Report by the Secretariat s15

India WT/TPR/S/182 Page 33

III. TRADE POLICIES AND PRACTICES BY MEASURE

(1) OVERVIEW

1. Since its previous Review in 2002, India has continued to reduce barriers to imports. The tariff has become the main instrument of trade policy and remains an important albeit declining source of tax revenue. The Government has continued to reduce applied MFN tariffs on non-agricultural products to meet its goal of reaching ASEAN tariff levels on these products by 2009. As a result, the overall average applied MFN tariff has fallen from over 32% in 2001/02 to less than 16% in 2006/07, widening the already large gap between the average tariffs for non-agricultural products (12.1%) and agricultural products (almost 41%).1 When ad valorem equivalents of non-ad valorem rates are taken into account, the overall average tariff is around 17.5%, reflecting these relatively high tariffs. Analysis of effective protection is complicated by the tariff exemptions granted for certain goods and uses. These exemptions (together with drawbacks) are aimed, inter alia, at mitigating the adverse impact of tariffs on exports and have continued to be simplified during the period under review. However, the overall average applied tariff based on customs duty collection rates is around 10%, suggesting that the effective rate is considerably lower, in great part due to these exemptions. Such measures also render the administration of the tariff complex, thereby making it susceptible to administrative discretion although, the authorities state that administration is carried out within a framework of clearly laid down rules and regulations and hence discretion is judiciously controlled. In addition to tariffs, additional duty, in lieu of excise (a central tax on domestic manufacture) and a 4% special additional duty to partly compensate for internal taxes such as value added tax, municipal tax, "market committee fees" etc., are charged to provide national treatment to the imported good. Under its growing regional trade agreements, India also offers preferential tariff rates although, with the exception of Sri Lanka and LDC members of SAFTA, these are not substantial.

2. As the overall applied MFN tariff declines, the gap between the bound and applied rates continues to grow. India's bound tariff rates are high, especially for agricultural products. As a result of completing implementation of its Uruguay Round commitments, India's overall bound rate is currently at 48.6%. The difference between the high bound rates and considerably lower applied rates creates uncertainty for importers by giving scope to raise tariffs within the bound rates. During the period under review, the authorities have raised tariffs substantially on 27 agricultural products, contributing in part to the slight increase in the overall average applied MFN rate (from 40.7% in 2001/02 to 40.8% in 2006/07).

3. The use of import restrictions, maintained under GATT Articles XX and XXI has declined, with around 3.5% of tariff lines subject to such measures. India also monitors imports of around 300 sensitive products and its use of state trading for food security, marketing, and domestic supply reasons is unchanged. Imports of second-hand cars over three-years old are also subject to licensing restrictions.

4. Since 2002, India's use of anti-dumping and countervailing measures has declined, although it is still one of the largest users of these instruments. Attempts are being made to harmonize national standards with international norms. Some 73% of Indian standards for which corresponding ISO/IEC standards have been issued are harmonized, while the total of Indian standards harmonized with international norms has risen from 17% to 22% since 2002. India is also trying to consolidate its large number of laws dealing with sanitary and phytosanitary measures to streamline SPS standards

1 This gap is somewhat smaller if ad valorem equivalents (AVEs) for non-ad valorem rates (all but two specific rates found in textiles and clothing) are included in the tariff analysis, raising the average tariff on non-agriculture to 14.1%. WT/TPR/S/182 Trade Policy Review Page 34 and enforcement and a system to carry out pest/disease risk analysis has been in place since July 2001.

5. Government procurement continues to be used as a policy instrument, although at the Central Government level significant efforts have been made to enhance transparency and competition in procurement procedures. It seems, however, that preferences remain for products manufactured by the small-scale sector and state-owned enterprises. India is not a party to the WTO's Agreement on Government Procurement.

6. In contrast to barriers to imports, which have been declining gradually, the export regime remains complex with numerous schemes aimed at reducing the anti-export bias inherent in India's trade and internal policies. Since 2002, new schemes have been added, and some incentives or schemes have been removed. The special economic zones (SEZs), to replace the existing export processing zones, offer investors a number of incentives, including tariff exemptions on imports of capital goods and other inputs as well as income tax holidays of up to ten years. The tax revenue forgone from the EPZ/SEZ schemes was estimated at over Rs 280 billion in 2004/05 (around 0.9% of GDP)2; there is considerable doubt as to the cost-effectiveness of SEZs in generating investment and employment. Other export measures include prohibitions and trade through designated agencies, which are essentially unchanged, and export taxes on a few lines pertaining to raw hides and skins and semi-finished leather; such measures tend to depress the domestic prices of these products and therefore constitute assistance to their downstream processing.

7. India's industrial policies, which include reservations for the public and small-scale sectors, and industrial licensing requirements, have, by and large, become less restrictive. Currently, three industries (atomic energy, railways, and substances notified by the Department of Atomic Energy) are restricted to the public sector, and industrial licensing is required for five industries; products reserved for manufacture by the small-scale sector have also declined from 799 at the time of the last Review to 326. Less progress has been made in reforming subsidies, especially those regarded as "non-merit" subsidies, which account for 58% of total subsidies, and the public sector, which remains a drain on scarce government resources. The largest share of direct subsidies continues to go to agriculture (including fertilizer and price support) and food, although petroleum (kerosene and liquefied petroleum gas) and the railways also receive a significant share. In addition, there are implicit subsidies, especially through subsidized prices of key services, like electricity and water. With regard to state-owned enterprises (SOEs), efforts were made to identify those that could be restructured and made profitable, while others were to be closed. However, as of July 2006, the privatization programme has been paused, pending a review.

8. Despite moderate tax rates, the pervasiveness of incentives is such that the tax system is also a major instrument of industrial policy as well as a source of revenue. At the same time, it is susceptible to tax avoidance, if not evasion. In recent years, an effort has been made to rationalize the tax structure, including through the removal of incentives with the potential for causing resource misallocation. Attempts to render the income tax system more neutral (by reducing/removing some incentives and thereby broadening the income tax base), while at the same time improving enforcement, have contributed to the increase in direct taxes collected. With regard to indirect taxation, a value-added tax was implemented by most states in April 2005, replacing state-level taxes on purchase or sale of goods. The Central Government levies "excise duty" on goods at the manufacturing stage and a 12% service tax on a number of services. It also levies a central sales tax on inter-state sales of goods, which is collected and appropriated by the states. It is envisaged that the

2 Nevertheless, according to the Receipts Budget, most of these schemes "may not be termed incentive schemes since they largely represent input tax credit that has to be allowed in order to offer a level playing field to our exporters" (Budget 2006/07). India WT/TPR/S/182 Page 35 central and state taxes on goods and services will eventually be combined into a goods and services tax (GST).

9. Implementation of the Competition Act 2002 has been delayed due to legal challenges to certain provisions; certain amendments had to be made to the Act, and these are being processed after a detailed examination in Parliament. When it becomes functional, the Act will permit the Competition Commission of India to take action against cartels and other anti-competitive practices, including those originating outside India but affecting the domestic market.

10. Technological progress is one of the main engines driving growth in GDP and productivity (and thus competitiveness) in the long-run; thus, new technologies need to be nurtured and intellectual property rights protected adequately in the domestic market. In this regard, the Patent Act has been amended, ending the ten-year transition period for India to implement its obligations under the TRIPS Agreement. The Act was also amended to permit compulsory licences for exports of patented pharmaceutical products in exceptional cases (following the amendment to the TRIPS Agreement), although it appears that no compulsory licences have been granted. Efforts have also been made to step up enforcement, including through increased police raids and information and training campaigns. However, the lack of data on civilian or criminal prosecutions, and long and cumbersome legal procedures (Chapter II) would suggest that these are insufficient deterrents to IPR violations.

11. An efficient capital market capable of mobilizing domestic savings and channelling them into the most productive investments is essential for improving India's competitiveness and thus its long-term development. Recognizing that good corporate governance is essential for the establishment of such a market, the authorities have been taking steps to improve the framework in this regard.

(2) MEASURES DIRECTLY AFFECTING IMPORTS

(i) Procedures

(a) Registration and documentation

12. There have been no major changes in import and export procedures. Under the Foreign Trade (Development and Regulation) Act, 1992, no person may engage in import or export unless authorized to do so by the Director General of Foreign Trade (DGFT) through an importer-exporter Code (IEC) number.3 However, under the Foreign Trade Policy procedures, certain goods may be imported without an IEC number, including by Central Government ministries, imports for personal use, and trade with Myanmar and Nepal valued at under Rs 25,000 per consignment.4

13. Three documents are required for most goods imports: the invoice, packing list, and bill of lading or airway bill. Import permits for products subject to restrictions and health and sanitary certificates must be obtained prior to import from the relevant Government departments and submitted along with the Customs declaration. Additional documentation may be required, such as a country of origin certificate for goods imported under a preferential trade agreement or for goods entering under an export incentive scheme and qualifying for duty reductions.

14. To speed up customs clearance, the electronic data interchange (EDI) system was introduced in May 1995 and is applied at all major ports and air cargo complexes. It is operational in 34 customs

3 Foreign Trade (Development and Regulation) Act, 1992 (Chapter III). 4 The full list of exemptions is available in Ministry of Commerce (2006b). WT/TPR/S/182 Trade Policy Review Page 36 stations, and about 85% to 90% of import/export documents are processed electronically: about 0.25 million importers/exporters are using EDI facilities. According to the authorities, the EDI and a risk management system at major customs ports has significantly reduced the time taken for customs clearance (section (ii)(b) below). Imports declared under the EDI system do not require a formal bill of entry to be filed with Customs, but the importer is required to file a cargo declaration. The importer must, however, submit the required documents at the time of examination of the goods. For imports not filed under the EDI system, additional documents are required, including: signed invoice, packing list, bill of lading, letters of credit, and relevant import or industrial licences, etc.5

(b) Preshipment inspection

15. In October 2004, the Department of Commerce announced that imports of unshredded scrap required preshipment inspection and would be permitted only through designated ports; the list of ports has been gradually expanded to 26.6 Preshipment inspection is also required for imports of certain types of second-hand and defective items of steel, as well as textiles and textile articles. Imports of certain types of second-hand and defective steel products are permitted only through Mumbai, Kolkata and Chennai ports, while imports of textiles and textile articles must be accompanied by a preshipment inspection certificate stating that they do not contain hazardous dyes prohibited under the Environment (Protection) Act 1986. Preshipment inspection certificates are provided by 99 recognized certifying agencies, including several based outside India.7

(ii) Customs valuation and clearance

(a) Valuation

16. There have been no major changes to customs valuation procedures since India's last Review, in 2002. The only statutory change for trade facilitation purposes, was an amendment of Rule 9(2) of the Customs Valuation Rules 1988, which clarified that the cost of moving freight from the port to an inland container depot or a container freight station before customs clearance, would not be included in the cost of transport as it would be considered part of the post-import cost. Valuation is determined under the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988, most recently amended in September 2001. Under these Rules the value of imported goods is the transaction value defined as "the price actually paid or payable for the goods when sold for export to India", which should include costs and services incurred by the buyer as well as the cost of inputs, royalties, licence fees, etc. that are not included in the price paid (Rule 9). If the transaction value cannot be determined the value is based on: the transaction value of identical goods sold for export to India and imported at or about the same time; the transaction value of similar goods; deductive value; computed value; or the residual method.8 Customs valuation procedures have been improved through the use of online databases (see below). India also uses reference prices to value some agricultural imports (Chapter IV(2)).

17. India continues to maintain reservations under Annex III, paragraphs 3 and 4 of the Agreement on Customs Valuation concerning the reversal of the sequential order of Articles 5 and 6 and the application of Article 5.2, whether or not the importer so requests. 9 The Committee on

5 A full list of documentation required is provided in the Customs Manual. Viewed at: http://www.cbec.gov.in/cae/customs/cs-manual/manual_3.htm, [24 April 2006]. 6 DGFT Public Notice No. 39 (RE-2005)/2004-2009, 16 August 2005. Viewed at: http://dgft.delhi.nic.in/ [7 February 2007]. 7 Government of India, Press Information Bureau, "Preshipment Inspection Certificate for Import of Scrap Made Mandatory", 15 October 2004. 8 Rules 5-8 of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988. India WT/TPR/S/182 Page 37

Customs Valuation concluded its examination of India's legislation on customs valuation in May 2006.10

(b) Customs clearance

18. With the introduction of the Risk Management System (RMS) in December 2005, routine assessment, audit, and examination of all imported goods/bills of entry has been discontinued. The focus is now on quality assessment, examination and post clearance audit of bills of entry selected by the RMS. Import declarations filed with Customs are processed electronically and produce an electronic output that determines whether the consignment needs to be appraised or examined or both, or be cleared after payment of duty. Goods may also be examined before assessing the duty liability at the importer's request, in case of incomplete information at the time of import, or, if deemed necessary by the Customs Appraiser/Assistant Commissioner. Where the RMS has identified a cargo as low risk, "self assessment by importer" and "no examination by Customs" is accorded. Imports by clients accredited under the Risk Management Programme are facilitated through "no assessment" and "no examination" facilities. According to the authorities, customs clearance activities account for around 15-18% of the total cargo "dwell time" at ports of entry. The introduction of the RMS in major customs locations, has reduced the time taken by Customs to eight hours (two hours for assessment and six hours for examination). For accredited clients, the clearance ranges from one to four hours.

19. The mid-term review of the Tenth Five-Year Plan called for further trade reforms by, inter alia, redoubling efforts to modernize customs, streamlining documentation requirements, and widening the coverage of EDI. According to the review, "the consequent reduction of transaction costs for exports would go a long way in improving competitiveness and in achieving the country's target of doubling exports by 2008-09. These measures would also make the country more attractive for FDI".11 Since December 2002, the National Import DataBase (NIDB) has been used by the Directorate General of Valuation to speed up valuation procedures. The NIDB permits a comparison with data gathered on the value of recent imports of comparable goods and is used by all 34 EDI stations as well as non-EDI stations through electronic mail. In addition, the RMS is due to be phased in at customs stations by March 2007. The RMS uses a valuation risk assessment module (VRAM) to use a weighted average value of recent like imports of sensitive goods. The list of products considered to be sensitive was not provided as the specifics of risk assessment are confidential. According to Customs, the introduction of these electronic databases has facilitated quicker clearance of imported cargo on the basis of self assessment without requiring any intervention by Customs for "a considerable percentage" of the total cargo; the percentage could not be revealed for enforcement reasons.

20. Under Chapter XV of the Customs Act, 1962, appeals against decisions taken by a Customs officer are heard by the Commissioner (Appeals). Appeals must be made within sixty days from the date of communication of the decision by Customs. Decisions by the Commissioner (Appeals) should be made, where possible, within six months from the date the appeal is filed. The Customs, Excise and Service Tax Appellate Tribunal hears judicial appeals against decisions by the Commissioner of Customs and the Commissioner of Customs (Appeals).12 Appeals must be filed within three months from the date of receiving a communication from the Commissioner of Customs. The Appellate 9 WTO document G/VAL/2/Rev.22, 10 April 2006. Under Article 4 of the Agreement on Customs Valuation, if the customs value cannot be determined under Articles 1, 2 and 3 of the Agreement, it can be determined under Article 5, and Article 6 if it cannot be determined under Article 5. However, if the importer requests, the order of application of Articles 5 and 6 shall be reversed (Article 4 of the Agreement on Implementation of Article VII of the GATT, 1994). 10 WTO document G/VAL/M/41, 24 May 2006. 11 Planning Commission (undated), p. 481. WT/TPR/S/182 Trade Policy Review Page 38

Tribunal must reach a decision, where possible, within three years from the date on which an appeal is filed. Data on the number of appeals were not provided. Final appeals can be made through the High Court and the Supreme Court. An alternative channel for final resolution of assessment disputes, avoiding prolonged litigation, has been created under the Customs and Central Excise Settlement Commission.

(iii) Tariffs13

(a) Overview

21. Despite declining from 32.3% to 15.8% (excluding AVEs) since the last Review, Indian tariffs remain a major source of revenue for the Central Government. They are expected to account for over 23% of net tax revenue in 2006/07 (30% in 2001/02). Both the MFN and bound tariffs are based on the Harmonized Commodity Description and Coding System (HS 02) and are applied at the HS eight-digit level. The Government is bringing non-agricultural tariffs down, inter alia, to align them with ASEAN rates by 2009; as a result, the current "peak rate" is at 12.5% although some 2.5% (8.8% including ad valorem equivalents) remains above this peak rate; the peak rate was reduced to 10% in the tariff announced for 2007/08. While both applied and bound tariffs have declined, they remain high: the applied tariff provides a major source of protection to certain sectors including agriculture, automobiles, and textiles and clothing. The applied tariff is also complex: in addition to being announced with the annual Budget, rates are changed on an ad hoc basis through gazetted notifications, with the approval of Parliament; numerous exemptions render the system complex to administer, and therefore more susceptible to administrative discretion (Annex III.1). A study based on 2001 data, found that India's high import tariffs are equivalent to a substantial export tax and thus a major impediment to its exports.14 It is likely that the decline in average tariff protection since then has reduced this export tax burden.

(b) Bound tariff

22. Over 75% of India's tariff is bound, 100% for agricultural (WTO definition) and 71.6% for non-agricultural products. In general, bindings range from zero to 40% for non-agricultural products, and to 150% for most agricultural products; some edible oils are bound at 300%. India also renegotiated bindings on some agricultural products (mainly cereals) that were previously bound at 0%; the current average bound tariff for cereals (HS Chapter 10) is 86.3%, and ranges from 60% to 100%. India has not made any commitments in Chapters 3, 42, 46, 64-67, 74, 76, 78-79, 82-83, 92-94 and 97, while partial bindings are mainly in Chapters 48, 51-55 and 85.

23. Implementation of India's Uruguay Round commitments was completed in 2005. As a result, the simple average bound tariff fell to 48.6% in 2006/07 (Table III.1). The bound rate is particularly high in agriculture, averaging 117.2%, while the average for non-agricultural products is 34.7%; textiles and clothing are bound at 29.2%. These averages are also considerably higher than corresponding applied MFN rates, most of which have been declining (Chart III.1). The difference

12 The Tribunal does not have jurisdiction in cases involving goods imported or exported as baggage; goods that are not unloaded at their place of destination; and payment of duty drawback (Section 129A of Article XV of the Customs Act, 1962). 13 During the course of this Review the Secretariat received four versions of the applied MFN tariff. The most recent tariff, received in January 2007, contained some 12,300 lines. Some 600 of these are "ex" lines and have been counted only once in the tariff analysis presented in this report. Changes to the applied tariff were announced with the Budget for 2007/08 at the end of February 2007. However, these changes are not included in the tariff analysis presented here. 14 Based on 2001 data, India's import tariffs were equivalent to an export tax of 31%, one of the highest among the 26 developing countries covered by the study (Tokarick, 2006). India WT/TPR/S/182 Page 39 creates uncertainty for importers in India as it gives considerable scope to the Government to raise tariffs; this scope has been used to raise agricultural tariffs in recent years (Table AIII.1).

Table III.1 India's tariff structure (Per cent) MFN 2001/02 2006/07 2006/07 Final bound tariff tariff tariff excluding excluding excluding including AVEsa AVEs AVEs AVEs

1 Bound tariff lines (% of all tariff lines) .. 75.2 75.2 75.2 2. Simple average applied rate 32.3 15.8 (15.1) 17.5 (16.8) 48.6 Agricultural products (HS01-24) 41.7 42.7 (38.2) 42.7 (38.2) 117.6 Industrial products (HS25-97) 30.8 11.9 (11.8) 13.9 (13.8) 36.4 WTO agricultural products 40.7 40.8 (36.2) 40.8 (36.2) 117.2 WTO non-agricultural products 31.0 12.1 (12.0) 14.1 (14.0) 34.7 Textiles and clothing 31.3 12.3 (12.3) 22.5 (22.5) 29.2 3. Domestic tariff "peaks" (% of all tariff lines)b 1.3 2.7 (2.6) 3.9 (3.7) 7.4 4. International tariff "peaks" (% of all tariff lines)c 93.9 13.8 (12.5) 19.1 (17.8) 72.2 5. Overall standard deviation of tariff rates 13.0 17.4 (15.0) 20.7 (19.2) 39.1 6. Coefficient of variation of tariff rates 0.4 1.1 (1.0) 1.2 (1.1) 0.8 7. Duty-free tariff lines (% of all tariff lines) 1.1 2.6 (2.7) 2.6 (2.7) 2.2 8. Non-ad valorem tariffs (% of all tariff lines) 5.3 6.1 (6.1) 6.1 (6.1) 6.1 9. Non-ad valorem tariffs with no AVEs (% of all tariff lines) 5.3 0.0 (0.0) 0.0 (0.0) 0.0 10. Nuisance applied rates (% of all tariff lines)d 0.0 0.5 (0.5) 0.5 (0.5) 0.0

.. Not available. a Implementation of the U.R. was completed in 2005. Calculations are based on 8,794 bound tariff lines (representing 75.2% of total lines), of which 8,580 (73.4%) are fully bound and 214 (1.8%) partially bound. b Domestic tariff peaks are defined as those exceeding three times the overall simple average applied rate. c International tariff peaks are defined as those exceeding 15%. d Nuisance rates are those greater than zero, but less than or equal to 2%. Note: Tariff analysis based on standard tariff rates. The 2001/02 tariff schedule is based on the 6-digit HS96 nomenclature consisting of 5,113 lines; the 2006/07 tariff schedule is based on the 8-digit HS02 nomenclature consisting of 11,695 lines. Data in brackets include exemptions, applicable at the full 8-digit tariff line. AVEs for non-ad valorem rates are provided by the authorities. For calculations excluding AVEs the non-ad valorem part of alternate rates has been taken into consideration. Source: WTO calculations, based on data provided by the Indian authorities.

24. India notified the Committee on Market Access that it reserved its rights under Article XXVIII:5 of GATT 1994 to modify its Schedule XII during the three-year period commencing 1 January 2006.15

(c) Applied MFN tariff

Structure

25. India's MFN tariff is applied at the 8-digit level of the Harmonized System. Under the Customs Tariff Act, 1975, the MFN tariff is based on the standard rate, which is a statutory duty; however, the "effective" tariff may be lower because of general- or industrial-use-based exemptions (Annex III.1 and below). India's tariff is announced in the annual Budget at the end of February; additional changes to individual tariff rates are made through notifications issued during the year. In

15 WTO document G/MA/166, 2 November 2005. WT/TPR/S/182 Trade Policy Review Page 40 addition to customs duty, importers are required to pay an additional duty (countervailing duty) and a special additional duty in place of local taxes (Annex III.1).

Chart III.1 Average MFN (standard) and bound tariff rates, by HS section, 2006/07 Per cent 220160

Standard rate 200140 Bound rate 120

Average bound rate 100 (48.6%) Average standard rate 80 (15.8%)

0 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21

01 Live animals & prod. 07 Plastic & rubber 13 Articles of stones 19 Arms & ammunition 02 Vegetable products 08 Hides & skins 14 Precious stones, etc. 20 Miscellaneous manuf. 03 Fats & oils 09 Wood & articles 15 Base metals and prod. 21 Works of art, etc. 04 Prepared food, etc. 10 Pulp, paper, etc. 16 Machinery 05 Mineral products 11 Textiles & articles 17 Transport equipment 06 Chemicals & products 12 Footwear, headgear 18 Precision instrument

Note: Calculations exclude specific rates and include the ad valorem part of alternate rates. Only section 2 is fully bound; sections 12, 19, and 21 are fully unbound. All other sections include bound, partially bound, and unbound lines.

Source : WTO Secretariat calculations, based on data provided by the Indian authorities.

26. The current applied MFN tariff has 11,695 lines, of which 93.9% are ad valorem; of the non-ad valorem rates, two are specific rates (for almonds, shelled and in shell) while 716 (6.1%) are alternate rates (in textiles and clothing). India also provides a number of exemptions on imported inputs for certain sectors or importers depending on the industrial use of the import. As a result of these exemptions, the effective applied tariff is considerably lower than the simple average standard rate. However, because a large majority of the exemptions relate to industrial use, they cannot be included in the tariff analysis. To the extent that a tariff exemption is related clearly to a particular tariff line, the Secretariat has tried to incorporate the exemption in the tariff analysis. Both rates are reported (see Table III.1). Ad valorem equivalents provided by the authorities are also included (Annex III.1 describes the methodology used to calculate the AVEs).

27. In 2006/07, the standard rate of tariff ranged from 2% to 182% (up to 150% if exemptions are included) (from 2% to 354% including AVEs). The largest number of lines (7,519 or 64.3%) are at the "peak rate" of 12.5%, followed by 10.4% of lines at 25-30% (Chart III.2); 300 lines are duty free (2.6% of the tariff). The number of zero rated lines, with the exception of those relating to India's India WT/TPR/S/182 Page 41

ITA commitments, is essentially unchanged since the previous Review, except the applied tariff on pulses and lentils, which was recently reduced to zero.16

Chart III.2 Distribution of standard tariff rates, 2006/07

Number of tariff lines (65.0%) 1,6007,600

1,4007,400 (10.4%) 1,200

1,000 (7.3%)

800 (6.1%).

400 (2.6%) (2.2%) (2.4%) (1.9%) 200 (1.4%) (0.8%)

0 Duty free >0-5 >5-10 >10-15 >15-20 >20-25 >25-30 >30-55 >55-95 >95 Tariff rates

Note: Calculations include AVEs provided by the authorities. Figures in parentheses denote the share of total lines.

Source: WTO Secretariat calculations, based on data provided by the authorities of India.

Tariff average, dispersion, and escalation

28. In 2006/07, India's applied MFN tariff averaged 15.8% although the average is 17.5% when AVEs are included (Table III.1). Average tariff protection has declined from 32.3% in 2001/02 (although, as the 2001/02 tariff was at the HS 6-digit level, with only 5,113 tariff lines, the two figures are not strictly comparable). The average applied rate for agriculture is considerably higher, at 40.8% (WTO definition), while the tariff for non-agricultural imports is 12.1%. The tariff on non-agricultural products, especially, has declined as the "peak rate" of tariff has been cut in successive budgets, inter alia, to meet India's goal of achieving ASEAN levels of tariff protection for non-agricultural products by 2009. In the 2006/07 Budget, the peak rate for non-agricultural products was cut further from 15% to 12.5%.17 Despite this, however, 254 tariff lines or around 2.5% (8.8% including AVEs) of the tariff on non-agricultural products (WTO definition) remain above the peak rate. Rates above 12.5% are applied mainly to fish products (Chapters 3, 15, 16 and 23), natural rubber products (Chapter 40), textiles and clothing (Chapters 51-52, 54-55, 57-58, 61-63), and passenger motor vehicles and motorcycles (HS 87). In agriculture (WTO definition), the highest rates

16 Customs Notification No. 57/2006, Viewed at: http://www.cbec.gov.in/cae/customs/cs- act/notifications/notfns-2k6/cs57-2k6.htm [23 January 2007]. Tariff lines with rates at 12.5% but with part of the line at zero due to the ITA are not included. 17 The peak rate was further cut to 10% in the 2007/08 tariff although this is not reflected in the tariff analysis. WT/TPR/S/182 Trade Policy Review Page 42 are found, inter alia, in beverages and spirits, oil seeds, fats and oils and their products, grains, and coffee, tea, cocoa, and sugar. The overall average tariff for non-agricultural goods is also higher, at 14.1%, when AVEs are included (12.1% excluding AVEs). Inclusion of the AVEs, which are found in textiles and clothing, raises the average tariff for these products from 12.3% to 22.5%.

29. While the tariff on non-agricultural products has been falling, in part to meet the goal of reaching ASEAN tariff levels, a few agricultural tariffs have increased; India's high bound rates have permitted such increases (Table AIII.1). Tariff rates have been increased, inter alia, for tea, coffee, pepper, cloves, cardamom, poppy seeds, garlic, cut flowers, and honey. Partly due to this, the overall average tariff on agricultural products rose slightly from 40.7% in 2001/02 (and from 35.1% in 1997/98) to 40.8% in 2006/07. In addition, tariff rates for some products remain very high, notably some edible oils and alcohol products. The result of these tariff changes is an increase in dispersion, which has more than doubled, from 0.4 in 2001/02 to 1.1 in 2006/07 (dispersion in the tariff, as measured by the coefficient of variation (standard deviation as a share of the average tariff)). The standard deviation has also increased from 13.0 at the time of the last Review to 17.4.

30. The result, in part, of increased protection for agricultural and raw materials, seems to be higher protection for unprocessed than for semi-processed products and in some cases for semi-processed than for final products. While at the time of the last Review, the pattern of de-escalation from semi-processed to processed products was found mainly in paper, printing and publishing, the 2006/07 tariff also exhibits de-escalation from unprocessed to semi-processed products for industries, including food, beverages and tobacco, and textiles and leather (Chart III.3). 18 However, according to the authorities, there are very few cases of de-escalation in MFN rates: in a number of cases, tariffs on specified raw materials have been changed to rectify de-escalation arising out of preferential rates under free-trade agreements.

(iv) Tariff exemptions

31. While the average MFN tariff based on the standard rate is still relatively high, the effective applied tariff is likely to be considerably lower due to a wide range of tariff exemptions. The exemptions are both product-specific and based on industrial use. In the Budget speech delivered in February 2006, the Minister of Finance acknowledged the complexity of the tariff exemptions, which are made public through notifications issued throughout the year. It was proposed that many of those that had outlived their usefulness would be removed. To reduce the multiplicity of these exemptions, most have been consolidated under one notification (Notification 21, dated 1 March 2002). Some, nevertheless, continue to be based on industrial use and therefore cannot be included in an analysis of the tariff. As a result, the Secretariat was only able to include exemptions on some 750 tariff lines at the HS 8-digit level (around 6.4% of the tariff).

32. The inclusion of the tariff exemptions in the current applied MFN tariff reduces the average rate to 15.1% (compared with an average based on the standard rate of 15.8%) (Table III.1). The averages are 16.8% and 17.5%, respectively, when AVEs are included. The inclusion of the exemptions makes very little difference to the average for non-agricultural products (12.0% compared with 12.1%), while the average for agriculture drops from 40.8% to 36.2%. However, the average tariff rate based on duty collection is 10%, suggesting that the exemptions play an important role in the economy.

18 See for example WTO (2002). India WT/TPR/S/182 Page 43

Chart III.3 Tariff escalation by 2-digit ISIC industry, 2001/02 and 2006/07

Per cent 55 50 Average standard rate in manufacturing 2001/02 (32.5%) 45 40 35 30 25 20 15 10 . 5 . a a . . 0 n n Food, Textiles and Wood and Paper, Chemicals Non-metallic Basic metal Fabricated Other beverages leather furniture printing and mineral metal and tobacco publishing products products and machinery Per cent 55

50 2006/07 45

30 Average standard rate in manufacturing (14.9) 25

5 . . a a . . 0 n n Food, Textiles and Wood and Paper, Chemicals Non-metallic Basic metal Fabricated Other beverages leather furniture printing and mineral metal and tobacco publishing products products and machinery

First stage of processing Semi-processed Fully processed

Note: Calculations are based on standard rates. Excluding specific rates and including the ad valorem part of alternate rates. AVEs are not included.

Source : WTO Secretariat calculations, based on data provided by the Indian authorities. WT/TPR/S/182 Trade Policy Review Page 44

(v) Tariff-rate quotas

33. There has been no change in policy on tariff-rate quotas, which are maintained on 14 tariff lines at the HS 8-digit level including: milk powder; maize; crude sunflower seed and safflower oil; and refined rape, colza and mustard oil. The quotas, which are allocated by the Directorate General of Foreign Trade, based in the Ministry of Commerce, are: up to 10,000 tonnes per year at the in-quota rate for milk powder; up to 500,000 tonnes for maize; and up to 150,000 tonnes for sunflower seed or safflower oil or fractions thereof and for rape, colza and mustard oil at in-quota rates of duty. 19 Tariff quotas for these products, which are issued on the basis of requests from designated agencies, are assigned pro rata when requests exceed the quota for the year (to 31 March).20 In practice, however, no tariff quotas have been requested for rape, colza or mustard oil since 2002/03, while a quota of 10,000 tonnes was issued for milk powder only in 2003/04 (Table AIII.2). According to the authorities, other than for sunflower seed or safflower oil, there is no demand for the quotas. No data are available on the extent to which the quotas issued are filled. While TRQs were not issued for some of these products for certain years, imports have occurred over recent years, presumably at out-of-quota rates.21 India has not notified these tariff-rate quotas to the WTO but plans to do so as soon as possible. Under its free-trade agreement with Sri Lanka, India also maintains tariff-rate quotas on clothing and tea imports (Chapter II). No data were available on the extent to which these preferential tariff-rate quotas have been filled in recent years.

(vi) Other charges affecting imports

34. In addition to tariffs, imports are subject to an additional duty (CVD) in lieu of an excise duty, which is a tax on domestically manufactured goods; as of 1 March 2006, all imports are subject to a special duty of 4% so that they are taxed at similar rates as domestically produced goods subject to internal taxes such as value-added tax, municipal tax, "market committee fees", etc. (section (4) below); the VAT, which has been implemented by a majority of the states, is not levied on imports or exports. It appears that the nomenclature difference between the excise tax and the customs tariff at the time of the previous Review has now been reconciled, as the two schedules are now identical. However, there is still a difference between the special duty and other domestic taxes, which may have rates that are higher or lower than the 4% special duty rate and that vary from state to state for certain products (section (4) below).

(vii) Tariff preferences

35. India offers tariff preferences to selected countries under its regional trade agreements (Table III.2). The agreements in force are: SAFTA (which replaced the SAPTA), Asia Pacific Trade Agreement (previously the Bangkok Agreement), preferential areas tariff (Seychelles, Mauritius, and Tonga) and the agreements with Sri Lanka and with Singapore. However, apart from the agreement with Sri Lanka and concessions for least developed country members of the SAFTA, the tariff lines covered by these agreements are less than 50% of the tariff. There is also very little in the way of tariff concessions, with the overall average ranging from 15.5% to 10.6% (the latter for SAFTA LDC members) compared with the overall MFN average of 15.8%; the overall average for imports from Sri Lanka, in contrast, is 3%. Tariff concessions are especially low in sensitive sectors, such as agriculture, again with the exception of Sri Lanka, and in textiles and clothing. It appears that India is considering granting unilateral tariff preferences to least developed countries in Africa. 22 The

19 Department of Commerce (2006b), pp. 45-46. 20 The full list per product is given in Department of Commerce (2006b), pp. 46-47. 21 For example, although no TRQs were issued for milk powder (HS040210) in 2004/05 and 2005/06, India imported 233,620 kg in 2004 and 243,798 kg in 2005. 22 The Hindu online. Viewed at: http://www.thehindubusinessline.com/2005/10/27/stores/ 2005102703050100.htm [24 November 2006]. India WT/TPR/S/182 Page 45

Secretariat was unable to obtain clarification on the application and coverage of such unilateral tariff preferences.

Table III.2 Summary analysis of the Indian preferential tariff, 2006/07 (Per cent) Preferential linesa Overall WTO WTO non- Fish & fishery Textiles & average agriculture agriculture products clothing (% of all lines)

Standard rate 15.8 40.8 12.1 30.0 12.3 Preferential Agreements APTAb 10.8 15.3 40.6 11.6 10.4 12.2 Preferential Areasc 2.7 15.5 38.8 12.1 30.0 12.3 SAFTA Id 23.7 15.0 37.2 11.7 27.6 12.2 SAFTA IIe 84.4 10.6 30.0 7.8 14.8 7.1 Sri Lanka FTAf 88.5 3.0 7.6 2.4 0.0 9.8 Singapore FTA 41.7 14.6 40.2 10.9 23.7 11.9 Bangladeshg 83.6 10.5 29.9 7.7 5.3 7.3 Sri Lankah 89.5 3.0 7.5 2.4 0.0 9.8 a Only items corresponding to an 8-digit tariff line and inferior to their respective standard rate are taken into account. b Asia-Pacific Trade Agreement: preferential rates are applicable to Bangladesh, China, the Republic of Korea, and Sri Lanka. c Seychelles, Mauritius, and Tonga. d South Asian Free Trade Area. e South Asian Free Trade Area tariffs for LDC members (Bangladesh, Bhutan, Maldives, and Nepal). f Calculations include out-of quota rates and exclude in-quota rates. g Including South Asian Free Trade Agreement and APTA. h Including South Asian Free Trade Agreement, APTA, and Sri Lanka FTA. Note: Calculations exclude specific duties and include the ad valorem part of alternate rates. Source: WTO Secretariat calculations, based on Arun Goyal (2006), Bigs Easy Reference Customs Tariff 2006-2007, Academy of Business Studies, New Delhi, and Indian Government tariff notifications No. 38/2006, No. 67/2006, No. 68/2006 and No. 89/2006; and information provided by the authorities.

(viii) Rules of origin

36. India generally applies preferential rules of origin under its bilateral and regional trade agreements through a combination of minimum local content and value addition, and a change in the HS tariff heading. Minimum value addition requirements under existing agreements range from 30% to 50% of the f.o.b. value of the finished good. Under the SAFTA and the agreement with Singapore, there are also product specific-rules of origin for some 180 and 380 products, respectively (Table III.3).

Table III.3 Preferential rules of origin Agreement Rules of origin

Regional SAFTA Up to 40% of the f.o.b. value of the finished good for India and Pakistan, 35% for Sri Lanka; 30% for LDCs with change in tariff heading (CTH) if produced in a single country and 50% for regional cumulation. Product specific rules exist for 180 products. WT/TPR/S/182 Trade Policy Review Page 46

Agreement Rules of origin APTA Not less than 45% of the f.o.b. value of the finished good for developing member countries, 35% for LDCs and 60% aggregate content for regional cumulation Preferential Areas Not less than 50% of the ex-factory cost of the finished good GSTP Not less than 50% of the f.o.b. value of the finished good, 60% for regional cumulation Table III.3 (cont'd) Bilateral Bhutan No specific rules Nepal Twin criteria of change in four-digit tariff and 30% value addition at ex-factory price Myanmar No specific rules Singapore At least 40% of the f.o.b. value of the product must originate in parties to the agreement; change in HS four- digit code. Product specific rules exist for some 380 products (including food products, chemicals, plastics, paper and paperboard, books, nuclear reactors, boilers and machinery parts, electrical machinery and parts, railway or tramway locomotives, photographic and cinematographic products, and apparatus). Sri Lanka Minimum local value-added content of 35% with CTH (25% if the raw material or inputs are sourced in either country subject to the condition that the aggregate value addition in the contracting parties is not less than 35% of the f.o.b. value of the product Afghanistan Not less than 50% of the f.o.b. value of the finished product and CTH

Source: Department of Commerce online information. Viewed at: http://commerce.nic.in/ [13 June 2006]; and WTO (2002), Trade Policy Review: India.

(ix) Import prohibitions, restrictions, and licensing

(a) Import prohibitions

37. Import prohibitions are maintained under Section 11 of the Customs Act 1962. Under the Act, the Government may, by notification in the Official Gazette, impose absolute or conditional import (or export) prohibitions. Such measures can be maintained for, inter alia, security, public order and standards of decency or morality, prevention of smuggling or shortage of goods, foreign exchange and balance of payments reasons, prevention of agricultural surpluses, standards, intellectual property, and the conservation of exhaustible resources.23

38. The main change since India's previous Review is the introduction of import prohibitions on some livestock and livestock products, including domestic and wild birds, meat and meat products from avian species, and live pigs and pig meat products (except processed pig products) (Table III.4).24

Table III.4 Import prohibitions, 2006 and 2001 Product prohibited on 1 April 2006 Products prohibited on 1 April 2001 Tallow, fat and/or oils, rendered or otherwise of any animal origin Tallow, fat and/or oils, rendered or otherwise, of any animal origin including: including: (i) Lard stearin, oleo stearin, tallow stearin, lard oil, oleo oil and (i) Lard stearin, oleo stearin, tallow stearin, lard oil, oleo oil and tallow oil not emulsified or mixed or prepared in any way tallow oil not emulsified or mixed or prepared in any way (ii) Neats-foot oil and fats from bone or water (ii) Neat's-foot oil and fats from bone or water (iii) Poultry fats, rendered or solvent extracted (iii) Poultry fats, rendered or solvent extracted (iv) Fats and oils of fish/marine origin, whether or not refined, (iv) Fats and oils of fish/marine origin, whether or not refined, excluding cod liver oil, squid oil containing Eicospentaenoic excluding cod liver oil, squid oil containing Eicospentaenoic acid and De-cosahexainoic acid acid and De-cosahexaenoic acid

23 Section 11(2) of the Customs Act, 1962. 24 Import of domestic and wild birds including captive birds (excluding poultry); processed meat and meat products from avian species including wild birds (except poultry) and semen of domestic and wild birds was prohibited with effect from 11 August 2005. This measure was taken in view of reported outbreak of Highly Pathogenic Avian Influenza (HPAI). India WT/TPR/S/182 Page 47

Product prohibited on 1 April 2006 Products prohibited on 1 April 2001 (v) Margarine, imitation lard and other prepared edible fats of (v) Margarine, imitation lard and other prepared edible fats of animal origin animal origin (vi) Degras (residues from the treatment of fatty substances or animal or vegetable waxes) Table III.4 (cont'd) Animal rennet Animal rennet Wild animals including their parts and products and ivory Wild animals including their parts and products and ivory Beef and products containing beef in any form Beef and products containing beef in any form Natural sponges Fish waste (HS 05119110, 05119120, and 05119130) Domestic and wild birds including captive birds; Not prohibited live pig and pig meat products (except processed pig products); meat and meat products from avian species including wild birds (except processed poultry meat and poultry meat products); semen of domestic and wild birds; products from animal origin from birds intended for use in animal feed or for agricultural or industrial use Imports of the following products from countries reporting the Not prohibited outbreak of highly pathogenic avian influenza: (i) day-old chicks, ducks, turkey and other newly hatched avian species (ii) hatching eggs (iii) eggs and egg products (iv) meat and meat products from avian species including wild birds (v) feathers (vi) pig meat products (vii) pathological material and biological products from birds

Source: Ministry of Commerce and Industry (2006), Department of Commerce, Foreign Trade Policy 2004-2009; and information provided by the authorities.

