based on the balance-of-payments constraint approach and the technological gap
approach to growth, see Ali and Perez (2006).
Page 38 of 42
(12.) These empirical studies are also not useful for policy purposes given that
different models, and sometimes the same models, have generated quite
different results related to the same policy scenario (Bandara 2009).
(13.) Taylor and von Arnim (2007: 2) argue that one of the main problems of
these models is the assumption made that central macroeconomic indicators
such as trade deficits and foreign debt do not change in response to any trade
policy change. Similarly, assumptions made on important parameter values such
as export demand elasticities, substitution elasticities between labour and
capital, and imported goods and locally produced goods (the so-called Armington
elasticity) also play an important part in the results generated by CGE models.
Other critiques have also pointed out that these assumptions are so rigid that
the models tend to provide pre-determined answers (Bandara 2009; Dhar 2007;
Taylor and Arnim 2007).
(14.) In the case of India–Sri Lanka FTA and SAPTA/SAFTA, the discussion has
tended to be only in terms of the increase in FDI flows into particular sectors
following the entry into force of the FTA. While Kumar (2007a and 2007c)
analysed the implications of FTAs for FDI flows in general, Banga and Sahu
(2010) and Francis (2011a) appear to be the only two studies that have examined
the potential increase in FDI flows pursuant to the coming into effect of a
particular FTA in the context of two-way/intra-industry trade.
(15.) Exceptions are contributions from the civil society such as Action Aid
(2008), Bhutani (2010), CEC, TWN, and India FDI Watch (2008), Sengupta
(2011), and Singh (2009).
(16.) For detailed discussions of the experiences of the developing countries

involved in these regional integration agreements, see Kattel et al. (2009) for
Central and Eastern European countries, Puyana (2010a) for Mexico’s
experience under NAFTA, and Palma (2010) for Latin American countries in
general.
(17.) It is interesting to note that the Asian Development Bank (ADB) (2008)
study on emerging Asian regionalism also acknowledged the fact that the Asian
economies were principally connected through trade, financial flows, and direct
investment and that government initiatives were following where markets led.
(18.) For a detailed discussion on the evolution of regional integration in

Southeast Asia through market-led integration and regionalism, see Francis and
Kallummal (2009a).
(19.) See, for instance, the argument in Kumar (2005).
(20.) Competitive regionalism, wherein countries seek ‘to secure their trade
interests as well as establish spheres of influence that include but also go
Page 39 of 42
beyond trade policy’, was originally conceived as driving developed countries’

PTA initiatives (Majluf 2004).
(21.) At the same time, given that the developed country markets continue to
remain important for India, India’s decision to go for an FTA with the EFTA and
the EU seems to be driven by the fact that these developed country blocs have
signed or are negotiating PTAs with several of India’s competitors in those
developed country markets.
(22.) For studies that use this methodology for analysing the impact of some non-
Indian PTAs, see Caldentey (2007), Francis (2011a), Francis and Kallummal
(2006, 2009a), Pizzaro (2006), among others. Using a similar methodology, Pal
(2008) established that developing countries stand to lose in RTAs with
developed countries because the effective margin of preference is insignificant.
Note that a similar analysis can be done using RCA indices in conjunction with
India’s and partner countries’ margin of preference in each other’s and third
country markets.
(23.) Overall, India’s share in world exports increased only insignificantly over a
16-year period, from less than 1 per cent in 1995 to just 1.7 per cent in 2011.
(24.) This is also supported by the analysis of bilateral trade between India and
Thailand in IDEAs (2009), which showed that there is a growing concentration of
bilateral imports and exports in the broad industrial categories of iron and steel;
electrical machinery and parts; mineral fuels and parts; machinery and parts;
vehicles; pearls, precious stones, among others. It was also seen that 57 out of
84 EHS product items (at HS 6-digit level) are under the 6 product categories
(at HS 2-digit level): machinery; plastics and articles thereof; electrical
machinery; precious stone and metals; iron and steel; and organic chemicals.
Thus the FTA had a significant role in changing the nature and pattern of
bilateral trade.
(25.) Major PTA partners are those which share at least a 1 per cent share in
India’s total exports. India has a negative trade balance with ASEAN-10 as a
whole too.
(26.) This is usually referred to in the literature as intra-industry trade at the HS

2-digit level. However, at the disaggregated level, this could involve both inter-
industry trade as well as intra-industry trade. This requires detailed analysis at
the HS 6-digit or SITC 5-digit level.
(27.) See Athukorala (2003), Haddad (2007), among several others.
(28.) See also Nag (2011) in the case of the automobile sector.
(29.) For a more detailed discussion, see Francis (2011a).
Page 40 of 42
(30.) See also Patnaik and Rawal (2005).
(31.) See the trends discussed in Chandrasekhar and Ghosh (2010, 2013).
(32.) See also Patnaik (2003).
(33.) By January 2013, average tariffs in all the agricultural sectors will drop to
zero under AIFTA, from as high as an average of 29 per cent. See the detailed
discussion in Francis (2011a). Also see Raju (2010), Raina (2010), and several
other papers on the agricultural sector presented at the National Seminar on
AIFTA at CDS, Thiruvananthapuram.
(34.) See Goswami (2011) for a critique of the argument that the high post-
harvest losses in India is the most compelling reason to permit a flood of
investment in the new sector of agricultural logistics and allow the creation of
huge food processing zones, and to link all these to retail food structures in
urban markets.
(35.) Under customary international law, this includes non-discriminatory

treatment of investors and investments with respect to measures adopted/
maintained by the host Party relating to losses suffered in its territory due to
armed conflict or civil strife.
(36.) See also Francis and Kallummal (2013).
(37.) For a detailed discussion, see Francis (2011b).
(38.) See Gopakumar (2010) for a detailed discussion.
(39.) Depending on industrial and technology policies, the impact and

implications of FDI for the development of host economies can be very different
from those of foreign portfolio capital inflows, as the latter are pure financial
investments seeking capital gains.
(40.) See Francis (2011b) and Francis and Kallummal (2013) for an exposition of
these arguments.
(41.) While making commitments in services too, policymakers need to recognize

the impact of corporate agriculture and foreign-dominated agricultural services
(apart from inputs) in wholesale and retail trade, logistics and transport on
sustainable agricultural production for ensuring food security (Francis and
Kallummal 2013).
(42.) For instance, see Sharma (2009) for a discussion of the kind of demands
being made by the EU in the services chapter of the EU–Korea FTA.
(43.) See Reddy (2010) and Ghosh (2010) for a detailed discussion.
Page 41 of 42
Page 42 of 42
Economic Openness and Indian Agriculture

Economy
Jayati Ghosh

Print ISBN-13: 9780199458943
DOI: 10.1093/acprof:oso/9780199458943.001.0001

Ramesh Chand
Sumedha Bajar
DOI:10.1093/acprof:oso/9780199458943.003.0008

This chapter analyses the impact of increased openness of Indian agriculture in
the wake of liberalization policies and implementation of WTO agreement in
1995. Evidence from last two decades has been gathered and a case is made for
strategic liberalization of Indian agriculture sector over free trade. Changing
trends in agriculture trade indicate that while ratio of trade to domestic
production of agricultural commodity follows the movement in international food
prices and exports have shown high sensitivity to changes in global food prices
indicating towards lack of competitive edge of India’s export items. Although
there have been efforts made and mechanisms put in place to not allow sharp
changes in global prices to affect Indian agriculture as these could have
tremendous impact on domestic economy and vulnerable population, at the same
time, the two options for price stabilisation viz. buffer stock vs trade (import/
export), were analysed and the latter was found to be costlier; it is argued that
buffer stock is a better option to safeguard consumer and producer interests.
Keywords: Indian agriculture, free trade, strategic opening-up, trade composition, nutrition, buffer
stock
India followed highly protectionist trade policies in the agriculture sector till the
early 1990s. Barring a few traditional commercial commodities, agricultural
trade was subjected to measures like quantitative restrictions, canalization,
licences, quotas, and high tariff rates. These measures, thus, strictly regulated
imports and exports to safeguard interest of domestic producers and consumers.
In most of the commodities, levels of export and imports were determined based
Page 1 of 31
on fluctuations in domestic supply and exports were residuals. Similarly, imports

were allowed in the wake of fall in domestic production to fill the gap between
domestic demand and supply. There was little emphasis on export-oriented
production and production pattern was strictly guided by domestic requirement
and self-sufficiency in almost all major commodities. Allocation of resources
based on comparative advantage in trade hardly got any emphasis. Trade policy
for agriculture was highly protective and inward looking. This scenario has
undergone significant changes since the initiation of economic reforms in the
country in 1991. External trade was further liberalized with the implementation
of the World Trade Organization (WTO) agreement on agriculture in 1995 and
after India lost its case in WTO to retain Quantitative Restrictions (QRs) on the
grounds of balance of payments (BoP) problems.
Soon after the initiation of economic reforms, which were followed by a new
export–import policy1 announced on 31 March 1992 to give thrust to trade
liberalization, a serious debate commenced on the impact of trade openness on
the agriculture sector. It was argued (p.332) that since Independence, India
had protected its industry sector through trade policy by insulating it from the
foreign market, and disprotected its agriculture (Gulati and Sharma 1995; Rao
et al. 1994; Singh 1995). As economic reforms and trade liberalization involved
reduced protection to domestic industry and downward adjustment in
overvalued exchange rate, they were expected to improve terms of trade and
export prospects for the agriculture sector. These two changes are reported to
have resulted in significant reduction in the anti-agriculture bias through a more
balanced degree of relative sectoral protection (Dholkia 1997).
The more intense debate on the impact of trade liberalization and increase in
openness on the agriculture sector started after WTO came into being in 1995,
even though India liberalized agriculture trade partly because of its WTO
commitment and partly based on domestic policy considerations. This debate
covers several issues. One set of scholars feel that there are tremendous
opportunities for Indian agriculture to benefit from increased openness of its
agriculture and to take advantage of trade by reallocation of resources based on
principle of comparative advantage (Gulati 2001, 2002; Gulati and Sharma 1994,
1997; Gulati et al. 1996; Parikh et al. 1995, 1997; Pursel and Gulati 1995).
Therefore, this school of thought emphasize closer integration of Indian
agriculture with world agriculture and favours openness. The other group of
scholars is skeptical about gains from international trade in agriculture for
several reasons (Bhalla 2004; Chand 1999, 2002a, 2002b; Chand and Jha 2001;
Nayyar and Sen 1994; Storm 1997, 2001). The main reasons cited for this are (a)
international prices are highly distorted and do not represent true opportunity
cost of the resources and (b) world prices suffer from serious year-to-year
fluctuations and free trade will transmit volatility to domestic prices, which is
not considered favourable for consumers and producers in developing countries
(Chand 2008). According to this school of thought, India should follow strategic
Page 2 of 31
openness rather than general or indiscriminate openness of agriculture sector.

Further, according to the first school of thought, trade offers a much better
option for stabilizing domestic supply and prices than stabilization through
costly buffer stock operations (Srinivasan and Jha 1999) whereas the second
school of thought favours stocks and domestic stabilization as a better
proposition than trade (Chand 2003).
The issue of self-sufficiency in food production in a large country like India has
also received considerable attention. On the one hand, it (p.333) is argued that
a large country cannot rely on the global market for its food requirement as
international supply is limited and global prices are very sensitive to export/
import decision of a country like India. On the other hand, merits of self-reliance
as against self-sufficiency are also highlighted (Gulati et al. 1996). Concerns
have also been expressed about implications of openness for food security and
livelihood as a large segment of population depends heavily on agriculture for
employment and earnings. A balanced view was put forward by Chakravarty and
Singh (1988) before India opened up its economy. They argued that there is no
unique optimum level of economic openness for all countries at all times. The
wrong kind of openness and or the timing and sequence of openness could cause
irreversible losses.
Studies based on empirical evidence on the effects of trade liberalization in

agriculture based on Computable General Equilibrium (CGE) model are sharply
divided. Storm (2001) demonstrates that the costs of the close integration of
India’s agriculture sector with the world economy are large and also unequally
distributed. The results suggest that it may be desirable to use quantitative
restrictions on trade or variable levies on export and import. According to Storm
(2001), while close integration leads to a large fall in GDP growth and a
dramatic decline in the real income of low-income households, strategic
integration results in a significant rise in real GDP and a considerable
improvement in income of low-income classes. The chapter underscores the role
of domestic agricultural price policy on growth and equity and emphasizes
regulated rather than liberalized trade for domestic price policy to play an
effective role. In contrast to this, Parikh et al. (1995, 1997) found that in the
short run, trade liberalization adversely affects both growth and equity. In the
medium and long run, trade liberalization was found to accelerate growth by
bringing about more efficient allocation of resources across sectors—and in the
process helped to reduce poverty. Both sets of studies use base scenarios, which
reflect a given price situation, and their conclusions seem relevant if that
scenario holds. However, the international price situation is highly volatile and
the ratio of domestic to international prices shows wide swings. Thus benefits
from trade do not follow the same pattern over time in many cases, and in some
cases the trade scenario turns from exportable to importable, which completely
change trade equations and estimates of gain from trade. Therefore, it is
important to look at the effects of openness on producers, consumers, and (p.
Page 3 of 31
334) various economic aspects over a period of time, taking into account
different phases of volatility in international prices rather than arriving at a
conclusion just by comparing a year or two.
It has now been almost two decades since India embraced economic openness as
a part of the new economic policy. Global liberalization under WTO has also
completed one and a half decades. These are sufficiently long periods for
understanding the implications and drawing lessons relating to economic
openness involving liberalization and integration of domestic economy with
global economy on Indian agriculture. The chapter examines the nature of and
trend in openness of agriculture in India and discusses its various implications.
The chapter is organized into seven sections. The first section presents changes
and patterns in openness of agriculture, which are seen through trends in
agricultural trade and ratios of trade to output for the agriculture sector as a
whole and for its segments. The second section discusses changes in the
composition of agricultural trade with the opening up of the economy. The effect
of economic openness on integration of the domestic market with the global
market is examined in the third section. The fourth section debates the changes
in food and nutrition security after liberalization. The importance of regional
equity in a large and diverse country and the implications of trade liberalization
in such a situation are discussed in the fifth section. Empirical evidence on
benefits of buffer stock vis-à-vis trade in terms of price stabilization over a
longer time period is presented in the sixth section. The seventh section
discusses the role of regulation and state intervention to safeguard against the
shocks like global food crisis. Conclusions are presented in the eighth section.
Trade Trend and Openness

During the early 1980s, India met a part of its food demand from imports, which
constituted close to 4 per cent of agricultural output of India. Also, the level of
agricultural (crop and livestock sector) imports exceeded the level of
agricultural exports by a small amount and this sector did not generate any
trade surplus during the early 1980s (see Table 8A.1). Strong emphasis was laid
during the late 1980s on attaining and improving self-sufficiency in food,
particularly for edible oil that formed the bulk of agricultural imports. As a
result, agricultural imports declined to less than one third and the ratio of (p.
335) import to domestic production dropped to less than 1 between 1981–2 and
1990–1. In contrast to the trend in imports, exports witnessed an increase,
though quite small. Agricultural exports witnessed exponential growth after the
early 1990s, though there was a decrease in between for a short period (Figure
8.1). Between 1991–2 and 2008–9, India’s agricultural exports increased from
US$ 2.8 billion to US$ 15.6 billion. Agricultural imports in the same period
increased 10 times, from US$ 0.67 billion to US$ 6.77 billion. Exports exceeded
imports by more than US$ 2 billion during the early 1990s thus generating a
surplus. The trade surplus almost doubled by 1996–7, followed by a large
squeeze during the late 1990s which wiped out the increase witnessed during
Page 4 of 31
initial years of reforms and opening up. Agriculture trade surplus took a big
upward turn after 2003–4. Exports exceeded imports by US$ 10.7 billion during
2007–8, which is a record level of trade surplus generated by agriculture sector
in the country.
Ratio measures like export, import, and net trade divided by total domestic
production are better indicators than absolute figures for capturing openness,
trade performance, and integration of domestic
(p.336) economy with global

economy. Information on these
indicators for the period 1990–1 to
2008–9 is depicted in Figure 8.2
and Table 8A.2.
The ratio of trade (export and
import) to domestic production2
has followed a steady increase
after 1990–1 which indicates
rising openness and increase in
integration of domestic
economy with the global
economy in this period. Exports Figure 8.1 Trade in Agri-food Products:
constituted less than 3 per cent 1981–2 to 2008–9 (in US$ billion)
and imports constituted less Source: Agricultural Statistics at a
than 1 per cent of total output Glance, Ministry of Agriculture.
of agriculture (crops and
livestock sector) in the early
1990s. These ratios went past 7
per cent and 3 per cent,
respectively, in the next two
decades. However, this change
has not been smooth and it is
characterized by various
phases. It is interesting to point
out that these phases coincided
with the movement in global
food prices. As the index of
global food prices increased
Figure 8.2 Ratio of Trade to Output of
from 118 during the early 1990s
Agriculture Sector
to 149 during 1996–7,
proportion of exports in value of Source: Agricultural Statistics at a
agricultural output increased Glance, Ministry of Agriculture.
from around 3 per cent to more
than 5 per cent in the same
period (Figure 8.3). After 1996–7, as global food prices declined, the proportion
Page 5 of 31
of agriculture production sold in overseas market also followed a decline. Once

again, when global prices started rising after 2001–2, ratio of export to output
also followed suit. Between 2003–4 (p.337)
and 2008–9, global food prices

increased by 83 per cent and ratio
of export to output increased by
62 per cent.
The close and strong
association between export
orientation of Indian agriculture
and global food prices is clearly
visible from Figures 8.2 and 8.3.
The post 1990–1 period can be
clearly divided into three
phases based on movements in Figure 8.3 Global Food Price Index: Base
global food prices: a phase of 2005 = 100
modest increase in global food
Source: Commodity Price Data, Pink
prices (1990–1 to 1996–7), a
Sheet, World Bank.
phase of decline in global food
prices (1997–8 to 2002–3) and a
third phase of rapid increase in global food prices (2003–4 to 2008–9). The share
of India’s agricultural export in total domestic production also presents a similar
pattern. The correlation between global food prices and proportion of domestic
production sold outside the country was 0.85 in the last two decades.
Unlike exports, the ratio of imports to domestic production showed more or less
a rising trend since 1990–1, irrespective of changes in global food prices (Figure
8.2). Imports constituted less than 1 per cent of value of agricultural output
during the early 1990s. In the decade of 1990–1 to 2000–1, the ratio of imports
to domestic output more than doubled. There was a further increase in the
import intensity of agriculture sector in the next 10 years. The association (p.
338)
Table 8.1 Linear Correlation between Trade Ratios and Global

Food Price Index
Trade ratio Correlation Level of significance
Export to output 0.85 0.99
Import to output 0.35 Not significant, up to 0.95
Net trade to output 0.84 0.99

Source: Computed from the data taken from (i) Commodity Price
Data, Pink sheet, World Bank; (ii) Agricultural Statistics at a
Page 6 of 31
Glance, Ministry of Agriculture and (iii) National Accounts

Statistics, Central Statistical Organisation.
between import share in domestic production and global prices was found to be
statistically non-significant up to 5 per cent level with the correlation coefficient being
0.35 (Table 8.1).
Thus, to sum up, the surplus generated through agricultural trade (export–
imports) has seen tremendous increase since 1990–1. Agricultural exports
exceeded imports by US$ 2 billion during the early 1990s. The trade surplus
increased to US$ 4 billion during 1996–7. There was a dip in net trade for some
time during 1998–9 to 2004–5 due to stagnation in exports. When exports of
agriculture sector picked up with increases in global food prices, net trade also
witnessed a very sharp increase in absolute value as well as in relation to growth
of domestic agricultural output. Thus, like exports, the ratio of net trade to
domestic output closely followed the movement in international food prices. The
correlation between the two was 0.84, which was highly significant.
It emerges from the trend in agricultural imports and exports that the opening
up of the economy since 1991 has been much more favourable for export than
for imports of agriculture sector. The export performance of Indian agriculture is
critically dependent upon the global price situation and hence we can infer that
India’s agricultural exports do not have a strong competitive edge as exports are
found to shrink considerably when global price situation turns unfavourable.
Changes in Composition of Trade

The opening up of trade by India affected exports and imports of various
commodities in different ways. Accordingly, the composition of agricultural
exports and imports has undergone a significant change since 1991. These
changes can be seen from Table 8.2 for exports and Table 8.3 for imports. It is
also interesting to note that some (p.339)
Page 7 of 31
Table 8.2 Changes in Composition of Agricultural Exports: 1991–2 to 2009–10
Exports (US$ million) Trend Growth Composition (%)

Rate
1991–2 to 1994–5 2006–7 to 2009– 1991–2 to 1994–5 2006–7 to 2009– Change in Share
10 10
Cereals 384 2,940 14.54 16.4 25.8 9.33
Pulses 18 129 14.18 0.8 1.1 0.38
Tea and coffee 564 1,006 3.93 20.7 7.0 –13.74
Spices 166 1,123 13.59 6.1 7.8 1.72
Horticulture 507 1,942 9.36 18.7 13.5 –5.13
Livestock 109 1,318 18.06 4.0 9.2 5.17
Oilseed and oil 740 3,032 9.85 27.2 21.1 –6.11

meal
Sugar and 66 798 18.11 2.4 5.6 3.14

molasses
Cotton and jute 110 1,659 19.82 4.1 11.6 7.51
Miscellaneous 54 402 14.31 2.0 2.8 0.81
Tobacco 136 615 10.55 5.0 4.3 –0.74
Total agriculture 2,718 14,349 11.73 100.0 100.0 —

Source: Agricultural Statistics at a Glance, Ministry of Agriculture.
Page 8 of 31
Table 8.3 Changes in Composition of Agricultural Imports: 1991–2 to 2009–10
Imports (US$ million) Trend Growth Composition (%)

Rate
1991–2 to 1994–5 2006–7 to 2009– 1991–2 to 1994–5 2006–7 to 2009– Change in Share
10 10
Cereals 131.6 569.0 10.3 15.1 7.7 –7.4
Pulses 147.4 1,412.3 16.3 16.9 19.0 2.2
Tea and coffee 0.0 40.8 0.0 0.0 0.6 0.6
Spices 10.4 237.3 23.2 1.2 3.2 2.0
Horticulture 222.1 1,028.4 10.8 25.4 13.9 –11.5
Livestock 6.5 9.7 2.7 0.7 0.1 –0.6
Vegetable oil 106.1 3,493.2 26.2 12.1 47.1 35.0
Sugar and 182.0 345.8 4.4 20.8 4.7 –16.2

molasses
Cotton and jute 68.0 280.8 9.9 7.8 3.8 –4.0
Total agriculture 874.2 7,417.3 15.3 100.0 100.0 —

Source: Agricultural Statistics at a Glance, Ministry of Agriculture.
Page 9 of 31
(p.340) commodities appear in both exports as well as imports. Since the early
1990s, agricultural exports grew at an annual compound growth rate close to 12 per
cent and imports have increased at the rate of 15.3 per cent. Tea and coffee, which
were important traditional export items from India, showed less than 4 per cent
growth, which was almost one-third of the growth in total agricultural exports of the
country. As a result, their share in agricultural export fell from 20.7 per cent during
1991–2 to 1994–5 to 7.0 per cent during 2006–7 to 2009–10.
The much-hyped horticulture sector exports grew at a rate which was lower than
the growth in total farm exports. Further, import of horticulture has risen at a
higher rate than its export growth rate. Cotton and jute showed highest growth
in export among all major groups, closely followed by livestock products. India
has also increased its sugar export by more than ten times during the last two
decades, though these exports are highly fluctuating.
India is known for importing huge quantities of vegetable oil. Strong initiatives
were launched during the late 1980s to reduce dependence on import of edible
oil and to attain self-sufficiency in edible oil. These efforts were helpful in raising
oilseed output and domestic production of vegetable oils.3 However this did not
help in reducing dependence on imports as domestic consumption rose rapidly.4
Since the early 1990s imports of edible oil have increased from less than half a
million tonnes to close to 8 million tonnes. In value terms, the import of
vegetable oil increased from US$ 106 million to US$ 3.5 billion in recent years,
thus registering an annual increase of 26 per cent. Also worth noting is that the
imports of edible oil accounted for more than 47 per cent of the total
agricultural imports of India in recent years as compared to 12 per cent during
the early 1990s.
It is interesting to observe that though India’s oilseeds sector is repeatedly

criticized for very high import dependence, the impressive performance of
oilseed sector in export has escaped attention. Exports of oil meal and oilseeds
from India experienced annual growth close to 10 per cent since the early
1990s, which has led to an average annual export of this group of US$ 3 billion
during 2006–7 to 2009–10. Thus, close to 90 per cent of the import bill of
vegetable oils is met from exports of the oilseed sector.5
Foodgrains have increased their share in exports as well as imports. India has
remained a net exporter of rice for a long time. However, it has remained at the
margin of self-sufficiency in the case of wheat—sometimes exporting and some
time importing depending (p.341) upon fluctuations in domestic production.
Pulses have emerged as an important import item in foodgrains. Share of
foodgrains has shown a big increase in total export and a big decrease in import.
Foodgrains now (2006–7 to 2009–10) constitute a little more than one-fourth of
agricultural imports and a little more than one-fifth of agricultural exports with a
trade surplus of more than US$ 1 billion.
Page 10 of 31
In the post-WTO period, India’s plantation sector has faced a stiff global
competition. Despite this, export of spices from India recorded an annual growth
of 13.6 per cent. Though import of spices into the country increased at a much
higher rate than exports, the annual earnings from the exports during the four
years ending with 2009–10, were more than four times the value of imports.
Integration between Domestic and International Prices

As mentioned before, until the early 1990s, domestic prices of most of the
agricultural commodities in India were insulated from the world market through
various instruments like trade bans, quantitative restrictions, canalization, and
licences. The overvalued exchange rate further acted as a check on partaking of
any advantage that may result from exports. However, with the liberalization,
which started gradually in 1991 and intensified after the establishment of the
WTO in 1995, agricultural trade has witnessed tremendous increase. The ratio of
trade to domestic production was below 5 per cent till 1994–5 and it started
increasing steadily thereafter. During the year 2008–9, India’s agricultural trade
with other countries reached 11 per cent of value of agricultural output and 13.6
per cent of GDP agriculture. The increase in ratio of trade to output after 1994–5
has been associated with significant increase in integration of domestic and
global prices. This can be seen from the simple correlation between domestic
and international prices, expressed in US dollars, presented in Table 8.4. The
correlation was below 0.3 in the case of maize, rice, wheat, and sugar from 1981
to 1995. It increased to more than 0.8 for rice, wheat, and sugar for the ensuing
period 1996–2009.
Free Trade vs Strategic Opening up

Despite significant liberalization, trade in agriculture continues to be regulated
as India has preferred to go for strategic opening up (p.342)
Page 11 of 31
Table 8.4 Correlation between Domestic and World Prices of Select Commodities
Period Maize Rice Wheat Sugar
1981–95 0.122 0.165 0.198 0.286
1996–2009 0.753 0.808 0.835 0.877

Sources: (i) Commodity Price Data, Pink sheet, World Bank. (ii) Agricultural Statistics at a Glance, Ministry of
Agriculture.
Note: Domestic prices are for Delhi market for wheat and rice, Bengaluru for maize, and Muzaffarnagar in Uttar Pradesh for sugar.
International prices refer to maize US no. 2 fob, rice Thai 5% broken, wheat US HRW 1, sugar world.
Page 12 of 31
rather than completely free trade. The country adjusts its trade policy from time to
time, depending upon domestic production and price situation as well as the global
situation. The guiding principle for the opening up has been to allow domestic prices to
move in tandem with the trend in global prices but insulate against sharp spikes and
troughs. This can be seen from the information presented in Table 8.5. The table
presents two scenarios of global prices. Year 2001 represents low prices scenario and
year 2009 represents high price scenario. Global food price index with base 2000 =
100 was 103 during 2001 and it was 205 during 2009 (Commodity Price Data, Pink
sheet, World Bank 2011).
Page 13 of 31
Table 8.5 Trade and Price Policy during Different Phases of Global Prices
Policy instrument Year Wheat Rice Groundnut oil Sugar
International price 2001 127 173 190
2009 224 555 400
Import duty 2001 50 80 75–85 60
2009 0 70 0 0
Export 2001 Free Free Free Free
2009 Banned Non-Basmati: ban Banned or restricted Banned

Basmati: MEP
Increase in MSP 2001 5.2 4.1 5.6 6.1
2009 17.6 11.1 35.5 59.9

Sources: (i) Commodity Price data, Pink Sheet, World Bank. (ii) Agricultural Statistics at a Glance, Ministry of
Agriculture.
Page 14 of 31
(p.343) During the year 2001 when global prices were ruling low, India did not
put any restrictions on exports of most of agricultural commodities but imposed
a very high duty on import to prevent cheap import depressing domestic prices
(see Table 8.5). Thus, during the period of low global prices, India followed trade
policy that protected interest of producers. Similarly, when international prices
were low, minimum support prices (MSPs) were increased by a small amount.
Global food and agricultural prices started showing steep increase after 2006
and the years 2007 to 2009 represent a situation where there was a spike in
food prices. In this situation India reversed its policy from what it was during the
time of low global prices (during 2000–1). Imports were freely allowed but
exports were either banned or restricted. The logic behind this policy was to
prevent a steep hike in domestic prices due to transmission of global price
effect. Therefore, in this kind of situation, trade policy was used to protect
consumers against abnormal increases in global prices. However, MSP was
given a steep hike during these years in order to minimize the gap between
trend level of global prices and domestic prices. MSPs for wheat and rice were
raised by 17.6 per cent and 11.1 per cent during 2009 and groundnut prices
were raised by 36 per cent in the same year. These increases were much higher
than the rise in MSP during the phase of low global prices when it was raised by
less than 6 per cent.
Further, in 2009, the Directorate General of Foreign Trade, New Delhi, issued as
many as 17 notifications relating to export and import of agri-food products to
effectively regulate and control trade flows. This explains the entire logic
underlying the changes in India’s trade policy after the opening up of its
economy.
Trade Openness, Food Security, and Nutrition

Many studies have reported a decline in the level of nutrition, particularly in
rural population in India, after 1993–4 (Deaton and Drèze 2009, Meenakshi and
Vishawanathan 2003). Some studies (Chand and Kumar 2006) have proved that
the decline in per capita production and availability of cereals is responsible for
this deterioration as cereals are the major source of basic nutrition—namely,
calorie and protein—while pulses are considered vital for protein. It is pertinent
to know how trade openness has affected the availability (p.344) of staple
foods in the country. This was seen by comparing per capita production and
availability of cereals and pulses for the four-year period from the beginning of
opening up and 15 years after this (Table 8.6). Production of cereals and pulses
in the country has not kept pace with the growth in the population. As a result,
per capita production of cereals fell from 188.3 kg between 1991–2 and 1994–5
to 186 kg between 2006–7 and 2009–10. Similarly, per capita production of
pulses declined from 14.6 kg to 12.8 kg, involving a 12.4 per cent reduction. In
the same period, trade in cereals and pulses had increased in both directions—
that is, both imports as well as exports witnessed an increase. Annual export of
cereals from India increased from less than 1 million tonnes to more than 5
Page 15 of 31
million tonnes whereas their import increased from 0.45 million tonne to 2.03
million tonnes. Import of pulses increased from 0.47 million tonnes to 2.76
million tonnes. Trade helped in maintaining per capita availability of pulses in
the country despite a reduction in production. However, trade also resulted in a
net diversion of cereals, which are a staple food in India, to other countries and
reduced per capita availability of cereals by 2.5 kg per person per year after two
decades of opening up.
It was also found that while trade reduced year to year instability in domestic
supply of cereals, it worsened the already high year-to-year fluctuations in
domestic supply of pulses.
Table 8.6 Foodgrain Production, Availability, and Instability
Particular Period Cereals Pulses
Production/person: kg 1991–2 to 1994–5 188.30 14.60
2006–7 to 2009–10 186.00 12.80
Production net of trade/person: kg 1991–2 to 1994–5 188.00 15.10
2006–7 to 2009–10 183.20 15.10
Total export: million tonne 1991–2 to 1994–5 0.66 0.03
2006–7 to 2009–10 5.24 0.16
Total Import: million tonne 1991–2 to 1994–5 0.45 0.47
2006–7 to 2009–10 2.03 2.76
Instability: total production % 1990–1 to 2009–10 1.92 7.97
Instability: production net of trade 1990–1 to 2009–10 1.22 12.12

Source: Agricultural Statistics at a Glance, Ministry of
Agriculture.
(p.345) Trade Openness and Regional Equity

After opening up of the economy, trade flows and trade patterns experienced
significant changes. There have been two major changes in agricultural trade
that have had an impact on large part of population: (a) increase in net export of
cereals, primarily rice and (b) increase in import of vegetable oils. As a result,
domestic prices of cereals and oilseeds have moved closer to global prices. This
implies that cereal prices in domestic market have moved up and oilseed prices
have moved down. As India is a vast and diverse country, with different regions
following different cropping pattern, the changes in trade pattern have affected
different regions differently. The states and regions that have net surplus in
cereals are expected to benefit from the opening up that involves a rise in cereal
prices, and, the states and regions that have a net deficit in cereals are expected
to be adversely affected by such opening up. The reverse holds true in the case
Page 16 of 31
of opening up of edible oil imports. Further, different states also differ in terms
of level of economic development, per capita income, and the consumption
pattern. In some states, rice is the main staple food while in others wheat is the
prominent food. In view of varied climatic conditions, different states specialize
in production of different crops. Therefore, the impact of trade liberalization is
bound to affect different states in different ways. No serious attempt has been
made to estimate effect of trade liberalization on different states of India at
sectoral or economic level. Chand (1999b) has looked at state-wise impact of
trade liberalization by focusing on rice and wheat. The study revealed that
Punjab was the top beneficiary of trade liberalization in rice and wheat, followed
by Haryana, while small positive gains also accrued to the states like Uttar
Pradesh, West Bengal, and Madhya Pradesh. All the remaining states, which
constituted about 63 per cent population of the country, were found to be on the
losing side from grain trade liberalization. Among the 12 losing states, 10 had
per capita incomes lower than the national average. The overall relationship
between per capita income of a state and its net social gain was positive and
significant, which implied that higher the per capita income of a state, the more
was the gain from liberalization of trade in wheat and rice. Conversely, the lower
the per capita income of a state, the higher was the loss due to liberalization of
rice and wheat trade.
(p.346) Trade vs Stock for Price Stabilization

Buffer stocks have been used by the government as an important instrument for
the purpose of price stabilization. However, this involved heavy cost in terms of
procurements, handling, carrying, and storage, which is becoming fiscally
unsustainable. As an alternative, it has been suggested that the government
should use the instrument of variable levies on external trade to stabilize
domestic prices. Under this, it is suggested that when international prices are
low, a higher tariff on import should be fixed to provide price support to
domestic producers and when international prices go high, tariff should be
reduced. Similarly, variable levies on export can be worked out for net exporting
countries (Jha and Srinivasan 1999). These authors found the trade option to be
superior compared to buffer stock in stabilizing prices under liberalized trade
regime. Their findings were refuted by Chand (2003) who contended that due to
high volatility in global prices, any comparison of trade option with stock option
can result in different outcomes depending upon the magnitude of international
price in that particular year. Thus, in order to find out whether trade option is
more economical as compared to buffer stock for domestic price stabilization,
one needs to take a longer period into consideration as this will cover the
various phases of prices. To accomplish this, Chand (2003) compared export
parity price during a year of above-normal production and import parity price
during a year of below-normal production with the economic cost of grain to
Food Corporation of India (FCI) by selecting a long period of 26 years from 1975
to 2000. The study assumed that inter-year price stability requires purchase by
Page 17 of 31
government exceeding trend output and sale from buffer stock to the tune of the
deficiency of output from the trend output.
The comparison of trade option with the policy of buffer stock for domestic
stabilization of wheat price shows that out of 16 years, when domestic supply
was short of trend, the cost of meeting the supply deficit from domestic sources
(economic cost to FCI) was lower than import parity price in 10 years (Table
8.7). For 6 years, meeting the shortfall in supply from import turned out to be a
cheaper option for maintaining stability in domestic supply. If domestic
wholesale price is assumed to be the outcome of government policy of price
stabilization, then its comparison with the net (p.347)
Page 18 of 31
Table 8.7 Frequency Distribution of Superiority of Trade vs Buffer Stock as Stabilization Measures during Production
being Higher or Lower than Trend: 1974 to 2000
Particulars Production Scene: Wheat Production Scene: Rice
Above Normal Below Normal Above Normal Below Normal
Target of stabilization Producers Consumers Producers Consumers

measure
Trade better option than 1 5 2 5

buffer stock
Buffer stock better option 10 11 10 9

than trade
Source: Chand (2003).
Page 19 of 31
price that can be earned from sale of produce in international market during the years
of above-normal production indicates gain/loss to producers from domestic price
stabilization. Wheat production was above normal in 11 out of 26 years. Out of these
11 years, price realized from export turned out to be lower in as many as 10 years.
Selling in international market would have fetched a better price than that available
under government intervention in only three of these years.
A comparison of domestic stabilization measures for rice shows that during the
12 years since 1975, when output was short of trend, economic case of rice with
government agencies was lower than the import parity price (IPP) in as many as
10 years. Only in 2 out of 12 years import was more cost effective option than
domestic stabilization. In the case of second scenario, when actual output
exceeded the trend, domestic producers could earn better from export only in 5
out of 14 years. In the remaining 9 years domestic wholesale price as
determined by government intervention turned out to be higher than export
parity price (EPP).
The above analysis shows that among the two options, namely, stabilization
through buffer stock and trade, the latter is found to be costlier than buffer
stock in most of the years though it also depends upon fluctuation in
international price. If the relationship between domestic and international price
in future remains same, as observed (p.348) during the last 26 years, then the
policy of price stabilization through buffer stock seems to be a better option than
trade.
Opening up and Crisis Management

