International Trade India & World Trade Organization (WTO)
Trade in Goods - Agriculture State of Play on Agriculture Negotiations in the Doha Round WTO I. Agriculture
The agriculture negotiations apply to the products covered under the Agreement on Agriculture (AOA) of the World Trade Organisation (WTO), namely, all basic agricultural products, the products derived from them and all processed agricultural products. This also includes wines, spirits, tobacco products, fibres such as cotton, wool and silk and raw animal skins for leather production. Fish and fish products and forestry products are not included. The three main elements or “pillars” of the Agreement on Agriculture (AOA) and the negotiations are: (i) market access, (ii) domestic support and (iii) export competition. The Doha Ministerial Declaration of November 2001 committed Members to comprehensive negotiations aimed at: substantial improvements in market access; reductions of, with a view to phasing out, all forms of export subsidies; and substantial reductions in trade-distorting domestic support. Special and differential treatment for developing Members is also intended to be an integral part of the modalities. The Chair of the Committee on Agriculture (Special Session) brought out a fourth revision of draft modalities for agriculture on 6 December 2008. Discussions on this text began in September 2009. From July 2009, the Chair has been conduction discussions along two tracks: namely, data requirements for implementing modalities and issues bracketed or otherwise annotated in the draft agriculture modalities text issued on 6 December 2008. The discussions in the first track are aimed at identifying the base data that needs to be annexed with modalities and devising the formats in which this data will be presented. The main elements of the draft agriculture proposals are summarized below: II. MARKET ACCESS
The customs tariff is the duty charged on the import of any good into the domestic territory of a country. The negotiations at the WTO are on bound customs tariffs, which are the ceiling rates notified to the WTO, while the tariffs which are actually applied by the customs authorities on imports into a country are the applied customs tariffs. The applied tariffs cannot ordinarily exceed the bound customs tariffs in the WTO Member countries. Developed countries would have to reduce their bound tariffs in equal annual instalments over five years with an overall minimum average cut of 54%. Developing
countries would have to reduce their final bound tariffs in equal annual instalments over ten years undertaking a maximum overall average cut of 36%. Both developed and developing Members would have the flexibility to designate an appropriate number of tariff lines as Sensitive Products, on which they would undertake lower tariff cuts. Even for these products, however, there has to be “substantial improvement” in market access, and so the smaller cuts would have to be offset by tariff quotas allowing greater access for imports. The three issues being negotiated, therefore, are the number of Sensitive Products, the tariff cuts they are to take and the compensatory access through tariff quotas. While this flexibility is available to both developing and developed countries, it is particularly important for developed countries to be able to protect their commercially sensitive tariff lines.
III. Special Products
This is a special and differential treatment provision that allows developing countries some flexibility in the tariff cuts that they are required to make on a designated number of products. This is critical for countries such as India to meet their food and livelihood security concerns and rural development needs. The revised draft modalities of 6 December 2008 propose an SP entitlement of 12% of agricultural tariff lines. The average tariff cut on SPs is proposed as 11%, including 5% of total tariff lines at zero cuts.
IV. Special Safeguard Mechanism This is another special and differential treatment provision exclusively for developing countries that gives them the right to have recourse to a Special Safeguard Mechanism (SSM) based on import quantity and price triggers. The SSM is important for developing countries in order to protect their poor and vulnerable farmers from the adverse effects of an import surge or price fall. The safeguard duties under the proposed SSM would be triggered by either an import quantity trigger or a price trigger. The trigger for invoking the SSM determines when the safeguard duty can be imposed. If the import quantity trigger is set too high, the SSM loses all efficacy because it can then only be used in the most exceptional circumstances. The same holds true if the price trigger is set too low. The main issues being discussed are: (a) the trigger: i.e. when the mechanism would be applicable; (b) the size of the remedy: i.e. how high overall duties can go above the MFN tariff; and (c) duration of the remedy and whether safeguard duties could be applied in consecutive years. In July 2008, discussion was essentially centred on the second part, namely, the circumstances in which the pre-Doha bound rates could be breached. Exporting countries wanted an initial trigger of 40% i.e imports had to be at least 140% of the previous period imports before the country would impose a safeguard duty. The G-33 (and India) argued that this was far too high a trigger, effectively denying them recourse to the SSM. Unreasonable restrictions on the SSM in terms of very high triggers and inadequate remedies
defeat the very objective of protecting poor, vulnerable farmers in developing countries. Given its objectives, it must be a simple and effective mechanism. The exporting countries on the other hand are seeking to ensure market access into developing countries by trying to limit such provisions. The G-33 coalition has been striving to ensure an effective safeguard instrument. The G-33 has circulated a set of documents in the WTO. These documents call for refocusing discussions on the development dimension of the measure and offer a response based on the Group‟s technical analysis to various restrictive elements being proposed by the SSM opponents. V. Tariff Capping This is primarily a developed country concern, particularly some countries belonging to the G10, namely, Japan, Iceland, Switzerland and Norway. These countries impose prohibitively high tariffs on their agricultural products. Tariff capping would bring down these very high tariffs, over and above what would be required by the tariff reduction formula. While these developed countries are not prepared to accept this, on the other hand, on industrial goods, the Swiss coefficient in the tariff reduction formula limits all new bound tariffs to levels below the coefficient (except for the products under flexibilities). VI.Tariff Simplification This is an entirely developed country concern, particularly for the EU, Norway, Switzerland and Canada. These countries use a large number of non-ad valorem (NAV) tariffs on their agricultural imports. Developing countries, on the other hand, rely predominantly on ad valorem (AV) duties. NAV duties act as an additional layer of non-transparent protection. As these are used mainly by developed countries, they act as a barrier to market access for developing country exports. In contrast, in the case of industrial goods, the draft modalities propose 100% tariff simplification. VII. Tropical and Diversification Products and long-standing preferences
The mandate of the Doha Round committed Members to addressing the issue of achieving the fullest liberalisation of trade in tropical agricultural products. The draft modalities, accordingly, propose faster and deeper cuts on such products. In the WTO agriculture negotiations, the proponents are 10 Latin American countries (the Tropical Products Group). They want the EU, US, Switzerland, Japan and some of the other developed country importers to take faster and deeper cuts on tropical products. The mandate also recognized the importance of longstanding preferences and said that the issue of preference erosion would be addressed. As per the modalities being discussed, the tariffs on products in an agreed list, on which certain countries have been accorded preferences in imports, would be cut over a longer period and/or take lower cuts. The proponents here are countries belonging to the African-CaribbeanPacific (ACP) Group. The two groups involved thus have competing interests. While the Tropical Products Group want faster and deeper liberalization, the ACP Group is seeking to protect its preference margins. Discussions in the WTO on this subject are focused on two aspects: (i) the
methodology for reducing tariffs on tropical products and preference products and (ii) deciding on the number of products to be included in each list. These discussions have, however, taken place mainly amongst the EU, US, the Tropical Products Group and the ACP Group. While India is not a member of the Tropical Products Group, India too has export interests in many of the products and has been demanding that the matter should be discussed in a more transparent manner amongst the larger WTO membership. India has also been negotiating to protect its own interests in tropical product exports. Progress on the subject was closely linked with an agreement relating to the import of a particular tariff line of bananas. On 15 December 2009, an agreement was signed amongst the ACP, the EU and the Tropical Products Group, namely, the “Geneva Agreement on Trade in Bananas”. As per the Agreement, the EU shall maintain an MFN tariff-only regime for the importation of bananas. Thus, there will be no more quotas for the ACP countries. The EU will:
cut its MFN import tariff on bananas in eight stages, from the current rate of €176/tonne to €114/tonne in 2017 at the earliest; and make the biggest cut first, by €28/tonne to €148/per tonne, once all parties sign the deal.