(b) Import restrictions and licensing

39. Import restrictions can be imposed under the Customs Act, 1962 and the Foreign Trade (Development and Regulation) Act, 1992. Some 415 tariff lines (around 3.5% of the tariff) at the HS 8-digit level are currently subject to import restrictions under Articles XX and XXI of the GATT. The items are mainly in sections 19 (arms and ammunition), 1 (live animals), 21 (works of art), 5 (mineral products) and 2 (vegetable products) (Chart III.4).

40. India also monitors imports of some 300 items that are considered to be sensitive. The monitoring mechanism was set up after the removal of quantitative restrictions on imports in 2002. The products, which are monitored by a committee chaired by the Secretary of the Department of Commerce, include edible oil, cotton, silk, milk and milk products, cereals, fruit and vegetables, spices, automobiles, tea, coffee, alcoholic beverages and products produced by the small-scale industry. Imports of certain items, including second-hand cars (over three-years old) and imports from Sri Lanka subject to preferential tariffs (such as tea), must be imported through specified ports (Mumbai for second-hand cars, Kochi and Kolkata for tea and Chennai, Mumbai and Jawaharlal Nehru Port Mumbai for garments). WT/TPR/S/182 Trade Policy Review Page 48

Chart III.4 Import restrictions/licensing by HS section, 2006/07 Per cent of HS section 3085

0 l 1 3 4 6 7 9 2 3 5 8 1 2 5 8 0 1 4 6 7 9 0 a 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 1 2 2 t o T 01 Live animals and prod. 07 Plastic and rubber 13 Articles of stones 19 Arms and ammunition 02 Vegetable products 08 Hides and skins 14 Precious stones, etc. 20 Miscellaneous manuf. 03 Fats and oils 09 Wood and articles 15 Base metals and prod. 21 Works of art, etc. 04 Prepared food, etc. 10 Pulp, paper, etc. 16 Machinery 05 Mineral products 11 Textiles and articles 17 Transport equipment 06 Chemicals and prod. 12 Footwear, headgear 18 Precision instruments

Source : Ministry of Commerce and Industry (2006), Department of Commerce, Foreign Trade Policy 2004-09. (x) Contingency measures

(a) Anti-dumping and countervailing measures

Overview

41. There have been no changes in India's anti-dumping and countervailing legislation during the review period. Anti-dumping measures may be taken under the Customs Tariff Act, 1975, as amended by the Customs Tariff (Amendment) Act, 1995, and the Customs Tariff (Identification, Assessment and Collection of Anti-Dumping Duty on Dumped Articles and for Determination of Injury) Rules, 1995.25 Under Article 5 of the Customs Tariff Rules, an anti-dumping investigation can be initiated by the Directorate General of Anti-Dumping and Allied Duties (DGAD) in the Ministry of Commerce and Industry upon a written application by, or on behalf of, domestic industry26, or on its own initiative if it is satisfied that there is justification to launch an investigation. The DGAD must inform the government of the exporting country and issue a public notice containing details of the

25 WTO documents G/ADP/N/1/IND/1, 15 August 1995; G/ADP/N/1/IND/2/Corr.1, 9 January 1996; and G/ADP/N/1/IND/2/Suppl.1, 23 December 1996. 26 No investigation can be initiated if the producers making the application account for less than 25% of total domestic production of the like article. The DGAD must also examine the accuracy and adequacy of the evidence provided and determine that there is sufficient evidence of dumping, injury, where applicable, and a causal link between the dumped imports and the alleged injury, where applicable, before initiating an investigation. India WT/TPR/S/182 Page 49 initiation and the time limits for interested parties to make their views known. The public notification is usually issued within 45 days of receipt of proper documentation, and the time limit for interested parties is a further 30 days. A preliminary finding regarding export price, normal value, and margin of dumping would normally be issued in a public notice within 150 days of the initiation, following which the Department of Revenue in the Ministry of Finance may impose a provisional duty not exceeding the dumping margin.27 The provisional duty may not be imposed until 60 days after the date of the public notice launching the investigation, and may remain in place only for six months; this may be extended to nine months, upon the request of exporters representing a significant percentage of trade. Final findings must be notified to the Central Government within one year of the investigation unless the investigation is extended (by a maximum of six months) under special circumstances. The dumping margin for each known exporter or producer is determined by the DGAD, following which the Department of Revenue may, within three months of publication of the final findings, impose the anti-dumping duty by notification in the Official Gazette. The anti-dumping duty would remain in place for five years unless extended (for five-year periods) by the DGAD.28

42. Countervailing measures may be imposed under the Customs Tariff Act, 1975 (Part 9) and the Customs Tariff (Identification, Assessment and Collection of Countervailing Duty on Subsidized Articles and for Determination of Injury) Rules, 1995. The decision to initiate an investigation must be notified through a public notice, with relevant information to be provided by interested parties within 30 days of the notice. Provisional duties may be imposed, but only after six months from the date of initiation of the investigation, and may remain in force for a maximum of four months. Final findings must be published by the DGAD within one year of the date of initiation; the period may be extended by the Central Government in exceptional circumstances for a further six months. Definitive countervailing measures must be imposed by the Central Government on the recommendation of the DGAD within three months of the final findings being published. Final measures may stay in force up to five years.

43. Appeals against anti-dumping and countervailing measures imposed by the Central Government can be made under Chapter XV (Section 129) of the Customs Act, 1962 to the Customs, Excise and Service Tax Appellate Tribunal (CESTAT). The CESTAT can only handle appeals made against measures taken by the Central Government. The appeal must be filed within 90 days of the final duty being notified by the Central Government. Since 2002, 54 appeals have been made to the Appellate Tribunal of which 32 cases had been settled by end December 2005. In 19 of the 32 cases the measures imposed were upheld, in 8 cases they were modified, 3 cases were rejected and 2 cases referred back to the DGAD. The CESTAT decision can be appealed to the Supreme Court.

Measures

44. Between January 2002 and December 2005, India initiated 176 anti-dumping investigations and took final measures in 163 cases; an additional 20 investigations were initiated in January-June 2006, with measures taken in 8 cases. During 2002-05, the products involved included chemicals and products thereof (41.5%); plastics and rubber and products thereof (16.5%); base metals (13.1%); and textiles and clothing (10.8%).29 The majority of investigations were targeted at

27 The investigation can be terminated at any time: if there is a written request from or on behalf of domestic industry; if there is insufficient evidence of dumping or injury or if the injury is negligible; if the margin of dumping is less than 2% of the export price; or if the volume of the dumped imports is less than 3% of imports of the like product unless the countries accounting for 3% individually account for over 7% collectively of imports of the like product (Article 14 of the Customs Tariff (Identification, Assessment and Collection of Anti-dumping Duty on Dumped Articles and for Determination of Injury) Rules 1995). 28 Any review of a measure must be concluded within 12 months of the date of initiation of the review. 29 Up to June 2006, these percentages were: 39.3%, 18.9%, 12.8%, and 9.7%. WT/TPR/S/182 Trade Policy Review Page 50

China (21.6%), the EC (13.6%), Chinese Taipei (9.1%), and Korea (8%) (Chart III.5).30 As at June 2006, 177 anti-dumping measures were in force. India did not take any countervailing actions during this period.

(b) Safeguards

Legislative and administrative framework

45. Safeguard legislation is contained in Sections 8B and 8C of the Customs Tariff Act, 1975, with Section 8C relating specifically to imports from China. The Customs Tariff (Identification and Assessment of Safeguard Duty) Rules 1997 and the Customs Tariff (Transitional Products Specific Safeguard Duty) Rules 2002, describe the procedures to be followed for the application of safeguard measures. Investigations on safeguards are carried out by the Director General of Safeguards, based in the Department of Revenue, Ministry of Finance. A request for a safeguard investigation must be made in writing to the Director General, by, or on behalf of, the domestic industry. The investigation must be completed and notified publicly within eight months of the date of initiation of the investigation, or within such extended period as the Central Government may allow following which a provisional duty may be imposed for up to 200 days. The final safeguard may be in place for four years, but can be extended by the Central Government, if deemed necessary, for a maximum of ten years. A safeguard in place for longer than one year must be progressively liberalized at regular intervals.

46. Although the Director General's decisions on safeguards cannot be appealed under the legislation31, appeals may be made to the High Court and the Supreme Court.

Measures

47. During January 2002 to December 2005, India initiated four safeguard measures; it imposed final measures in only one of these cases (Epichlorohydrin) for a period of one year (up to 29 October 2003). In addition, one safeguard investigation was initiated on 13 August 2002 for industrial sewing machine needles imported from China.32

(xi) Standards and other technical requirements

(a) Standards

48. The Bureau of Indian Standards (BIS) (formerly the Indian Standards Institution) established under the Bureau of Indian Standards Act, 1986, and operational since 1 April 1987, is responsible for formulating and enforcing standards for 14 sectors.33 It has also been designated by India as the WTO-TBT Enquiry Point, while the Ministry of Commerce and Industry is responsible for implementing and administering the WTO Agreement on Technical Barriers to Trade. 34 India accepted the Code of Good Practice on 19 December 1995.35 In addition to the standards developed

30 Up to June 2006, these percentages were: 23.5%, 12.2%, 9.7%, and 7.7%. 31 Directorate General of Safeguards online information. Viewed at: http://www.dgsafeguards. gov.in/legal_framework_provisions.html [20 July 2006]. 32 WTO document G/SG/N/6/IND/14, 10 September 2002. 33 These are: production and general engineering; chemicals; civil engineering; electronics and information technology; electrotechnical standards; food and agriculture; mechanical engineering; management and systems; medical equipment and hospital planning; metallurgical engineering; petroleum, coal and related products; transport engineering; textiles; and water resources (BIS online information. Viewed at: http://www.bis.org.in/sf/sfp1.htm) [19 May 2006]). 34 WTO document G/TBT/2/Add.56, 22 October 1999. 35 WTO document G/TBT/CS/N/26, 29 January 1996. India WT/TPR/S/182 Page 51 by the BIS, these are sector-specific standards for the automobile industry, pollution, food, drugs and cosmetic, as well as atomic energy and civil aviation. WT/TPR/S/182 Trade Policy Review Page 52

Chart III.5 Anti-dumping measures, January 2002 - December 2005

(a) Number of cases initiated and measures in force 240 Cases initiated 220 Measures in forcea 200

2002 2003 2004 2005

a Anti-dumping measures in force on 31 December.

(b) Initiations by product (c) Initiations by origin Per cent Per cent

Machinery & mechanical/ Base metals Middle electrical b & products CIS East applicances thereof 5.7 4.0 Articles of 13.1 4.5 EC Other 3.4 stones, mica 13.6 4.0 Mineral products 2.8 China 21.6 Textiles & their articles United States 10.8 4.5 Brazil 2.8 Pulp of wood, paper Other 3.4 5.7

South Africa 2.8 Chinese Taipei Other Asia 9.1 Plastics & rubber 4.4 & products thereof Indonesia Chemicals & products Singapore 16.5 4.5 Thailand 5.1 thereof Korea, Malaysia 4.5 41.5 Rep. of 3.4 8.0 b See Table AI.3 for member countries. 49. The BIS is a founder member of the International Organization for Standardization (ISO) and Source : Notifications to the WTO. is an active participant in its standardization activities. It participates in the ISO's policymaking India WT/TPR/S/182 Page 53 committees such as on Developing Country Matters (DEVCO), on Conformity Assessment (CASCO), on Consumer Policy (COPOLCO) and 62 technical committees. The BIS is also an active participant in the activities of the International Electrotechnical Commission (IEC) and participates in 34 of its technical committees.

50. As the national standards setting body, the BIS plays an important role in regional cooperation programmes such as the SAARC and the BIMST-EC with regard to discussions on standards and conformity assessment. In addition, the BIS has signed bilateral cooperation agreements in the fields of standardization, conformity assessment, quality assurance, and training with national standards organizations in several trading partners. The bilateral cooperation covers exchange of information and personnel. In some cases, there are provisions of mutual acceptance of inspection reports and test reports. The agreement with the ISO covers the utilization of the National Institute of Training for Standardization (NITS) as a Regional Training Centre of ISO. The BIS has memoranda of understanding with, Cuba, Germany, Israel, Mauritius, Russian Federation, Turkey, Bhutan, Nepal, Ukraine, Armenia, Sri Lanka, Afghanistan, Brazil, and the United States (ANSI).

51. To increase awareness of the importance of standards amongst domestic companies and consumers, the BIS provides training, both to industry and government and also to its own staff. BIS employees are also provided training on a regular basis, while consumer awareness programmes are conducted to inform them about the BIS standard mark as well as penalties and grievance redressal mechanisms.36

52. Standards are formulated through 14 Division Councils set up to oversee standards in each of the sectors. The Standards Monthly Additions gives details of the status of new or draft standards or standards being withdrawn. There have been no basic changes to the process of formulating standards since 2002. Proposals for establishing new standards, or modifying old ones, may be submitted in writing to the BIS by agencies of the central and state governments, industry and consumer associations and professional bodies and members of the BIS and of its technical committees. Draft standards are published for comments on the BIS website for not less than one month. On average, it takes between 12 and 28 months to issue a new standard or harmonize an existing national standard with an international one. Some standards are fast tracked and developed within 12 months to meet industry demands. Standards are also reviewed and updated on a regular basis; reviews generally take place at least once in five years.

53. India currently has around 18,300 standards; according to the authorities, 5,821 have corresponding ISO/IEC standards and 4,307 of these (around 73%) are harmonized with ISO/IEC standards (Table AIII.3). Some 53% of standards issued between July 2002 and October 2006 are harmonized with ISO/IEC standards. According to the authorities, the process of reviewing identified standards where ISO/IEC standards exist, is being expedited. In addition, a greater percentage of sectoral standards, for example, in chemicals, petrochemicals, electrical and electronic industries, tend to be aligned with ISO/IEC standards.

(b) Product certification

54. The BIS operates a product certification scheme under the Bureau of Indian Standards Act, 1986 and its accompanying regulations and rules. The Bureau of Indian Standard Mark (ISI) is granted to products meeting the requirements of relevant Indian standards. Although ISI certification is voluntary, it has been made compulsory for 66 products related to health and consumer safety (133 at the time of the last Review).37 It is not clear, which products have been removed from the list.

36 Bureau of Indian Standards (2005). 37 Appendix III of ITC(HS). WT/TPR/S/182 Trade Policy Review Page 54

Both imported and domestically produced goods on this list must conform to certification requirements. The BIS has eight laboratories that provide conformity testing for imported and domestically produced goods. In addition, a number of other accredited independent laboratories having a demonstrated system complying with ISO/IEC Guide 17025:1999 and laboratories under the control of central and state governments have been approved by the BIS, which uses them for conformity testing.38 Product certification can also be granted outside India once the manufacturer's production facilities have been approved and licensed by the BIS. More than 60 licences have been granted under this Foreign Manufacturer's Scheme in some 15 countries. The licence fees include the cost of the inspector's visit and stay, an annual fee of Rs 1,000 (US$20) and an annual marking fee of US$2,000 to be paid by the manufacturer. The licence is initially valid for one year and can be renewed annually (at a fee of Rs 500 or around US$10).39 Indian importers may also be granted a BIS licence provided they have the required infrastructure to test each consignment when it reaches India. The BIS operates IEC international certification schemes and has been designated the national certification body for recognizing and issuing certificates under the IECEE-CB and IECQ schemes.40 In addition to product certification, the BIS grants licences and ECO MARK to environmentally friendly products.

55. The BIS also operates certification schemes for management systems, including quality management, environmental management, occupational health and safety management and hazard analysis critical control point (HACCP). The quality management systems certification scheme was launched in 1991 and covers a number of industries and services.41 Over 20 major economic activities have been accredited by the Raad voor Accreditatie (RvA).42 The Environmental Management Systems (EMS) Certification scheme is operated according to the ISO 14000 series of standards. The BIS also operates the Food Safety Management System (FSMS) according to IS/ISO 22000:2005, launched in 2006, and Certification of Public Service Organizations for Service Delivery according to IS 15700:2005 (to be launched by 31 March 2007).

(xii) Sanitary and phytosanitary measures

56. SPS standards are governed and enforced through a number of laws and agencies. The Prevention of Food Adulteration Act, 1954 is the main law on food safety and quality. Imports and quarantine are regulated through additional legislation such as the Livestock Importation Act, 1898 most recently amended in 2001; the import of plants and plant materials is regulated under the provisions of the Plant Quarantine (Regulation of Import into India) Order 2003, issued under the

38 For a full list of recognized laboratories, see BIS online information. Viewed at: http://www.bis.org.in/lab/osladd1.htm [13 June 2006]. 39 BIS online information. Viewed at: http://www.bis.org.in/cert/fm.htm [13 June 2006]. 40 IEC System for Conformity Testing and Certification of Electrical Equipment and IEC Quality Assessment System for Electronic Components, respectively. 41 The sectors covered include engineering; chemicals; pharmaceuticals; cement; ceramics; food; textiles; automobiles; machinery; metallurgical industries; electrical; electronics; aeronautics; hospitals; financial services; banking; construction; wholesale and retail trade; education and training; hotels; power; printing; telecommunications; testing laboratories; and information technology. 42 Textiles and textile products; chemicals, chemical products and fibres; rubber and plastic products; non-metallic mineral products; concrete, cement, lime, plaster, etc.; basic metals and fabricated metal products; machinery and equipment; electrical and optical equipment; other transport equipment; wholesale and retail trade; repair of motor vehicles, motorcycles, and personal and household goods; food products, beverages and tobacco; leather and leather products; wood and wood products; pulp, paper and paper products; printing companies; manufacturing not elsewhere classified; transport, storage and communication; other services; hotels and restaurants; electrical supply; pharmaceuticals; manufacture of coke and refined petroleum products; and financial intermediation, real estate, renting (limited to NACE 65). (BIS online information. Viewed at: http://www.bis.org.in/cert/qsintro.htm [13 June 2006]). India WT/TPR/S/182 Page 55

Destructive Insects and Pests Act, 1914. Implementation of these Acts and subordinate legislation is carried out by different central government ministries, making the system relatively complex (Table III.5). India's enquiry points under the SPS Agreement are: the Ministry of Health and Family Welfare for human-health-related issues; and the Departments of Animal Husbandry, Dairy and Fisheries, and Agriculture and Cooperation in the Ministry of Agriculture, respectively, for animal health and plant health issues.43

Table III.5 Principle SPS legislation and implementing agencies, 2006 Legislation Subject Implementing agency

Prevention of Food Adulteration Act, Food safety and quality Ministry of Agriculture, Ministry of Food 1954 Processing, Ministry of Health - Fruit Products Order, 1955 Quality of processed fruit products Ministry of Food Processing - Meat Food Products Order, 1973 Quality of processed meat products Ministry of Food Processing (up to 2004 Department of Agriculture and Cooperation, Ministry of Agriculture) - Milk and Milk Products Order, 1973 Quality of milk and milk products Department of Animal Husbandry, Dairying and (last amended 1992) Fishing, Ministry of Agriculture Essential Commodities Act, 1955 Consumer protection State government agencies Livestock Importation Act, 1898 Procedures for import of livestock Department of Animal Husbandry, Dairying and (amended in 2001) Fishing, Ministry of Agriculture Destructive Insects and Pests Act, 1914 Procedures for import of plants and Directorate of Plant Protection, Quarantine and plant materials Storage, Department of Agriculture and Cooperation, Ministry of Agriculture Drugs and Cosmetics Act, 1940 Regulation of import, manufacture, and Ministry of Health sales of drugs Export (Quality Control and Inspection) Regulation of quality control for exports Exports Inspection Council, Ministry of Act, 1963 Commerce and Industry

Source: WTO Secretariat, based on Government of India online information and information provided by the authorities.

57. In an attempt to streamline SPS procedures and enforcement, the Food Safety and Standards Act was passed by Parliament in August 2006 although it is yet to be enforced; this Act consolidates 13 laws and establishes the Food Safety and Standards Authority (FSSA). The regulations and rules to implement the Act are currently being formulated.

58. Imports of primary agricultural material require a phytosanitary import permit, issued by the Department of Agriculture and Cooperation under the Plants, Fruit and Seeds (Regulation of Import into India) Order, 2003. The Plant Quarantine (Regulation of Import into India) Order was promulgated in 2003 (under the Destructive Insects and Pests Act, 1914). 44 It has been amended several times, most recently in July 2006. Imports of plants or plant products into India (with the exception of those listed under Schedule VII of the Plant Quarantine (Regulation of Import into India) Order 2003) require a permit issued under this Order. The permit is issued only after completion of a pest risk analysis. The analysis is based on a comparison of pest profiles in the exporting country and India in line with the IPPC guidelines on pest risk analysis; the Department of Agriculture and Cooperation is assisted by research institutes, such as the Indian Council of Agricultural Research (ICAR), in conducting this analysis. Pest risk analysis has been carried out for some 2,000 commodities since the process began in 2004. All applications for a permit must be made to the

43 WTO document G/SPS/ENQ/19, 25 January 2006. 44 The Plant Quarantine (Regulation of Import into India) Order, 2003 repealed the: Rules for regulating the import of insects in India notified under notification No. F 193/40-A, 3 February 1991; Rules for regulating the import of live fungi into India notified under notification No. F 16-5(I)/43-A, 10 May 1943; import of cotton into India Regulations, 1972; and the Plants, Fruits and Seeds (Regulation of Import into India) Order, 1989. WT/TPR/S/182 Trade Policy Review Page 56 relevant authority seven days in advance of importation.45 The permit is valid for six months and permits multiple shipments of imports. Import permits are ordinarily issued within two working days. Each consignment must also be accompanied by a phytosanitary certificate issued by the relevant authority in the originating country. All imports of plants, plant material, and other plant products must be carried out through designated sea and airports and land frontier stations.46

59. Imports of livestock and meat products are regulated, respectively, under the Livestock Importation Act, 1898 (amended last in 2001) and the Meat Food Products Order, 1973 and require an import permit issued by the Department of Animal Husbandry, Ministry of Agriculture. The livestock permit is valid for six months and can be used for multiple consignments. All imports of livestock must enter through designated ports.

60. Quarantine facilities for plants and seeds must be established at the importer's cost following guidelines prescribed by the Plant Protection Advisor. The period of quarantine is stated in the permit issued under the Plant Quarantine (Regulation of Import into India) Order. Samples of the imported products are examined by the relevant inspection authority (as listed in Schedule XI of the Order), and if found to be free of pests and diseases, are cleared to be imported. Any fumigation required must be carried out by an approved agency at the importer's cost. Fumigation should normally take two days. Appeals against decisions by the inspection authority may be made to the Plant Protection Advisor within seven days of communication from the inspection authority. There is no prescribed limit for the disposal of an appeal by the Plant Protection Advisor. A second appeal cannot be made. However, the Plant Protection Division of the Department of Agriculture and Cooperation is allowed to relax conditions in the Plant Quarantine (Regulation of Import into India) Order 2003 in the public interest.

61. In the WTO Committee on Sanitary and Phytosanitary measures, Members have raised several questions regarding India's policy on, inter alia, restrictions on imports of live birds, fresh poultry meat, and meat products, due to avian influenza. According to the authorities, this has been resolved amicably, as well as a ban on the use of food grade wax under the Prevention of Food Adulteration Act. With regard to the ban on the use of food grade wax, India has consequently permitted two varieties of edible waxes to be used for coating fresh fruits up to the level of GMP subject to labelling of the type of wax used and the best before date. Some Members also expressed concerns about the lateness of India's notifications on new fumigation requirements in place since January 2004, as this did not allow sufficient time for comment; there was also concern that the measures deviated from international standards. Non-notification of various SPS measures was also raised by several Members.47 According to the authorities, all WTO Members were given sufficient time to comment on the Plant Quarantine (Regulation of Import into India) Order 2003 issued in February 2004 after it had been notified to the WTO-SPS Committee. The Order was made operational only on 1 August 2004 after all comments received had been considered. The authorities note, furthermore, that fumigation requirements for preshipment quarantine are according to international standards and that all phytosanitary notifications are being issued and adopted only after careful consideration by technical experts of comments or suggestions received from WTO Members.

62. The Drugs and Cosmetics Act, and its rules, which regulate the quality and safety of drugs (including those based on traditional Indian medicine) and cosmetics, is administered by the Central Drugs Standard Control Organization (CDSCO) in the Ministry of Health and Family Welfare. The overseas manufacturers' manufacturing sites and the drugs to be imported are registered under the provisions of the Drugs and Cosmetics Rules, 1945. All merchant importers and domestic

45 The issuing authority depends on the expected point of entry (see Schedule X of the Order). 46 The full list is provided in Schedule I of the Order. 47 WTO documents G/SPS/GEN/204/Rev.2 to Rev.6. India WT/TPR/S/182 Page 57 manufacturers of drugs require import licences issued by the CDSCO.48 It takes approximately 2-3 weeks to issue an import licence, which is valid for three years.49 For renewal of an import licence, a fresh application must be made three months before the expiry of the existing licence; the current licence is deemed to remain in force until the renewal. Appeals against CDSCO decisions may be made to the Secretary, Ministry of Health and Family Welfare within 30 days of receiving the rejection.

63. All drug imports must enter through designated ports of entry50 and must have a remaining shelf life of at least 60% from the date of import. Upon import, the Customs official may, if he has reason, send a sample for testing to the CDSCO.

(xiii) Labelling

64. Packing and labelling of food products is regulated by the Prevention of Food Adulteration Rules (Part VII). All food product labels should include: the name, trade name or description of food contained in the package; the ingredients used, in descending order of their composition by weight or volume; name and address of manufacturer or importer; net weight or measure of volume of contents; month and year of manufacture or packaging; date of expiry, which, for products containing aspartame, should not be more than three years from the date of packing; purpose of irradiation and licence number where relevant; and best before consumption date. In addition, for products containing artificial flavouring the chemical names of the flavourings should not be used and for products containing natural flavouring substances, the common name of the flavours should be mentioned on the label. The label should also indicate the animal origin of gelatine in products containing gelatine. More specific labelling requirements are specified for other products, such as infant milk substitutes and infant foods, bottled mineral water, and milk products. Furthermore, the Ministry of Health and Family Welfare has recently notified the quantitative ingredient declaration (QUID) requirement as a percentage of the ingredient at the time of manufacture of the food.

65. There appear to have been no changes to labelling requirements since 2002. Mandatory labelling of quantities has been notified, but is to be implemented at a later date. The Ministry of Health and Family Welfare, has issued a comprehensive labelling requirement for genetically modified food. This proposed regulation (notified as a draft (GSR 152(E), dated 10 March 2006)), broadly requires that all packages of food/food ingredients of GM origin, subject to the approval of the Genetic Engineering Approval Committee (GEAC), should be labelled indicating that they are of GM origin; and that the product has been cleared for sale in the exporting country, so that verification, if needed, can be discussed with the exporting country without the need for testing. Documents supporting this approval must be provided at the time of import.

(xiv) Government procurement (a) Introduction 66. A transparent and competitive system of government procurement is necessary to ensure value for money as regards public expenditure programmes, and to improve India's fiscal situation. Such a system can bring important developmental benefits, particularly in promoting the efficient use of scarce resources in the provision of infrastructure and other economically and socially important goods, services, and public works. India has recently implemented significant reforms in its

48 Under the Drugs and Cosmetics Rules, 1945, all licence applicants must pay a fee of Rs 1,000 for a single drug and an additional Rs 100 for each additional drug to be imported (Paragraph 24 of the Drugs and Cosmetics Rules, 1945). 49 Paragraph 28 of the Drugs and Cosmetics Rules, 1945. 50 Paragraph 43A of the Rules. WT/TPR/S/182 Trade Policy Review Page 58 procurement procedures at the central government level, including enhanced use of electronic technologies and other steps to increase transparency. Similar reforms have been carried out in certain states. Extension and deepening of these reforms promises further benefits. 67. The procurement system is decentralized in India, comprising a multiplicity of entities at the central, state, and local levels in addition to numerous public sector enterprises. Consolidated data are not available on the economic significance of government procurement, including a breakdown of the value of contracts by tendering method. Data from cross-national studies suggest, however, that government procurement typically constitutes in the range of 10-15% of total economic activity or more.51 In India, the percentage may be significantly higher given the role of public companies in key sectors such as railways, and in the economy generally. (b) Procurement procedures and institutional framework52 Procedures and institutions at the central government level 68. Central government procurement is governed by the General Financial Rules (GFRs), which are promulgated by the Ministry of Finance. These rules were extensively overhauled in 2005, to enhance administrative flexibility and ensure full accountability for the use of public funds and transparency mechanisms appropriate to the scale of relevant activities. They have the status of subordinate legislation. Chapter 6 of the rules deals with procurement of goods and services and Chapter 8 with contract management. All government purchases must be in accordance with the principles outlined in the GFRs. Organizations that have their own website must publish their tender notices and enquiries on those websites. Central government organizations that do not have their own website must post the notices on the National Information Centre (NIC) website. 69. The GFRs provide for purchases based on advertisements (open tender), direct invitation to a limited number of firms (limited tender), invitation to one firm only (single tender), and negotiation with one or more firms. The normal procedure for procurement over Rs 2.5 million is through open tender. Department heads have discretion in deciding whether to advertise tenders abroad. The GFRs also provide for purchase of goods without quotation (up to Rs 15,000) and purchase of goods by local purchase committee (up to Rs 100,000). Limited tendering is allowed for procurement up to Rs 2.5 million and above only in cases: of urgency and where justification is provided by the Ministry/Department; where it is considered not to be in the public interest to procure goods through open tender; and where the possibility of additional suppliers being tapped is deemed to be remote (Rule 151 GFR). 70. Commonly used goods required by central government entities on a recurring basis typically are purchased under rate contracts administered by the Directorate-General of Supplies and Disposals (DGS&D) in the Department of Commerce. These contracts are intended to allow the procurement of goods from reliable sources without the need for recurrent tenders. In principle, there is no preference for domestic as opposed to imported goods for such procurement. Foreign manufacturers may be registered, with or without Indian agents. However, both Indian and non-Indian suppliers must be able to provide after sales support in India, and the products purchased must be "suitable for use" in India. 71. Tender notices are generally publicized through the Indian Trade Journal, a monthly bulletin issued by the DGS&D, and are available on the NIC-NET of the National Informatics Centre (NIC).

51 OECD (2001). 52 This section draws on insights and material contained in Hoda (2006); ADB/OECD (undated); various materials prepared for a "National Seminar on Government Procurement". Viewed at: http://www.unctadindia.org/displaymore.asp?Gr=&chkey=&subitemkey=771&itemid=378&subchnm=Past& subchkey=56&chname=Events; and information provided by the Government of India. India WT/TPR/S/182 Page 59

For global tenders, notices may also be published or disseminated through Indian embassies. Tender specifications are drafted on the basis of national or international standard specifications. The DGS&D registers interested firms as approved contractors. It has a comprehensive website, which provides, inter alia: specifications of products on rate contracts; notices, agendas, and minutes of consultative meetings with stakeholders; downloadable tender notices and enquiries; complete text of parallel rate contracts; DGS&D manual; important circulars; and the names of registered suppliers. 72. Recently, the Central Government has entrusted to the DGS&D a mandate for a project on e-government procurement under the National e-Governance Plan (NeGP). This reflects the government's determination to implement electronic tools to ensure transparent and competitive procurement processes across all government entities. Preferential policies at the central government level 73. India retains preferential policies for central public-sector and micro and small enterprises. Central public-sector enterprises are permitted to submit fresh bids in response to private sector bids. For tenders valued between Rs 50 million and Rs 1 billion, a central public-sector enterprise whose bid is within 10% of that of a large private unit is allowed to revise its price downward and is eligible for a contract or parallel-rate contract. This system has been extended until 31 March 2008. 74. Micro and small enterprises (MSEs) receive purchase and price preferences in procurement by central government ministries and departments and public-sector enterprises. Under the purchase-preference system, 358 specified items must be procured exclusively from MSEs. The price preference system provides that if the price offered by the micro or small enterprise is not more than 15% above the price offered by a large enterprise, the product must be purchased from the former. MSEs are also assisted by way of: (i) issue of tender sets free of cost; (ii) exemption from payment of "earnest money" (deposits); and (iii) waiver of security deposits up to the monetary limit for which the unit is eligible, based on certain transparent criteria. The National Small Industries Corporation (NSIC) serves as a single point of negotiation for eligible MSEs for government purchasing preference schemes. Procurement at the state government level 75. For the most part, the state GFRs that govern procurement are based on the old GFRs of the Central Government, which were updated in 2005. State governments make extensive use of procurement systems as an instrument of industrial policy, and tend to make less extensive use of electronic procurement tools. There are, however, important exceptions: the state government of Andhra Pradesh has pioneered the use of electronic procurement tools53; and Karnataka, Uttarakhand, and Chattisgarh have also moved ahead in this area. Efforts are under way to encourage similar reforms in other states.54 Procurement in the railway and other specialized sectors

76. Procurement in the railway, postal system, telegraph, and defence sectors is subject to specialized procedures developed by the responsible ministries, within the overall framework of the GFRs. In general, competition from foreign suppliers is allowed in respect of high technology or high

53 See Aggarwal, R.P. (undated), e-Procurement in GoAP, slide presentation. Viewed at: http://www.unctadindia.org/displaymore.asp? Gr=&chkey=&subitemkey=771&itemid=378&subchnm=Past&subchkey=56&chname=Events. 54 See Gupta, M.P. (2006), New Procurement Policy of Government of India: State Government Policies and Tasks Ahead, slide presentation. Viewed at: http://www.unctadindia.org/displaymore.asp? Gr=&chkey=&subitemkey=771&itemid=378&subchnm=Past&subchkey=56&chname=Events. WT/TPR/S/182 Trade Policy Review Page 60 value items. For procurement in the railways sector, foreign firms are free to participate in tenders advertised in India only, but payment against such contracts must be made in Indian rupees at par with indigenous suppliers. Global tendering is frequently used in procurement of rolling stock, wheels, machinery and plant equipment, including technology transfer.

(c) Anti-corruption measures in public procurement

77. Recently, a number of initiatives have been taken by the Central Government (and certain state governments) to promote greater transparency and accountability in public procurement and thereby deter corruption. For example, central government procurement procedures are covered by the Right to Information Act, 2005. Under this legislation, information on any decision by public authorities, including on procurement, can be accessed within a prescribed time frame. All procurement decisions are also subject to audit by the Comptroller and Auditor-General of India, and to legislative review and judicial scrutiny. India is a signatory to the United Nations Convention against Corruption. The ratification of the Convention will proceed once implementing legislation is in place. A joint working committee is considering the requisite legislation to be framed in this regard. India is also participating in the ADB/OECD Anti Corruption Action Plan for the Asia Pacific and has made a commitment to develop "appropriate transparent procedures for public procurement that promote fair competition and deter corrupt activity, and adequate simplified administration procedures".55

(d) Agreement on Government Procurement

78. An issue for the future is whether and/or at what stage it might be to India's advantage to consider participation in the WTO Agreement on Government Procurement (GPA). 56 Traditionally, India has firmly rejected such participation on various grounds, including the extent of changes that (it was perceived) might be required in its domestic procurement systems and scepticism regarding the extent of benefits to its suppliers from GPA-ensured access to foreign procurement markets. 57 However, the reforms to date have moved India towards a more transparent and competitive procurement framework. Another factor to be considered is that other major developing countries such as China and Saudi Arabia have made commitments eventually to seek accession to the GPA, in their WTO accession protocols.58

(xv) State trading

79. India's last notification to the WTO on state trading was made in October 2001. According to this notification, the reasons for maintaining state trading include food security and to enable better marketing and pricing of state traded products, ensure steady domestic supply, and conservation and proper utilization of some metal ores and rare earths for export.59 The major change since 2002 is the removal of ammonium sulphonitrite from the list of products subject to state tendering; these currently include petroleum products, urea, coconut oil and products, and some cereals (Table III.6). Data on the share of imports of these products by state-trading enterprises are not available.

55 ADB/OECD (undated). 56 The Agreement on Government Procurement provides a vehicle for the progressive opening of parties' markets to international competition through legally enforceable provisions on non-discrimination, which apply to procurements "covered" by the Agreement (i.e. those set out in each party's schedules). In addition, various provisions of the Agreement relating to the provision of information to potential suppliers, contract awards, qualification of suppliers and other elements of the procurement process aim to ensure transparency and non-discriminatory conditions of competition between suppliers. 57 Srivastava, Vivek (2003), pp. 235-267. 58 WTO document GPA/89, 11 December 2006. 59 WTO document G/STR/N/7/IND, 8 October 2001. India WT/TPR/S/182 Page 61

Table III.6 Imports subject to state trading, 2001 and 2006 October 2001 1 April 2006 Agency

Wheat Unchanged Food Corporation of India Rye Unchanged Oats Unchanged Maize Unchanged Rice Unchanged Grain sorghum Unchanged Buckwheat, millet, canary seed, jawar, bajra, ragi, other cereals Unchanged Copra Unchanged State Trading Corporation of India Limited and Crude coconut oil (coconut oil and its fractions) Unchanged Hindustan Vegetable Oils Corporation Limited Other Unchanged All types of motor spirit (gasoline) Unchanged Indian Oil Corporation Limited All types of aviation spirit Unchanged All types of spirit type (gasoline type) jet fuel Unchanged Kerosene type jet fuels (aviation turbine fuel) Unchanged Diesel gas oil Unchanged Other gas oil Unchanged Urea, whether or not in acqueous solution Unchanged Minerals and Metals Trading Corporation of India Limited; Indian Potash Limited; and State Trading Corporation of India Limited Ammonium sulphonitrite Not subject to Minerals and Metals Corporation of India Limited state trading

Source: WTO document, G/STR/N/7/IND, 8 October 2001; and Ministry of Commerce Foreign Trade Policy.

(xvi) Other measures

80. There has been no change in the policy on countertrade during the period under review. At the time of India's last Review in 2002, it was stated that while no law required Indian exporters to enter into countertrade agreements, global tenders sometimes provided preference to companies who agreed, ceteris paribus, to countertrade operations. The main SOEs involved in countertrade in the past were the MMTC and the STC.60

(3) MEASURES DIRECTLY AFFECTING EXPORTS

(i) Procedures

81. Exporters must register with the Directorate General of Foreign Trade (DGFT) and obtain an IEC number to be eligible to carry out commercial imports or exports. If goods are to be exported under an export promotion scheme this must be declared on the shipping/export bills filed with Customs at the time of export.

82. The shipping bill must be filed with supporting documents (including invoice, packing list, etc.) at Customs. Once it has been processed, goods are examined by Customs before they can be exported. Goods subject to export restrictions and quotas must also be accompanied by licences issued by the relevant Government departments. Shipping bills can be filed seven days in advance of the presentation of goods to Customs (15 days in advance for exports by sea). Upon presentation of goods for export, a "let export" order is given, on an average within 2-3 hours, for exports by air and within 8 hours for 90% of exports by sea.

60 WTO (2002). WT/TPR/S/182 Trade Policy Review Page 62

(ii) Quality control and preshipment inspection

83. Since its previous Review in 2002, India has not made any major changes to its quality control and preshipment inspection measures for exports. Under the Export (Quality Control and Inspection) Act, 1963, the Export Inspection Council of India (EIC) carries out quality control and preshipment inspection to ensure minimum standards for exports. The Act empowers the Central Government to notify commodities along with minimum standards for their export. Although more than 1,000 products have been notified, export certification is mandatory for fish and fish products, dairy, poultry, egg, meat and meat products, and honey. No new products have been notified since 2002. The EIC has five export inspection agencies (EIAs) located across major cities in India, supported by 38 sub-offices and laboratories to carry out the preshipment inspection and certification. They also issue preferential certificates of origin for exports, as required. In addition, other preshipment inspection agencies have been approved for inspection of minerals and ores, mainly iron ore, manganese ore, etc. under the EIC Inspection Agency Recognition Scheme, 2002, which is based on ISO/IEC 17020; 35 such agencies have been notified.

84. The EIC's main systems of export inspection and certification include: consignment-wise inspection (CWI), a systems-based approach for in-process quality control (IPQC), self-certification (SC) and food safety management systems based certification (FSMSC). Residue monitoring plants (RMPs) are being set up in various sectors including dairy, poultry, marine, egg products, and honey. Over 98% of certified exports, by value, were covered in 2005/06 by mandatory export certification under the FSMSC system.61 The FSMSC is based on international standards of food safety management, such as HAACP/GMP/GHP, and involves approval and surveillance of food processing units. Currently, around 450 units are approved under the FSMSC. The EIC, through the EIAs, also issue certificates, inter alia, for health, non-GMOs, and authenticity of basmati rice. A scheme for issuing non-GMO certificates commenced in 2006/07. The EIC's certification has been recognized for a range of food and non-food products.

(iii) Export taxes

85. With the exception of tanned and untanned hides, skins and leathers (except manufactures of leather), all other exports otherwise subject to tax have been exempted through notifications. 62 The export tax rates for leather range from 10% to 25% of the f.o.b. value of the product. 63 An export cess applied to various products including coffee, spices, tobacco and other agricultural commodities has been repealed by the Cess Laws (Repealing and Amending) Act, 2005 enacted in 2006. No information was provided to the Secretariat on which exports remain subject to cess.64

(iv) Minimum export prices

86. The authorities state that no minimum export prices are imposed under the current Foreign Trade Policy.

61 Department of Commerce (2005), Chapter 11. 62 Customs Notifications 100 of 1989, amended by Notifications 48 of 1990, 133 of 1992, 91 of 1993, 68 of 1995, and 135 of 2000. 63 Customs Notification No. 133/2000, 17 October 2000. Viewed at: http://www.cbec.gov.in/cae/ customs/cs-act/notifications/cs133-2k.htm. 64 It appears from the Customs online information that cesses continue to apply for exports of shellac and lac based products, manganese ore, chrome ore, mica, and iron ore. India WT/TPR/S/182 Page 63

(v) Export prohibitions, restrictions, and licensing

(a) Export prohibitions

87. Export prohibitions, which are maintained under the Foreign Trade Policy, are in place for environmental, food security, marketing, pricing, and domestic supply reasons, and to comply with international treaties. Since 2002, a few products have been added to the list of prohibited exports (Table III.7). In addition to these export prohibitions, India also issues ad hoc prohibitions on exports of sensitive products; for example, export prohibitions have recently been issued for wheat, pulses, and sugar (Chapter IV(2)(ii)).