The changes taking place in the global economy and various factors related to
climate change and global warming are causing serious and often abrupt
fluctuations in global food and agricultural prices. These fluctuations turned
abnormally high during 2007–8 and created a sort of global food crisis. There is
a fear that supply shocks for agri-food commodities are likely to become more
severe, more frequent and will persist for longer periods. These kinds of changes
are likely to exacerbate the already high volatility in international food prices.
The experience of the year 2007 and 2008, when the world faced food crisis,
shows that India has very effectively protected its market, and managed its food
situation comfortably, in the wake of abnormal increase in global food prices,
whereas, some countries have been badly hit. Year-on-year rate of inflation in
India in any month during 2007–8 in wheat and rice remained below 11 per cent,
whereas, global prices show more than 100 per cent inflation in wheat and more
than 200 per cent annual rate of inflation in rice in the early months of 2008, as
shown in Figures 8.4 and 8.5. Similarly, food prices inflation in India did not
exceed 11 per cent whereas global food inflation exceeded 40 per cent in the
early months of 2008. It is quite useful to explore how India can escape the
wrath of food crisis on its domestic food prices.
Page 20 of 31
After the liberalization of external trade, India liberalized its domestic market by
revoking many provisions of Essential Commodities Act, 1955. The Central
Government issued the ‘Removal of Licensing requirements, Stock limits and
Movement Restrictions on Specified Foodstuffs Order, 2002’ on 15 February
2002, allowing dealers to freely buy, stock, sell, transport, distribute, and
dispose of any quantity in respect of wheat, paddy/rice, coarse grains, sugar,
edible oilseeds, and edible oils without requiring any licence or permit from the
government. This was followed by launching of futures trading in wheat and rice
in the year 2003. Another important step taken up by the central government
and various state governments was to adopt the model Agriculture Produce
Market Committee (APMC) Act which facilitated direct contract between buyer
(trading firm/processor, exporter) (p.349)
(p.350) and producers/farmers

for purchase of produce which is
known as contract farming.
Private trade responded very
quickly to take advantage of this
situation. Futures trading in wheat
started moving in tandem with the
Chicago Board of trade (CBOT)
future prices. This raised domestic
prices of staple food and they
attained equilibrium with global Figure 8.4 Annual Rate of Inflation in
prices. Wheat prices in India
Wheat Prices, Month to Month (in per
during some months in the years
cent)
2005–6 and 2006–7 increased by
almost same the percentage as the Sources: (i) Commodity Price Data, Pink
price increase in global market sheet, World Bank for International
(US Hard Red Wheat [HRW]). Prices.
While prices of wheat during
(ii) Database of Indian Economy, RBI for
2005–6 remained under strong
domestic prices.
upward pressure, wheat harvest
during 2005–6 (refer to wheat
harvested during March to May
2006) turned out to be lower than
normal and lower than
anticipated. Due to the strong
pressure on wheat prices and poor
harvest during 2006, public
agencies could procure only 9.226
million tonnes wheat against
target of 15 million tonnes. By
paying a little more than MSP,
private sector succeeded in
attracting farmers to sell wheat to Figure 8.5 Annual Rate of Inflation in
it rather than to public agencies. Rice Prices, Month to Month (in per cent)
Thus the wheat stock available
Page 21 of 31
with government on 1 July 2006 was only 8.2 mt against a minimum norm of 17.1 mt,
and, foodgrain stock was 19.3 mt as against norm of 26.9 mt. This decline in the stocks
and the strain on foodgrain supply coincided with similar supply situation at global
level. In the wake of rising trend in global food prices and low stock with public
agencies, Indian government took four major decisions.6 First, a ban on futures trading
in wheat and rice was announced by the Finance Minister in his budget speech on
February 2007. Second, exports of wheat were suspended in early 2007 and those of
rice were banned in October 2007. Third, government went for import of wheat by
public sector agency (State Trading Corporations) at a price higher than the one ruling
in the country in July 2007. Government decision to go for import was found to have a
magical effect on open market food prices (Chand 2007). Fourth, states were asked to
use provisions of Essential Commodity Act to put restrictions on private trade in grains
—these restrictions were removed in year 2002 to attract private investments in grain
trade. This experience reveals that following factors helped India to safeguard against
adverse impact of global food crisis (Chand 2009):
1. Active participation of Sources: (i) Commodity Price Data, Pink
government in rice and sheet, World Bank for International
wheat market Prices.
2. Institutional mechanism
(ii) Database of Indian Economy, RBI for
for dealing with price
domestic prices.
instability
3. Intelligent monitoring of
domestic and global prices and supply situation
(p.351) 4. Prompt policy action to maintain price stability
5. Frequent changes in regulation to curve profiteering activities of
private sector
6. Changes in trade policy in response to global changes
7. Social safety network
Based on this, Chand (2009) concluded that market forces cannot provide
safeguard against global shocks like food crisis and financial crisis. Therefore,
regulation and intervention by government are a must to safeguard domestic
economies and vulnerable population from global shocks and volatility. It is
asserted that this cannot be done if appropriate institutional mechanisms are not
in place. These mechanisms cannot be created in a year or two just to respond to
a crisis situation, rather these mechanisms need to be kept in place permanently.
Indian agriculture has seen several changes in the wake of the liberalization
policies. The choices that the policymakers have had to make have been tough.
In a nation that still battles with food security issues, letting the situation in
international market determine the price and supply can be nothing short of
detrimental. Following liberalization, both imports and exports have increased
tremendously and India’s agricultural trade has generated a substantial surplus.
But the journey has not been smooth. It has been observed that ratio of trade to
domestic production of agricultural commodity moves in tandem with the
movement in global food prices. It is only the exports that show considerable
Page 22 of 31
amount of sensitivity to global food prices; imports on the other hand have been
increasing steadily irrespective of changes in the global food prices—hence, one
can infer that India’s agricultural exports lack the strong competitive edge. The
composition of trade has also seen large variations after the opening up. Exports
have been rising at the rate of 12 per cent and imports at the rate of 15.3 per
cent. But this growth came not from the growth in traditional trade items like
tea and coffee or horticulture, but from groups like livestock products, sugar,
cotton and jute, and cereals for exports, and vegetable oils, spices, and pulses
for imports. Foodgrains have increased their share in both exports and imports.
India continues to remain a net (p.352) exporter of rice and at the margin of
self-sufficiency in wheat, which is sometimes exported and sometimes imported
depending upon the domestic production situation. The value of India’s
agricultural trade is now 13.6 per cent of the agricultural GDP and 11 per cent
of the value of agricultural output. Integration of domestic and global prices is
considered responsible for the increase in ratio of agricultural trade to output.
The correlation between domestic and international prices of maize, rice, wheat,
and sugar rose substantially during the period 1976–2000.
The government is faced with the question whether it should free the trade in
agriculture or only go for strategic opening up. The path followed till now has
been to open up the economy and allow domestic prices to move with the trend
in the global prices but insulate these against sharp crests and troughs.
With almost two decades since the liberalization reforms, India is still battling
with problem of under-nutrition. Per capita production and availability of cereals
—the staple food in India—have shown a decline, thus posing serious concerns
regarding the basic nutrition issues of large parts of population. Production of
cereals and pulses has not kept pace with the growth in the population growth
rate. Trade in cereals and pulses have increased. India exported 5 million tonnes
of cereals annually from 2006–7 to 2009–10, which has resulted in a net
diversion of cereals, resulting in a reduction in their per capita availability. As a
consequence of the major changes in agricultural trade, domestic prices of
cereals and oilseeds have come closer to global prices, which means that in the
case of cereal prices they have increased and decreased in the case of oilseeds,
thus benefiting those states that have a surplus in cereals and hurting those
which are deficit in cereals and surplus in oilseeds. As different states differ in
their level of economic development, their per capita income, and their
consumption patterns, the resulting effects of liberalization differ for each state.
The trade pattern following the opening up of the economy has been favourable
for states with higher per capita income and adverse for the states with lower
per capita income.
The supply and price shocks in both global as well as domestic prices are
becoming more frequent, more severe, and much longer. Thus price stabilization
is assuming greater importance. A comparison of (p.353) buffer stock versus
Page 23 of 31
trade (import/export) for stabilization of domestic market in the wake of

fluctuations in domestic production show that in an overwhelming number of
cases, buffer stock is a better option than trade to protect the interests of
consumers and producers. Similarly, policies like prompt changes in trade policy,
buffer stock, and domestic regulation have helped India sit pretty and safeguard
itself against transmission of the effect of global food crisis during 2007–8.
There is a strong evidence to suggest that strategic liberalization rather than
free trade in agriculture should be the cornerstone of India opening up the agri-
food sector to the world economy.
Table 8A.1 Export, Import, and Trade Surplus of Agriculture

Sector (in US$ million)
Year Export Import Net trade
1981–2 2,609 2,796 –187
1990–1 2,817 672 2,144
1991–2 2,614 604 2,009
1992–3 2,520 993 1,527
1993–4 3,200 599 2,601
1994–5 3,086 1,667 1,418
1995–6 5,070 1,511 3,559
1996–7 5,677 1,597 4,080
1997–8 5,478 1,920 3,558
1998–9 5,025 3,103 1,923
1999–2000 4,454 3,256 1,198
2000–1 4,588 2,175 2,413
2001–2 4,677 2,867 1,810
2002–3 5,327 3,237 2,090
2003–4 6,082 4,070 2,012
2004–5 7,099 4,188 2,911
2005–6 8,813 3,831 4,982
2006–7 11,667 5,906 5,761
2007–8 16,741 6,073 10,668
2008–9 15,883 6,772 9,111
Page 24 of 31
Source: Agricultural Statistics at a Glance, Ministry of

Agriculture.
(p.354)
Page 25 of 31
Table 8A.2 Ratio of Export to Value of Domestic Production of Agriculture Sector (in per cent)
Year Export/VAO Import/VAO Net trade/VAO Index Food price
1980–1 3.48 3.75 –0.27 140
1990–1 2.84 0.68 2.16 118
1991–2 3.04 0.70 2.34 118
1992–3 3.14 1.24 1.90 117
1993–4 3.77 0.71 3.06 121
1994–5 3.17 1.71 1.46 131
1995–6 5.07 1.51 3.57 145
1996–7 5.14 1.45 3.70 149
1997–8 4.89 1.71 3.17 136
1998–9 4.42 2.73 1.69 124
1999–2000 3.77 2.75 1.01 101
2000–1 4.11 1.95 2.16 100
2001–2 4.05 2.48 1.57 103
2002–3 4.83 2.94 1.90 114
2003–4 4.78 3.10 1.68 126
2004–5 5.28 3.12 2.17 134
2005–6 5.77 2.51 3.26 136
Page 26 of 31
Year Export/VAO Import/VAO Net trade/VAO Index Food price
2006–7 6.34 3.19 3.14 152
2007–8 7.68 2.79 4.90 208
2008–9 7.73 3.28 4.45 231

Sources:
1. Agricultural Statistics at a Glance, Ministry of Agriculture.
2. National Accounts Statistics, Central Statistical Organisation, New Delhi.
Page 27 of 31
References
Bhalla G.S. 2004. Globalisation and Agriculture, State of India’s Farmers,

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in the South’, WIDER Discussion Paper, Helsinki.
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Commodity Aspects, Working Paper 45, CGPRT Centre, ESCAP, United Nations,
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———. 1999b. ‘Trade Liberalisation and Net Social Welfare: A Study of Selected
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———. 2002a. ‘Indian Agriculture and WTO: Looking Beyond Doha’, Keynote
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———. 2002b. Trade Liberalisation, WTO and Indian Agriculture: Experience and
Prospects. New Delhi: Mittal Publications.
———. 2003. Government Intervention in Foodgrain Markets in India in the

Changing Context, Policy Paper 19, National Centre for Agricultural Economics
and Policy Research, New Delhi.
———. 2007. ‘Wheat Import and Price Outlook for 2007–8: Separating the Grain
from the Chaff’, Economic and Political Weekly, 42(30): 3196–9.
———. 2008. ‘International Trade, Food Security and the Response to the WTO
in South Asian Countries’, in Basudev Guha Khasnobis, Shabd S. Acharya, and
Benjamin Davis (eds), Food Security: Indicators, Measurement and the Impact of
Trade Openness, pp. 262–83. Oxford: Oxford University Press.
———. 2009. ‘Global Food and Financial Crises: Experience and Perspectives
from India’, Agricultural Reforms and Trade Liberalization in China and Selected
Asian Countries: Lessons of Three Decades, Policy Assistance Series 6, FAO
Regional Office for Asia and the Pacific, RAP Publication 2009/15, Bangkok.
(p.356) Chand, Ramesh and Dayanath Jha. 2001. ‘Trade Liberalization:

Agricultural Prices and Net Social Welfare’, in S.S. Acharya and D.P. Chaudhari
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(eds), Indian Agricultural Policy at the Cross Roads, pp. 17–126. New Delhi:
Rawat Publishers.
Chand, Ramesh, Dayanatha Jha, and Surbhi Mittal. 2004. ‘WTO and Oilseeds
Sector’, Economic and Political Weekly, 39(6): 533–7.
Chand, Ramesh and P. Kumar. 2006. ‘Country Case Study India’, in Harmon
Thomas (ed.), Trade Reforms and Food Security, pp. 329–64. Rome: Food and
Agriculture Organization of United Nations.
Deaton, Angus and Jean Drèze. 2009. ‘Food and Nutrition in India: Facts and
Interpretations’, Economic and Political Weekly, 44(7): 42–64.
Dholkia, Bakul H. 1997. ‘Impact of Economic Liberalisation on the Growth of

Indian Agriculture’, in Bhupat M. Desai (ed.), Agricultural Development
Paradigm for the Ninth Plan under New Economic Environment, pp. 122–36.
New Delhi: Oxford and IBH Publishing Co. Pvt. Ltd.
Gulati, Ashok. 2001. Trade Liberalisation and Food Security: Challenges to

Indian Policy Makers, mimeo, International Food Policy Research Institute
(IFPRI), Washington DC, January.
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Journal of Agricultural Economics, 84(3): 754–61.
Gulati, Ashok and Anil Sharma. 1994. ‘Agricultural under GATT: What It Holds
for India’, Economic and Political Weekly, 29(29): 1857–63.
———. 1995. ‘Subsidy Syndrome in Indian Agriculture’, Economic and Political

Weekly, 30(39): A93–A102.
———. 1997. ‘Freeing Trade in Agriculture: Implications for Resource Use

Efficiency and Cropping Pattern Changes’, Economic and Political Weekly, 32(52,
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Allocative Efficiency-Case of Edible Oils’, Economic and Political Weekly, 31(45–
46): A15–A24.
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Directorate of Economics and Statistics, Ministry of Agriculture, GoI.
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Ministry of Agriculture, GoI.
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Ministry of Agriculture. Various issues. Agricultural Statistics at a Glance. New

Delhi: Ministry of Agriculture, GoI.
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in India’, Economic and Political Weekly, 29(20).
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for Agricultural Liberalisation: Consequences for Growth, Welfare and
Distribution’, Economic and Political Weekly, 30(39): A90–A92.
———. 1997. ‘Agricultural Trade Liberalization: Growth, Welfare and Large

Country Effects’, Agricultural Economics, 17(1): 1–20.
(p.357) Pursell, Garry and Ashok Gulati. 1995. ‘Liberalising Indian Agriculture:
An Agenda for Reform’, in Robert Cassen and Vijay Joshi (eds), India: The Future
of Economic Reform, Chapter 10, pp. 261–312. Oxford and New Delhi: Oxford
University Press.
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A170.
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site=statistics, last accessed in April 2015.
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Assessment for India’, World Development, 25(3): 425–36.
———. 2001. ‘The Desirable Form of Openness for Indian Agriculture’,

Cambridge Journal of Economics, 25(2): 185–207.
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econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTDECPROSPECTS/
0,,contentMDK:21574907~menuPK:7859231~pagePK:64165401~piPK:
64165026~theSitePK:476883,00.html, last accessed in April 2015.
Page 30 of 31
Notes:
(1.) Under the new economic policy, rupee was devalued by 18 per cent against
the dollar and exchange rate was left to be determined by market forces. The
new Export-Import Policy was announced for five years (that is 1992–7) instead
of three, as in the past. The main features of the policy were that trade was free
except for a small negative lists of imports and exports. Canalization of trade
was abandoned and the government stopped determining the value or nature of
the import or exports, except for exports of onion and import of cereals, pulses,
and edible oils. Most of the quantitative restrictions on agricultural trade flows
were dismantled and tariff was also lowered somewhat.
(2.) Use of GDP or value added as the denominator for estimating openness, as is
the common practice, overestimates the degree of openness. Since export/
import represent value of output rather than value added it is proper to use
value of domestic production rather than GDP as denominator to estimate the
extent of integration of domestic economy with world economy.
(3.) In fact, after the mid-1980s, growth rate in oilseeds production was higher
than the growth rate in foodgrains (Chand et al. 2004).
(4.) Per capita availability of edible oil and vanaspati in the country increased
from 7.1 kg during 1993–4 to 12.7 kg during 2007–8.
(5.) Oilseeds in India are used to produce oil and oil meal and cake. While almost
all the vegetable oil is consumed in the domestic market a large share of the
oilmeal, which is a very rich source of protein, is exported. During 2004–5 to
2008–9, India exported more than 6 million tonnes of oilcake each year.
(6.) For details, see Chand (2009).
Page 31 of 31
Trade and Employment in India

Economy
Jayati Ghosh

Print ISBN-13: 9780199458943
DOI: 10.1093/acprof:oso/9780199458943.001.0001

Sumangala Damodaran
DOI:10.1093/acprof:oso/9780199458943.003.0009

From the late 1970s, theorists of economic liberalization have argued for
positive growth, allocative efficiency, and employment effects of reforms in
various markets, of which the labour market and export and import markets
have been considered the most prominent from the point of view of employment
creation. This chapter is about the relationship between trade and employment
in the Indian case. The chapter reviews the broad trends in trade and
employment from the beginning of the 1990s in India, and provides a review of
the theoretical and empirical literature on the trade–employment relationship in
general and then specifically for the Indian case.
Keywords: trade liberalization, foreign trade regimes in India, export performance, current account
balance, employment, growth
From the late 1970s, theorists of economic liberalization have argued for
positive growth, allocative efficiency, and employment effects of reforms in
various markets, of which the labour market and export and import markets
have been considered the most prominent from the point of view of employment
creation. Over the past two-and-a-half decades, in most developing countries
that have pursued a trajectory of economic reform, trade liberalization—loosely
defined as a move towards freer trade through the reduction of tariff and other
barriers—has been one of the most crucial aspects of the increasing integration
of the global economy and has been held to result in several advantages,
including increased employment in general and for developing countries in
particular.
Page 1 of 21
However, it has also been subject to a variety of critiques, based on facts such as
rising unemployment and wage inequality in the advanced countries, increased
exploitation of workers in developing countries and a ‘race to the bottom’ with
respect to employment conditions and labour standards, the de-industrialization
and marginalization of low-income countries, increasing poverty, and global
inequality and degradation of the environment (Ghose 2003; Lee 2005). Apart
from the empirical evidence, the critique is also of the theoretical underpinnings
of neoliberal prescriptions regarding the impact of trade liberalization on
employment.
This chapter is about the relationship between trade and employment in the
Indian case. Like in many other developing countries, India initiated a process of
liberalization in the mid-1980s and pursued the policy aggressively after 1991.
Not only were import controls (p.359) lifted and quantitative restrictions
removed, but import tariffs were also continuously lowered.
The chapter reviews the broad trends in trade and employment from the
beginning of the 1990s in India, and provides a review of the theoretical and
empirical literature on the trade–employment relationship in general and then
specifically for the Indian case. The chapter consists of three sections. The first
section briefly reviews the theoretical arguments that posit the positive
relationship between trade and employment, which underpin a substantial part
of the trade reform literature and also the critiques of the orthodox positions,
based on theoretical as well as empirical arguments. The second section broadly
reviews the trends in trade performance as well as employment in India in the
post-reform period. The third section presents a summary picture of the
empirical studies of the relationship between trade and employment in India.
Trade and Employment: The Expected Relationship and its Critiques

The arguments for the positive impact of trade liberalization on labour markets
and employment have been underpinned by the assumptions and predictions of
the Heckscher-Ohlin model and its variants, despite the numerous critiques of
the model that exist. Viewed within this framework, trade liberalization is
presumed to be unambiguously good for developing countries1 with plentiful
supplies of labour which, it is held, will export labour-intensive commodities and
import commodities with relatively higher capital requirements.2 Thus, as a
developing country gradually integrates with the world economy, greater trade
based on comparative advantages in resource endowments will not only increase
efficiency and growth but it will observe a change in the composition of its
output towards more labour-intensive activities. This will shift the national
demand for labour curve to the right, and under an assumption of a fairly elastic
supply of labour, will lead to an increase in overall employment. It is also
expected, under Heckscher-Ohlin assumptions, that such increases in trade will
lead to a lowering of wage inequality in the manufacturing sector of developing
countries, as the gap between the wage rates of skilled and unskilled labour gets
Page 2 of 21
narrowed. This is expected to happen through moving towards freer trade which
should induce developing countries (p.360) to move towards specialization in
labour-intensive manufactured products, in which they have a comparative
advantage, and shift away from the production of capital- and skill-intensive
manufactured products. In as much as the former type of industrial production
uses more unskilled labour than the latter, the changes in the industrial
structure brought about by trade liberalization will lead to greater demand for
unskilled labour and a fall (or relative fall) in the demand for skilled labour. In
consequence, the wage rate ratio of unskilled to skilled labour will rise and lead
to a reduction in wage inequality.
Thus, the relationship between trade and employment is expected to be positive,

following from orthodox theory, if the following processes happen: (a) an
increase in the overall rate of growth of the system; (b) a shift of production in
favour of sectors that are labour intensive in character; (c) a shift of production
in favour of more labour-intensive techniques within individual industries; (d)
changes in the relative bargaining position of workers as a result of the changes
in the extent of work participation; and (e) smooth shifts between sectors and
activities.
Thus, static, once-and-for-all gains are assumed to arise as the resource

misallocation under import substitution is corrected and resources shift from
inefficient to efficient sectors, activities and firms, with the gains taking the form
of the well-known Harberger welfare triangles. Further, dynamic gains from
liberalization are said to result from improved X-efficiency, greater
entrepreneurial effort, decreased rent seeking with reduced government
intervention—all factors that move the economy towards greater efficiency.3
They can also result if there are increasing returns to scale (IRS) because firms
can supposedly operate at lower costs due to higher levels of output associated
with the availability of external markets.
But some phenomena emerged that were not in line with traditional trade theory
in its static and dynamic version, calling its relevance into question. First, it was
seen that most industrialized countries trade mostly with other industrialized
countries and hence orthodox trade theory was only of very limited use in
predicting employment effects resulting from this type of trade, that is, trade
between similar countries. Second, as Deraniyagala and Fine (2001) have noted,
empirical estimates of the welfare costs of relative-price distortions created by
interventionist trade policies rarely exceed 2 or 3 percentage points of GDP.
Third, it was seen that in an open economy, employers would be (p.361) more
likely to threaten to lay off workers when they demand higher wages than in a
closed economy, and hence the mere threat of sourcing inputs from another
country or of delocalization may weaken workers’ resistance to wage reductions.
Fourth, a lot of employment reshuffling was observed to take place within
sectors rather than across sectors as traditional trade theory would predict (Lee
Page 3 of 21
2005). Fifth, as Akyuz (2005) argues, factors of production, including land,

labour, and capital, are often sector specific or product specific and thus cannot
be necessarily substituted, shuffled, and redeployed. Expansion in sectors
benefitting from liberalization requires investment in skills and equipment,
rather than simply redeploying labour. Unless accompanied by such investment,
new activities and industries cannot be set up to the extent needed to replace
those displaced by import liberalization. Investment would also be needed for
rationalization in existing industries if they are to survive in the face of greater
import competition. Thus the immediate impact of rapid trade liberalization
could be unemployment, de-industrialization, and growing external deficits, even
though there may be a significant increase in export growth. Some of the old
industries may survive through downsizing and labour shedding, and this may
lead to improved average productivity. But the overall impact could be a decline
in industrial employment and value added as firms that go out of business could
not be fully replaced by new firms in sectors enjoying greater competitiveness.
Trade liberalization could thus trigger a restructuring of economic activity that
takes the form of company closures and job losses in some parts of the economy
and start-ups of new firms, investment in increased production and vacancy
announcements in other parts of the economy. More importantly, when the initial
damage inflicted on industry is deep, the process of industrial restructuring in
response to new incentives may be delayed and the economy could remain
depressed for prolonged periods. Sixth, it was also argued that high-skill
premiums and thus wage inequality could be problems that characterized a
transitional period before positive effects can be expected (Collier and Dollar
2001).
From the 1980s, new trade models were developed to address shortcomings of
standard trade theory by dealing with realities of trade in a more complex
manner (Brander and Spencer 1985; Grossman and Helpman 1991; Grossman
and Horn 1988; Krugman 1984, 1986). They introduced new growth theory,
market imperfections, strategic (p.362) behaviour, and new institutional
economics to understand the nature of interventions or trade openness for
countries where these factors are present. Notably, with these, the possibility
that interventionist trade policy might be justified in specific circumstances was
acknowledged, although, as Deraniyagala and Fine (2001) note, political
economy arguments centred on rent-seeking argued that intervention in trade
was detrimental. Thus, in many models involving strategic behaviour by firms in,
say, oligopolistic markets, it was found that strategic industrial policy could be
justified.4 Given, for example, that scale economies and imperfect competition
are widespread in developing countries, arguments for intervention based on
them could be justified (Helleiner 1992). Thus, many models based on strategic
behaviour and imperfections in markets justify interventionist trade policy and in
fact require multiple and country-/sector-specific policy instruments as the
number of imperfections go up.
Page 4 of 21
The relationship between trade and growth, similarly, was found to get
complicated and not unambiguous. Trade was posited to have effects on growth
through endogenous growth models, for example, through technology and
knowledge spillovers (Grossman and Helpman 1991). Positive effects could
accrue if there is effective transmission of information, increasing competition,
entrepreneurial effort and wider markets, or negative effects would occur if
innovative activities were displaced, making overall effects of trade openness
ambiguous. Further, the nature of technology and technology transfer would
determine whether trade openness would positively impact growth.
Apart from the transitional problems as well as those that might not allow
smooth shifts between activities and sectors sketched earlier, the relationship
between trade and growth could itself be subject to question in specific
circumstances, as the ambiguous conclusions of the new growth literature
showed. This, in turn, could be seen to affect employment. Thus trade may be
seen to affect employment growth through its impact on the growth rate of
output and on the growth rate of employment per unit of output (Goldar 2009). A
rapid growth in exports in an industry, for instance, may raise the growth rate in
output of the industry, and thus contribute to employment generation. This
overall impact on the total output of the manufacturing sector has been referred
to as a scale effect in a study of the trade–employment relationship in India (Sen
2008). In this case, an increase in export (p.363) orientation would increase
employment. But, it may simultaneously reduce the labour intensity of
production (because more mechanized methods of production are brought into
use) and thus tend to reduce employment growth, the process effect (Sen 2008).
Alternatively, an increase in export orientation of an industry may be associated
with changes in the product mix in favour of labour-intensive products causing
labour intensity to go up. A rapid increase in imports of a product may have an
adverse effect on the output of the competing domestic industry and thus have
an adverse effect on employment growth, the composition effect, as
demonstrated by several studies (Feenstra and Hanson 1996; Hasan et al.
2007a, 2007b; Rodrik 1997; Sen 2008). Import competition may force the
inefficient firms to quit and compel many other firms to introduce more
mechanized methods of production, both of which may have an adverse effect on
labour intensity and hence on employment growth.
In other words, to begin with, larger exports can stimulate growth and have
direct positive employment effects only if net exports are positive or there exists
a trade surplus that serves as a demand stimulus and an inducement to invest
for an individual country, assuming that exports will increase labour intensity of
production and the production structure of the country.
Further, as Chandrasekhar (2010) points out, there could be indirect effects of

trade on growth and employment, such as export revenues allowing a country to
dissociate the structure of production from serving the domestic market. This
Page 5 of 21
could be because of the nature of demand for its exports per se, but also
because the needs of growth require imports, even for export production, in turn
necessitating foreign exchange supplies. Thus, it may be crucial for a country to
engage in trade merely to earn the foreign exchange to finance imports
associated with a given rate of growth and a given trade policy regime. Such a
shift in the composition of domestic supplies could have employment impacts.
Finally, as he points out, it is necessary to distinguish between the impact on
growth of a ‘policy of openness’ and merely a greater involvement in trade.
In concrete terms, while any of the effects outlined here may be seen, it is
necessary to understand that it is difficult to draw any firm conclusions on the
impact of trade liberalization simply on the basis of associations between
changes in trade on the one hand and growth and employment performance on
the other. The first problem is one (p.364) of establishing causality between
trade liberalization and growth and employment performance. The fact that the
evidence on the relationship between trade liberalization and growth is
ambiguous, at best, has also been pointed out more recently by Chandrasekhar
(2010). An increase in exports and the trade–GDP ratio cannot automatically be
attributed to the effects of trade liberalization, as other factors are involved.5
The growth in exports and the trade–GDP ratio could be the result of higher
growth achieved through a successful development strategy or favourable
external market conditions. This is especially so since export growth is typically
a major component of overall growth and the two are strongly correlated.
However, despite the numerous critiques and qualifications that questioned the
kind of relationship that orthodox theory predicted and in fact despite the
ambiguous results that were seen to obtain with the refinements to orthodox
theory through the introduction of imperfections, strategic behaviour and new
growth models, prescriptions for developing countries continued to be based on
this expected relationship. In fact, even as it came to be argued that trade
liberalization per se might have ambiguous effects on employment, as has been
pointed out earlier, a systematic case was made in later reform literature that
linked up reforms in foreign trade regimes with reforms in the labour market.
With experiences of structural adjustment in the 1980s and early 1990s, it
became apparent that transition periods following reform were becoming long
and countries which had undertaken extensive reforms in several markets
appeared to experience different kinds of problems that were contrary to what
the reform literature had predicted. With increasing unemployment emerging as
one of these problems, the discussion started focusing more on the need to move
towards low-cost production of tradables as the optimum strategy to promote
both growth and efficiency. Production of tradables, in turn, needed to be done
at low costs in order to be competitive and the focus turned to determinants of
export competitiveness in developing countries with low labour costs being
considered the prime determinant. The adoption of specific kinds of labour
regimes in a large number of countries (such as export processing zones),
Page 6 of 21
combined with the nature of export markets in globalized production systems,

led to pervasive use of subcontracting arrangements and informal labour
processes in developing countries. There was a shift from the ‘costs of
transition’ paradigm that talked (p.365) of falling wages as an adjustment
mechanism to permit restructuring in the face of crisis to keeping wages and
employment costs low to enhance competitiveness and expand employment,
especially in the context of labour-surplus developing economies. In this
perspective, it is labour market inflexibility that explains mass unemployment
and what hindered employment expansion, even with export orientation,
according to this view.
In India, the deficiencies of the trade policy regime and their adverse impact on
growth had been made by the well-known NBER studies of the developing
country trade regimes of the 1970s (Bhagwati and Srinivasan 1975), followed by
specific studies, for example, that protectionist policies created an anti-export
bias World Bank (1989), that it was import controls, rather than tariffs, that
limited imports (Joshi and Little 1996) and so on. In this phase, the link between
trade liberalization and employment, as argued earlier, was assumed to be
automatic, given enough time for adjustment.
In India, the literature that argued from the insider–outsider perspective on the
labour market discussed above was indirect.6 This literature argued that
organized sector employment did not grow in India because of restrictive labour
legislations, where restrictive laws and union pressures prompt entrepreneurs to
adopt labour-saving technologies. This second strand of the literature, or the
second-generation reform literature, in turn generated an offshoot in the form of
insider–outsider arguments that linked up to a vast literature on the informal
sector in developing countries. Labour markets in this framework tend to be
rigidly dualistic, with strong ‘insiders’ in the formal segment preventing wage
and employment flexibility and keeping the ‘outsiders’ strictly out of the ambit of
benefits. It was argued that trade reforms could not create employment in the
formal sector, despite expansion of markets and instead led to an expansion of
the informal sector’s employment. Trade reforms might then be expected to
depress informal wage by contracting the formal sector and driving labour into
its informal counterparts (Marjit et al. 2009; Mazumdar and Sarkar 2004).
Hanson and Lieberman, as cited in a World Bank Country Report (1989) and Ajit
K. Ghose (2003) suggested that apart from the difficulty of cutting the real wage
per worker, the laws and procedures of job security in India discouraged
adjusting the size of the labour force in accordance with changing demand
conditions—also argued econometrically by Fallon and Lucas (1993). According
to (p.366) Mazumdar and Sarkar (2004), the restrictions on employment eased
when ‘insider power’ reduced, to even out the labour market. The essential
argument was that if and when there was wage and employment flexibility and a
Page 7 of 21
reduction of insider–outsider gaps, the availability of export markets for labour-

intensive goods would enhance employment.
Trade and Employment in the Reform Period—Empirical Evidence from