In return, Latin American countries will:
not demand further cuts in the framework of the Doha Round of talks on global trade once it resumes; settle several legal disputes pending against the EU at the WTO, some dating back as far as 1993.
Once the European Parliament gives its consent to the deal, the EU will bind its new tariff schedule – meaning it commits not to raise tariffs above the new rates. The conclusion of the Banana deal signals that rapid progress will also be made on Tropical Products and Preference Erosion. VIII. DOMESTIC SUPPORT
The Agreement on Agriculture distinguishes between support programmes that stimulate production directly, and those that are considered to have no direct effect. Domestic support that has a direct effect on production and trade has to be cut back. The draft modalities propose cuts in the Overall Trade-distorting Domestic Support (OTDS) as well as cuts or caps on the individual categories of domestic support, referred to as Amber Box, Blue Box and Green Box support. The current proposal is for a 70% cut in OTDS by the US and 80% by the EU. A 70% cut brings US OTDS to about US$ 14.5 billion, from their current ceiling of US$ 48.2 billion. This is still well above their estimated applied level of US$ 7 billion in 2007.
This issue is of prime importance to Burkina Faso, Benin, Mali and Chad (the Cotton 4). The C-4 proposal on the table implies an 82.2% cut in domestic support for cotton by the US. Apart from the C-4, it is of significance to Brazil and India also, both major exporters of cotton. In India, cotton is also a politically sensitive subject. This issue has seen very little multilateral discussion at the WTO.
X. EXPORT COMPETITION In terms of the draft proposals of 6 December 2008 , developed countries are required to eliminate all forms of export subsidies by 2013. Developing countries have to do so by 2016.
Under the WTO’s Agreement on Agriculture, developing countries had the flexibility to provide certain subsidies, such as subsidising of export marketing costs, internal and international transport and freight charges etc. According to the current proposals, this provision would continue to be available to developing countries till 2021 i.e. 5 years beyond the year 2016 when they would be required to phase out all other forms of export subsidies.
India’s Priorities in the Agriculture Negotiations Safeguarding the interests of low income and resource poor agricultural producers remains paramount for India. In this context, the following issues are vital: Overall tariff reductions on bound rates of not more than 36%; Self-designation of an appropriate number of Special Products guided by indicators based on the three fundamental and agreed criteria of food security, livelihood security, and rural development needs; An operational and effective Special Safeguard Mechanism to check against global price dips and import surges, which is more flexible than the existing special safeguard available mainly to developed countries; Substantial and effective cuts in OTDS by the US and the EC and tighter disciplines on product-specific limits on AMS and the Blue Box; Simplification of non-ad valorem tariffs on agricultural products, by the developed countries, as has already been done by developing countries; Capping of tariffs on agricultural products, over and above the tariff reduction formula, to address the issue of some very high tariffs imposed by some developed countries on agricultural products; and
Safeguarding India‟s export interests in the negotiations on tropical products and preference erosion.
India has been working constructively with her coalition partners in developing country groupings such as the G-20 and the G-33 in order to achieve an outcome in the agricultural negotiations that would fully reflect the level of ambition of the Doha mandate and the interests of developing countries.
International Trade India & World Trade Organization (WTO)
Trade in Goods - Agriculture WTO Agreement on Agriculture Introduction Salient Features India‟s Commitments Mandated Negotiations
INTRODUCTION After over 7 years of negotiations the Uruguay Round multilateral trade negotiations were concluded on December 15, 1993 and were formally ratified in April 1994 at Marrakesh, Morrocco. The WTO Agreement on Agriculture was one of the many agreements which were negotiated during the Uruguay Round. The implementation of the Agreement on Agriculture started with effect from 1.1.1995. As per the provisions of the Agreement, the developed countries would complete their reduction commitments within 6 years, i.e., by the year 2000, whereas the commitments of the developing countries would be completed within 10 years, i.e., by the year 2004. The least developed countries are not required to make any reductions. The products which are included within the purview of this agreement are what are normally considered as part of agriculture except that it excludes fishery and forestry products as well as rubber, jute, sisal, abaca and coir. The exact product coverage can be accessed in the legal text of the agreement from the web site www.wto.org.
SALIENT FEATURES The WTO Agreement on Agriculture contains provisions in 3 broad areas of agriculture and trade policy : market access, domestic support and export subsidies. Market Access This includes tariffication, tariff reduction and access opportunities. Tariffication means that all non-tariff barriers such as quotas, variable levies, minimum import prices, discretionary licensing, state trading measures, voluntary restraint agreements etc. need to be abolished and converted into an equivalent tariff. Ordinary tariffs including those resulting from their tariffication are to be reduced by an average of 36% with minimum rate of reduction of 15% for each tariff item over a 6 year period. Developing countries are required to reduce tariffs by 24% in 10 years. Developing countries as were maintaining Quantitative Restrictions due to balance of payment problems, were allowed to offer ceiling bindings instead of tariffication. Special safeguard provision allows the imposition of additional duties when there are either import surges above a particular level or particularly low import prices as compared to 1986-88 levels. It has also been stipulated that minimum access equal to 3% of domestic consumption in 1986-88 will have to be established for the year 1995 rising to 5% at the end of the implementation period. Domestic Support For domestic support policies, subject to reduction commitments, the total support given in 1986-88, measured by the Total Aggregate Measure of Support (total AMS), should be reduced by 20% in developed countries (13.3% in developing countries). Reduction commitments refer to total levels of support and not to individual commodities. Policies which amount to domestic support both under the product specific and non product specific categories at less than 5% of the value of production for developed countries and less than 10% for developing countries are also excluded from any reduction commitments. Policies which have no or at most minimal, trade distorting effects on production are excluded from any reduction commitments („Green Box‟-Annex 2 of the Agreement on Agriculturewww.wto.org. The list of exempted green box policies includes such policies which provide services or benefits to agriculture or the rural community, public stock-holding for food security purposes, domestic food aid and certain de-coupled payments to producers including direct payments to production limiting programmes, provided certain conditions are met. Special and Differential Treatment provisions are also available for developing country members. These include purchases for and sales from food security stocks at administered prices provided that the subsidy to producers is included in calculation of AMS. Developing countries are permitted untargeted subsidised food distribution to meet requirements of the urban and rural poor. Also excluded for developing countries are investment subsidies that are generally available to agriculture and agricultural input subsidies generally available to low income and resource poor farmers in these countries.