Table III.7 Export prohibitions, 2002 and 2006 Status in Description (status on 1 April 2002) Reason for prohibition March 2006

All wild animals, animal articles including their products and derivatives excluding Protection of wildlife under Unchanged those for which ownership certificates have been granted and those required for the Wild Life (Protection) transactions for education, scientific research, and management under the Wild Act, 1972 Life (Protection) Act, 1972, including their parts and productsa Special chemicals, organisms, materials equipment and technologies (SCOMET) Dual use items Unchanged goods as specified in Appendix 3 of the book titled "ITC(HS) Classifications of Export and Import Items"b Live exotic birds except albino budgerigars, budgerigars, Bengali finches, white Protection of wildlife under Unchanged finches, and zebra finches, which may be exported subject to preshipment the Wild Life (Protection) inspection, and java sparrows, which are subject to export restrictions Act, 1972 Beef and offal of cows, oxen and calves Social and religious reasons Export of buffalo meat was not prohibited on 1 April 2002 Undersized rock lobsters and sand lobsters (HS 0306 11 00, 0306 2100) and sand Ecological reasons Added lobsters (HS 0306 12 10, 0306 12 90 and 0306 22 00) (Notification No.16 dated 17.7.2003 for prohibition) Human skeletons Social reasons Unchanged Peacock tail feathers including handicrafts and articles of peacock tail feathers Control of poaching and Unchanged illegal trade in wildlife and its products Shavings and manufactured items of shed antlers of Chital and Sambhar Control of poaching and Unchanged illegal trade in wildlife and its products Tallow, fat and/or oils of any animal origin excluding fish oil Social and religious reasons Unchanged Chemicals under the Montreal Protocol when exported to a country that is not party Ecological and Unchanged to the Montreal Protocol on Substances that Deplete the Ozone Layer environmental reasons Condomsc (certain brands) Added Wood and wood products in the form of logs, timber, stumps, roots, barks, chips, Ecological and Unchanged powder, flakes, dust, pulp and charcoal other than sawn timber made exclusively environmental reasons out of imported logs/timber Fuel wood in logs, in billets, in twigs, in faggots or in similar forms; wood in chips Ecological and Added or particles; sawdust and wood waste and scrap, whether or not agglomerated in environmental reasons logs, briquettes, pellets or similar forms Wood charcoal (including shell or nut charcoal), whether or not agglomerated Ecological and Added environmental reasons Wood sawn or chipped lengthwise, sliced or peeled, whether or not planed, sanded Ecological and Added or end jointed, of a thickness exceeding 6 mm, other than sawn timber made environmental reasons exclusively out of imported logs/timber Table III.7 (cont'd) WT/TPR/S/182 Trade Policy Review Page 64

Status in Description (status on 1 April 2002) Reason for prohibition March 2006 Sandalwood in any form, but excluding finished handicraft products of Ecological and Unchanged sandalwood, machine finished sandalwood products, sandalwood oil environmental reasons Red sanders wood in any form, whether raw, processed or unprocessed but Ecological and Unchanged excluding value added products of red sanders wood such as extracts, dyes, musical environmental reasons instruments and parts of musical instruments made from red sanders wood procured from legal sources Mechanical wood pulp To conserve natural Added resources Chemical wood pulp, dissolving grades To conserve natural Added resources Chemical wood pulp, soda or sulphate, other than dissolving grades To conserve natural Added resources Chemical wood pulp, sulphite, other than dissolving grade To conserve natural Added resources a Including under Chapters HS 0106, 0208, 0210, 0300, 0407-0408, 0410, 0502, 0504-0511, 1504, 1506, 1516-1518, 1600, and 3000. b Including under Chapters HS 28-29, 30, 35-40, 48-48, 59, 69-91, and 93. c Certain brands and those with certain markings/stamps as set out in the Export Policy Schedule. Source: WTO (2002), Trade Policy Review: India; and Ministry of Commerce (2006), Foreign Trade Policy (Schedule 2: Export Policy).

(b) Export restrictions and quotas

88. Export restrictions are largely unchanged since the last Review. Some 171 lines at the HS 8- digit level (excluding special chemicals, organisms, materials, equipment, and technologies) are currently subject to restrictions; products may only be exported if a licence is issued by the Directorate General of Foreign Trade (DGFT), on the approval of its Export Facilitation Committee.

89. Onions may be exported through 13 designated state-trading enterprises (without quantitative ceiling) subject to conditions of quality laid out by NAFED from time to time. In addition, quantitative ceilings are notified by the DGFT for sandalwood oil and sandalwood chips, recommended by the Ministry of Environment and Forests to conserve natural resources. All the quotas are allocated by the DGFT. Quotas for wheat and wheat products, grain and flour of barley, maize, bajra, ragi and jowar, butter, non-basmati rice and lentils, gram, beans and flour made from them were removed in March 2002.65

(vi) Measures maintained by importing countries

90. Between January 2002 and December 2005, Members initiated 52 anti-dumping investigations against imports from India; final measures were taken in 25 cases. Members also initiated 12 countervailing actions against India and imposed final measures in 12 cases during the period. During January-June 2006 investigations were initiated for three products and final measures were taken in six cases. India has also identified a number of sanitary and phytosanitary restrictions maintained by Members as potential barriers to its exports. Issues raised during the period under review in the WTO Committee on Sanitary and Phytosanitary Measures include: maximum levels for certain aflatoxins in food stuffs, residual pesticide tolerance and inspection methods for tea, MRLs in animal products for imports into the EC, and geographical BSE risk assessment requirements maintained by the EC, import requirements on meat and eggs maintained by Switzerland, as well as Japan's restrictions on imports of mangoes.66 India also believes that SPS measures maintained on

65 DGFT online information. Viewed at: http://164.100.9.245/exim/2000/not/not01/not4901.htm [12 June 2006]. 66 WTO documents G/SPS/GEN/204/Rev.2 to Rev.6. India WT/TPR/S/182 Page 65 mango imports into the United States, Australia, and New Zealand, cereal and cereal product imports into the United States, and cut flower and grape imports into Japan are a barrier to its exports.

(vii) Duty and tax concessions

91. In an attempt to mitigate the impact of, if not remove, the anti-export bias inherent in the tariff and other indirect taxes, India has established various schemes for exporters to obtain tax rebates or remissions. The schemes include drawbacks for customs duty paid, and exemptions from payment of import duty. They render the export regime rather complex.

(a) Drawback

92. The system of duty drawback and its rates are reviewed and revised every year. Drawback is available under the Customs Act, 1962 for re-exports of goods on which import duty was paid (Section 74) and for imported material used in the manufacture of exports (Section 75). Drawback rates are drawn up annually and released soon after the Budget is introduced in Parliament. The rates are based on parameters including the prevailing price of inputs, standard input-output norms published by the DGFT, share of imports in total inputs, and the applied rates of duty; in most cases, the drawback is less than 100% of the import duty paid. According to the authorities, although the rates are based on a mixed classification, they are fully aligned with the HS nomenclature at the HS 4-digit level.67 The rates are expressed as a percentage of the f.o.b. value of the export.

(b) Other duty and tax concessions

93. In order to offset the incidence of import duties and internal taxes India provides tax exemptions and rebate/remission to exporters through various schemes (see section (4)(ii) below) and on customs duty. While barriers to imports have declined and the indirect tax system has been rationalized over the years, the number of these schemes renders the export regime increasingly complex. In the latest Foreign Trade Policy, announced in March 2006, the Duty Free Import Authorization (DFIA) scheme was announced to replace the DFRC scheme, the agriculture scheme was expanded to include village industry products, while the Target Plus scheme introduced in 2004 was discontinued (Table AIII.4).

94. In addition to introducing new programmes and replacing others, changes have been made to existing programmes. The Duty Free Import Authorization (DFIA) scheme offers exemptions in respect of customs duty, additional duty, education cess, and any anti-dumping or safeguard duties in force for inputs used in exports. The main difference between the DFIA and the Advance Authorization scheme seems to be that the Advance Authorization scheme requires positive value added in exports, and the DFIA requires minimum value added of 20%. The export obligation period for the EPCG has been extended to 12 years in certain cases (Table AIII.4). Changes to the "Served from India" scheme, include a reduction in duty-free imports from 20% to 10% of foreign exchange earned by restaurants in the previous financial year.

95. The Government has estimated revenue forgone from these schemes at Rs 537.7 billion in 2006/07, up from provisional figures of Rs 375.9 billion for the previous year; the largest shares are

67 Ministry of Finance, Circular No. 22/2005-Cus., 2 May 2005. Viewed at: http://www.cbec.gov.in/cae/customs/dbk-schdule/dbk-2005-06/circular0506.doc [24 May 2006]. The authorities also state that a complete alignment with the customs tariff at the 6- and 8-digit levels is not required as the objectives of the customs tariff and the drawback schedule are different. The 6-digit and 8-digit sub-headings of the drawback schedule have been devised keeping in view the composition of Indian exports, just as the 8-digit level sub-headings in the customs tariff have been devised keeping in view the composition of imports into India. WT/TPR/S/182 Trade Policy Review Page 66 accounted for by the Advance Authorization Scheme (32.8%) and the EOU/EHTP/STP Scheme (25.4%).68

(viii) Free-trade zones

96. India's first export processing zone was established in Kandla in 1965, followed by the Santa Cruz Electronics Export Processing Zone in 1973. Although they were set up to counter the anti- export bias inherent in India’s policies of import substitution, research has suggested that they were not particularly successful due to continued restrictions on their operations and on foreign direct investment.69 In 1980, the export oriented unit (EOU) scheme was introduced. The EOUs were set up outside the EPZs, but were managed by the Development Commissioners of the EPZs and had access to the same incentives. Further EPZs and specialized processing zones (for software, electronic hardware, and agriculture) were set up in the following years. In 2001, the Government further expanded the network by establishing Special Economic Zones (SEZs). The degree of success of these zones is not clear. A recent study, for example, found that exports from the EPZs and SEZs as a share of total exports have been almost stagnant since the early 1990s.70 Data provided by the authorities for 2001/02 to 2005/06, show that the share of total exports from EOUs has remained at between 8% and 10% and from the SEZs (including EPZs) at between 4% and 5%. 71 There also appears to be considerable sectoral variation, with exports of gems and jewellery and electronics faring better than other industries.

97. Of the seven EPZs in India, one is exclusively for exports of electronic products and gems and jewellery.72 In addition to income tax relief and holidays (Table AIII.4), the incentives provided for investing in the EPZs include exemption from import licences, single window approval process, and exemption from customs duty for industrial inputs; imports from the domestic tariff area (DTA) are also exempt from payment of excise duty. There are also around 2,334 EOUs in the country receiving the same incentives initially as firms established in the EPZs although the EPZs have now become SEZs (see below).

98. The multi-product SEZs, which can be set up by government or private entities over a minimum contiguous area of 1,000 hectares (at least 200 hectares in selected states) 73, are self- contained parks providing advanced infrastructure, and all units operating in the SEZs are offered simplified customs and other administrative procedures, and facilities such as electricity, and water. In contrast to EPZs and EOUs, there are no minimum export requirements for SEZs although they are required to be net foreign exchange earners. In addition to the tax incentives already provided to the EPZs and EOUs, investors in the SEZs are eligible for other incentives, including: exemption from the service tax and minimum alternate tax; up to 100% FDI in most activities; and a relaxation of certain requirements including environmental impact assessment, labour laws, and residence requirements for foreign managing directors of companies (Table AIII.4).74

68 Ministry of Finance (2007). 69 Aggarwal (2005). 70 Aggarwal (2004). 71 Data provided by the authorities show that exports from EOUs grew from Rs 187 billion in 2001/02 to Rs 377 billion in 2005/06, and from SEZs from Rs 92 billion to Rs 223 billion during the same period. 72 Kandla Free Trade Zone; Falta Export Processing Zone; Santa Cruz Electronics Export Processing Zone; Vishakhapatnam Export Processing Zone; Chennai Processing Zone; Cochin Export Processing Zone; and Noida Export Processing Zone. 73 SEZs proposed in the states of Assam, Meghalaya, Nagaland, Arunachal Pradesh, Mizoram, Manipur, Tripura, Himachal Pradesh, Uttaranchal, Sikkim, Jammu and Kashmir, Goa or in a Union Territory (Chapter II of the Special Economic Zones Rules, 2006). 74 In certain cases, labour laws have been delegated by states to the SEZs, and specific legislative amendments have been passed by some states to introduce flexibility in labour and environmental requirements India WT/TPR/S/182 Page 67

99. Thus far, approval has been given for around 237 SEZs across 19 states and 3 Union Territories; all of the existing EPZs have been converted to SEZs. Like the EPZs, each SEZ is administered by a Development Commissioner. Applications for establishing a unit in a SEZ must be made to the Development Commissioner of the SEZ along with supporting documents. The Approval Committee must provide its decision to the applicant within 15 days of receipt of the application; for applications requiring an industrial licence, approval must be given within 45 days by the SEZ's Board of Approval in the Ministry of Commerce and Industry. 75 Sector-specific considerations based on, inter alia, export potential and product sensitivity, apply for high grade iron ore, coffee, polyester yarn, and some textiles and clothing products.76 A large share of the industries approved to operate in the SEZs seem to be information technology based industries. The cost- effectiveness of these SEZs in generating incremental investment and employment is open to question. As these are fairly capital-intensive activities, it is not clear that this is the most effective way to create additional employment opportunities, especially for the less-skilled labour force. The Ministry of Finance estimates that forgone taxes from the SEZs will amount to some Rs 1,750 billion (US$39.6 billion) by 2011, while the Ministry of Commerce estimates that the SEZs will bring in US$13.5 billion in investment and 890,000 jobs by 2009.77 Duty forgone from the SEZs was estimated at Rs 21.5 billion in 2006/07.78 These figures suggest that the amount of investment generated by SEZs falls far short of the associated tax revenues forgone and that the average cost of the jobs created is very high, all of which casts doubt on the cost-effectiveness of SEZs. The Reserve Bank of India has also noted that the revenue loss in providing incentives may be justified only if the SEZs ensure forward and backward linkages with the domestic economy.79

(ix) State trading

100. There has been further liberalization in state trading in exports since 2002. The main changes concern onions, which can be freely exported by a number of state cooperatives, while some petroleum products (LPG and kerosene) can be exported subject to obtaining a "no objection" certificate from the Ministry of Petroleum and Natural Gas (Table III.8). Indian exports of sugar are subject to tariff rate quotas in the United States and the EC and are exported through the Indian Sugar Exim Corporation Limited, which is a sugar producers cooperative.80

applied to the SEZs (SEZ online information. Viewed at: http://www.sezindia.nic.in/lab.asp [30 June 2006]. 75 SEZ online information. Viewed at : http://sezindia.nic.in/howapply_enterprise.asp [16 June 2006]. 76 Rule 18 of the SEZ Rules 2006. Viewed at: http://www.sezindia.nic.in/sez-rules2006.pdf [16 February 2007]. 77 The Economist, 27 January 2007. 78 Ministry of Finance (2007). 79 RBI (2006b). 80 Quantitative ceilings are notified by the DGFT from time to time (ITC(HS), Schedule 2: Export Policy). WT/TPR/S/182 Trade Policy Review Page 68

Table III.8 Exports subject to state trading, 2001 and 2006 October 2001 1 April 2006 Agency Onions (all varieties other than Bangalore Under notification 20 of 8 October 2003, all varieties National Cooperative Consumers' rose onions and Krishnapuram onions) of onions (including Bangalore rose and Federation of India Ltd.(NCCF); Krishnapuram) can be exported; in addition to the National Agricultural Cooperative agencies previously authorized, onions can be Marketing Federation of India Ltd. exported by the Karnataka State Cooperative (NAFED); Gujarat Agro Marketing Federation Ltd. (KSCMF); the North Industries Corporation Ltd. Karnataka Onion Growers Co-operative Society (GALC); Maharashtra State (NKOGCS); the West Bengal Essential Commodities Agricultural Marketing Board Supply Corporation (WBECSC) Ltd.; M.P. State (MSAMB); Andhra Pradesh State Agro Industries Development Corporation Trading Corporation; and Spices (MPSAIDC); Karnataka State Produce Processing Trading Corporation Ltd. (STCL) and Export Corporation (KAPPEC); Madhya Pradesh State Co-operative Oil Seeds Growers Federation Ltd.; and the Andhra Pradesh Marketing Federation (AP MARKFED). - Bangalore rose onion Not subject to state trading (see above) - Krishnapuram onion Not subject to state trading (see above) Niger seeds Not subject to state trading Gum karaya Unchanged Tribal Cooperative Marketing Development Federation of India Ltd. Preferential quota sugar to the EC and the Unchanged Indian Sugar Exim Corporation United States Limited subject to quantitative ceiling notified by DGFT from time to time Mica scrap Not subject to state trading Iron ores concentrate prepared by Unchanged Kudremukh Iron Ore Company beneficiations and or concentration of Ltd. low-grade iron ore containing 40% or less of iron produced by Kudremukh Iron Ore Company Ltd. Iron ore pellets manufactured by Unchanged Kudremukh Iron Ore Company Kudremukh Iron Ore Company Ltd. out of Ltd. concentrates produced by it Manganese ores below 46% Mn Unchanged Minerals and Metals Trading Corporation (MMTC); and Manganese Ore India Ltd. (MOIL) Chrome Ore lumps with Cr2O3 not Unchanged Minerals and Metals Trading exceeding 40% Corporation (MMTC). Low silica, friable/fine ore with Cr2O3 not Unchanged Minerals and Metals Trading exceeding 52% and silica exceeding 4%; Corporation (MMTC) and low silica friable/fine chromite ore with Cr2O3 in the range of 52-54% and silica exceeding 4% Crude oil Unchanged Indian Oil Corporation Liquefied petroleum gas Free subject to obtaining NOC from Ministry of Petroleum and Natural Gas Kerosene Free subject to obtaining NOC from Ministry of Petroleum and Natural Gas Rare earths (including yttrium) ores, Free although monazite is a prescribed substance . concentrates and compounds thereof subject to the provisions of the Atomic Energy Act, 1962 Other materials containing the following Free but subject to the provisions of the Atomic substances as accessory ingredients, Energy Act, 1962 including: - Samerskite - Uraniferrous allanite radium ores and concentrates

Source: WTO document G/STR/N/7/IND, 8 October 2001; and Ministry of Commerce and Industry (2006), Foreign Trade Policy 2004-2009; Schedule 2: Export Policy. India WT/TPR/S/182 Page 69

(x) Export finance, insurance, and guarantees

101. Export finance is provided primarily by the Export-Import Bank of India (Exim Bank) as well as through mandatory annual lending targets for commercial banks. The Exim Bank was established in 1982 under the Export Import Bank of India Act, 1981. Its primary responsibility is to finance, facilitate, and promote India's exports. It is wholly owned by the Government of India and its Board of Directors includes representation from the Ministries of Commerce and Industry, and Finance, as well as the Reserve Bank of India, banks, and the private sector.

102. The Exim Bank provides a range of financing products, support programmes, and value-added services to promote two-way trade and investment. It provides credit to governments and to overseas financial institutions to enable buyers in those countries to purchase capital/engineering and manufactured products and related services from India on deferred payment terms negotiated between the Exim Bank and the overseas agency. 81 The export credit can be provided to Indian companies, commercial banks or overseas entities.82 The bank also provides various export guarantee schemes and fee-based services to support international trade and investment, and conducts related research.83 The bank is wholly owned by the Government of India (GOI), which has subscribed to its equity capital. The Government has also subscribed to an issue of long-term subordinated bonds, which qualify as Tier I capital of the bank. The bank also raises resources from the domestic and international capital markets.84 Under the Act, the bank is required to act on business principles and is also liable to tax under the Income Tax Act. The bank usually lends on a cost-plus basis at market-related interest rates. In certain cases, it may (at the behest of and on behalf of the Government) extend a line of credit to an overseas government or institution. The top five industrial sectors to which the bank had exposure, on 31 March 2006, were textiles and garments, metals and metal processing, engineering goods, construction goods and services, and capital goods.

103. Under the current guidelines on lending to the priority sector, 12% of net bank credit (within the overall target of 32% of net bank credit stipulated for priority sector lending) must be loaned to the export sector by foreign banks having offices in India. The loans may be provided in domestic or foreign currency and are at concessional rates of interest. As at March 2006, 19.4% of net bank credit by foreign banks went to the export sector: out of 29 foreign banks, 26 have achieved the 32% target.

104. Export insurance is provided by the Export Credit Guarantee Corporation of India Limited (ECGC). The ECGC is under the administrative control of the Ministry of Commerce and Industry, and its Board of Directors includes representation from the Central Government, the RBI, and the banking, insurance, and exporting sectors. It provides: credit risk insurance for exporters of goods and services; pre- and post-shipment cover to banks and financial institutions, to enable exporters to obtain adequate and need-based financing; and overseas investment insurance to Indian companies investing in joint ventures abroad either through equity or loans on a "liberal basis".85 According to

81 Export Import Bank of India online information. Viewed at: http://www.eximbankindia.in/ services-1a.html [20 July 2006]. 82 Export-Import Bank of India online information. Viewed at: http://www.eximbankindia.in/ faq.html [24 July 2006]. 83 The guarantees include: bid bond guarantees; advance payment guarantees; performance guarantees; guarantees for release of retention money; and guarantee for raising borrowings overseas for execution of project export contracts (Export-Import Bank of India online information. Viewed at: http://www.eximbankindia.in). 84 Instruments used by the bank for raising short-term finances include commercial paper and certificates of deposit; instruments used for raising medium- and long-term funding include syndicated loans and bonds. Resources are raised on the strength of the bank's own balance sheet. 85 ECGC online information. Viewed at: https://www.ecgcindia.com/Portal/aboutus/aboutus.asp#q1, 24 July 2006; and Department of Commerce and Industry (2006), pp. 37-40. WT/TPR/S/182 Trade Policy Review Page 70 the authorities, "liberal basis" implies that the ECGC cover is expected to provide increased comfort to exporters to enhance their exports and to the banks for financing the exporters, but does not imply concessional rates of premium or terms. In addition, in March 2006, the Government approved the establishment of a National Export Insurance Account (NEIA), to ensure the credit-risk cover for medium and long-term exports, which are commercially viable and are desirable from a national interest point of view, but which ECGC cannot underwrite without affecting their competitiveness. 86 Funding for these programmes will be provided by the Central Government or through the Tenth Five Year Plan.87 The ECGC will only administer the NEIA, the risk will be borne by the Government. Furthermore, the authorities note that the ECGC is guided in its decisions solely by commercial judgement and does not receive a subsidy from the Government.

(xi) Export promotion and marketing assistance

105. In addition to the tariff concessions and exemptions and export programmes mentioned above, the Department of Commerce encourages exports indirectly through the Assistance to States for Development of Export Infrastructure and Allied Activities (ASIDE) scheme, which provides assistance for setting up new export promotion parks and zones and complementary infrastructure such as road links to ports, container depots, and power supply; the Marketing Development Assistance (MDA) scheme, to support efforts by the export promotion councils (EPCs) in their export promotion activities; the Market Access Initiative (MAI) scheme, which provides assistance for research on potential export markets; as well as other incentives to improve quality, infrastructure, etc. related to agriculture through the commodity boards and councils.88 India's EPCs and commodity boards also continue to promote exports of specific products. The India Trade Promotion Organization (ITPO) also continues its promotion activities by organizing trade fairs and exhibitions in India and abroad.89

(4) MEASURES AFFECTING PRODUCTION AND TRADE

(i) Industrial policy

(a) Overview

106. The Statement of Industrial Policy, issued in 1991, which started the process of economic liberalization in India, sets the basis for current industrial policy. 90 Licensing requirements are in place for a number of industries, although these have been substantially reduced since 1991. As a result of gradual reform, there are now three industries reserved only for the public sector, compulsory industrial licensing is required for five industries, 326 products at the HS 8-digit level are reserved for the small scale sector, and there are locational restrictions under urban zoning and environmental regulations for non-Small-Scale Industry (SSI) units subject to industrial licensing.

86 Projects include high risk with respect to a single country; high value of a single transaction; and large value projects involving unusual or unconventional credit terms, which are beyond the normal, risk-bearing capacity of the ECGC (Department of Commerce, 2006). 87 This includes Tenth Plan expenditure of Rs 17.25 billion for the ASIDE programme (Rs 14.9 billion had been released by end December 2005); and Rs 660 million for the financial year 2005/06. 88 Department of Commerce (2006). 89 Other organizations affiliated to the Ministry of Commerce and Industry include the Federation of Indian Export Organizations (FIEO), the Indian Diamond Institute, and the Indian Council of Arbitration, which, inter alia, provides arbitration facilities to settle trade disputes (Department of Commerce, 2006). 90 India's policy on industrial licensing is based on the Industries (Development and Regulation) Act, 1951. India WT/TPR/S/182 Page 71

(b) Public sector reservation

107. As at April 2006, three industries (atomic energy, substances specified in the schedule to the notification 212(E) issued by the Department of Atomic Energy (15 March 1995), and railway transport) are reserved exclusively for investment and manufacture by public sector companies. At the time of the last Review, defence aircraft and warships were also reserved for the public sector.

(c) Compulsory industrial licensing

108. India continues to require compulsory industrial licensing for a few industries for security, safety, strategic, social, and environmental reasons; the main change since the previous Review is the removal, on 23 September 2005, of the drugs and pharmaceuticals industry as it seems these are already subject to licensing under the Drugs Control Order (Table III.9).91

Table III.9 Industries for which industrial licensing is compulsory Industry

1 Distillation and brewing of alcoholic drinks 2. Cigars and cigarettes of tobacco and manufactured tobacco substitutes 3. Electronic aerospace and defence equipment: all types 4. Industrial explosives, including detonation fuses, safety fuses, gun powder, nitrocellulose, and matches 5 Specified hazardous chemicals i.e. (i) hydrocyanic acid and its derivatives, (ii) phosgene and its derivatives and (iii) isocyanates and diisocyanates of hydrocarbon, not elsewhere specified (example methyl isocyanate)

Source: Information provided by the authorities.

109. Potential investors in industries subject to compulsory industrial licensing must submit an application to the Secretariat for Industrial Approvals (SIA) in the Department of Industrial Policy and Promotion (DIPP) of the Ministry of Commerce and Industry. Decisions are made within 4-6 weeks of receipt of the application. The Licensing Committee takes into account the location and pollution/environmental impact of the proposed industrial unit. For industries exempt from the industrial licence requirement, applicants must submit an "Industrial Entrepreneur Memorandum" to the SIA. A "carry on business" (COB) licence is required for micro and small manufacturing enterprises that exceed the investment limits (in plant and machinery, excluding land and buildings) prescribed for them (section (d) below); if the unit exceeds the investment limit indicated on the COB, it must obtain an industrial licence; following the granting of the COB the unit loses its SSI status.92

110. Environmental clearance is also required separately for 39 categories of developmental projects, from the Central Government or, as the case may be, from the State level Environmental Impact Assessment Authority, under notifications issued by the Ministry of Environment and Forests, under the Environment (Protection) Act, 1986.93 Applications for environmental clearance must be made to the authorities prescribed by the notification. The authority must grant or refuse environmental clearance within 105 days of receipt of the final environmental impact assessment (EIA) report (incorporating environmental concerns arising from public consultations, where applicable). The main change since the previous Review of India, is a new EIA notification issued on 14 September 2006, which seeks to rationalize and re-engineer the EIA process and to decentralize

91 Department of Industrial Policy and Promotion Notification, Gazette of India, 23 September 2005. 92 Department of Industrial Policy and Promotion (2005). 93 These categories include: manufacturing and chemical industries, river valley and hydroelectric projects, infrastructure, nuclear and thermal power plants, mineral extraction, and large construction. WT/TPR/S/182 Trade Policy Review Page 72 decision making in most cases to the state authorities in order to render the process faster and transparent.94

111. Locational restrictions continue to apply to setting up industrial units in 23 cities (21 cities at the time of the previous Review) with a population of over one million (according to the 1991 census). Manufacturing enterprises must obtain an industrial licence to invest within a radius of 25 kilometres of the Standard Urban Area limits of these cities, unless the unit is to be established within an area designated as an "industrial area" before 25 July 1991, or if the industry is designated as "non-polluting" such as electronics, computer software, and printing.95 Data provided by the authorities on industrial licences granted indicate that most applications since 2002 have been approved (out of 698 applications received up to October 2006, 471 or 67.5% have been approved, and 26 or under 4% rejected). The main sectors in which the licences were approved are textiles, chemicals (other than fertilizers), metallurgical industries, and defence industries.

(d) Small-scale enterprises

112. Under the Micro, Small and Medium Enterprises Act (MSMED), 2006, enterprises are classified as micro, small and medium enterprises according to the amount of investment. For enterprises involved in manufacturing, micro enterprises are defined as those with investment of up to Rs 25 million; small as those with investment between Rs 25 million and Rs 50 million; and medium enterprises as those with investment between Rs 50 million and Rs 100 million. In services, micro enterprises are defined as those with investment of up to Rs 1 million; small as those with investment between Rs 1 million and Rs 20 million; and medium enterprises as those with investment between Rs 20 million and Rs 50 million.

113. According to estimates, the SSI/MSE sector accounted for around 40% of gross industrial value added in India and almost 44% of manufactured exports in 2005/06. It is estimated that at the end of 2005/06, there were around 12.3 million MSEs providing employment to 29.5 million people. 96 The sector's contribution to the economy in terms of output and employment has grown steadily, with output growth at 9.2% (at constant prices) and employment growth at 4.3% annually during 2002/03 and 2005/06.97

114. To promote the development and enhance the competitiveness of MSEs, the MSMED Act, 2006 entered into effect on 2 October 2006. The Act provides a legal framework to recognize the concept of "enterprise" (in manufacturing and services) and to integrate the three tiers of micro, small and medium-sized enterprises. The Act also provides for a statutory consultative mechanism at the national level with stakeholders, particularly the three classes of enterprises, and with a wide range of advisory functions. It also establishes, inter alia, specific funds and schemes/programmes to promote, develop, and enhance the competitiveness of these enterprises; credit policies and practices; preferences in government procurement for products and services of micro and small enterprises; more effective mechanisms for mitigating the problems of delayed payments to micro and small enterprises; and simplified procedures to close poorly performing firms. The legislation also defines medium-sized enterprises for the first time and micro enterprises for the first time under law. According to the authorities, some nine notifications/model rules (the latter to be adopted by state governments) have been issued in this connection.

94 Ministry of Environment and Forests online information. Viewed at: http://envfor.nic.in/legis/ eia/so1533.pdf [8 February 2007]. 95 Department of Industrial Policy and Promotion (2005). 96 RBI (2005). 97 Ministry of Finance (2006). India WT/TPR/S/182 Page 73

115. A number of products have been reserved for production only by SSI/MSE in order to encourage their development.98 Over the years, however, recognizing that reservation did not necessarily help SSI units to develop and expand, the Government has gradually reduced the number of products. The policy on reservation, including a review of products on the list, is implemented by the Advisory Committee on Reservation created in 1984. The review is based on consultations with all stakeholders, followed by a recommendation to the Government. Since the previous TPR of India, the number of products reserved exclusively for SSIs has declined from 799 to 326. The products removed from the list include: textiles, rubber, leather, plastics, chemicals, and mechanical engineering products (Table III.10). It is estimated that in 2001/02 these products accounted for around 8.4% of the total output of the SSI sector.99 In certain cases, non-SSI units can manufacture items reserved for SSIs, including: where the undertaking existed prior to the reservation of the item being manufactured by it and has a COB licence; when a SSI becomes too large and has a COB licence; if a non-SSI obtains a letter of intent with an obligation to export a minimum of 50% of its output; where a non-SSI has been granted a licence prior to the reservation of an item, it can continue to produce that item to the extent of the prescribed licensed capacity; and when a unit is established in a special economic zone (SEZ).

Table III.10 Items reserved for the small-scale sector, 2001 and 2006 Product 2001 May 2006

Food and allied industries 12 9 Textile products including hosiery 16 0 Articles of silk and man-made fibre hosiery 15 0 Wood and wood products 14 9 Paper products 30 19 Leather and leather products including footwear 9 0 Rubber products 21 0 Plastic products 15 13 Injection moulding thermo-plastic products (1) 42 37 Injection moulding thermo-plastic products (2) 7 3 Chemicals and chemical products laboratory chemicals and reagents 62 7 Natural essential oils 7 2 Organic chemicals, drugs and drug intermediates 37 12 Other chemicals and chemical products 76 20 Glass and ceramics 3 3 Ceramic table wares and allied items in stone wares semi-vitreous wares and earthen 24 24 wares Mechanical engineering excluding transport equipment 193 61 Electrical machines, appliances and other apparatus including electronics and 47 17 electrical appliances Electronic equipment and components 9 1 Transport equipment, boats and truck body building 3 3 Auto parts components and ancillaries and garage equipment 47 0 Bicycle parts, tricycles and perambulators 42 41 Miscellaneous transport equipment 4 4 Miscellaneous: mathematical and survey instruments; sports goods; stationary 52 20 items; clocks and watches Others 22 21 Total 799 326

Source: Data provided by the Small Industries Development Organisation, Ministry of Small Scale Industries.

98 In 1967, when reservation for the SSI was introduced, 67 products were reserved; the number peaked at 836 products in 1989 and has progressively declined since then. 99 Information based on the Third All India Census of Registered SSI Units and sample survey of unregistered SSI units and provided by the authorities. WT/TPR/S/182 Trade Policy Review Page 74

116. In addition to the list of items for exclusive manufacture by the SSI, restrictions are in place on investment in SSI/MSEs: any non-MSE enterprise that has no interest in another industrial undertaking can hold up to 100% equity in MSEs. However, if the unit or enterprise has an interest in any other industrial undertaking, it may invest a maximum of 24% equity (including FDI). These issues, based on the Industries (Development & Regulation) Act, 1951, as well as the list of items reserved for manufacture by the SSI, are currently under review.

117. In 1999, the Government established the Ministry of Small Scale Industries (split into the Ministry of Small Scale Industries and Ministry of Agro and Rural Industries in 2001) to provide assistance to the states in developing small-scale industries. The Ministry operates with the help of the Small Industry Development Organization (SIDO) and the National Small Industries Corporation Limited (NSIC), a public sector enterprise. The SIDO (also known as the Office of the Development Commissioner (Small Scale Industries)), which was established in 1951, provides, inter alia, technology support services, and marketing assistance to SSI units through its offices across the country. Assistance includes direct credit and credit through the banks under the priority sector lending targets as well as other forms of protection, such as government purchase of 358 items exclusively from the small-scale sector and a 15% price preference for the SSI units (Table AIII.5) (section (2)(xiv)). The National Small Industries Corporation Limited (NSIC) is the single-point of registration for eligible MSEs for government purchase preference schemes.

118. Despite these efforts to assist the SSI, industrial "sickness" appears to remain a problem. The main reasons are inadequate and delayed credit, obsolete technology, infrastructural constraints, management deficiencies, and marketing problems. Under the RBI's latest guidelines, an SSI unit is defined as sick when any of its loan accounts remain substandard for more than six months; or if after at least two years of commercial production, there is an erosion in the net worth of the unit due to accumulated losses of up to 50% of its net worth during the previous accounting year. 100 According to the most recent survey conducted by the SIDO, 104,769 units (or 1% of all SSI units) were judged to be "sick". "Incipient" sickness measured as continuous decline in gross output over three consecutive years was found in 750,922 units (around 7.14% of all SSI units).101 To address these problems, the RBI issued detailed guidelines to banks in January 2002 on detection of sickness at an early stage and remedial measures, and for rehabilitation of sick SSI units identified as potentially viable. These guidelines include, inter alia, changes in the definition of sick SSI units, norms for deciding their viability, and concessional finance. The Government also announced the Policy Package for Stepping up Credit to Small and Medium Enterprises (SMEs) on 10 August 2005, while the RBI issued detailed guidelines on 8 September 2005 on a debt restructuring mechanism for all eligible SMEs (including SSIs). These guidelines include, inter alia, viability criteria, prudential norms for restructured loan accounts, provision of additional finance, and time frame for working out the restructuring package and its implementation. As at March 2006, the assets of 594 SME units had been subject to restructuring under the debt restructuring mechanism.

100 SIDO online information. Viewed at: http://www.smallindustryindia.com/Print.jsp?filename=/ ssiindia/census/ch7.htm [4 July 2006]. 101 Almost 60% of sick SSI units were found in the states of West Bengal, Kerala, Maharashtra, Karnataka, and Andhra Pradesh, while over 54% of incipient sickness was found in the Kerala, Tamil Nadu, Andhra Pradesh, Karnataka and Maharashtra (SIDO online information. Viewed at: http://www.smallindustryindia.com/Print.jsp?filename=/ssiindia/census/ch7.htm [4 July 2006]. India WT/TPR/S/182 Page 75

(ii) Taxation and non-tax assistance

(a) Tax policy

Overview

119. India's tax system has moderate tax rates but a narrow tax base, owing to an array of exemptions and incentives. As a result, average effective tax rates (the ratio of taxes collected to the notional tax base) tend to be low, but marginal effective tax rates are high, thereby creating a potential distortion to both investment and financial decisions.102 Under the Indian Constitution, taxation is a shared responsibility, with both the central and state governments raising revenue through certain taxes. The main taxes levied by the Central Government are income tax (personal and corporate), customs duties, excise duties, and service tax. The Central Government also levies a central sales tax (CST) on inter-state sales of goods, but this is collected and appropriated by the states. The states raise most of their revenues through the sales tax (replaced by the VAT in most states), although there are also other taxes like state excise duty on alcohol, stamp duties, octroi/entry tax, tax on professions, tax on agricultural income, etc.

120. Since 2000/01, the Central Government's total tax revenues have ranged between 5.9% and 8.4% of GDP (between 8.2% and 11.4%, if transfers to the states are included (Table I.5)). (Revenues including state taxes rose from 14.5% of GDP in 2000/01 to 16.6% in 2005/06.) Excises and corporate income tax accounted for the largest shares of tax revenues in 2006/07, 2.3% and 2.4% of GDP, respectively (Table I.4). Whereas the share of customs tariffs in the Central Government's total tax revenues has declined substantially, owing to reductions in tariff rates, the shares of corporate and personal income taxes have risen considerably, mainly as a result of improvements in tax administration and compliance.103

121. Despite the gradual increase in total tax revenue, India's tax to GDP ratio is relatively low, and services, which make up over half of India's GDP, are not taxed appropriately. 104 Moreover, the tax base is relatively narrow due to the many exemptions granted for both direct and indirect taxes, resulting in poor buoyancy.105 Despite statements to the contrary by successive Governments, it has been suggested that the number of exemptions have increased rather than fallen over the years. 106 Other problems include the cost of tax compliance, which is high, and the low probability of violators being caught, leading, according to a recently established Taskforce, "to an endemic culture of tax avoidance" as well as tax evasion.107 Reforms necessitated by the Fiscal Responsibility and Budget Management Act, 2003, which requires the Government to eliminate its revenue deficit by 2008/09, have to further address some of these deficiencies in the tax system (Chapter I).

Indirect taxes

122. The main indirect taxes (in terms of their share of tax revenue) are excise duties, customs duties, and service tax for the Central Government; and state sales tax (now replaced by VAT), CST,

102 Poirson (2006). 103 Rao (2005). 104 Despite being introduced in 1994, the service tax still only accounts for under 8% of total tax revenue and just over half a percent of GDP. 105 See for example, Ministry of Finance (2003). 106 See for example, Mukhopadhyay (2006), pp. 1324-1326. 107 Ministry of Finance (2003), p. 17. WT/TPR/S/182 Trade Policy Review Page 76 and excise duties on alcohol for the states. During 2005/06, indirect taxes accounted for about 70.7% of total tax revenue of central and state governments. Central indirect taxes have been declining as a share of total central tax revenue, from 63% in 2000/01 to 52% in 2006/07 (Table I.4). According to the authorities, the tax revenue of VAT-implementing states registered an increase of 13.8% during 2005/06 over 2004/05 under the earlier sales tax system (Box III.1).

Box III.1: Introduction of the value-added tax Reform of the state sales tax and introduction of a value-added tax began in 1994, when a conference of Chief Ministers of the States and Union Territories and the Ministry of Finance was held. An Empowered Committee of State Finance Ministers was constituted on 17 July 2000 to discuss details of the introduction of a new state-level value-added tax as well as the relevant rates. Its terms of reference included: monitoring the implementation of uniform floor rates across all states and union territories, and the phase-out of incentives linked to the sales tax; and determining steps to be taken to implement a value-added tax to replace the sales tax. The Empowered Committee agreed to prepare for the introduction of a uniform, nation-wide state VAT by 1 April 2001, with assistance from the Central Government. The date was later changed to 1 April 2002 and then to 1 April 2003. One State adopted the VAT on 1 April 2003 and another 19 states and union territories on 1 April 2005. Currently 30 states and union territories have implemented the VAT. Of the remaining five, two union territories do not have a sales tax, one state declared that it would implement the VAT from 1 January 2007, and one union territory from 1 April 2007. The remaining State has yet to take a decision on implementing the VAT. In the states that have implemented the VAT, most goods are subject to rates of 4% or 12.5%, while gold and silver ornaments are taxed at 1%; some 550 goods are covered by the VAT, while 46 commodities including natural and unprocessed goods produced by the unorganized sector, like fresh fruit and vegetables, fresh milk, salt, bread, unprocessed meat and fish, organic manure etc., are exempt for social reasons. Around 270 goods, including medicines and drugs, agricultural and industrial inputs, and capital goods, are taxable at 4%; all other products are subject to the rate of 12.5%. A few items, like petrol, diesel, liquor, etc. are subject to a minimum rate of 20%. The Committee decided to exclude sugar, textiles, and tobacco products because they were subject to additional excise duty in lieu of sales tax by the Central Government, against which the states received a share of central tax revenues. The authorities note that the initial experience with the VAT has been encouraging. The new system has been well received and the transition smooth. The tax revenue of implementing states increased by 13.8% during 2005/06 (compared with the sales tax revenues during 2004/05), which is higher than the growth rate for these states during the previous five years. During April-November 2006, there was significant further improvement, with an increase of about 25.5% over the corresponding period of the previous year. Source: Empowered Committee of State Finance Ministers (2005), A White Paper on State-Level Value Added Tax, 17 January; Press Information Bureau "Implementation of State VAT" 21 August 2006; WTO (2002), Trade Policy Review: India; and information provided by the authorities.