India
What does the empirical evidence show in the Indian case? What have the
employment effects of trade been? This section looks at the overall trends in
trade and in employment in India in the post-liberalization period and then
reviews available studies that look at the relationship.
First, India’s trade–GDP ratio had remained relatively stable through most of the
1980s but started to increase considerably from the late 1980s, doubling
between 1987 and 2001, from 13 per cent to 26 per cent, and increased more
rapidly to reach 33 per cent in 2007 and 43 per cent by 2013 and this
presumably reflected the adoption of trade liberalization. It has been noted that
while this is lower than the world average, which was 52 per cent in 2004, it is
considerably higher than that for many large economies such as the US, Brazil,
and Japan (Tong and Zheng 2008). The ratios of both exports and imports to
GDP rose quite sharply during the 1990s and this continued into the next
decade. While the export–GDP ratio was 6.2 per cent in 1980 and 7.1 per cent in
1990, it rose to 13.2 per cent by 2000 and 22.7 per cent by 2008. The import–
GDP ratio which was 9.4 per cent in 1980 and 8.4 per cent in 1990 rose to 14.2
per cent by 2000 and 28 per cent by 2008 (Chandrasekhar 2010).
Second, this happened in a context of high growth during the years of

liberalization. According to official figures, GDP growth accelerated from its
‘Hindu rate’ origins of around 3.5 per cent in the 1970s and earlier to 5.4 per
cent in the 1980s, 6.3 per cent during the decade starting 1992–3, and an annual
average rate of close to 9 per cent during the years 2002–3 to 2008–9. However,
when the global crisis affected growth, rates fell to 6.7 per cent in 2008–9 and
7.4 per cent in 2009–10. As Chandrasekhar (2010) states, ‘India is of interest
because we can examine the impact of trade liberalization on the labour market
in a context of creditable growth.’
(p.367) Third, a quick overview of export and import performance in the pre-
and post-liberalization periods in the Indian economy shows an increase in
growth rates of both exports and imports in the post-liberalization period, both
substantially more in the 2000s than in the 1990s. Exports and imports in dollar
terms grew at 9.7 per cent and 10.8 per cent, respectively, in the 1990s and 19.8
per cent and 25.6 per cent, respectively, between 2000 and 2005
(Chandrasekhar 2010). Exports grew at 20 per cent between 2005 and 2012,
despite the setback due to the 2008 crisis and imports grew at about 22 per
cent.
Page 8 of 21
Fourth, while trade liberalization focused mainly on the manufacturing sector,

export performance was better in the service sector rather than the
manufacturing sector. While the growth of merchandise exports in the 1990s
was more rapid than in the previous decade, it did not match up to the growth
experienced in the 1970s when the economy was much more closed. Meanwhile,
the growth of merchandize imports in the 1990s was much more rapid than in
the 1980s (although much less than in the 1970s when it reflected the oil price
shocks). There were signs of a revival in merchandise exports during the first six
years of this decade. This makes it difficult to directly link trade liberalization to
the country’s export performance, although liberalization did affect the level of
manufactured exports from the country.
Fifth, employment trends in the post-liberalization period have been generally

characterized as ‘jobless growth’ by numerous studies, with the expectations
that liberalizing external trade and foreign investment would not only generate a
higher rate of output growth, but also lead to a restructuring of production in
favour of labour-intensive activities and therefore also an increase in
employment significantly not being realized till the end of the 1990s. Even
though there had been acceleration in employment growth between 1999–2000
and 2004–5, by the end of the last decade, this had gone down again. National
Sample Surveys (NSS) (conducted in 1983, 1987–8, 1993–4, 1999–2000, 2004–5,
and 2008–9) revealed a sharp, and even startling, decrease in the rate of
employment generation across both rural and urban areas during the 1990s. The
rate of growth of employment, defined in terms of the current daily status (a
flow measure of the extent of jobs available) declined from 2.7 per cent per year
in the period 1983–94 to only 1.07 per cent per year in 1994–2000 for all of India
(Chandrasekhar 2010; Jose 2008; (p.368) National Commission for Enterprises
in the Unorganized Sector [NCEUS] 2010). This refers to all forms of
employment—casual, part-time, and self-employment. For permanent or secure
jobs, the rate of increase was close to zero. In fact, the fall of workforce
participation and the slowdown in the rate of employment growth were so
dramatic that they called into serious question the pattern of growth over this
decade.
On the face of it, therefore, trade and employment trends do not in an overall
sense lend themselves to unambiguous conclusions in the case of India. In fact,
most empirical studies have focused on indirect links between the two. Thus,
empirical studies that look at the trade–employment relationship in India can be
grouped into three categories: first, those that look at the relationship via the
trade balance, that is, those that argue that while trade liberalization might have
enhanced export growth, its employment effect might have been minimal due to
counter-tendencies based on higher rates of import growth, that trade
liberalization could have both positive and negative effects on employment in
terms of job creation and job destruction; second, those that examine the effect
of trade on the composition of industries and of exports therein and the impact,
Page 9 of 21
thereof, on employment; third, those that focus on the impact of exports on the
quality of employment. The remaining part of the chapter hence is devoted to
looking at these three dimensions.
Trade Liberalization, Export Growth, the Current Account Balance, and Employment
A cross-country study of 22 developing countries from different continents
(Thirlwall and Paulino 2004) that have undergone extensive trade liberalization
from the mid-1970s to the late 1990s found that across the board, reduction in
export and import duties significantly affected growth of exports and imports,
with impact on import growth being greater. For a 1 percentage point reduction
in duties, exports grew just under 0.2 per cent while imports grew between 0.2
per cent and 0.4 per cent. Further, liberalization has increased income elasticity
of demand for imports and exports by roughly equal amounts but has increased
price elasticity of demand for imports by more than for exports.
In the Indian case, the said study shows that the more liberalized trade regime
raised import growth by more than export growth. Compared to the pre-
liberalization period, the first six years of (p.369) liberalization raised export
growth by just under 2 per cent and import growth by around 6 per cent.
This result was also upheld in two studies by Goldar (2002, 2009). Goldar (2002)
in a study of the trends in trade for the period 1970–1 to 1999–2000 found that
the growth rate of both exports and imports accelerated in the 1990s compared
with the previous decades. Also, there was a significant increase in the ratio of
exports to GDP and imports to GDP, both these facts having been pointed out
before in the section on overall trends. Further, there was a rapid growth in the
share of manufactured exports in total exports even as the current account
deficit remained negative and imports grew faster in the initial post-reform
period.
If we look at trends in employment over the entire reform period, the results are
mixed. First, the evidence for the early post-reform period. Goldar (2002)
showed that there was a marked acceleration in employment growth in
manufacturing in the1990s in comparison to the pre-reform period. At the
aggregate level, this increased to 3.1 per cent per annum in the period 1990–1
to 1997–8. Employment elasticity in manufacturing was found to be 0.26 in the
period 1973–4 to 1989–90, and increased to 0.33 in the period 1990–1 to 1997–8,
with a sharp increase in employment elasticity in export-oriented industries
(especially those exporting substantially to developing countries), which
contributed to an increase in employment elasticity at the aggregate level. This
was found to be commensurate with the results of a study by Ghose (2003) who
found that in the case of China, India, Malaysia, and Indonesia, trade was found
to increase employment elasticity in manufacturing for the period. Goldar (2002)
concluded, for the period up to the mid-1990s, therefore, that trade
liberalization seemed to have encouraged the growth of labour-intensive
Page 10 of 21
industries and labour-intensive methods of production, and this led to an

increase in employment elasticity, resulting in faster growth in employment in
manufacturing. He also concluded that the significant downward trend in the
share of export-oriented industries in manufacturing employment, during the
period 1973–4 to 1989–90, was arrested in the 1990s, presumably due to trade
liberalization.
Mazumdar and Sarkar (2004), who also compared pre-reform and post-reform
elasticities in employment in manufacturing, found, for the first five years of
reform, that there was a rise in import penetration ratios in high-technology
sectors like machinery and transport (p.370) equipment, concluding that trade
liberalization measures allowed some industry groups to establish themselves
with a sizable ‘import penetration’ ratio without an increase in export
performance, whereas textile and textile products, leather and such low-
technology industries showed increase in export performance. The industry
composition is discussed in detail in the following section.
A completely different conclusion for the initial period was put out by Sen
(2008), who looked at the trade–employment relationship from 1975–99. While
agreeing that employment growth between 1985 and 1999 was higher than for
previous periods, he argued that the employment coefficients of exports and
imports had consistently fallen over this period and the difference between them
had narrowed over time. This means that a unit increase in manufacturing
exports matched by an identical increase in manufacturing imports led to a
smaller positive effect on employment in 1996–9 as compared to 1975–80. The
reason for decrease in overall employment co-efficient for India’s exports over
1975–99 appears to be a fall in employment intensity of production. Further,
using a growth accounting approach, he argues that whatever changes in
employment were seen were more attributable to domestic demand than to
changes in trade.
Whatever the reasons for the positive employment expansion in the early reform
period, Goldar’s more recent study (Goldar 2009) found that these trends were
reversed and employment in organized manufacturing declined since 1995, a
fact corroborated by Chandrasekhar and Ghosh (2007) as well. If both organized
and unorganized employment are considered, Goldar (2009) found that
employment in the manufacturing sector, organized and unorganized
manufacturing combined, grew at the rate of 4.8 per cent per annum in the
period 1999–2000 to 2004–5, this being higher than the average growth rate
achieved during the previous four decades: about 3.1 per cent per annum from
1961 to 1987–8 and about 1.7 per cent per annum from 1987–8 to 1999–2000.
However, this was due to high rates of growth of employment in unorganized
manufacturing which match that of aggregate manufacturing—not a surprising
result, according to him, because unorganized manufacturing accounts for a
very large part of the employment in aggregate manufacturing, about 86 per
Page 11 of 21
cent in 2004–5. The growth rate in employment in unorganized manufacturing

from 1999–2000 to 2004–5 was about 5.6 per cent per annum, which exceeded
the growth rate achieved in the four previous (p.371) decades—about 3.3 per
cent per annum from 1961 to 1987–8 and about 1.7 per cent per annum from
1987–8 to 1999–2000. In the period 1993–4 to 2004–5, which covers most of the
post-reform era, the growth rate in employment in organized manufacturing was
only about 0.7 per cent per annum. Employment growth in unorganized
manufacturing in this period was about 3.7 per cent per annum.
These results were most recently also upheld by the much publicized report of
the NCEUS (2010), which showed that while total employment in the economy
increased from 396 million to 456 million between two rounds of NSS Surveys of
Unorganised Manufacturing, the change in organized manufacturing was
marginal, only about 35 million. The increase in total employment of 58 million
has been of an informal kind. Given that some of this increase (about 7.7 million)
happened in the formal sector, the entire increase in the formal sector’s
employment was informal in nature, that is, without any job or social security.
These facts have been pointed out by Chandrasekhar (2010) and Jose (2010) as
well.
Clearly, therefore, even if organized sector employment went up with trade

liberalization, it lasted only five years, with the entire reform period after 1995
seeing growth of employment mostly in the unorganized sector. This aspect will
be taken up in more detail in a later section.
Trade, Industry Composition, Exports, and Employment

We review here the evidence on the effect of trade on the composition of
industries and of exports therein and the impact, thereof, on employment. Ghose
(2003), in an empirical review of several countries, found that compared to
import-competing industries, export-oriented industries have lower labour
productivity in developing economies and higher labour productivity in
industrialized countries in general—for example, the ratio of labour productivity
in export-oriented industries to that of import competing industries was 0.51 for
India and 1.77 for the US. What this means is that export-oriented industries in
developing countries would tend to be labour intensive, in keeping with
Heckscher-Ohlin kind of predictions and trade liberalization should increase the
share of such industries in total production and also show a greater share of
their exports in total exports. However, it can also be argued, as Spiezia (2004)
does, that if differences in productivity gap (p.372) between developing and
industrialized countries were larger for labour than for capital, then developing
countries would end up with exporting capital-intensive goods and creating less
employment. Further, due to openness of trade, developing countries could fill
the productivity gap in capital by importing more efficient machinery from the
Page 12 of 21
industrialized countries, which would reduce employment in developing

countries. What does the evidence show?
In Goldar’s first (2002) study, an analysis of the factor content of trade (based on
data for 1995–6) showed that export-oriented industries were less capital and
skill intensive (more labour intensive) than import-competing industries, which
is consistent with the Heckscher-Ohlin notion of comparative advantage and this
in turn reinforced the findings of Ghose (2003).
Nambiar et al. (1999), in a study that covered the late 1970s to after the
mid-1990s, argued that trade over the years shrunk India’s manufacturing base,
both in terms of value added and employment. For the period 1978–9 to 1996–7,
trade, more specifically import liberalization, cut value added in manufacturing
by Rs 48,431 million, that is, roughly by 6 per cent. In 1978–9, trade provided a
net addition of 3.1 lakh jobs in manufacturing. On the contrary, in the
subsequent periods, trade either rendered many jobless or, if at all, created
fewer jobs. The adverse impact of import liberalization was most pronounced on
the capital goods sector followed by the intermediate sector.
The study also brought out another contrast between the pre-liberalization and
post-liberalization periods in the composition of industries, in turn influencing
employment dimensions. Between 1978–9 and 1989–90 the manufactured
exports basket contained nearly 50 per cent of intermediate and capital goods.
However, since 1991–2 consumer goods have dominated India’s manufactured
exports—their share has increased from 50.6 per cent in 1989–90 to 72.5 per
cent in 1996–7. Employment shifts have proceeded in a similar fashion—the
consumer goods sector accounted for 88 per cent of total manufacturing
employment in 1997–7. This, as we can see, is an expected effect of trade
liberalization, where more labour-intensive sectors saw increasing shares in
exports.
However, for the later reform period, Goldar (2009) shows that the net effect of
trade on employment in organized manufacturing has been marginal primarily
due to two reasons—the changing product composition and the changing
direction of trade. The share (p.373) of petroleum products, whose
employment generation is a tiny fraction of industries like readymade garments,
increased considerable in India’s export basket (from 2 per cent in 1996–7 to 19
per cent in 2007–8), while traditionally labour intensive products lost their
share. Further, the advanced countries’ (EU, USA, and Japan) share and the
growing significance of China as India’s major trading partners had an adverse
impact on industrial employment. This is because labour-intensive products have
much greater weight in India’s exports to the former than China. Between 1995–
6 and 2003–4, it was also found that there is negative correlation between
employment growth rate and level of labour intensity of industry as well as
Page 13 of 21
between labour intensity and output growth. There has also been a fall in the
relative share of labour-intensive industries in industrial output.
Similar results were shown for a study by Sankaran et al. (2009), which looked
at the changes in employment growth of two-digit manufacturing industries in
the period 1990–1 to 2004–5. Of 22 manufacturing industries, 7 which together
accounted for 36 per cent of the employment share, showed negative
employment growth, whereas the remaining 15 saw positive employment
growth. Within the latter category, wearing apparel, motor vehicles, and leather,
which saw significant export growth, also saw significant employment rates of
growth, whereas the largest number of industries with high export growth saw
low or negative rates of growth of employment.
It is apparent from the review of empirical evidence until now that the expected
high employment outcomes of trade liberalization have not materialized in the
Indian case, except maybe to some extent in specific industries like wearing
apparel, automobiles, and leather. It is probably the case, as Chandrasekar and
Ghosh (2007) have noted, that falling real wages or cheap labour have not been
sufficient to ensure employment growth after 2000 because the negative effects
of openness on employment generation have been strong enough to offset the
benefits of the cheap labour for employers.
We now move on to the employment impact of exports in qualitative terms.
Exports and Employment—Qualitative Effects

As outlined in the theoretical section above, a significant argument that linked
export expansion to employment hinged on wage and (p.374) employment
flexibility and a reduction of ‘insider–outsider’ gaps between formal and informal
workers, in other words, to flexible labour markets. The question to be
examined, then, is whether such qualitative changes happened in the reform
period and what the nature of such changes was.
For the initial post-reform period, Ghose (1999) estimated an employment

quality index (EQI) using NSS data for the period 1977–8 to 1993–4 and showed
that the quality of employment deteriorated in aggregate economy and in all the
three sectors and also that the deterioration has been higher for males as
compared to females for the aggregate economy (Mahendradev 2000).
In an indirect relationship, Mazumdar and Sarkar (2004) examined the

employment elasticities of pre-reform and post-reform periods, where the two
major changes in labour market outcomes were (a) the fall in the share of
wages; and (b) the change in the trade-off towards employment growth rather
than wage growth. The net effect was a substantial increase in employment
elasticity. They summarize this to be due to employment growth ‘rather than
wage growth’, implying a qualitative change in the nature of employment.
Page 14 of 21
The wage–employment trade-off had in fact swung heavily in favour of

employment growth even as the share of wages declined significantly. We
can conclude with some confidence that, if the aim of liberalization had
been to promote labour-intensive growth and reduce the power of those
already in employment, our first cut at the evidence shows that the policy
certainly succeeded in its objectives to some extent.
Only the older industries seemed to favour wage growth relative to employment
growth. Further, they found that there has been a distinct shift of production and
employment to small-medium enterprises (SMEs), reducing the role of large
factories in the manufacturing sector.
These results, if valid, would seem to be according to expectations from

standard theoretical frameworks as referred to earlier. To dwell on this a bit
here, it seems to emerge from the above that liberalization in general, of which
trade liberalization is a significant component, has resulted in an overall decline
in organized employment, in increased employment in the unorganized sector, in
shift of employment to SMEs relative to large factories, and a decline in wages.
All these aspects point to greater informalization in the economy in both the
formal and informal (p.375) sectors. Further, this appears to be a general
feature of industrialization in the country, as a study by Mitra (2007) found.
Mitra examined the nature of the relationship between industry and the informal
sector at the state level for India and found that the share of the informal sector
is equally high in the states which are highly industrialized in comparison to the
states which are industrially backward.
Chandrasekhar and Ghosh (2007) and Chandrasekhar (2010) contextualize the

overall economy-wide scenario within which this has happened. They find that
the average real wage of workers in organized manufacturing has been stagnant
since 2000 and there has been a significant decline in the proportion of all forms
of wage employment across the board (rural–urban, men–women, sectors),
including a fall in casual employment, accompanied by a sharp increase in the
number of self-employed workers, accounting for nearly half of India’s labour
force.
During liberalization the organized manufacturing sector saw a sharp increase

in labour productivity as measured by net value generated per worker, but very
little of the benefits accrued to workers, with wages accounting for only 15 per
cent of value added in organized manufacturing. Further, they found that the
gender gap in wages has risen consistently in both organized and unorganized
sectors, for example, female casual workers get only 58 per cent of the wages
received by male workers.
There have been specific studies that have looked at the impact of trade reform
on informal employment (Harriss-White et al. 2007; Marjit and Maiti 2009).
Page 15 of 21
Studies that focused on the impact of trade reform on the wage of the informal
workers in a small open economy by using general equilibrium framework
(Marjit 2003) argued that with a limited degree of capital mobility between the
formal and informal sectors, trade reform reduces the informal wage. Marjit et
al. (2003) analysed NSS data on informal manufacturing in India between the
periods 1984–5 and 1999–2000 and argued that reform tends to expand the size
of the informal sector through a cut back in employment in the formal sector
when formal and informal sectors are producing different goods and a tariff
protects the formal sector.
In an important contribution to the debate, the NCEUS (2010) countered the

argument that employment inflexibility, or the inability of employers to hire and
fire workers or to exit industries, limited (p.376) employment in India. It
pointed out that first, in many industries like the textile industry in Ahmedabad
and Kanpur, there were large retrenchments and drastic cutbacks in
employment (NCEUS 2010; Papola 2009), whereas several industries expanded
employment despite ‘increasing’ labour costs. Second, rather than labour laws,
market and technology considerations were important in effecting increases or
decreases in employment. Third, employment growth, when it takes place in
specific industries, as was seen in some export industries like wearing apparel
and leather products between 1983 and 2004–5, takes place in both unorganized
and organized segments, although the nature of employment even in the
organized sector might be informal, that is, with no security. What is pertinent to
note is that especially in export-oriented industries, the pressure to keep labour
costs low and to ensure greater control over the labour process was what led to
the informalization in both the organized and unorganized segments.
There are a number of reasons to be concerned about the existence and

persistence of informal employment in the developing world and there is a huge
literature that has examined this conceptually and empirically for more than a
decade now. Such employment is often characterized by poor working
conditions, both in terms of remuneration and the existence and/or enforcement
of basic labour standards. Further, informal employment can leave too many
workers frozen out of the networks they need to access to insert themselves
higher up in the global value chains that their labour so often serves. Carr and
Chen (2004) and NCEUS (2010) demonstrate how home-based production like in
the Indian case can leave workers with insufficient information and bargaining
power to claim the economic rents that globalization makes increasingly
available to employers and contractors, concentrating them instead in the hands
of local middlemen and transnational corporations. What is important to note is
that while informalization processes have been found to be pervasive and
increasing in the Indian economy, even this reliance on low labour costs has not
been effective enough to generate sufficient employment in exporting industries
in any significant sense.
Page 16 of 21
This chapter surveyed the literature on trade and employment in the Indian case
in the post-liberalization period. It points out that while it (p.377) is difficult to
draw any firm conclusions on the impact of trade liberalization simply on the
basis of associations between changes in trade on the one hand and growth and
employment performance on the other, traditional theory and a lot of the policy
prescriptions hinge on the existence of a direct relationship.
The evidence on the relationship, at best, is ambiguous in the Indian case. Even
as India’s trade–GDP ratio increased considerably from the late 1980s and this
also happened in a context of high growth during the years of liberalization,
employment trends in the post-liberalization period have been what is generally
referred to as ‘jobless growth’. Overall, except for a brief five year period
between 1999–2000 and 2004–5, when employment showed an increasing trend,
and the initial post reform period until 1997, when manufacturing employment
grew significantly, trade liberalization has not resulted in any substantial
positive break in employment trends. Even in cases where employment growth
in specific export industries has been significant, it has been informal in nature
to a large extent, keeping with a generalized informalization process in the
Indian economy.
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Page 20 of 21
Notes:
(1.) The early exposition of this position came from the famous National Bureau
of Economic Research (NBER) studies of developing country trade regimes,
edited by Jagdish Bhagwati and Anne Krueger. See (Bhagwati 1978).
(2.) Standard trade theory was concerned with how trade per se can be mutually
beneficial to all countries that engage in foreign trade. The ‘developing country’
idea was relevant here only so far as such countries were assumed to be labour
abundant.
(3.) These arguments have been succinctly reviewed in Deraniyagala and Fine
(2001).
(4.) For example in Bhattacharjea (1995).
(5.) This has been pointed out in various multi-country studies, for example,
Thirlwall and Paulino (2004) and Ghose (2003).
(6.) See Mazumdar and Sarkar (2004); Fallon and Lucas (1991), two of such
contributions to the Indian literature on economics.
Page 21 of 21
Labour Movement in Globalizing India

Economy
Jayati Ghosh

Print ISBN-13: 9780199458943
DOI: 10.1093/acprof:oso/9780199458943.001.0001

G. Vijay
DOI:10.1093/acprof:oso/9780199458943.003.0010

The contentious debate labour movement and its role in development has had
various dimensions. There have been controversies pertaining to a variety of
theoretical approaches to the analysis of labour mobility in the context of
economies such as India. Criticism of the definitions and concepts employed by
the official macro-statistics to measure migration, which underestimate and
misrepresent the phenomena in India, has generated alternatively a plethora of
micro-level case studies. These studies added great richness to the existing
literature, presenting various patterns of mobility across different sectors and
regions of India. However, what are the appropriate indicators and what is the
appropriate analytical framework to understand migration remains unresolved.
This chapter presents a review of the research dwelling on such questions and
controversies with reference to both internal as well as international movements
of labour with a specific focus on India in the context of globalization.
Keywords: migration theories, internal migration, international migration, circulation, informal

economy, rural distress, Indian officials statistics on migration, migration case studies
Why Does Labour Move?—Theoretical Approaches to Migration

The mainstream neoclassical economic model does not recognize the possibility
of involuntary unemployment under competitive conditions of accumulation.
Competitive accumulation renders all resources scarce and therefore in a
competitive process value of resources is revealed and resources are fully
employed. However, this simple neoclassical model found itself inadequate when
it had to analyse Third World economies that seemed to be based on subsistence
where stagnation rather than vibrant accumulation was the reality. How can
Page 1 of 59
prices allocate if subsistence rather than exchange was the purpose of

production and the economy was stagnant? The challenge was to overcome
stagnation so that competitive markets could function.
It is in this context that development economists like Arthur Lewis (1954)

proposed that several Third World economies were stuck in stagnation because
they were over-dependent on traditional sectors that had little scope for
accumulation. Lewis proposed that modern industrialization can be an engine to
drive accumulation and achieve development. The outcome was a dual-sector
model that causes mobility of labour from low productivity, low wage traditional
sector to high productivity, higher wage modern sector. The model envisages
that (p.382) surpluses generated in the modern sector are converted into
investments for a secular expansion of modern sector causing continuous
absorption of labour from traditional sector. This model was used extensively to
explain rural (traditional) to urban (modern) migration of labour. However, while
this model propounds that there is an unlimited supply of labour from the
traditional sector and implies full employment in the modern sector, it failed to
account for the inertia exhibited by rural labour despite the wage differentials
and also could not explain the existence of urban unemployment which was a
significant phenomenon. On the other hand, critical perspectives challenged the
Lewisian framework by arguing that expansion of the modern sector need not
always lead to complete absorption of labour moving away from the traditional
sector. Under conditions where expansion of the modern sector is concomitant
with introduction of labour displacing technological change, expansion of the
modern sector may happen without expansion of employment opportunities for
labour. This led to pondering on questions related to incompatibility of supply-
side and demand-side decisions.
Todaro (1977) and others, consequently, formulated a model which suggested

that wage differential is only one of the considerations amongst several other
wide-ranging costs and benefits, characterized as push and pull factors, that
migrants weigh in making rational choices about whether to migrate or not. This
formulation however could not explain circulation and existence of the informal
sector. Accordingly, intellectual contributions of other scholars and of Todaro
himself incorporated the problem of imperfect information and argued that
decisions made under imperfect information led to incongruity between
expectations and actual outcomes, following which labour who make wrong
choices might eventually come back to the place of origin or enter the informal
sector to escape unemployment while continuing to explore the possibilities of
entering the modern sector. In its modified version this exploration involves
experience, coterminous with accumulating human capital, causing yields to go
up with time (Lucas Jr 2004). These decisions are an outcome of rational trade-
offs between an array of cost and benefit considerations which included not only
monetary but social, quality of life and psychological costs and benefits. All the
models—the Lewisian, Todaro’s, and Lucas’s models—concern themselves more
Page 2 of 59
with permanent migration rather than circulation. When circulation of labour

(p.383) proved to be a systematic pattern and not an aberration it remained
unexplained. These models did not incorporate the role of Networks including
role of families away from markets.
The New Economics of Labour Migration (NELM) (Stark and Bloom 1985) and
the contributions by Mark Granovetter (1974) and Thompson et al. (1991) have
incorporated some of these questions. The circulation of labour was interpreted
as a household-level rational portfolio diversification of risk decision under
imperfect markets especially in the absence of insurance markets and the
missing demand-side information channels which rationalized the continuity of
rural family ties and social networks (Granovetter 1974; Stark and Bloom 1985;
Thompson et al. 1991).
The Marxist approach, which comes as an alternative explanation for

accumulation-centric approaches, argues that migration is a phenomenon that is
suggestive of instability and inequality that are innate to the very process of
development in a capitalist system. Underlying the primary impetus to mobility
is dispossession of means of production or destruction of production systems
caused by coercive social or political acquisition, or unviability, triggered off by
technological or organizational progress. Mobility is accentuated by transition of
society from self-reproducing simple commodity production systems to
expanding or accumulative capitalist production systems where the role for
monetary exchanges assumes significance leading to social differentiation,
which, in itself, could contribute to movement of labour. Mobility of labour is
thus a fallout of circulation of capital rather than an individual rational choice.
The informal sector in this framework contrary to the interpretation offered by
certain other theoretical approaches is not a consequence to regulations and
therefore cannot be analysed as representing an illegal sector nor is it
representative of segmentation caused by imperfect markets but rather it is part
of a process of accumulation (De Soto 1989). In this process, informal markets,
where labour markets are unregulated, could provide cheap inputs or act as
training grounds for labour thus providing avenues for cost and risk shifting for
capital. Thus, informal economies may represent structural interconnections for
accumulation and need not have transient phases in development. Further, the
existence of social networks which also play significant roles in the reproduction
and subsistence of labour can be seen as part of this process of exploitation and
appropriation of surplus (Breman 1985; Standing 1985).
(p.384) The empirical studies present a far greater challenge to us in terms of

being able to theorize, because the reality presents itself in the form of
conflicting evidence. Within and between the macro-data-based studies and the
micro-level case studies, there are contesting interpretations about the
interrelationship between patterns of migration and development.
Page 3 of 59
Debate on Complexities of Migration—Conundrums of Empirical Inquiry

Findings and Limitations of Macro-level Analysis
There are several intellectual contributions made by scholars adopting different
analytical frameworks to the debate on migration. The purpose of this exercise is
not to present an exhaustive review of all the works. It however aims at
presenting the range of frameworks and approaches and the varied
interpretations and inferences drawn, based on the observations made from a
variety of economic, social, spatial, and sectoral dimensions of mobility, that help
in understanding the causes, processes, patterns, impact, and consequences of
internal and international migration and its relation to development. One needs
to be however aware of the fact that based on conservative estimates also,
internal migration accounts for a proportion of workers that is 3–8 times larger
in terms of number of workers and significantly larger even in terms of value of
remittances contributed than international migrants.1 Further, the variation in
the patterns of internal migration is much larger, and finally the quantum of
research studies contributed on internal migration are more in comparison to
research done on international migration from India. Considering the above
aspects, more emphasis is given to internal migration in this review.
The World Bank Report (Ahmed and Narain 2010) provides a defence for the
conventional paradigm as applied to the Indian labour market. The report makes
an attempt to discern the determinants of labour market outcomes by analysing
regional differences and attempts at comprehending the changes in the patterns
of internal migration. The report finds that in comparison to the 50th Round of
National Sample Survey (NSS) data, the 55th Round data shows that between
1993 and 2000 there are increasing divergences in labour market outcomes
across regions. First, based on the correlation between employment (p.385)
and participation rates, different regions showing similar trends can be
clustered together. Second, there are significant differences across these
clusters in terms of female and male employment and participation rates. Third,
there are no signs of convergence between these clusters in terms of
employment and participation rates. Fourth, it is maintained that in contrast to
the employment indicators that have been diverging across regions, for all
categories of casual employment, wages across regions seem to be converging
suggesting a reduction in inequality. However, earnings of the urban salaried
and the casual-wage employed show a divergence in terms of averages and
across regions.
The report maintains that the reason for the divergence observed across regions
is not only on account of the initial resource endowment difference, but more
significantly due to the differences in the employment and participation rates,
which, in turn, are determined by labour market policies pursued. The report
holds that the relationship between accumulation and expansion of employment
opportunities is determined by the incentives or disincentives for firms in
employing more labour provided by the labour market regulations. While
Page 4 of 59
regulations create rigidities, there has been a tendency for the firms to
substitute labour, thus, leading to jobless growth.
However, the report maintains that across regions, the jobless growth argument
does not hold true. The labour regulations have led to high urban unemployment
and therefore reduced the ‘expected wages’ from migration to urban areas. This
is the primary reason that has led to reduction in rural–urban migration and has
hampered urbanization, adversely affecting the incentives to expand urban
infrastructure. The report argues that it is the labour market regulations that
have led to mobility of capital to small towns (where labour market can be more
flexible), which however lack advantages of agglomeration and therefore have
an adverse impact on productivity and accumulation. It is also the labour market
regulations that are accused of causing labour market segmentation and the
reason why women are increasingly pushed into casual employment. The report
argues ingeniously that given other social roles of women, although women are
willing to enter salaried jobs, they are on the lookout for part-time work and
seek flexible timings which is prevented by labour market regulations.
Thus, by eliminating such labour market regulations, which cause rigidities

especially amongst the salaried workers (who form 7 per cent of the labour
market), and by introducing pro-migration social (p.386) security policies, to
address informalization, this approach claims to be simultaneously resolving
several developmental challenges. This strategy claims to be achieving
urbanization, industrial agglomeration economies, promotion of rural–urban
migration, higher productivity and accumulation, reduced regional and sectoral
inequalities in terms of wage differentials within each skill segment and gender
equality. The pertinent idea being that an urban-centric development and
promotion of rural–urban migration are seen as crucial elements for
development and regulation of labour markets is an impediment (Ahmed and
Narain 2010).
Based on the migration tables in Census data,2 it is stated that over the years,
the percentages of permanent migrants based on place of last residence to the
total population have been changing. While the percentage of migrants to total
population was 30.6 in 1971, it declined to 30.3 in 1981 and further to 27.4 in
1991. The percentage of migrants has however increased to 30.07 in 2001. The
percentage of male migrants declined from 18.9 in 1971 to 17.8 in 1981 and
further to 14.6 in 1991. It has however increased to 17.03 in 2001. The
percentage of female migration increased to 48.3 in 1981 as compared to 42.3 in
1971 and, in 1991, it was 41.2, which again increased to 44.05 in 2001. In
comparison to the rural and urban categories, the percentage of migrants in
rural areas increased from 28.2 in 1971 to 30.07 in 2001, while the percentage
of urban migrants declined from 28.2 in 1971 to 17.3 in 2001. In both rural and
Page 5 of 59
urban areas, the share of female migrants is again found to be dominant (Parida
and Madheswaran 2010).
The research inferences drawn by some scholars based on macro data have been
that it is not the poor and disadvantaged who are migrating more, but migrants
belong largely to better-off sections of Indian society. It is also argued that the
socially disadvantaged groups like the Scheduled Castes and Scheduled Tribes
are not more migratory than other social groups (Bhagat 2009). The implication
of highlighting such findings usually is to argue on the lines of the framework
that suggests that the migration of the relatively better educated from rural
areas to urban areas is to be understood as a strategic rational choice by rural
households since the relative risk of finding alternative employment avenues
with better incomes for the educated is lower and therefore the incomes of
household at the origin in the form of remittances can be higher (Bhatt 2009).
(p.387) There are however differences in the interpretations. It is argued

elsewhere (Ghosh 2005, cited in Bhatt 2009: 152) that
An extensive part of internal migration in India at large, and from the

states of Rajasthan and Orissa in particular, is ‘distress-led’. It is induced
by a colossal collapse following the economic difficulties marking
cultivation, the availability of rural employment, and, the inadequate
employment opportunities in towns to name a few. And this absolute
desperation has led to a more insecure type of movement which is briskly
on the rise. Infuriating the already miserable plight of these outmigrants,
distress migration reeks of innumerable pitfalls. The difficulty of finding
paid work, the sheer possibility of being duped, the exposure to criminality
of various sorts, the problem of dealing with such basics as housing and
sanitation, have been found to be particularly acute for such migrants, who
are often constrained to simply living on the streets.
It is further maintained that ‘When it comes to India, short distance migration

predominates, with around 60% of migrants changing their residence within the
district of enumeration, and over 20% within the state of enumeration, while the
rest move across the state boundaries’ (Dyson et al. 2004: 108). Herein, women
too, migrate over short distances following marriage, while the proportion of
male life-long migrants is less in most poor states and high in most developed
regions. More so, inter-state migration reflects a similar trend: with developed
states showing high inter-state immigration, while poor states exhibiting low
rates of total and male immigration (Sasikumar and Srivastava 2003). Though
migration statistics in the early 1990s suggested a decline in mobility, which
prompted the inference that population mobility in India is low (Kundu and
Gupta 1996). Yet, evidence based on NSS figures for 1992–3 and 1999–2000,
and indirectly supported by the census, exhibit an increase in migration rates—
from 24.7 per cent to 26.6 per cent over that period. In addition, as per the 2001
Page 6 of 59
Census of India data, out of the total population of 1,028.6 million persons in
India as per the 2001 Census, about 307 million (or 29.9 per cent) were reported
as migrants born outside the village/town of their enumeration.
Moreover, Srivastava and Bhattacharya (2003), in their analysis of the NSS

estimates from the 49th and 55th Rounds on comparing the decadal migrant
streams, also reveal that:
(p.388) 1. a greater percentage of the urban migrant workers were from

the non-agricultural sector (self-employed or regular employed);
2. a greater percentage of the male migrant workers were self-employed
or in regular employment in 1999–2000;
3. in the case of females, however, a larger percentage of decadal female
migrant workers worked in 1999–2000 as casual labourers (in the rural
areas in agriculture).
(See Bhatt 2009: 156.)
The NSS results for the more recent period (1999–2000 to 2007–8) show that
among the total migrants, rural–urban migration increased from 18.8 per cent of
the total migrants to 19.5 per cent of all migrants in 1999–2000 and 2007–8,
respectively. In the same period, urban–urban migration increased from 12.9 per
cent to 13.1 per cent. The NSS 2007–8 migration data, excluding marriage-
related migration, shows that males form 59.1 per cent of the total migrants,
while females formed 40.9 per cent of migrants. Of the male migration, 49.55
per cent was employment oriented, while 5.1 per cent of the female migration
was employment oriented. In the period 2001–11, urban population increased
from 286 million to 377 million. For the first time since Independence, urban
population growth (91 million) exceeded rural population growth (90.5 million).
The NSS 64th Round shows an increase in short-duration outmigration although

there is a slight change in the concept.3 There were an estimated 15.2 million
short-duration outmigrants, of whom 12.9 million (85.1 per cent) were male and
13.9 million (71 per cent) were rural outmigrants. The overall outmigration rate
was 1.33 (1.72 for rural areas and 0.4 for urban areas). While most migrants
were from rural areas, more than two-thirds migrated to urban areas. Here, too,
the more distant urban destinations predominated—it is observed that 36.4 per
cent of the outmigrants went to urban areas in other states (a total of 45.1 per
cent went to other states) and 22.1 per cent went to urban areas in other
districts. But inter-state migration was more among males (47.9 per cent)
compared with females (27.5 per cent).
It is further observed that in terms of the social categories of the short-term

migrants, Scheduled Tribes are especially involved in short-duration migration;
18.6 per cent of such migrations were of short duration compared with only 6
per cent of long-term (p.389) migrations. Similarly a higher proportion of
Page 7 of 59
Scheduled Castes were short-duration migrants. In terms of their economic

status (given below in terms of per capita consumption quintiles), they
predominate in the lower quintiles just as long-term outmigrants predominate in
the higher quintiles. The percentage of short-duration outmigrants in the lowest
two quintiles was 54 per cent, whereas 57 per cent of the long-term migrants
were in the highest two quintiles. Most seasonal/short-duration outmigrants
were young. Half of them were in the age group of 15 to 29 years and more than
a quarter were in the age group of 30 to 44 years. Additionally, 52 per cent were
either illiterate or had not even completed primary education and 55.4 per cent
were casual workers.
In terms of the industries that predominantly employed short-term migrants, it

was observed that construction emerged as the principal industry employing
short-duration outmigrants. The outmigrants constituted 36.2 per cent of those
employed in the construction industry, followed by agriculture (20.4 per cent)
and manufacturing (15.9 per cent). The other major industries were trade and
transport. Further, in terms of the remittances, the 64th Round of NSS indicated
that the total remittances by outmigrants amounted to Rs 493.5 billion in 2007–
8, of which internal migrants contributed the lion’s share—about two-thirds—
while the remaining came from international outmigrants (Srivastava 2011)
(Table 10B.1).
An interesting sub-theme to the focal question under debate here is the relation
between rural–urban migration and urbanization. There are varying perceptions
here as well. While one set of scholars argue that in the post-globalization phase
there is a great potential for urbanization, the other perspective emphasizes the
exclusionary nature of urbanization that constrains urbanization. It is argued
that
the character of migration has changed to more permanent forms of

migration, as migrants move with their families showing a higher level of
urbanization than in the past. Migrants also appear to value their rural
safety nets much less than in the past, showing confidence in the growth
opportunities brought by migration. Migration also appears to have
reached a critical point, beyond which rates of urbanization are expected
to grow much faster, judging by the experience of other countries.
The important contribution of migration to poverty alleviation needs to be

recognized. Migration permits the use of flexible labour (p.390) policies
which would help accelerate growth. But there is a need to build on the
human skills of migrants so that their remuneration and opportunities
increase over time. There is a need to support migrants by improving their
access to remunerative work, schooling, healthcare, training, safe working
conditions and adequate housing. (Jha 2008: 21)
Page 8 of 59
While interpreting the macro data, the critics argue that it is in the less
urbanized and less developed countries that urbanization would witness rapid
growth. Countries are likely to witness ‘elite capture’ of urban infrastructure
and economies and tend to focus on orderly urbanization and good governance.
Reforms in land, capital, and labour markets would usher policies and
programmes that are likely to restrict the entry of poor and unskilled migrants
from rural areas, accentuating exclusionary urban growth. (Kumar 2010; Kundu
2009, 2011a, 2011b; Kundu and Sarangi 2007).
Need for Micro-level Research