Export Subsidies The Agreement contains provisions regarding members commitment to reduce Export Subsidies. Developed countries are required to reduce their export subsidy expenditure by 36% and volume by 21% in 6 years, in equal installment (from 1986 –1990 levels). For developing countries the percentage cuts are 24% and 14% respectively in equal annual installment over 10 years. The Agreement also specifies that for products not subject to export subsidy reduction commitments, no such subsidies can be granted in the future.
INDIA'S COMMITMENTS Market Access As India was maintaining Quantitative Restrictions due to balance of payments reasons(which is a GATT consistent measure), it did not have to undertake any commitments in regard to market access. The only commitment India has undertaken is to bind its primary agricultural products at 100%; processed foods at 150% and edible oils at 300%. Of course, for some agricultural products like skimmed milk powder, maize, rice, spelt wheat, millets etc. which had been bound at zero or at low bound rates, negotiations under Article XXVIII of GATT were successfully completed in December, 1999, and the bound rates have been raised substantially. Domestic Support India does not provide any product specific support other than market price support. During the reference period (1986-88 ), India had market price support programmes for 22 products, out of which 19 are included in our list of commitments filed under GATT. The products are - rice, wheat, bajra, jawar, maize, barley, gram, groundnut, rapeseed, toria, cotton, Soyabean (yellow), Soyabean (black), urad, moong, tur, tobacco, jute, and sugarcane. The total product specific AMS was (-) Rs.24,442 crores during the base period. The negative figure arises from the fact that during the base period, except for tobacco and sugarcane, international prices of all products was higher than domestic prices, and the product specific AMS is to be calculated by subtracting the domestic price from the international price and then multiplying the resultant figure by the quantity of production. Non-product specific subsidy is calculated by taking into account subsidies given for fertilizers, water, seeds, credit and electricity. During the reference period, the total non-product specific AMS was Rs.4581 crores. Taking both product specific and non-product specific AMS into account, the total AMS was (-) Rs.19,869 crores i.e. about (-) 18% of the value of total agricultural output. Since our total AMS is negative and that too by a huge magnitude, the question of our undertaking reduction commitments did not arise. As such, we have not undertaken any commitment in our schedule filed under GATT . The calculations for the marketing year 1995-96 show the product specific AMS figure as (-) 38.47% and non-product specific AMS as 7.52% of the total value of production. We can further deduct from these calculations the domestic support extended to low income and resource poor farmers provided under Article 6 of the Agreement on Agriculture. This still keeps our aggregate AMS below the de
minimis level of 10%. India‟s notifications on AMS are available at web site addresswww.wto.org/wto/online/ddf.htm (G/AG/N/IND/1). Export Subsidies In India, exporters of agricultural commodities do not get any direct subsidy. The only subsidies available to them are in the form of (a) exemption of export profit from income tax under section 80-HHC of the Income Tax Act and this is also not one of the listed subsidies as the entire income from Agriculture is exempt from Income Tax per se. (b) subsidies on cost of freight on export shipments of certain products like fruits, vegetables and floricultural products. We have in fact indicated in our schedule of commitments that India reserves the right to take recourse to subsidies (such as, cash compensatory support) during the implementation period.
Revised on 4.7.2001 MANDATED NEGOTIATIONS Article 20 of the Agreement on Agriculture (AoA) (www.wto.org) mandates that negotiations for continuing the reform process in agriculture will be initiated one year before the end of the implementation period. As the implementation period for developed countries culminated at the end of the year 2000, the negotiations on the Agreement on Agriculture have begun in January 2000. These negotiations are being conducted in special sessions of the WTO Committee on Agriculture (COA) at Geneva. The following are the broad parameters for carrying out negotiations: Experience of member countries in implementation of reduction commitments till date; The effects of reduction commitments on World Trade in Agriculture; Non trade concerns, special and differential treatment to developing country members and the objective of establishing a fair and market oriented agricultural trading system; and Identifying further commitments necessary to achieve the long-term objectives of the Agreement. During extensive deliberations in the WTO Committee on Agriculture and in the General Council, member countries had agreed to broadly adhere to the mandate of Article 20 of the Agreement. In pursuance of the same, in the first phase of the negotiations, members have submitted 47 negotiating proposals, which were discussed in Seven Special Sessions of the CoA. With the approval of the Cabinet Committee on WTO Matters, India also submitted its negotiating proposals to the WTO on 15th January 2001, in the areas of market access, domestic support, export competition and food security. These proposals were drawn up and drafted based on inputs received from wide ranging consultations with various stakeholders and keeping in view India‟s objectives in the negotiatio ns, which are to protect its food and livelihood security concerns and to protect all domestic policy measures taken for poverty
alleviation, rural development and rural employment as also to create opportunities for expansion of agricultural exports by securing meaningful market access in developed countries. India also co-sponsored two papers, one on "Market Access" along with 11 other developing countries and another on "Export Credits for Agricultural Products" along with 9 other countries/group of countries.
From India's perspective it would be most crucial during the Doha negotiations to protect the interests of its farmers, even at the cost of foregoing benefits that might have otherwise been made in services and NAMA negotiations
*B+India’s economic scenario[/B]
After growing at the so-called ‘Hindu Rate’ of growth of 3.5%, India’s Gross Domestic Product (GDP) growth accelerated to 5.6% in the 1980s and averaged an unprecedented 6% in the period 1992-93 to 2003-04. The growth rate in 2005-06 was 8.4%, and expectations are that India will be able to achieve a 10% rate of growth in the immediate future.
In terms of the sectoral shift in GDP, the share of agriculture fell from 58% to 25% between 1950 and 2001, while that of industry increased from 15% to 26%, and the share of services increased from 27% to 49%. The service sector accounted for almost 54% of the country’s GDP in 2005-06.