123. Central excise taxes (CENVAT), which are essentially taxes on manufactures, are imposed only on domestically produced goods. They remain the most important indirect tax for revenue purposes, although their share declined from over 35% of total central tax revenue in 2000/01 to 25% in 2006/07, mainly due to rationalization and reduction of rates. As a result of several years of reform, the rate for many goods was unified at 16%. However, in the 2006/07 Budget, a large number of products (mostly textiles and clothing) were made subject to the lower rate of 8%; further products were added to the list in the 2007/08 Budget. A scheme was introduced in March 1986 to enable manufacturers to receive a credit for excise duty paid on raw materials and for components used in the manufacture of final products. The modified VAT (MODVAT) is now applied to most excisable India WT/TPR/S/182 Page 77 goods.108 According to the authorities, the excise duty is a value-added tax wherein the tax paid on inputs is credited against the duty paid on final products, thus reducing the cascading effect of taxation at different stages of manufacture. Some products are also subject to an additional excise duty under the Additional Duties of Excise (Goods of Special Importance) Act of 1957, which is imposed on all types of fabrics except silk fabrics, in lieu of sales tax. The Additional Duties of Excise (Textiles and Textiles Articles) Act 1978 was abolished in the 2004/05 Budget. 109 The tax schedule is complicated by the presence of many exemptions, including for production based on geographical location, for small-scale industries, and for certain activities. It has also been suggested that while the CENVAT is levied on manufactured goods, services (which have grown in importance over the years), are not adequately taxed and that a larger number of services should be covered by the service tax (see below).110

124. The service tax, which was introduced in 1994, is currently levied by the Central Government on some 99 services; a number of services were added to the list in the 2007/08 Budget. Initially imposed at 8% of the value of services provided, the rate has been increased gradually over the years. The 2006/07 Budget raised the rate from 10% to 12%. The inter-state sales tax is levied by the Central Government at a rate of 4%. There are also wealth taxes, state taxes on agricultural income, and others such as stamp duty, taxes on motor vehicles, and octroi.

125. The state VAT is levied at 4% or 12.5%, except for gold and silver items, which are taxed at 1% (Box III.1). Traders with turnover up to Rs 500,000 are exempt from payment of tax. Traders with turnover between Rs 500,000 and Rs 5 million have to register under VAT, but are allowed to opt for a simplified tax on total turnover at a nominal rate not exceeding 1%. These traders do not receive input tax credits and cannot issue tax invoices. Traders with turnover above Rs 5 million must pay VAT. Certain items, such as alcoholic beverages and petroleum products, are subjected to a higher floor tax rate of 20%. The VAT is zero-rated on exports. The input tax credit is allowed in respect of input taxes paid within the same State. Central sales tax on inter-state sales of goods is not rebatable against VAT.

Direct taxes

126. Corporate and personal income taxes account for 31.3% and 17.6%, respectively, of total Central tax revenue.111 While the share of personal income tax has remained relatively stable since 2002, there has been a substantial increase in the contribution of corporate tax to total revenue. Both the top personal tax and statutory corporate tax rates (for Indian companies) are currently 30% (the threshold for the 10% surcharge on personal income tax was raised in the 2005/06 Budget to Rs 1 million).112 The Government minimum alternate tax (MAT) on company book profits, was raised from 7.5% to 10% in the 2006/07 Budget, partly in response to the erosion of the tax base resulting from a large number of exemptions and incentives (see below).

127. While the statutory rates are relatively high compared with neighbouring countries and particularly south east Asia, a large number of exemptions and concessions and tax holidays are offered to investors, likely making the effective rate of corporate tax significantly lower (estimated at

108 Goods excluded included tobacco and tobacco products, matches, cinematographic films, motor spirits, high speed diesel, and some woven fabrics. 109 Revenues from this additional excise duty are shared between the Centre and states. The present share of state governments under the Award of the Twelfth Finance Commission (2005/06 to 2009/10) is 30.5%. 110 Government of India (2002), Chapter 8. 111 Provisional figures for 2006/07. The respective figures for 2005/06 are 28% and 17.9%. 112 All companies incorporated in India, whether domestic or foreign owned, are regarded as domestic companies. For foreign branches, the tax rate is 41.82%, which includes 40% tax rate + 2.5% (x40%) surcharge and 2% (x41%) education cess WT/TPR/S/182 Trade Policy Review Page 78

21% in 2002).113 Over the years, reviews of tax policy have suggested a reduction or removal of the activity-based or sector-based exemptions available through the tax system. The Tenth Five year Plan calls for, inter alia, a reduction in unnecessary exemptions in order to raise sufficient resources to implement the Plan.114 A review of tax policy carried out in 2002 also suggested a removal or reduction of exemptions, which render the tax system complex and susceptible to tax evasion and "rent seeking".115 The MAT adds further complexity to the tax structure.

128. The Government appears to have accepted most of the suggestions made by the Task Force. These include: moderation of tax rates, reduction of depreciation rates, elimination of standard deduction, filing of annual information returns by third parties, exemption for long-term capital gains and dividend income from listed equity. Other recommendations, according to the authorities, are taken into consideration while making legislative amendments from time into time, and implementing them, wherever considered appropriate. Most of the recommendations relating to reform of tax administration, notably to reduce the compliance cost by simplification of forms and procedures for filing taxes, have also been implemented. Some action also appears to have been taken on the Task Force recommendations to remove exemptions granted under Sections 10A and 10B (for export) and Sections 80IA and 80IB (infrastructure, industrial and regional development), although new measures have also been added since the previous Review (see below).

Tax incentives

129. India's last notification to the WTO Committee on Subsidies and Countervailing Measures was made in October 2001. According to that notification, tax incentives are provided mainly under Sections 10A, 10B and 80 HHC of the Income Tax Act 1961. However, incentives under 80HHC have been phased out since then and no deduction under this section is available as from assessment year 2005/06. The incentives are provided "with a view to improving the foreign exchange reserves of the country".116 India plans to notify changes to its incentives to the WTO as soon as possible.

130. Direct tax incentives to exporters are provided under Sections 10A, 10AA, 10B and 10BA of the Income Tax Act. Under Section 10A of the Act, a 100% tax deduction for ten years is available for export profits of manufacturers of goods or computer software located in a special economic zone, export processing zone, free-trade zone, electronic hardware technology park, or software technology park. Section 10B provides similar incentives for EOUs. Export profits under this section were excluded from the minimum alternate tax (MAT)117; however, an extension of the MAT to include tax relief claimed under sections 10A and 10B was proposed in the 2007 Budget. The provisions of Section 10B were amended in 2002 to reduce the tax deduction to 90% for the financial year 2002/03 and to provide a five-year 100% tax deduction for undertakings commencing operations in SEZs on or after 1 April 2002, followed by a partial tax deduction of 50% for the two subsequent assessment years.

113 Based on a report by the Planning Commission cited in WTO (2002). 114 Planning Commission (2002), Chapter 3. 115 The Report on Direct Taxation suggests that the exemptions "promote rent-seeking behaviour and contribute to the complexity in tax laws. In terms of administration, exemptions more often than not lead to tax leakage and tax abuse thus increasingly making the system counter productive and dysfunctional" (Government of India, 2002, p. 11). 116 WTO document G/SCM/N/71/IND, 19 October 2001. 117 The provision permitting 25% of domestic tariff area (DTA) sales to be included in the tax deduction available under this section was removed as of 2001/02 and it was clarified that profits from on-site development of computer software (including software development services) outside India would qualify for a tax holiday. India WT/TPR/S/182 Page 79

131. Under the Finance Act, 2003, undertakings commencing operation in SEZs on or after 1 April 2002, were given a further deduction of 50% of profits credited to a Special Economic Zone Re-investment Allowance Reserve Account to be used for acquiring new plant or machinery, to be used within three years118; deductions under Section 10A to the business of cutting and polishing precious and semi-precious stones were extended; business losses or unabsorbed depreciation from financial year 2000/01 of undertakings receiving deductions under Section 10A were extended; and restrictions on eligibility for deductions under this section on account of changes in ownership were removed. These changes became effective from 2003/04, except for the carry-forward of business losses (permitted from 1 April 2001).

132. The SEZ Act, 2005, which entered into effect on 10 February 2006, introduced a new section 10AA in the Income Tax Act. It provides for a deduction of an SEZ unit's export profits derived from the manufacture of goods or from providing services. The deduction is available on 100% of profits for the first five years and 50% of profits for the following five years. A further deduction, of up to 50% of profits re-invested in the business, is available for the next five years. A new section 10BA was inserted in the Income Tax Act by the Taxation Laws (Amendment) Act, 2003 with effect from 2003/04. This provides for a 100% deduction of export profits up to 2008/09 from the manufacture or production of hand-made articles or items of artistic value that use wood as the main raw material, provided at least 90% of the sales during the previous year are exports of such wood-based articles and the undertaking employs at least 20 workers in the manufacturing process during the year. The purpose of this tax concession is to promote exports of traditional artistic products, which would keep alive traditional skills.

133. Under Section 80IA, tax incentives are available for infrastructure facilities, including the development of roads, water supply projects, treatment systems, irrigation, sanitation, ports, telecommunication services, power, and the development and maintenance of special economic zones and industrial parks. With the exception of telecommunications services, the incentive comprises tax holidays for ten consecutive assessment years; for telecommunications, the tax holiday is for five years, followed by a 30% deduction for the next five years, for an undertaking that started providing telecom services before 1 April 2005.119 Section 80IB provides tax benefits to industrial undertakings in the state of Jammu and Kashmir and to companies engaged in: scientific research and development; commercial production or mineral oil refining; developing and building housing projects; processing, preserving, and packaging of fruits or vegetables or handling, storage, and transportation of foodgrains; and operating and maintaining a hospital in a rural area. Most of these tax benefits were restricted to undertakings/companies set up by 31 March 2007 or 31 March 2008. The eligibilities period for other tax benefits under section 80IB for new units is over. The Task Force on Direct Taxes suggested that these incentives had not served their purpose and should be removed with immediate effect.120 Deductions under Section 80H, including general export incentives, construction abroad, and software exports, were phased out by end 2004/05; and the deduction under Section 80P, to cooperative banks, was withdrawn in 2006.

134. The Income Tax Act provides additional incentives, including for shipping (Section 33AC)121; and deductions for revenue and capital expenditure (other than for land) on scientific research (under Section 35). 118 However, until the acquisition of the new plant or machinery, the reserve may be used by the undertaking (other than for distribution through dividends or profits or for remittance outside India as profits, or for the creation of any asset outside India). This deduction is available for three years. 119 Government of India (2002), Tables 5.5 and 5.6. 120 Government of India (2002), p. 147. 121 The incentive is a deduction from profits of any sum of money transferred to a special reserve account and to be used for acquiring new ships to enable shipping companies to build up capital for new acquisitions (Government of India, 2002, p. 138). WT/TPR/S/182 Trade Policy Review Page 80

135. New tax incentives have also been introduced since the previous Review of India in 2002. These include a ten-year tax holiday for an undertaking owned by an Indian company and set up for reconstruction or revival of an electricity generating plant122, and a tax exemption for the income flowing between a subsidiary company and its Indian holding company involved in generation, transmission or distribution of electricity, if the income is for reconstruction or revival of an existing electricity company (the transfer must have been notified before 31 December 2005). In addition, under the SEZ Act, a ten-year tax holiday has been extended to a developer of a SEZ notified on or after 1 April 2005. Other tax incentives introduced by the Central Government include deductions ranging up to ten years for companies involved in processing, preserving, and packing fruits and vegetables; for hospitals in rural areas; and for offshore banking units or a unit of the International Financial Service Centre established in a SEZ under Section 80. In addition, 100% deductions of tax on profits have been granted for between five and ten years on profits from production of certain targeted activities in certain states.123

136. Data on duty forgone from these incentives were made available for the first time in the 2006/07 Budget. Under Section 10A revenue forgone in 2004/05 was estimated at Rs 70.8 billion for software companies located in Software Technology Parks and Rs 13.4 billion for SEZs including EPZs and free trade zones. In 2005/06 and 2006/07, revenue forgone was Rs 68.7 billion and Rs 99.4 billion under Sections 10A and 10AA; Rs 17.9 billion and Rs 25.9 billion for EOUs (Section 10B); Rs 108.9 billion and Rs 157.6 billion for Section 80IA; and Rs 62.3 billion and Rs 90.2 billion under 80IB.

(b) Subsidies

137. Direct subsidies as reported in the Central Government's annual budgets declined from around 1.9% of GDP in 2002/03 to around 1.4% of GDP in 2005/06 (Table III.11). The largest subsidy continues to be provided for food (over half of direct subsidies budgeted for 2006/07); additional agriculture-related support is provided in the form of fertilizer subsidies and price support (the latter included under "other subsidies"). Other major direct subsidies are provided for price support for petroleum products and for the railways. These direct subsidies are not reported in India's notifications to the Committee on Subsidies and Countervailing Measures, which were last notified in October 2001 (see section (a) above).

138. While there has been a decline in direct subsidies, a recent paper commissioned by the Ministry of Finance suggests that they account for around 38% of total government subsidies including those "hidden" in the provision of social and economic services. The paper also estimated that explicit and implicit subsidies accounted for around 4.2% of GDP in 2003/04.124 Moreover, the share of "merit" subsidies (including education, health care, soil and water conservation, research and development) in 2003/04 was only around 42% of total subsidies. A more detailed examination of the major subsidies (food, fertilizer, and petroleum) reveals the need for reform especially in the way food subsidies are targeted, the method of setting minimum support prices for certain agricultural products, and the costing and targeting of the fertilizer subsidy. 125 The report suggests that the subsidies on kerosene and LPG for weaker sections of society do not meet the desired objectives and, in the case of LPG, should be gradually reduced and removed, while the availability of kerosene could be improved 122 If it was formed before 30 November 2005, notified before 31 December 2005 and starts generation, transmission or distribution of electricity before 31 March 2007. 123 Information provided by the authorities (Ministry of Finance). 124 Government of India (2004). 125 It seems that nearly half the fertilizer subsidy is collected by industry, while the remainder is shared equally between rich and poor farmers; the former, because of their greater purchasing power, appropriate a larger share of the economic benefits than the poor farmers (National Institute of Public Finance and Policy, 2003). India WT/TPR/S/182 Page 81 through an open and competitive market. India last notified its aggregate measure of support for agriculture to the WTO in March and June 2002, respectively, for export subsidies and domestic support (Chapter IV(2)).

Table III.11 Explicit subsidies, 2002/03-2006/07 (Rs billion and per cent of GDP) 2006/07 Type of subsidy 2002/03 2003/04 2004/05 2005/06 (budget) Total 456.9 459.4 478.5 478.6 472.9 (% of GDP) 1.9 1.7 1.5 1.4 .. Of which: Food 414.7 252.0 258.0 232.0 242.0 Indigenous urea fertilizers 75.0 81.4 101.4 104.1 104.1 Imported urea fertilizers 0.1 0.01 4.7 11.0 11.0 Sale of decontrolled fertilizer with 35.0 36.6 50.5 57.5 57.5 concession to farmers Petroleum subsidy 62.7 65.7 35.5 29.3 30.8 Subsidies to railways for dividend 10.7 2.1 13.3 9.9 10.8 relief and other concessions Interest subsidies 7.7 9.3 5.7 21.8 4.9 Other subsidies 23.8 9.3 9.4 13.1 12.0

.. Not available. Source: Government of India, Expenditure Budget, Vol. 1, various years.

139. In addition to direct subsidies, transfers are made to state governments and by individual government ministries and agencies, including to state-owned enterprises and for research and development. Assistance is also provided to utilities, such as power, mainly in the form of regulated prices, and to services such as transport (other than rail transport, which receives an explicit subsidy) and postal services. In addition, although the administered price mechanism (APM) for petroleum has been dismantled, complete pass-through of international prices does not take place (section (iii)). In a period when prices of international crude oil and petroleum products have risen sharply, the consequent higher cost is shared by the National Oil Companies, consumers, and through budgetary support from the Government. Kerosene distributed as part of the targeted public distribution system (TPDS) and LPG for domestic use receive explicit subsidies through the budget, as comparatively cleaner fuels (see (iii) below). The state governments also provide subsidies, especially for basic services such as education and health.126

(iii) Price controls

140. Price controls continue for agricultural and pharmaceutical products and to some extent petroleum products. In agriculture, the Government maintains minimum support prices (MSPs) for 25 major agricultural commodities. This policy (and the products covered) is unchanged since the previous Review (Chapter IV(2)). The Government also provides a limited number of food products, such as rice, wheat, and sugar, and kerosene, at controlled prices to a targeted population living below the poverty line, through the TPDS (Chapter IV(2)). The price of urea (a nitrogenous fertilizer) is also controlled through a "group concession scheme", which replaced the retention price-cum-subsidy scheme (RPS) on 1 April 2003 (Chapter IV(2)). The price of other phosphatic and potassic fertilizers like di-ammonium phosphate (DAP), muriate of potash (MOP) and 11 grades of complex fertilizers is indirectly controlled through a concession scheme under which the indicative maximum retail prices

126 It is estimated that in the late 1990s around 90% of state revenues were spent on subsidies (National Institute of Public Finance and Policy, 2003). WT/TPR/S/182 Trade Policy Review Page 82

(MRPs) are notified by the Government. A producer/importer selling fertilizers at the indicative MRPs is compensated under the concession scheme. The price of single super phosphate (SSP) is also fixed by the state governments and ad hoc concessions are provided by the Central Government for the sale of SSP.

141. While the APM applied to certain petroleum products, including petrol and diesel, was eliminated by March 2002, full price pass through does not occur and price changes are still lagged (Chapter I). In addition, prices of kerosene (under the TPDS) and LPG remain subject to control.

142. Prices of 74 bulk drugs and related formulations are controlled through the Drugs Price Control Order (DPCO) 1995, to ensure the availability of quality drugs at "reasonable prices"; the controls cover approximately 20% of the market. The Pharmaceutical Policy of 2002 was not put into effect because of a judicial order. A new policy is being formulated.

143. Prices of certain services, including electricity and water, are also fixed and subsidized at different rates by different state governments (Chapter IV). Price controls on seeds of cattle fodder, food crops, fruits and vegetables are scheduled under the Essential Commodities (Amendment) Bill, 2006.

(iv) Role of state-owned enterprises and privatization

(a) Overview

144. State-owned enterprises (SOEs) were set up to help develop infrastructure and industry, to create employment, to provide substitutes for imports and save on the use of foreign exchange, and for income distribution and regional development purposes.127 Investment in SOEs grew from Rs 290 million in 1951 to Rs 2,741 billion at the end of March 2001, while the number of SOEs at the central level increased from 5 to 242128; in 2004/05, there were 237 central SOEs, employing 1.69 million people (down from 2 million five years earlier).129 The major sectors of activity are coal and lignite, power, defence, and railways. The 2006/07 Budget announced additional equity support of Rs 169 billion and loans of Rs 27.9 billion to Central SOEs. The Government has also infused non-financial support of Rs 25.7 billion to restructure ten SOEs in the last two years.130

145. In addition, there are an estimated 831 state-level SOEs 131, and 1,050 non-departmental commercial undertakings and companies in banking and insurance. Official government figures put the share of the central public sector at around 11.2% of GDP in 2005/06, down from 12.6% in 2002/03. However, other estimates put the public sector at around one fourth of GDP in 2001.132 The return on investment in SOEs appears to have been low: post-tax profits of central SOEs did not exceed 5% of total sales or 6% of capital employed during 1986/87-1997/98. The figures for SOEs competing with the private sector are significantly worse.133

146. The State Electricity Boards (SEBs), the railways, and fertilizer producers appear to have been the worst drain on public finances and a source of inefficiency. The SEBs have incurred annual deficits as high as 1.5% of GDP, placing substantial constraints on state fiscal resources. 134 It has 127 Industrial Policy Resolution 1956. 128 Ministry of Finance (undated), Chapter 3. 129 Employment in PSEs is declining in part due to a voluntary retirement scheme. 130 Non-financial support may involve "non-cash flow", surplus, waiver of interest and interest penalties, government loans, guarantee fees, conversion of loan into equity/debentures, etc. 131 Ministry of Finance (undated), Chapter 17. 132 Makhija (2006), pp. 1947-1951. 133 Ministry of Finance (undated), Chapter 6. 134 IMF (2005b). India WT/TPR/S/182 Page 83 been suggested that the SEBs poor performance has been due, in part, to inadequate pricing of utilities and other infrastructure services, and poor recovery of the cost of services (Chapter IV(power)).135

147. In the absence of a bankruptcy law, companies in financial difficulty may be referred under the Sick Industrial Companies (Special Provisions) Act (SICA), 1985, to the Board for Industrial and Financial Restructuring (BIFR), either for closure or revival. However, the BIFR has been widely criticized as ineffectual, as the SICA procedures laid down for the BIFR to follow have led to endemic delays.136 A Bill to repeal the SICA, introduced in Parliament in 2003, has been passed but not yet gazetted due to delays in setting up a National Company Law Tribunal to replace the BIFR.

148. In an attempt to recognize and reward public sector enterprises (PSEs) that had performed well, the Government in 1997 identified 11 well performing PSEs as "Navratnas" (nine gems). The companies were selected on the basis of factors such as size, performance, nature of activity, and future prospects. An additional 39 companies were identified as "mini-ratnas" (mini-gems) in 1999 and given greater financial, managerial, and operational autonomy. Such companies, of which there were 50 on 31 March 2006, were given power to incur capital expenditure of up to Rs 5 billion.

(b) Privatization

149. "Disinvestment" or privatization of India's SOEs, several of which are considered to be large and inefficient, has been hesitant and has often fallen short of monetary targets. 137 The decision to disinvest in selected SOEs was announced in the Industrial Policy Statement of 1991. This was followed by specific recommendations on disinvestment by the Rangarajan Committee in April 1993, although no action was taken on these recommendations. In 1996, a Disinvestment Commission was established and the Budget for 1998/99 announced a decision to reduce government shareholdings in selected "non-strategic" SOEs to 26% while maintaining majority shareholdings in "strategic sectors". In March 1999, the Government decided that strategic PSEs would be in: arms and ammunition, defence equipment, defence aircraft, and warships; atomic energy; and railway transport. Moreover, the reduction of the Government's stake in non-strategic industries to 26% would be considered on a case-by-case basis. It was also declared that workers' interests would be protected in all cases. Despite these statements of intent, little progress has been made on privatization. During the first ten years of the privatization programme, it is estimated that only around 19% of total equity in some 40 SOEs was sold, with no majority shareholding sales. Since then, there has been privatization in ten central SOEs, 19 hotels owned by India Tourism Development Corporation Limited, and three hotels owned by Hotel Corporation of India Limited. It seems that in 13 additional cases, privatization efforts are stalled.138 At the State level, of 831 SOEs, 222 were identified for disinvestment, restructuring or closure. Of these, 68 have been closed down and 29 privatized; 140 cases are pending.139

150. Since India's previous Review, in 2002, further attempts have been made to rationalize and streamline privatization procedures. In May 2004, the Ministry of Disinvestment was renamed the Department of Disinvestment and moved into the Ministry of Finance. The Disinvestment Commission, set up in 1996, was reconstituted in July 2001 and all "non-strategic" SOEs referred to it for restructuring or privatization. In addition, in the 2004/05 Budget, a Board for Reconstruction of

135 Nagaraj (2006), pp. 2551-2557. 136 According to some estimates, it takes some 20 years on average to complete the process of rehabilitation or closure of a sick company under this structure (The Hindu online information. Viewed at: http://www.thehindu.com/thehindu/biz/2003/02/17/stories/2003021700140200.htm [5 July 2006]). 137 During 1991/92-2004/05 (14 years), except during four years, sales were well below targets (Ministry of Finance, 2005, p. 163). 138 Makhija (2006), pp. 1947-1951. 139 Ministry of Finance (undated), Chapter 17. WT/TPR/S/182 Trade Policy Review Page 84

Public Sector Enterprises (BRPSE) was established in December 2004. The Board is expected to advise the Government on restructuring PSEs, including disinvestment or closure.

151. The privatization policy evolved from the sale of minority shares in public sector companies prior to 2000 to a preference for sales to a strategic partner. Thus, since 2001, the recommendations of the Disinvestment Commission have focused mainly on minority or majority sales to a strategic partner (Box III.2).

Box III.2: The process of disinvestment for strategic sales Following the recommendations of the Disinvestment Commission, there is a three-tiered mechanism by which decisions are made to implement the recommendations. The Disinvestment Commission's proposals are considered by the Cabinet Committee on Disinvestment (CCD). The CCD is headed by the Prime Minister and consists of the Deputy Prime Minister, Ministers of Power, Law and Justice, Commerce and Industry, External Affairs, Finance and Company Affairs, Petroleum and Natural Gas, Civil Aviation, and Disinvestment, as well as the Deputy Chairman of the Planning Commission and the Minister overseeing the company being considered for disinvestment. Its functions include deciding the price band for the sale of government shares either through the domestic or international capital markets; the final sales price and the strategic partner; and approving the annual and three-year rolling plan of disinvestment. Following approval by the CCD, an Advisor is selected through competitive bidding, to be responsible for the disinvestment process. Strategic investors are selected from a shortlist of bidders invited through an announcement in national newspapers and websites of the Department of Disinvestment, the Administrative Ministry concerned with the company, and the company concerned. In some cases announcements are also made in international newspapers. The Expressions of Interest received are scrutinized by the Advisor concerned and the short listing done by the Inter-Ministerial Group on the basis of recommendations of the Advisor. There are no specific criteria in regard to nationality. A foreign company, subject to the Government's sectoral policy on FDI, is eligible for consideration. The Advisor is responsible for preparing draft share purchase and shareholder agreements, which must be approved by the Ministry of Law and the CCD before being sent to the prospective bidders for their final financial bids. The sealed bids are opened by an Inter-Ministerial Group made up of officials of the Ministry of Finance, Departments of Public Enterprises, Legal Affairs, and Company Affairs, as well as the Administrative Ministry and the Director of the SOE being considered for disinvestment. A final decision on the strategic sale is taken by the CCD. At the third level, there is a Core Group of Secretaries on Disinvestment, which oversees implementation of the decision and makes recommendations to the CCD on disinvestment policy matters. The Core Group is headed by the Cabinet Secretary and includes the Secretaries of the Ministries of Finance, Heavy Industries and Public Enterprises, Disinvestment, the Planning Commission, and the Administrative Ministry as well as any other relevant ministries or departments. Source: Ministry of Finance (undated), Disinvestment Manual. Viewed at: http://www.divest. nic.in/manual03/chap10.htm [6 July 2006].

152. The present Government initially decided that all future privatization of SOEs would take place within the context of its Common Minimum Programme.140 It decided in principle to list large, profitable PSEs on domestic stock exchanges, selectively selling a minority stake (up to 49%) so as not to disturb the public sector character of the companies.141 The proceeds of such sales were to be channelled into a newly established National Investment Fund, constituted on 23 November 2005, and would be used for investment in: social sector projects promoting education, health care, and employment, and for capital in selected profitable and revivable PSEs that yield adequate returns to

140 Government of India (2004b). 141 Department of Disinvestment online information. Viewed at: http://www.divest.nic.in/ annrepo2004-05/mainreport.htm [6 July 2006]. India WT/TPR/S/182 Page 85 enable them to finance expansion or diversification.142 However, no funds have been deposited with the NIF. The Government also planned to devolve managerial and commercial autonomy to profitable SOEs operating in a competitive environment143; according to the authorities companies operating in "a non-competitive environment" would include those in the three remaining sectors reserved for the public sector. Attempts would be made to restructure loss-making SOEs, failing which they would be closed down or sold. However, on 6 July 2006 the Government announced that it had "decided to keep all disinvestment decisions and proposals on hold pending further review" 144; it appears that some 16 recommendations for strategic sales made by Disinvestment Commissions are not being pursued, as the present Government's policy is not to continue privatizations.145

(v) Intellectual property rights

(a) Overview

153. Technological progress is one of the main long-term engines of growth in GDP and productivity (and thus competitiveness), therefore, new technologies need to be nurtured by adequate protection of intellectual property rights in India's domestic market. This is important for foreign innovators and enterprises, as well as for Indian innovators and enterprises seeking to compete in an increasingly globalized economy.

154. The administration and protection of intellectual property rights in India is divided between the Department of Industrial Policy and Promotion in the Ministry of Commerce and Industry, which is responsible for industrial property through the Controller General of Patents, Designs and Trade Marks; the Ministry of Human Resource Development, which supervises copyright protection; and the Ministries of Agriculture and Communication and Information Technology, which administer the protection of plant varieties and semiconductors and integrated circuits, respectively. India is a member of most of the key international conventions and agreements on intellectual property rights. In addition, there are proposals to further amend the Indian Copyright Act in light of the WIPO's WCT and WPPT treaties.

(b) Industrial property

Patents

155. The Patents Act, 1970, governs the granting of patents. During the period under review, the Act was amended twice (June 2002 and April 2005). The Patents (Amendment) Act, 2002 extended the period of protection granted for all product and process patents to 20 years from the date of filing (Section 53); previously, protection was for five years for process patents for food or medicine and 14 years for other cases. Other key changes introduced by the 2002 Act include a more detailed framework for the granting of compulsory licences and deletion of the sections dealing with "licences of right" (see below). The Patents (Amendment) Act, 2005, by deleting Section 5 of the Act, which excluded product patents for food, medicine or drug or products using chemical processes, ended the ten-year transition available to India and other developing countries under the TRIPS Agreement. The regime for exclusive marketing rights, introduced under the 1999 amendment was also revoked.

142 Department of Disinvestment online information. Viewed at: http://www.divest.nic.in/ annrepo2004-05/mainreport.htm [6 July 2006]. 143 Ministry of Finance (2005), p. 163. 144 Prime Minister's Office Press Release 6 July 2006. Viewed at: http://pmindia.nic.in/ pressrel.htm [18 July 2006]. 145 Department of Disinvestment online information. Viewed at: http://www.divest.nic.in/ annrepo2004-05/mainreport.htm [6 July 2006]. WT/TPR/S/182 Trade Policy Review Page 86

156. Under the current Patents Act, which became effective on 1 January 2005, patent protection may be granted to any invention relating to either a product or process that is new, involves an inventive step, and is capable of industrial application (Article 2(1)(j)). The Act also sets out products or processes that are not recognized as inventions and are therefore not patentable. 146 Patents of addition for an improvement to a patented product can be granted to the holder of the original patent for the same period as the validity of the original patent.

157. Applications for patents may be submitted by nationals of any country, to the Controller General of Patents, Designs, Trademarks and Geographical Indications. Under the 2005 amendment, applications will only be examined by the Patent Office if requested by the applicant or by another interested party within 48 months, failing which the application is deemed to have been withdrawn. The Act also provides for pre- and post-grant opposition under Chapter V.147 The patent rights accrue from the date of publication of the patent application, which is within one month after completion of 18 months of its filing or at an earlier date, if requested by the applicant. On average, it takes between 10 and 60 months to grant a patent depending on the information provided by the applicant. However, the applicant is not entitled to institute any infringement proceedings until the patent has been granted. For patents relating to pharmaceuticals filed before 1 January 2005 (the "Mailbox"), the rights of the patentee accrue from the date of grant of the patent, but the period of protection remains 20 years from the date of filing. Moreover, the patent holder may not institute infringement proceedings against manufacturers already producing the patented product when the patent is granted; in such cases, the patent holder is entitled to receive reasonable royalties. 148 The law does not define "reasonable", which depends on the circumstances of each case, like royalty payment under Article 31 (h) of the TRIPS Agreement. The law also does not define the authority for determining the royalty. However, according to the authorities, although some 8,000 applications were made through the Mailbox facility, there have been no demands for royalty payments from patent holders. It is not clear how many patents have been granted under this facility.

158. India currently has 16,419 patents in force, of which 4,486 have been granted to Indians and 11,933 to foreigners resident abroad (Table III.12). As a result of procedural improvements, including a time limit of three months for examiners to complete examinations once complete documentation is received, efforts are being made to clear the Patent Office's large backlog of 19,000 patent applications (around 30,000 at the time of the last Review).

Table III.12 The number of patents granted and in force, 2001-06 2001/02 2002/03 2003/04 2004/05 2005/06

Patents granted - Indians 654 494 945 764 1,396 - Foreigners resident abroad 937 885 1,524 1,147 2,924 - Total 1,591 1,379 2,469 1,911 4,320

Patents in force

146 These are: inventions whose primary or intended use or commercial exploitation would be contrary to public order or morality or cause serious prejudice to human, animal or plant life or health or to the environment; the process for the medicinal, surgical, curative, prophylactic or other treatment of human beings; plants and animals or their parts (including seeds, varieties and species, and biological processes for the production or propagation of plants and animals) other than microorganisms; mathematical or business methods or computer programs and algorithms; and the topography of integrated circuits and traditional knowledge (Section 3). 147 Pre-grant opposition must be made within four months of publication of the application, while the period for post-grant opposition is up to one year. 148 Section 11A of the Patent Act. India WT/TPR/S/182 Page 87

- Indians 1,578 1,479 2,075 2,200 4,486 - Foreigners resident abroad 6,742 6,519 4,331 4,657 11,933 - Total 8,320 7,998 6,406 6,857 16,419

Source: Data provided by the authorities.

159. Compulsory licences can be granted under Chapter XVI of the Patents Act. Under Section 84 any person interested in working a patent can, after the expiry of three years from the date of grant of the patent, apply to the Controller for grant of a compulsory licence. The grounds for such a compulsory licence may include: that the reasonable requirements of the public with respect to the patented invention have not been satisfied; the patented invention is not available at a reasonably affordable price; or that it is not worked in India. The Controller may issue a licence upon terms and conditions outlined in the Act.149 Two years after a compulsory licence has been granted, the Central Government or any other interested person may request the Controller to revoke the patent on the grounds that it has not been worked or that the reasonable requirements of the public have not been met, or that it is not available to the public at a reasonable price. The Controller would normally make a decision within one year of it being presented. No compulsory licences have been granted under this provision. The Central Government may also, if necessary, such as in the case of a national emergency, provide for issue of a compulsory licence for a patented product through a notification in the Official Gazette (Section 92) and may use a patented invention for government purposes (Section 100). Following the amendment to the TRIPS Agreement in December 2005 to include the decision on patents and public health, a new section 92A was inserted in the Act to permit compulsory licences for exports of patented pharmaceutical products in certain exceptional circumstances. This provision has not been used to date.

160. India also permits parallel imports, the definition of which was changed in 2005 from "importation of patented products by any person from a person who is duly authorized by the patentee" to "importation of patented products by any person from a person who is duly authorized by the law".

161. False representation of any article sold in India as being patented in India or for which an application has been made are punishable by a fine of up to Rs 100,000. Contravention of secrecy provisions relating to certain inventions or falsification of any information relating to the Patents Register is punishable by a fine or imprisonment of up to two years. Appeals can be made to the Appellate Board established under Section 83 of the Trade Marks Act, 1999. However, pending establishment of the Appellate Board, appeals are to the High Courts.

Trade marks

162. Trade marks are protected under the Trade Marks Act, 1999 and the Trade Marks Rules, 2002 (in force since September 2003), which repealed the Trade and Merchandise Marks Act, 1958. The changes introduced by the Act, include: protection to well known marks, as well as service and collective marks; extension of the period of protection from seven to ten years; establishment of an Appellate Board; and increased penalties for infringement of trade marks.

149 The terms and conditions stipulated in Section 90 include: ensuring that the royalty or remuneration paid to the patent holder is appropriate; that the licence is fully worked by the holder; that the patented products are made available to the public at reasonably affordable prices; that the licence granted is non-exclusive and non-assignable; that the licence is granted for the balance of the term of the patent; that the licence is provided for predominant use in the Indian market; in case of semi-conductor technology, the licence is to be used for public non-commercial use; and in case the licence is granted to remedy an anti-competitive process, the licensee is permitted to export the product if necessary. WT/TPR/S/182 Trade Policy Review Page 88

163. Trade marks must be filed in writing at one of the offices of the Trade Marks Registry. Following examination to determine whether the trade mark is distinctive and does not conflict with an existing or pending trade mark, the Registry publishes the trade mark in the Trade Marks Journal. Opposition to the trade mark can be made within three months of publication (extendable by one month) to which the applicant must respond within two months. Following a decision to register the trade mark a certificate of registration is issued. The trade mark is registered for ten years, renewable for further periods of ten years on payment of the prescribed fee. If the registered mark is not used for a continuous period of five years and three months from the date it was registered, or if the renewal fee is not paid within the prescribed period, it can be removed from the registry on grounds of non- use. Appeals against a decision by the Registrar may be made to the High Court pending establishment of the Appellate Board.

164. Under the Act, registration of a trade mark gives the owner "the exclusive right to the use of the trade mark in relation to the goods or services and to obtain relief in respect of infringement of the trade mark" (Chapter IV, 28(1)). Registration is not compulsory, but the owner cannot bring a legal case against an infringer if the mark is not registered. The law also enables a suit for passing off to be filed for the use of any trade mark that is identical or deceptively similar to the plaintiff's trade mark, whether registered or unregistered. The Trade Marks Act, 1999, preserves common law rights in respect of an unregistered trade mark. Penalties for falsification of trade marks and selling or providing goods that infringe trade marks include a prison term of at least six months, extendable to three years, and a fine of between Rs 50,000 and Rs 200,000. Second or subsequent convictions may lead to imprisonment of between one and three years and a fine of between Rs 100,000 and Rs 200,000. Falsely representing a trade mark as registered may lead to imprisonment of up to three years and/or a fine. Other penalties include imprisonment of up to two years and/or a fine for improper description of a place of business as connected with the Trade Marks Office and for falsification of entries in the Register.

Industrial designs

165. Legislation governing industrial designs in India is the Designs Act, 2000 and the Designs Rules, 2001. Under the Act, designs may be registered by the Controller General of Patents, Designs and Trade Marks, provided that: they are new or original; have not been disclosed to the public in India or another country by publication prior to the filing or priority application date; they are significantly distinguishable from known designs or combinations of known designs; and they do not comprise or contain scandalous or obscene matter. Following registration, the design is published in the Gazette of India and made publicly available in a Register of Designs.

166. Industrial designs are protected for ten years, extendable by five years, upon payment of the appropriate fee. A design may be cancelled at any time by the Controller General if it is determined that it does not fulfil the requirements for registration defined in the Act. Three design registrations have been cancelled since 2002. Appeals against a decision by the Controller General may be made to the High Court within three months of the decision. Four appeals have been made to the High Court since 2002 and are pending.

167. The sale, import or imitation of any article in which the design is registered without the consent of the registered owner is punishable by a fine of up to Rs 25,000 (to be paid to the registered owner) or any other damages incurred of up to Rs 50,000 if the owner begins legal proceedings. The Act does not contain criminal penalty provisions. India WT/TPR/S/182 Page 89

(c) Copyright

168. Copyright is protected under the Copyright Act, 1957, most recently amended in 1999. Protection is granted to: original literary, dramatic, musical and artistic works; cinematographic films; and sound recordings. The term of protection is the lifetime of the author plus 60 years for literary, dramatic, musical and artistic works; and 60 years after the year of publication for anonymous and pseudonymous works, photographs, cinematographic films, sound recordings, and works owned by the Government or by a public undertaking or an international organization. Broadcast reproduction rights are for 25 years from year of broadcast, and performers rights are for 50 years from the date of performance.

169. Compulsory licences may be issued for works withheld from the public or for unpublished "Indian works"150, where the author is dead or unknown. In such cases applications may be made to the Copyright Board, which after holding an inquiry, may direct the Registrar of Copyright to issue the licence under specified terms and conditions. The Central Government may also, if it deems it to be in the national interest, require the heirs or executors of a work whose author is no longer alive, to publish the work. Applications for licences to publish a translation of a literary or dramatic work in any language may be made to the Copyright Board seven years after publication of the work (three years if the translation is required for teaching, scholarship or research). Parallel imports are not permitted by the law.

170. Both civil and criminal remedies are available for infringement of copyright. Under Section 63, the penalties can be imprisonment for between six months and three years and/or a fine of between Rs 50,000 and Rs 200,000. Repeat offences are punishable by imprisonment of one to three years and/or a fine of Rs 100,000 to Rs 200,000.151 Any person who knowingly makes use of an infringing copy of a computer program is punishable by imprisonment of seven days to three years and/or a fine of Rs 50,000 to Rs 200,000. The penalty for making or possessing plates for making infringing copies of protected works is imprisonment of up to two years and/or a fine. Publication of a sound recording or a video film in contravention of the Act is liable to imprisonment of up to three years and a fine.

(d) Other intellectual property

Geographical indications

171. Geographical indications are protected under the Geographical Indications of Goods (Registration and Protection) Act, 1999 and the Geographical Indications of Goods (Registration and Protection) Rules, 2002. The Geographical Indications Registry was established on 15 September 2003.

172. Applications for registration of a geographical indication must be made in writing to the Registrar of Geographical Indications who is the Controller General of Patents, Designs and Trade Marks. Geographical indications can be registered for any or all goods in a territory of a country or a region or locality in that territory (Section 8).152 Once the application is accepted, the Registrar issues

150 "Indian work" is defined as an artistic work by a citizen of India or a cinematographic film or record made or manufactured in India" (Article 31). 151 In both cases, the penalty can be reduced if the infringement has not been made for gain in the course of trade or business. 152 Geographical indications will not be registered if their use: will likely deceive or cause confusion; would be contrary to any law in force, and if they comprise or contain scandalous or obscene matter or any matter likely to hurt religious susceptibilities, which would otherwise not be entitled to protection in a court. In addition, GIs determined to be generic names or indications of goods and therefore not protected in their country WT/TPR/S/182 Trade Policy Review Page 90 an advertisement of application. If there is no opposition to the registration within three months, the GI will be registered. If the application is not accepted by the Registrar, the grounds for the refusal must be given in writing. Registration of trade marks containing geographical indications may be invalidated by the Registrar of Trade Marks (section 25). Decisions by the Registrar may be appealed to the Appellate Board within three months from the date of notification of the Registrar's decision.