Alternative approaches use micro-level case studies based data to understand
migration. Although there is no agreement within the micro-level case-study-
based research on interpretation of migration processes, their disagreements
with the macro-data-based analysis due to the limitations of the data is
emphatic. Scholars who draw inferences based on the micro-level case studies
have been very critical of the research that relies only on official data. Such
scholars point to the importance of micro-level studies and primary data
collection by highlighting the limitations of the official data (Breman 2010;
Deshingkar and Akter 2009).
Deshingkar and Akter (2009) argue that both the National Census and the NSS
use definitions of migration that are not employment related. First, these
definitions are based on categories such as change in birthplace and change in
last usual place of residence.4 Second, they give only the main reason for
migration and thus miss secondary reasons which are often work related,
particularly in the case of women. Third they count migrant stocks and not flows
which are actually more important for policymaking. Finally, they seriously
underestimate categories of work that employ migrant workers. While analysing
the data provided by the Census and NSS on migration these limitations must be
understood. The 64th round of NSSO has at least attempted to take on board
some of these concerns.
(p.391) The scholars further point out that there are six major shortcomings of
official data:
1. It tends to underestimate short-term movements and thus

underestimates or altogether misses the seasonal and circular migration,
which, according to certain village studies, accounts for the bulk of
migratory movements for work.
2. Women’s migration is not adequately captured because the surveys ask
for only one reason for migration to be stated. This is usually stated as
marriage and therefore, the secondary reason, that is finding work at the
destination, may not be mentioned.
3. It does not capture migration streams that are illegal or border on
illegality, that is, trafficking for work and various forms of child labour.5
Page 9 of 59
4. It does not count properly rural–rural circulatory migrants who work

on commercial farms and plantations or rural–urban migrants who
migrate for a few months at a time to work in very small industries.
5. It does not capture adequately the movement of Scheduled Caste and
Scheduled Tribe people mainly because these groups are engaged in
short-term migration and this is not measured properly in the surveys for
the reasons stated above. There are numerous case studies which show
high mobility levels among these groups.
6. It misrepresents the relationship between poverty and migration. While
village studies show high levels of migration amongst the poor (not the
poorest), official statistics show that migration is higher among better-off
groups because these statistics mainly cover permanent migration, which
has a higher representation of people from more affluent and better
educated backgrounds.
The micro-level case-study-based research has highlighted the significance of

temporary migration in internal migration patterns rather than permanent
migration. Both the supporters and critics of new economic policy believed that
economic reforms would increase internal migration. The proponents believed
that the new impetus would boost economy and job opportunities leading to
increased pull factors conducive for accelerated rural–urban migration. On the
other (p.392) hand, the opponents hold that economic reforms would adversely
affect the village and cottage industries and impoverish rural population leading
to increased rural–urban migration (Kundu 1997).
There is no accurate estimate of temporary migration in India. While policy

circles project a figure of 30 million, this is seen as an underestimation on the
basis of micro-level evidence emerging from various parts of the country. Since
the NSSO and census data fail to adequately account for circular migration,
official estimates of 10 million (1 per cent of population) seasonal migrants is
seen as an underestimation. However, other projections such as a figure of 150
million by some studies are seen as over-estimations. (Deshingkar and
Farrington 2009; Jones and de Souza 2007 [as cited in Deshingkar et al. 2008]).
A variety of patterns have been identified in temporary migration. Temporary

migration could include temporally daily commuters, seasonal migrants or
circular migrants, and spatially, this could be intra-district, inter-district, or
inter-state migration. It is predominant in dry and forest areas and
predominantly constitutes vulnerable groups such as Scheduled Castes,
Scheduled Tribes, and women (Deshingkar et al. 2008). The temporary migrants
usually get employed in a variety of activities. It is pointed out ‘Migrant
destinations are towns and cities, industrial zones, stone quarries and coastal
areas for fish processing and salt panning’ (Deshingkar 2006). Jobs tend to be in
factories, agro-processing plants or in terms of working as porters, domestic
Page 10 of 59
servants, bus conductors, rickshaw pullers, street hawkers, petty traders, and
construction workers’ (Bird and Deshingkar 2009: 2).
As already stated in the first section, the micro-level research in itself is not free
from controversies. Although there is an agreement on the importance of
temporary migration, there are serious debates and conflicting inferences drawn
about the impact and consequences of such migration patterns. These studies
can be broadly classified into two approaches: The first approach looks at
migration as a phenomenon that is to be seen as a consequence to push and pull
factors produced by development process that manifest in turn as coping and
accumulation strategies. This approach draws a general inference that migration
brings about improvements to the conditions of the households on the basis of
indicators such as increase in incomes, better quality of life, and upward social
mobility. This scholarship recognizes the problems of migrants but argues that
prevention of migration is a (p.393) faulty analytical approach and that the
policy has been based on such approach. This approach seeks to resolve the
problems alternatively through appropriate policy framework and institutional
mechanisms that promote migration as a livelihood strategy of households
aiding them to pave their way out of poverty.
Alternatively, a second approach looks at these mobility patterns predominantly

as forced migration emanating from distress caused by capitalist model of
development. This approach argues that the development process has been
wrought, first with structural mismatches in terms of the proportion of labour
displaced by the contraction of rural sector and the proportion of labour
absorbed by the expansion of the urban sector and second, by structural
interdependencies between pre-capitalist and capitalist production systems and
social formations, which, far from leading to the development of this working
class, intensify exploitation, reinforce new forms of unfreedom, and generate a
category called the working poor. The predominant forms of temporary
migration are seen by this approach as a symptom of a deeper problem that
requires not merely piecemeal interventions which could provide relief but what
is required to address the problem is more substantive structural corrections
(Breman 1998; Standing 1985).
Micro-level Inquiry and the Paradoxes of Empiricism

As labour circulation is a phenomenon for which macro data is not available,
inferences are drawn based on micro-level primary data gathered by scholars
engaging in case-study-based research. Some of these micro-level case studies
focusing on temporary migration and labour circulation and their major findings
are discussed in this section. These case studies are intended to be broadly
representative of experiences of different regions, sectors, and social groups and
provide an insight into a range of low-skilled to high-skilled activities to have a
general understanding.
Page 11 of 59
A migration stream from western Odisha’s Nuapada and Bolangir districts to

work in brick kilns located in areas around Hyderabad in Andhra Pradesh6 is one
of the several cases reviewed as part of a review paper. These were
predominantly poor people from Scheduled Caste and Scheduled Tribe
households including large numbers of (p.394) women and children, indulging
in labour. The recruitment involves contractors who pay an advance, which the
workers repay during the course of work for which they receive about Rs 175–
200 for 1,000 bricks. The working hours range from 12–15 hours. Of the total
workers, 35 per cent are children. Strong vested interests, it is argued, are
preventing the Odisha government from intervening for the release of the
bonded labour (Deshingkar and Akter 2009).
Of the other cases reviewed, some are part of a major compilation of micro-level
case studies (Deshingkar and Ferrington 2009). These research contributions
together broadly present an approach to the understanding of circular
migration. In the following paragraphs, we briefly review these works.
In the study by Badiani and Safir (2009) the findings are based on the
examination of six villages—four in two districts, namely, Shoapur district and
Akola district of Maharashtra and two in Mahabubnagar district of Andhra
Pradesh. There were four rounds of surveys done in 1975 and 1984 by ICRISAT
and again in 2002.7 These villages were resurveyed by the scholar in 1992. The
scholars address an interesting question which is whether shocks caused by
failure of rainfall explained circular migration. On the basis of the research
findings, the scholar concludes that the circular migrants, who are dependent on
cultivation, seem to be more responsive to the rainfall shock than those circular
migrants who are either employed as agriculture labour or in non-agriculture
occupations as primary source of incomes. It is also argued that the proportion
of income from circular migration in these sections has been gradually
increasing and there is also a tendency for some of these circular migrants
becoming permanent migrants. Thus, the study maintains that the
characterization of circular migration as a distress migration and as a coping
strategy is suited more for households who are excessively dependent on rainfall
—like cultivating households. For others however, circulation needs to be seen
as an alternative livelihood strategy.
The second study by Deshingkar, Rao, et al. (2009), is based on the study of six
villages in Andhra Pradesh. The analysis is based on three surveys conducted in
2001–2, 2003–4, and 2006–7. The sample villages were chosen to represent
three regions of Andhra Pradesh—Telangana (Medak district), Rayalaseema
(Chitoor district), and Coastal Andhra (Krishna district), which represent
different levels of development of agriculture and varied social formations in
terms of the resource and (p.395) asset inequalities and caste and production
relations. The study argues that migration cannot be seen as a homogenous
entity since there are a large range of migration streams each having different
Page 12 of 59
origin, process, and outcome. The scholars contend that ‘whether or not
migration remains at the level of coping or becomes more accumulative depends
on a number of factors including improved work availability, rising wages,
cutting out intermediaries, and improving skills’ (Deshingkar, Rao, et al. 2009).
The rural–rural migration pattern for sugarcane harvesting from Medak district,
involving both intra-district migration and inter-district migration to other
districts, including to Nizamabad and Karimnagar, was characterized as
accumulative migration. Migration helped these households save enough to
afford asset improvements to their agricultural lands such as investing in
borewell and then to move on to cultivation in their own land. Sugarcane
cutting, as an activity however, has been on the decline, but, in villages which
are well connected, alternatively a rise in commuting and employment in
informal activities was witnessed. The migration from Chitoor is a rural–urban
mobility, that is, from rural non-farm to informal sector, involving inter-state
migration. Skilled workers belonging to the traditional stone quarrying caste
migrated to Bengaluru to work as trench diggers and in cable-laying activity,
which, the scholars argue, did not lead to immediate asset accumulation, but
caused mobility in terms of standard of living.
In some cases the scholars observed a migration which started off as a coping
strategy, but eventually became an accumulative strategy. The scholars point out
that the households used the migration and commuting earnings in ways that
enhanced their well-being. The households spent their earnings on improving
nutrition, labour productivity, and reducing sickness and debt. While it is
maintained that migration earnings reduced dependence on private
moneylenders, for a section of Scheduled Castes who are recruited by agents
who pay advances in the form of loans which are repaid by labouring, repaying
loans became the primary objective of earning. Such modes of recruitment, the
scholars argue, were found in brick kilns, construction work, road digging, and
sugarcane harvesting work.
The scholars maintain that despite the costs, risks, discrimination, and dangers
associated predominantly with work and living conditions (dirty, degrading, and
dangerous) of unskilled migrants belonging to (p.396) lower castes, tribes, and
women and despite the problems faced especially by groups such as widows
belonging to migrant households, but who are staying behind, there is a marked
improvement in the incomes of the households. The mobility is more significant
amongst skilled, male, non-farm workers than amongst women and unskilled
farm workers.
A third contribution by Sharma et al. (2009) is about circulation of labour in

Madhya Pradesh. The scholars hold that growth in Madhya Pradesh ‘has been
uneven and drought prone and forested tribal districts in the south of the
country have continued to rank among the worst poverty traps in the country.
Page 13 of 59
People from these districts are heavily dependent on circular migration for
meeting their everyday needs’.
The study is based on three surveys conducted in 2001–2, 2003–4, and 2006–7 in
six villages in Madhya Pradesh. The six villages are part of three districts that
represent three regions of the state: Bundelkhand, Malwa, and Mahakoshal. The
three regions represent different agro-climatic characteristics with different
levels of development of agriculture. The regions also differ in their levels of
urbanization and industrialization. They have a varied demographic
characteristics with some regions being inhabited predominantly by tribal
population whereas others by Scheduled Castes. The scholars also suggest that
the sample represents different land distribution patterns as well as social
relations.
The study finds that circular migration among tribal populations in remote, hilly,
and infertile-soil-ridden tribal villages is very high. The study states that over the
years nature of migration has been undergoing changes. It is argued that
circular migration has grown faster than commuting and permanent migration.
It is also observed that rural–rural migration within agriculture has decreased
and instead migration to larger towns and more recently to small towns has
grown. It is pointed out that inter-state migration from Madhya Pradesh to
Gujarat and Maharashtra has grown.
The research findings suggest that circular migration accounts for the highest
share of net annual household incomes (31.4 per cent). It is also noted that
circular migration earnings account for higher proportion of household incomes
among the lower castes and tribes namely the Scheduled Castes, Backward
Castes, and Scheduled Tribes. It is observed further that as a percentage of total
earnings, the circular (p.397) migration earnings of landless and marginal
farmers are slightly lower than that of small, medium, and large farmers. The
scholars maintain that although skill does lead to higher level of earnings
amongst migrants, it is the socio-economic background of the households that
seem to determine their earnings significantly. It is observed that a vast majority
of the households (180 households) have preserved their well-being rank
because of migration earnings while a marginal segment have shown an
improvement (7 per cent). However, the well-being of a significant segment of
migrants (38 per cent) has shown a decline. The scholars argue that while
improvement from migration earnings are related to landowning and availability
of irrigation, deterioration is observed to be related to fragmentation of land and
indebtedness. It is contended that indebtedness, which in turn is linked to mode
of recruitment by middlemen, is on the decline and this has resulted in increase
in creditworthiness of households from a situation of chronic indebtedness. It is
argued that migration earnings have been used for bettering nutrition, towards
Page 14 of 59
health expenditure, and for meeting costs of agricultural inputs, all of which,
according to the scholars, suggests improvements to household conditions.
It is inferred that migration of poor households is constituted predominantly of

Scheduled Tribes, Scheduled Castes, and women migrants, characterized by
lack of skills, who employ themselves in construction work and agriculture
sectors involving middlemen jobbers. Such migration takes the form of coping
strategies. On the other hand, migrant households possessing assets and skills,
usually belonging to Backward Castes and upper-caste households gaining
employment through their social networks in non-agricultural activities in larger
cities seem to experience accumulative migration.
The fourth case study is on the migration amongst Bhils, Garasias, and Meena
tribes, as well as non-tribal populations in the southern region of Rajasthan, who
have low rainfall and poor irrigation facilities (Joshi and Khandelwal 2009). The
region is also plagued with degradation of forest resources and low productivity
of livestock. These factors, in combination with unsuccessful employment
generation interventions by government and NGOs alike, have led to the
phenomenon of outmigration for employment in a range of activities, such as
mining and quarrying, brick kilns, hotels and restaurants, domestic help, and
cotton pollinators. These migrations are predominantly to Gujarat and
Maharashtra, and more recently also to Bengaluru8 and Chennai.
(p.398) The scholars focused on seasonal inter-state and intra-state migrant

workers from Kotda in south of Udaipur who work in the brick kilns of Gujarat
and neighbouring districts of Pali and Sirohi in Rajasthan. The workers for brick
kilns are recruited by contractors who pay the workers an advance, usually to
the tune of Rs 3,000, 15–20 days prior to the brick production season, which is
then repaid by the workers, whose payment is based both on time (Rs 50–60 per
day) as well as piece wages (Rs 180–200 per 1,000 bricks of Patla variety and Rs
100–120 per 1,000 bricks of the Khadkan variety). The largest segment of the
workers is in the age groups of 20–30 years with recruitment starting from 17
years and going up to 45 years.
Another migration stream identified is that of predominantly tribals as well as in

lesser proportion migrants belonging to Rajput, Meghwal, and Brahmin
communities from a hilly block called Gogunda in Udaipur to work as textile
workers in Surat.
A third stream of migration identified was that of ice-cream vendors from

Railmagra of Rajasamand in south Rajasthan. Persistent drought, population
increase, and limited land are identified as the causes for migration. These
migrants belong predominantly to Scheduled Castes. In the activity of ice-cream
vending, there seems to be some scope for mobility since it involves different
levels of skills. In this labour market also, the cart owners pay advances to the
Page 15 of 59
vendors ranging from Rs 2,000 to Rs 2,500. The migration is for a period of six
to eight months. The migration is to different destinations including some cities
and towns in Gujarat, Maharashtra, Andhra Pradesh, Karnataka, and Tamil
Nadu.
In case of all the migration patterns discussed, the living conditions, nutrition,
and the working conditions of all the categories of migrants is characterized by
long working hours and strenuous activity. The work environment has been
observed to be poorly ventilated or unhygienic, where workers are rendered
vulnerable to work related injuries or to exhaustion and sickness. However, more
specifically, there are different forms of costs borne by the migrant households.
In case of the brick kiln workers, migration has been a cause for children
dropping out of schools. In the case of textile workers migrants suffered
insecurities emanating from informality such as cheating, underpayment, and
delayed payments from contractors and even suffered corporal punishment.
With reference to mobility, in the case of brick kiln workers very little mobility
prospects exist with some becoming contractors and (p.399) mates. In case of
textile workers, migrants in general are employed in unskilled activities.
However, non-tribals are seen to be in better paid activities than tribals.
A fifth study contributed by Deshingkar, Kumar, et al. (2009), is based on a study

conducted in six districts of Bihar, namely, Nalanda, Muzaffarpur, Gaya, Purnia,
Madhubani, and Sitamarhi. The study pointed out that migration is a result of
worsening poverty caused by floods and waterlogging, fragmentation, and low
productivity of farm lands. The streams of migration identified include inter-
district rural–rural migration for seasonal farm work, rural–urban migration for
rickshaw pulling and manual work.
In case of the first migration stream, the employment is gained through contacts
and, the scholars point out, since payment is made in cash as well as in kind,
there is smoothing of consumption requirements and prevention of sliding down
into poverty for these households.
In case of the second migration stream, it is pointed out that if regular work is
available, not only does migration contribute to improved consumption but it can
become an accumulative option leading to leasing-in of land by these
households.
In addition to the above migration streams, two other streams are identified—
inter-state and international migration. One of the streams is of migration to
brick kilns in Uttar Pradesh and Nepal, and a second stream is of migration to
Punjab and Haryana for farm work. In the first case the scholars observe that in
this labour market the labour is recruited by agents who pay an advance amount
of Rs 2,000–5,000. It is maintained that these earnings are better than the
casual non-farm labour. The labour relations however are characterized as a
Page 16 of 59
form of bondage. This labour market is associated with poor living conditions,
long working hours, and physical isolation. It is observed that the overall
improvement in the well-being of households is limited.
In case of the second stream, workers migrate to Punjab and Haryana to work as
farm labourers in paddy, wheat, cotton, sugarcane, and vegetable farms. A
disturbing factor that the scholars identify is the high incidence of child labour.
It is pointed out that although scholars elsewhere have characterized this labour
market as a form of bonded labour, this work gives an opportunity to poor and
lower-caste households to earn reasonable wages which they would not be (p.
400) able to in the local markets. There are however very few prospects for
upward mobility.
A final migration stream identified is to Delhi, Mumbai, Bengaluru, Surat, and

Hyderabad to undertake a range of non-farm casual work as well as to work in
regular employment avenues such as employment as factory workers. The
scholars observe that skilled workers earn substantially more than unskilled
workers and further that new skills that are learnt could be put to use to
improve conditions in the place of origin. They have found that while the migrant
labour suffers from health risks and exploitation in these markets, in the place of
origin, issues like borrowing of foodgrains for survival and taking loans at high
interest rates have virtually disappeared. It is also found that migration earnings
are being invested in agriculture for leasing-in land, drilling borewells, and
purchasing inputs.
Sixth study by Sophie Llewelyn (2009) is on seasonal migration in Betul district

of southern Madhya Pradesh. It is stated that slightly more than half of the
village studied is inhabited by tribal households belonging predominantly to
Korku tribe who are socially and economically more marginalized than Gond
tribes. While 90 per cent of the Korku households depend on agriculture labour
as their primary or secondary source of livelihood, 40 per cent are landless. The
vulnerability on account of rain-fed agriculture and lack of access to credit is
seen as the cause for migration. While majority of the migrant streams are for
agriculture harvesting work, the largest migration stream is towards brick kilns.
This migration is an inter-state migration to brick kilns located in Maharashtra
which emerged in the 1990s and involves recruitment by contractors who pay
the workers an advance of Rs 2,000 to Rs 3,000; in some cases, even Rs 10,000.
The labour market is characterized by poor living and working conditions
indicated by bad housing, lack of sanitation, low payments, etc.
The scholar (Llewelyn 2009: 202–37) argues that the migration provides the
labour opportunities for diversifying their livelihoods into more regular and
more remunerative employment than is locally available. However, it is pointed
out that the labour succeed neither in overcoming the discrimination emanating
from traditional oppressive social structures nor in surging over the situation of
Page 17 of 59
chronic indebtedness they are caught in. This employment is analysed as a

forced livelihood option. However, the debt bondage the scholar argues presents
a less oppressive labour relation than the labour relations households (p.401)
are likely to suffer if they do not migrate. The option to migrate is therefore out
of relatively greater humiliation and oppression and not out of poverty and is
open only to those who are relatively better placed in terms of access to kinship-
based social networks and so on.
The manufacturing sector seems to be no exception in so far as some of the

conditions of migrants are concerned. The cases of textile and garment industry
workers in Bhiwandi of Maharashtra and the study of Bihari migrants working in
the garment industry operating in Delhi suggest the same. The scholars point
out:
Garment units employ large numbers of women migrants. The work is

characterized by long hours, and a lack of health and welfare benefits,
minimum wages, and job security. Work-related illnesses and disorders
include: headaches and stress-related fatigue, back problems, disturbances
of the Menstrual cycle, repetitive strain injury, loss of weight, respiratory
problems, kidney and bladder infections from retaining urine for long
periods of time, and sinus problems and allergies from the dust and
materials used. (Ramaswamy and Davala 2008: 22; Deshingkar and Akter
2009: 14)
It is further held: ‘A visit to Bhiwandi reminds one of scenes usually associated

with the beginning of the Industrial Revolution: thousands of persons sleeping in
or next to numberless ramshackle sheds in which the deafening sound of the
looms is heard 24 hours a day, with no ventilation, proper light, children doing
tedious work for long hours, and dust and dirt everywhere.’ (Ramaswamy and
Davala 2008; Deshingkar and Akter 2009).
Another case study (Tiwari 2005) is that of the experience of the migrant
workers in footwear industry which predominantly employs child labour. The
industry is concentrated in Tamil Nadu, Mumbai, Uttar Pradesh, Punjab, and
Delhi. Around 80 per cent of the children work for contractors at ‘home’, that is,
small units which can evade the law. The rooms are cramped, poorly lit, and
poorly ventilated. Many suffer from respiratory problems, lung diseases, and
skin infections because of constant exposure to glue and fumes. They are also
exposed to risk of nasal cancer, neurotoxicity, and adverse physical factors.
However, in what may be seen as a statement of perspective, the scholar

maintains: ‘Yet this kind of work is perceived as a good work opportunity
because it is well-paid compared to work at home. Interviews with migrants and
key informants in rural Bihar indicate that those families that have migrants in
Page 18 of 59
such occupations regard (p.402) themselves as fortunate and acquire the jobs
through social networks’ (Tiwari 2005: 7).
A similar framework is applied to migrant sex workers in what is seen as

conditions of migrant labour in the ‘service sector’ and it is stated:
[A] study of Andhra Pradesh showed that contrary to popular perceptions,

a majority of sex workers were not trafficked into the trade (only 1–5% had
been trafficked), but had begun working in the trade because of poverty
and debt (Population Council 2008). This poor economic situation was
often the result of being left destitute by the death of the parents or
husband, after divorce/separation, or the husband having a chronic
debilitating sickness. A large proportion of the sex workers interviewed in
the AP case study had cell phones and bank accounts which have allowed
them to become independent of exploitative touts.(Deshingkar and Akter
2009: 27)
S. Sundari’s (2005) work is based on 470 sample respondents drawn from

Coimbatore city/Tirupur town and another 485 respondents drawn from
Chennai, with the sample migrants being grouped as those working in the
formal/informal sectors and those engaged in the construction activities (this
group represents seasonal migrants). This study engages in a comparative
assessment of conditions of individual migrant households (although with a
specific focus on gender). Interestingly, although the scholar points out that the
impact of migration involves a mix of both gains and losses, she differs with the
policy framework provided by Priya Deshingkar and others and maintains that
‘as migration is seen as contributing to urban environmental degradation, the
policy framework must aim at (i) reducing migration by adopting a “remain at
village” approach. The strategy is to promote rural development and guarantee
employment to rural population through various schemes and (ii) improving the
living conditions of the urban slums crowded by the already arrived migrant
population’ (Sundari 2005: 2303).
While most of the above works try to focus through a comparative framework on
the relative mobility of the individual migrant households in pre- and post-
migration phases, several other works focus slightly on different indicators,
issues and present a different analytical framework, as discussed in the
following paragraphs.
Singh and Iyer (1985) present the case of inter-state, rural–rural migration from
eastern Uttar Pradesh and Bihar to Haryana and (p.403) Punjab, which is an
experience accounted for as part of the studies reviewed earlier. Despite very
different time frames, this study is of great relevance since this work
significantly brings to the fore the stark difference in the frameworks. The
scholars argue that the migration patterns of tribals who were recruited by
Page 19 of 59
intermediaries to work as farm workers in relatively backward mode of

agriculture in Hoshiarpur were akin to conditions of bonded labour. The
experiences of tribal migrants were very different from those of the non-tribals
migrating to Ludhiana to be employed as farm workers, where, the scholars
suggest, there has been capitalist penetration into agriculture. The scholars
present some shocking instances of pre-capitalist forms of exploitation as part of
cost-cutting strategies of Hoshiarpur landlords.
The tribals are each disposed off for a sum of Rs 300 to Rs 400 to
employers, who regarded this as a wage advance, and on engaging the
tribal labourers do not pay them any cash wages for the first four to six
months… At the end of this period, a monthly wage of Rs 60 to Rs 80 is
fixed. The wages are not given to the labours at the end of the each month
lest they run away… The labours were not sure who would be the next
victim of the master’s wrath. When a labour did not clean a tractor to the
satisfaction of his master, the master pierced a needle (used for stitching
gunny bags) into the right eye of labourer; the needle missed the target
and struck his eyebrow. (Singh and Iyer 1985: 231, 233)
Arguing the case for the existence of neo-bondage in the labour relations Jan
Breman (2010) argues:
In one of the villages where I did my fieldwork (in Gujarat), land-poor and
landless labourers would leave their homes at the end of the harvest, as
the rainy season was coming to an end, to work in brick kilns or salt pans
near Mumbai. The labourers were recruited by an agent working for the
employer, who sealed the agreement made with the owner of a brick kiln
or salt pan by paying them earnest money. The seasonal migrants repay
the debt as they worked. The brick makers, for example do not even know
what the rate is per 1,000 bricks, on the basis of which they are finally paid
off. This rate is only determined at the end of the season when the
employer has marketed his bricks and knows what price his production has
fetched. It means, in fact, that a larger part of employer’s risk is
transferred to his workers. (Breman 2010: 338–9, emphasis added)
It is further emphasized by the scholar in what may be seen as an argument that

these labour relations do not seem to be a transient (p.404) phase in what
could be a rational choice in expectation of a lagged mobility process. The
scholar asserts:
It is important here to note that, in the half a century that I have been
visiting brick kiln, the organization of labour process has hardly changed.
It remains largely small scale and with minimum use of technology, with a
flexibility that enables it to be tailored to demand. Despite the high labour
intensity, the wage of temporary bonded labourers account for only a small
Page 20 of 59
proportion of total production cost. This is undoubtably one of the main

reasons that labour has not been replaced by capital. (Breman 2010: 339,
emphasis added)
This inference that poverty of migrants may not be a transient phase can be
validated further even by the analysis of changes in income and consumption by
yet another study of migrants from Bihar, Uttar Pradesh, Madhya Pradesh, and
Rajasthan settled in Delhi slums9 (Kumar and Aggarwal 2003). The scholars
state that
the proportion of BPL persons state wise was 48.36 per cent from Bihar,
67.85 per cent from Uttar Pradesh, 83.33 per cent from Madhya Pradesh
and 36.36 per cent from Rajasthan out of their corresponding total
populations. The evidence shows that migrants from Bihar are
proportionally not as poor, as is generally perceived, as migrants from
other states. If we want to compare these migrants with the total survey
population, almost 20 per cent from Bihar, 27 per cent from Uttar Pradesh
and 4 per cent from each Madhya Pradesh and Rajasthan were below the
poverty line.
We observe that of the total households below poverty line, 23.40 per cent
were residing since the past 10–14 years. In the category 4–9 years, there
were 21.28 per cent households and the percentage was 20.21 among
those staying in these slums for 20–29 years. There were 8.51 per cent
households of the total BPL who did not migrate from other places but
were born in Delhi. One can infer that the length of stay in the city did not
help the households in improving their economic condition. (Kumar and
Aggarwal 2003: 5299)
Jan Breman (2010) identifies another case of neo-bondage in the agro-industry in

the region of his research. The scholar maintains:
Sugarcane is a labour-intensive crop that requires a large army of cutters

in the harvest period. The cooperative sugar mills set up to process the
cane delivered by the farmers followed the example of the existing agro-
industry in Maharastra and hired labour from outside for the cutting
season, rather than make use of the reserve pool of farm (p.405)
labourers locally available. Agents for the mills contract gangs of cane
cutters from far-off regions for the campaign, which begins at the end of
October and lasts, depending on the size of the harvest, until well into may.
They are recruited in the monsoon, because the land- poor and landless
peasants in the hinterland then have no income to meet their basic needs.
The mill agents pays jobbers an advance, which they use to recruit a gang
they will lead for the duration of the harvest campaign. In their contracts,
the jobbers also under take to accompany the cutting teams—usually
Page 21 of 59
consisting of a man, his wife, and at least one child—that make up their
gang on the journey from their homes and to return again with them at the
end of the season.
The mode of payment for the work performed on a piece rate basis is
identical to that customary to the brick kilns. The acceptance of an
advance implies acquiescence with a debt relationship that leaves the
labourer no other choice than to depart from the home when the mill gives
the jobbers the sign.
Cane cutters, too, repay their debt with their labour power. What stops
them from reprocessing their freedom after reaching this turning point and
leaving is that the balance of their wages is not paid until the end of the
season. If one of the teams of cutters decide to leave early, they forfeit the
balance of their wages that the mill is ‘safeguarding’ for them. (Breman
2010: 339–40)
Another case study presented is by Mohammad Talib (2010) of migrant workers

from Madhya Pradesh and Rajasthan working in the stone quarries of Delhi. The
scholar maintains:
These profiles support the argument of this book that there is no ‘pure’
social category of free workers, who own only their labour power which
they exchange for a wage to eke out subsistence. Rather, the workers
discussed here are people who may be living with families or households
and, sometimes in a state of indebtedness, which curtails their freedom.
The case studies presented by Talib try to bring to the fore the link between poor
working conditions involving continuous inhalation of dust and poor living
conditions involving lack of safe drinking water and sanitation that cause severe
health disorders in addition to the trauma of alienation from kinship ties and
social niches which are intricately linked to the suffering on account of drudgery
and humiliation to alcoholism, domestic violence, and neglect of children. The
objective conditions of the working class economy present such vicious circles of
apparently insurmountable poverty and (p.406) indebtedness wherein faith,
and not reason, seems to give hope to people.
A study on migration of tribals from Odisha (Jha 2005: 1496) states:
[I]n the last century a noticeable change has taken place in the nature and
pattern of tribal migration. Between 1950 and 1980, tribal people migrated
to the rural areas of Bihar and West Bengal mainly to work as agricultural
labour. But from 1980 onwards, they started migrating to bigger cities in
search of employment. This is obvious from the large concentration of
tribal people in metropolitan cities like Delhi, Kolkata and Mumbai.
Another new feature of tribal migration from these states in recent years
Page 22 of 59
has been the large scale migration of single women to cities in search of
livelihood, which is a subtle change from the earlier migration patterns.
Lack of medical attention, sexual exploitation, high incidence of HIV and

consequential social stigma attached to migrants leading to difficulties of
finding partners, social ostracization and destitution in other cases have
been observed.
Tribal migrant girls are reported to be living in unhygienic conditions in