India’s export of services has displayed one of the fastest growth rates in the world -- that is, over 17% per annum in the 1990s (when the world average was 5.6%). Service exports showed significant buoyancy during 2004-05, doubling from US$ 25 billion to US$ 51 billion. They now account for 39% of India’s total exports.
The service sector boom in India in the post-Uruguay Round period shows that India has a competitive advantage in several services sectors. However, employment in services has not increased in proportion to the rising share in GDP and trade in India, unlike the situation in the rest of the world. In 1999-2000, services contributed around 24% of employment in India, in contrast to 30% in middle-income countries,
70% in Singapore and around 35% in Thailand. This is perhaps the main reason why trade and economic growth in India has been seen as “jobless”.
Trade already accounts for more than 30% of India’s GDP, an increase of almost 10 percentage points since 2002. Therefore, the final outcome of the WTO negotiations would be an important determinant of overall economic growth in India.
A major constraint facing the country is the persistence of infrastructure deficits: lack of reliable power supply which dampens growth impulses in different sectors of the economy, as well as inefficient and high cost of infrastructure such as roads, railways, airports, seaports and electricity.
According to various estimates, in view of its needs, India is currently spending a miniscule amount on infrastructure. In contrast, China spends seven times as much as India in absolute terms.
India’s negotiating stand at the WTO should be viewed within this context. This article does not question the rationale for India’s continued engagement at the WTO. Instead, it seeks to explain developments in three areas of negotiation: agriculture, Non-Agricultural Market Access (NAMA) and services. It also attempts to capture India’s negotiating position on these issues, highlighting significant shifts on specific issues wherever these have occurred.
[B]Doha negotiations: Agriculture, NAMA and services[/B]
In November 2001, following up on the Doha Ministerial Declaration, WTO members launched an ambitious Work Programme covering negotiations on agriculture, Non-Agriculture Market Access (NAMA), services, dispute settlement, antidumping duties, subsidies, etc. In addition, intense work was envisaged in new areas of investment, competition policy, transparency in government procurement and trade facilitation, with the objective of initiating negotiations in 2003. In the Doha Ministerial Declaration, WTO members expressed their resolve to find appropriate solutions to the implementationrelated concerns raised by developing countries. These concerns emerged out of the problems encountered by developing countries in the implementation of agreements finalised during the Uruguay Round.
When launched, the Doha Round of trade negotiations was scheduled to be completed by January 1, 2005. However, like the preceding Uruguay Round, the Doha Round has encountered many roadblocks, and progress has been slow. Unable to bridge the gap between differing positions on agriculture and what are known as the “Singapore issues” (investment, competition, transparency in government procurement, and trade facilitation), the Cancun Ministerial Meeting, held in 2003, ended without any results on the issues on the negotiating table. However, some of the contentious issues were settled in the July Framework Agreement of 2004.
Expectations from the Hong Kong Ministerial meeting, held in December 2005, were scaled down in advance of the meeting. Decisions on most of the contentious and substantive issues were postponed until 2006. These included decisions on the formula, specific numbers and timeframe (commonly referred to as modalities) for reduction in agricultural subsidies, and agricultural and non-agricultural tariffs. Despite major players in the WTO negotiations meeting at regular intervals, consensus on the modalities continues to be elusive. Since July 24, 2006, WTO negotiations have gone into suspension mode.
Under GATT, agriculture was subject to ‘soft’ disciplines compared to industrial products. In 1955, the United States obtained a permanent waiver from substantial obligations in agriculture. The European Union implemented an elaborate system of protection for its farmers through huge subsidies. This resulted in severe distortions in the production and trade of agricultural products. Some degree of discipline in agriculture was introduced through the Uruguay Round Agreement on Agriculture. When the Doha Round was launched, it was expected that a significant reduction, if not full elimination of the distortions, would be achieved in the negotiations. These hopes may be belied.
Opinion on the utility and effectiveness of the WTO as a forum for negotiating rules on agricultural tariffs and subsidies is split. According to one view, in most developing countries agriculture is not so much a matter of commerce as one of livelihood. It may, therefore, not be appropriate to treat it on a par with industrial goods. Accordingly, disciplines on agriculture should not be included in trade agreements at the WTO. However, a contrary view also exists which perceives WTO negotiations as the only available vehicle for seeking a reduction in developed-country subsidies, which have significantly distorted global trade and agricultural production.
Of all the issues being negotiated under the ongoing Doha Work Programme, none would have deeper implications for the vast multitude of poor around the world than the negotiations on agriculture. Agricultural development represents a convergence of the main objectives of economic policy in developing countries: growth, stability and poverty alleviation. As trade can interact with these objectives in complex ways, the results of the agriculture negotiations could crucially determine the extent of policy flexibility available to developing countries to pursue these goals in a manner consistent with WTO obligations.
Negotiations towards an Agreement on Agriculture are being undertaken on what are called three pillars -- domestic support, market access, and export competition. With respect to each of these pillars, different developing countries have differing interests, often conflicting in nature. The July Framework and the Hong Kong Ministerial Declaration leave open a wide range of options within each pillar of the agriculture negotiations, which provide both risk and opportunity for developing countries. This has brought a considerable degree of complexity to the negotiations. Different country groups have been formed, based on commonality of interests on specific issues, the most important among them being the G20 and the G33. India is a member of both these groups.
It is generally accepted that the agricultural subsidies provided by developed countries not only restrict the access of developing-country exports, but have also depressed world food prices. Subsidised exports by developed countries also pose a threat to food and livelihood security in developing countries by depressing domestic market prices. Reduction of agricultural subsidies by developed countries is, therefore, a crucial goal that is being pursued by developing countries.
The July Framework distinguishes between two broad categories of domestic support. Trade-distorting support and non-trade-distorting support (that is, support with no or minimal impact on trade and production).
Trade-distorting support is made up of various components. The July Framework foresees a substantial reduction of overall trade-distorting support, as well as each component of such support. The framework further states that there will be a strong element of harmonisation of trade-distorting
support among developed members because higher levels of permitted trade-distorting support are required to be subject to deeper cuts.
It has been estimated that under the existing WTO regime, the EU and the US have the flexibility to provide $ 100 billion and $ 48.22 billion, respectively, of trade-distorting support. The actual level of trade-distorting subsidy provided by them is less than the ceiling under the WTO. During negotiations in July 2006, the US offered to reduce the ceiling on its overall trade-distorting support by 53%, from $ 48.22 billion to $ 22.5 billion. Developing countries had proposed a limit of $ 10.5 billion.