173. Protection for the owner of the geographical indication and any authorized user is ten years, but may be renewed by the Registrar for a further period of ten years. Currently, 28 geographical indications are registered in India. Additional protection may be provided by the Central Government to certain goods or classes of goods by notification in the Official Gazette. Registration guarantees exclusive use of the geographical indication by the owner or authorized user and protection in case of infringement. Infringement is defined under the Act as: use of the geographical indication to indicate or suggest that the goods originate in a geographical area other than the true place of origin in a misleading manner; use that constitutes an act of unfair competition, including passing off; and use of a geographical indication to falsely indicate that the goods are those to which the registered GI relates. The penalty for falsifying or falsely applying geographical indications, or selling goods under false geographical indications is imprisonment for six months to three years, and a fine of Rs 50,000 to Rs 200,000. Repeat offences are subject to a prison term between one and three years and a fine of Rs 100,000 to Rs 200,000. The Geographical Indication Registry has received two requests under Section 50 of the Act for the opinion of the Registrar, which has to be obtained before conducting search and seizure; a suit was filed for infringement in the Delhi High Court by the registered proprietor of the GI; the matter ended in a compromise.

Plant varieties

174. The Parliament passed the Protection of Plant Varieties and Farmers' Rights Act in 2001. Criteria for the registration of new plant varieties include novelty, distinctiveness, uniformity, and stability.153 Applications must be made to the Registrar-General of Plant Varieties; applications that comply with the requirements of the Act, are advertised. Opposition to the registration must be made within three months of advertisement; the applicant has two months to respond. If there is no opposition, or if the opposition is rejected, the variety is registered in the Plant Varieties Registry and an official certificate given to the applicant. For registration of essentially derived varieties, the Registrar must forward the application and supporting documents to the Protection of Plant Varieties and Farmers' Rights Authority for examination. If the Authority is satisfied that the essentially derived variety has been derived from the initial variety, it directs the Registrar to register the new variety.

175. The term of protection is nine years for trees and vines and six years for other crops, renewable for a further nine years (for extant varieties of trees and vines, or a total of 15 years for annual crops from the date of notification under the Seeds Act 1966). However, under Chapter VI of the Act, a farmer is entitled to save, use, sow, resow, exchange, share or sell his farm produce, including seed (except branded seed), of a variety protected by the Act.

176. The Act also provides for benefit sharing. Once the certificate of registration is issued, the Authority publishes the contents of the certificate and invites claims of benefit sharing in the registered variety; claims are accepted only from Indian citizens or institutions established in India. The breeder may submit an opposition to the claim. Moreover, any person or group of persons may, of origin, or that falsely represent that the goods originate in another country will not be registered. 153 The variety is novel if, at the date of filing, the propagating or harvested material has not been sold or otherwise disposed of by or with the consent of its breeder for exploitation in India, earlier than one year before the date of filing of the application, or, outside India, earlier than six years for trees and vines and earlier than four years for other varieties. India WT/TPR/S/182 Page 91 on behalf of any village or local community in India, file a claim attributable to their contribution to any new variety (Section 41).

177. Compulsory licences may be granted after three years from the date of issue of the certificate of registration. A request may be made to the Authority on the grounds that the reasonable requirements of the public for seed or other propagating material of the variety have not been satisfied or that it is not available to the public at a reasonable price. The term of a licence will be determined by the Authority, who must ensure reasonable compensation to the breeder (Section 51). The compulsory licence can also be revoked or modified by the Authority at any time. No compulsory licence has been granted so far.

178. Appeals against decisions by the Authority or the Registrar can be made to the Plant Varieties Protection Appellate Tribunal. The Tribunal, which has not yet started functioning must, to the extent possible, reach a decision on an appeal within one year.

179. Infringement is defined as: the sale, export, import or production of a protected variety without the permission of its breeder or within the scope of a registered licence without the permission of the registered licensee or agent; or the use, sale, export, import or production of any other variety that is given an identical or deceptively similar denomination of a variety registered under the Act so as to cause confusion. The penalty for applying a false denomination is imprisonment for between three months and two years and/or a fine of Rs 50,000 to Rs 500,000. The penalty for selling varieties to which a false denomination is applied is imprisonment of between six months and two years and/or a fine of Rs 50,000 to Rs 500,000. The penalty for falsely representing a variety as registered is imprisonment of between six months and three years and/or a fine of Rs 100,000 to Rs 500,000. Repeat offences are liable to imprisonment of between one and three years and/or a fine of Rs 200,000 to Rs 2 million. No case of seizure or infringement has been reported.

Semiconductor integrated circuits layout-designs

180. The Semiconductor Integrated Circuits Layout-Design Act was passed in September 2000. There have been no changes to this legislation since the previous Review. Applications should be made in writing to the Registrar and filed at the office of the Semiconductors Integrated Circuits Layout-Design Registry, although it appears that the Registry is not yet functional. Upon accepting the application, the Registrar must publish an advertisement within 14 days. Opposition to registration must be made within three months of publication of the advertisement and the applicant is given two months to respond. A registration certificate will be issued to the applicant. Registration is for ten years from the date of filing the application or from first commercial exploitation in India or elsewhere, whichever is earlier. Decisions by the Registrar may be appealed to the Layout-Design Appellate Board.

181. Infringement is defined as unauthorized reproduction, whether by incorporating in a semiconductor integrated circuit or otherwise, a registered layout-design or any part of it, or unauthorized import, sale, or distribution for commercial purposes of a registered layout-design or a semiconductor integrated circuit incorporating a semiconductor integrated circuit with a registered layout-design. However, reproduction is permitted for scientific evaluation, analysis, research or teaching. In addition, if a person creates another original layout-design on the basis of scientific evaluation or analysis of a registered layout-design, that person has the right to reproduce, sell or incorporate this layout-design in a semiconductor, while if a person independently develops a layout- design that is identical to a registered one, that person may use it as desired without infringing. The penalty for infringement of a layout-design is imprisonment for up to three years and/or a fine of Rs 50,000 to Rs 1 million. WT/TPR/S/182 Trade Policy Review Page 92

Trade secrets

182. There is no specific legislation regulating the protection of trade secrets nor enforcement measures/penalties for violations of trade secrets. However, aggrieved parties can seek action through the Civil Courts.

(e) Enforcement

183. Enforcement of intellectual property rights in India is carried out by the police for domestic cases and by the police and customs for imports and exports. Domestic enforcement, especially for copyright violations, appears to have been stepped up, notably through the setting up of a Copyright Enforcement Advisory Council (CEAC). The CEAC, headed by the Secretary (Higher Education) in the Government of India, has 28 other members including the head of Police from some states as well as senior officers of related departments like Customs; it meets twice a year. In addition special IPR cells have been set up, currently in 18 states, and nodal officers appointed to coordinate enforcement activities with industry. Industry associations and copyright societies are also involved in supplementing and sometimes guiding the efforts of the enforcement agencies. A police officer (not below the rank of a sub-inspector) has ex officio powers to seize goods suspected of infringing copyright.154

184. Under the Customs Act, Customs may seize and hold goods "for a reasonable period", including for suspected violations of intellectual property rights, following which, the goods must be released or a court injunction obtained to start infringement proceedings. Under Section 53 of the Copyright Act 1957, the Registrar of Copyright has the power to order that copies of an infringing work cannot be imported and order a physical search of any ship, dock or premises. An amendment to this provision, to transfer the power of banning import of any infringing copy to the Commissioner of Customs, is currently under consideration.

185. Enforcement by the police has been stepped up through increased raids since 2004. As a result some 6,290 cases were filed in 2004 with the National Crime Records Bureau (1,211 cases in 2000). According to information provided by the National Crime Records Bureau (NCRB), 2,108 cases were registered under the Copyright Act between January and June 2005. This resulted in the arrest of over 2,000 alleged offenders and over Rs 93 million in seized material. Similarly, data made available by the IMI, an industry group, reveals over 2,100 raids and 2,255 arrests in 2005/06 in music-related copyright violations. The police also have ex officio powers under the Trade Marks Act, 1999, which permits any police officer not below the rank of deputy superintendent of police or equivalent, to search and seize without warrant the goods, die, block, machine, plate, and other instruments or goods suspected of infringing intellectual property. However, the police officer must obtain the opinion of the Registrar before any search and seizure. No data were provided to the Secretariat on enforcement with regard to other IPR violations, nor on the number of IPR infringement cases that have been settled through the courts.155

186. The Government has stepped up training to increase awareness of IPR enforcement. The Intellectual Property Institute (IPI) provides training to government officials (including from the IP offices and from other government agencies), the private sector, including management in companies, creators of IPRs, and academics, and to "potential users from the public at large". A scheme of the

154 According to a ruling by the Supreme Court of India, such infringements would cover not only goods being imported for the Indian market but also goods transiting India for eventual export to a third country (Gramophone Company of India Ltd vs Bivendra Bahadur Pandey & ORS, AIR 1984 SC 667, 21 February 1984). 155 It is suggested that court proceedings are overly burdensome, courts are severely backlogged and there are massive delays in bringing criminal and civil cases to final judgement (IIPA, 2006). India WT/TPR/S/182 Page 93 copyrights division (the intellectual property education, research and public outreach scheme) aims to create an IP culture and awareness at colleges and universities through grants for seminars, training, and discussions on IP, especially copyright. Activities are also carried out in conjunction with industry organizations.

187. Despite these efforts, however, according to NASSCOM, which represents India's software suppliers, it appears that much remains to be done to improve IPR enforcement.156 While the reported number of police raids appears to have increased in recent years, it is unclear whether these are a sufficient deterrent to further violations of IPRs, given that there is very little information on the number of cases resulting in prosecutions through the justice system or civil or criminal penalties.157 The authorities state that the courts are well aware of the gravity of the problems and the legal provisions of the various IP laws and regularly pronounce sound enforceable judgements. Moreover, there is a growing realization of the need to sensitize the judiciary on the role of IPRs and the impact of IP violations on the economic climate, and creativity and innovation, including through seminars for the judiciary.

(vi) Corporate governance

188. An efficient capital market capable of mobilizing domestic savings and channelling them into the most productive investments is essential for improving competitiveness and thus long-term development. Recognizing that good corporate governance is essential for the establishment of such a market, the authorities have been taking steps to improve the framework in this regard. While the basic framework for governance of companies in general is provided by the Companies Act, 1956, the Securities and Exchange Board of India (SEBI) Act 1992 and the Listing Agreement with stock exchanges contain requirements for governance of listed companies, and the Securities Contracts (Regulation) Act, 1956 cover tradeable government paper, stocks, shares, bonds and other marketable securities. In addition, corporate governance in banks and non-bank financial companies is regulated by the Reserve Bank of India (RBI).

189. Schedule VI of the Companies Act outlines financial reporting requirements for companies incorporated under the Act. These include reporting of company balance sheets, and profit and loss accounts. The Act, most recently amended in 2002, is enforced by the Ministry of Company Affairs.158 The 2002 amendment dissolved the Company Law Board replacing it with a National Company Law Tribunal and an Appellate Tribunal. The Company Law Tribunal and the Appellate Tribunal are empowered to examine and pass judgement with regard to all cases under the Companies Act. Appeals against decisions by the Appellate Tribunal can be heard by the Supreme Court.

190. The National Foundation for Corporate Governance (NFCG) was established on 1 October 2003 to improve awareness of the importance of implementing good corporate governance practices. It is a non-profit body and includes participation from the Ministry of Company Affairs, the Confederation of Indian Industries (CII), the Institute of Company Secretaries of India (ICSI), and the Institute of Chartered Accountants of India (ICAI).

191. The Companies Act, 1956, is currently being reviewed with an emphasis on transparency, accountability, and good corporate governance, along with institutional arrangements to ensure that stakeholder rights are recognized and equitably and more speedily protected. The proposed revisions are also expected to enable shareholders-based enforcement based on shareholders democracy, rather 156 The National Association of Software and Service Companies states that, despite measures taken, software piracy in India remains high (NASSCOM online information. Viewed at: http://www.nasscom.in/ Nasscom/templates/NormalPage.aspx?id=6247 [22 November 2006]). 157 IIPA (2006). 158 World Bank (2004). WT/TPR/S/182 Trade Policy Review Page 94 than a state-based enforcement regime, with more effective protection of investor/minority shareholder rights. The revision will also address the issue of rehabilitation, including winding up and liquidation of companies including "sick industries" in a time-bound manner. It is not clear when the revisions are expected to be submitted to Parliament. Other efforts to improve governance include the "MCA21 e-Governance Project", which began in March 2005, and has required all companies to submit their documents electronically to the Registrar of Companies since 16 September.

192. While the Companies Act addresses corporate governance issues among companies in general, corporate governance requirements for listed companies, are also provided in clause 49 of the Listing Agreement. Clause 49, which has been amended and updated periodically, contains details about the composition of boards of directors, board procedures, code of conduct of board members, and composition and powers of an independent audit committee. Companies are also required to submit a report on corporate governance. Clause 49 was most recently amended on 1 January 2006 to incorporate recommendations made by another committee on corporate governance set up by the SEBI in 2003.159 Clause 49 details mandatory and non-mandatory provisions.160 In order to improve disclosure standards applied by the SEBI, the Committee on Disclosures and Accounting Standards was constituted in September 2006. It has members drawn from various segments of the capital market and advises the SEBI on issues related to, inter alia, initial and continuous disclosure requirements of companies; disclosure requirements for intermediaries; operational and systemic risks, if any, in the primary securities market; smooth implementation of accounting standards developed by the ICAI; as well as inputs to ICAI for reviewing accounting standards and bringing them into line with internationally accepted standards.

193. Good corporate governance in banks is important as they are the major source of capital in the economy. The Advisory Committee on Corporate Governance was set up by the RBI in 2000 to examine the state of corporate governance and to suggest ways in which to improve standards and levels of compliance. Among its various recommendations were suggestions to improve corporate governance in public sector banks by transferring governance from the administering ministries to the banks' boards and by streamlining the appointment of directors. The Advisory Group also recommended the strengthening of the Companies Act and the role of independent directors. This was followed by a report by a Consultative Group of Directors of Banks and Financial Institutions in 2002, which made recommendations with regard to the role of the board of directors of banks. As a result, the RBI has issued 'fit and proper' criteria for directors of banks, including the constitution of a Nomination Committee of the Board to scrutinize declarations made by the directors, and the exercise of due diligence to determine the suitability of persons being appointed or renewed as directors. The Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/80 has been amended to ensure "fit and proper" criteria are applied to the elected directors on the Boards of Public Sector Banks (PSBs). The Government has also implemented the RBI's suggestions on due diligence in respect of nominated directors on the boards of PSBs.

194. The RBI, through its Board for Financial Supervision, inspects and monitors banks using the CAMELS approach (Chapter IV). However, it appears that the RBI cannot insist that directors nominated by the government or elected by shareholders to the boards of the public sector banks also

159 The Narayan Murthy Committee on Corporate Governance. 160 The mandatory provisions include, inter alia, strengthening the definition of independent directors; clarifying the role/responsibilities/powers of audit committees; improving quality of financial disclosures including related party transactions and proceeds from public/rights/preferential issues; requiring Boards to adopt a formal code of conduct; requiring CEO/CFO certification of financial statements and improving disclosures to shareholders. Certain non-mandatory clauses, like whistle-blower policy and restriction of the term of independent directors, along with other non-mandatory provisions, have also been included in the revised Clause 49. India WT/TPR/S/182 Page 95 meet these "fit and proper" guidelines.161 Nevertheless, as part of reform to increase competition in the banking sector, efforts have been made to increase the independence of public sector banks. In addition, urban cooperative banks (UCBs) and rural cooperative banks (RCBs), which are currently a source of considerable weakness in the banking sector, are not subject to RBI governance procedures but to state government regulations. Neither are they subject to shareholder scrutiny as they do not depend on equity markets for their funds. Such banks will need to be brought under the purview of the corporate governance structure to which private sector banks are currently subject. The RBI has been providing regulatory support to small and weak UCBs, while strengthening their supervision, including through consultation with state governments and representatives of the UCBs. The Reserve Bank has also issued a "Vision Document for the Urban Co-operative Banks" which, inter alia, envisages a state-specific strategy for addressing issues relating to UCBs. As part of this strategy, memoranda of understanding are being signed between the RBI and the respective state governments, which envisage the constitution of a state-level Task Force for Co-operative Urban Banks that would, inter alia, identify viable and non-viable UCBs in the State and suggest time-bound plans for the revival of the viable UCBs and non-disruptive exit for others.

195. The Chartered Accountants (Amendment) Act was passed by Parliament in March 2006. The amendment, inter alia: expands government membership of the Council of the Institute of Chartered Accountants of India and gives the Government power to dissolve the Council in certain exceptional cases; broadens disciplinary procedures for misconduct, including the establishment of a Tribunal and Appellate Authority; and provides for the establishment of a Quality Review Board, to review the quality of services provided by members of the Institute, and to make recommendations for improving these services.162

(vii) Competition policy

(a) Introduction

196. Legislation to address anti-competitive practices by enterprises (e.g. cartels and abuse of a dominant position) is an important counterpart to measures aimed at liberalizing markets. Since its last Trade Policy Review, India has adopted the Competition Act, 2002. The Act embodies an economics-based approach to competition law and should, therefore, be a bulwark of the competitive market system. However, implementation of the core enforcement provisions of the Act has been delayed by the need to address questions raised in legal challenges to certain provisions of the Act. These and other matters are the subject of amendments currently before Parliament. In the meantime, the Monopolies and Restrictive Trade Practices Act, 1969 (MRTP Act) remains in force. The new Competition Commission, which will be responsible for the administration of the new legislation, has undertaken useful preparatory studies and research that will assist in the effective implementation of the law.

(b) Statutory framework

197. The Competition Act was enacted by the Indian Parliament in December 2002 and received the assent of the President in January 2003. It contains provisions dealing with anti-competitive agreements, abuse of dominant position and "combinations" (mergers), which are broadly comparable to those of other jurisdictions with effective laws in this area and, for the most part, embody a modern, economics-based approach.163 The Act permits the Competition Commission of India (CCI) to take action against cartels and other anti-competitive practices originating outside India but

161 Reddy (2005). 162 The Chartered Accountants (Amendment) Act, 2006. 163 See Chakravarthy (2005). WT/TPR/S/182 Trade Policy Review Page 96 affecting Indian markets and consumers.164 The Act also attaches importance to and provides a legal basis for "competition advocacy" activities by the CCI, which has been created pursuant to the legislation (i.e. research and policy advice by the Commission, aimed at removing impediments to the operation of competitive market forces). This reflects a widely-held view that such activities are an important complement to competition law enforcement.165 The importance attached to competition advocacy is in line with and reinforces other liberalization measures implemented over the past decade to remove licensing and other measures that have, in the past, limited competition in markets.

198. A key thrust of the Competition Act is to create a new enforcement body, the CCI, with a staff trained in modern enforcement methods and branches in various Indian cities. Eventually, the CCI will replace the Monopolies and Restrictive Trade Practices Commission (MRTPC), created under the MRTP Act. However, implementation of the Competition Act has been delayed by constitutional issues relating to the structure of the new CCI, in particular the apparent vesting of adjudicatory powers in a non-judicial body. Consequently, only one Member has been appointed to the Commission and the substantive enforcement provisions of the Act (e.g. regarding agreements, abuses of a dominant position and mergers) have still to be brought in force. The constitutional concerns will be addressed by proposed amendments to the Act that are before Parliament, the Competition (Amendment) Bill 2006, and will, inter alia, establish a separate Competition Appellate Tribunal to be headed by a current or former judge of the Supreme Court or a High Court Chief Justice.166

199. In addition to addressing the constitutional issues raised in the Supreme Court writ, the proposed amendments will fine-tune other aspects of the legislation and remove certain provisions that require amendment. For example, the amendments will delete a provision adopted in 2002 that enabled the CCI to issue a temporary injunction to restrain parties from importing goods. 167 The proposed amendments also attempt to strengthen the statutory basis for introduction of a "leniency programme" to facilitate enforcement of the anti-cartel and related provisions of the Act.168

200. In contrast to the substantive provisions of the new Competition Act, the existing MRTP Act is not perceived as providing a modern statutory framework to address practices such as cartels and abuse of dominant position. Rather, its objectives are framed in terms of: the prevention of concentration of economic power; the control of monopolies; and the prohibition of monopolistic trade practices, and restrictive and unfair trade practices. The MRTP Act was amended in 1991 to provide a greater focus on curbing monopolistic, restrictive, and unfair trade practices. 169 In practice, the MRTPC has had greater focus on enquiries into alleged restrictive trade practices and unfair trade practices, than on monopolistic trade practices (Table III.13). Temporary injunctions and compensation orders have been issued in numerous cases.

Table III.13 Cases disposed of by MRTPC, 2002-05

164 Such an enforcement approach broadly emulates those of the United States and EC, which also permit action to be taken against foreign cartels and other anti-competitive arrangements that affect those jurisdictions' consumers. 165 Anderson and Jenny (2004), Chapter 4. 166 Bhattacharjea (2006). 167 As Bhattacharjea points out, countering an anti-competitive practice involving imports by shutting out the imports "amounts to chopping off one's head to cure a headache" (Bhattacharjea, 2006). 168 Such programmes, which typically offer immunity from prosecution to the first member (and sometimes other members) of a cartel who confess to the authorities and provide information leading to the prosecution of other members, are now viewed as an essential part of the toolkit of modern competition authorities (Bhattacharjea, 2006). 169 Chakravarthy (2005). India WT/TPR/S/182 Page 97

2002 2003 2004 2005

Monopolistic trade practices enquiry 0 0 2 0 Restrictive trade practices enquiry 171 81 31 64 Unfair trade practice enquiry 169 105 51 74 Temporary injunction 60 69 81 55 Compensation 420 178 116 144 Total 820 433 281 337

Source: Information provided by the authorities.

201. The Consumer Protection Act, 1986 (COPRA) protects consumers' interest through the establishment of consumer fora, which settle grievances regarding, inter alia, quality and pricing of goods and services. Consumers have the right to seek redress against "unfair and restrictive trade practices" (as defined in the Act)170 and "unscrupulous exploitation of consumers".171

(c) Challenges to be faced and preparatory work undertaken

202. The new Competition Commission, when its powers are in force, will face significant challenges. There are reasons to believe that developing economies tend to be more vulnerable to anti-competitive practices than developed countries. The reasons include: high 'natural' entry barriers due to inadequate business infrastructure, including distribution channels, and (sometimes) intrusive regulatory regimes; asymmetries of information in both product and credit markets; and a greater proportion of local (non-tradeable) markets.172 Thus it may be particularly important to protect, consumers in developing countries against cartels, monopoly abuses, and the creation of new monopolies through mergers. Bid rigging in public procurement markets (i.e. collusive tendering) is also pervasive in many developing economies, and merits vigorous enforcement initiatives.173

203. In anticipation of these challenges, and full entry into force of the 2002 Act, significant public education, training, and preparatory work for the implementation of the Act has been undertaken by the Commission. This includes the preparation of a series of studies on competition issues in particular sectors, including manufacturing, transport, telecommunications, and energy markets. International organizations, including the World Bank, FIAS, DFID and USAID, have extended assistance to the Commission for capacity building including funding some of the above mentioned studies. Recently, a state-of-the-art volume on the techniques and modalities of competition law analysis has been published under the editorship of the CCI's serving members, as a reference tool for persons involved in implementing competition law in India and other developing economies. 174 When the Commission becomes fully operational, it will continue to focus on competition advocacy work (e.g. to eliminate regulatory barriers to competition in telecommunications and other infrastructure sectors) in addition to core enforcement activities e.g. relating to cartels. This approach is expected to provide a sound basis for the eventual implementation of the new legislation.175

170 Unfair trade practice means any practice that, for the purpose of promoting the sale, use or supply of any good or service, causes loss or injury to the consumer. 171 There is some overlap in the coverage of the two Acts. However, there are several distinctive features in regard to the constitution of the adjudication machinery, jurisdiction, type of persons who may seek relief, nature and scope of relief, administrative procedure, etc. 172 Anderson and Jenny (2004). See also Dutz (2002). 173 See Anderson (2006). 174 Dhall (2007). 175 Dhall (2005). WT/TPR/S/182 Trade Policy Review Page 98

Annex III.1: The tariff and other import charges

1. India's tariff consists of standard rates (also referred to as basic rates) which are statutory rates applied under the Customs Tariff Act, 1975. The tariff is announced with the Budget annually; and additional changes are made through notifications issued during the year. There are a large number of exemptions and reductions, some of which are applied at the tariff line level. Others may be based on industrial use and are thus difficult to include in any calculation of the effective applied tariff rate, which is likely to be significantly lower than the standard rate of tariff. As a result of reform over the years, most of the exemptions have been consolidated under one notification (Notification 21, issued on 1 March 2002).

2. India's current MFN tariff is applied at the HS 8-digit level. It has 11,695 lines, of which 10,977 are ad valorem, 716 (around 6.1% of the tariff) carry alternate duties; and two have specific duties. The Secretariat was provided ad valorem equivalents for the specific components of the alternate duties, which are all in textiles and clothing. The AVE calculations for 563 of the 716 lines are based on import data for 2004 and 2005. For tariff lines under HS 5801.31, for which no import data were available for these years, the authorities used base rates computed under the Non-Agriculture Market Access simulations. For tariff lines under HS 6101.20, data for imports during April-June 2006 were used for the AVE calculations, since, according to the authorities, data for 2004 and 2005 were erroneous. AVEs for the remaining 151 lines could not be calculated due to a mismatch between the units of quantity imported according to statistics maintained by the Directorate General of Commercial Intelligence and Statistics (DGCI&S) and the units on which specific duty rates apply (e.g. the data on imports may be based on square metres while the duty is charged according to kilogrammes). The authorities have therefore used a conversion factor of 0.17 for fabric weighing more or less than 170 grammes per square metre and 0.2 in lines where the description states "more or less than 200 gms/sqm". Where there are no mismatches, the conversion factor was taken as 1.

3. In addition to customs duties (standard or applied tariffs), additional duties (also called countervailing duties) are charged at the border in lieu of central excise duties (a tax on manufactured goods), which are charged only for domestically produced goods. The additional duty rates charged are the same as the excise duties and hence have not been included in the Secretariat's tariff analysis. In addition, India charges a 4% special additional duty (also known as special countervailing duty) to bring the overall tax rate on imported goods more into line with that on domestically produced goods, which are subject to internal taxes, such as VAT, municipal tax, "market committee fees", etc. The 4% duty, however, is not harmonized with internal taxes, making it unclear to what extent the taxes on imports and on domestic goods are equivalent. The additional duty is calculated as a percentage of the value of the import plus any applicable tariff (but not any anti-dumping or countervailing duty applicable), while the special additional duty is charged as a percentage of the value of the import plus the tariff and the additional duty. India WT/TPR/S/182 Page 99

IV. TRADE POLICIES BY SECTOR

(1) INTRODUCTION

1. During the past five years, India's real GDP growth has averaged nearly 7% annually. Growth has been driven largely by the services sector, which accounted for almost 54% of GDP in 2005/06, up from 50% in 2000/01; wholesale and retail trade, hotels, transport, and communications were the leading subsectors. Manufacturing has grown less rapidly, although sufficient to maintain its share of GDP relatively stable at between 15% and 16%. By contrast, growth in agriculture has been very sluggish, and its share of GDP declined from around 24% to 19% during the period. Notwithstanding India's impressive overall growth rate, lack of infrastructure, particularly in transport and electricity, constitutes a major obstacle to maintaining its current growth rate, let alone achieving substantially higher growth rates that the Government is aiming for.

4. Agriculture is characterized by low labour productivity, which is about one-sixth of the level in the other sectors of the economy, with obvious implications for living standards and poverty in rural areas. The reasons for this low productivity include fragmented landholdings, a low level of mechanization and much of the cropped area dependent on rainfall for irrigation, which has made output in the sector rather variable; crop yields have also been declining, in part due to poor seed quality and overuse of land and inputs. The sector also remains subject to considerable government intervention, notably in the form of price support and input subsidies, which have become a fiscal burden, and restrictive marketing practices. Public investment in infrastructure and research has been inadequate and crowded out by spending on subsidies and, while private investment has grown in recent years, it has not been sufficient. Some efforts have been made in the period under review, especially to reduce marketing restrictions, although the government continues to monitor trade in certain sensitive commodities closely to ensure stable domestic supply and prices. With demand for essential commodities, such as cereals, declining in favour of vegetables, milk and meat, a major reorientation is required in the Government's agricultural policy, which until now has encouraged the production of cereals. However, food security remains a priority area of concern for the Government in view of the size of the population and skewed distribution of production.

5. Manufacturing growth has been rapid, at an average of almost 7% since 2000/01, in part due to continued structural change and a relaxation in industrial licensing and FDI restrictions. Its contribution to exports of goods has declined, however, from 76.5% to 69.8% of the total, while its share of total merchandise imports increased from 42.9% to 48.4% during 2000/01-2005/06. In part to meet its goal of reaching ASEAN level tariffs for non-agricultural goods, India has continued to reduce its applied MFN tariffs. As a result, the overall applied MFN tariff for manufactured goods (ISIC) fell from 32.5% in 2001/02 to 14.9% (16.8% including AVEs) in 2006/07. Despite this, tariff peaks remain, especially in automobiles, where the average tariff is 33.6%, and imports of second-hand motor vehicles over three-years old are subject to import licensing restrictions. The textiles and clothing sector remains protected by relatively high tariff barriers, a large percentage of which are non ad valorem (inclusion of ad valorem equivalents raises the average tariff for the sector to 22.5%). While exports of textiles and clothing have increased, partly due to a removal of quotas under the Agreement on Textiles and Clothing (ATC), the share of textiles and clothing exports in total merchandise exports has declined, probably due to increased competition in the global market. However, India's share in the global market for textiles and clothing has increased from 3% in 2001 to 3.7% in 2006. Information technology, which is relatively free of domestic and trade restraints, has continued to be a major contributor to India's economic growth. The sector also receives additional assistance through tax holidays provided by the software and hardware technology parks as well as the special economic zones and through priority sector lending (for software). WT/TPR/S/182 Trade Policy Review Page 100

6. The services sector grew by 9.8% in 2005/06 and continues to be the key driver of economic growth; between 2002/03 and 2006/07, it contributed 68.6% of the overall average growth in GDP. Greater progress has been made in reforming services than in other parts of the economy. In banking, measures have been adopted to raise foreign investment limits and to align prudential requirements with international practice. Foreign banks have been permitted to establish wholly owned subsidiaries since 2005. Although banking and insurance continue to be dominated by state-owned companies, measures have been adopted to encourage competition from the private sector. Efforts are also being made to improve governance of banks and to prepare the sector for implementation of the Basel II capital adequacy framework, although this has been postponed. While the performance of the banking sector has improved in general, with the ratio of non-performing loans (NPLs) continuing to fall, NPLs remain high in rural banks and rural cooperatives. The performance of rural cooperatives is especially problematic as they are closely involved in extending credit to the rural sector. The Securities and Exchange Board of India (SEBI), the regulator of India's securities market, is making efforts to create a well functioning capital market. The securities exchanges are to be corporatized and all listed companies must meet corporate governance requirements specified in the listing agreement by January 2006.

7. A continued obstacle to maintaining growth is the lack of infrastructure. In some areas, notably telecommunications, much progress has been made with a significant increase in penetration, especially of mobile telephony. The result has been a corresponding decline in tariffs of domestic and international long-distance calls. In transportation, efforts are ongoing to improve rail and road transport. Although railways is one of the two sectors remaining exclusively in the public sector, private-sector participation is being encouraged in some areas, especially for the carriage of freight and the development of infrastructure through public-private partnerships (PPPs). PPPs are also being used to develop India's national highway network under an ambitious plan to upgrade the current network as well as build 1,000 kilometres of new expressways. In air transport services, greater private competition has resulted in a significant decline in prices and an increase in the number of passengers travelling to, from, and within India. Restrictions on FDI have been relaxed to 49% of total equity (100% for non-resident Indians), although foreign airlines may not invest in the sector. Less progress has been made in maritime transport where efforts to attract both private domestic and foreign investment have not been successful. Port services, on the other hand, have been improved, in part by augmenting capacity through private-public partnerships. However, electricity continues to be a major problem, with little progress being made on reducing transmission and distribution losses and addressing the considerable difficulties faced by the public sector electricity providers.

(2) AGRICULTURE

(i) Overview

8. The contribution of agriculture and allied activities to India's GDP has been declining, from almost 24% in 2000/01 to 18% in 2005/06 (Table I.2). In contrast, it accounts for almost 60% of employment, suggesting that labour productivity is about one-sixth that of the non-agricultural sector and raising concerns about poverty and living standards in the rural areas.176 The key crops are rice, wheat, sugarcane, cotton and oilseeds. As the world's largest producer and consumer of tea, India has been making efforts to improve the productivity of its tea plantations. Horticultural crops, as well as fisheries and animal husbandry, which are estimated by the authorities to account for around 54% of the output of the sector, are expected to grow rapidly. India was the world's biggest dairy producer and second largest producer of fruit and vegetables in 2003/04, and the Tenth Five Year Plan has

176 Official employment figures, which are based on employment in the formal sector, show that agriculture employs around 5% of the total workforce. However, estimates including informal employment, show that the figure is closer to 60% (see for example, Chadha and Sharma, 2005, pp. 23-101). India WT/TPR/S/182 Page 101 aimed for horticultural growth of 8-9% per year. Demand for horticultural products is likely to be enhanced further with the opening of the retail sector to foreign investment in 2006. India's production of milk has also increased substantially, with around 91 million tonnes produced in 2004/05. A closely linked and rapidly growing activity is food processing, which, until recently, received inadequate attention.177 However, it is estimated that the food processing industry is generating around 250,000 new jobs a year178, although it is hampered by infrastructural constraints.

9. Despite increasing in value from US$6.4 billion in 2000/01 to almost US$10.8 billion in 2005/06, exports of agricultural products as a share of total merchandise exports declined from 14.1% in 2000/01 to 10.4% in 2005/06 (Table AI.3). The value of the main export, rice, increased from US$653 million to US$1.4 billion during the period. India's imports of agricultural products continue to be minimal and fell from 7.6% of total merchandise imports in 2000/01 to 4.9% in 2005/06; the largest share is accounted for by edible vegetable oil.

10. As a result of important gains in productivity in the 1960s and 1970s, mainly due to the introduction of high-yield wheat and rice varieties as well as investment in irrigation, India became self-sufficient in the production of cereals. However, since the 1980s, there has been a slowdown in growth in production and labour productivity in Indian agriculture.179 The slowdown is mainly attributed to declining public-sector investment and, while private investment in agriculture has increased in recent years, it has been mainly in niche areas such as food processing. Since 2003/04, the share of public-sector investment in agriculture has been increasing whereas private sector investment has shown a decline.180 With only around 40% of the cropped area irrigated, output remains highly dependent on rainfall and therefore varies considerably from year to year. In addition, land ownership ceiling laws as well as succession patterns have resulted in increased fragmentation of land holdings, preventing the development of scale economies and mechanization.181 Tenancy laws do not give well-defined rights to tenant farmers, who make up a significant share of agricultural producers, and therefore they lack the incentive to develop the land. Other factors of low productivity include regulation of agricultural markets and the movement of major crops, which has dissuaded the private sector in general from investing in the sector, and relatively low levels of research and development.

11. Since 2002/03, agriculture has grown at an average of less than 2%, although growth was rather erratic in part due to a drought in 2002/03. There has also been a significant change in consumption patterns: per capita cereal consumption has declined while consumption of milk, eggs, horticultural products, and meat has increased. Within cereals the pattern has been a move away from coarse grains towards consumption of rice and wheat. The pattern is evident in both urban and rural areas. In recent years, these changing patterns of consumption, accompanied by growth in production of cereals, have resulted in a surplus of grain production, and growing costs associated with maintaining stocks of wheat and rice and providing certain essential foods to the poor at low prices. The diversification of demand suggests a need for greater investment in crops other than cereals and livestock and in infrastructure to support more downstream activities, such as food processing. In this

177 Food processing now forms part of the priority sector, for which commercial banks are required to set aside part of their lending. Other incentives include zero excise duty on processed fruit and vegetables and tax holiday and other concessions (Ministry of Food Processing, 2005). 178 Business India, 10 September 2006. 179 Average growth in crop yields for example declined from 2.77% per year in the 1980s to 1.72% in the 1990s (Chadha and Sharma, 2005, pp. 23-101). 180 Total investment in agriculture increased from Rs 381.8 billion in 2000/01 to Rs 431.2 billion in 2004/05. The share of private investment was around 82% until 2003/04; then declined to around 71% of the total (Ministry of Finance, 2006). 181 Landholdings on average are around 1.06 hectares (in 2002/03), well below the ceilings set by state laws. WT/TPR/S/182 Trade Policy Review Page 102 regard, the distinct bias in agriculture price support policies in favour of food grains in the past probably distorted cropping patterns and would need to be rectified.182

12. The Government's policy of providing key inputs at subsidized prices has also resulted in a growing subsidy bill to the detriment of public investment in infrastructure and research and development. Subsidized inputs such as fertilizer, water, and power have also, in some cases, led to overuse and problems of water-logging and salinity, as well as degradation of natural resources. 183 There seems to be very little change to the basic policy of supporting producers by subsidizing inputs through direct subsidies, and output through minimum support prices, although in recent years more emphasis has been placed on infrastructure investment.

13. Stagnation in the sector has been recognized, most recently in the approach paper to the 11th Five Year Plan, which suggests that in addition to efforts to increase productivity on farms through better resource use, there is a need for diversification to higher-value-added output including horticulture and floriculture, also because of changing demand patterns. Greater emphasis is also placed on the fisheries and livestock subsectors. India's National Agricultural Policy, announced in 2000, aims to improve the post-harvest and marketing infrastructure so as to reduce the losses in agricultural output (estimated at 30-40% especially for horticultural products) that result from poor storage and processing facilities. Other plans to address the infrastructural problem include the Bharat Nirman programme, which has identified seven areas of rural infrastructure to be addressed by 2009.184

14. While addressing the problems of agriculture may be politically difficult, some effort is being made to improve processing and marketing. Since 2002, foreign direct investment has been permitted in tea plantations and, since 2006, in horticulture, animal husbandry, and food processing and retailing (Chapter II), and some nine items in the agricultural and allied industries are currently reserved for production by the small-scale sector.185 In addition, linkages between farmers and processors, for example, through contract farming, have been increasing in certain parts of the country. In its 2004/05 Budget, the Government announced a National Horticulture Mission, which aims to increase output to 300 million tonnes by 2011/2012 and to enhance exports of these products. Investment in a tea fund is also expected to be used for re-plantation of tea gardens in the country. Increasing support from the private sector is also being sought to help set up agricultural markets, marketing infrastructure, grading certification, and quality inspection. The Central Government has also circulated a model law to allow for direct marketing and contract farming arrangements for adoption by the states (see (d) below).

182 Ministry of Finance (2006). 183 The Planning Commission's approach paper to the 11th Five Year Plan, for example, notes that semi-critical, critical, and over-exploited areas of groundwater use are increasing and already cover 29% of the blocks in the country. 184 The programme aims to create 10 million hectares of additional irrigation capacity; to connect all 66,802 habitations in the rural areas with a population above 1,000 with all weather roads; to construct 6 million houses for the rural poor; to provide potable water to 55,067 habitations and to address habitations where water quality is not good; to provide electricity to all un-electrified villages (some 125,000) and to connect 23 million households below the poverty line; and to connect the remaining 66,822 villages with a public telephone. 185 These are: pickles and chutneys; bread; pastry; hard boiled sugar candy; rapeseed, mustard, sesame, and groundnut oils (except solvent extracted and except for agri and growers cooperatives for the first three oils); and ground and processed spices, except for spice oil and oleo resin spices (SIDO online information. Viewed at: http://www.smallindustryindia.com/publications/reserveditems/List%20of%20 reserved%20Items.pdf [11 December 2006]. India WT/TPR/S/182 Page 103

(ii) Agricultural policies

(a) General framework

15. Agricultural policy in India is guided by a number of goals: food self-sufficiency, ensuring remunerative prices to farmers, and stable prices for consumers. To meet these goals an array of measures are in place, including direct subsidies, price controls, and minimum prices for certain crops, input subsidies, as well as restrictions on the movement of goods (domestic and international) to ensure stable domestic supply and prices.

16. Agricultural policy is formulated and implemented at the central level by the Ministry of Agriculture, with the Five Year Plan providing broad guidelines on policy and the allocation of funds. Under the Constitution, agriculture is a state subject, but important decisions like those relating to research and development, facilitating infrastructure and investment, credit and trade, are taken by the Central Government. Some model laws formulated at the central level can be adapted by the state governments according to their needs. The Commission for Agricultural Costs and Prices (CACP) was set up in 1965 to advise the Government on setting minimum support prices (MSPs) for different commodities (currently 25 essential commodities) and the mechanisms for implementing the MSPs. In addition to the Ministry of Agriculture and the CACP, a number of public sector agencies are responsible for implementing agricultural and food policies. The most important of these, the Food Corporation of India (FCI) was set up in 1964 to implement the food policy, including procuring and maintaining buffer stocks of food grains and for distributing food grains through the public distribution system (PDS) and various welfare schemes for poverty alleviation (see below). It is supported by the Central Warehousing Corporation set up in 1965. The FCI purchases foodgrains at procurement prices set by the Government and sells them at the Central Issue Price (CIP) also fixed by the Government. To the extent that the CIP does not include the cost to the FCI of purchasing, storage, and transportation, the Central Government subsidizes the FCI. The cost of the subsidy had risen to Rs 233 billion in 2004-05.186 The FCI and the National Agricultural Cooperative and Marketing Federation of India (NAFED), set up in 1958, also implement the Government's price support scheme (see below). Procurement of other crops, such as cotton and jute are also carried out by state-owned companies: the Cotton Corporation of India (CCI), and the Jute Corporation of India (JCI).

17. The first National Agricultural Policy, announced in July 2000, aims, inter alia, to raise annual growth in agriculture over the next two decades to over 4%, based on an efficient use of resources while conserving India's soil, water, and biodiversity, and equity across regions. The goals include: improving growth to over 4% in a sustainable manner; improving food and nutritional security; creating a favourable environment for increasing capital formation in agriculture; external and domestic market reforms; improving electrification and irrigation facilities; improving the marketing infrastructure as well as facilities for preservation, storage and transportation to reduce post harvest losses; providing an insurance policy for farmers to cover the whole growing season; and a continuous review of pricing and trade mechanisms to improve the economic environment in agriculture and the balance between rural and urban incomes. These objectives are being pursued through programmes like Bharat Nirman, the National Horticultural Mission, initiatives to improve agricultural credit, micro irrigation, and agriculture market reforms.