Delhi. Placement companies usually take half of the salary paid as
commission. Some have been employed in socially stigmatized activities
such a massage centres. In several instances these girls get cheated either
in the form of non-payment of wages or worse they are sold to brothels in
Delhi and Mumbai.
There are other cases that focus on conditions of the households especially who
are left behind by the migrants. Rafique et al. (2006), basing their study on
different migration patterns observed in West Bengal, argue:
[I]n households where members migrated seasonally for these two kinds of
work (transplanting, harvesting rice and other informal activities viz., brick
kilns, construction, road building and earth moving work), those staying
behind often worked harvesting chilli. Getting work in the fields of kin
within the village was very common. These cases shed light on an often
neglected aspect of migration by poor, vulnerable households: the
livelihoods of household members who remain behind. In Jalpara, where
gender ideologies, and the seasonality of the chilli crop, mean that wage
work for women remains very limited, the struggle to get by in the absence
of male earners can be particularly intense. Many women staying behind
have to rely on hard work and on maintaining and negotiating relations
with kin and other contacts to keep a minimum level of food and cash
coming in. Such (p.407) relations are also important for accessing health
services, and for physical security. (Rafique et al. 2006: 25)
The cases of migrant labour in the manufacturing sector presented through a

collection of case studies by Kapadia et al. (1999) give us a clue to
understanding the experiences of migrant workers from an alternative
perspective.
It is important to note in the debates on migration especially in the

manufacturing sector that migrants have been used to achieve flexibilization of
the labour which simultaneously has implications for weakening the organized
working class. One of the important techniques has been to have standby
temporary workers who could replace skilled workers, as required, who are
called the badli workers. However, De Haan (1999), by studying Calcutta’s jute
industry, points that underlying the emergence of an institution such as the badli
Page 23 of 59
labour there are organizational, historical, and social dynamics which cannot be
analysed merely as sub-serving the employer’s interests but also suggestive of
changing conditions of production and the workers themselves.
It is very important to note that the labour relations go through an evolutionary

process through different phases of performance of the concerned commodity
segment in question. This makes a pertinent point that market conditions for
commodities keep changing and labour mobility may not be a secular or linear
process.
Karin Kapadia, who studies the gem-cutting industry in Tamil Nadu (Tannirpally
in Trichy District), points to how the changed policy orientation in India of the
1990s, which led to cutting back of rural public sector spending, had a
disastrous impact on the non-agriculture employment available to the rural poor
that increased migration and advantaged the entrepreneurs. This represents in a
way how the labour policy could trigger migration streams, which, in turn, could
sub-serve the objective of accumulation for owners of capital.
While keeping the workers in circulation advances the accumulation of capital, it

may also propel search costs and skill-/experience-based efficiency-related
uncertainties due to high labour turnover. Another study of Surat’s diamond
industry by Miranda Engelshoven (1999) points out how the employers use
strategic income-generating work-related incentives and bakis (loans) as a
means to retain/tie down especially skilled workers to their employment in what
is (p.408) otherwise a flexible labour market. It is also observed that even in
modern industries, the use of physical violence on workers exists. She points out
that in the instances where diamonds are found to be lost by the owners, ‘“blind
faith” is used to detect the thief; the suspected worker is tied, beaten up, and
tortured’.
The significance of analysing the vulnerable, insecure, and unfree working class
is pointed out by Breman (2010), who argues that ‘taking all variation in degree
and duration into account, I estimated that not less than 10 per cent of working
population in the informal sector of the urban and rural economy in India, which
totalled 395 million people in 2005, is employed on terms that amount to debt
bondage’.
Several works make it amply clear that while analysing migrant workers, far
from treating them as individual rational agents in a competitive market, it is
important to recognize that migrants often are vulnerable as they are displaced
from their social niches and often end up as unorganized workers in insecure
employment avenues. Markets far from surmounting social practices of
discrimination, take advantage of pre-capitalist social formations and identities
since they operate within what have been termed as social structures of
accumulation (Harriss-White, cited in Basu 2006; Knorringa 1999).
Page 24 of 59
Migrant workers working in manufacturing industries need not always

experience unfreedom in employment relations only on account of debt. The
origins of unfreedom need not be only employer–employee relation based, other
institutional mediations meant for subsistence could be equally significant. In a
case study by Vijay (2005), concerning new industrial labour markets in Andhra
Pradesh, for instance, it is observed that these manufacturing industrial towns
have enormous flow of migrant workers from different districts of Andhra
Pradesh as well as inter-state migration of male workers from Odisha, Bihar,
Uttar Pradesh, and Tamil Nadu and both male and female workers from Kerala
and Karnataka. This oscillating labour market generates a trust deficit situation
for workers. The migrant workers are too poor and do not have money to meet
current expenses and there are time lags in payments that, therefore, require
trust in order to conduct day-to-day transactions for subsistence. As a
consequence, workers find themselves in dependent and unfree employment
relations where labour contractors play this important role of standing as
repayment surety on behalf of the migrant workers, following which the
migrants get access to food and groceries (p.409) by surviving on credit
purchases called khatas. A similar unfreedom entails the provision of
accommodation for workers in the premises of a manufacturing unit. Workers
are used as replacements for sick workers or are made to work for more than
the stipulated hours of work because they are available on the premises.
It is this vulnerability and insecurity of workers which forms the basis for cost-
cutting strategies that are otherwise also referred to as low-road industrial
strategies, used by manufacturing units to cope with adverse conditions in
competitive markets. Putting out or outsourcing of production by larger
industries and the informalization of the production and the labour market are
closely connected to the vulnerable and insecure social and employment
conditions of the migrant labour. (Bhadhuri 1996; Bose 1996; Jeyaranjan and
Swaminathan 1999; Ramaswamy 1999).
From Internal to International Migration and Global Production Networks

The markets discussed previously connect the local- and national-level
production systems to what are referred to as global production networks or
global value chains. It is observed:
The use of irregular workers is intensifying and labour is rapidly becoming

more mobile physically and geographically in empowerment linked to
global production. Vulnerable workers are being employed in global
production systems… Many workers are employed on a temporary or
casual basis, sometimes up to 12 months a year without a permanent
contract. The use of migrant labour (international or internal) is common
in many sectors… One strategy by suppliers to cope with increasingly
Page 25 of 59
competitive cost pressure and tightening production schedules is the use

of third party labour contract. (Barrientos et al. 2010: 127–30)
The scholars point out how the development of global production networks seem
to be ignoring the interests of labour. By presenting the global production
locations in Delhi and Gurgaon as case studies they show how, while industrial
infrastructure was being developed, residences for migrant labour were not part
of the policy concern.
In this debate as well, there are varying interpretations of the role of migration.
While one perspective looks at the flow of rural, non-industrial workers into the
global production networks essentially (p.410) as part of a process of
informalization of the labour market, another perspective looks at these trends
as part of decentralization of production which democratizes control over value
and provides avenues to empower the rural workforce by equipping them with
competencies that enable mobility (Cadene 1998).
In this context, it is relevant therefore to have as research agenda questions

pertaining to the nature of the global production networks into which internal
migrants are getting absorbed. The global production networks are
differentiated into (a) markets, (b) modular value chains, (c) relational value
chains, (d) captive value chains, and (e) hierarchy. Each network potentially
represents a qualitatively different set of labour relations. In so far as migration
is associated with vulnerability and insecurity of workers, it tends to result in the
disorganization and, consequentially, uncivility and coercion enter social
transactions resulting in a decline of the socially and historically generated level
of subsistence that could cause a deterioration in the conditions of existing
labour. These dynamics however cannot be known by merely investigating into
the relativistic mobility of migrant households alone (Vijay 2009).
At the other end of this spectrum are the international migrants. The
international migration streams have to be differentiated in order to develop an
analytical perspective of the migration patterns. It needs to be recognized that
the internal migrants and international migrants form qualitatively different
segments of migrants considering the pre-requisite resources for international
migration are high. Notwithstanding the difference, the conditions of a large
proportion of international and internal migrant labour seem to be converging in
terms of informalization and deteriorating standards in the quality of the labour
markets.
With reference to the international migration, two major works reviewed include
that of Deepak Nayyar (1994), who analyses India’s international migration
scenario from the 1950s to the 1990s, another important contribution is by
Devesh Kapur (2010), whose work includes the more contemporary trends in
international migration from India. While Nayyar’s work is based on more
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conventional official data and the vantage point for analysis is India, Kapur’s
work tries to present the analysis from the vantage point of the place of origin as
well as destination with specific reference to the US as a case. Devesh Kapur has
relied on gathering information through both official as (p.411) well as five
more innovative primary data sets which have a sample size of 2,10,000
respondents from 11,000 towns and 2,800 villages, and covers 22 states of India.
This sample forms a part of the database on Asian Indian Population in the US.
In addition to Survey of Emigration from India which was inserted as an
additional module to the Indian Readership Survey (IRS), the scholar himself has
undertaken a Survey of Asian Indians in the United States (SAIUS). The scholar
has used an innovative technique of matching the last names of telephone
subscribers in four largest cities, located in different parts of India with a
commercial database available from InfoUSA. A database of 13,418 Indians in
the US was built after different stages of filtering of this data. While a total of
8,370 calls were made, 2,200 respondents were then randomly interviewed over
the telephone using an Indian call centre (for details about the methodology
used for SAIUS, see Kapur [2010: 281–6, Appendix II]).
Distinct Labour Flows

It is estimated that the total emigration from India is about 10 million as of 2008
(World Bank 2008 as cited in CDS 2009). Deepak Nayyar (1994) points out that
there are two distinct categories of labour flows in migration across national
boundaries from independent India: (a) emigration to the industrialized
countries, which began in the early 1950s; and (b) labour exports to the Middle
East, which began in mid-1970s. The migration to the industrialized world was
permanent and a very large proportion of these migrants were persons with
professional expertise or technical qualifications.
Considering the case of migration to the industrialized countries, it is argued

elsewhere that ‘if the central contradiction between the “demographic decline”
in the developed countries and the “demographic dividend” of the developing
countries continues to exist, the flow of labour across national boundaries would
remain unchanged’ (CDS 2009).
The migration to the oil exporting countries was temporary in nature and most
of these migrants were unskilled workers and semi-skilled or skilled workers in
manual or clerical occupations (Nayyar 1994). It may be noted that ‘even in a
highly literate Kerala, about 60% of emigrants working in Gulf countries are less
than secondary level of education’ (Zachariah et al. 2003).
(p.412) Devesh Kapur’s observations resonate those of Deepak Nayyar. Devesh

Kapur states:
Education significantly affects selectivity into the country of migration.

Quietly simply, the highly educated migrate to industrialized countries,
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while less educated go to the Middle East. Thus the selection effect of who
leaves is amplified by where they go. The education level of emigrant is
strongly linked to household income and in turn effects the selection of the
countries migration. Recent estimation of migration rate from India for
those with tertiary education is 42 times those with primary and 14 times
those with secondary education (these estimations are based on emigration
only to the Organization for Economic Cooperation and Development
[OECD] countries). (Kapur 2010: 62, 64)
Elsewhere a steep increase in migration to countries of South East Asia such as

Malaysia has been noted (Sasikumar and Hussain 2008).
Determinants and Composition of Emigration

Regarding the factors determining the migration streams while Deepak Nayyar
argues that
the contours of these labour flows were demand-determined rather than

supply-determined. The massive differences in wage levels, and the even
greater differences in expected incomes over a life-cycle, obviously created
a desire to migrate on the supply side. Yet, the ability to migrate was
almost entirely dependent on the possibilities of employment and barrier to
immigration in the countries of destination. Thus it was combination of
market forces and immigration law which determined the outcome on the
demand side. (Nayyar 1994: 116)
Addressing some of these fundamental questions Devesh Kapur states that ‘who
leaves, for where, when, and why?’ have been partly mediated/determined by
the policies motivated by historical, political, and economic conditions of the
countries to which Indians have been immigrating into (Kapur 2010: 7). For
instance he points out that
following the end of World War II, post-War reconstruction and acute
labour shortage created a large demand for unskilled and semiskilled
workers in United Kingdom… Since the policies of Middle East countries
made permanent settlement extremely difficult, Indian migration (p.413)
to this region was inherently temporary… Second, the liberalization of US
immigration law in 1965 led to large emigration of highly skilled
professionals and students seeking to study in and eventually immigrating
to the United States… The Indian born population in United States grew
from around 13,000 in 1960 to nearly one million by 2000 and 1.5 million
by 2007—of which two-thirds arrived after 1990. (Kapur 2010: 52, 53)
Sasikumar and Hussain (2008), while pointing out the significant but inadequate
legal framework in the form of the Emigration Act of 1983 in India, classify the
regulatory regimes concerning immigration in the regions of destination into:
laissez-faire, regulated system, state-managed system, and state monopoly
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systems (Abella 1997, as cited in Sasikumar and Hussain 2008). It is also noted
in the previous study that even in the high-skilled segment the immigration
policies in recent times have been increasingly promoting temporary
immigration unlike the pre-1990s scenario.
The policy, in turn, is a result of conflicting social interests. In recent times for
instance, the immigration rules of high-skilled segment workers has become
controversial with the corporations in developed countries wanting relaxation of
immigration regulations, while the locals fear loss of jobs and lowering of wages
and standards. (Aneesh 2000).
Considering the composition of emigrants from India, Nayyar states that
unskilled workers constituted about 40 percentage of the labour outflows

to the Middle East, skilled workers accounted for somewhat less than 50
percent, while white–collar workers and high skilled workers made up
approximately 5 percent each… The principal destinations of the migrants
were Saudi Arabia, the United Arab Emirates, and Oman. Taken together,
these three countries absorbed 60 to 80 percentage of annual labour
outflow from India, and provided a home for two- third to four-fifth of
Indian migrant population in the Middle East during the period under
review… It was government of labour-importing countries, in consultation
with employers, who made the basic decision, not only on the number of
workers or the skill composition, but also about wage levels and working
conditions. (Nayyar 1994: 30, 116, 117)
Discussing the composition of the migration flows Devesh Kapur points out with
reference to the temporal dimension, ‘nearly, 90 percent of households with a
member outside the country report that the (p.414) member left after 1990s,
with the rural percentage (92.2) somewhat higher than the urban (64
percent)’ (Kapur 2010). The penetration of the emigration phenomena into rural
areas has increased in the post-reforms period.
Further, he observes:
• First, for a country like India’s size, this is not surprising. Barely, 1.7 per
cent of households have family members abroad, and only 2.9 percent have
their extended family abroad.
• Second, there is a strong urban bias in households that have global links
through migration.
• And third, the more ‘elite’ the socio economic status of a household in India
is the larger its global network. While the network size increases with
income, it does so much more sharply at the highest end. As one would
expect, the number of members abroad also increases with income in both
Page 29 of 59
urban and rural areas, with the richest rural households having a greater
likelihood of members abroad than poor urban households.
(See Kapur 2010: 56.)
Kapur also points out that ‘An overwhelming majority of households reported
that the family members who lived abroad were male (81.8 per cent)’ (2010: 61).
In case of the share of females migrating out, it was 13.3 per cent from urban
areas and 4.7 per cent from rural areas.
In terms of religious identity, he argues that ‘relative to their share in the Indian
population, Indian Muslims are likely to be under-represented in the United
States for two key reasons: lower levels of education and greater selectivity of
educated Muslim migration to the Middle East’ (Kapur 2010: 77).
It is a significant observation that in terms of caste composition of the Indian

origin population residing in the US:
High caste dominates, with dominant caste as the second largest group.
Some high castes are also dominant castes. The representation of
members of the most socially marginalized groups, India’s scheduled
castes and scheduled tribes, who comprise more than one-fifth of country’s
population, is at best a couple of percent in the Indian origin population
residing in the US. Lower-caste groups, who comprise roughly half (p.
415) of India’s population, are also severely underrepresented.
Underlying political trends in India are likely to result in a change, but not
in the short term. (Kapur 2010: 81)
In terms of ethnicity, Kapur argues that ‘residents from Gujarat, Maharashtra,

Punjab and Tamil Nadu are “over-represented” in the United States, (compared
to the shares of these states’ population in India)’, however, if linguistic criterion
is used, then, ‘Gujaratis, Punjabis and Tamilians are “over-represented”…this is
because emigrants from Maharashtra are Gujaratis and Tamilians rather than
Marathi speakers’ (2010: 79).
Emigration and Development

The analysis of impact of international migration from India on development for
Nayyar is based on its consequence for indicators such as financial flows,
employment and output, return migration, and imports and exports. In addition
to some of these considerations, Kapur however analyses the social and political
economy considerations as well to draw inferences.
Nayyar argues that ‘International labour migration from India has been
associated with two sorts of financial flows: remittance inflow which constitutes
unrequited transfers and capital flows in the form of repatriable deposits. These
financial flows, which acquire significant dimension from the mid-1970s
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onwards, were small in the context of national economy but large in the context
of balance of payments’ (1994: 117).
It is important to note that remittances, it is argued, are an effective instrument

to address ‘transient poverty rather than structural poverty’ (Kapur 2004 as
cited in CDS 2009).
Analysing the macroeconomic impact of labour flows on output and employment,

based on migration flows, it is maintained that the impact was obviously limited.
The dimension of emigration to the industrialized countries and labour export to
the Middle East were marginal, if not miniscule, when compared with the
workforce and employment or underemployment in the economy as a whole.
Given the magnitude of labour outflows and enormous reservoir of surplus
labour, in a situation where unemployment was widespread not simply among
the unskilled and uneducated but among the skilled and (p.416) educated, the
impact of withdrawal of labour on the output in India would have been
negligible. Insofar the emigrants were unemployed or underemployed before
their departure, which was probably the case for most of the unskilled or semi-
skilled workers who migrated to the Middle East, it would have led to a direct
reduction in the open or disguised unemployment to a marginal extent. Insofar
the emigrants were employed before their departure, which was possibly the
case for most professional, technical, or skilled persons who migrated to
industrialized countries, it would have led to an indirect, though once again
marginal, reduction in unemployment since replacement workers would have
been drawn from the available surplus labour.
The permanent migration of persons with professional expertise or technical

qualifications, mostly to the industrialized countries, represented a privatization
of benefits and socialization of costs, where the benefits in the form of higher
incomes accrue to the migrants as individuals, while the substantial costs of
their higher education are borne by society as a whole without any tangible
return. The temporary migration of unskilled, semi-skilled, and skilled workers,
mostly to the Middle East, is different so far as the social cost of school
education or vocational training is modest and social benefits derived from
remittances or skills formation are significant, but there are problems of poor
working conditions in employment abroad and of the reapportion of migrants in
the labour market on their return to be considered.
Nayyar however argues that there are exceptions to this observation. In

contrast, the impact of output may not have been insignificant and the impact of
employment may not have been favourable if labour markets were segmented by
profession, skill, and region, in which case migration would have created sector-
specific or region-specific shortages. More importantly, perhaps, it may have led
Page 31 of 59
to some deterioration in quality of labour available in as much as the best sought

to migrate and were placed by the second best.
Despite being predominantly a migration stream of unskilled workers, the role of

remittances of Middle East migrants from Kerala to the development of the
otherwise stagnant economy has been considerable. Scholars point out that
the remittances were sufficient to wipe out 60% of the state’s debt in 2003.
The remittances in 2003 were 15 times the export earnings from (p.417)
cashew and 18 times that from marine products. The effect of remittances
on Kerala’s per capita annual income in 2003 was an increase of Rs.
5,678… Kerala’s per capita income reached 49 percent above the national
average in 1999–2000’. (Zachariah and Irudaya 2004 in Azeez and Begum
2009: 58)
Remittances have also contributed to improvements to housing, transportation,

town planning, educational and religious institutions, amenities, and other
infrastructural facilities (Kannan and Hari [2002], as cited in Azeez and Begum
[2009]). The impact of remittances are said to be dependent on the stability of
employment. Households where the emigrants’ duration of stay was 10 years or
more have seen economic improvement, decline in fertility rate, improved
nutrition and lowering of child mortality, and better utilization of health facilities
in comparison to non-migrant households (Banerjee et al. 2002).
It is observed elsewhere that a structural shift in remittance inflows from

migrant Indians occurred in the early 1980s following the oil price boom in the
Gulf countries and migration of unskilled and semiskilled labour from India. This
was followed by another structural shift in the mid-1990s, coinciding with the
new wave of migration of skilled labour in the information technology–related
sectors (Annexure 3C). Although a unit change in oil prices leads to a 0.8 per
cent change in remittance inflows to India, the impact of a unit change in the
real income in the US leads to a 2.5 per cent increase in remittance inflows to
India. The relatively high impact of a change in the real incomes in the US on
remittance inflows to India could be attributed to a high level of per capita
income of the Indian migrants working in information technology-related areas
and financial services and investment motives of the migrants. In the short-run
the scholars observes that the economic crises has had an impact on the
remittance inflows which is attributed to the cumulative impact of factors such
as economic and financial uncertainties in the host countries, fear of job losses
among migrants, precautionary savings by the migrants and planning for
contingencies in the recipient countries, and the like (Sirkeci et al. 2012).
Impact on Exports and Imports

Considering the aspect of the impact of migration on exports and imports,
Nayyar contends that the impact of emigration on exports has (p.418) been
Page 32 of 59
positive, even if not large, insofar migrants, particularly those in Middle East,
created a demand for the ethnic foods and thus induced some export expansion
which otherwise may not have been possible. The impact of migration on
imports, through direct and indirect linkages, was probably small, although it is
possible that remittance from migrants helped sustain the import liberalization
which began in the late 1970s, just as the capital flow from migrants helped
sustain the import liberalization which gathered momentum in the mid-1980s.
Kapur’s analysis however seems to point out that there is a difference in the
quality of emigrants to US during the time frame that Nayyar is analysing and
thereafter. This has implications for India in terms of the quality of labour that it
is losing on account of emigration. Further, Kapur takes a much larger set of
commodity groups and international economic interlinkages especially as
mediated by networks to analyse the impact of diasporas. He points out that:
Indian migrants to the United States are relatively younger, are more
educated, and have higher income compared to the native-born and other
foreign–born populations. From the late 90s onwards, these trends were
exemplified, largely due to the large influx of H-1B visa holders. Between
1998 and 2008, 27.6 percent of all H-1 B visas (1,135,581) were issued to
Indian citizens. In contrast to both India-born immigrants from the 1980s
and other foreign-born immigrants, the Indian–born immigrants from
1990s were significantly more educated, with a particular concentration
among those individuals having earned a master’s degree… Thus, while 33
percent of Indians who came during the 1990s and were still in the United
States in 2000 earned more than twice the native-born median for 2000,
only 17 percent of those who came during 1980s and were still in the
United States in 1990s earned more than twice the native–born median for
1990. (Kapur 2010: 73)
The implication of this observation is that the Indian immigrants in US during

the 1980s were relatively less qualified and saw relatively less mobility than the
Indian immigrants in US during the post-reform period.
It is further observed from the US census that
if we turn to the characteristics of the Asian Indian population in the

United States, nearly 60 percent of which was born in India, data from the
2000 U.S. census confirms the distinctive characteristics of this group. It
has the highest median family income, a function of the (p.419) highest
level of education (nearly two-third have a college education or higher
education), the highest labour participation rates (71 percent), and the
highest fraction engaged in a high-skilled occupation (more than half).
(Kapur 2010: 73)
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Role of Return Migration

Finally considering the role of return migrants, Nayyar (1994) argues:
Return migration is likely to have increased in the incidence of open or

disguised unemployment, even at margin, by exerting pressure on the
labour markets where job opportunities were scarce. The problem of
unemployment may have been aggravated among returning migrants who
acquired or upgraded skills while abroad, if they were reluctant to enter
the same occupation on return.
In terms of their macroeconomic impact, these financial flows were perhaps

most significant in the context of balance of payments (BoP). The remittance
inflows financed a large proportion of the balance of trade deficit and thus
reduced the current account deficit to manageable proportions. It is clear that
remittance from migrants improved the BoP situation or, in more recent past,
prevented from deteriorating as much as it otherwise would have (Nayyar 1994:
119).
It is held by Kapur that although as a consequence to the emigration of highly

skilled workers ‘the implications of this loss are manifold, including negative
effects on higher education institutions in India, the quality of health care, and
innovation’ (Kapur 2010: 121). Health it is held is a sector where Indian
physician migration has had a significant impact, although perhaps less positive
than in other sectors. The most important health effect is, of course, on the
population rising from the absence of some of India’s best trained physicians
(largely educated at public expense). Further, traditionally, nurses in India have
come from Kerala’s Christian community. In recent years, the growing
international demand for nurses—especially in Organization for Economic
Cooperation and Development (OECD) countries is leading women from other
communities in Kerala to also join nursing schools, and new private nursing
schools have sprung up to meet this demand. The above two categories form
part of the global health care chains or networks related migration (Alonso-
Garbayo and Mayben 2009; Jeffery 1976; Raghuram 2009).
(p.420) Kapur (2010) observes:
An indication of the severity of the flight of scientific and engineering

talents can be gauged by the fact that the ratio of patents filed by Indians
in North America to that by Indians in India (when normalized by
population) is about 28,000:1… But the most severe long term impact has
been the loss of potential high-quality faculty in Indian higher education,
and thereby on human capital of the next generation. (Kapur 2010: 121)
However, he maintains that
Page 34 of 59
since only a fraction can actually emigrate, it is at least possible that the
economy will end up with a greater stock of human capital. The
phenomenon has been referred to in the literature as ‘brain gain’. Although
the basic brain gain story has some plausibility, given the clearly forward-
looking nature of demand for skills, it has been strongly criticized since the
highest-ability individuals will invest in skills regardless of prospect of
emigrating, but these individuals will be particularly prone to being
recruited away when the prospect of emigration is opened up.
Another area where the economic effects of the brain gain have been
positive is the flow of ideas both from the Diaspora as well as from return
migrants. Increasingly, a large number of Indian-origin faculties in
business schools abroad, advise the Indian firms. Return migration has
augmented human capital through additional training, experience, and
networks. (Kapur 2010: 122; also see Raghuram 2009)
Nayyar draws sceptical conclusions, aiming at addressing the possible

adversities of emigration while maintaining that macroeconomic consequences
of emigration are inconclusive since ‘no systematic analysis let alone policy
formulation’ can be made since there is a paucity of data and therefore it is
imperative that such database is built. Second, it is worth considering a tax on
emigration to industrialized countries, to compensate at least for the cost of
higher education, either as a lump sum before departure or over a period of time
after migration, though there may be discrepancy between its desirability and its
feasibility. Third, concerning the export of short-term migrant workers, it may be
worth establishing a corporation in the public sector, not to create government
monopoly of labour exports, but to provide competition to private sector
recruitment firms.
Kapur, on the other hand, concludes that emigration has contributed to the
increase in inequalities. However it is also observed (p.421) that the reputation
and network capital of the Indian diasporas have played an important catalytic
role in the development of different sectors, both among the largest sources of
foreign exchange. These, financial flows, from the diasporas have been
regionally concentrated in the southern and western states. These states have
been growing faster in any case than their poorer counterparts in the north and
east, and consequently, international migration has amplified inter-state
inequalities in India.
It is very relevant in this context to introduce yet another dimension of the huge
informal labour market that exists in the developed countries which suggests
that not all immigrants in developed countries are highly educated with
permanent jobs. Fran Ansley (cited in Kabir 2005) brings to relief the problems
of undocumented immigrants into US who are struggling for livelihoods, who
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contribute to accumulation but who are without access to health insurance or

any other minimum social security cover provided to citizens.
On the other side, concerning the gulf migration stream it is pointed out that the
semi-skilled, unskilled contract workers face several problems such as
‘premature termination of job contracts, changing the clauses of contract to the
disadvantage of the workers, delay in payment of salary dues, violation of
minimum wage standards, freezing of fringe benefits and other perks, and
forced overtime work without returns. There are several media reports of
extreme forms of violence and unfreedom especially with reference to migrants
to Middle East countries.
Impact of Crisis
Some contributions have focused on the impact of global crisis on international
migration. A significant and extensive study focusing on international migrants
to Saudi Arabia and Gulf Cooperation Council (GCC) countries10 points out that
the crisis had affected a large number of workers in some way or the other (an
estimate puts that nearly 40 per cent of the workers have been affected). The
effect varied across different industries, across various occupations, across
various skill levels and also depended on the number of years of experience of
the expatriate. The strategies adopted by the workers to cope with the crisis
were also varied. Consequential to the global economic crisis, the predominant
ramifications were cuts in salary, stoppage of (p.422) increments, and stoppage
of benefits and perks which the expatriates had to suffer. The effect of this
phenomenon was more severe in case of middle income group workers engaged
in semi-skilled and skilled jobs, since they have to make their own arrangements
for accommodation and food. In South Asia including India, among the return
emigrants, about 73 per cent remained unemployed even one month after their
return, while the remaining 27 per cent managed to find employment as regular
wage workers and as casual wage labourers or become self-employed. However,
at the time of survey, the proportion of unemployed among the return emigrants
declined from 73 per cent to 42 per cent. Among the employed, about 37 per
cent managed to find regular employment, whereas casual and contract workers
constituted 40 per cent and 8 per cent of the workers respectively at the time of
the survey (Rajan and Narayana 2011).
Finally, the International Organization of Migration (IOM) attempts at the

possibility of drawing strings through the internal and international migration to
provide a ground for a grand theory. This literature reiterates that migration is a
rational choice and the decisions of migrant households are based on welfare
improvements due to income differentials. This approach looks at migration by
households across time as a continuous interlinked chain migration streams that
happen in stages. These dynamics are modelled as ‘step-migration’ phenomena
with each higher level income being a function of higher level of skill and
experience. The unskilled rural labour, low-skilled urban informal work, high-
Page 36 of 59
skilled urban modern sector, and finally highly skilled, highly experienced
international labour markets present various steps in terms of the income
differentials around which mobility of workers is patterned. It is argued for
instance that if a section of the high-skilled workers in the urban modern sector
migrate to join the international labour market, this mobility provides
opportunities for a section of workers who have acquired skills by working in the
informal sector for a long time to move into the high-skilled urban modern sector
having a similar impact on the opportunities for mobility of rural unskilled
workers (De Wind and Holdaway 2008).
Conceptualizing Empirical Paradoxes

As is quite evident from the different sets of findings by empirical inquiries,
concerning both the internal as well as international (p.423) migration we find
that the trends seem to be mixed. The general inferences that can be drawn
about the role of migration or emigration are therefore apparently quite
confusing. Conceptually, one approach contends:
Migration is a routine livelihood strategy adopted in India and not simply a

response to shocks. People certainly do migrate because there is not
enough work locally, but such migration should not be understood as
forced or distress migration. Many poor people perceive migration as an
opportunity. It allows them to escape highly exploitative patron-client
relationships in their home village, earn more than they would have done
before and provides them with improved roads, communication networks
and an expanded informal economy. Short-term, non-permanent, migration
from poor and underdeveloped regions to more prosperous regions and
countries can (but does not always) offer people an important opportunity
to diversify and exit from poverty. The current policy and institutional set
up does not allow the sending households and areas, as well as receiving
areas, to maximize the benefits from internal, regional and international
migration. Without the opportunity to migrate many poor people would
have fallen into deeper poverty and experienced severe food insecurity.
The costs and risks of migration might be cut by more flexible schools, pro-
poor programmes and insurance for mobile populations. (Bird and
Deshingkar 2009: 6)
Elsewhere it is maintained that ‘without migration, a majority of the poor would

not be able to spend on health, festivals, and ceremonies and would face the risk
of sliding deeper into poverty’ (Korra 2010: 5–6).
Based on such studies Priya Deshingkar tries to classify migration patterns into
coping migration and accumulative migration.
This classification however clearly pre-ordinates an income mobility centric

analytical frame. This raises serious questions about the commensurability and
the variety of trade-offs made by increments to income or income dependent
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human development indicators (for qualitatively different forms of costs

including unfreedom, isolation, loss of health, corporal punishments, sexual
exploitation, and humiliation). And further, Priya Deshingkar’s approach tends
towards an individualistic rational choice approach that risks undermining the
role of structural coercion in what seem to be apparently individual choices. In
Deshingkar’s analysis, individual perceptions sometimes are taken as
magnitudes for determining mobility even while (p.424) presenting objective
indicators suggestive of appalling social conditions. This approach could
dangerously circumvent the more complex questions of both objective and
normative foundations of the analytical framework to understand the idea of
mobility in social relations of production subsumed by overarching structures of
bondage and exploitation.
It is pertinent in this context to refer to a contribution by Unnithan-Kumar et al.

(2008) who based their research on migrant households in two slums (bastis) of
Jaipur, Rajasthan, point out to this interesting conflict between individual
perceptions and objective indicators.
Many of them (migrants) viewed their migration to the basti in a positive

light for the income, employment and raised standard of living it brought.
Access to a better and greater range of food and clothes is seen as a direct
result of her employment as a sweeper in wealthier households. At the
same time, the basti was regarded as a dirty and polluted place, directly
responsible for illness and disease. The restricted areas for defecation,
open sewers, lack of clean drinking water, infestation by flies, rats and
mosquitoes, cramped living, cooking and sleeping quarters and the
exposure to industrial and chemical wastes, all made the basti a risky place
to live in. The basti was also a major rubbish sorting depot (outsiders
called it the kachra or rubbish basti) which made it all the more hazardous,
especially for young children… The connection between income and food
was particularly stark for those households that were dependent on daily
wage earnings. Here family members ate on a more ad hoc basis,
sometimes postponing meals until the money had come in to buy food.
When families move out of rural contexts, they also lose the access their
children have, to mid-day meals provided at rural schools and in this sense
become worse off as a result of their move. (Unnithan-Kumar et al. 2008:
11)
It is further observed that even though children did not have a nutritious diet by
biomedical standards, access to food was seen as an advantage of living in the
basti. NFHS-2 data has pointed to the high levels of maternal and childhood
anaemia and its close relation to maternal and infant mortality (see Bose [2006]
for the reliability of NFHS-3 findings on anaemia). More than 70 per cent of
children between 6 and 35 months in the report are shown to have some form of
anaemia, which may be classified into mild: 20 per cent, moderate: 53 per cent,
Page 38 of 59
and severe: 10 per cent (see International Institute for Population Sciences
(IIPS) and ORC Macro 2001: 174–5, as cited in Unnithan-Kumar et al. 2008).
(p.425) Quite clearly, individual perceptions as well as income indicators are

inadequate measures to draw conclusions about mobility of migrant households.
Further, critical refection on the pattern of mobility is required. Elsewhere,

describing the structure of alternative livelihood options available to different
sections of rural society, and its relation to mobility, a relatively more complex
typology is provided which recognizes a gradation in place of polarities. This
typology suggests that there could be:
(i) Chronically poor and near destitute, limited to farm operations, or no

options;
(ii) Insecure poor, depending upon non-farm casual labour; and
(iii) Secure poor, on an accumulative path.
Chronically poor and near destitute, limited to farm operations, or no option:
It is maintained that the chronically poor or near destitute households usually

comprise the illiterate, unskilled, old, sick, or disabled. These could be
households that lack labour available for work or in case of lower caste and
Scheduled Tribe households who lack access to common property resources.
These households also may lack social networks. If they are lucky, they may have
a ruminant or two but they lack assets to migrate, and find credit unobtainable
or expensive. It is held however that, for most members of this class, access to
other types of non-farm labour work is constrained by mobility, dependency,
physical strength, and weak social networks.
Insecure poor, depending upon non-farm casual labour:
These are said to be highly diversified households, with members pursuing a

range of occupations none of which is accumulative or skilled. They are usually
landless labourers or marginal farmers and migrants to urban areas for
construction work with women usually working as casual farm labourers or
domestic maids. Although seasonal migration for farm and non-farm work is
seen as essential for the survival of these households, unless the work is secured
through long-standing relationships, the work search often tends to be hit and
miss and can be very risky. It is argued that although travelling to places does
provide (p.426) with higher wages, there are considerable risks such as
dealing with unknown city and culture, investing considerable funds in travel
and work search, risking non-payment of wages, and being away from home and
family for long periods. It is maintained that those who find and keep work,
without being cheated, may however return with large savings and often this is
enough to move the household up into the next category—the secure poor.
Page 39 of 59
Secure poor, on an accumulative path:
The secure poor are understood to be the first group to move into farming that
can provide up to six months of food per year, and can guarantee at least one
crop. The land is irrigated and households have livestock, making agriculture
less precarious. In many cases, non-farm activities (migration being an
important option) provide the structural underpinning of their progress and have
given them the extra income and capital to investing in the farming. A
diversified portfolio, spread against risk, leading to a steady accumulative
pathway out of poverty, is the hallmark of their existence. However,
accumulation levels are low, and so shocks and sudden demands on income may
set the household back to the starting point or make them transiently poor (Start
et al. 2005: 298–300).
While these typologies in themselves present a relatively complex picture, the

mobility process that is observed contradicts the general inference drawn by
Priya Deshingkar in her later works (Deshingkar and Akter 2009; Deshingkar
and Sandi 2011; Deshingkar et al. 2014). The patterns of mobility presented
here clearly suggest that the possibilities of mobility for poor households
through migration are partly contingent upon the initial conditions of the labour
and need not be a secular process. To interpret the movement from one
commodity segment, sector, or production system to another, dispersed
regionally as coterminous with mobility, there must be a process where, in a
dynamic accumulation context, when contraction or death of specific
commodities or production systems happen, these transient structures of value
production act as carriers of labour where skill sets, experience, and social
networks that workers equip themselves with help them transit from one
commodity segment, sector, or production system to another which is either
secularly upwardly mobile or at least downwardly secure.
(p.427) It is extremely important to note that Priya Deshingkar herself

recognizes that mobility of households is not a downwardly secured process
(Start et al. 2005). Given this structural observation, to make a general
conclusion that migration can be a livelihood strategy out of poverty would be an
empirical fallacy. Although the attempt to provide a nuanced narrative of
temporary migration by Deshingkar’s approach can be appreciated, the
direction suggested by the arguments and analysis however fail to adequately
recognize the structural processes initiated in a post-globalized, post-reforms
scenario where the emerging dominant patterns are associated with greater
vulnerabilization, informalization, casualization, feminization, etc., all of which
question the general inference drawn by Deshingkar about what migration
represents. Further, since these processes have explanations in the structures of
accumulation and mobility, they cannot be associated with functional failures
attributed to gaps in policy or missing institutions. The pertinent question is not
whether there has been an increase in income but whether income mobility of
Page 40 of 59
labour is a sustainable phenomenon that is integral to the process of

accumulation? If there are varied patterns provided by evidence what underlies
this complex process?
Priya Deshingkar’s approach is clearly a fragmented reading of mobility as it

disconnects the worker’s mobility from production centric understanding and
relocates it in an income centric framework of mobility. Thus, erroneously
concluding that the problem is with migration policy (although there is no denial
of its role in improving workers’ lives) rather than the misplaced priorities of the
development model itself that seem to preordain rapid short-term accumulation
over more inclusive, sustainable long-term accumulation. Paradoxically, the
evidence of mobility that workers have experienced is often a consequence to re-
ploughing of the migration earnings into expanding their original production
systems. But if these production systems were to be located in a structurally
adverse context wherein they are experiencing a contraction, there would be no
systematic argument to offer in favour of mobility as development except for
analytically questionable indicators such as possession of mobile phones
(Deshingkar et al. 2014: 16).
Temporary migration may not be a transient phenomenon in the lives of these

migrants. If at all anything, the evidence seems to suggest that over the past
decade, in addition to the existing temporary (p.428) migrants, new sections of
society have joined these streams. The number and proportion of temporary
migrants has been increasing and not decreasing. We have more reasons to
believe therefore that temporary migration could well be a permanent
phenomenon in the lives of workers and not a transient phenomenon considering
that there is neither assured upward mobility, nor is this mobility downwardly
secure. A similar criticism holds true to the reading of mobility of labour in
international migration that analytically disconnects this process of mobility
across different global production networks from the structural control over
production and value which leave the poor economies with cost cutting
strategies that pauperize the working poor.
With reference to the international migration analysis, the problem seems to be

a massive divergence in experiences and the growing inequality between
different streams of migrants for instance the stream to the UAE or GCC
countries as against the professionals going to North America or Europe.
Certainly developing a unified general model to analyse these different streams
would be to thrust analytical-model-based regularity of behaviour on varied
motivations and outcomes. To comment more generally on the theorization of
international mobility as well as internal migration together, we need to discuss
more abstract aspects of the conceptual framework. While the existing
theoretical mainstream paradigms analyse migration based on income
differentials, rational choice under information asymmetries, and strategic
games, etc., these frameworks perhaps are inadequate to comprehend the
Page 41 of 59
complexity involved in migration processes. In a dynamic accumulation process

that seems to govern the overall nature of labour mobility internally or
internationally, spatially or in terms of overall well-being, therefore, an analysis
of impact of migration on labour cannot be:
1. Household- or individual-unit-based rational choice analysis ignoring

social and institutional mediations;
2. A relativistic measure of mobility of individuals or households in
comparison to their own initial position;
3. An income or income-determined indicator-centric measure;
4. Determined by the trade-off between non-commensurable values with
increments to income; and
5. Independent of the changing production and labour relations within
and between production systems.
(p.429) The reason for this understanding is that while internal and external
economies of production are significant for accumulation these are socially and
institutionally mediated processes that interconnect different production
systems and, given these conditions, expansion in some production systems
could lead to mobility of some sections of workers, while simultaneously, there
could be destruction of other production systems happening in the system that
might be associated with distress or deterioration in the conditions of workers.
The question that needs to be asked is not if workers are becoming increasingly
mobile in terms of incomes and consumption but if the nature of accumulation of
changing production systems as a process is propelling mobility of labour
gauged on a multivariate scale of mobility considering the fact that social and
institutional mediations matter help transform and relieve people over a period
of the conditions that produce lack of well-being and help people gain control
over their circumstances. There is no denial that migration and emigration could
lead to betterment of incomes and consumption of certain individuals or
households, in certain production systems, in certain commodity markets in
certain sectors and in certain moments. This mobility may be valuable in itself
but it may or may not be a basis for drawing general inferences about relating
migration to mobility or development. This general inference depends on what
ramifications these specific processes of mobility in turn have for the overall
processes of mobility of workers in the labour market as a whole. It is therefore
pertinent to draw a distinction between the proposition that migration could
cause mobility of workers and the proposition that migration is an indicator of
development. Further, empirically, both the observation that migration leads to
mobility and the evidence that migration leads to unfreedom present two
dimensions of the same reality. Although the literature on migration places these
dimensions as if these are contradictory claims, it is not a paradox that in
analysing internal and international migration, increasing mobility of workers
could coexist with increasing forced migration and unfreedom of workers, (just
the way that reduced absolute poverty levels can coexist with exasperated
Page 42 of 59
relative poverty and ultra-poor which may in turn lead to social dominance or
monopolization of institutions) and it is equally true that globally increasing—
prosperity, modernity, middle class, urbanization—can coexist with growing un-
civility and coercion in the nature of state and social relations.
Table 10A.1 Migration Statistics based on Census Data
Migrants by 2001 Census 1991 Census Variance (%)

place of birth (Including J&K*) (Excluding J&K) (1991–2001)
Total population 1,028.6 838.5 21.5
Total migrants
Persons 307.1 229.8 32.9
Male 90.4
Female 216.7
Intra-district 181.7 136.2 32.6
Inter-district 76.8 59.1 29.5
Inter-state 42.3 27.2 54.5
From abroad 6.1 6.9 −11.6