The US offer must also be seen in light of the fact that its actual level of trade-distorting subsidies in 2005 was about $ 19.7 billion, and in some previous years substantially less than that. As the existing level of trade-distorting subsidies is below $ 22.5 billion, the 53% reduction in ceiling would have resulted in only ‘paper reduction’, without any actual cut on the ground. In fact, the US would have the space to [I]increase [/I]trade-distorting subsidies from $ 19.7 billion to the ceiling of $ 22.5 billion.
This has been a matter of considerable disappointment for developing countries like India and other G20 members, particularly because the US is seeking effective tariff reduction from developing countries in exchange for paper reduction in its subsidies.
The on-going agriculture negotiations also provide an opportunity for review and clarification of criteria of ‘green box subsidies’ -- the so-called non-trade-distorting subsidies -- with a view to ensuring that these subsidies have no, or at most minimal, trade-distorting effects, or effects on production. Under the Uruguay Round commitments, countries can provide green box subsidies without any ceiling, provided these subsidies have no trade- or production-distorting effects.
It has been estimated that, under the green box category, almost US$ 90 billion subsidies are provided by the US, the EU and Japan. There are considerable theoretical arguments and a certain amount of empirical evidence that establish that green box subsidies significantly enhance production through different economic effects. In short, green box subsidies provided by developed countries are adversely affecting the interests of farmers in developing countries. While the Doha Round negotiations do not envisage any reduction commitment or ceiling on green box subsidies, proposals have been made by G20 countries to limit such payments to farmers with low levels of income, landholding and production. This might indirectly prevent big farmers and agri-business from receiving handouts under green box.
A point that bears highlighting is that even if the most ambitious proposal of reducing trade-distorting domestic support is agreed upon -- which appears to be an unlikely outcome -- it would still provide considerable leeway to developed countries to grant billions of dollars of farm support. Further, the absence of strict disciplines on green box could undermine gains that may be achieved through a reduced ceiling on trade-distorting subsidies. This should be a matter of concern for developing countries.
Developed countries have consistently demanded that developing countries, including India, reduce their agricultural tariffs. However, it is widely understood that tariff liberalisation by developing countries could have severe consequences -- such as large-scale unemployment, poverty and hunger -unless they are accompanied by a substantial reduction in, if not removal of, developed-country farm subsidies.
It was agreed in the 2004 July Framework, and further elaborated in the 2005 Hong Kong Declaration, that developing countries would have the right to self-designate certain products as Special Products (SPs). SPs would be subject to flexible tariff reduction. Self-designation of SPs is required to be guided by indicators based on criteria such as food security, livelihood and rural development concerns. While most developing countries have favoured broad coverage of products under SPs, some developed countries have suggested that SPs be restricted to not more than five products. The latter proposal would severely undermine the ability of developing countries to protect the livelihood of their farmers against a surge in cheap and subsidised imports from developed countries.
It is sometimes argued that, in order to address food shortages in India, the country should not be averse to reducing agricultural tariffs during the WTO negotiations. This argument is fallacious, as India can apply low customs duty to facilitate food imports while continuing to keep high bound rates on agricultural products.
The export competition pillar includes various forms of direct and indirect export subsidies, export credits, export insurance, food aid, etc. The most significant development in the export competition pillar has been the decision at the Hong Kong Ministerial meeting to eliminate export subsidies by 2013.
However, the actual impact of the elimination of export subsidies may be rather limited, given the fact that the amount of these subsidies -- less than $ 10 billion per year -- is significantly less than the amount of domestic support.
The agricultural sector is India’s most vulnerable sector. With the livelihood of around 650 million people in the country being dependent on agriculture, India’s interests in the negotiations on agriculture are mainly defensive. India’s offensive interests lie in reducing the heavy subsidisation in developed countries.
India’s interests in agriculture have always been dictated by the need to safeguard millions of small farmers who operate the majority of farm holdings in the countryside. Agriculture determines the very social fabric of India and is more a way of life and means of livelihood than a question of commerce. Further, India has 25 agro-climatic zones that, on the one hand, provide diversity to crop cultivation and, on the other, make crop rotation within a farm extremely difficult. Given these complexities in agriculture, India has essentially defensive interests in agriculture. India’s bound rates and applied agricultural tariffs are among the highest in the world.
Further, the government has considerable flexibility to increase customs duties on most agriculture products, as there is a substantial gap between the existing bound rates and applied customs duty. To illustrate, the bound rate on some edible oils is 300%, but the applied customs duty is 100%. Thus, the government has the flexibility to raise customs duty on some edible oils. However, in respect of certain products like olive oil, the bound rate and applied customs duty are the same -- 45% -- leaving almost no flexibility for raising customs duty, even if the need were to arise in the future.
Keeping its agrarian crisis in view, India had made a strong pitch for according adequate tariff protection to certain products by designating them special products. The products within agriculture regarding which India is extra sensitive with respect to trade liberalisation -- due to their potential for huge employment-generation and livelihood concerns -- include cereals, edible oils and oilseeds and dairy products. Other agricultural products produced by small farmers and, therefore, sensitive for India are spices, ginger, cane sugar, etc. These need to be protected against deep tariff reduction.
As part of G33, India has strongly supported the need for developing countries to have a Special Safeguard Mechanism (SSM) which would allow them to impose additional tariffs when faced with cheap imports or when there is a surge in imports. However, developed countries and some developing countries have sought to impose extremely restrictive requirements for invoking SSM, which would render this instrument ineffective.
As far as agriculture is concerned, overall there does not appear to have been any major shift in India’s negotiating stand. It has firmly resisted making deep tariff cuts on agricultural products. At the same time, it is aggressively pushing developed countries to reduce their farm support. However, as part of the G20 it has diluted its stand on green box and blue box (subsidies provided for limiting production) subsidies. At the Cancun Ministerial meeting in 2003, the G20 had sought a cap on green box subsidies and rejected any expansion of blue box subsidies. However, by the time the 2004 July Framework was concluded both these demands appear to have been abandoned. India also does not seem to have made any headway in obtaining the right to apply quantitative restrictions on agricultural imports, a demand repeatedly made by stakeholders such as farmers’ organisations and NGOs.
While India’s negotiating strategy has been defensive, in general, there are several products in which it may have an export interest. These include cereals, meat, dairy products, some horticultural products and sugar, which may see a growth in export opportunities with reductions in tariff. India’s negotiating strategy should also be cognizant of the export opportunity that may be unleashed in the processed food sector, which has seen significant growth over the past few years. It is here that the decision at Hong Kong to eliminate export subsidies by 2013 assumes importance.