(b) Import policy

18. Although protection from imports of agricultural products has declined, India continues to use trade policy to support its overall goals of food self-sufficiency and price stability. Thus, tariffs, the

186 Food Corporation of India online information. Viewed at: http://fciweb.nic.in/capital_structure/ capital_structure.htm [6 December 2006]. WT/TPR/S/182 Trade Policy Review Page 104 main instrument of trade policy, continue to be adjusted from time to time to ensure sufficient domestic supply of key products. An example is the exemption (zero duty) granted for imports of wheat in 2006 to replenish local grain stocks mainly for the public distribution system; the standard tariff rate is currently 50%. Import licences also seem to be issued to support this policy; for example, recently, imports of wheat, normally restricted to state trading, were also permitted by private importers.187 India has also recently notified import quotas under its bilateral agreement with Sri Lanka on certain products where no quota previously existed; and export restrictions are also issued from time to time to ensure sufficient domestic supply (see below).

Tariffs

19. The simple average applied MFN tariff for agriculture (WTO definition) increased slightly from 40.7% in 2001/02 to 40.8%, compared with a simple average bound rate of 117.2% (Table III.1). Tariffs on agricultural products are all ad valorem except for two lines (shelled and non-shelled almonds), unchanged from the previous Review. Applied tariff rates range from 0% to 182% (effective rates range from 0 to 150%). The highest rates are in HS Chapters 22 (beverages, spirits and vinegar); 21 (miscellaneous edible preparations); 9 (coffee and tea); 15 (animal or vegetable fats); and 10 (cereals) (Chart IV.1). Some of these rates, notably for cereals, are currently at their bound rates. However, for the majority of tariffs, there remains a considerable gap between the applied and bound rates, ranging from 10% to 300%. This has enabled the Government to raise its standard rate of tariff on some agricultural products (Table AIII.1). India also uses "reference prices" to calculate customs duty applicable on imports of, inter alia, palm oil (crude and RBD), palmolein oil (crude and RBD), and crude soybean oil. Under Section 14(2) of the Customs Act, reference prices can be fixed by the authority "if satisfied that it is necessary or expedient to do so"; customs duty on these imports are calculated on the basis of the reference prices rather than the price quoted by the importer.188

20. Preferential access to agriculture is provided under India's free-trade agreements. India's offer under these agreements ranges from 8.4% of its agricultural tariff lines (WTO definition of agriculture) for members of the Asia-Pacific Trade Agreement (APTA) to 92.5% under the free-trade agreement with Sri Lanka. The tariff concessions under most of these agreements are not very significant: the average agricultural tariff ranges from 37.2% for SAFTA to 40.6% for APTA (the MFN average is 40.8%); however, for Sri Lanka, the average is 7.6% while for least developed country members of the SAFTA (Bangladesh, Bhutan, Maldives, and Nepal), the agricultural tariff is 30.0% (Table III.2).

21. India maintains bound tariff rate quotas on milk powder, maize, sunflower seed and safflower oil, and rape, colza or mustard oil (14 tariff lines at the HS 8-digit level); the policy remains unchanged from the previous Review, although it seems that with the exception of sunflower seed and safflower oil, quotas are generally not issued because, according to the authorities, there is no demand from importers (Chapter III(2)(v)). Tariff rate quotas are also maintained on imports of tea under the free-trade agreement with Sri Lanka (Chapter II). Moreover, India has recently notified import quotas on vegetable fats (vanaspati, including bakery shortening and margarine), pepper, and desiccated coconut from Sri Lanka. Vanaspati imports will be limited to 250,000 tonnes per year, and imports of pepper to 2,500 tonnes per year; imports of desiccated coconut will be restricted to 500 tonnes per year at a concessional duty rate of 30%.189 The quotas on vanaspati, pepper, and desiccated coconut

187 Directorate General of Foreign Trade, Notification No. 16 (RE-2006)/2004-2009, 29 June 2006. Viewed at: http://dgftcom.nic.in/exim/2000/not/not06/not1606.htm [11 December 2006]. 188 According to the authorities the prices are aligned with international prices and are revised frequently to avoid any discrepancy with international prices. 189 Directorate General of Foreign Trade, Public Notice No. 17 (RE-2006)/2004-09, 2 June 2006 and Public Notice No. 69 (RE-2006)/2004-09, 21 November 2006. India WT/TPR/S/182 Page 105 are not in the original bilateral agreement and appear to be the result of an agreement signed on 14 November 2006; a copy of this was not available.

Chart IV.1 Standard rates on agricultural products, 2001/02 and 2006/07 Per cent 140 2001/02 120 2006/07

80 Average standard rate Average standard rate HS01-24 (2006/07) HS01-24 (2001/02) 42.7% 41.7% 60

0 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 HS Chapter HS Chapter Description

01 Live animals 02 Meat and edible meat offals 03 Fish and crustaceans, molluscs and other aquatic invertebrates 04 Dairy produce; birds eggs; natural honey; edible products of animal origin n.e.s. 05 Products of animal origin, n.e.s. 06 Live trees and other plants; bulbs, roots and the like; cut flowers and ornamental foliage 07 Edible vegetables and certain roots and tubers 08 Edible fruit and nuts; peel of citrus fruits or melons 09 Coffee, tea, mate and spices 10 Cereals 11 Products of the milling industry; malt; starches; wheat gluten 12 Oil seeds and oleaginous fruits; miscellaneous grains, seeds and fruit; straw and fodder 13 Lacs; gums, resins and other vegetable saps and extracts 14 Vegetable plaiting materials; vegetable products n.e.s. 15 Animal or vegetable fats and oils and their cleavage products; prepared edible fats; animals or vegetable waxes 16 Preparations of meat, or fish or of crustaceans, molluscs or other aquatic invertebrates 17 Sugars and sugar confectionery 18 Cocoa and cocoa preparations 19 Preparations of cereals, flour, starch or milk; pastrycooks' products 20 Preparations of vegetables, fruit, nuts or other parts of plants 21 Miscellaneous edible preparations 22 Beverages, spirits and vinegar 23 Residues and waste from the food industries; prepared animal fodder 24 Tobacco and manufactured tobacco substitutes

Note: The 2001/02 tariff is based on 6-digit HS96 nomenclature consisting of 704 lines (HS01-24); the 2006/07 tariff is based on 8-digit HS02 nomenclature, consisting of 1,466 lines (HS01-24). Excluding two specific rates for both years.

Source : WTO Secretariat calculations, based on data provided by the Indian authorities. WT/TPR/S/182 Trade Policy Review Page 106

Import prohibitions and restrictions

22. Imports of tallow, fat and oils of animal origin, animal rennet, wild animals and their parts, beef and its products, natural sponges, fish wastes, domestic and wild birds, and poultry from countries reporting outbreaks of avian influenza, are prohibited for reasons of public health and safety and on moral/religious grounds. Import restrictions currently cover 7.7% of agricultural tariff lines. In addition, state trading continues to be used for imports of cereals (wheat, rice, maize, rye, oats, and coarse grains), and copra and crude coconut oil; however, data on imports of these products by state-trading agencies are not collected by the authorities. The Government also monitors imports of a number of agricultural products considered to be sensitive, including milk products, fruit and nuts, coffee, tea, spices, cereals, and edible oils. The authorities maintain that the only measure that can be taken in case of a surge in imports of these products is an increase in the applied rates of customs duties within their respective bound rates.

(c) Export policy

Overview

23. While the vast majority of agricultural exports are unrestricted, exports of some items regarded as essential and sensitive are closely monitored and subject to ad hoc restrictions as the need arises (see below). As a producer of a wide variety of agricultural products, India is also keen to expand its exports, especially of horticultural products. Sector-specific policies are in place for these products to improve output and productivity, including through increased investment in research and development. In its 2002-07 Foreign Trade Policy, India took additional steps to boost exports of agricultural products. Agri-export zones were established to encourage exports of certain products. The zones receive assistance from central and state governments to improve efficiencies in supply chains of the identified product; assistance may be in the form of extension of services and inputs from the Ministry of Agriculture, R&D support from the Agriculture Universities, or the setting up of cold storage facilities through assistance from the National Horticultural Board. There are currently 60 agri-export zones sanctioned by the Central Government and monitored by the Agricultural and Processed Food Products Export Development Authority (APEDA). However, of the total investment of Rs 17.18 billion envisaged over 2002-07, just under half has been realized, and only around 43% of expected exports have actually taken place from the zones.190 The Vishesh Krishi Upaj Yojana (special agricultural products scheme), which was introduced in 2004, promotes exports of fruit, vegetables, flowers, minor forest produce, dairy, poultry, and their value-added products. 191 The incentive is an import duty credit equivalent to 5% of the f.o.b. value of exports in the previous year beginning 1 April 2004 (1 April 2005 for dairy, poultry, and related processed goods), although the Government reserves the right to remove any of the products from this scheme.192 According to data provided by the authorities, exports from the 60 zones were valued at around Rs 21.5 billion during April 2005-March 2006.193 No separate data are available on exports from the Vishesh Krishi Upaj Yojana.

190 APEDA (2006), Ref No. APEDA/CM/15/2005-06, 30 June 2006. 191 The full list of products is in the Foreign Trade Procedures, Appendix 37A. Viewed at: http://dgft.delhi.nic.in/ [11 December 2006]. 192 The duty credit is permitted only at a rate of 3.5% of the f.o.b. value of exports in the previous year if the exporter has used any benefits under the duty/exemption/remission schemes. Units in special economic zones will not be eligible for the duty credit. 193 It was stressed during the course of this Review that exports from the agri-export zones were already taking place before the zones were set up. India WT/TPR/S/182 Page 107

Export restrictions

24. Over the years India has gradually removed prohibitions, licensing, and other restrictions on exports. However, as with its import policy, India also takes into consideration the domestic supply of items crucial for its food security. Thus, notifications are made from time to time to restrict exports or lift export restrictions in order to maintain domestic supplies and stability in domestic prices. For example, in 2006, exports of pulses and sugar (except sugar subject to a tariff rate quota in the United States and the EC) were prohibited, to maintain domestic supplies of these products in order to keep the price at a "reasonable level".194 The export of sheep meat, and goat meat on the bone has also been prohibited since 21 August 2006. Most recently, India has banned exports of wheat, apparently to contain the rise in domestic prices.195

25. India prohibits exports of certain agricultural products for health, environmental, and religious reasons (Chapter III(3)(v)). Export licensing is in place for live animals and some animal products, seeds, seaweed and other algae, residues and waste from food industries, as well as pure races of silk worm and silkworm seeds. There has been no major change in the policy on state trading, which includes onion, and gum karaya (Chapter III(3)(ix)). However, export cesses maintained for several products, including coffee, spices, tobacco and other agricultural commodities, were removed in 2006 (Chapter III(3)(iii)).

(d) Internal policies

Overview

26. Internal policies have been driven largely by food nutrition and livelihood security considerations. The Agriculture Produce Market Committee (APMC) Acts, which are enacted by states, restrict private investment in various commodities; the list of notified commodities varies from State to State. Recognizing the need for reform in this area, the Central Government formulated a Model Act in September 2003, the State Agricultural Produce (Development and Regulation ) Marketing Act, in consultation with state governments as well as trade and industry. The Act aims to, inter alia, develop competitive agricultural produce markets in the private and cooperative sectors and promote private investment in the development of marketing infrastructure.196 Some 12 states and union territories have amended their APMC Acts, and 5 have partially amended their Acts. The Essential Commodities Act, 1955 and the various Orders issued thereunder give the Government broad powers to keep prices "at reasonable levels", and to restrict the storage and movement of goods across state borders, although the Act has been amended substantially to reduce some of these restrictions.

27. India's internal measures to support agriculture include direct subsidies for inputs and indirect assistance through price support. Some direct support is also provided in the form of grants for infrastructure and research although this has declined considerably. As India does not have reduction commitments under the WTO Agreement on Agriculture aggregate measure of support (AMS), it is required to restrict its agricultural support to within the de minimus level of 10% during the base period (1986-88). India last notified its AMS commitments and its export subsidies to the WTO in March 2002 for the period 1996/97-2000/01.197 According to the authorities, the notification is to be updated as soon as more recent data are collected.

194 DGFT notifications 15 (RE-2006)/2004-2009, 27 June 2006, and 18 (RE-2006)/2004-2009, 4 July 2006. Viewed at: http://dgft.delhi.nic.in/ [7 December 2006]. 195 Financial Times, 15 February 2007. 196 Ministry of Finance (2004). 197 WTO documents G/AG/N/IND/2, 11 June 2002; and G/AG/N/IND/3, 1 March 2002. WT/TPR/S/182 Trade Policy Review Page 108

28. Public investment in agriculture and allied activities has been declining since the mid 1980s but has shown an increase since 2002/03.198 It is estimated that during 2002-04, public investment in the sector was around Rs 105 billion (1993/94 prices), while private investment was Rs 352 billion.199 The increased private sector investment has not fully compensated for the loss of public sector investment up to 2002/03. In contrast, spending on subsidies has been rising, estimated at over Rs 350 billion in 2002/03 or over four times public spending on agriculture (Table IV.1), and it has been suggested that such spending has crowded out public sector investment in infrastructure and other activities.200

Table IV.1 Public sector investment and subsidies in agriculture, 2000-05 (Rs billion) 2000/01 2001/02 2002/03 2003/04 2004/05

Public investment in agriculture and allied sector 75.8 82.5 76.6 94.4 46.4a Total subsidies 345.4 375.2 350.3 .. .. - Fertilizer 138.0 125.9 110.2 .. .. - Electricity 60.6 93.4 73.5 .. .. - Irrigation 137.6 146.0 154.0 .. .. - Otherb 0.9 1.0 1.3 .. ..

.. Not available. a Budget estimate. Excludes expenditure by states and union territories b Subsidies given to marginal farmers and to Farmers' Cooperative Societies in the form of seeds, development of oilseeds, pulses, etc. Source: Ministry of Agriculture (2005), Agricultural Statistics at a Glance 2005, Directorate of Economics and Statistics, Department of Agriculture and Cooperation.

Support for agricultural crops

29. In addition to direct subsidies, India has various mechanisms to safeguard the interests of its farmers from rapid market fluctuations, and to provide stable prices to consumers. India's price policy for agriculture is aimed at ensuring a remunerative and stable price environment in order to increase production and productivity, "with a view to evolving a balanced and integrated price structure in the perspective of the overall needs of the economy and with due regard to the interests of the producers and the consumers, particularly in the background of inherently unstable character of the market place for agriculture produce, which often inflict undue losses on the growers, even when they adopt the best available technology package and produce efficiently".201 Under the Price Support Scheme (PSS), minimum support prices (MSPs) are issued for major field crops.202 MSPs are announced by the Government following the recommendations of the Commission for Agricultural Costs and Prices (CACP).203 Intervention takes place when prices of the relevant commodities fall below the MSP, 198 India at present appears to invest only about 0.5% of its agricultural GDP in agricultural research compared with 0.7% in developing countries and 2-3% in developed countries (IFPRI, 2005). 199 Ministry of Agriculture (2005). 200 Chadha and Sharma (2005), pp. 23-101. 201 CACP online information. Viewed at: http://dacnet.nic.in/cacp/. 202 These are: paddy, maize, coarse cereals, pulses (arhar, moong, urad, gram, and masur), cotton, groundnuts, sesamum, niger seed, wheat, barley, rapeseed/mustard, safflower, sunflower seed, soy bean, toria, copra, jute, sugarcane, and tobacco (Department of Agriculture and Cooperation online information. Viewed at: http://agricoop.nic.in/farmprices/MSP-E.pdf [6 December 2006]). 203 The CACP takes into account a number of factors when calculating MSPs, including cost of cultivation/production, trends of input use, procurement and distribution, input/output price parity, trends in domestic and international prices, demand and supply, inter-crop price parity", effect on industrial cost structure and general prices, cost of living, and the "terms of trade" between agricultural and non-agricultural sector. India WT/TPR/S/182 Page 109 resulting in procurement at the MSP by the Food Corporation of India (FCI) for cereals, the National Agricultural Cooperative and Marketing Federation of India (NAFED) for pulses and oilseeds, the Cotton Corporation of India and NAFED for cotton, and the Jute Corporation of India for jute. MSPs have been raised in recent years and recommendation for MSPs appear to have been relatively higher for rice and wheat than for other crops.204

30. For products not covered by the MSPs, but for which the price may decline significantly as a result of a bumper crop and a glut in the market, the Government undertakes "market intervention" on specific request from the states, at a mutually agreed price. Under the Market Intervention Scheme (MIS), when the price of a particular commodity falls below the cost of production, the procuring agencies buy at the fixed Market Intervention Price (MIP) during a fixed period or until the price of the commodity stabilizes and exceeds the MIP, whichever is earlier. The MIP or mutually agreed price is based on the cost of production, which in turn is finalized following detailed discussions between the officials of the concerned governments. The losses incurred by such procurement are shared equally by state and central governments. Horticultural and other agricultural commodities that are perishable and are not covered under the PSS are procured under the MIS. Such market intervention, which is carried out by NAFED and agencies designated by the state governments concerned, has, since 2002, involved procurement of products such as onions, potatoes, apples, eggs, oil palm, seeds, oranges, garlic, pineapple, spices, and grapes. The loss incurred is shared by the central and state governments on a 50:50 basis (75:25 in case of north eastern states) and restricted to 25% of procurement cost or actual loss, whichever is less. Actual losses under the MIS were Rs 429 million in 2002/03 and Rs 56 million in 2005/06.

31. Under the existing policy on procurement of foodgrains, the Central Government grants price support to paddy (rice), coarse grains, and wheat through the Food Corporation of India (FCI) and state government agencies. The agencies open procurement centres in all Districts producing marketable foodgrain surpluses in the marketing seasons, and buy foodgrains at the MSP announced for the season. The farmer has the option to sell to the government agencies, or in the open market. According to the authorities, in this way the procurement policy ensures that farmers receive remunerative prices for their produce and enables the Central Government to procure foodgrains for distribution under the targeted public distribution system (TPDS), and other welfare schemes. It also enables the building up of buffer stocks of foodgrains with the FCI, to ensure food security. The TPDS (originally PDS) was set up to ensure distribution to consumers of essential commodities: currently wheat, rice, coarse grains, sugar (only for families below the poverty line, some states in the north-east, and in hilly areas and some island territories), and kerosene. It is operated under the joint responsibility of the central and state governments; the Central Government is responsible for procurement, storage, transportation, and allocation of stocks, while the state governments are responsible for identification of beneficiaries, issue of ration cards, and distribution of food grains to them through 486,000 "fair price shops" set up for this purpose. Grains and other items destined for the TPDS are purchased by the FCI at MSPs and sold to state governments at a Central Issue Price (CIP) determined by the Government.

32. As a result of criticism of the PDS, the targeted system was introduced in 1997 to better serve the poorer segments of the population. There are currently three categories of consumers within the TPDS: families estimated to be above the poverty line (APL), families below the poverty line (BPL), and a category introduced within the BPL in 2000 called the antyodaya anna yojana (AAY). Beneficiaries in the APL and BPL categories, currently 115.2 million and 65.2 million, respectively, are identified by state governments on the basis of caloric requirements laid down by the Planning Commission and are currently allocated around 50% of their estimated daily grain requirements

204 It is suggested that, as a result production of wheat and rice rose substantially in the 1980s and 1990s (Virmani and Rajeev, 2002). WT/TPR/S/182 Trade Policy Review Page 110 through the TPDS.205 The AAY category, which makes up some 38% of the BPL category, has some 25 million families identified by the states and includes the unemployed, casual labourers, marginal farmers and rural artisans, widows, orphans, etc.206 The CIPs under the TPDS are fixed by the Government and involve a subsidy, particularly for the BPL and AAY consumers. 207 The food subsidy budgetary allocation for 2006/07 is Rs 239.86 billion, or 4.3% of total government expenditure.208 Procurement of rice and sugar are subject to "levies", which are fixed shares of output that must be sold to the Central Government at fixed prices for the TPDS. The sugar market, which is slowly being liberalized, is currently subject to a levy of 10% (15% at the time of the last Review). Although the remaining sugar can be sold on the open market, it is also subject to monthly sales quotas determined by the Government in order to ensure price stability. 209 As a sign of further intervention, the Government amended the Essential Commodities Act in June 2003 to require all trade in sugar to take place under the direction of the Government210; exports of sugar are also currently prohibited. Rice procured by the Government through a statutory levy on rice millers and rice dealers is fixed by states in consultation with the Central Government and varies from State to State; it currently ranges from 10% to 75% of paddy procured by rice millers/dealers.211

33. In addition to the TPDS, other welfare measures have been introduced to increase access to food, especially for children, through the mid-day meal scheme, the annapurna scheme for the elderly, food for work programmes (sampoorna gramin rozgar yojana (SGRY)) and the National Food for Work Programme (NFWP). The SGRY, announced on 15 August 2001, is a universal programme and offers 5 million tonnes of foodgrain free of charge to be distributed by states and union territories. The NFWP, launched on 13 October 2004, is designed to provide 100 days of employment at the minimum wage for at least one able-bodied person from each household in the country. According to the authorities, the tribal areas would mainly benefit from the latter scheme. The Government also provides an emergency feeding programme, and there is a Village Grain Bank Scheme to ensure supply of grains to food-scarce villages or areas as notified by state governments. Between 1996/97 and 2006/07, the Government sanctioned the establishment of 13,219 such grain banks in different states.

205 This is estimated at 35 kg (raised from 25 kg in 2002) of foodgrains per household per month. 206 Department of Food and Public Distribution online information. Viewed at: http://fcamin.nic.in/ dfpd/EventDetails.asp?EventId=29&Section=PDS&ParentID=0&Parent=1&check=0 [6 December 2006]. 207 They are currently 67% of the economic cost to the FCI for APL families, 41% for BPL families, and 22% for AAY families for rice. In respect of wheat, they are 50% of the economic cost to the FCI for APL families, 34% for BPL families, and 16% for AAY families; losses incurred by the FCI are covered by the Central Government through a subsidy. 208 The cost was around 2.5% of government expenditure in the early 1990s (Virmani and Rajeev, 2002). 209 The monthly quotas (release mechanism) were to be discontinued by the Government by 31 March 2003; however, following appeals by sugar producers, it was decided to continue issuing the quotas up to September 2005 and to review the situation in February 2005. A Committee set up in March 2004 to suggest ways to revitalize the sugar industry recommended that the release mechanism be discontinued by the end of 2005. However, as at 28 February 2006, the recommendation did not appear to have been accepted by the Government (Department of Food and Public Distribution Notification No. 1-2/2006, dated 28 February 2006 requires producers to sell and dispatch monthly quotas of sugar according to the monthly release order. Viewed at: http://www.fcamin.nic.in/dfpd/EventDetails.asp?EventId=867&Section=Sugar%20 and%20Edible%20Oil&ParentID=867&child_continue=1&child_check=0 [8 December 2006]. 210 Department of Food and Public Distribution online information. Viewed at: http://www.fcamin.nic.in/dfpd/EventListing.asp?ID_PK=100&Section=Sugar%20and%20Edible %20Oil&ParentID=0 [8 December 2006]. 211 Department of Food and Public Distribution online information. Viewed at: http://www.fcamin.nic.in/dfpd/EventListing.asp?Section=Levy%20and%20Control %20Orders&id_pk=14&ParentID=0 [8 December 2006]. India WT/TPR/S/182 Page 111

34. In the late 1990s, relatively high MSPs, especially for rice and wheat212, compared with market prices, and the changing composition of demand for agricultural products, led to the build-up of huge public stocks of grain (64.7 million tonnes in 2002, almost three times the buffer stock requirements and significantly in excess of the 10 million suggested by the Expenditure Reforms Commission), requiring the FCI to release major stocks both domestically and for export, especially during 2002/03 and 2003/04.213 In 2005, stocks fell below buffer stock requirements, requiring imports, especially of wheat. The cost of maintaining buffer stocks, and thus the overall food subsidy, rose substantially, to Rs 241.8 billion by 2006/07; there is also concern that the quality of food stocks and storage facilities are not good. Efforts are being made to decentralize procurement to the states (some 11 states have adopted the scheme), although questions remain about financing of operations, reimbursement of expenses, and release of subsidy by the Central Government. 214 There is also concern that because the FCI's costs are covered by the Central Government, it has little incentive to improve efficiency, while the targeting of the TPDS could be improved significantly. Efforts are also being made to improve the operational efficiency of the FCI; according to the authorities, these resulted in savings of Rs 1.83 billion up to August 2006.215

35. To respond to some of these concerns, in 2000, the Government constituted a High Level Committee to formulate a long-term grain policy. The Committee's report, presented in 2002, suggested, inter alia, that: MSP's should be fixed on the basis of costs of production in more efficient regions; all rice levies should be discontinued; state levies should not be more than 4% of the MSPs; decentralized procurement must be made attractive to the Central Government; the efficiency of the FCI should be improved; and the Government should introduce a major food-based employment programme. The Committee also suggested that there should be an immediate shift to the unified TPDS, with Central prices being based on acquisition cost at a single CIP across the country, because the TPDS undermined the viability of the Fair Price Shops and resulted in leakages. In line with these recommendations, the Government made moderate increases in MSPs up to 2005/06 and the decentralized procurement scheme more viable by defraying incidental costs, such as storage and interest charges for state agencies. The Government has also implemented the SGRY and the NFWP and is making efforts to improve the efficiency of the FCI. Where state levies are high the Central Government has requested the state governments to reduce them. The Government rejected the recommendation on the universal PDS since it was felt that this would result in the TPDS losing its focus on meeting the needs of the poor.

Input subsidies

36. The three main inputs receiving subsidies are fertilizers, electric power, and water for irrigation. In addition, subsidies are provided for seeds and pesticides, including through price control orders issued from time to time. Spending on fertilizer subsidies increased from Rs 138 billion in 2000/01 to Rs 182.99 billion in 2005/06 and, with input prices high, it is expected that the cost will rise substantially in 2006/07.216 To make fertilizers available to farmers at affordable prices and to encourage their use, the Government controls the price at which fertilizers are sold to farmers. As this price is lower than the cost of production, the difference is paid to fertilizer manufacturers as compensation. Currently, urea is subject to price controls under the Fertilizer (Control) Order, 1985, 212 It appears that MSPs for paddy rice and wheat have been fixed at levels higher than recommended by the CACP in recent years (Virmani and Rajeev, 2002). Additional states charges and levies inflate prices further. 213 Ministry of Finance (2005). 214 Ministry of Finance (2006b). 215 The efficiency measures include: improved financial management, network optimization, renting out of excess storage capacity, reuse of gunny bags, reduction of procurement and establishment costs, outsourcing of non-critical activities, and reduction of labour costs. 216 Ministry of Finance (2006b). WT/TPR/S/182 Trade Policy Review Page 112 although ad hoc price controls are also applied to phosphatic and potassic fertilizers through a "Concession scheme for decontrolled phosphatic and potassic fertilizers". 217 The new pricing scheme (NPS), also known as the group pricing scheme, has been implemented in two stages (April 2003 and April 2004).218 Under the NPS, a flat rate of subsidy is determined for a group of manufacturers. The groups of manufacturers are divided according to production methods and age of manufacturing plants. The new scheme also provides incentives for producers to increase efficiency. 219 An additional freight subsidy is paid for transportation costs incurred by the manufacturer. Importers of urea are also paid a subsidy to make up for the difference between the price of imports and retail prices. There has been no change in the retail price of fertilizers since 28 February 2002.220

37. The subsidy provided by the state governments in the form of low or zero tariffs for electricity used in agriculture amounted to Rs 73.5 billion in 2002/03 (Table IV.1).221 Electricity is a concurrent subject under the Constitution of India. The Electricity Act, 2003 provides that a state government may decide to give subsidy to a category of consumers in the tariff determined by the State Electricity Regulatory Commission. The law also requires the state government to provide such a subsidy from its own budget to the concerned power utility. The power subsidy for the agriculture sector is also used for irrigation through tube wells, and surface water use is subsidized at rates below cost. The total subsidy for water for irrigation grew from Rs 137.6 billion in 2000/01 to Rs 154 billion in 2002/03. Additional subsidies are provided for infrastructure, including the expansion of the irrigation canal network and its upkeep, and the expansion of drip and sprinkler systems, which use less water.

38. Indirect subsidies for the agriculture sector are provided in a number of ways, including facilitating access to credit and insurance policies. This includes access to credit under the priority sector lending requirement for commercial banks (at least 18% of their total lending needs to be to the agriculture sector). It appears, however, that commercial banks have consistently failed to meet this target, and have been permitted to deposit up to 1.5% of the shortfall in net bank credit to agriculture with the Rural Infrastructure Development Fund (RIDF) since it was set up in 1995/96. The RIDF was established to assist states in investing in rural infrastructure and is administered by the National Bank for Agriculture and Rural Development (NABARD). The interest rates for banks depositing their shortfalls with the RIDF until 2001/02 were 0.5% less than the rates of interest charged on RIDF

217 Phosphatic and potassic fertilizers were decontrolled in 1994. However, their prices increased significantly, resulting in a decline in their use and subsequent overuse of urea forcing the Government to announce maximum retail prices for these fertilizers as well (Department of Fertilizers, online information. Viewed at: http://fert.nic.in/fertilizersubsidy/background.asp [7 December 2006]). 218 The NPS replaced the Retention Price Cum Subsidy (RPS) scheme, which was the difference between the retail price and the retention price (defined as the cost of production plus a 12% post-tax return on net capital assets). 219 These are: (i) the urea units had been given preset energy consumption norms, effective 1 April 2004. If the units achieve a better energy efficiency, then they are allowed to retain the benefits thereof; (ii) the urea units are encouraged to produce more than 100% of reassessed capacity for which the net gain sharing formula on sale of additional production between the Government and the units is in the ratio of 65:35; and (iii) the units that use naphtha, FO/LSHS as feed stock for urea are encouraged to convert to cheaper, cleaner, and more efficient feed stock, i.e. gas/LNG under NPS. 220 Ministry of Finance (2006b), Chapter 8. 221 The Integrated Energy Policy report by an Expert Committee notes that, although less than 48% of billed energy is sold to industrial and commercial consumers, this segment yields over 70% of actual revenue collected by the state utilities. Moreover, the cross-subsidization has resulted in industries finding it cheaper to set up their own generating plants rather than pay the high rates charged by state electricity distributors (Planning Commission, 2006b, Chapter X). India WT/TPR/S/182 Page 113 loans to state governments. However, the rates are now based on the prevailing bank rate with the interest rate inversely proportional to the amount of the shortfall in credit to the agriculture sector.222

39. The goal of the Tenth Five Year Plan (2002-07) was a substantial increase in credit to agriculture, to Rs 7,367 billion, up from Rs 2,299 billion under the Ninth Five Year Plan. However, there has been a considerable shortfall, prompting the Government to announce a new credit policy in June 2004, which aimed to increase credit by requiring each rural and semi-urban branch of a commercial bank to take up on average at least two to three new investment projects in certain areas identified by the Government.223 As a result, agricultural credit increased from Rs 869.8 billion in 2003/04 to Rs 1,253 billion in 2004/05; almost 84% of the target of Rs 1,410 billion for 2005/06 had been met by end 2006.224 An Advisory Committee was also constituted by the Reserve Bank of India on the flow of credit to agriculture from the banking system. Several of the recommendations by the Committee were implemented by the RBI in May 2004.225 Other forms of credit include the Kisan Credit Card scheme with a withdrawal limit based on the farmers' operational landholding. The Government is also implementing a National Agricultural Insurance Scheme (NAIS) covering all the major crops, initially with a 50% subsidy on the premium for small and marginal farmers to be phased out over a period of five years. At present, a 10% subsidy on the premium is available to small and marginal farmers. The subsidy is shared equally between state and central governments. However, it seems that only around 14% of farmers on average are currently covered by any crop insurance, which does not cover price fluctuations. In addition, farmers do not, in general, have any insurance cover against other risks such as accidents and illness.226 Agricultural income is exempt from income tax; agricultural products are subject to a 4% VAT, and states may also levy a state tax on agricultural holdings.

40. However, it appears that small and marginal farmers face considerable difficulty in access to credit and their share in total credit to the agricultural sector is falling. 227 Moreover, while the share of total credit that seems to be non-institutional (i.e. moneylenders who tend to charge high rates of interest), while declining, remains significant and is likely to be especially high for marginal farmers. Indebtedness and poor harvests appear also to be the major causes for the recent cases of suicides among small and marginal farmers. To assist small-scale farmers, in its most recent Budget, the Government has announced a 7% limit on interest rates charged for loans of up to Rs 300,000. It was also announced in the Budget that a Committee on Financial Inclusion would be appointed to examine the reasons for exclusion of marginal farmers from access to credit and to suggest solutions. The Committee on Financial Inclusion, set up in June 2006, will study the pattern of exclusion, identify the barriers confronted by vulnerable groups, and suggest suitable measures and a monitoring mechanism.

222 For example, if the bank had a shortfall of less than 2 percentage points of its net credit, the interest rate would be the prevailing bank rate, but if its shortfall was between 2 and 4.99 percentage points, the interest rate would be the prevailing bank rate minus 1% (NABARD online information. Viewed at: http://www.nabard.org/roles/ridf/genesis.htm [5 December 2006]). 223 These are: plantations and horticulture, fisheries, organic farming, agri-processing, livestock, micro-irrigation, sprinkler irrigation, watershed management, village pond development, and others (Ministry of Finance, 2005). 224 Ministry of Finance (2006b). 225 RBI (2004a). The recommendations that have been accepted include a waiver on collateral requirements loans of up to Rs 50,000 for crops, and Rs 500,000 for loans for agri-business and "agri-clinics". 226 Planning Commission (2006a). 227 Mohan (2004). WT/TPR/S/182 Trade Policy Review Page 114

(3) ENERGY

41. Bottlenecks in the energy sector, arising from inadequate and inefficient infrastructure, tend to increase transaction costs and prevent the economy from realizing its full potential, regardless of progress in other areas. Recognizing this, the Government has been making efforts to reduce infrastructure bottlenecks, by encouraging private participation.

(i) Oil and gas

42. The Indian oil and gas industry can be broadly divided into three subsectors: exploration and production; refining; and marketing. All three subsectors are dominated by public sector companies. In exploration and production, the two national oil companies (NOCs) accounted for 78% and 9.4% of total oil production in 2004/05, while private companies and joint ventures accounted for 12.6%. 228 Of the 19 refineries, one is privately owned, and accounts for 26% of total refining capacity. 229 In addition, foreign investment is restricted to 26% of total investment in public sector refineries.

43. India is facing increased demand for petroleum products. The Expert Committee on Integrated Energy Policy in the Planning Commission estimated that in order to sustain 8% growth of GDP up to 2031/32, India needs, at least, to increase its primary energy supply three to four fold.230 If taking 2003/04 as the base year, India's commercial energy supply would need to grow by 5.2-6.1% per annum, and its total primary energy supply would need to grow by 4.3-5.1% annually.231

44. The increased demand requires further reform in the sector. To encourage investment, measures have been adopted to promote private participation. Thus, no activity in the sector is reserved exclusively for public entities; apart from refining undertaken by public sector units, up to 100% foreign investment is allowed in all activities, including exploration, production, and marketing. Five private companies have been granted marketing rights for the transportation fuel, in addition to the four public oil marketing companies.232 In refining, the authorities expected that private enterprises could account for 29% of the total refining capacity in 2006/07.

45. Measures have been taken to encourage exploration and production of oil and gas. Under the New Exploration Licensing Policy (NELP) announced in 1997, 100% foreign investment was allowed in all types of exploration, with no minimum expenditure commitment. Various incentives have also been provided, such as income tax holidays for seven years from the start of commercial production, and tax deduction of capital expenditure on exploration and drilling operations, including customs tariff exemption on imports for petroleum operations. The authorities believe the NELP provides a level playing field to private sector companies, by giving them the same fiscal and contractual terms as public companies. Since the NELP began, in 1999, production sharing contracts (PSCs) have been signed for 110 blocks, and 30 discoveries have been made by private companies (including joint ventures).

228 Ministry of Petroleum and Natural Gas (2006). The two NOCs are the Oil and Natural Gas Corporation Ltd (ONGC), and the Oil India Ltd (OIL). 229 The Economic Survey 2006-2007, issued on 27 February 2007, states that India currently has 17 public sector refineries and 2 private refineries. 230 Planning Commission (2005). 231 IBEF (2006c). 232 The four public oil marketing companies are the Indian Oil Corporation Ltd (IOC), the Hindustan Petroleum Corporation Ltd (HPC), the Bhatat Petroleum Corporation Ltd (BPC), and the Indo Burma Petroleum Ltd (IBP) (subsidiary of IOC). India WT/TPR/S/182 Page 115

46. Despite being a net exporter of petroleum products, India imports around 70% of consumption.233 Nonetheless, high international prices have not been fully passed through to the domestic market; inaccurate price signals may affect the development of oil and gas sector. The Indian Government used to set fuel prices under an administered pricing mechanism (APM). Although the APM was eliminated in April 2002, complete pass-through of international prices does not take place. Although after April 2002 the oil marketing companies (OMCs) were allowed to adjust prices based on import parity, after consulting the Ministry of Petroleum and Natural Gas, this system was suspended at the end of 2003, when oil prices started to climb. 234 In August 2004, the Government approved a system under which OMCs could adjust gasoline and diesel prices within a 10% price band of a three-month average of import parity prices; however, this system has never been applied.

47. According to the authorities, complete pass-through of international oil prices, which rose sharply in 2006, could cause severe difficulties for transportation, and have serious inflationary implications. Accordingly, a Committee was established to look into various aspects of pricing and taxation of petroleum products. The Committee issued its report in February 2006. Following its recommendations, in June 2006 the Government commenced a trade-parity-based pricing mechanism, comprising 80% of import price parity and 20% of export price parity. 235 Nevertheless, prices of kerosene and liquid petroleum gas (LPG) remain subject to government control (Chapter III(4)(iii)). Applied MFN tariffs on petrol and diesel have been reduced several times during the review period; the most recent reduction, from 10% to 7.5% in June 2006, was to mitigate the effects of international price rises on domestic prices.236 The Government also continues to monitor the prices of kerosene, LPG, motor spirit and diesel; according to the authorities, price monitoring is in the interest of the weaker sections of society.

48. Natural gas supplied by existing pre-NELP oil and gas fields and distributed to certain key sectors, such as electricity and fertilizers, is allocated at administered prices. Gas supplied by suppliers other than the two national oil companies (the ONGC and the OIL) is sold at the market price.

49. Kerosene prices in India remain among the lowest in the world primarily due to subsidies provided by the Government.237 In addition, it was estimated that the cost of subsidies to petroleum increased from 0.5% of GDP in 2003/04, to 0.7% of GDP in 2004/05 238, because of the increase in international prices. Although these subsidies have shielded some poor households from the impact of higher oil prices, there are substantial leakages. For example, it was estimated that kerosene consumed by households below the poverty line under the TPDS accounted for less than 38% of all kerosene consumption, and almost 49% of kerosene distributed through the TPDS was diverted for non-household use or for sale on the black market.239 The authorities do not consider that there are substantial leakages, and state that research conducted by the National Council of Applied Economics Research (NCAER) shows that at least 62% of PDS kerosene reached the targeted beneficiaries in 2004.240

233 Planning Commission (2005). "Currently, the refining capacity in the country is more than the domestic requirements, making India a net exporter of petroleum products", p. 11. 234 IMF (2006b). 235 Ministry of Petroleum and Natural Gas (2006). 236 Ministry of Finance (2007b), p. 145. 237 IMF (2006b). 238 IMF (2006b). 239 IMF (2006b). 240 The authorities indicate that the measures taken or intended to reduce leakages include introducing a marker system, and advising the NOCs to install global positioning systems on all the tank trucks carrying petrol/diesel to retail outlets by March 2007. WT/TPR/S/182 Trade Policy Review Page 116

50. Under the Petroleum and Natural Gas Regulatory Board Act 2006, passed on 31 March 2006241, a Regulatory Board is to be set up to regulate the refining and marketing of petrol, petroleum products, and natural gas, but not exploration and production of crude oil and natural gas. The Act also provides for a legal framework for the downstream gas sector, including the development of natural gas pipelines, as well as local gas distribution networks. The authorities state that a committee is working on identifying suitable members of the Board.

(ii) Electricity

(a) Overview

51. The electricity industry has undergone major changes over the last decade. Under the Indian Constitution, electricity is regulated by both the central and state governments. At the central level, the Ministry of Power is responsible for administration of the Electricity Act 2003, issues related to the Central Electricity Regulatory Commission (CERC), and rural electricity schemes. The CERC is responsible for regulating the tariff of generating companies owned or controlled by the Central Government and those that operate in more than one state; it is also in charge of inter-state transmission. The State Electricity Regulatory Commissions (SERCs) administer electricity firms (generation, transmission, and retail) operating in a single state.

52. It is estimated that in order to support 7% GDP growth per annum, growth of electricity supply needs to be over 10% annually.242 Generation capacity in particular, which is currently 127,673 MW, must double every ten years for the next three decades. Accordingly, structural reforms are urgently needed to increase generation, transmission, and distribution capacity, to improve efficiency and reduce losses.

(b) Structural reform

53. Previously, there was a state electricity board (SEB) in every state; these were government-owned integrated utilities, and generating companies could not choose their customers unless approved by the Government on a case-by-case basis. The SEBs have been running at a loss since the late 1980s and, against this backdrop, the electricity industry has been facing challenges such as: inadequate generation; accumulated losses in the generation, transmission, and distribution of electricity; unsustainable cross-subsidies; low access to electricity, particularly in rural areas; and a lack of investment in infrastructure. Accordingly, electricity supply continues to lag behind demand; 43% of the total population and 56% of the rural population does not have access to electricity.

54. Realizing the need for reform, a number of states began unbundling the SEBs, and as a result, the number of players in each segment of the industry has increased. In particular, there are 21 companies engaging in electricity trading, 18 of which are privately owned. Out of 74 generation companies, 9 are controlled by the Central Government, 25 by state governments; the remainder are privately owned. State governments, however, continue to play a major role in the transmission and distribution of electricity. Out of 13 transmission companies, 11 are controlled by state governments and one by the Central Government, while 31 of the 48 distribution companies are controlled by state governments and one by the Centre.