Source: http://www.censusindia.gov.in.
Notes: * J&K = Jammu and Kashmir.
While computing variation, J&K has been excluded from the 2001 Census.
Page 43 of 59
Table 10A.2 Migrants by Place of Last Residence, Indicating Migration Streams (Duration 0–9 Years) (India 2001)
Migration Stream 2001 2001 (in per cent)
Persons Males Females Persons Males Females
Total migrants 98,301,342 32,896,986 65,404,356
Intra-state 80,733,441 23,998,283 56,735,158 100.0 100.0 100.0

migrants total
Rural–rural 48,880,074 9,985,581 38,894,493 60.5 41.6 68.6
Rural–urban 14,222,276 6,503,461 7,718,815 17.6 27.1 13.6
Urban–rural 5,213,151 2,057,789 3,155,362 6.5 8.6 5.6
Urban–urban 9,898,294 4,387,563 5,510,731 12.3 18.3 9.7
Unclassified 2,519,646 1,063,889 1,455,757 3.1 4.4 2.6
Inter-state 16,826,879 8,512,161 8,314,718 100.0 100.0 100.0

migrants total
Rural–rural 4,474,302 1,759,523 2,714,779 26.6 20.7 32.7
Rural–urban 6,372,955 3,803,737 2,569,218 37.9 44.7 30.9
Urban–rural 1,053,352 522,916 530,436 6.3 6.1 6.4
Urban–urban 4,490,480 2,201,882 2,288,598 26.7 25.9 27.5
Unclassified 435,790 224,103 211,687 2.6 2.6 2.5
International 740,867 386,461 354,406 100.0 100.0 100.0

migrants total
Page 44 of 59
Migration Stream 2001 2001 (in per cent)
Persons Males Females Persons Males Females
To rural areas 392,807 188,518 204,289 53.0 48.8 57.6
To urban areas 348,060 197,943 150,117 47.0 51.2 42.4

Source: Table D-2, Census of India, 2001 at http://www.censusindia.gov.in.
Page 45 of 59
Table 10B.1 NSSO 64th Round: Reasons for Migration

(Employment-related reasons per 1,000 persons)
Reason Rural Urban Total
In search of employment 168 202 185
In search of better employment 175 169 172
Business 43 48 45
To take up employment/better employment 106 128 117
Transfer of service/contract 48 105 77
Proximity to place of work 12 13 12
Total 552 665 608
Table 10B.2 NSSO 64th Round: Data on Migration (Household-

level Characteristics)
Indicators of Migration Rural Urban Total
Proportion of migrant households (Per 1,000 13 33 19

households)
Proportion (per 1,000) of migrant households for 552 665 608

employment-related reasons
No. of households reporting outmigration (per 1,000 304 193

households)
No. of households received remittance (per 1,000 365 240

households reporting outmigration)
Average amount of remittance received (Rs ʹ00) per 207 436

reporting household
Page 46 of 59
Table 10B.3 Number of Migrants per 1,000 of Each Social Group: All India
Social Group Rural Urban
Male Female Persons per 1,000 Male Female Persons per 1,000
55th Round
ST 56 357 204 282 411 345
SC 64 434 244 225 393 305
OBC 65 428 242 237 417 323
Others 81 443 259 276 426 347
All 69 426 244 257 418 334
64th Round
ST 47 440 238 288 430 356
SC 49 482 260 235 447 337
OBC 51 468 255 230 437 331
Others 68 506 281 290 477 379
All 54 477 261 259 456 354
Page 47 of 59
Page 48 of 59
Table 10C.1 Source Regions of Workers’ Remittances to India
Year Asia North America Europe Other Total (in US$)
Per cent
1997–8 31.3 37.1 26.0 5.6 11,875
2000–1 34.3 44.9 19.0 1.8 13,065
2006–7 34.9 32.5 17.0 15.6 30,835
2007–8 34.8 32.7 16.9 15.5 43,508
2008–9 34.9 29.4 19.5 16.1 46,903
2009–10 (April– 34.8 29.7 19.5 16.0 27,515

September)
Sources: Report on Currency and Finance, Reserve Bank of India and RBI Monthly Bulletin, April and November 2006
as cited in Sirkeci et al. (2012: 110).
Page 49 of 59
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Notes:
(*) I wish to thank Amiya Kumar Bagchi, Prabhat Patnaik, Jayati Ghosh, Jan
Breman, and D. Narasimha Reddy for their valuable comments on an earlier
draft. I also wish to thank my research scholars Nithu, Ranjan, and Aneesh at
the University of Hyderabad for their significant assistance in the course of
writing this chapter.
(1.) We know from the NSS data that the number of internal migrants in India
exceeds the number of international migrants. Individual transfers are small, but
according to the 64th Round of the NSS, we now know that in total, internal
migrant remittances exceed international remittances, amounting to over US$
7.5 billion per year (as compared with less than US$ 4 billion, the value of
transfers received from migrants outside the country) (Deshingkar and Sandi
2011).
(2.) Appendix 10A is intended to present relevant parts of the structure of the
Census data and not provide the entire data.
(3.) The 64th Round considered the people who stayed away from their usual
place of residence (UPR) for work or for seeking work for a period between one
month and six months as short-duration outmigrants, provided further that they
had stayed away for more than 15 days in any one spell.
(4.) Defined by taking six months of residing at a place as the timeframe to

determine the usual place of residence UPR.
(5.) For instance it is noted that while the census of India reported 12.66 million
working children, the estimates by agencies working against child labour such
as The Global March and the International Center on Child Labor and Education
(ICCLE) calculate that there are roughly 25–30 million child workers in India
(ITUC 2007) and Human Rights Watch says that more than 100 million could be
working because so many are out of education. Smaller studies and NGO
assessments (some of which are reviewed later) show that child migrants form a
large part of the workforce in several major sectors such as construction, brick
kilns, small industries, domestic work, and farm work.
Page 58 of 59
(6.) Note that this refers to the erstwhile united Andhra Pradesh state. Andhra
Pradesh has been bifurcated into two states—Andhra Pradesh and Telangana—
as a consequence to the Andhra Pradesh Reorganization Act of 2014. The new
state of Telangana has been created on 2 July 2014. Following this act, the
districts of Adilabad, Karimnagar, Medak, Nizamabad, Warangal, Rangareddi,
Nalgonda, Mahbubnagar, Khammam (excluding villages mentioned in G.O.M.S.
No.111, Irrigation & CAD Department 2005), and Hyderabad, have been
territorially divided from Andhra Pradesh to form the Telangana state.
(7.) In 1972 four of the six villages surveyed by ICRISAT were surveyed again by
two scholars Walker and Ryan (1990). ICRISAT resumed data collection in the
villages in 2002.
(8.) Bangalore and Madras have been renamed officially as Bengaluru and
Chennai. Some scholars still use the old names while others have started using
the new one.
(9.) For a study that draws very different inferences from those drawn by Kumar
and Aggarwal (2003), about how duration of stay of the migrant households
relates to the possibilities for circumventing poverty with specific reference to
the case of migrants settled in Delhi slums, see Gupta and Mitra (2002).
(10.) In Saudi Arabia as well as other GCC countries, the rapidly growing sectors
like construction, trade and manufacturing, which employ the bulk of the
workforce are largely dominated by the expatriates. The scholar presents the
Indian embassy estimates which state that, ‘50 percent of the 1.8 million Indian
expatriates in the United Arab Emirates (UAE) are unskilled workers, 25 percent
semi-skilled and 25 percent skilled professionals’.
(11.) Data for the tables in this appendix has been sourced from Srivastava 2011.
Page 59 of 59
Environmental Concerns, the Global Commons, and the Indian Economy

Economy
Jayati Ghosh

Print ISBN-13: 9780199458943
DOI: 10.1093/acprof:oso/9780199458943.001.0001
Environmental Concerns, the Global

Commons, and the Indian Economy
Sangeeta Bansal
DOI:10.1093/acprof:oso/9780199458943.003.0011

Scientific evidence of the link between growing rates of anthropogenic
greenhouse gas (GHG) emissions and climate change is growing. How to
manage this global common resource has become one of the most important
policy debates in recent times. The critical question is how to engage nations in
long-term effort to protect the global climate. India is one of the most vulnerable
countries to negative climate impacts. Also emissions from India are growing
rapidly in recent years. It, thus, becomes imperative to investigate what role
India should play in the global effort of mitigating GHG emissions. This chapter
places India in the global context in terms of GHG emissions. It then explores
the stand India should take in international negotiations, and discusses various
policy measures India has already taken, and can take domestically to mitigate
emissions in an efficient and equitable manner.
Keywords: climate change, greenhouse gases, carbon emissions, mitigation, vulnerability, India, Kyoto
protocol
The atmosphere is a classic case of global commons. All countries in the world
have been using its services as a sink for their waste emissions. Until the
Industrial Revolution, the atmosphere was able to absorb and assimilate these
emissions. For the past 150 years, however, human activities have added
significant quantities of emissions of greenhouse gases (GHGs), at a rate faster
than the absorptive capacity of natural systems resulting in increased
accumulation of these gases in the atmosphere. The key GHGs are carbon
dioxide (CO2), methane, and nitrous oxide. An increase in the levels of GHGs
Page 1 of 33
could lead to greater warming by strengthening the natural greenhouse effect,1

which, in turn, could have a major impact on the world’s climate. GHGs mix
uniformly in the upper atmosphere and, therefore, damages are completely
independent of the location of emission sources. This makes climate change a
global commons problem. As with other common property resources, market on
its own will fail to protect the global climate and reduce harmful GHGs. How to
manage this common resource has become one of the most important policy
debates of our time.
Climate change is a complex process and there are still significant uncertainties
regarding: how fast it is occurring; extent to which human activities are
contributing to it; what is the tipping point beyond which climate change is
irreversible; what are the potential adverse impacts of climate change; extent to
which nature and human society could adapt to climate change, etc.
Nevertheless, there is a broad acceptance among scientists of the link between
growing rates of anthropogenic (p.441) (caused by humans) GHG emissions
and climate change. According to the Fourth Assessment Report of the
Intergovernmental Panel on Climate Change (IPCC), human-induced climate
change presents a serious and a growing danger to human societies (IPCC
2007a). The report observes that the earth’s climate system, when compared
with the pre-industrial era, has demonstrably changed at both global and
regional scales. In the absence of drastic mitigation effort, the global mean
temperature may increase significantly by year 2100. It further estimates that
limiting GHG concentration to 450 parts per million in volume (in CO2 equivalent
terms) provided only a 50 per cent chance of restricting temperature rise to 2
degrees Celsius. This would require that global emissions of GHGs peak and
turn towards a downward trajectory by 2015, and be reduced by 50 to 85 per
cent by 2050 compared to the level they were at in 2000.
Given the scientific evidence of the link between anthropogenic GHG emissions
and climate change, there is a growing consensus among national governments
that mitigation of GHGs is desirable. The disagreement is about how the
associated cost burden is to be shared.
Until recently, the industrialized countries have primarily contributed to the

accumulation of anthropogenic GHGs in the atmosphere. According to historical
responsibility, the developed countries should be bearing the major costs of
mitigation. Developing countries are concerned about equitable sharing of
carbon abatement burden and are not unjustified in asking to be allowed to
expand their energy use to fuel social and economic development. Increased
energy use with the present technologies would entail increased emissions.
In recent years, however, emissions from developing countries are growing

rapidly as these economies are on their economic and demographic growth path.
Between 1971 and 2008, global CO2 emissions had doubled. They increased by
Page 2 of 33
40 per cent between 1990 and 2008. In 2008, while emissions from Annex I
countries2 (developed countries and economies in transition) remained nearly at
the same level as in 1990, those from non-Annex I countries3 (developing
countries) increased by 124 per cent. Strikingly, in the year 2008, for the first
time the aggregate CO2 emissions of the developing countries were larger than
those from the developed countries, China and India respectively, being the
second and fourth largest emitter of CO2. Further CO2 emission levels of the
Annex I countries in 2008 fell below 1990 levels. (p.442) It should be noted,
however, that these reductions mostly occurred in the Annex I EIT (economies in
transition) countries4 and that 2008 emission levels for the Annex II countries5
as a whole were actually 12 per cent above 1990 levels (IEA 2010).
India is an important player in terms of both contributing to climate change as

well as getting affected by it. There has been a sharp increase in aggregate CO2
emissions from India from 1990 to 2011 with emissions increasing at an average
annual growth rate of 5.4 per cent per annum. This has dramatically changed
India’s relative position as the largest emitter of CO2—from eighth largest
emitter of CO2 in the world in 1990 to fifth largest in 2007, fourth largest in
2008, and third largest since 2009. Even in terms of aggregate GHGs, India’s
emissions have doubled between 1994 and 2011, making it the fourth major
emitter in 2011 after the US, China, and the European Union. In per capita
terms, however, emissions from India are one of the lowest globally.
The negotiations on a global climate change policy are in progress. In deciding

its stand in these negotiations, India must first assess how important it is for
India that an international agreement takes place. A major consideration would
be how it is going to be affected if there is a delay in the agreement. The factors
determining effect of a delay in the agreement on India are—its vulnerability
towards climate change and its role in mitigation efforts.
Various studies on vulnerability conclude that India is one of the countries that is
most severely affected by negative climate impacts (Mendelsohn et al. 2006).
Potential impacts on India include water scarcity due to glacier melts; decline in
food production due to monsoon variability; increased potential for spread of
diseases; and increased vulnerability to cyclones, floods, droughts, and coastal
flooding. Given India’s contribution to GHGs and its vulnerability to climate
change, its participation is crucial in any international agreement on GHG-
mitigation effort.
Until now India has been unwilling to join a treaty and been reluctant to take on
internationally binding GHG-mitigation targets. The analysis in the chapter
suggests that it is no longer advisable for India to stay passive. If climate-change
negotiations require a pro-active stand from India it should not hesitate to take
it. A key challenge for India is to identify measures that would promote
development objectives while addressing climate change problem. A potential
Page 3 of 33
policy (p.443) measure is to strive for achieving energy efficiency in the

economy, seek technological and financial support for the same, and insist on a
policy of international trade in emission permits.
To place India in a global perspective, the next section gives an overview of the
global scenario of GHGs followed by a section on the Indian scenario describing
economic and energy structure in India, and trends in GHG emissions in India.
India’s vulnerability to climate change is discussed in the fourth section. The
fifth section discusses by far the most comprehensive multinational effort to
mitigate climate change, that is the Kyoto Protocol (KP). The policy issues for
India can be categorized into its stand towards international negotiations in
terms of global commitment, and domestic policies adopted to meet its
commitment in an efficient and equitable manner. Policy options for India are
analysed in the sixth section. The seventh section contains recent initiatives
taken by India at the domestic level. Finally the last section concludes the
chapter.
Global Scenario of GHGs

Atmospheric concentrations of CO2 have increased from 280 parts per million
(ppm) in the pre-industrial era to about 395 ppm in 2013 with the fastest growth
occurring in the post-1995 period. Significant increases have also occurred in
levels of methane (CH4) and nitrous oxide (N2O), increasing from 715 parts per
billion (ppb) to 1,800 ppb and 270 ppb to 325 ppb, respectively (Carbon Dioxide
Information Analysis Center [CDIAC] 2014). See Table 11.1 for the Share of
Various GHGs at Global Level in 2011. Combining all the GHGs, the carbon-
equivalent levels of GHGs have reached roughly 440 ppm at present.6 These
gases have a long-term effect as they stay in the atmosphere for decades to
centuries. Table 11.2 and Figure 11.1 show the world’s top 10 emitters of GHGs
in 2011.
Emissions of CO2 account for the largest share of the total GHG emissions and
therefore, occupy an important place in the discussion on climate change. The
emissions are very unevenly, distributed across countries. Of the total world CO2
emissions of 30.3 gigaton7 in 2010, over 70 per cent originated from just 10
countries. Table 11.3 and Figure 11.2 show the figures for 2012. China, the
largest emitter of CO2 contributed over 27 per cent of the total global emissions
followed by the United States which generated 18 per cent, and India (p.444)
Table 11.1 Share of Various GHGs at Global Level in 2011
Gas MtCO2e Percentage Share
Carbon dioxide (CO2) 32,273.73 74.0
Methane (CH4) 7,262.93 16.5
Page 4 of 33
Gas MtCO2e Percentage Share
Nitrous Oxide (NO2) 3,557.45 8.1
Total F Gas 722.62 1.6
Total GHG 43,816.73

Source: Climate Analysis Indicator’s Tool, http://cait2.wri.org/
wri/, last accessed in April 2015.
Notes: F gas: Fluorinated gases (Hydrofluorocarbons, Perfluorocarbons, and
Sulfur Hexafluoride).
MtCO2e: Million metric tons of carbon dioxide equivalent.
Table 11.2 Top Ten GHG Emitters of the World in 2011
Countries MtCO2e Percentage of World Total
China 10,552.61 24.08
USA 6,550.10 14.95
EU 4,540.94 10.36
India 2,486.17 5.67
Russia 2,374.31 5.42
Japan 1,307.41 2.98
Brazil 1,131.10 2.58
Germany 882.93 2.02
Indonesia 834.58 1.90
Canada 716.21 1.63
Total of top 10 31,376.36 71.61
World total 43,816.73

Source: Climate Analysis Indicator’s Tool, http://cait2.wri.org/wri/
Country%20GHG%20Emissions?
indicator[]=Total%20GHG%20Emissions%20Excluding%20Land-
Use%20Change%20and%20Forestry&indicator[]=Total%20GHG%20Emissions%20Inclu
Use%20Change%20and%20Forestry&year[]=2011&sortIdx=0&sortDir=desc&chartTyp
last accessed in April 2015.
Note: MtCO2e: Million metric tons of carbon dioxide equivalent.
contributed around 7 per cent of the global total. Among the five largest emitters of
CO2, the levels of per capita emissions were very diverse, ranging from 1 ton (t) of CO2
per capita for India and 5 t for China to 18 t for the US. Per capita emissions are
Page 5 of 33
growing for the developing countries. For example, between 1990 and 2008, China
more than doubled its per capita emissions and India increased them by almost 80 per
cent. (p.445)
Figure 11.1 Top Ten GHG Emitters of the

World in 2011
Source: Based on the data in Table 11.2.
Table 11.3 Top Ten Emitters of CO2 in 2012
Countries Total CO2 emissions in Million Metric Percentage of World

Tons in 2012 Total
China 8,106.43 25.09
USA 5,270.42 16.31
India 1,830.94 5.67
Russia 1,781.72 5.51
Japan 1,259.06 3.90
Germany 788.32 2.44
Korea 657.09 2.03
Iran 603.59 1.87
Saudi 582.67 1.80

Arabia
Canada 550.83 1.70
Total of 21,431.07 66.33

top 10
Page 6 of 33
Countries Total CO2 emissions in Million Metric Percentage of World

Tons in 2012 Total
World 32,310.29
total
Source: Energy Information Administration: International Energy
Statistics, http://www.eia.gov/cfapps/ipdbproject/IEDIndex3.cfm?
tid=90&pid=44&aid=8, last accessed in April 2015.
(p.446)
In terms of sectoral
contributions, energy
represents about 65 per cent of
global anthropogenic GHG
emissions. Global demand for
energy is expected to grow due
to rapid growth in population
and income in developing
countries, adoption of western
Figure 11.2 Top Ten CO2 Emitters in
lifestyles, and increased use of
2012
electrical appliances all over
the world. GHG emissions from Source: Based on the data in Table 11.3.
the energy sector are
dominated by the direct
combustion of fossil fuels. In 2008, fossil sources accounted for 81 per cent of
the total primary energy supply (TPES). Within the energy sector, generation of
electricity and heat is the largest producer of CO2 emissions and was
responsible for 41 per cent of the world CO2 emissions in 2008. Worldwide, this
sector relies heavily on coal, which is the most carbon-intensive of fossil fuels.
As compared to gas, coal is on average nearly twice as emission intensive. After
electricity and heat generation, transport is the second largest sector
representing 22 per cent of global CO2 emissions in 2008 (US Energy
Information Administration [EIA] 2010).
Indian Scenario
India’s share in global emissions of GHGs has been rising. In 1994, GHG
emissions from all anthropogenic activity in India were 1,228 million tons (mt) of
CO2 equivalent, which accounted for about 3 per cent of the total global
emissions. Of this about 63 per cent (794 mt) (p.447) was emitted as CO2, 33
per cent (18 mt) was CH4, and the rest 4 per cent (178 thousand t) was N2O. The
CO2 emissions were dominated by emissions due to fuel combustion in the
energy and transformation activities (about 83 per cent of CO2 was generated by
all energy), road transport, and cement and steel production. The CH4 emissions
were dominated by emissions from enteric fermentation in ruminant livestock
and rice cultivation. The major contribution to the total N2O emissions came
Page 7 of 33
from the agricultural soils due to fertilizer applications. At a sectoral level, the
energy sector contributed 61 per cent of the total CO2 equivalent emissions,
with agriculture contributing about 28 per cent, the rest of the emissions were
distributed amongst industrial processes (8.5 per cent), waste generation (1.9
per cent), and land use, land use change, and forestry (commonly referred to as
LULUCF activities) (Sharma et al. 2006).
By 2007, the net GHG emissions from India have increased to 1727.71 mt of CO2
equivalent8 and accounted for about 5 per cent of global emissions. Of the
aggregate GHG emissions, 1221.76 mt was CO2 emissions, CH4 emissions were
20.56 mt, and N2O emissions were 0.24 mt. At a sectoral level, energy
contributed to 58 per cent, industry 22 per cent, agriculture 17 per cent, and the
waste sector 3 per cent of the net CO2 equivalent emissions, respectively (Indian
Network for Climate Change Assessment [INCCA] Report 2010). It is interesting
to observe that while share of the industry sector in gross domestic product
(GDP) in India has remained around 27 per cent from 1991 to 2007, the
corresponding share in aggregate GHG emissions has increased by 2.5 times
over the same period as given in Tables 11.4 and 11.5.
Page 8 of 33
Table 11.4 Sector-wise Shares in GHG Emissions (in per cent)
Energy Industry Agriculture Waste Generation
1994 61 8.5 28 3
2007 58 22 17 3
Source: INCCA 2010.
Page 9 of 33
Table 11.5 India’s Sectoral Contribution to GDP in 1991 and 2007

(in per cent)
Agriculture Industry Services
1991 32.8 27.4 39.8
2007 18.5 26.4 55.1

Source: Economic Surveys 1990–1 and 2007–8.
(p.448) Per capita GHG emissions in India are very low as compared to the
other countries. In the year 2005, the US per capita CO2 equivalent emissions
were 14 times higher than that of India and the German per capita emissions
were six times higher. Even per capita emissions of China, a densely populated
and a developing country like India, were more than three times that of India as
given in Table 11.6.
Of the total GHG emissions in India, 64 per cent are in the form of CO2, which
forms nearly 5 per cent of the global CO2 emissions. These emissions have more
than doubled between 1990 and 2008, and are likely to grow. Table 11.7 and
Figure 11.3 illustrate the trend growth in CO2 emissions in India. A large share
of these emissions is produced by the electricity and heat sector, which
represented 56 per cent of CO2 emissions of 2008. The corresponding figure for
the transport sector was only 9 per cent. The share of fossil fuels in electricity
generation was 83 per cent in 2008, with 69 per cent coming from coal-fired
power plants, 10 per cent from natural gas and 4 per cent from oil (IEA 2010).
The predominance of coal in the generation of energy in India is because of
abundant coal reserves and it being the lowest-cost fuel source for electricity
generation. Although India has vast domestic coal reserves, the quality of
domestic coal is low—with a low heating value and a higher ash content. Higher
quality coal can be made available in India either through import or by washing
the domestic coal and reducing its ash content (Khanna and Zilberman 1999).
Page 10 of 33
Table 11.6 Relative Per Capita GHG Emissions (metric ton of CO2 equivalent per person)
1990 1995 2000 2005
Qatar 38.30(2) 44.50(1) 56.80(1) 68.90(1)
UAE 41.10(1) 42.30(2) 39.40(2) 39.00(2)
Australia 23.600(9) 23.70(7) 26.30(6) 27.30(7)
USA 23.9(8) 23.50(8) 24.20(8) 23.40(9)
Russia 19.8(12) 14.1(20) 13.0(20) 13.7(21)
Germany 15.0(22) 13.3(23) 12.2(24) 11.9(28)
EU 11.4(39) 10.5(36) 10.2(41) 10.3(43)
China 3.2(102) 3.90(95) 3.8(101) 5.50(85)
India 1.3(154) 1.4(152) 1.6(153) 1.7(149)

Source: Data sourced from Climate Analysis Indicator’s Tool.
Note: * The figures in brackets denote the rank of the respective country.
Page 11 of 33
(p.449)
Table 11.7 Total Carbon Dioxide Emissions for India (Million

Metric Tons)
Year CO2 Emissions
1980 291.20
1985 447.38
1990 578.62
1995 879.55
2000 990.98
2005 1181.40
2006 1280.60
2007 1366.01
2008 1449.00
2009 1642.93
2010 1714.91
2011 1752.68
2012 1830.94
Source: Energy Information Administration: International Energy
Statistics, available at http://www.eia.gov/cfapps/ipdbproject/
iedindex3.cfm?
tid=90&pid=44&aid=8&cid=IN,&syid=1980&eyid=2012&unit=MMTCD,
last accessed in April 2015.
(p.450) The Indian economy

has experienced strong growth
during the last few years. It has
become a major energy
consumer at the global level. In
2008, it ranked fourth in terms
of total primary energy supply
with 621 million ton of oil
equivalent (Mtoe), behind the
US (2,326 Mtoe), China (2,130
Mtoe), and Russia (687 Mtoe).
There are, however, large
disparities in energy Figure 11.3 Trend in Co2 Emissions from
consumption in India with a India
significant under provision of energy to a large population—about 44 per cent of
Page 12 of 33
the population is without access Source: Based on the data in Table 11.7.
to electricity (Government of
India [GoI] 2008). Over 70 per
cent of the energy requirement of households (mainly for cooking) is satisfied by
firewood and dung cake. In per capita terms, energy consumption is India is
among the lowest globally. As compared to the world average of 72 million
British thermal units (MMBtu) of primary energy consumed per capita/year,
India consumes only 16 MMBtu. The corresponding figures for the US and China
are 335 MMBtu and 56 MMBtu, respectively. While formulating its policies India
should take into account that any policy that increases price of energy (without
financial compensation) would make it inaccessible to a yet larger population.
The Kyoto Protocol

The Kyoto Protocol of the UNFCCC, adopted in 1997 at the third Conference of
the Parties (COP 3) in Kyoto, Japan, is by far the most comprehensive
multinational effort to mitigate climate change. It placed equity and
development at the centre of the climate change negotiations and has
UNFCCC’s principle of ‘common but differentiated responsibilities and
respective capabilities’ embedded in it. Accordingly, those who had drawn more
than their fair share of the global commons were required to compensate those
who had suffered for this. For the first time, the Protocol laid down
internationally binding emission reduction targets for the industrialized
countries, including a specific time frame to reach these targets. It requires
Annex I countries to reduce their overall GHG emissions, mainly CO2, by 5.2 per
cent below 1990 levels, over a five-year period from 2008–12.
As a means to lower the overall cost of achieving the emission reduction target,
the KP adopted three market mechanisms that provide flexibility to the
industrialized countries to meet their targets by (p.451) purchasing emission
reductions from other countries. These mechanisms are:
1. Joint implementation
2. International Emission Trading
3. Clean Development Mechanism
Joint implementation (JI) refers to the process that enables countries with
specific emission reduction targets under the protocol (that is, the industrialized
or Annex I countries) to obtain credit for implementing GHG abatement projects
in other Annex I countries. Clean development mechanism (CDM) is broadly
similar but pertains to GHG abatement projects implemented by industrialized
countries in non-Annex I (or developing) countries. Emission trading refers to
the trade of emission reduction units within Annex I parties. While both JI and
CDM are project-based mechanisms, Emission Trading is not necessarily so.9
The economic rationale of these mechanisms is to exploit the differentials in
marginal costs of climate change mitigation between countries. A significant
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achievement of these mechanisms was making carbon a tradable commodity by

creating markets for emissions at regional or global scale.
The non-Annex I parties do not have emission reduction targets under the
protocol. They figure in the protocol through hosting CDM projects. The projects
under CDM would obtain certified emission reductions (CERs), which can then
be sold to Annex I buyers who can use them to meet a part of their emission
reduction commitments. One essential requirement of earning the qualified CER
is that GHG emission reductions through the project must be ‘additional’, that is,
the project emissions must be below hypothetical baseline emissions or in other
words, should be additional to what would have happened in the absence of the
project.
India acceded to the KP in 2002. Since India has no binding targets to reduce
GHGs under the protocol, it provided opportunities for gains without having to
share the burden of GHG reduction. Babiker et al. (2000) and Chander (2003)
argue that a decrease in fossil fuel demand by industrialized countries triggered
by CO2 cuts under the protocol would lead to a reduction in world energy prices
and benefit major energy-importing countries such as India. Lower energy
prices would facilitate faster economic growth. In addition to lowering of (p.
452) energy prices, developing countries would earn revenue through projects
under CDMs.
There are many difficulties in implementing CDM projects and the associated
transaction costs are high. The project has to be approved by the Executive
Board and the approval procedure is cumbersome. Small firms would find it
difficult to obtain these approvals and be left out of the process. Secondly,
investors from Annex I countries would be interested in CDM only if reducing
emissions under the CDM was cheaper than any other available option under JI,
emission trading, or domestic action. Another problem with CDM mechanism is
related to the ‘baseline’. Since baseline depends on existing government policies
that could affect GHG emissions, this could lead to perverse incentives. Further,
the incentive to participate in the emission trading programmes is determined
by the price that carbon credits would fetch. The price of carbon credits
exchanged on the European Union (EU) emission trading scheme (EU-ETS)
evolved at around 20 euro per ton of CO2 equivalent in 2005 with a peak at
nearly 30 euro, before an abrupt fall in 2006 followed by a gradual descent to
nearly zero in 2007 (Nussbaumer 2007).
Although KP is an important and first step towards global effort at mitigating

GHG emissions, it has limitations. Climate change is a long-term problem and
the Protocol aims at short-term targets. These targets are far too low and
inadequate to limit GHG concentration in the atmosphere to 450–550 ppm which
is needed in order to stabilize climate. Further the KP does not have sufficient
incentives for countries to comply. Finally, by adopting different mechanisms for
Page 14 of 33
trading within Annex I countries, and Annex I and non-Annex I countries, it does
not aim at providing a world-wide common price for carbon.
The first commitment period of the KP comes to an end in 2012. Excluding

Soviet Union and Eastern Europe, overall emissions of industrialized countries
increased substantially since 1990. Over the period 1990–2008, total aggregate
GHG emissions for Annex I Parties decreased by 6.1 per cent. This, however, was
due to collective economic meltdown of former Soviet bloc countries in 1990s
leading to huge decreases in GHG emissions of the order of 36 per cent. For
Annex I non-EIT Parties, GHG emissions increased by 7.9 per cent (UNFCCC
2010). Emissions in developing countries also increased substantially. Overall,
technologies and policies implemented since (p.453) 1990 are unlikely to be
adequate to meet the needed future decrease in world GHG emissions.
India’s Vulnerability to Climate Change

Climate change can manifest itself through gradual shifts in temperature,
precipitation, and a rise in sea level, resulting in changes in the frequency,
intensity, and duration of extreme events. It will affect different regions and
sectors differently based on their sensitivity and adaptive capacity, and therefore
their vulnerability to these changes.
Rough projections from the third assessment report of the IPCC indicate that the
region of southern Asia could experience temperature increase of the order of 5
degrees centigrade by 2080 (IPCC TAR WGII 2001). This could result in serious
impacts on agriculture, forest resources, and coastal resources. Other
consequences could be an increased incidence of heat-related health stress and
vector borne diseases such as malaria, as well as changes in water availability
that put pressure on urban settlements.
The agricultural sector in India is reliant on seasonal rains and river-based

irrigation. A number of studies have analysed effect of climate change on Indian
agriculture. The studies have shown that in general, the mean monsoon intensity
and variability is expected to increase (Ashrit et al. 2001; Kumar et al. 2006).
Studies by Kumar and Parikh (1998, 2001), have shown that climate change
would have significant impact on Indian agriculture. They have estimated that
with a temperature rise of 2.5°C to 4.9°C, losses for rice and wheat may vary
between 32 per cent and 40 per cent and 41 per cent and 52 per cent,
respectively, and the GDP would drop by between 1.8 per cent and 3.4 per cent.
They have estimated that with a temperature change of 2°C and an
accompanying precipitation change of 7 per cent, farm level total net revenue
would fall by 9 per cent. Aggarwal (2009) estimates that 1°C increase in
temperature may reduce yields of wheat, soyabean, mustard, groundnut, and
potato by 3 to 7 per cent. Sanghi et al. (1998) attempt to incorporate adaptation
options while estimating agricultural impacts. They calculate that a 2°C rise in
mean temperature and a 7 per cent increase in mean precipitation would reduce
Page 15 of 33
net revenues by 12.3 per cent for the country as a whole. The reduction in
principal cereal crops would affect food security of India.
(p.454) India has more than 6,500 km of coastline. The regions adjacent to the
coastline have fertile soil and are densely populated. A rise in sea level would
cause flooding of the low lying areas and would result in salinization of the soil
and fresh water resources. There could be increase in extreme events such as
cyclones. The overall effect would be devastating for the coastal regions. Roy et
al. (2006) estimate that even a 100 cm rise in sea level can lead to coastal
welfare loss of US$ 1,259 million. There would be further loss on account of
migration, strain on infrastructure, and ecological damage.
In addition to impact on agriculture and coastal areas, India’s water resources

and forest resources would also get affected by climate change. Although there
are still ambiguities and uncertainties in vulnerability studies, it is evident that
for India the economic costs of climate change are tremendous. According to
Mendelsohn et al. (2006), India is more vulnerable to climate change than many
other countries.
The impact of climate change would be different for different sections of the
society. Most of India’s poor are directly dependent on climate-sensitive
resources such as agriculture, forests, and river water. Due to their dependence
on natural resources and lack of means to protect themselves from
environmental shifts, the poor are the most vulnerable to the effects of climate
change and are likely to face forced migration, malnutrition, water scarcity,
ecological threats, and loss of livelihoods.
India’s Stand in International Negotiations

The target of limiting GHG concentration in the atmosphere to 450–550 ppm in
order to restrict increase in global temperature to 2°C provides a global cap on
emissions. The issue then arises as to how emission permits may be allocated
across countries. One extreme is to allocate permits on a status quo basis, that
is, either in proportion to current emissions or emissions in some base year, say,
1990. This alternative would allocate very large permits to the industrialized
countries and would be regarded as blatantly unfair by developing countries and
would never be accepted by them. The other extreme is to allocate permits on
the basis of population or in inverse proportion to per capita income, which
would allocate all permits to developing countries. Since the industrialized
countries would then have to buy permits for all their emissions from developing
countries, (p.455) this would imply a large transfer from industrialized
countries to developing countries, well in excess of what the latter would need to
compensate them for the costs imposed on them for their mitigation effort. Such
a basis would be resisted by the developed countries. The agreeable allocation of
permits would lie between these two extremes and would depend on notions of
fairness and bargaining strength of countries. Fairness demands that developing
Page 16 of 33
countries are allowed to increase energy use to achieve economic development.