[B]Non-Agricultural Market Access(NAMA)[/B]
In GATT/WTO, the term ‘tariff’ is used to refer to a customs duty levied at the time a product is imported into the territory of any country. Tariffs generally have three functions: (i) to provide revenue to the government; (ii) to protect the domestic product from competition with the imported product, as the latter becomes more costly because of the tariff; and (iii) to function as an instrument of development policy in discouraging non-priority imports (such as luxury goods), while encouraging priority imports like capital goods and industrial intermediates. As the imported product becomes more expensive with the levy of a tariff than it would be without it, tariffs have a restraining effect on imports.
GATT/WTO requires member countries to bind their tariffs at mutually negotiated rates with a commitment that the applied customs duty in a member’s territory will not exceed the negotiated level,
which is referred to as the [I]bound level[/I]. When a country undertakes the obligation to ‘bind’ tariff on a product, it cannot raise the tariff on that product beyond the ‘bound’ level. It may, however, apply a lower tariff at its own discretion. If a country has not ‘bound’ the tariff on a particular product, it is free to put any level of tariff on it. The bound levels for a country are included in that country’s tariff schedule, which is kept in the WTO as a record.
The negotiations on industrial tariffs are mainly on two issues: how to reduce tariffs by working out a formula for tariff reduction, and what percentage of products will be covered by tariff binding (commitment on binding coverage -- that is, the obligation not to raise tariffs beyond committed bound levels on a range of products that are not currently covered by binding).
Under GATT/WTO, there are different approaches to commitments on tariff reduction. The least onerous approach for tariff reduction is to reduce the average tariff, with low reduction on products requiring high tariff protection and higher reduction on products not requiring special protection. A more onerous approach is to reduce tariffs on each tariff line on the basis of a linear formula, under which tariffs are proportionately cut by a fixed percentage. The most onerous method for taking action on tariff reduction commitments is through a non-linear formula under which higher tariffs are cut more than lower tariffs. To illustrate, a product with an initial tariff of 70% will face a higher cut than another product with an initial tariff set at 40%. The extent of tariff cuts under a non-linear formula depends on the value of the coefficient. One commonly used non-linear formula is the so-called Swiss Formula (see below).
Under GATT negotiations, developing countries were not required to reduce tariffs on a product-byproduct basis. Under the Uruguay Round commitments, they were required to undertake tariff cuts in the least onerous manner -– through average tariff reductions.
[B][I]NAMA negotiations: Doha and beyond[/I][/B]
Paragraph 16 of the Doha Declaration, which is on NAMA, has the following four elements:
[*]Reduction/elimination of tariffs, including tariff peaks, high tariffs and tariff escalation, as well as nontariff barriers, in particular on products of export interest to developing countries.[/*] [*]Comprehensive product coverage without any [I]a priori[/I] exclusions.[/*]
[*]Special needs and interests of developing countries and Least Developed Countries (LDCs) to be taken fully into account.[/*] [*]Less than full reciprocity by developing countries and LDCs in reduction of tariffs.[/*]
Certain features of the Doha mandate on NAMA bear highlighting. First, the Doha Declaration did not specify whether tariff reduction should be undertaken on the basis of average tariff cuts or line-by-line formula-based cuts. Thus, the possibility existed for developing countries to seek tariff reduction through the least onerous method of average tariff reduction. Second, although the coverage of products for tariff reduction would be comprehensive without [I]a priori [/I]exclusions, the possibility exists for keeping certain tariff lines outside the scope of tariff reduction. Third, the mandate provides for the special needs and interests of developing countries to be [I]fully [/I]taken into account in the negotiations. Fourth, under the concept of ‘less than full reciprocity,’ developed countries could be expected to undertake deep tariff cuts without commensurate concessions from developing countries.
These four features of the Doha mandate would suggest that the interests of developing countries would be protected during NAMA negotiations. However, subsequent developments do not indicate that the negotiations are proceeding in a direction that would address the main concerns of developing countries like India.
In the July Framework it was recognised that the formula approach is key to reducing tariffs. It was specified that countries would continue to work on a non-linear formula, to be applied on a line-by-line basis. Certain flexibilities for addressing the concerns of developing countries were also envisaged in the July Framework. As far as NAMA negotiations are concerned, the crucial point is that the July Framework should be viewed only as providing initial elements for further work, and should not be treated as having been accepted.
At the Hong Kong Ministerial meeting of the WTO in 2005, it was decided that NAMA tariff reductions would be undertaken through what is known as the Swiss Formula. Expressed mathematically, the Swiss Formula is as follows:
t1 = (a X t0) / (a+t0), where t1 = new reduced tariff after application of the Swiss Formula; t0 = original tariff on which the Swiss Formula is applied; a = coefficient which determines how steep the tariff cuts will be: the lower the coefficient, the larger the cuts.
*B+*I+NAMA negotiations: India’s stand*/I+*/B+
From India’s submissions on NAMA to the WTO, it would appear that India’s negotiating position has evolved considerably and changed significantly from its initial approach to tariff reduction and its earlier stand on how unbound tariff lines should be treated for purposes of tariff reduction.
India’s initial approach to NAMA negotiations is contained in its submissions TN/MA/W/10 (dated October 22, 2002) and TN/MA/W/10/ Add 1 (dated January 8, 2003). From the outset, India does not appear to have supported the least onerous approach to tariff reduction through average tariff cuts. Instead, it favoured the relatively more onerous approach of a simple percentage cut on each product. In April 2005, even this approach was abandoned in favour of a still more onerous formula -- the nonlinear ABI (Argentina-Brazil-India) Formula, which is a variation of the Swiss Formula. Thus, India’s approach has evolved from seeking a less tedious approach to tariff cuts to proposing and accepting tariff cuts based on the Swiss Formula, which would result in significant tariff reductions.
As far as unbound tariff lines are concerned, India’s initial negotiating stand was that developing countries should have the flexibility not to bind certain tariff lines still considered domestically sensitive or strategically important. However, in a joint submission by Argentina, Brazil and India, TN/MA/W/54 (dated April 15, 2005), India has clearly stated that, “increasing the binding coverage to 100% is a desirable objective of this Round”. This is another instance of a significant shift in India’s negotiating stand between October 2002 and April 2005.
In general, no country can be expected to adhere to its initial negotiating stand during the course of trade negotiations. The process of negotiations involves trade-offs, with countries conceding ground on certain issues in order to secure gains in other areas. It would, therefore, be useful to assess what gains developing countries, including India, have made in the NAMA negotiations.