55. However, for the SEBs, the cost of producing and transmitting electricity remains much higher than the sales price, and cross-subsidies for agriculture and households, by charging high

241 The Petroleum and Natural Gas Regulatory Board Act 2006. Viewed at: http://indiacode.nic.in/ fullact1.asp?tfnm=200619. 242 IBEF (2006d). India WT/TPR/S/182 Page 117 prices to commercial and industrial consumers, have led to negative rates of return. Between 2005/06 and 2006/07, the rate of return of the SEBs deteriorated from -24.8% to -27.4%.243 Also, as SEBs dominate the transmission and distribution of electricity, their financial difficulties indicate that they have not been able to pay fully for the purchase of electricity generated by private power producers. Hence, although 100% foreign investment has been permitted in electricity generation, transmission, and distribution, the amount attracted is low. Furthermore, the SEBs' losses, and the consequent low foreign and private investment have contributed to the lack of investment in infrastructure. These infrastructure bottlenecks, in turn, have constrained not only the growth of the sector, but also the development of the economy.

56. Transmission and distribution (T&D) losses also remain high, with many states reporting losses of over 40% in recent years.244 These losses are mainly attributed to inadequate investment in infrastructure, lack of a distribution network in rural areas, low metering efficiency, and theft. Accordingly, in March 2003, the Government initiated the Accelerated Power Development and Reforms Programme (APDRP) for transmission and distribution, to reduce the aggregate technical and commercial (AT&C) losses. Initially, the target was to reduce AT&C losses from 60% to 15% in about five years, but it was found later that the baseline 60% was not correct and the 15% target was too ambitious. Accordingly, a Taskforce set up by the Ministry of Power suggested a graded reduction in AT&C losses. Utilities with AT&C losses: above 40% should reduce them by 4% per year; between 30-40% by 3% per year; between 20-30% by 2% per year; and those with less than 20% losses should reduce them by 1% per year.245 So far, AT&C losses have fallen from an average of 39% in 2001/02 to 33.5% in 2005/06.

57. Under the Electricity Act 2003, which entered into force in 2003: generation (other than large hydro generation) was delicensed; open access and electricity trading were allowed in the transmission and distribution of electricity; distribution was also delicensed in "notified" rural areas246; and unbundling of the SEBs was promoted. In particular, under the Act, consumers with a load of more than 1 MW are allowed open access to transmission and distribution by January 2009. In addition, the Appellate Tribunal for Electricity became operational from 21 July 2005, and started hearing appeals against decisions of the electricity regulatory commissions. Although the implementation of the Act has not been even at the state level, and three states have recently reintroduced free access to electricity for farmers, the authorities consider that most of the states have taken significant steps in the direction of deregulation.

58. The Electricity Act required the Central Government to formulate the National Electricity Policy, in consultation with the Central Electricity Authority (CEA)247 (a statutory agency under the Ministry of Power), and state governments. The Policy, issued in 2005, aimed to realize full access to electricity by 2009, and increase supply to meet demand by 2012. An important component of the

243 Ministry of Finance (2007b), p.180. 244 Ministry of Power online information. Viewed at: http://powermin.nic.in/JSP_SERVLETS/ internal.jsp [30 November 2006]. 245 Ministry of Power (2006). 246 Electricity Act, Part IV Licensing, Article 14: "Provided also that where a person intends to generate and distribute electricity in a rural area to be notified by the State Government, such person shall not require any licence for such generation and distribution of electricity". 247 The CEA was first set up in 1951 as a part-time body, and became a full-time agency in 1975. Under the Electricity Act 2003, the CEA's functions include providing advice to the Central Government on issues relating to the national electricity policy; specifying the technical standards and safety requirements for electrical plants and electric lines; specifying the grid standards for operation and maintenance of transmission lines; and conditions for installation of meters for transmission and supply of electricity (CEA online information. Viewed at: http://cea.nic.in/about_us/functions_cea.html [13 December 2006]). WT/TPR/S/182 Trade Policy Review Page 118 policy is to promote open access in transmission, which would enable electricity from surplus regions to be supplied to deficit regions.

59. The Rural Electricity Infrastructure and Households Electrification (Rajiv Gandhi Grameen Vidyutikaran Yojna (RGGVY)) scheme was introduced in April 2005, to provide full access to electricity, particularly in rural areas, by 2009. The Rural Electrification Corporation (REC) is in charge of implementing the scheme. A capital subsidy of 90% is provided for the provision of rural electricity distribution infrastructure, including the Rural Electricity Distribution Backbone (REDB), the Village Electrification Infrastructure (VEI), and the Decentralized Distributed Generation (DDG) and Supply. A 100% subsidy is provided for electricity consumed by households below the poverty line. As at December 2006, 27 states had signed memoranda of agreement (MoAs), agreeing to implement the RGGVY. Under this scheme, 9,819 villages obtained access to electricity in 2005/06 (in addition to the 26,543 villages between 1996/97 and 2004/05).

60. To increase private participation in the sector, 100% foreign equity participation has been allowed since 1991 in all segments of the industry. Subsequently, FDI in generation, transmission, and distribution was brought under the automatic approval route. Since 2005, 100% FDI has also been permitted in the trading of electricity. Certain fiscal benefits, in the form of duty concessions and tax holidays, have also been provided.248 In addition, all electricity projects have a 100% income tax exemption for ten consecutive years, within 15 years of commencement or from undertaking a substantial renovation or modernization of existing transmission lines. The authorities state that as a consequence of the restructuring efforts, investor confidence has been improving. About 40,000 MW of new generation capacity is under construction with investments of more than Rs 1,600 billion. The Government's Ultra Mega Power Project has also been developed with investment through public-private partnership.249

(c) Subsidies and pricing

61. Government subsidies, including cross-subsidies to the electricity sector, appear to have reached unsustainable levels. In 2006/07, direct transfers from state governments to the SEBs reached Rs 138.7 billion, in addition to an "uncovered subsidy" of Rs 212.01 billion.250 Recognizing that cross-subsidies hide inefficiencies and losses in operations, the National Electricity Policy recognizing the urgency of reducing subsidies. However, the policy stipulates that consumers below the poverty line and consuming electricity below a specified level may receive cross-subsidies in the form of tariff reductions, which should be at least 50% of the overall average cost of supply. According to the authorities, as the complete elimination of cross-subsidies would not be feasible in the near future, there is a proposal to amend the Electricity Act by deleting the phrase "elimination of cross subsidies". Thus, cross-subsidies would be reduced rather than eliminated.251 The authorities state that consumption by agricultural consumers increased by 5.8% in 2004/05, with revenue increasing by 8.5%. During the same period, industrial consumption increased by 11.5% with revenue increasing by 9.99%. This, according to the authorities, indicates the beginning of reduction in cross-subsidies.

248 For example, under the Mega Power Policy, large generation projects can obtain capital import-duty concessions, and/or the waiver of local levies to reduce costs. All inter-state projects with a capacity of 1,000 MW and above for thermal, and 500 MW and above for hydro projects, are treated as mega power projects. 249 According to the authorities, two projects, each with 4,000 MW generation capacity, have been awarded through tariff-based competitive bidding. It seems the U.K. based Globeleq is the major consortium partner in one of the recently awarded 4,000 MW ultra mega power projects in Madhya Pradesh. 250 Ministry of Finance (2007b), p. 180. 251 The proposed amendment also includes provisions relating to control of theft of electricity, as well as providing electricity universally to urban and rural areas. India WT/TPR/S/182 Page 119

62. To promote competition, competitive bidding guidelines, issued on 19 January 2005, provide for the determination of tariffs for purchasing electricity by distribution companies; the electricity regulatory commissions are required to adopt tariffs determined through the bidding process. Currently, the tariff is determined on the basis of the capital cost and the performance of a project. Public sector utilities have been given a five-year transition period to move from the cost-performance based tariff to a competitive bidding based tariff.252 Exceptions include the one-time expansion of existing projects, i.e., existing generation projects can expand 50% of their current capacity within the present tariff regulation regime, or where a state-controlled company is identified as the developer of the project.253

(4) MANUFACTURING

63. Manufacturing has been growing rapidly since the previous Review (Table I.2) of India, due partly to structural reform. The share of manufacturing in GDP increased from 15.6% in 2000/01 to 16% in 2005/06 (Table I.2). Its share in total merchandise exports fell from 76.5% in 2000/01 to 69.8% in 2005/06, while the share in imports rose from 42.9% to 48.4% (Chart I.1).

64. There has been a decline in industrial licensing and FDI restrictions. Border protection for manufacturing also fell significantly, as the average MFN rate in manufacturing (ISIC) fell from 32.5% in 2001/02 to 14.9% in 2006/07 (Chart III.3).254 However, the reduced average tends to conceal some high tariff rates, such as on new and second-hand automobiles, which are at 60% and 100%, respectively.

(i) Textiles and clothing

(a) Introduction

65. Employing around 35 million people, textiles and clothing (T&C) remains the largest manufacturing industry in India in terms of employment.255 It accounted for 4% of GDP and 14% of industrial production in 2004/05.256 The authorities indicate that the T&C sector accounted for 8.62% of total employment, and labour productivity in T&C appears to be lower than in the remainder of the manufacturing industry.257

66. The textiles and clothing industry is regulated by the Ministry of Textiles, and comprises the "organized" mill sector, with relatively sophisticated technology and integrated composite spinning, weaving, and processing mills, and the "decentralized" sector. The "decentralized" sector, the largest part of the T&C industry, is composed of powerloom units (accounting for 62% of total clothing production), and handloom units (which operate with low levels of technology).258

252 The authorities indicate that, once the tariff is determined through competitive bidding, no further regulatory scrutiny is envisaged. This, as stated by the authorities, also reduces regulatory uncertainty. 253 Ministry of Finance (2006b), Chapter 9. 254 The average MFN rate in manufacturing, excluding AVEs, is 15.1% for 2006/07, or 17.0% including AVEs. 255 Ministry of Textiles (2006). The T&C sector is also the second largest provider of employment after agriculture. 256 Ministry of Textiles (2006). 257 According to figures provided by the Department of Heavy Industry, labour productivity, if measured in terms of gross value added per employee, is 1.48 for weaving and spinning, and 1.61 for other textiles manufacturing, lower than that for machinery (3.31), iron and steel (7.45), and automobiles (10.6). 258 USITC (2001): "The handloom industry is an integral part of rural life in India. Although it has high production cost and low productivity, it is known for its unique products, which have helped it develop a niche in global markets." WT/TPR/S/182 Trade Policy Review Page 120

(b) Reform measures and assistance

67. Textiles and clothing products used to be subject to small-scale industries (SSI) reservations, and consequently a foreign equity restriction of 24%. The reservation, however, prevented firms from benefiting from economies of scale. The Government has gradually "de-reserved" textiles and clothing products from the SSI list over the past few years, and 100% foreign ownership is now allowed in the industry.

68. In addition to the SSI reservation, which constrained the competitiveness of India's T&C exports, other factors affecting the industry's competitiveness include low value added, lack of diversification in terms of export destinations (65.4% of India's T&C exports were directed towards the United States and the EC in 2005, up from 58.7% in 2004259), little inward FDI260, and poor infrastructure.261 In particular, according to the RBI, transaction costs were higher in T&C than in India's other leading export sectors in 2003.262

69. Measures have been introduced to increase productivity, by, for example, restructuring certain subsectors (e.g. mills). Although private firms, which are supposed to be more efficient, accounted for 92% of yarn production and 94% of fabric production in the mill sector, the "organized" mill sector has apparently accumulated large debts.263 The Government announced a package to restructure mills to alleviate the debts. Facilitated by the National Textile Corporation (NTC), 65 mills have been shut down under the Industrial Disputes (ID) Act.264 It appears that the Ministry of Textiles also provides "letters of comfort",265 which seem to be government guarantees to facilitate mills to obtain loans from banks. Moreover, Rs 500 million has already been invested to improve existing machinery, and Rs 4 billion has been used as adjustment assistance to reduce labour surplus.

70. The T&C industry has been receiving assistance in various forms, and for different purposes. The Handloom Reservation Order stipulates that 11 textile products must be manufactured by the handloom industry, and the Hank Yarn Obligation Order requires that all yarn producers process 40% (50% before January 2003) of their deliveries in hank form to ensure adequate supply for the handloom industry at "reasonable" prices.266 Furthermore, the Cotton Corporation of India (CCI), a state-owned enterprise established in 1970, engages in price support operations whenever the price of cotton falls to the government-set minimum support price (MSP). The loss incurred through price support operations is reimbursed to the CCI by the Government. More recently, assistance has been 259 UNSD Comtrade database. 260 Between 1991 and 2004, FDI in the sector was US$35 million (1% of total cumulative FDI flows into India during the period) (Tewari, 2005). 261 Ananthakrishnan and Jain-Chandra (2005). 262 RBI (2004b). According to the authorities, international trade is determined by market forces, and there has not been any bureaucratic control regulating the T&C sector in India. 263 The authorities state that, according to studies conducted by the South India Textile Research Association (SITRA) in July 2002, banks and other financial institutions had almost Rs. 600 billion of non- performing assets accumulated in the textiles sector. Accordingly, a package based on external commercial borrowings (ECBs) was announced to reduce debts. Under the package, rupee-term loans could be converted into foreign currency loans, to bring down the interest rates. However, the authorities state that the scheme could not commence, but did not provide reasons. 264 The NTC had 119 mills under its management, of which, 52 are to be restructured, 65 were shut down, and two transferred to a state government. The estimated cost of the restructuring is Rs 39 billion, which is to be financed by selling the land and assets of the closed mills. Employees of these mills were offered voluntary retirement, which, according to the authorities, had been accepted by 53,656 employees. 265 Ministry of Textiles (2005), p. 7. According to the authorities, the Ministry of Textiles does not provide any "letters of comfort" to the financial institutions or banks to provide loans or credit to the textile sector. 266 Ministry of Textiles online information. Viewed at: http://texmin.nic.in/annualrep/ar00_c05.htm. India WT/TPR/S/182 Page 121 provided to improve technology; the Technology Upgradation Fund Scheme (TUFS) was launched in 1999, and extended to 31 March 2007, to upgrade technology in existing plants and equipment, and to promote investment in new plants and equipment. Funds are provided in the form of reimbursement to interest on loans.267 Under the Tenth Five Year Plan (2002-2007), the Government allocated Rs 12.7 billion to TUFS.268

(c) Border measures

71. During the period under review, tariffs on textile machinery and equipment have been reduced; currently, there are 387 textile machinery items with a basic customs duty of 5%. In addition, imports of second-hand machinery have been permitted since April 2003. The authorities also indicate that India is keeping a large number of T&C items in positive lists under various RTA negotiations, where preferential tariff concessions are given or duty-free imports are allowed.

72. Nonetheless, the textiles and clothing industry remains protected by relatively high tariff barriers, a large percentage of which are non-ad valorem.269 Excluding AVEs, the current average tariff for the sector is 12.3%; however, inclusion of AVEs raises the average tariff up to 22.5% . Consequently, imports (mainly textiles) accounted for only 1.3% of total merchandise imports in 2005/06 (1.2% in 2000/01) (Table AI.2).270 Preferential tariffs also apply to textiles and clothing products under certain regional and bilateral preferential trade agreements (Table III.2). In addition, tariff rate quotas apply for imports from Sri Lanka: 6 million pieces of clothing may be imported duty free, if manufactured in Sri Lanka using fabric sourced from India; and a 75% tariff rebate is applicable to a further 2 million pieces.

73. Although the T&C industry's share of total merchandise exports fell from 27% in 2000/01 to 17.1% in 2005/06, it remains one of India's largest exporters (Table AI.3). Despite this downward trend, India's share of the global T&C market increased from 3% in 2001 to 3.7% in 2006.

74. The New Textile Policy 2000, issued in November 2000, was aimed at further increasing India's T&C exports to US$50 billion by 2010 (from US$12 billion in 2000/01). In addition, the discontinuation of the Agreement on Textiles and Clothing in 2005 was expected to increase India's T&C exports: exports of T&C products increased by 29.6% in 2005/06.271 However, exports continue to be constrained by aging machinery, inadequate infrastructure (such as power and ports), and rigid labour laws.272

75. Measures to increase exports include the Advance Authorization Scheme (AAS) (previously advance licensing scheme), and the Duty Exemption Pass Book scheme (DEPS) (Chapter III(3)(vii)). Around 300 T&C products have been identified under the AAS. Recently, to facilitate economies of scale, the Government has been trying to promote industrial and textile clusters. For example, it

267 Benefits under the scheme include: 5% interest reimbursement on rupee term loans; 5% exchange fluctuations on foreign currency loans; 15% or 20% credit-linked capital subsidy; 5% interest reimbursement plus 10% capital subsidy for specified processing machinery. 268 Ministry of Textiles (2006). 269 In the 2006/07 tariff, around 34.1% of lines for the textiles, wearing apparel, and leather industries (ISIC) are non-ad valorem. According to the authorities, there are no import restrictions. The non-ad valorem duties on T&C products are alternate duties, and are levied as ad valorem or specific duty, whichever is higher, with a view to discouraging very cheap products of dubious quality from non-market economies. 270 According to the authorities, the low share of textiles imports to total imports is not due to high tariff barriers; rather, it is because of large increases in non-textile imports, including raw materials, crude oil, and machinery items. 271 UNSD, Comtrade database. 272 Ministry of Finance (2007b), p.140. WT/TPR/S/182 Trade Policy Review Page 122 commenced the Integrated Textile Parks Scheme in 2005: by combining the Apparel Park for Exports Scheme, and the Textile Centre Infrastructure Scheme273, the integrated textile parks aim to provide infrastructure facilities to the textile industry.274 Exports are also promoted by helping firms to participate in international trade fairs and exhibitions.

(ii) Steel

76. Deregulation of the steel industry commenced in the early 1990s, when 100% foreign investment was allowed, restrictions on import or export of steel were reduced, and price regulations were discontinued. Partly as a result of the deregulation, and partly due to India's endowments of iron ore and non-coking coal, crude steel output rose by nearly 6% annually, and exports by 15% annually, between 1995 and 2005; global crude steel output growth was 4% annually during the same period. In 2005, India produced 38 million tonnes of steel, becoming the eighth largest steel producer in the world.

77. The industry is regulated by the Ministry of Steel, and comprises "main producers", "other major producers", and "secondary producers". The "main producers" are: the Steel Authority of India (SAIL) and Rashtriya Ispat Nigam Ltd (RINL), both state-owned enterprises, and Tata Steel Limited, a private company. The "main" and "other major" producers are those that have integrated steel-making facilities with production capacity over 0.5 million tonnes per year, and utilize iron ore and coal or gas for producing steel. The "secondary" producers, comprise firms with lower production capacity, including around 120 sponge iron producers, 650 mini-furnaces, and about 1,200 re-rollers.275

78. Labour productivity in crude steel production varies in terms of output per person; in general, productivity in companies established in the 1990s (mainly private enterprises) is much higher than in those established earlier (mainly public sector enterprises).276 In addition, nearly 6% of India's crude steel is produced using outdated open hearth processes (compared to 0.3% in the EC).

79. To promote the industry's competitiveness and improve efficiency and productivity, the National Steel Policy, issued in 2005 is aimed at increasing steel output to 110 million tonnes per annum by 2019/20 (from 38 million tonnes in 2004/05).277 By 2019/20, exports are envisaged to reach 26 million tonnes (based on double-digit growth until 2019/20), from around 4 million tonnes in 2004/05; thus, steel exports would account for 23.6% of total production, up from 11% in 2004/05. However, according to the latest demand and supply projection, production is likely to be 15-20% higher than the 110 million tonnes envisaged in the NSP, suggesting that exports would constitute a smaller share of total production than the estimated 23.6%.

273 Under the Apparel Park for Exports Scheme (launched in 2002), the Government approved setting up 11 apparel manufacturing centres around the country directed towards exporting. Under the Textile Centre Infrastructure Scheme (also launched in 2002), the Government was to develop infrastructure facilities at major textile production centres in India. 274 The Government seeks to implement the economic cluster model, to take advantage of the economies of scale on both demand and supply side. In this regard, the Government announced in the 2006/07 Budget that the cluster development approach would continue and would be extended to a further 100 clusters. 275 Ministry of Steel (2005). The authorities indicate that, by the end of 2006, there were 218 sponge iron producers, 787 electric induction and arc furnaces, and 1,361 re-rollers. 276 For example, in 2005/06, the labour productivity in Essar Steel and Jindal Steel, both privately owned, was 1,079 tonnes and 617 tonnes, per person per year, respectively, much higher than in SAIL (150 tonnes per person per year), and RINL (282 tonnes per person per year). TISCO, although privately owned, is the oldest steel producer in India and has labour productivity of 277 tonnes per person per year. 277 Ministry of Steel (2005). India WT/TPR/S/182 Page 123

80. The Government intends to help firms to increase output by, inter alia, removing procedural and policy bottlenecks in the availability of inputs, such as iron ore and coal, promoting investment in R&D278, and providing export credit.279 Also, given the slow progress of multilateral trade negotiations, the Government intends to focus on regional-trade agreements to increase market access for steel exports.280 In addition, the Government is committed to conducting reviews to remove infrastructural and institutional bottlenecks, so as to reduce transaction costs.281 Furthermore, the Government would encourage strategic alliances with buy-back arrangements. Steel exports may benefit from the Advance Authorization Scheme (AAS), and the Duty Entitlement Pass Book scheme (DEPS) (Chapter III(3)(vii)).282 According to the authorities, the production goal specified in the National Steel Policy is expected to facilitate the development of downstream industries that use steel as inputs, such as infrastructure construction, manufacture of transport equipment, machinery, and consumer durables.283

81. During the period under review, MFN tariffs for iron and steel imports have been reduced significantly, from an average 33.8% in 2001/02, to 7.1% in 2006/07 (ISIC 3710). As a result, trade in iron and steel has been growing fast, with import growth at an average annual rate of 55%, and export growth at 47%, between 2001/02 and 2005/06.284 Import restrictions, however, remain to discourage imports of low-priced "seconds" and "defective" materials including through floor prices.285 Imports of seconds or defects, which are allowed only through three designated ports (Mumbai, Calcutta, and Chennai), are also similar to mandatory pre-inspection certificates (by a "reputed" international agency). The tariff on these imports, at 20%, is much higher than the average tariff for steel products.286

278 According to the authorities, a tax rebate of 125% of the total expenditure incurred on R&D is allowed. 279 Ministry of Steel (2005). According to the authorities, the measures specified in the NSP are aimed at removing the constraints that are beyond the control of individual steel producers and that impede efficient growth of the steel industry. These include lack of infrastructure, scarcity and high cost of capital resources, as well as other rigidities that prevent steel producers' access to different inputs. 280 Ministry of Steel (2005). India is the largest steel producer in South Asia. According to the authorities, compared with its nearby countries in Asia, the Middle East, and Africa, India has considerable comparative advantage in terms of availability of raw materials, a large pool of skilled manpower, as well as technological capability. RTAs with these countries can provide better market access for India. 281 The NSP emphasizes the need to expand infrastructure for roads, railways, ports, and power by, inter alia, promoting investments through business models such as PPP (Public Private Partnership), better coordination among various agencies supplying infrastructure and services to the steel producers, and improving logistics. 282 The authorities state that these schemes are more relevant when the tariff rates are high. However, in the last decade the tariff rates on steel have been reduced significantly. 283 The authorities indicate that the production goal becomes particularly important as domestic consumption of steel has been increasing at double-digit rates in the last two financial years, and for the past 15 years the Indian steel industry has been driven principally by the growth in domestic markets, instead of being export driven. 284 UNSD Comtrade database. 285 Floor prices are applied to hot-rolled coils and sheets, cold-rolled coils and sheets, tinplate waste and waste/tinplate misprints, and electrical sheets (CRNO) and plates. 286 Ministry of Steel online information. Viewed at: http://steel.nic.in/policy.htm [29 November 2006]. According to the authorities, the import restrictions are actions permitted under the WTO Agreement, and are applicable only to the imports of "low-priced" "seconds" and defective materials, which are products not sold in the developed western country markets. The authorities state that these imports pose potential threats to the health and safety of users in India. WT/TPR/S/182 Trade Policy Review Page 124

82. Furthermore, the Government has a scheme to distribute iron and steel produced by the main producers (SAIL, RINL, and TISCO) to small-scale industries287, and to other Government departments (up to 30% of the total allocation). The distribution is through the Small Scale Industries Corporations (SSICs) at the state level, or the National Small Industries Corporation (NSIC). 288 To ensure that SSIs obtain these raw materials at "reasonable" prices, the Government provides nominal handling charges of around Rs 500 per tonne to the SSICs to cover their handling, transportation, and stockyard maintenance charges.289 The distribution scheme, however, may reduce enterprises' incentive to achieve economies of scale, and hence adversely affect the competitiveness of the industry. The National Steel Policy, stated that the distribution system would remain.

(iii) Automobiles

83. Following structural reform measures in the 1990s, the new Auto Policy was announced in March 2002 by the Department of Heavy Industry, under which 100% foreign ownership was allowed and minimum investment conditions were discontinued. Partly as a result of these measures, the automotive industry has been developing fast; total output increased by 17% in 2004/05, and exports of automobiles increased even faster, by 31.3%.290 The industry accounts for 5% of GDP and employs, directly and indirectly, around 13.1 million people. The authorities state that in terms of gross value added per employee, labour productivity in the automotive industry was 10.6 in 2003/04, much higher than in iron and steel (7.45), machinery (3.31), or structural metal products (2.3). Currently, there are 13 manufacturers of passenger vehicles, 9 manufacturers of commercial vehicles, and 17 manufacturers of two/three wheelers.

84. There are around 500 automotive component firms in the organized sector and some 10,000 firms in the unorganized sector. The industry has been growing at around 20% annually since 2000. Total value added reached US$10 billion in 2005, and is envisaged to grow to US$40 billion in 2014.291 In May 2006, all auto components (around 35 items) were removed from the SSI reservation list, giving a further boost to the sector's development.

85. Part of the objective of the new Auto Policy is for India to become a global source of auto components and an international hub for the manufacture of small passenger cars. The authorities indicate that, between 2000/01 and 2005/06, exports of automobiles as a proportion of total production increased from 3.5% to 8.9%. Exports of auto components increased from US$578 million in 2001/02 to US$2.1 billion in 2005/06. Export growth, particularly of automobiles, will be affected by India's regional trade agreements. In particular, under the agreement with Thailand, India eliminated tariffs on some auto components from September 2006.292

86. Despite deregulation, the automotive industry is still protected by relatively high import duties and non-tariff restrictions. Although the average applied MFN tariff for motor vehicles (ISIC 3843) fell from 44.2% in 2001/02, to 33.6% in 2006/07, it remains considerably higher than the

287 SSIs are industries with total investment of Rs 10 million or less. 288 Ministry of Steel online information. Viewed at: http://steel.nic.in/distribution.htm [29 November 2006]. 289 According to the authorities, the nominal handling charges do not affect the supply price to the SSI units, as the price of raw materials supplied is determined by the producer. 290 Other reasons for the rapid development of the automotive industry are the increased demand resulting from the burgeoning economy and the emerging middle class, and the relatively easier access to consumer finance. 291 IBEF online information. Viewed at: http://www.ibef.org/industry/autocomponents.aspx [12 December 2006]. 292 According to the authorities, apart from the agreement with Thailand, India has signed no other RTAs that include automobiles and auto components. India WT/TPR/S/182 Page 125 average for manufacturing (15.1% in 2006/07). The average applied MFN tariff for motor vehicles (HS 8703) fell slightly from 105% in 2001, to 100% in 2006.293 Given such high tariffs, it is likely that much of the FDI in the industry is for "tariff jumping" purposes. Although there are no licensing requirements for imports of new vehicles, licences need to be obtained for imports of automobiles more than three-years old, once safety and environmental requirements are met. In addition to a tariff of 100%, imports of used vehicles may enter only through Mumbai port.

(iv) Information technology (IT)

87. Information technology (IT) has been one of the fastest growing industries in the economy. The industry comprises software development, IT enabled services (ITES), business process outsourcing (BPO), and hardware manufacture. IT services and software account for more than 60% of the industry's total value added.

88. Deregulation of the industry includes reducing import barriers, relaxing foreign investment restrictions, and encouraging private sector participation. For example, tariffs on specified capital goods and IT hardware were eliminated in 1997. As India is a member of the Information Technology Agreement (ITA), since 1 March 2005, tariffs have been eliminated on all the specified 217 tariff lines. The peak rate for other electronics products is 12.5%. Although the excise duty on computers is 12.5%, exemptions are in place for microprocessors for computers, hard disc drives, floppy disc drives, CD ROM, DVD drives, USB flash memory and combo drives, as well as parts, components, and accessories of mobile handsets including cellular phones. In addition, FDI of up to 100% through the automatic route is permitted in electronics and information technology hardware manufacturing, software development, and ITES sector, except business-to-consumer (B2C) e-commerce.

89. The Government has adopted various measures to facilitate further development of the IT industry. Software technology parks (STPs) and electronic hardware technology parks (EHTPs) are single-window operations providing export services and incubation infrastructure to small and medium-sized enterprises (SMEs), to promote exports of IT products and services. The incentives to the firms operating under the STP and EHTP schemes include: duty-free access to imports of capital goods, raw materials, components and other related inputs; 100% exemption from excise tax on the purchase of domestic goods; and 100% exemption from payment of income tax on export profits up to 2009/10.294 Both schemes are implemented by the Software Technology Parks of India (STPI), a not-for-profit organization under the Department of Information Technology. The authorities indicate that STPI has set up 47 centres all over the country, and there are currently over 5,000 firms exporting under the STP scheme and over 70 firms under the EHTP scheme. The share of exports through STPs to total exports of IT software and services, including ITES and BPO, went up from 81% in 2001/02, to 98% in 2005/06. Special Economic Zones (SEZs) are also being promoted as export manufacturing centres. Tax incentives provided in SEZs include duty drawbacks and tax holidays. To encourage exports, the Export Promotion Capital Goods scheme (EPCG) allows for a tariff of 5% on imports of capital goods, provided certain export performance requirements can be met (Table AIII.4). In addition, the software industry benefits from priority sector lending (section (5)(iii) (a)). 293 According to the authorities, tariffs on automotive products were also reduced significantly except on CBUs of cars and two-wheelers. From 2001/02 to 2006/07, the average applied MFN tariff for motor vehicles (Chapter 87 apart from 8703 and 8711) fell from 40% to 12.5%. The MFN tariff for new cars and two-wheelers is 60%, and the tariff for used vehicles is 100%, both of which are unbound. In addition, major international manufacturers are setting up manufacturing facilities to access the large and growing domestic market. 294 Software Technology Parks of India online information. Viewed at: http://www.stpp.soft.net/ ehtpscheme.html. WT/TPR/S/182 Trade Policy Review Page 126

90. As a consequence of these measures, together with India's comparative advantage in the IT industry (India has a large pool of skilled labour earning relatively low wages), foreign investment has been growing rapidly in the IT sector, accounting for 25.1% of total FDI in 2005/06, up from 17.2% in 2003/04. The Indian software and ITES industry has grown at an annual rate of 28% during the last five years, and the industry's contribution to GDP grew from 1.2% in 1999/00 to 4.8% in 2005/06. The BPO sector grew by 48% in 2004/05, and was estimated to grow by 37% in 2005/06. Currently, India accounts for 65% of the global offshore market for IT services, and 46% of the global share of BPO industries.295 The IT industry is also one of the largest export sectors in the economy, accounting for 25% of India’s total exports (of goods and services) in 2005/06.

91. Further development of the IT industry in India may be constrained by lack of infrastructure. In addition, according to Nasscom studies, only 25% of technology graduates and 10-15% of general graduates are suitable for employment in the IT and BPO industries. Accordingly, reforms are required to improve infrastructure, including IT facilities, as well as power, roads, and airports, and to increase the supply of skilled labour. In this regard, the Indian Government set up a Task Force on Human Resource Development for the IT sector, whose main objective was to prepare a long-term strategy to increase the number of trained IT professionals. In addition, initiatives by the All India Council of Technical Education (AICTE) include industry-institute interactions through collaboration with industry associations, and revision of curriculum to ensure quality and industry relevance. The initiatives taken by the University Grants Commission (UGC) include establishing digital repository of research and training material, information communication and computer education, teaching innovations and career-oriented education programmes. Indian Institutes of Information Technology (IIITs) have also been set up by the Central and state governments together with the private sector to provide qualified IT professionals to the industry.296

(5) SERVICES

(i) Overview

92. The services sector is the key driver of economic growth; between 2002/03 and 2006/07, it contributed 68.6% of the overall average growth in GDP. 297 Greater progress has been made in reforming services than in other sectors of the economy. Trade, hotels, transport, and communication services grew at double digit rates for the three consecutive years (from 2003/04 to 2005/06). As a result of the continuing growth, services share of GDP increased from 50.5% in 2000/01 to 54.1% in 2005/06 (Table I.2). During the same period, exports of services increased by 27.4%, mainly due to increased software services exports; imports of services increased by 24.2% (Table I.1). The services trade surplus increased to US$23.9 billion in 2005/06, from US$15.4 billion in 2004/05 (Table AI.1).

(ii) Commitments under the General Agreement on Trade in Services

93. India's Schedule of Specific Commitments under the GATS has remained unchanged since 2002. Its commitments cover business services, communication services, construction and related engineering services, financial services, health related and social services, tourism and travel related services. MFN exemptions were scheduled for: communication services (audiovisual and telecommunication services); recreational services; and transport services. In the Doha Round, India has submitted both initial and revised offers.298 In its revised offer, India has included commitments 295 NASSCOM (2005). 296 Integrated townships have also been set up with particular focus on ITES and BPO industries, with a view to further improving infrastructure facilities, such as communication, power, roads, and airports. 297 Ministry of Finance (2007b), p.1. 298 WTO documents TN/S/O/IND, 12 January 2004; TN/S/O/IND/Rev.1, 24 August 2005; and TN/S/O/IND/Rev.1/Corr.1, 2 September 2005. India WT/TPR/S/182 Page 127 in a number of new sectors or subsectors299, and improvements to existing commitments in a number of sectors.300 The revised offer also contains improvements to its mode 4 initial offer with respect to the sectoral coverage of contractual service suppliers and independent professionals.

(iii) Financial services

94. Although financial services, particularly banking and insurance, continue to be dominated by state-owned companies, measures have been adopted to encourage competition from the private sector. For example, restrictions on foreign banks have been relaxed. Efforts have also been made to improve corporate governance in financial services. For example, the RBI introduced prudential requirements to align the banking sector with international practices, although implementation was postponed. Also, all stock exchanges must be corporatized, and from January 2006, all listed companies are required to adopt the corporate governance requirements specified in the listing agreement.

(a) Banking

Introduction

95. As at 31 March 2006, there were 89 scheduled commercial banks (excluding regional rural banks (RRBs)), 1,864 urban cooperative banks (UCBs), 8 development finance institutions (DFIs), 13,049 non-banking financial companies (NBFCs), and 17 primary dealers (PDs).301 All these are supervised by the Reserve Bank of India (RBI), through the Board for Financial Supervision. There are also 102 RRBs supervised by the National Bank for Agriculture and Rural Development (NABARD).302

96. India's banking sector continues to be dominated by public sector banks (PSBs), which account for approximately 72% of the sector's total assets.303 As at end March 2006, of the 89 scheduled commercial banks, there were 28 public sector banks, 28 private banks, 29 foreign banks, and 4 local area banks. All commercial banks (domestic and foreign) are still required to allocate a certain percentage of net lending (40% for domestic banks and 32% for foreign banks) to priority sectors (including agriculture and small-scale industries).304 These requirements, however, tend to restrict banks' performance and may lead to problems in recovering assets. According to the authorities, the priority sector lending requirements would not lead to difficulties in asset recovering, 299 New commitments include, inter alia, air transport services; architectural, integrated engineering and urban planning and landscape services; construction and related engineering services; distribution services; educational services; environmental services; life insurance services and services auxiliary to insurance; recreational, cultural and sporting services; tourism services; and veterinary services. 300 Improvements to existing commitments include asset management services and other non-banking financial services; banking services; computer and related services; construction and related engineering services; engineering services; research and development services; basic telecommunications and value-added telecommunications services. 301 RBI (2006b). 302 RBI (2006e). 303 On 31 March 2006, public sector banks accounted for 72.3% of total assets of the scheduled commercial banks, down from 75.3% a year earlier (RBI, 2006f). 304 Priority sectors include agriculture, small-scale industries, and other activities/borrowers such as retail trade, and software industry. Domestic banks are required to allocate 40% of their net bank credit to priority sectors. Of the 40%, 18% is to agriculture, 10% to weaker sections, and the rest to small-scale industries. Within the part to agriculture, the Government announced a farm credit policy in June 2004, which, apart from eased terms and condition on existing and future loans, envisaged a 30% annual increase in credit to the agriculture sector, so that total lending to agriculture would be doubled by 2007. For foreign banks, 32% of net lending must be to priority sectors (at least 10% for small-scale industries, and 12% for exports). WT/TPR/S/182 Trade Policy Review Page 128 as lending is on commercial terms; moreover, the level of non-performing assets (NPAs) in priority sector lending has declined in recent years.

97. Against the backdrop of fast economic growth, bank credit has also been growing fast. For example, bank credit increased by 31% in 2005/06; in contrast, total deposits of the scheduled commercial banks grew by 18%. The rapid credit growth may be a sign of financial deepening. 305 Although the ratio of private sector credit to GDP grew from 33% at end-March 2002 to 48% at end-March 2006, and the NPL ratio fell from 7.2% at end-March 2004 to 5% at end-March 2005, the rapid expansion of credit also raises questions about credit quality, and subsequently affects banks' capital adequacy ratios (CAR).306 The minimum CAR requirement for banks regulated by the RBI is 9%. At end-March 2006, the average CAR for commercial banks was 12.4%, down from 12.8% in March 2005. In addition, the most recent decline in the NPL ratio may be partly due to credit growth (and subsequently new loans to the market). As deterioration of loan quality typically occurs with a 1-2 year lag, the NPL ratio may increase in the future.307 Furthermore, as banks hold more than 30% of their deposits in government securities (much higher than the required 25%), the RBI encouraged banks to build investment fluctuation reserves (IFR) to reduce risks due to over-dependence on government securities.308

98. The difference between deposit and lending rates indicates the level of competition in the sector. A reduction in deposit rates in 2002/03 increased the interest spread, although since 2003/04, the spread has fallen as deposit rates increased (Table IV.2). Lending rates, on the other hand, have been quite stable.

Table IV.2 Deposit rates and lending rates, 2000-07 (Per cent per annum) Year Deposit rates Lending rates 2000/01 8.50-9.00 11.00-12.00 2001/02 7.50-8.50 11.00-12.00 2002/03 4.25-6.00 10.75-11.50 2003/04 4.00-5.25 10.25-11.00 2004/05 5.25-5.50 10.25-10.75 2005/06 6.00-6.50 10.25-10.75 2006/07a 7.00-7.50 11.00-11.50 a. Data for 2006/07 provided by the authorities, as at 22 December 2006. Source: RBI (2006), Handbook of Statistics on Indian Economy, Table 74: Structure of Interest Rates, Columns 3 and 8. Viewed at: http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/72704.pdf [8 December 2006].

305 The authorities state that the rapid credit growth represents increased banking penetration. According to the authorities, credit growth has been broad-based, including priority sectors, retail segment, particularly residential mortgages, and commercial real estate. 306 According to the authorities, the sharp rise in credit growth has been accompanied by a significant improvement in asset quality. The gross NPAs of SCBs declined by Rs.73.1 billion in 2005/06, after a decline of Rs 65.6 billion in 2004/05, and the ratio of gross NPAs to gross advances fell to 3.3% at end-March 2006 from 5.2% at end-March 2005. 307 According to the authorities, despite the rapid expansion of credit, if banks are able to generate resources internally and access capital from the market commensurate with the increase in bank credit, the CAR may not decline. 308 The authorities indicate that, commercial banks' holdings of government and other approved securities declined from 38.2% at end-March 2005 to 31.3% at end-March 2006. As suggested by the Basel Committee on Banking Supervision (BCBS), in January 2002 banks were advised to build investment fluctuation reserves (IFRs) within five years, so that a minimum of 5% of their investments should be in the categories of "available for sale (AFS)" and "held for trading (HFT)". India WT/TPR/S/182 Page 129

Structural reforms

99. Structural reforms have been continued to increase the competitiveness of the banking sector and reduce risks (including risks associated with rapid credit growth). The RBI has been introducing prudential requirements to align the banking sector with international practices. In particular, banks are required to implement the Basel II capital adequacy framework initially by March 2007. However, this requirement was postponed to 31 March 2008 for foreign banks operating in India and Indian banks operating abroad, and encouraged by 31 March 2009 for all other scheduled commercial banks. The RBI has adopted measures to facilitate capacity building of banks by training supervisors, monitoring bank risk management, and improving bank information disclosure. The RBI also plans to extend the pilot project on risk-based supervision, which currently applies to 23 banks.

100. In February 2005, the RBI formulated the Roadmap for Presence of Foreign Banks in India and the Guidelines on Ownership and Governance in Private Banks. The Guidelines cover minimum capital requirements, provisions on ownership structure, procedures for acquisition and transfer of shares, and conditions for senior officials and large shareholders.309 Private-sector banks must maintain minimum capital, initially of Rs 2 billion, to be increased to Rs 3 billion in three years, while net worth must be Rs 3 billion at all times. 310 To ensure diversified ownership, no entity can own or control more than 10% of the paid-up capital of a private sector bank.311 In addition, currently the voting rights of any individual, irrespective of their shareholding, are capped at 10%. It seems a Bill to amend the Banking Regulation Act will abolish this restriction. Currently in Parliament, the amendment also includes provisions for prior approval by the RBI for acquisition of 5% or more of shares or voting rights in a bank.

101. Measures have also been adopted to gradually lift restrictions on foreign banks, while certain limits on foreign competition will remain until 2009. For example, although in 2003/04 the aggregate foreign investment limit was increased from 49% to 74% in domestic private banks identified by the RBI for restructuring, the RBI has not laid down any criteria for identifying weak private-sector banks in need of restructuring, nor has it identified any bank for restructuring. In addition, the 49% limit remains for other private-sector banks until 2009.312 Furthermore, under India's GATS commitments, foreign banks were allowed to access the Indian market only through branches (i.e wholly owned subsidiaries or joint ventures were not allowed).313 The Roadmap issued by the RBI in February 2005 divided foreign participation in the banking sector into two phases. In the first phase, foreign banks are allowed to establish wholly owned subsidiaries (WOS), in addition to branches. The authorities indicate that, at present all 29 foreign banks in India are branches; so far, no foreign bank has set up a wholly owned subsidiary in India. In the second phase, to commence in April 2009, foreign banks may be permitted to enter into mergers and acquisitions with any private bank in India, subject to the overall investment limit of 74%.