The bargaining strength in turn would depend on vulnerability of a country to
climate change and the rate at which it discounts future. The less vulnerable a
country, the stronger would be its bargaining position, since it would relatively
lose little if the deal does not take place. Similarly, the larger the rate at which a
country discounts its future, the stronger would be its bargaining position as the
country cares more for the economic development of the present generation as
compared to uncertain impact of climate change on future generations.
In international climate negotiations, India has taken a position that it needs to

protect its growth and has emphasized equity and fairness as a criterion for
sharing the burden of GHG mitigation effort. It has been unwilling to join a
treaty and has refused to take on internationally agreed binding targets. India
has pushed for an emphasis on equal per capita emissions, that is, an allocation
in which emission permits are distributed to nations on the basis of population.
Inherent in such an allocation is the idea of an equal human right to the use the
global commons. As shown in Table 11.6, India’s per capita emission rates are
one of the lowest globally. An allocation based on equal per capita rule would
give India permits in excess of its actual emissions in the business as usual
scenario and trading of emission permits would lead to windfall gains for India.
The value of gains, however, would depend on the price of permits in the global
market.
The GoI has also made a commitment that it will not allow the country’s per
capita emissions to rise above per capita emissions in the advanced countries
(GoI 2008). This commitment, however, does not translate into a precise action
or a target because there is a great degree of uncertainty as to what would be
the per capita emissions of advanced countries from, say 40 years from now.
More recently, following China, India has announced that it is set to reduce the
emission intensity of its GDP by 20 per cent between 2005 and 2020.10 Emission
intensity refers to the level of GHG emissions (p.456) per unit of economic
activity, usually measured at the national level of GDP. A target in emission
intensity terms tends to reduce the uncertainty of costs incurred in meeting the
commitment.
The following equations will be helpful in understanding the effect of India’s

strategy in climate change negotiations on its welfare. The net welfare of the
economy can be measured as per capita GDP less damage from local pollution
less present discounted value of expected impact of climate change.
(1)
Page 17 of 33
CO2 emissions can be decomposed as:
(2)
The first term on the right hand side in equation 1 is per capita GDP and the
second term is emission intensity. Observe that a reduction in the growth of CO2
emissions does not necessarily translate in a lower growth of GDP per capita as
there could be reduction in the other two components, namely, rate of growth of
population or emission intensity. Emission intensity is in turn determined by
energy intensity (energy consumed per unit of GDP) and emissions per unit of
energy.
(3)
The first term on the right hand side reflects both a country’s level of energy
efficiency and its overall economic structure, that is, which of the sectors play a
dominant role in the economy and also sectoral composition of output. The
second term reflects the fuel mix used for generating energy. In fuels, coal has
the highest carbon content, followed by oil and then natural gas.
Whether an aggressive and early mitigation of the global GHGs is desirable from
India’s perspective depends on the relative size of loss in GDP from emission
reduction targets and potential impact of climate change on Indian economy. If
the latter is larger, it will be (p.457) in India’s interest that an international
agreement on climate change takes place.
Many studies have attempted to assess economic implications of GHG reduction

targets on the Indian economy. The studies are based on model simulations for
various possible scenarios. Different scenarios have been generated
corresponding to four broad policy alternatives that may be adopted to achieve
carbon reduction commitments—(a), emissions reductions without any
compensation, (b) with compensation, (c) trading of emission permits, and (d)
imposing carbon taxes.
Murthy et al. (2007) examine the impact of CO2 emissions constraints on GDP,
and the implications for the poor by using a multi-sector, inter-temporal model in
the activity analysis. They simulate the effects for three levels of cumulative
reduction in carbon emissions, namely, 10 per cent, 20 per cent, and 30 per cent,
from the business as usual scenario over a period of 35 years—from 1990 to
2025. They show that in the absence of any compensation, CO2 emission
reduction imposes costs on the economy in terms of lower GDP and higher
poverty. GDP falls by 0.53 per cent, 1.36 per cent, and 4.06 per cent, and the
number of poor increases by 2.1 per cent, 5.9 per cent, and 17.5 per cent in the
Page 18 of 33
30th year for 10 per cent, 20 per cent, and 30 per cent cumulative carbon
emission restrictions, respectively. To maintain the welfare levels large capital
inflows are required as compensation. According to the paper (Murthy et al.
2007), India needs US$ 87 billion of capital inflows as compensation to reduce
its carbon emissions by 30 per cent cumulatively over the 35-year period. Model
simulations, however, show significant welfare gains for India under the tradable
quota (for carbon emissions) system. India stands to gain both in terms of GDP
and poverty reduction if the emission permits are allocated on the basis of equal
per capita emission rights.
Using a computable general equilibrium (CGE) model, Ojha (2009) analyses the
impact of domestic carbon tax and participation in an internationally tradable
emission permits regime on carbon emissions, GDP, and poverty in the Indian
economy. It finds that the adoption of a carbon tax to restrict the carbon
emissions in the Indian economy to the 1990 level imposes heavy costs through
a fall in GDP and a rise in poverty. India, however, gains immensely in terms of
higher GDP growth and lower poverty in the scenario with internationally
tradable emission permits under an equal per (p.458) capita emissions
allocation scheme. Further, carbon taxes, along with targeted transfers to the
poor, and very modest emission reductions may not be detrimental to economic
growth and poverty alleviation.
Goldar and Pratap (2013) develop scenarios in which India and China cut CO2
emissions by a specified percentage and there exists international trading in
carbon. They use GTAP-E (modified version of Global Trade Analysis Project)
model for simulations. Assuming that both China and India accept the obligation
of cutting CO2 emissions between 5 and 15 per cent and there is international
carbon trading, the results of Goldar and Pratap’s study indicate that there is an
increase in welfare for India by about 0.2 to 0.3 per cent. Interestingly, they find
that China and India would be cutting emissions by an extent far larger than the
level imposed on them. If these two countries are required to cut only 5 per cent
of their emissions, they would actually cut emissions by about 20 per cent or
more if profitable carbon trade possibilities exist.
The key question for India is whether it can make a proposal that is likely to be
accepted by other countries and which does not entail compromising on its
economic growth.
To slow down rate of growth of CO2 emissions from India while protecting its per
capita growth, India should explore possibilities of reducing rate of growth of
other components, as given in equation 2. India is experiencing a slowing down
in the rate of growth of population. As for emission intensities, historically, they
fell between 1990 and 2002 for most countries. The most striking decline was in
China, where intensity dropped by 51 per cent over the 12 year period. India has
also reduced the CO2 emissions per unit of GDP by 21 per cent between 1990
Page 19 of 33
and 2008 (see Table 11.8). India aims to further reduce emissions intensity of
GDP by 20–25 per cent by 2020 as compared to
Page 20 of 33
Table 11.8 Trend in Energy Intensity for India (CO2 Emissions/GDP using Purchasing Power Parities) (Kg CO2 per 2005
US$ values)
1980 1985 1990 1995 2000 2005 2006 2007 2008 Change
(1980–
2008)
CO2 0.36 0.40 0.42 0.43 0.41 0.34 0.34 0.33 0.33 20.9%
Emissions
Source: CO2 emissions from fuel combustion, IEA statistics, 2010 edition.
Page 21 of 33
(p.459) the 2005 levels. Carbon dioxide emissions per unit of energy, however, have
been rising in India. It can be seen from Table 11.9 that they were nearly half the world
average in 1980 and have been continuously rising since then, reaching nearly the
world levels by 2008. The overall increase in CO2 emissions per unit of energy between
1990 and 2008 is 24 per cent. The falling trend in emission intensity and a rising trend
in carbon dioxide emissions per unit of energy imply that there must be a much
sharper falling trend in energy use per unit of GDP. It will be very interesting to
examine the cause of this rising efficiency in energy use over the years especially since
industrial share has remained similar over the period. Possible explanations could be
shift in composition of industries towards less energy-intensive products and
technological advancement towards lower energy consumed in the production process.
Subramanian et al. (2009) disaggregate total CO2 emissions into emissions from
consumption activity and emissions from production activity. They find that
compared to the US and some of the European countries, India is highly
inefficient in terms of production efficiency (which is measured as the CO2
emissions generated in production as a share of GDP). India is about 41.5 times
more inefficient than the US in terms of production efficiency. The inefficiency,
however, is less pronounced on consumption side. For every unit of consumption,
India generates about 2–3 times more CO2 emissions than do the industrial
countries. India can strive to get closer to the frontiers in terms of GHG-
efficiency in production and could seek financial and technological resources for
the same. In the process it could reap ancillary benefits in terms of improving
overall economic efficiency.
Khanna and Zilberman (1999) examine domestic policy distortions that affect
incentives to adopt energy efficient technologies focusing
Page 22 of 33
Table 11.9 CO2 Emissions/Total Primary Energy Supply (Tons CO2/Terajoule)
1980 1985 1990 1995 2000 2005 2006 2007 2008 Change
(1990–
2008)
World Avg. 59.7 57.4 57.1 56.3 56 56.7 57.1 57.4 57.2 0.3%
India 33.7 39.0 44.3 48.5 51 51.6 53 53.7 54.9 24.1%

Source: CO2 emissions from fuel combustion, IEA statistics, 2010 edition.
Page 23 of 33
(p.460) on the coal-based electricity sector in India. They find that domestic policy
reforms have potential to reduce emissions and increase welfare. Their paper
demonstrates that removal of existing trade and domestic policy distortions namely,
removal of the electricity subsidy, free trade in coal, and marginal cost pricing, provide
incentives for adoption of the energy efficiency-enhancing coal quality and reduces
carbon emissions by 6.6 per cent while increasing domestic welfare by 8.6 per cent.
This reduction in emissions is achieved by lowering the emissions per kilowatt hour of
electricity generated which allows carbon emissions to be controlled while the level of
electricity generated increases by 6 per cent.
Sengupta and Gupta (2003) examine the role of economic reform policies
introduced in India in 1991 on the efficiency of energy use and energy supply.
They conclude that India’s economic reforms programme at the macro-level and
in the energy sector have not yet been able to make any significant impact on
the energy efficiency of the Indian economy.
Coming to the second term in equation 1, burning of fossil fuels not only
produces GHGs but also local pollutants such as particulates, which are harmful
for health, making Indian cities highly polluted. India can use its policies
towards reducing GHG emissions to improve local air quality. According to
Bussolo and O’Connor (2001), a climate policy that focuses on reducing fossil
burning and curtailing emissions from this source can yield important ancillary
benefits in terms of better local environmental quality and improved health of
the population. Using a computable general equilibrium model, they estimate
the magnitude of spillovers from limiting growth of GHG emissions to local air
quality and the health of the urban population in India. The most important
spillovers are reductions in emissions of particulates with associated declines in
mortality and morbidity. Defining benefits in terms of reduced mortality and
morbidity due to reduced particulate concentrations, these are estimated at 334
lives saved per million tons of carbon abated (or, in monetary terms, US$ 58 per
ton of carbon emissions reduced). The results of the analysis suggest that the
size of the synergies between slowing GHG emission growth and improving local
environmental quality is not negligible and policymakers, therefore, should take
into account these health benefits in deciding the level of GHG abatement effort.
(p.461) In global negotiations to mitigate GHGs, two market-based

mechanisms are under consideration—a globally harmonized carbon tax and a
global cap and trade (CAT) system of emission permits. The US is pushing for
the former and the latter was the instrument in KP and is being used by the EU.
It has been theoretically established that under certain ‘ideal’ conditions, like
complete information the two instruments are equally efficient. If global
emission targets are set at a level at which the marginal cost of abating
emissions is equal to the marginal benefit from abating these emissions, the
carbon price determined under CAT is the same as the level of carbon tax that
equalizes marginal benefit of reducing emissions to their marginal cost. Both
instruments provide incentives to achieve reduction of emissions at the least
Page 24 of 33
cost to the society. The efficiency property, however, differs under uncertainty.
While the quantity instrument is preferred if there is uncertainty about the
benefits of emission reduction, the price instrument is better if costs of
reduction are uncertain (Weitzman 1974). Joshi and Patel (2009) argue that the
crucial difference between the two instruments is on grounds of equity. Initial
allocation of permits (free of cost) can address both equity and efficiency
concerns. The required financial transfers would take place automatically
through the working of the carbon markets. With a carbon tax, in addition to
agreeing on a uniform international tax, there would be a need for
intergovernmental transfer of funds, which would be politically difficult. From
this perspective, India’s interests would be much better served by CAT than a
carbon tax. Jacoby et al. (2008) compare the welfare effects of different permit-
allocation schemes and the implied financial transfers from advanced countries
to developing countries, given a global target of reducing emissions to 50 per
cent of the 2000 baseline by 2050.
The above analysis suggests that in the international negotiations, India could
consider committing to making serious effort at reducing rate of growth of CO2
emissions through focusing on using energy more efficiently and reducing
emissions per unit of energy. In return, it could seek technological and financial
support for the same. Also it should push for global trade in emission permits.
The policy measures at the domestic level include: removing distortions in
energy pricing, providing incentives for adoption of more energy efficient
technologies, and switching to cleaner fuels and sources of energy. To reduce
(p.462) emissions from coal-fired plants, it could either resort to importing
better quality coal or seek transfer of less carbon-intensive technologies from
the developed countries. Carbon capture and storage is one such technology
that reduces CO2 emissions from coal. Presently the technology is very
expensive and India will find it difficult to use without substantial financial
support.
In the next section, we discuss policy measures that India has taken voluntarily
at the domestic level to address climate change problems with a special focus on
the GoI’s Perform, Achieve, and Trade (PAT) scheme.
GHG-Reduction Measures Undertaken by India

India has set up a National Action Plan on Climate Change (NAPCC) that will
have eight national missions to look into different areas of sustainability and
energy efficiency. NAPCC stresses qualitative shifts in growth pathways by
modifying activities that generate emissions of carbon. It also includes
adaptation measures to the adverse effects of climate change.
National Mission on Enhanced Energy Efficiency (NMEEE), one of the eight

missions under NAPCC, has thrust on energy efficiency. To enhance energy
efficiency in the existing plants in energy-intensive industries, it is designing a
Page 25 of 33
scheme, PAT. The central government would notify energy-intensive industries as

designated consumers (DCs). The Ministry of Power has notified 563 DCs in
eight industrial sectors—thermal power plants, fertilizer, cement, pulp and
paper, textiles, chlor-alkali, iron and steel, and aluminium. A specific energy
consumption (SEC) target would be set for each plant in DCs, depending on the
level of energy intensity (energy use/output) of that plant. Each plant will be
required to reduce its energy intensity by the target percentage over a three-
year period from 2011–14. At the end of the three-year period, those units that
exceed their target will be credited tradable energy permits. Those plants who
fail to achieve their targets will have to buy permits or pay penalties for non-
compliance, which is Rs 10 lakh.
The scheme targets to achieve an overall reduction in energy use of the order of
10 million metric tons of oil equivalent (MMtoe). The overall target reduction
would be apportioned amongst the sectors in (p.463) proportion to their
relative energy use to ensure that the sector-wise reduction is proportionately
equal. Within each sector, the ratio of reduction required from each plant would
also be proportionate to the existing percentage of energy consumption. While
all DCs would be required to reduce their SEC, the less energy-efficient DCs in a
sector would be required to achieve a greater reduction in their SEC than the
more energy-efficient DCs in the same sector. It is proposed that the value of
each Euro Standard Certification (ESCert) would be based on the crude oil
price.
The PAT scheme is an innovative step that uses market mechanism for achieving
reduction in CO2 emissions through providing incentives for efficient use of
energy. Environmental regulation in India thus far has used command and
control instruments—use of market mechanisms under PAT is a step in the right
direction. The scheme is also consistent with the sectoral approach discussed in
international negotiations that entails voluntary acceptance of some emission
reduction targets for specific sectors. Improvements in end-use energy efficiency
would have benefits both for economic growth and for the environment. The
scheme would develop a market for energy permits. Since energy is a costly
input, firms on their own have an incentive to economize on its use within the
existing technologies. PAT scheme strengthens these incentives and promotes
adoption of better and more energy-efficient technologies and inputs. These
incentives would crucially depend on the expected price of energy permits. For
achieving efficiency in meeting the target, these prices should be determined
through trade in permits. The scheme, however, plans to value these permits on
the basis of crude oil prices. The scheme should carefully look into the basis for
distributing permits, and should not generate perverse incentives where firms
already using energy efficiently are penalized by giving a yet stricter standard.
Page 26 of 33
Bureau of Energy Efficiency, set up in 2002, is also promoting use of energy-

efficient appliances through innovative measures such as setting standards and
deploying various labelling schemes for electrical appliances.
India is also promoting renewable energy sources into its generation mix. Under
NAPCC, India plans to install plants for generating 20 GW of solar energy by
2020. India has an installed capacity of 12 GW of wind energy.
(p.464) Policy Recommendations for India

Given the scientific evidence of the link between anthropogenic GHGs and
climate change, there is a growing awareness about the problem and a
consensus at the global level that an aggressive and an early mitigation of GHGs
is desirable. The contentious issue, however, is how to share the associated cost
burden. The great divide is between the developed and developing countries.
While the historical responsibility of GHG emissions rests with the former, the
responsibility is slowly shifting towards developing (and emerging) countries in
recent years that are experiencing rapid economic growth.
The KP laid down binding emission targets for the industrialized countries and
did not have any reduction targets for the developing countries. The first
commitment period got over in 2012. The global emissions of CO2 have already
increased by 40 per cent over the 1990 levels. The three largest emitters of CO2
in the year 2010 are China, US, and India. An international agreement on
mitigation of GHGs in the post-KP period is unlikely to be effective without
active participation from these three countries. The US has been insisting that
irrespective of historical emissions, all major current emitters should be
required to take on some commitments, and has particularly singled out lack of
commitments from China and India as the reason for its failure to ratify the KP.
Although the developing countries are under increasing pressure to participate
actively in GHG mitigation effort, we would like to emphasize that in the
absolute as well as per capita terms, emissions from India are still much lower
than that of China, and therefore, it is misleading to club China and India
together. The two countries should assume very different responsibilities in the
mitigation effort.
The actual cost sharing would depend on some fairness criterion and bargaining
strengths of the negotiating countries. Fairness demands that the developing
countries are allowed to achieve economic development and an associated
increase in energy consumption. At the same time vulnerability of a country to
climate change reduces its bargaining strength in international negotiations.
Until now India has shied away from accepting a legally binding commitment on
reducing GHG emissions but it may have to re-think its stand in the face of
changing situation. Its relative position has changed from eighth largest emitter
of CO2 in 1990 to third largest in (p.465) 2009. The first question India needs
to ask itself is how serious it is in seeing that an agreement takes place. If it is
Page 27 of 33
serious for the agreement to take place, then instead of insisting on a criterion
that is unlikely to be accepted in the global negotiations, it should propose
something that is more likely to be accepted. Given increasing evidence of
India’s vulnerability to the impact of climate change, it should consider helping
to achieve a global climate mitigation agreement and seek a favourable deal in
the process.
In this chapter, we have argued that India’s commitment in GHG mitigation

effort does not have to be at the cost of its economic development. It needs to
explore policy options that enable it to meet both objectives. The possible
options include improving energy efficiency and reducing emissions per unit of
energy consumed. The former can be achieved by incentivizing firms to deploy
advanced, energy-efficient technologies and trying to reach world efficiency
levels in production. The latter can be achieved by switching fuel mix, expanding
share of renewable energy, and reducing emissions from coal-fired power plants
by either using superior quality coal or deploying carbon capture and storage
technologies. In return for its efforts it could seek financial and technology
support from the developed countries. In the process it would reap co-benefits in
terms of improved overall economic efficiency and reduced local pollution. The
challenge before India is to work out precise terms for its participation. Rai and
Victor (2009) argue that the costs of engagement in mitigation of GHG emissions
at the margins are not as high as many think and that the apparent dichotomy
between economic growth and de-carbonization of energy sources is not nearly
as serious. They have identified power sector reforms, efficiency of coal-based
power generation, and large-scale distribution of efficient cook-stoves (for
biomass burning) as three major policy options that will help India reduce
emissions without adversely affecting its economic growth.
Another important point is that India should ensure that climate-related

redistribution from developed countries to developing countries actually reaches
and benefits poor people in India. Since 44 per cent of the population in India is
without access to electricity, India should take care that GHG-mitigation policies
adopted at the domestic level do not adversely affect access of energy to the
poor. Further the poor are likely to be more affected from the impact of climate
change, therefore, there is a need for adaptation measures to protect (p.466)
them. Majority of Indians still have an eco-friendly lifestyle and follow practices
that entail low-energy use. These should be recognized and financially rewarded.
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Chander, Parkash. 2003. ‘The Kyoto Protocol and Developing Countries: Strategy
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the Fourth Assessment Report of the IPCC, Technical Summary and Chapter 10.
———. 2007b. ‘Mitigation’, in B. Metz, O.R. Davidson, P.R. Bosch, R. Dave, and
L.A. Meyer (eds), Working Group III contribution to the Fourth Assessment
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Jacoby, Henry D., M.H. Babiker, S. Paltsev, and J.M. Reilly. 2008. ‘Sharing the
Burden of GHG Reductions’, The Harvard Project on International Climate
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Agreements, Cambridge, Massachusetts, October, p. 124.
(p.468) Joshi, V. and U.R. Patel. 2009. ‘India and Climate Change Mitigation’, in
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pp. 167–96. Oxford: Oxford University Press.
Khanna, M. and D. Zilberman. 1999. ‘Freer Markets and the Abatement of

Carbon Emissions: The Electricity-generating Sector in India’, Resource and
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Kumar, K.K., B. Rajagopalan, Martin Hoerling, Gary Bates, and Mark Cane.
2006. ‘Unravelling the Mystery of Indian Monsoon Failures during El Nino’,
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The Ricardian Approach’, in A. Dinar, R. Mendelsohn, R. Evenson, J. Parikh, A.
Sanghi, K.K. Kumar, J. McKinsey, and S. Lonergan (eds), ‘Measuring the Impact
of Climate Change on Indian Agriculture’, World Bank Technical Paper No. 402,
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———. 2001. ‘Indian Agriculture and Climate Sensitivity’, Global Environmental

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McCarthy, J.J. (ed.). 2001. ‘Climate Change 2001: Impacts, Adaptation, and
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Climate Change on Rich and Poor Countries’, Environment and Development
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The Adaptive Response to Climate Change, Global Summit on Sustainable
Development and Climate Change, Conference organized by the Observer
Research Foundation and The Rose-Luxemburg Stiftung, 24 September.
Rai, V. and D.G. Victor. 2009. ‘Climate Change and the Energy Challenge: A
Pragmatic Approach for India’, Economic and Political Weekly, 44(31): 78–85.
Roy, Joyashree, Anupa Ghosh, and Gopa Baruah. 2006. The Economics of Climate
Change: A Review of Studies in the Context of South Asia with a Special Focus
on India, Report Submitted to The Stern Review on the Economics of Climate
Change. Available at http://www.hm-treasury.gov.uk./media/5/0/roy.pdf, last
Sanghi, A., R. Mendelsohn, and A. Dinar. 1998. ‘The Climate Sensitivity of Indian
Agriculture’ in A. Dinar, R. Mendelsohn, R. Evenson, J. Parikh, A. Sanghi, K.K.
Kumar, J. McKinsey, and S. Lonergan (eds), ‘Measuring the Impact of (p.469)
Climate Change on Indian Agriculture’, World Bank Technical Paper No. 402,
Washington, DC.
Sengupta, R.P. and M. Gupta. 2003. ‘Developmental Sustainability Implications

of the Economic Reforms in the Energy Sector of India’, in M.A. Toman, U.
Chakravorty, and S. Gupta (eds), India and Global Climate Change: Perspectives
on Economics and Policy from a Developing Country, pp. 36–71. Washington,
DC: Resources for the Future Press.
Sharma, S., S. Bhattacharya, and A. Garg. 2006. ‘Greenhouse Gas Emissions

from India: A Perspective’, Current Science, 90(3): 326–33.
Subramanian, A., N. Birdsall, and A. Mattoo. 2009. ‘India and Climate Change:
Some International Dimensions’, Economic and Political Weekly, 44(31): 43–50.
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‘National Greenhouse Gas Inventory Data for the Period 1990–2008’, Report
distributed on 4 November.
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Combustion Highlights’, EIA Statistics 2010 edition. Available at www.iea.org/
CO2highlights/pdf, last accessed in May 2013.
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Weitzman, M.L. 1974. ‘Prices vs Quantities’, The Review of Economic Studies,

41(4): 477–91.
World Resources Institute. 2007. Climate Analysis Indicator’s Tool Website, CAIT
version 8.0. Available at http://cait.wri.org/, last accessed in May 2013.
———. 2014. ‘Climate Analysis Indicators Tool: WRI’s Climate Data Explorer’,
Climate Analysis Indicators Tool (CAIT) 2.0. Washington, DC: World Resources
Institute. Available at http://cait2.wri.org, last accessed in June 2014.
Notes:
(1.) The earth receives energy from the sun. A part of this energy is absorbed by
the earth and some part of the absorbed energy is radiated back in the
atmosphere in the form of infrared radiation. The greenhouse effect is a process
by which infrared radiation from the earth’s surface is trapped by the GHGs
present in the atmosphere raising the temperature.
(2.) The Annex I countries, or the Annex I Parties to the 1992 UN Framework
Convention on Climate Change (UNFCCC) are: Australia, Austria, Belarus,
Belgium, Bulgaria, Canada, Croatia, Czech Republic, Denmark, Estonia,
European Economic Community, Finland, France, Germany, Greece, Hungary,
Iceland, Ireland, Italy, Japan, Latvia, Lichtenstein, Lithuania, Luxembourg,
Monaco, the Netherlands, New Zealand, Norway, Poland, Portugal, Romania,
Russia, the Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey,
Ukraine, the United Kingdom, and the United States.
(3.) ‘Non-Annex I countries’ refers to developing countries.
(4.) ‘Annex I EIT countries’ refers to economies in transition and includes

Belarus, Bulgaria, Croatia, Czech Republic, the Slovak Republic, Estonia,
Hungary, Latvia, Lithuania, Poland, Romania, Russia, Slovenia, and Ukraine.
(5.) Annex II includes those countries in Annex I that are not part of Annex I EIT.
(6.) By assigning a Global Warming Potential (GWP) value to a GHG, scientists

and policymakers compare the potency of each gas to trap heat in the
atmosphere relative to other gases. The heat trapping potential of other GHGs
are measured and compared with CO2. The GWP of CO2 is taken as one and
accordingly CH4 has a GWP of 21 and N2O has a GWP of 310. The duration of
stay in the atmosphere is 100 years, 12 years, and 114 years for CO2, CH4, and
N2O, respectively.
(7.) 1 gigaton = 109 ton, 1 million ton = 106 ton, 1 kiloton = 103 ton.
(8.) This figure includes land use change and forestry. The gross emissions in
2007 excluding LULUCF activities were 1904.73 million tons.
Page 32 of 33
(9.) The KP also has another mechanism called ‘Bubbles’, which refers to a
group of countries wanting to jointly comply with the commitments, with trading
confined to countries inside the bubble, such as the European Union.
(10.) China announced its goal of reducing the intensity of CO2 emissions per
unit of GDP in 2020 by 40 to 45 per cent compared with the level in 2005.
Page 33 of 33
Index

Economy
Jayati Ghosh

Print ISBN-13: 9780199458943
DOI: 10.1093/acprof:oso/9780199458943.001.0001
(p.470) Index
Agreement on Agriculture (AoA): Doha negotiations, 251–6;
domestic support, 229–30, 232–7;
export competition, 230–1, 237–43;
export subsidies, 230–1;
Falconer modalities, 254–6;
implementation of the commitments, 232–50;
levels of tariff protection and tariff rate quotas, 231, 243–50;
market access, 231–2, 243–50;
post–Uruguay Round experience, 256;
price support and input subsidies, 229;
Special Safeguard (SSG) provisions, 231;
tariffication of non-tariff barriers (NTBs), 231;
use of non–ad valorem tariffs, 243, 246–7
agricultural sector, 353;
agricultural output and employment, post-reform era, 51;
cereals and pulses, export–import ratio, 344–5;
climate change, effect of, 453–4;
composition of exports and imports, 334–41;
crisis management, 348–51;
economic reform policies of 1990s and, 5–6;
edible oil imports, 340, 345;
effect of trade liberalization, 308–11, 332–4, 351–3;
exports, 79;
FDI inflows in, 317;
foodgrain exports, 340–1;
foodgrain production, availability, and instability, 344;
food security and nutrition, 343–4;
free trade vs strategic opening up, 341–3;
growth in productivity, pre-reform period (1950–79), 36–7;
growth rates of production, 1980–1 to 2007–8, 89;
horticulture sector exports, 340;
Page 1 of 17
Index
impact of trade openness, 68, 331–8, 343–5, 352;

integration between domestic and international prices, 341–2, 352;
launching of futures trading, 348–50;
minimum support prices (MSPs), 343;
oil meal and oilseeds exports, 340;
per capita income of a state, 345;
policy of buffer stock for price stabilization using, 346–8, 352–3;
ratio of trade (export and import) to domestic production, 336–8, 354;
share in GDP, 123;
spices, export–import ratio, 341;
state-wise impact of trade liberalization, 345;
tea and coffee exports, 340;
trade flows and trade patterns, 345;
trade in agri-food products, 1981–2 to 2008–9, 335
Agriculture Produce Market Committee (APMC) Act, 348
ASEAN–China Free Trade Area (ACFTA), 294
(p.471) ASEAN Free Trade Area (AFTA), 305
ASEAN–India FTA (AIFTA), 288–9, 296, 301;
tariff reduction scenario, 302
Asian economies’ models of growth, 21–4, 29
Asian financial crisis, 2, 44, 188, 202, 204–5, 207–8, 210, 212, 214, 294
automobiles and auto components sector: employment growth, 373;
export performance, 74, 92–4;
FDI inflows, 176–7, 301;
outward FDI, 184;
tariff sectoral initiatives proposed, 265
balance of payments (BoP), 66, 186, 204, 306, 331;
Australian model, 196;
crisis, 1991, 22;
remittance inflows and, 415, 419
balance of trade in merchandise and services, 14–15, 91–2, 419
Bay of Bengal Initiative for Multi-sectoral Technical and Economic Cooperation
(BIMSTEC), 296
bilateral and regional agreements: ASEAN–India FTA (AIFTA), 288–9, 296, 301;
ASEAN–Japan FTA, 306–7;
ASEAN–Korea FTA, 306–7;
Bay of Bengal Initiative for Multi-sectoral Technical and Economic Cooperation
(BIMSTEC), 296;
Early Harvest Program (EHP) of the India–Thailand FTA, 296, 298, 304–5;
free trade agreements (FTAs), 92, 104n10, 204;
India–Afghanistan PTA, 104n11, 288;
India–Bhutan Agreement on Trade and Commerce, 287;
India–Chile PTA, 288;
India–Japan CECA, 303–4, 315;
India–Korea CEPA, 157, 159, 163n28, 288, 296, 314–15;
India–Malaysia CECA, 157, 288;
India–Mercosur PTA, 288;
India–Nepal Treaty of Trade, 104n11, 287;
India–Singapore CECA, 157–60, 288, 297, 313;
Page 2 of 17
Index
India–Sri Lanka FTA, 288–9, 296;