The Doha mandate provided for the reduction or elimination of tariff and non-tariff barriers on products of export interest to developing countries. This would have been an issue of particular interest to India as its exports in competitive sectors like apparel, leather and footwear, etc, face significant tariff barriers in developed-country markets. So far no proposal has been made, either by India or any other developing country, seeking reduction or elimination of tariffs on products of interest to developing countries. While tariff reduction through the Swiss Formula would cut into developed-country tariffs, particularly tariff peaks on apparel, footwear, etc, in the absence of product-specific proposals,
developing countries would lose an opportunity to seek deeper cuts on products of export interest to them.
The Doha mandate provided for developing countries to make less than fully reciprocal commitments. This is likely to be reflected through developing countries retaining the option to keep a certain percentage of products outside the scope of tariff reduction, or subjecting them to less than formula cuts. While the exact percentage of these tariff lines remains to be agreed upon, this should provide a certain amount of breathing space to India for protecting sensitive products from the adverse impacts of tariff reduction.
In one of its initial negotiating submissions (TN/MA/W/10/Add 1 dated January 8, 2003), India proposed that developing countries must get credit for autonomously binding their tariffs after the Uruguay Round. Credit for autonomous liberalisation can be obtained in the form of less onerous tariff reduction commitments. As India has bound a large number of tariff lines autonomously, after the Uruguay Round, it stands to gain significantly if agreement is reached on the methodology for getting credit. It is, therefore, surprising that India made a proposal on this issue only in June 2006, more than three years after having suggested the idea. As India’s proposal was made rather late, it does not appear to have been discussed at the WTO so far.
In its submission TN/MA/W/10 (dated October 22, 2002), India emphasised the significance it attaches to the removal of Non-Tariff Barriers (NTBs), particularly on products of export interest to developing countries. However, progress achieved so far in this matter does not hold out any promise for the removal of these barriers in the near future. In the Hong Kong Ministerial Declaration, the ministers have only taken note of the work done for “the identification, categorisation and examination of notified NTBs” and have recognised “the need for specific negotiating proposals,” which should be submitted as quickly as possible. There is, thus, no deadline even for the submission of proposals, let alone for the elimination of NTBs. Clearly, from India’s perspective, one of its important objectives -- the removal of NTBs -- has not seen the progress it might have desired.
It is clear that the main and substantial gain made by India so far in the NAMA negotiations relates to having the flexibility to protect certain sensitive products by keeping them outside the scope of the applicable tariff reduction formula.
[B][I]Implications for India of NAMA negotiations [/I][/B]
Empirical evidence suggests that the integration of a country into the global economy provides both benefits and challenges for consumers, business and the government. In a scenario where India’s economy no longer faces a foreign exchange shortage, it would be crucial for the country to leverage NAMA negotiations in order to generate employment through the expansion of trade. Given the relatively high level of NAMA bound tariffs in India, compared to developed countries, tariff reduction through the non-linear Swiss Formula would require India to make deeper tariff cuts than developed countries. In other words, the extent of percentage points by which India would be required to reduce its bound tariffs would far exceed the corresponding number for developed countries. Herein lies the imbalance in the possible outcome of NAMA negotiations for India. Domestically, one possible way of mitigating the adverse effects of tariff reduction could be by designing appropriate safety nets for sectors likely to be adversely affected by reduced tariffs.
As commitments on bound tariffs are almost irreversible, deep cuts in bound tariffs would make it difficult for India to use tariff protection as a tool for industrial policy in the future. In other words, India may not be able to protect some sectors of its domestic industry through appropriate levels of customs duty, even if there is a surge in imports of low-priced manufactured goods.
Given the employment potential of some of the informal sectors, including fish, natural rubber, etc, it is important for India to seek import protection in these areas. At the same time, India should not ignore the possibility of enhanced exports generating additional employment in other sectors.
Based on simulations undertaken, it is clear that the outcome of tariff reduction would not be tradeneutral or universally beneficial for different sectors. Labour utilisation for both skilled and unskilled labour falls in nine out of the 28 sectors, particularly in raw materials-based sectors, metals and auto components. However, there could be significant gains in output and labour use for textiles and apparel. As these gains are likely to accrue over a broad initial base, tariff liberalisation in this sector under NAMA could provide an overall balance for the country. For India, any sectoral initiative to reduce tariffs to zero in selected sectors would be meaningful only if developed countries agree to zero tariffs in the textiles and clothing sector.
Unlike many developing and developed countries, India is not a member of many regional/free trade agreements. Thus, India’s exports become uncompetitive to the extent of margin of preference enjoyed by its competitors in the domestic market of preference-granting countries. This disadvantage would be addressed after NAMA tariffs come down.
While India has defensive interests in agriculture and NAMA, in services it can afford to be on the offensive, given the edge that it has in most areas in this sector over other countries, both developed and developing.
*B+India’s offensive interests in services*/B+
From India’s point of view, services present a different picture from agriculture and industrial tariffs. As an emerging global power in IT and business services, the country is, in fact, a demander in the WTO talks on services as it seeks more liberal commitments on the part of its trading partners for crossborder supply of services, including the movement of ‘natural persons’ (human beings) to developed countries, or what is termed as Mode 4 for the supply of services. With respect to Mode 2, which requires consumption of services abroad, India has an offensive interest.
In sharp contrast, the interest of the EU and the US is more in Mode 3 of supply, which requires the establishment of a commercial presence in developing countries. Accordingly, requests for more liberal policies on foreign direct investment in sectors like insurance have been received. These developed countries are lukewarm to demands for a more liberal regime for the movement of natural persons.
Unlike many developing countries, India has taken offensive positions in this area as it has export interests in information technology (Mode 1). The country also seeks greater access to the EU and the US in terms of the movement of natural persons, or what is termed as Mode 4 in cross-border supply of services. Lack of movement in Mode 4 due to opposition by the US and the EU may affect India’s ability to offer much in other modes of services.
India would also like to see issues like economic needs test, portability of health insurance and other such barriers in services removed. As far as delivery of services through commercial presence (Mode 3) is concerned, there is an increasing trend of Indian companies acquiring assets and opening businesses
in foreign markets in sectors such as pharmaceuticals, IT, non-conventional energy, etc. This is further evidenced by the increase in Outward Foreign Direct Investment (OFDI) from $ 2.4 billion in 2004-05 to $ 6 billion in 2005-06. India may, therefore, have some interest in seeking liberalisation in Mode 3, although it may need to strike a balance with domestic sensitivities in financial services.
India has received many pluri-lateral requests for the opening of a number of services. However, while the demanders have high ambitions in terms of the market access they want, they are not willing to open up their own economies to the same degree, particularly in Mode 4. While the EU is fully committed to the pluri-lateral process, the US continues to indicate the high importance it gives to the bilateral request-offer. In fact, India has threatened to withdraw its offers if better offers, which may enhance India’s services exports, are not forthcoming from its trading partners. Mutual recognition of degrees, allowing portability of medical insurance, reducing barriers to movement of professionals, etc, are some of the areas of interest to India.
An important issue relating to the delivery of services and liberalisation is domestic regulatory reforms. Appropriate domestic regulations are necessary to prevent market failure as well as to address issues like quality control, accreditation and equivalence, effective registration and certification systems, revenue sharing, etc, for protecting and informing consumers. In addition, regulatory frameworks can also advance transparency. Any market access commitments that India might make during the ongoing negotiations must be preceded by an effective regulatory framework. The hiatus in the negotiations could be utilised for putting into place appropriate regulatory regimes in different service sectors.
Some experts are of the view that under the Uruguay Round commitments, developed countries already have a liberal trade regime in Mode 1 (which covers Business Processing Outsourcing or BPOs) with regard to some of the service sectors of interest to India. Further research needs to done to assess the extent of autonomous liberalisation undertaken by developed countries, which can be locked in during the negotiations, and consequent gains that can accrue to India. Further, even in the absence of additional liberalisation, India’s service exports would continue to grow in view of its cost advantage and demography. India could also explore the possibility of finalising mutual recognition agreements with the main importers of services, so that differences in national regulatory systems do not act as barriers to its exports.
From India’s perspective it would be most crucial during the Doha negotiations to protect the interests of its farmers, even at the cost of foregoing benefits that might have otherwise been made in services and NAMA negotiations.
As far as agriculture negotiations are concerned, the playing field may be tilted further against India if it is required to undertake deep tariff cuts without any concurrent elimination of farm subsidies by developed countries. Even the most ambitious proposal would permit the US and the EU to together provide trade-distorting subsidies to the extent of $ 30 billion. Further, without strengthened disciplines on green box, developed countries may be in a position to increase subsidies under this category beyond the present levels of $ 90 billion. Such high levels of farm subsidies in developed countries, accompanied with deep tariff reductions in India, could severely threaten the livelihood of India’s farmers as well as the food security of its people. There is no requirement for India to reduce bound rates to address the current food shortage.
As far as NAMA is concerned, without a steep reduction in tariffs in the textiles and clothing sector in developed countries, India may not stand to gain significantly. In respect of services, India would need to balance the incremental gains that might accrue to it from liberalisation in developed-country markets with the adverse consequences of making commitments to liberalise sensitive sectors. As India’s existing regime in some service sectors (like telecom) is more liberal than its existing commitments at the WTO, it could seek to leverage this by binding its existing regime, provided it obtains commensurate reciprocal concessions.
[I](Abhijit Das is Senior Trade Officer, UNCTAD India Programme)[/I]
India and the IMF
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C. R. L. NARASIMHAN
SHARE · COMMENT · PRINT · T+ TOPICS economy, business and finance economy (general)
macro economics international economic institution
Ahead of the recent IMF-World Bank meetings in Washington, Finance Minister P. Chidambaram questioned the accuracy of growth forecasts of member-countries put out by the world body. In specific focus has been the sharp downgrade by the IMF of India’s growth forecast for 2013-14. In its latest update to the World Economic Outlook (WEO), the IMF estimates the Indian economy to grow by just 3.8 per cent, sharply lower than the 5.6 per cent forecast in July. A pertinent question raised by Mr. Chidambaram has to do with the rationale, the reasons behind such a sharp downgrade: what is the significant bad news that the IMF has received between July and September to warrant such a steep downgrade? Many others too have made the point that the IMF’s methodology for calculating national accounts statistics is based on market prices whereas India publishes its estimates on factor cost. The Central Statistics Office (CSO) does give calculations on market prices also but those at factor cost are the usual reference point. The above point is valid. However, in the instant case, India’s gross domestic product (GDP) growth number, even if expressed at factor cost, will not be significantly better — it will be 4.25 per cent — according to the IMF. Official statistics from the government of India, the Prime Minister’s Economic Advisory Council (PMEAC) and the Reserve Bank of India expect the economy to grow by between 5 per cent and 5.5 per cent during fiscal 2013-14. Even this modest target seems difficult to achieve, given that in the April-June quarter, the economy grew by just 4.4 per cent, according to the CSO. The government is banking heavily on a revival of the farm sector on the back of good monsoons to push up the growth rates during the second-half of the year. However, most recent industrial output figures (IIP) for August are far from satisfactory with manufacturing continuing its slump. There is, however, renewed optimism on the current account front with September trade figures showing exports growing for three months in a row.
Mr. Chidambaram is on stronger ground when he questions the value of IMF’s surveillance mechanism, specifically on how it failed to warn member-countries of the possible deleterious consequences of the tapering off of the ultra soft monetary policies of the U.S. and other advanced countries. Mr. Chidambaram’s other point that too frequent downgrades in growth estimates impact negatively on market expectations and spread gloom is valid. IMF’s downgrade follows similar action by a very large number of private forecasters though, it must be said, very few have gone as low. The IMF’s action should, however, not be viewed in isolation from its other observations on India and even more pertinently the global economy. The IMF’s assessment of the world economy has changed quite drastically over the past few months. The most important change has come from the way major countries have fared since April. In the post-recession period, the big emerging economies were in the forefront of recovery. Advanced economies were lagging behind. By April this year, however ,the IMF was talking of a “three-speed recovery “with emerging growing rapidly, the Ü.S. and Japan doing reasonably, and Europe still mired in crisis. More recently the IMF chief reversed that view in a speech, acknowledging that in many advanced countries, “we are finally seeing signs of hope,” while momentum is slowing in countries such as India, China and Brazil. Analysts have unanimously interpreted the above statement to mean that it is no longer possible to identify winners and losers easily. Each individual country is distinct from another but at the same time there is growing inter-dependence. What, however, is clear is that unlike ever before in the postrecession period, advanced economies are in the forefront having put the worst behind them. The U.S. and Japan continue to grow, and the core European economies are also turning in positive growth. Against this backdrop, IMF’s lower forecast for India has to be explained in more nuanced terms than what the numbers suggest. Europe’s recovery has been marked by surpluses in the current account, which is matched by deterioration elsewhere, especially in India and other developing countries. This, in turn, has created vulnerabilities, as, for instance, the capital flight from India and other countries in the wake of the Fed’s hint of tapering, leading to rapid currency depreciation, inflation and a greater burden of foreign debt.