India–Thailand FTA, 92–3, 288, 296, 300;
Indo–Sri Lanka FTA, 104n11;
Preferential Trade Agreements (PTAs), see Preferential Trade Agreements (PTAs)
of India;
under SAARC, 294;
in services, 151–60;
tariff lines liberalized by India under APTA, 298
bilateral investment promotion and protection agreements (BIPA), 314
Bombay Stock Exchange (BSE) Sensex, performance post-liberalization years, 11–12
Brazil: average balance of trade in goods and services, 2009–11, 16;
exports of services, 14;
global trade shares, 13;
greenhouse gases (GHGs) emission, 444–5;
outward FDI, 183;
shares of world GDP, 1980–2010, 13
capital account convertibility (CAC), 201–11, 213n14
capital inflows, see foreign capital flows to India
China, 71–2, 79–80, 373:
average balance of trade in goods and services, 2009–11, 16;
domestic consumption of imports, 53–4;
FDI inflows to, 178–81;
FDI policies, 293;
greenhouse gases (GHGs) emission, 441, 443–6;
India’s share in exports and imports, 298;
managing exchange rates, 209;
merchandise exports, 12;
merchandise trade surplus, 15;
outward FDI, 183;
refining capacity, 105n26;
services export growth performance, 127;
shares of world GDP, 1980–2010, 13;
strategies for cutting CO2 (p.472) emissions, 458;
tariff liberalization under APTA, 296
climate change, 440–1, see also greenhouse gases (GHGs), emission of;
human-induced, 441;
impact on agriculture and coastal areas, 453–4;
impact on different sections of the society, 454;
India’s contribution to, 442–6;
India’s vulnerability to, 442, 453–4;
link between anthropogenic GHG emissions and, 441;
negotiations, state of, 442, 450
Commodity Credit Corporation (CCC), 240
comparative advantage, 4, 290, 331–2;
Heckscher–Ohlin notion of, 372;
Heckscher–Ohlin–Samuelson (HOS) model of international trade, 25;
India’s, 10, 25, 28, 36, 38;
Page 3 of 17
Index
in labour-based service delivery, 141–2, 360;

revealed comparative advantage (RCA) in services, India, 130, 133–4, 141, 291
Competition Act, formulation of, 44
current account transactions, 4
current account balance, 6–7, 14, 170;
employment and, 368–71
current account deficit, 6, 9, 11, 17, 28, 42, 45, 65, 68, 95, 182, 192, 199, 206, 369, 419
current account surplus, 17, 31, 207
deficit spending, 18–19
depository participants (DPs), 195
developing countries, 12–16, 25–6, see also China; India;
area of intellectual property (IP) rights in, 226;
Asian crisis and, 202–5;
capital flows, 173, 195;
capital flows to, 173, 177;
export-led growth strategy, 31;
export structure of, 71, 96;
features of negotiations on agriculture, 251–4;
formation of the NAMA-11 group, 260–1;
greenhouse gases (GHGs) emission, 441;
growth in services output and exports, 29–30;
impact of CAC, 202, 208, 210;
impact of policy barriers to services trade, 119;
internationalization of capital, 198;
international trade flows in services, 114–16;
non–ad valorem (NAV) tariffs, 246;
outward FDI, 183;
role of FDI, see foreign direct investment (FDI);
strategic protection by the State, 31–32;
tariff peaks, 243–44;
trade integration, 72–3, 96;
trade-related negotiations, 225–7, 230–1, 243–4, 251–2, 254–61, 264, 266–7, 272,
274–5, 278–9, see also bilateral and regional agreements; Doha Round
negotiations; General Agreement on Trade in Services (GATS); Preferential Trade
Agreements (PTAs) of India; Trade Related Intellectual Property Rights (TRIPS)
agreement
Doha Round negotiations, 311, see also General Agreement on Trade in Services
(GATS); TRIPS agreement; Agreement on Agriculture (AoA), see Agreement on
Agriculture (AoA);
‘Amber Box’ support, 229, 233–4, 254;
‘Blue Box’ support, 229–30, 233–5, 254, 281;
challenges, 281;
cotton subsidies and their impact on livelihoods in West and Central Africa, 282;
Declaration on the TRIPS Agreement and Public Health, 273;
Doha Ministerial Declaration, 264;
elimination of tariff barriers and non-tariff barriers (NTBs), 227;
‘Green Box’ support, 229–30, 233–5;
intellectual property (IP) rights, (p.473) 226–7;
needs of developing countries, 226;
Page 4 of 17
Index
non-agricultural market access (NAMA), see non-agricultural market access

(NAMA);
review of the Uruguay Round Agreements, 225–6;
Singapore issues, 227
domestic-market-seeking FDI, 31
Double Taxation Avoidance Agreements (DTAAs), 174–5, 190
Early Harvest Program (EHP) of the India–Thailand FTA, 296, 298
East Asian model of export-led growth, 24
economic reform policies of 1990s, 2, 22;
agriculture, impact on, 5–6;
behaviour of capital account, 7–9;
direction of trade, 10;
elements of balance of payments, 7;
employment, 45–46, 49–51, 359–73;
explicit aims of, 3–4;
export and import performance, 9–10;
foreign trade and investment, trends in, 6–12;
GATT and WTO commitments, 5;
impact, 3, 5–6;
merchandise trade deficit, 11;
opening up of capital account, 204–11;
policy changes to increase economic openness, 3–6;
rupee devaluation, 5–6;
stock market buoyancy and volatility, 11–12;
trade openness and industrialization, 41–54
emerging markets, 1, 15;
capital flows to (1980–95), 173;
flows of capital, 15;
India as favoured destination, 18, 287;
resource allocation in, 25
employment, see also labour mobility;
agricultural output and, post-reform era, 51;
in export-oriented industries, 369, 371–3;
export performance and, 373–6;
growth rate of output and, 362–3;
Heckscher–Ohlin assumptions on comparative advantages, 359–60;
in import-competing industries, 371–3;
in informal sector, 365;
in IT and BPO services, 141;
in labour-intensive industries, 359–60, 363, 369, 372–3;
in manufacturing industries, 369, 373;
in organized manufacturing, 372–3;
orthodox theory of relationship between trade and employment, 360–1, 364;
post-reform era, 45–6, 49–51, 359–73;
pre-reform period (1950–79), 37–8, 40;
in service sector and services exports, 124–6
Essential Commodity Act, 1955, 348, 350
European Union (EU), 74;
allocation of subsidies, 235;
Page 5 of 17
Index
average ad valorem equivalents (AVEs) of non–ad valorem (NAV) tariffs, 247–48;

domestic support commitments in Agreement on Agriculture (AoA), 232, 234;
export subsidies in agricultural trade, 237–9;
greenhouse gases (GHGs) emission, 444–5;
India’s exports to, 72–4;
levels of tariff protection and tariff rate quotas, 243–6;
production-related subsidies, 235;
shares of world GDP (1980–2010), 13;
tariff peaks, 243–4;
on TRIPS/CBD front, 279–80;
use of subsidies, 237, 241
exchange rate management, 42, 55, 209;
effective exchange rate, 95;
nominal exchange rate, 13, 198, 311;
overvalued exchange rates, 32, 39;
real effective exchange rate (REER) (2007–8), 95;
real exchange rate depreciation, 31, 56n7
export–GDP ratio, 54–55, 65, 366
(p.474) export-induced growth, 24
export-led growth, 55, 66;
basic concept, 23–4;
causal relation between export and economic growth, 32–3;
domestic resource mobilization and, 24;
East and Southeast Asian economies’ experience, 21–2;
empirical evidence for India, 32–4;
FDI-drive, 71;
integration with international markets, role of, 71–2;
Keynesian–Kaleckian analysis, 27;
macro-theoretic framework, 27–8;
market distribution effect, 103n6;
micro-theoretic framework, 25–7;
price competitiveness, role of, 71;
role of state, 30–2;
sectoral composition of exports, 28–30;
strategic State intervention for, 22;
structuralist macro models, 27;
unskilled-labour-intensive products, 25
export-led growth hypothesis, 32
export performance, 291, 295, 367;
agricultural exports, 79, 88–9;
auto components, 74, 92–4;
average applied MFN tariffs, 297;
chemicals and chemical products, 76;
China’s exports, 296, 299;
domestic factors influencing, 84–90;
drugs, pharmaceuticals, and fine chemicals, 74, 91;
engineering goods, 75–8;
FDI inflows and, 94;
foodgrain exports, 89–90, 106n35;
Page 6 of 17
Index
gems and jewellery, 75;

iron and steel and metal goods, 80;
Japan’s exports, 296;
in major sectors (2003–4 to 2011–2), 85;
Malaysia’s exports, 301;
manufactured exports, 74–6;
in 1990s, 68–9;
oil, 85–6;
petroleum products, 74, 84–8, 101–2;
primary products, 77;
shares in Indonesia, Thailand, and Vietnam’s exports, 300;
Singapore’s exports, 295–6, 301;
South Korea’s exports, 299;
textiles and textile products, 75;
total merchandise exports (2000–1 and 2007–8), 68
export pessimism, 22, 35
export promotion strategy: Asian economies’ models of growth, 29;
globalization and, 28–9;
importance of FDI for improved, 30–1;
importance of manufactured exports, 29;
off-shoring and business process outsourcing activities, 29;
role of State, 30–2;
service sector and services exports, 29–30
export-surplus-led growth, 24
external economic integration of India, 2
external economic liberalization, 3
financial crises since 1990s, 195
food security, 3, 226, 229, 251–52, 255, 311, 317, 321, 333, 343–44, 351, 453
foreign capital flows to India, 3–4, 6–7, 11, 17, 35, 457, see also foreign direct
investment (FDI); foreign trade;
capital account convertibility (CAC), 201–11, 213n14;
changing nature of, 170–3;
depository participants (DPs) route, 195;
FDI inflows, 173–83;
foreign institutional investor (FII) route, 181, 187–94;
foreign portfolio investment (FPI), 185–94;
Industrial Policy Resolution of 1956 and, 170–71;
macroeconomic management of capital flows, 194–211;
policy changes regarding, 171;
post-reform era, 173;
in 2000s, 95;
securities investment, 191–2, 194, 206;
short-term capital movements, 192–3;
Staff (p.475) Position Note (SPN), 210;
use of ‘Participatory Notes’ (PNs), 188–91
Foreign Direct Investment Confidence Index, 175, 212n5
foreign direct investment (FDI), 43, 112–13, 118, 310;
in agricultural sector, 317;
on domestic service sectors, 318;
Page 7 of 17
Index
export promotion strategy and, 30–1;

FDI Restrictiveness Index (2010), 147;
outward FDI from India, 183–5;
pharmaceutical sector, 172, 176;
role in promoting exports, 31–2;
in services, 120, 133–8, 146, 148–9;
vertical, 179
Foreign Exchange and Regulation Act (FERA), 1973, 171;
Coca Cola Corporation, case of, 171
foreign institutional investors (FIIs), 181, 187–94
Foreign Investment Promotion Board (FIPB) of India, 174
foreign portfolio investment (FPI), 185–95
foreign trade, see also export performance; import performance;
direction of trade, 71–4;
domestic factors influencing export, 84–90;
export performance, in 1990s, 68–9;
exports, composition of, 74–80;
exports, imports, and trade balance (1990–1 to 2011–12), 70;
following 2008–9 global crisis, 71;
imports, composition of, 80–4;
imports, since the 1990s, 68–9;
manufactured exports and imports, 90–4;
movements in real effective exchange rate, 95;
total merchandise exports (2000–1 and 2007–8), 68;
trade–GDP ratio, 70;
trade liberalization measures and, 67–71
free trade, 25, 91, 341–3, see also bilateral and regional agreements
GDP, 354n2;
agriculture’s share in, 123, 341;
average share of industry, 123;
composition across sectors, 124;
export–GDP ratio, 54–5, 65, 366;
growth, post-reform era, 45;
import–GDP ratio, 65, 366;
impact of CO2 emissions constraints on, 457;
net welfare of the economy and, 456;
post-liberation era, 366;
services contribution, 113, 122–4;
share in India’s service sector and services exports, 113, 122–4;
trade–GDP ratio, 66, 70, 364, 366, 377;
world, 1980–2010, 13
General Agreement on Tariffs and Trade (GATT), 5, 41, 228, 257, 263, 268
General Agreement on Trade in Services (GATS), 116, 318, see also Doha Round
negotiations;
architecture, 267–70;
bilateral request-offer approach, 270, 284n21;
domestic regulation (DR), 270–71;
emergence of, 266–67;
general provisions, 268;
Page 8 of 17
Index
India’s multilateral commitments and offers under, 152–7;

negotiations on market access, 270;
negotiations on rule making, 271–2;
plurilateral request-offer approach, 270, 284n22;
specific commitments to provisions, 268–70;
state-of-play reports, 272
global cap and trade (CAT) system of emission, 461
global economy, India’s position, 12–16;
balance of trade in goods and services (2009–11), 16;
global trade shares, 12–13;
shares of world GDP (1980–2010), 13
global financial crisis (2008–9), 7, 71, 209
global food crisis, 348, 350–1
(p.476) Global Food Price Index, 336–7;
Indian agriculture and global food prices, 337;
linear correlation between trade ratios and, 338;
trade and price policy during different phases, 2001 and 2009, 342
globalization: benefits from, 28–9, 66;
export growth and, 28–9;
migration and urbanization post, 389
of services, 116, 121
Global System of Trade Preferences (GSTP), 287
Global Trade Analysis Project (GTAP), 289
greenhouse gases (GHGs): adoption of a carbon tax, 457–8;
CO2 emissions of, 441–2;
economic implications of GHG reduction targets, 457;
emission of, 440–1;
emission intensity, 456;
GHG-mitigation targets, 442;
global negotiations to mitigate, 461–2;
global scenario, 443–6;
Indian scenario, 446–50;
reduction measures undertaken by India, see GHG-reduction measures
undertaken by India
growth penalty, 31
Harberger welfare triangles, 360
Heckscher–Ohlin–Samuelson (HOS) model of international trade, 25–6
Hindu rate of growth, 37
import–GDP ratio, 65, 366
import performance, 367;
auto component imports, 92–3;
capital goods, 80–1, 84;
China’s imports, 299;
commodity groups, 82;
gems and jewellery, 83;
gold, 84;
iron and steel and metalliferous ores, 80;
Malaysia’s imports, 301;
Page 9 of 17
Index
oil, 80, 83;

petroleum products, 83;
of remanufactured products, 263;
shares in Indonesia, Thailand, and Vietnam’s imports, 300;
Singapore’s imports, 301;
South Korea’s imports, 299;
import substituting industrialization (ISI) model, see under import substitution
import propensity, 9, 204
import substitution, xix, 5, 360;
import substituting industrialization (ISI) model, xiii, 34–35, 90
India: CO2 emissions per unit of energy, 459;
economic evolution, 1–2;
economic ‘openness’ of, 1;
efficiency of energy use and energy supply, 459;
energy intensity of, 458;
export-led growth hypothesis, 32–4;
FDI policy, 314–18, see also foreign direct investment (FDI);
foreign exchange reserves, 206–7;
GDP growth, 18;
GHG-reduction measures undertaken by India, 462–6;
GoI’s Perform, Achieve, and Trade (PAT) scheme, 462–3;
international trade and finance, 16–20;
Look East policy, 293;
MFN tariffs, 231, 268, 274, 284n20, 287–8, 294–5, 297, 302, 308–9, 311, 313–15,
318–20;
per capita emission rates, 455;
policy recommendations, 464–6;
position in global economy, 12–16;
refinery capacity, 85;
stand in negotiations in GHG concentration, 454–62;
strategic protection role by the State, 30–2;
trade performance in the 2000s, 66, see also export performance; foreign trade;
import performance;
use of renewable energy, 463
Indian Patents Act, 1970, 171
India–Singapore Comprehensive Economic Cooperation Agreement (p.477) (CECA),
157–60;
mutual recognition agreements (MRAs), 159
Industries (Development and Regulation) Act, 1951, 172
inflation, 18, 45, 50, 89, 117, 197, 202;
food, 348–9
intellectual property (IP) rights, 226–7, 315–16
international agreement on mitigation of GHGs, see Kyoto Protocol
international climate negotiations, 454–62
intra-industry trade, 83, 90–1, 103n8, 106n36, 291, 301, 305
IT and BPO services, 52, 132, 142;
exports, 18, 137–41
Kyoto Protocol, 450–3, 464;
clean development mechanism (CDM), 451–2;
Page 10 of 17
Index
emission reduction targets, 450–2, 464

labour mobility, see also employment; migration;
agriculture harvesting work, 400;
brick kiln workers, case of, 397–9;
case-study-based research, 393–409;
circulation of labour in Madhya Pradesh, 396–7;
conclusions about mobility of migrant households, 425–7;
contribution to poverty alleviation, 389–90;
cross-border labour mobility, 141–3;
due to fallout of circulation of capital, 383;
in footwear industry, 401;
global crisis and, 421–2;
in global production networks, 409–10;
inadequate employment opportunities, reason of, 387;
individual perceptions and objective indicators, 424;
to industrialized countries, 411;
in informal markets, 383;
Lewis model, 381–2;
macro-level analysis, 384–90;
in manufacturing sector, 401, 408;
Marxist approach, 383;
micro-level analysis, 390–3;
migrant sex workers, 402;
NSS estimates, 388, 390;
to oil exporting countries, 411;
percentage of migrants to total population, 386;
primary impetus to, 383;
short-duration outmigrants, 389;
socially disadvantaged groups, 386, 388–9, 393–4, 397, 400;
to South East Asia, 411;
study of six villages in Andhra Pradesh, 394–6;
Todaro model, 382;
urbanization and, 389–90;
workers’ remittances and, 432
Lahiri Committee on FIIs and PNs, 190–1, 193
Lal–Bery–Pant (LBP) model, 197–8
Lewis, Arthur, 381–2
Licence Raj, 38–9
liquidity in the Indian economy, 17
macro-theoretic framework, 27–8
Mahalanobis Growth Model, 35
manufacturing sector: Asian economies’ models of growth, 29;
automobile component exports, 92–3;
export performance, 28–9, 74–5, 90–7, 367;
under ISI regime, 54;
pharmaceutical exports, 91;
for 1993–4 to 1999–2000, 74
market-oriented economy, 43
merchandise exports: aggregate balance of trade in, 14;
Page 11 of 17
Index
China, 12–13;
India, 37–8, 47, 57n21, 66–71, 74, 84, 128, 367;
world, 13
merchandise trade deficit, 11, 15–16, 18, 83
micro-theoretic framework, 25–8; see also Heckscher–Ohlin–Samuelson (HOS) model of
international trade
(p.478) migration: coping migration and accumulative migration, 423;
factors determining emigration, 412–15;
forced migration, 393;
impact on exports and imports, 417–19;
impact on labour, 428;
internal migration, 383–90;
international migration, 409–22;
international migration on development, impact of, 415–17;
inter-state and intra-state migrants, 398;
inter-state migration, 387;
patterns observed in West Bengal, 406–7;
return migrants, role of, 419–21;
rural–rural, 391, 395–6, 399, 402;
rural–urban, 385–6, 389, 391–2, 395;
statistics, 430–1;
streams of, 399–400;
temporary migration, 392–3;
textile workers migrants, case of, 398;
tribal migrants, 403, 406
Monopolies and Restrictive Trade Practices (MRTP) Act, 35–6, 39, 44, 171–2
most favoured nation (MFN) rate, 231, 268, 274, 284n20, 287–8, 294–5, 297, 302, 308–
9, 311, 313–15, 318–20
multilateral trade, xx–xxi, 5, 31, 226–8, 266–7, 283n4, 293–5;
in services, 151–7
Mutual Recognition Agreements (MRAs), 312
Narasimham Committee on Financial Systems, 186, 213n10
net welfare of the economy, 456
non-agricultural market access (NAMA): Argentina, Brazil, and India (ABI) Formula for
tariff reduction, 260;
Doha negotiations, 258–61;
formation of the NAMA-11 group, 260–1, 283n8, 284n9;
issue of sectoral zero-for-zero, 263–6;
‘July framework’ for tariff reduction, 259, 263;
problem of NTBs, 261–3;
sectoral negotiations, 263–5;
Swiss Formula for tariff reduction, 259–60;
‘tariff harmonization’ approach, 259;
Uruguay Round of tariff negotiations, 257–8
non-tariff barriers (NTBs), 311–12;
proposals addressing the problem of, 261–3;
Resolution Mechanism, 263;
tariffication in AoA, 231–2, 243, 247, 251, 258;
Technical Barriers to Trade (TBTs) and Sanitary and Phyto-sanitary (SPS), 311;
Page 12 of 17
Index
textual proposals on, 262

North American Free Trade Agreement (NAFTA), 293
off-shoring and business process outsourcing activities, 29
Organisation for Economic Co-operation and Development (OECD): India’s exports to,
72–3;
restrictiveness of services trade policies, 119–20, 146;
variations in business services performance, 118
outward foreign direct investment (OFDI), 183–5
Parikh Committee report on pricing of petroleum products, 105n29
petroleum sector: domestic production of petroleum products, 104n19;
import performance, 83;
petroleum product exports, 74, 84–8, 101–2;
relationship between relative prices of petrol and export volume, 101–2
pharmaceutical sector, 172;
balance of trade since 2005, 92;
bulk drug production, 91;
export performance, 74, 79, 90–1, 98;
FDI inflows, 172, 176;
outward FDI, (p.479) 184;
trade deficit in bulk drugs, 91–2;
TRIPS Agreement and, 274, 315
portfolio capital flows, 185–97, 208, 212
Prebisch-Singer hypothesis, 28
Preferential Trade Agreements (PTAs) of India, 287–92;
comprehensive, 308–13;
emerging policy issues, 313–20;
export performance, 291, 295;
free trade agreements (FTAs), 289;
impact of, 289, 291;
logic of production sharing through regional and global production networks, 305;
market access gains in, 295;
Mutual Recognition Agreements (MRAs), 312;
national treatment clauses under, 316;
patterns of FDI and two-way/intra-industry trade, 291;
policy issues, 313–20;
preferential tariff liberalization, impact of, 295–308;
provisions on investment protection, 319–20;
revealed comparative advantage (RCA) indices, 291;
rise in, 292–5;
trade creation and, 289;
trade diversion effects of tariff liberalization within a, 288–9;
trade flows between PTA member countries and non-member countries, 289;
trade policy shift and, 292–4;
treatment of investments, 318–19
pre-reform period (1950–79), see also trade openness and industrialization, post-
reform era;
anti-export bias, 39;
banking sector, 36;
choice of industrialization strategy, 38;
Page 13 of 17
Index
choice of industrialization strategy, implications, 38–41;

export growth, 41;
export promotion schemes, 35;
growth in agricultural productivity, 36–7;
growth in employment, 37–8, 40;
heavy industrialization programme, 36;
import-intensive industrialization programme, 39–40;
import licensing system, 35, 38–9;
industrial expansion, 37;
industrial growth, 37;
industrial licensing system, 35–6, 38–9;
merchandise exports, 37–8;
performance, 37–8;
policies, 34–7;
problems with licensing regime, 39;
rate to GDP growth, 37;
regulation of anti-competitive behaviour of firms, 36;
small-scale production, 36
production networks, 71–73, 83, 90, 293, 296, 299–301, 303, 305–6, 308, 312–13;
global, 300, 305, 409–10, 428
qualified foreign investor (QFI), 194
Rangarajan Committee on Balance of Payments, 186
Reliance Industries, 40
Reliance Petrochemicals, 85, 105n22, 105n30
remittances, 7, 11, 14, 17, 68, 142, 170–1, 384, 386, 389, 415–19, 431–32, 432n1
‘Removal of Licensing requirements, Stock limits and Movement Restrictions on
Specified Foodstuffs Order, 2002,’ 348
rupee devaluation, 5–6, 11, 68
Russia: energy consumption, 450;
financial crisis (1998), 195;
GHG emission, 444–5, 448;
India’s exports to, 72;
service-led growth, 30, 51
service sector and services exports, 29–30, 317;
average growth rate of services exports for (p.480) select countries (2000–10),
127;
bilateral and regional initiatives of India, 157–60;
business process outsourcing (BPO), 113–14;
in CAGR terms, 122–3, 126–7, 134;
challenges to India’s exports, 143–5;
characterizing services trade, 116–18;
composition of services exports, 131–2;
contribution of transport and travel services, 127;
contribution to overall employment, 124–6;
cross-border labour mobility, see under labour mobility;
domestic help, nursing, and paramedical services, 142–3, 159, 419;
driving segments, 122;
economic reform and liberalization process, 145–9;
Page 14 of 17
Index
FDI inflows in India, 133–8, 146, 148–9;

globalization of services, 116;
growth rates of value added, post-reform era, 150;
H1B admissions in USA, 142–3;
impact of services on growth, 118;
implications of services liberalization, 149–51, 160;
in India, 121–6;
issues related to, 114–21;
IT and BPO services, 132, 137–42;
mode-wise nature of services delivery, 117–19;
multilateral commitments and offers of India, 152–7;
net export earnings, 133;
policies affecting services trade, 118–21;
post-reform era, 44, 47–8, 112–13;
revealed comparative advantage (RCA) of India, 130, 133–4, 162n12;
share in India’s GDP, 113, 122–4;
trade balance (2009–11), 16;
trade policies, 118–19;
trends in trade, 126–33;
visas and work permits, 142–4;
volume of remittances received by India, 142;
world exports, 112
services trade restrictiveness index (STRI), 119–20
South Africa, 249–50;
average balance of trade in goods and services (2009–11), 16;
outward FDI, 183;
South Asia, South Asian Free Trade Agreement (SAFTA), 104n11
South Asian Preferential Trade Agreement (SAPTA), 287
sovereign wealth funds (SWFs), 207
S.S. Tarapore (the Tarapore Committee) on capital account convertibility, 201–2, 207–
11
State intervention and export performance, 22, 30–2
state-owned public enterprises, 35
tariff: rate of protection 231, 246, 250, see also exchange rate management; non–ad
valorem tariffs, see Agreement on Agriculture (AoA)
terms of trade, 28–29, 35, 149, 204, 332
trade–employment relationship in India, see also employment;
causality between trade liberalization and growth and, 364;
comparison of pre-liberalization period and liberalized period, 368–71;
during export expansion, 362–3, 373–6;
growth rate of output, 362–3;
Heckscher-Ohlin assumptions, 359–60;
industrial composition, 371–3;
orthodox theory, 360–1, 364;
post-reform era, 366–76
trade–GDP ratio, 66, 70, 364, 366, 377
Page 15 of 17
Index
trade integration, 71–3, 293, 301, 320

trade liberalization, 287–91;
in agriculture, xxi, 51, see also under (p.481) agricultural sector; economic
openness and, see trade openness and industrialization;
challenges under, xxi;
impact of, 4–6, 26, 46, 86;
impact on labour market and employment, 359–65, 368–73, see also trade–
employment relationship in India; employment;
impact on export growth 368–72;
measures of, xix, 41, 67–8;
in services, 266, 269
trade openness and industrialization, post-reform era: agricultural output and
employment, 51;
business process outsourcing (BPO), 47;
employment growth, 45–6, 49–51;
entry of foreign capital, 49;
exchange rate management, 42;
export–GDP ratio, 54–5;
export growth, 42, 46–9;
food exports, 51–2;
GDP growth, 45;
import liberalization, 43;
industrial growth rate, 44–5;
institutional reforms, 43–4;
merchandise exports, 47;
nationalization of loss-making public sector units, 43;
1991 onwards, 42–4;
policies of deregulation and privatization, 41–2;
quality concerns, issues related to, 52–3;
rationalization of exchange rates, 41–2;
second generation reforms, 42–3;
services exports, 47–8, 52;
special economic zones (SEZs), 44;
1980s trade policy, 42;
telecommunication sector, 52;
textiles sector, 53;
thrust areas of reforms, 42–4
Trade Promotion Authority (TPA), 281
Trade Related Intellectual Property Rights (TRIPS) agreement, 226, 315;
establishment of a multilateral register for wines and spirits, 278–9;
formation of a strategic coalition, 279–81;
protection of geographical indications (GIs), 276–9;
public health and, 273–4;
UN CBD and, 274–6
Trade-Related Investment Measures (TRIMs), 319
transfer pricing, 29
unemployment, 26, 50, 361, 364–5;
disguised, 416, 419;
in rural areas, 106n31;
Page 16 of 17
Index
urban, 382, 385

United States, 74;
access opportunities for remanufactured products, 263;
allocation of subsidies, 235;
authorization for food aid programmes, 240, 242;
average AVEs of NAV tariffs, 247–8;
domestic support commitments in Agreement on Agriculture (AoA), 232–3;
economic costs of production, 235–7;
energy consumption, 450;
export subsidies in agricultural trade, 240;
greenhouse gases (GHGs) emission, 443, 445–6;
implications of targeted use of subsidies, 237;
India’s exports to, 72–4;
negotiations on GIs, 276–7;
shares of world GDP (1980–2010), 13;
tariff peaks, 243–4
Uruguay Round Agreements, 226, 228–30, 243, see also Doha Round negotiations;
General Agreement on Tariffs and Trade (GATT); General Agreement on Trade in
Services (GATS); Trade Related Intellectual Property Rights (TRIPS) agreement;
negotiations on GIs, 276–7;
tariff negotiations, 257–8
Verdoorn’s Law, 29
(p.482) World Trade Organization (WTO): agreements, 6, 41, 268; see also General
Agreement on Tariffs and Trade (GATT); General Agreement on Trade in Services
(GATS); Trade Related Intellectual Property Rights (TRIPS) agreement;
expansion in scope of, 225–7
Page 17 of 17
About the Editor and Contributors

Economy
Jayati Ghosh

Print ISBN-13: 9780199458943
DOI: 10.1093/acprof:oso/9780199458943.001.0001
(p.483) About the Editor and Contributors

Editor
Jayati Ghosh
is Professor at the Centre for Economic Studies and Planning,
Jawaharlal Nehru University, New Delhi. She is executive secretary at
the International Development Economics Associates (IDEAs) (http://
www.networkideas.org). She writes regular columns in various
newspapers and blogs and has advised several national and
international organizations.
Contributors
Sumedha Bajar
is a PhD scholar at the Institute for Social and Economic Change
(ISEC), Bengaluru. She is currently researching on ‘Infrastructure
and Economic Growth: Evidence from India’. She joined the National
Institute of Labour Economics Research and Development in
September 2014. She has interned at several places including United
Nations Conference on Trade and Development (UNCTAD), New
Delhi and National Council of Applied Economic Research (NCAER),
New Delhi. She has presented at several national and international
conferences.
Sangeeta Bansal
is Professor of Economics at the Jawaharlal Nehru University, New
Delhi. She is an associate editor of Resource and Energy Economics,
and was an editorial board member of Environment and Development
Economics. Her research interests are in the field of environmental
and agricultural economics. She has published her research in the
leading journals in the area of environment, and agricultural and
resource economics.
(p.484) Malini Chakravarty
Page 1 of 4
is Senior Economist at Economic Research Foundation, New Delhi.

She has taught economics at various reputed institutes and also
worked as researcher at Indian Council for Research on International
Economic Relations (ICRIER), New Delhi. Her areas of interest
include macroeconomics, international trade, and development
economics. Her latest publication is ‘Public Finance Policy and
Inequality: A Review of the Contrasting Experiences of India and
Ecuador’ in Democratic Renewal versus Neoliberalism: Towards
Empowerment and Inclusion, edited by Consuelo Silva Flores and
Claudio Lara Cortes (2014).
Ramesh Chand
is Director at the National Institute for Agricultural Economics and
Policy Research (NIAP) of the Indian Council of Agricultural Research
(ICAR), New Delhi. He also served as ICAR National Professor. He
has more than 30 years of experience in research and teaching at
senior academic positions. He has also worked as a consultant for
Food and Agriculture Organization (FAO), United Nations
Development Programme (UNDP), Economic and Social Commission
for Asia and the Pacific (ESCAP), and the World Bank. He is actively
involved as a member several high-level committees of the
Government of India. He has been published widely in reputed
national and international journals and is also the chief editor of the
Agricultural Economics Research Review.
Rupa Chanda
is a Professor of Economics and Social Sciences at the Indian
Institute of Management Bangalore. She has also worked as an
economist at the International Monetary Fund (IMF) in Washington,
DC. Her research interests include the World Trade Organization,
international trade in services, regional integration, and migration.
She has undertaken research assignments for international and
Indian organizations, including the World Health Organization
(WHO), United Nations Development Programme (UNDP),
Organisation for Economic Co-operation and Development (OECD),
the European Commission, and Indian Council for Research on
International Economic Relations (ICRIER), among others. She has
co-ordinated several research grants from international funding
agencies.
Sumangala Damodaran
is an economist who has joined the School of Development Studies at
Ambedkar University Delhi after a 17-year (p.485) teaching stint at
Lady Shri Ram College, University of Delhi. She also worked as a
Research Associate at the Institute for Studies in Industrial
Development, and as a consultant with the National Commission for
Enterprises in the Unorganised Sector (the Arjun Sengupta
Page 2 of 4
Committee) of the Government of India in 2008–9. Her research has

been in the area of industrial and labour studies.
Kasturi Das
served as a consultant at the Research and Information System for
Developing Countries (RIS), New Delhi.
Ananya Ghosh Dastidar
is Associate Professor at the Department of Business Economics,
University of Delhi, New Delhi, where she teaches graduate courses
on statistics, econometrics, macroeconomics, and global finance. She
has worked on issues related to trade openness, income distribution,
poverty, and education and has consultancy experience with the
Planning Commission of India, International Food Policy Research
Institute (IFPRI) and the United Nations Development Programme
(UNDP).
Biswajit Dhar
is Professor of Economics at the Jawaharlal Nehru University, New
Delhi. He previously served as the Director-General at the Research
and Information System for Developing Countries (RIS), New Delhi.
Smitha Francis
is a consultant at the Institute for Studies in Industrial Development
(ISID), New Delhi. Previously, she worked at Economic Research
Foundation (ERF), New Delhi, and the Research and Information
Systems for Developing Countries (RIS), New Delhi. She has also
been a visiting faculty at South Asian University, New Delhi, and
Ambedkar University, New Delhi. Her research interests include
international trade and finance, industrial policy, structural change,
Southeast Asian economies, and macroeconomic policy interactions
under globalization.
Parthapratim Pal
is Professor at the Indian Institute of Management Calcutta. He has
also worked with the Indian Council for Research in International
Economic Relations (ICRIER), New Delhi, Economic Research
foundation (ERF), New Delhi, and the Indian Institute of Foreign
Trade (IIFT), New Delhi. He has done a number of (p.486)
consultancy and research works for the Ministry of Commerce,
Ministry of Agriculture, United Nations Development Programme
(UNDP), World Trade Organization (WTO), United Nations
Conference on Trade and Development (UNCTAD), and the British
High Commission. His areas of interest include international trade,
regional trade agreements, WTO-related issues, and international
capital flows. He has been published widely in nationally and
internationally reputed journals and books.
G. Vijay
Page 3 of 4
is Assistant Professor at the School of Economics, University of

Hyderabad. Earlier he has taught at Institute of Public Enterprises,
Hyderabad and National Academy for Legal Studies and Research
University, Hyderabad. His recent publications include ‘The Business
of Health Care and the Challenges of Health Security; The Case of
Arogyasri Health Insurance Program in Andhra Pradesh’ in The Long
Road to Social Security, by K.P. Kannan and Jan Breman (2013), and
‘Systemic Failure of Regulation: The Political Economy of
Pharmaceutical and Bulk Drug Manufacturing’ in The Politics of the
Pharmaceutical Industry and Access to Medicines: World Pharmacy
and India, edited by Hans Lofgren (2013).
Page 4 of 4

Title Pages: Economics: Volume 2: India and The International Economy

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Economics: Volume 2: India and the International

Print publication date: 2015

(p.iii) ICSSR Research Surveys and Explorations

Oxford University Press is a department of the University of Oxford.

© Indian Council of Social Science Research 2015

The moral rights of the authors have been asserted

First Edition published in 2015

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Economics: Volume 2: India and the International

Print publication date: 2015

(p.vii) Tables and Figures

6.3 Domestic Support granted by the EC (1995–6 to 2009–10) 234

10B.2 NSSO 64th Round: Data on Migration (Household-level

3B.1 Relationship between Relative Prices of Diesel and Export Volumes

7.3 India’s Shares in Indonesia, Thailand, and Vietnam’s Exports and

Economics: Volume 2: India and the International

Print publication date: 2015

Economics: Volume 2: India and the International

Print publication date: 2015

The chapters provide important insights on the unfolding of economic processes

exogenous to policy, rather than an ‘export-led’ growth through a conscious

Malini Chakravarty (Chapter 3) examines recent patterns of trade in order to

In the case of manufactured goods exports, Chakravarty observes that the

Rupa Chanda provides a comprehensive review of trade in services in Chapter 4.

Parthapratim Pal (Chapter 5) analyses the changing policy approaches to capital

In both multilateral and bilateral trade negotiations, agriculture has proved to

In Chapter 9, Sumangala Damodaran provides a review of the theoretical

Chapter 10 is concerned with how greater external economic integration has

Taken together, the chapters provide a comprehensive and multidimensional

Jayati Ghosh (p.xxiv)

Economics: Volume 2: India and the International

Print publication date: 2015

India in the Changing Global Economy

Abstract and Keywords

Keywords: India, international trade, international investment, structural change, production

economic ‘openness’ of India, which, in turn, transformed some aspects of

(p.2) Following is the position taken by the Government of India (GoI), as

Much of this success is related, as in the aforementioned quotation, to the

by trade liberalization is argued to have forced domestic producers to

This ‘upside’ view of the external economic integration of India can be

Policy Measures to Increase Economic Openness

These aims translated into successive changes in the pattern of regulation in

• reduction in direct state control in terms of administered prices and

• privatization of many previously publicly held assets, often in controversial

• rationalization and reduction of both direct and indirect tax rates;

• attempts (often unsuccessful) to reduce fiscal deficits which usually involved

• trade liberalization involving shifts from quantitative restrictions to tariffs

• financial liberalization involving reductions in directed credit, freeing of

• shift to market-determined exchange rates and liberalization of current

(p.5) • some capital account liberalization, including easing of rules for

There was an explicitly declared shift in policy towards greater export

Several policy measures that involved increased economic openness in terms of

Increased dependence on foreign capital inflows was justified on the grounds

Trends in India’s Foreign Trade and Investment

there were significant changes, as

were dominated by portfolio inflows and external commercial borrowing. This is

(p.9) private equity firms are

(p.10) to import within the

The Indian economy was not really chosen to be a favourite of international

India’s Position in the Changing Global Economy