102. Banks operating in India (including public-sector banks, privately owned banks, and foreign-invested banks) authorized to deal with foreign exchange, are eligible to set up offshore banking units (OBUs) in special economic zones (SEZs). Each of the eligible banks is allowed to 309 The authorities indicate that ownership and governance of banks specified in the Banking Regulation Act 1949 are supplemented by regulatory prescription issued by the RBI from time to time. 310 Ministry of Finance (2006b), pp. 56-57. 311 Exceptions are allowed for the consolidation or restructuring of weak banks; RBI approval is required. 312 Individual foreign institutional investment (FII) is restricted to 10%, and the aggregate limit for all FIIs is capped at 24%; this limit, however, can be raised to 49% once approved by the board and the shareholders. Investment by non-resident Indians (NRIs) is limited to 5%, and aggregate NRI investment is limited to 10%; the limit can be raised to 24% upon approval by the shareholders. 313 Restrictions were also imposed on the number of banking licences (12 per year both for new entrants and existing banks), and on the value of the banking system's assets in the hands of foreign banks (15% of total assets). WT/TPR/S/182 Trade Policy Review Page 130 establish only one OBU per SEZ, essentially for wholesale banking operations. As a start-up contribution, the parent bank should provide a minimum of US$10 million to its OBU. OBUs are exempt from maintaining the cash reserve ratio (CRR); statutory liquidity ratio (SLR) exemption may be considered for a specified period on request from individual banks.314 OBUs are expected to provide loans at international rates to companies located in SEZs; nonetheless, OBUs in SEZs are not allowed to accept or solicit deposits or investments from Indian residents, or open accounts for them.

103. Other measures to promote the competitiveness of the banking sector include the RBI's efforts to improve corporate governance, in transparency, offsite surveillance, and prompt corrective action. A consultative group of directors of banks and financial institutions was established in November 2001. The group's report submitted to the RBI in April 2002, provided various recommendations on corporate governance issues.315 So far, accounting standards have been brought into line with international practices; however, further efforts are needed to align information disclosure.

104. Regional rural banks (RRBs) and rural cooperative banks (RCBs) have performed poorly in recent years, with high NPL ratios. The performance of RCBs is especially problematic as they are closely involved in extending credit to the rural sector. The authorities indicate that, on the whole, RCB profits were marginal in 2004/05, while the majority were loss making; hence, reforms are required to improve their competitiveness. The Task Force on Revival of Rural Cooperative Credit Institutions submitted a revival package in February 2005; the Government, in consultation with state governments, has approved the revival package. The package includes measures to, inter alia, provide financial assistance, introduce legal and institutional reforms, and improve the quality of management. So far, it has been accepted by 11 states and one union territory316; eight states have already signed MoUs with the Central Government.317 The implementation of the revival package is monitored by the National Implementing and Monitoring Committee (NIMC), established by the Central Government in April 2006.

105. RRB mergers have been encouraged: according to the authorities, the number of RRBs declined to 102 in October 2006, from 196 in March 2005. The ratios of gross and net NPLs of RRBs fell from 8.5% to 7.3% and from 5.1% to 4%, respectively, between 2004/05 and 2005/06. The Reserve Bank also set up a "Task Force on Empowering Boards of Regional Rural Banks for Improving Their Operational Efficiency" in September 2006.

(b) Insurance

Overview

106. The Insurance Regulatory and Development Authority (IRDA), established in 2000, is the insurance sector regulator. Its functions include supervising the development of the sector, granting licences to insurance intermediaries, and specifying the percentage of insurance business to be undertaken in rural areas and the social sector.318

314 For all banks (except OBUs), the CRR is 5% and the SLR is 25%. 315 These recommendations include criteria for appointing bank directors, maintaining independent directors for checks and balances, clarifying the roles of boards, including on issues related to risk exposure and NPL ratio, and tightening risk management. The criteria for appointing bank directors were included in a circular issued by the RBI in June 2004. 316 The 11 states are Andhra Pradesh, Gujarat, Madhya Pradesh, Maharashtra, Orissa, Punjab, Rajasthan, Sikkim, Tamil Nadu, UP, and Uttaranchal; the union territory is Dadra and Nagar Haveli. 317 These are Andhra Pradesh, Gujarat, Madhya Pradesh, Maharashtra, Orissa, Rajasthan, UP, and Uttaranchal. 318 The "social sector" includes the "unorganized" sector, informal sector, economically vulnerable or backward classes, and other categories of persons both in rural and urban areas. India WT/TPR/S/182 Page 131

107. Structural reforms include reducing government interference in the state-owned Life Insurance Corporation (LIC), and General Insurance Corporation (GIC), both of which have dominant positions in the industry.319 Competition from private domestic and foreign enterprises has also been promoted. Currently, there are 16 life insurance companies (15 private and 1 public), 15 general insurance companies (9 private and 6 public), and one reinsurance company. Increased competition has resulted in rapid growth in the industry; between 2001/02 and 2005/06, the average annual growth rate of total life insurance premiums was 27.8%, and the corresponding figure for general insurance was 16.5%. The market share of private insurers increased from 12.6% in 2003/04 to 26.5% in 2005/06 for life insurers, and from 14.5% to 26.3% for general insurers.

108. The insurance industry continues to be dominated by SOEs. The market shares of LIC and GIC, in life and general insurance, although lower than in 2003/04 (87.4% and 85.5%, respectively), were still 73.5% and 73.7%, respectively, in 2005/06. Competition in the industry is constrained by the relatively high entry barriers: the minimum capital required to set up an insurance company is Rs 1 billion, and that for a reinsurance company is Rs 2 billion. Foreign investment is restricted to 26% of total investment; an amendment to increase the restriction to 49% is under consideration by the Government. Restrictions also remain with regard to raising funds from NRIs, where only cash injections from shareholders are permitted.

109. All insurance companies are required to maintain a solvency margin at a ratio of 1.5 (ratio of actual to the required solvency margin).320 In 2004/05, 11 life insurance firms complied with the requirement (including the LIC); in general insurance, two public-sector firms, and one private-sector firm, did not comply.321

Further reform

110. The Tariff Advisory Committee under the IRDA determines premiums for fire, motor vehicle, engineering, and workmen's compensation insurance; the insurance companies set premiums for all other general insurance categories. The authorities consider that the current tariff regime is inconsistent with increasing competition; hence, the Government notified plans to replace the system with a risk-based rating system by 2007. Controls on tariff rates were to be removed on 1 January 2007; and from 31 March 2008, terms and conditions can be negotiated between companies and their clients.

111. In 2005, the penetration rate as a percentage of GDP was low, at 2.53% for life insurance and 0.62% for general insurance. Penetration in rural areas is particularly low; thus, in 2003, the Government set up a working group on micro-insurance to increase the penetration of insurance in rural areas, by, for example, allowing cross-selling of insurance products between life and general insurance companies. Other measures to increase rural insurance coverage include a National Agriculture Insurance Scheme (NAIS), operated by the Agriculture Insurance Company of India. Subsidized by the Government, the NAIS requires insurance companies to provide a certain percentage of their business to rural and socially backward sections of society.322

319 The Government has signed "statements of intent" (SOIs) with companies, containing quantitative and qualitative parameters, with which the performance of these companies would be monitored. 320 IRDA (2005). The solvency margin required for life insurers is Rs 500 million and a sum based on a formula given in the IRDA (Assets, Liabilities and Solvency Margin of Insurers) Regulations 2000. The required solvency margin for general insurers is the highest of: Rs 500 million (Rs 1 billion for reinsurers); 20% of net premium income; or 30% net incurred claims. 321 IRDA (2005). 322 The requirement is based on the IRDA Obligations of Insurers to Rural Social Sector Regulation 2002. The authorities state that the regulation is currently under review. WT/TPR/S/182 Trade Policy Review Page 132

112. Increased penetration is also pursued in health insurance, which covers only 1% of the population. Currently, the health insurance industry is dominated by charitable institutions and government agencies, which provide insurance services free of charge, as well as family-run businesses. To increase the coverage of health insurance, the IRDA launched a Universal Health Insurance Scheme (UHIS), with subsidies provided by the Government. The UHIS was modified in July 2004, and was restricted to families below the poverty line (BPL).323 A health insurance working group was also established to examine the promotion and development of health insurance. Furthermore, a committee established under the IRDA made several recommendations on issues related to, inter alia, minimum capital requirements, risk-based price setting, and restrictions on foreign investment.324

(c) Securities

113. Since the Securities and Exchange Board of India (SEBI) was established in 1992, the securities sector has been developing fast, due largely to a series of structural reform measures. 325 Currently, there are 22 "recognized" stock exchanges in India, all regulated by the SEBI under the Securities Contract (Regulation) Act 1956, and the SEBI Act 1992.326 The two largest are the National Stock Exchange (NSE), and the Bombay/Mumbai Stock Exchange (BSE), both listing essentially the same stocks. As at 31 October 2006, there were 1,125 and 4,790 companies listed in the NSE and the BSE, respectively. 327

114. Foreign investment is allowed, either in the form of foreign institutional investment (FII), or their sub-accounts328. FIIs are permitted to invest in all types of securities, but are generally restricted to a maximum of 24% of a company's paid-up capital; this restriction can be increased to the sectoral limit.329 Furthermore, FII investment is limited to US$2 billion in government securities, US$1.5 billion in corporate securities330, and US$9 billion for external commercial borrowings.331 Accordingly, the number of FIIs registered with SEBI increased from 685 in 2004/05, to 882 in 2005/06, and to 1,030 by mid-January 2007.332

115. The Securities Law (Amendment) Act 2004 was enacted to increase the sector's efficiency, Under the Act, all stock exchanges must be corporatized; hence, the ownership and management will 323 Under the revised UHIS, Rs 200 per year is provided for an individual, Rs 300 for a family of five, and Rs 400 for a family of seven. By end-November 2006, public-sector companies had issued 46,464 policies, covering 63,935 families and 201,090 individuals. 324 The Committee recommendation to reduce the capital requirement for exclusive health insurers to Rs 0.50 billion is under consideration by the Government. 325 For example, the Depositories Act 1996 came into force to increase trading efficiency and improve transparency. To diversify products, and enable market participants to manage risks better, the Securities Contract (Regulation) Act 1956 was amended to allow for derivative trading, which commenced in 2000, and is limited to the NSE and the BSE. 326 It seems that some stock exchanges in India are not recognized by the SEBI. 327 The authorities indicate that, as at October 2006, the value of shares traded on the NSE and BSE was US$343.33 billion and US$56.5 billion, respectively. 328 Sub-accounts are those opened by FIIs operating in India for other foreign companies, foreign individuals, or foreign institutions. 329 The sectoral limit is the aggregate amount of foreign investment (including FDI and FII) permitted in a particular sector, as specified in India's foreign investment policy. 330 These limits were increased from US$1.75 billion and US$500 million, respectively, in April 2006. 331 The RBI announced increases in the limit for FII investment in Government Securities to US$2.6 billion by 31 December 2006, and to US$3.2 billion by 31 March 2007. Further, in July 2006, the RBI allowed banks to increase capital funds to meet the BASEL II requirements by issuing certain financial instruments, such as "innovative perpetual debt instruments" and "debt capital instruments". 332 According to the IBEF, by 17 January 2007, the number of FIIs registered with SEBI increased to 1,030. Viewed at: http://www.ibef.org/economy/foreigninvestors.aspx [22 February 2007]. India WT/TPR/S/182 Page 133 be separated from the trading rights of the members of a recognized stock exchange, and the stock exchanges will change from not-for-profit entities to profit-driven corporations. In addition, 51% of the equity of the corporatized stock exchange should be owned by the public (other than shareholders having trading rights), within 12 months of publication of the corporatization scheme. The authorities state that the corporatization of stock exchanges will ensure greater accountability and improve transparency, apart from addressing the issue of conflict of interest.

116. In addition, from January 2006, all listed companies are required to adopt the corporate governance requirements specified in the listing agreement; all new listings must meet these requirements at the time of listing.333 Furthermore, the Government announced in the Budget 2004/05 the intention to establish a separate trading platform for small and medium-sized enterprises (SMEs). In this regard, the BSE has set up IndoNext, under the present BSE Online Trading (BOLT) System, to help SMEs to raise capital. Tax incentives have also been provided since 2004/05: from 2004 taxes were removed on long-term capital gains, and reduced to 10% on short-term capital gains. In the 2005/06 Budget, a one-time exemption from stamp duty was granted to facilitate the corporatization of stock exchanges. The securities transaction tax (0.15%) remains in place.

(iv) Telecommunications

(a) Introduction

117. Since the previous Review of India, the regulatory framework for telecommunications services has changed little. The telecom industry is administered under the Indian Telegraph Act 1885, the Indian Wireless Telegraphy Act 1933, and the Telecom Regulatory Authority of India Act 1997. The Telecom Regulatory Authority of India (TRAI), established in 1997, continues to be the regulator; its objectives are, inter alia, to regulate telecommunications services, protect the interests of service providers and consumers, and ensure the development of the telecom sector. The Department of Telecommunications (DOT) is responsible for policy formulation and issuing licences for telecom services.334 The DOT also administers the two public-sector companies, the Bharat Sanchar Nigam Limited (BSNL), and the Mahanagar Telephone Nigam Limited (MTNL).335 In addition, dispute settlement is the responsibility of the Telecom Disputes Settlement and Appellate Tribunal (TDSAT).336 Since 2001, TDSAT has dealt with 1,491 cases; as at 22 December 2006, 1,156 had been settled and the remainder were pending. Most disputes handled by the TDSAT involve non-payment/withholding of duties, or different interpretations of regulations.

333 Companies are required to file a quarterly compliance report with the stock exchanges, which in turn have to submit a consolidated report to SEBI within 60 days from the end of each quarter. For the quarter ending June 2006, in the NSE, 1,001 out of 1,085 companies required (around 92%) submitted the report. In the BSE, 2,546 out of 4,127 companies required (around 62%), submitted the report. 334 India is divided into 23 telecom service areas (consisting of 19 circle service areas and four metro service areas). Licences are issued for a specific service area; however, an operator can apply for a licence in more than one service area as long as it fulfils all the eligibility requirements set by the DOT. The eligibility requirements include restrictions on foreign investment, and that the majority of directors on the Board must be resident Indian citizens (DOT online information. Viewed at: http://www.dotindia.com). 335 In October 2000 when the Department of Telecom Services (DTS) and the Department of Telecom Operations (DTO) were corporatized, the business of providing telecom services was transferred to BSNL, a newly established company under the Company's Act 1956. The MTNL is majority government owned (56.25% of total equity), and provides basic landline, mobile, long distance, and trunk call services in Mumbai and Delhi. 336 TRAI was formed under the Telecom Regulatory Authority of India Act 1997, amended in 2000. The amendment provided for the establishment of TDSAT, which deals with disputes between licensors and licensees, service providers, and between service providers and consumers, with regard to any TRAI order or decision. TDSAT has both appellate and original jurisdiction. WT/TPR/S/182 Trade Policy Review Page 134

118. The telecom industry has grown rapidly since 2002: the number of subscribers (for fixed line and cellular phone) increased from 44.97 million in March 2002 to 183.5 million in November 2006; the average annual growth rate was 35%. The driver of growth has changed from fixed line to mobile telephony, which grew from 13 million subscribers in 2003 to 143.1 million in 2006. Private service providers have also increased significantly, accounting for 64.1% of total phones in November 2006, up from 15.1% in March 2002. The private service providers have concentrated on providing mobile phone services, as fixed line telephony services remain dominated by the public sector providers, although their market share fell from 98.6% in 2001/02 to 92.6% in November 2006.

(b) Structural reforms

119. To simplify the licence regime, a Unified Access Service (UAS) licence regime for fixed line and cellular services was introduced in November 2003.337 The UAS regime allows an operator to provide any or all types of services permitted in the licence; thus, operators are no longer required to have separate licences for each type of service provided. Furthermore, in April 2004, licence fees were reduced by 2%; current fees range from 6% to 10% of adjusted gross revenue (AGR) for UASs in the designated service area.

120. Restrictions to foreign investment have been relaxed since 2000, when 100% foreign ownership was allowed for internet service providers (ISPs) without gateways, infrastructure providers providing dark fibre, and electronic and voice mail services; companies providing these services must, nonetheless, divest 26% of equity in favour of the Indian public in five years, if they are listed outside India. From 2001, 74% foreign ownership was permitted for ISP with gateways, radio paging, and end-to-end bandwidth services.338 In November 2005, foreign investment equity restrictions were increased from 49% to 74% in certain areas, such as fixed line, cellular, unified access services, national and international long-distance calls services.339

121. At the sub-sectoral level, unrestricted entry was permitted for national long-distance (NLD) calls in August 2000, with no limit on the number of service providers. Currently, there are two publicly owned and 14 private NLD operators. The NLD licence is issued for 20 years, and can be extended once for ten years. From 2006, entry requirements have been reduced for NLD operators; entry fees were reduced from Rs 1 billion to Rs 25 million, and licence fees from 15% to 6% of AGR. In addition, the mandatory roll-out obligations for NLD licences were removed on 14 December 2005.340

122. Deregulation of international long-distance (ILD) calls has continued since the privatization of the Videsh Sanchar Nigam Limited (VSNL) in February 2002.341 Licences for ILD services are issued initially for 20 years, with an automatic extension for five years. Like the NLD sector, there is

337 The TRAI issued guidelines on the UAS, effective on 11 November 2003. UAS operators are free to provide, within their area of operation, services covering collection, carriage, transmission, and delivery of voice and/or non-voice messages over the licensee's network. DOT online information. Viewed at: http://www.dot.gov.in/basic/basicindex.htm. 338 Foreign investment in these services is also subject to licensing and security requirements notified by the Department of Telecommunications. 339 FDI up to 49% may take place through the automatic route. Proposals need to be approved by the Foreign Investment Promotion Board if foreign investment is over 49% (Department of Industrial Policy and Promotion, 2006b). 340 DOT online information, "ILD and NLD Licences Simplified". Viewed at: http://www.dot.gov.in/ ild/ILDNLD10NOV05.doc. 341 The Government used to be the majority shareholder (53% of equity) of the VSNL until February 2002, when it sold 25% stake to the TATA group. VSNL employees hold 2% of shares, and the Government currently holds a 26% stake. India WT/TPR/S/182 Page 135 no limit on the number of service providers. There are nine private and one public ILD service providers; private operators account for more than 90% of market share. In January 2006, a new ILD licence agreement reduced entry fees from Rs 250 million to Rs 25 million, and licence fees from 15% to 6% of AGR. Furthermore, there are no mandatory roll-out obligations for ILD service licensees except to have at least one switch in India.342

123. The broadband policy announced by the DOT on 14 October 2004 allows service providers to access mutually agreed commercial arrangements, so as to use the available copper-loop for the expansion of broadband services. The authorities expect that there will be 20 million subscribers to broadband services, along with 40 million internet subscribers, by 2010.343

(c) Tariff policies

124. In September 2002, the requirement for cellular service providers to obtain approval from the TRAI on tariff changes was removed. Currently, TRAI regulates tariffs for services where markets are not competitive; according to the authorities, these are rural fixed line telephone calls, national roaming in mobile phone calls, and leased circuits. Tariffs for all other telecom services have been liberalized. Increased competition as a result of deregulation, together with tariff rationalization measures, have resulted in significant tariff reductions: the peak national long distance tariff (above 1,000 km) fell from US$0.67 per minute in 2000 to US$0.02 per minute in 2006, the international long-distance tariff for the United States fell from US$1.36 to US$0.16 per minute, and the mobile phone tariff for local calls fell from US$0.36 to US$0.009-0.04 per minute.

125. In 2006, the public sector operators, BSNL and MTNL launched a "One India" plan; from 1 March 2006, customers pay Rs 1 per minute for domestic long-distance calls (their fixed line and cellular).344 Also from 1 March 2006, the authorities decided to change the access deficit charge (ADC) regime.345 The ADC charges were recovered by: a per minute charge on incoming and outgoing international calls; and a 1.5% revenue share on the adjusted gross revenue (AGR) of all telecom service providers, apart from revenue generated from the rural subscribers. According to the authorities, the ADC is to be replaced by the USO regime (see below).

(d) Reform in rural areas

126. From March 2002 to November 2006, telephone density in India increased from 4.3% to 16.3%. However, density was much higher in urban areas (51.5%) than in rural areas (1.85%). In order to improve telephone access in rural areas, a universal service obligation (USO) commenced in April 2002.346 Supported by a levy of 5% of the AGR of all telecom service providers (except value added service providers like Internet, voice mail, e-mail services), the USO fund is distributed through a bidding process to, inter alia, village public telephones (VPTs) and rural community phones

342 DOT online information, "ILD and NLD Licences Simplified". Viewed at: http://www.dot.gov.in/ild/ILDNLD10NOV05.doc. Under the previous mandatory roll-out obligations, within three years of obtaining a licence, an ILD operator had to set up four international gateways/switches in each part of the country (north, south, east and west), and be able to connect calls to an international destination via regional hubs in, for example, North America, Europe, and Middle East. 343 By the end of September 2006, there were 8 million subscribers, including 2 million broadband subscribers. 344 Ministry of Finance (2006b), p. 185. 345 The ADC had been an amount paid by telecom service providers at the callers end, to telecom service providers at the receivers end on cellular to fixed line calls, and domestic long-distance calls. The ADC was charged to subsidize the cost incurred by service providers in providing services in rural areas and for local facilities. 346 The Universal Service Support Policy came into effect on 1 April 2002. WT/TPR/S/182 Trade Policy Review Page 136

(RCPs). The Government has set a target of one phone per three rural households by 2007 (about 50 million rural connections), and one phone per two rural households by 2010 (about 80 million rural connections). In addition, the Government intends to subsidize the construction of 7,871 infrastructure sites for the provision of mobile phone services in rural and remote areas. So far, 90% of villages in India have VPTs.

(v) Transport

(a) Road and rail transport

Road transport

127. Nearly 65% of freight and 85% of passenger traffic is carried by road in India. National highways (NHs) form the economic backbone of the network; those connecting all the major cities and state capitals constitute around 2% of the total road network347, but carry nearly 40% of the total road traffic. Under the Indian Constitution, national highways are maintained by the Central Government; they form the main long-distance highways in the country. The varied climatic, demographic, and traffic situation prevents uniformity of national highways: they six-laned in some parts, to even "non-metalled" stretches in remote areas; many NHs are being upgraded/refurbished.

128. The policy focusing on improving road connectivity across the country has brought about significant investment in road development. The scale and quality of highways are considered to be critical for sustaining India's growth momentum. Road maintenance and upkeep are underfunded; however, this is being addressed in the Tenth Five Year Plan (2002-2007), which assigned high priority to the seven-phase National Highway Development Programme (NHDP) being implemented by the National Highways Authority of India (NHAI).348 The Government realizes the importance of the road network and its maintenance, which is evidenced by the increase in the budgetary allocation for NHDP. The NHDP envisages investment of Rs 2,200 billion (US$50 billion) on concessions/contracts to be awarded by 2012. NHDP sub-projects under phases III-VII are to be funded on a build, operate, and transfer (BOT) basis, where private investment is to be recovered through tolls. The private component in phase II has also been increased. The Government has already approved projects for upgrading approximately 11,000 km of roads and highways as well as the construction of 1,000 km of new expressways, under phases III, V and VI of the NHDP, at an estimate cost of Rs 800 billion.349 The entire NHDP is scheduled to be completed by December 2015.

129. The National Highways (Amendment) Bill, 1995, provides for private investment in the building and maintenance of these arteries. The Government carries out and bears the cost of all preparatory work including the project feasibility study, land acquisition, environmental clearance, etc.350 Rights of way (ROW) are then made available to concessionaires free of all encumbrances. Projects are assigned on a BOT basis, and real estate development can be made an integral part of these projects to enhance their financial viability. The Government retains ownership of the land for highway construction and roadside facilities. The NHAI may provide capital grants of up to 40% of the cost of the project to enhance viability, on a case to case basis. A 100% income tax exemption is given for any consecutive ten-year period out of 20 years of operation, (including the construction period). Duty-free imports are permitted for specified, modern high capacity equipment for highway 347 Out of a total of about 66,590 km, 32% are single lane/intermediate lane, 56% are two-laned, and the rest are four lanes or more. 348 For more information on road policy matters, see NHAI online information. Viewed at: http://www.nhai.org/index.asp. 349 Ministry of Finance (2006b). 350 In the Budget for 2007/08, the Government has increased allocations for the preparatory fund for road projects. India WT/TPR/S/182 Page 137 construction. The concession may be granted for up to 30 years; the road is then transferred back to the NHAI by the concessionaire.

130. Up to 100% FDI has been permitted in roads since 1997. The NHAI can participate with up to 30% of the total equity in BOT projects.351

131. International competitive bidding is used for projects financed by international lending agencies and for larger projects for which sufficient numbers of domestic consultants/contractors/consortium are not available. Local (national) bidding is used for projects financed by the NHAI. At present there are 46 foreign contractors from 27 countries working on 85 different projects sanctioned by the NHAI. National treatment is provided to foreign investors; however, for registration purposes, proof of residence is needed.

132. The Government plans to replace the Carriers Act 1865 with the Carriage by Road Bill 2005. The new Bill would require all freight booking companies to be registered and have a record of the movement and type of cargo, and to declare taxed and untaxed cargo. Furthermore, under the provisions of the Bill transport/booking companies would be liable for the safe delivery of goods based on their invoice value.

Railway transport

133. India's rail network, one of the largest and busiest in the world, is considered as the lifeline of its transport infrastructure. According to the authorities, during 2005 Indian Railways (IR) transported approximately 6 billion passengers and 667 million tonnes of freight. Most of the freight is loaded and unloaded at IR's dedicated freight sidings. Utilization of different segments of the network is uneven; the trunk routes connecting the four metropolitan cities of Delhi, Kolkata, Chennai, and Mumbai account for 16% of the total network, but are responsible for more than 50% of the traffic.

134. Rail transport is reserved for the state and is a state-owned monopoly. However private participation and foreign investment is permitted in many non-core areas and activities, including hospitality (tourism and catering), construction and management of freight terminals, and freight operations. Furthermore, public-private partnerships (PPPs) are being encouraged in infrastructure construction projects.

135. IR is one of the world's largest employers, with more than 1.4 million employees. It is controlled by the Central Government via the Ministry of Railways. A seven-member Railway Board, reporting to the Union Minister for Railways, is responsible for policy formulation and overall control of the railways. Significant changes to the railway network have taken place, such as strengthening and modernizing through doubling, multiplication, electrification, and new line extensions. However, a sizeable area of the country remains inaccessible by rail, which offer immense opportunities for rail infrastructure and terminal development.352

351 National Highway Authority of India. Viewed at: http://www.nhai.org/page10.htm. 352 Financial Times, 24 April 2006, "Railways: The shift from socialism has 'passed us by'". Viewed at: http://www.ft.com/cms/s/6fd78b5e-d149-11da-a38b-0000779e2340,dwp_uuid=894d591e-d9c4-11da-b7de- 0000779e2340.html [20 November 2006]. WT/TPR/S/182 Trade Policy Review Page 138

136. IR manufactures its own rolling stock and heavy engineering components.353 This is largely for historical reasons, mainly related to import substitution of expensive technology-intensive products. According to the authorities, the import content in the production of rolling stock is under 4%. Several other public entities under the administrative control of the IR ensure railway and railway-related operations.354

137. IR significantly improved its performance during 2004/05-2005/06; freight and passenger traffic grew by 9.4% and 7.4%, respectively – much higher than the historical rate of 4% and 2% over the 13 preceding years. IR earns around 67% of its revenue and most of its surplus from the freight sector, and uses this surplus to cross-subsidize the loss-making passenger segment.355 According to the authorities, in 2003/04, subsidies for passenger services, operation of uneconomic branch lines, essential commodities carried below cost, and new lines opened for traffic were estimated to be Rs 57.38 billion (US$1.25 billion). However, competition from trucks and low-cost airlines, which offer cheaper rates, has led to a decrease in rail tariff in real terms. Other IR problems include its high accident rate (although the authorities indicate that this has improved), overcrowding, and ticketless travel, as well as antiquated communication, safety, and signalling equipment.

138. A 2001 report (the Mohan report) by an expert group appointed by the Ministry of Railways argued for radical structural change. The report stressed that the railways should be run on commercial lines and that subsidies should be transparent; IR should start divesting "non-core" activities, such as catering and manufacturing, and should reduce staff numbers; the Railway Board should shed its conflicting responsibilities as regulator and policymaker, and should start producing intelligible accounts. Other recommendations were that IR should establish standard commercial criteria for its investments and should stop using its freight customers to subsidize passenger fares.356

139. A reform strategy to recapture the predominant position of railways in the transport sector has been built around generating capacity by improving the existing infrastructure and assets. On the supply side, an increase in axle load from 20.3 to 22.9 tonnes as well as reduction in turn-around time from seven to five days have generated the necessary incremental freight-loading capacity. 357 Similarly, increasing popular passenger trains by using the spare stocks of coaches and mopping up the slack has led to increased carrying capacity per train. These operational innovations have led to lower unit costs of operation in the face of rising input costs. On the demand side, a dynamic and

353 The seven state-owned IR manufacturing plants are managed directly by the Ministry of Railways, and their general managers report to the Railway Board. The production units are: Diesel Locomotive Works (Varanasi); Chittaranjan Locomotive Works (Chittaranjan); Diesel-Loco Modernisation Works (Patiala); Integral Coach Factory (Chennai); Rail Coach Factory (Kapurthala); Wheel & Axle Plant (Bangalore); and, Rail Spring Karkhana (Gwalior). Since 2000, some locomotives have been produced in collaboration with General Motors, USA. 354 They include the Central Organisation for Railway Electrification (CORE), the Centre for Railway Information Systems and a number of public-sector undertakings such as: the Indian Railways Catering and Tourism Corporation; Konkan Railway Corporation; Indian Railway Finance Corporation; Mumbai Rail Vikas Corporation; Railtel Corporation of India – Telecommunication Networks; RITES Ltd. – Consulting Division of Indian Railways; IRCON International Ltd. – Construction Division; and Rail Vikas Nigam Limited. 355 Most of IR's freight earnings come from carrying bulk goods such as coal, cement, food grains, and iron ore; an estimated 90% of freight comes from nine items benefiting from freight concessions. Some types of freight, for example, fruit, vegetables, and salt are subsidized. 356 According to the railways' own figures: moving one passenger one kilometre made a loss of Rs 0.15 (US$0.003) in 2006; and shifting a tonne of freight one kilometre made a profit of Rs 0.16. Passenger trains account for nearly two thirds of railway services, but produce just one third of revenue. According to a rough calculation by the World Bank, freight tariffs could be reduced by more than 40% if the social burdens (non- recovery of costs from passenger service) were paid directly by the user or the Government. 357 Speeding up the turn-around times is claimed to have added some 24% to freight revenue. India WT/TPR/S/182 Page 139 market-driven tariff policy linked to seasonality and price elasticity has been put in place. Across-the- board increases in freight rates have been replaced by selective changes in response to market forces; however, the general trend has been a reduction of tariff in real terms. 358 This transformation has delivered efficiency gains, operating margins, and healthy financial surpluses.359 It is envisaged that by 2012, IR is likely to handle about 70% more traffic.

140. To accelerate the expansion of infrastructure for growth, public-private partnerships (PPPs) have been given a larger role in attaining strategic goals, such as increasing private capital in areas where PPPs can improve efficiency and to control costs.360 IR is looking seriously at all options to remove and prevent any bottlenecks to growth. The gap between the increasing need for rolling stock and the combined capacity of state-owned production units is to be bridged by increasing capacity through a new public-private manufacturing unit.

141. Under a PPP scheme introduced in 2006/07, the operator will run freight trains in a non-discriminatory manner, and IR will collect haulage charges. Furthermore, the operator will be free to set tariffs. The introduction of this scheme ended the monopoly enjoyed by the IR-owned Container Corporation of India (CCI) in the movement of containers. Nevertheless, CCI shifted 20 million tonnes last year, accounting for approximately one third of total international container traffic in India, which is growing at an annual rate of approximately 15%.

(b) Maritime transport

Shipping

142. Around 95% of India's trade in goods is seaborne; 13.7% was on Indian-flag vessels in 2004/05, down from 22.4% in 2001/02. Thus, although India's total trade has grown rapidly during the review period, its maritime transportation has grown at a much slower pace.361 This could be attributed to increased competition from foreign-flag vessels and reduced competitiveness of Indian-flag vessels.362

143. India currently has 774 commercial vessels, with a gross tonnage of 8.4 million tonnes; the three largest companies own more than 60% of gross tonnage. 363 The maritime sector contributes around 0.3% to GDP. It is regulated under the Merchant Shipping Act 1958, by the Department of Shipping in the Ministry of Shipping, Road Transport and Highways, which is responsible for the

358 The Ministry of Railways has been rationalizing its tariff structure since 2002/03. The objective of the tariff revision is to reduce existing cross-subsidies and to ensure a more transparent and cost-based rating regime. 359 The generation of revenues by railways was at Rs 136.12 billion (roughly US$3 billion) in 2005/06, up from Rs 23.50 billion (slightly more than US$0.5 billion) in 2000/01. 360 The following projects and/or areas are being implemented: construction of a new dedicated freight corridor; world class railway stations, passenger amenities and commercial utilization of land; operation of container trains and construction of private sidings, inland container depots and rail-side warehouses; the wagon investment scheme; port connectivity works and other infrastructure projects; and parcel services. 361 From 1990/91 to 2005/06, the Indian fleet's total gross tonnage grew at around 1.8% per annum, compared with average trade growth of about 14% (KPMG, 2006). The authorities state that, the number of vessels increased from 560 in 2002 to 739 in 2006, and the growth in tonnage was -9.41% in 2003, 12.4% in 2004, 15.4% in 2005, and 5.64% in 2006. 362 The average age of Indian ships is 16.5 years, compared to the world average of 12.2 years (KPMG, 2006). 363 The market shares of the three largest shipping companies are: around 33% for Shipping Corporation India, 22% for Great Eastern Shipping Co., and 11% for Essar Shipping Co. WT/TPR/S/182 Trade Policy Review Page 140

Government's interests in the sector, such as the major ports and the Shipping Corporation of India. 364 Maritime transportation is administered by the Directorate General of Shipping (DGS), under the Department of Shipping. The DGS is also in charge of the registration and safety-related issues of ships.365

144. Competitiveness in India's maritime transport has been affected by infrastructure bottlenecks, together with certain measures adopted by the Government. For example, carriage of government cargo remains reserved first for the Shipping Corporation of India (SCI), then for vessels chartered by the SCI. Accordingly, the Government issued a Draft Policy for the Maritime Sector in February 2005, aimed at improving cost-effective movement of cargo, promoting transparency in the decision-making process, and increasing the efficiency of operations in infrastructure. The policy is to guide maritime transportation to 2025, and is financed through a cess levied for ten years, at Rs 0.05 per kg of foreign-bound cargo passing through Indian ports, and Rs 0.02 per kg for coastal and low value cargo.366

145. Reform measures have been adopted to increase the competitiveness of maritime transportation services. For example, 100% foreign investment is allowed in the shipping sector, including for coastal shipping (Table AII.3).367 Cabotage is reserved for Indian-flag vessels, but foreign-flag vessels are permitted to carry coastal cargo when no Indian-flag vessel is available. 368 Moreover, the Government introduced a tonnage tax in 2004/05, with a view to encouraging investment. Instead of the corporate tax, companies may choose to pay the tonnage tax, which is levied on the registered tonnage of a company assuming a certain income from that tonnage. 369 The Government considers the introduction of the tonnage tax contributed to the increase in gross tonnage from 6.94 million tonnes on 1 April 2004, to 8.41 million tonnes on 31 December 2006.370

146. In its GATS schedule India has listed an MFN exemption on cargo sharing (apart from with its bilateral partners: Bulgaria, Pakistan, and the UAE), and cargo reservations under the UN Code of Conduct for Liner Conferences.371

364 The Ministry of Shipping is responsible for administering maritime transport (including shipping, ports, and related industries), ship building and ship repair, shipping arrangements for the Government and its entities, formulating policy for privatization and infrastructure arrangements, and shipping-related environmental issues. The Shipping Corporation of India is India's largest shipping company, with more than 80 ships and around one third of the gross tonnage of the sector. The Corporation also manages ships belonging to other Government agencies; currently, 52 ships are managed this way. 365 Under the Merchant Shipping Act 1958 and related rules, for a ship to be registered as an Indian-flag vessel, it must be owned by a citizen, or a company, or body established by or under any Central or State Act, with its principal place of business in India, or a cooperative society registered under any law effective in India. 366 Department of Shipping online information. Viewed at: http://shipping.gov.in/writereaddata/ linkimages/Draft%20Maritime%20Policy%20_Modified_1939436815.pdf [4 December 2006]. 367 However, it seems there has not been any FDI in coastal shipping. 368 DGS online information. Viewed at: http://www.dgshipping.com/dgship/final/tcsrep/ Chapter_2_2.htm. 369 For details of tonnage tax, see Income Tax Department online information. Viewed at: http://www.taxmann.com/TaxmannDit/Displaypage/dpage1.aspx?md=2&typ=cn&yr=2006&chp= 3570 [8 December 2006]. 370 According to the authorities, other reform measures include: simplifying the procedure for purchasing and registering new ships; abolishing the technical clearance requirement for acquiring second-hand vessels (below 25 years of age); and increasing the depreciation rate of vessels from 20% to 25%. 371 In its revised offer, India has offered to remove the MFN exemption on cargo reservations. India WT/TPR/S/182 Page 141

147. There are 12 "major" ports and 187 "non-major" ports in India; the major ports account for around 75% of total cargo handled. Cargo handled between 1999/00 and 2005/06 increased from 271.9 million tonnes to 423.4 million tonnes for major ports, and from 63.4 million tonnes to 151 million tonnes for other ports.

148. Ports in India are regulated under the Indian Ports Act 1908, which provides guidelines for shipping safety, conservation of ports, and other issues such as charges, penalties, and other services. Eleven of the major ports are managed by Port Trusts, under the Major Port Trust Act 1963, while Ennore Port Limited is the first corporatized major port under the Companies Act. Major ports are administered by the Ministry of Shipping, Road Transport and Highways. In 1997, a Tariff Authority of Major Ports (TAMP) was established to regulate tariffs for all major ports372; non-major ports are administered by respective state governments.

149. Problems in the ports subsector include over-regulation, lack of investment in infrastructure, and the consequent customs clearance delays.373 The Government has introduced a number of policy initiatives to deregulate and to encourage public-private participation in ports. Foreign investment restrictions have been relaxed; there is no approval requirement for up to 51% foreign investment in projects providing supporting services to water transport; automatic approval is granted for proposals with up to 100% foreign equity in construction and maintenance of ports and harbours; and the private sector is invited to participate in open tenders on a build-operate-transfer (BOT) basis. In addition, a "landlord" port model, which separates port ownership from port operations, has been adopted for Ennore Port Limited. Furthermore, the National Maritime Development Programme (NMDP), formulated by the Department of Shipping, envisages investment of over US$13.3 billion to increase the capacity of ports and to promote their competitiveness. As a result, port efficiency has been improved, as the average turnaround time fell from 5.1 days in 1999/00, to 3.5 days in 2005/06.374

(c) Air transport

Introduction

150. Air transport, like other transport services, is important for growth and development. First, efficient air transport services are a key intermediate input to trade in both goods and services sectors (such as tourism).375 Second, air transport services can be traded as a service in their own right. A 2005 study highlighted the importance of an efficient, effective, and reliable air transport sector, especially in developing countries, in promoting development and facilitating realization of the gains from trade.376

151. Air transport services have blossomed since the termination of the state monopoly over scheduled air transport services in 1994 and subsequent reforms to the domestic regulatory

372 The TAMP fixes tariffs for major ports, but has no jurisdiction over non-major ports (KPMG, 2006). 373 Problems of the ports subsector also include overstaffing, which tends to reduce labour productivity. Labour employed on vessels, and those working on shore, are subject to different management systems. The Dock Labour Boards are in charge of workers on board, and the port trusts are in charge of workers on shore. The authorities state that, apart from three major ports, the system has been integrated in all major ports. The Government has also initiated measures to rationalize the staffing levels at these ports. 374 However, this is still much longer than the ten-hour average turnaround time in Hong Kong, China, (Ministry of Finance 2007b, p. 194). 375 The contribution of air transport to trade in goods is not limited to the movement of air cargo per se. The transport of natural persons (i.e. business persons) is itself an important input to trade in both goods and other services, as well as to foreign investment in diverse industries. 376 WTO (2005), pp. 213-264. WT/TPR/S/182 Trade Policy Review Page 142 environment. Currently, domestic passengers are served by 13 scheduled domestic operators in addition to 51 companies that provide charter services. New entry and greater flexibility in providing services has benefited consumers through lower fares and substantially expanded services.377

152. Indian air transport services nonetheless face a major challenge in responding to sustained growth in the demand for passenger and cargo transport services (domestic and international) as a result of India's continuing high growth. The demand for air transport services is income-elastic. In an expanding developing country market, it typically increases at as much as twice the rate of GDP. In this context, a failure to provide the level of service demanded at competitive fare-levels can act as a brake on overall growth and development.378

153. Important steps have already been taken to stimulate service expansion and competition in domestic and international air transport services, notably through significant liberalization of entry and pricing in domestic passenger and cargo transport services, and a relatively open environment for international service providers. Nonetheless, further change is needed. First, the scope for continuing (and even more) rapid development of air transport services, as will be needed, is constrained by inadequate infrastructure, notably airports.379 Second, although foreign investment in domestic air services has been substantially liberalized, investment by foreign carriers is prohibited. This represents a barrier to investment flows. Third, a more sweeping approach to international liberalization may be needed.380 Competition in the sector would benefit from the application of effective competition rules, notably with respect to possible mergers.

Implications of projected demand growth in the coming years

154. Air transport in India faces a major challenge in expanding its services to meet the expected increase in demand generated by the country's rapid economic growth over the past decade and projected to continue in the coming years. There are indications that, already, the rate of expansion may not be optimal. In 2005, the International Air Travel Association (IATA) forecast an average rate of growth in international passenger service of 8.4% annually until 2009. When domestic services are factored in, the expected average annual growth rate for the same period is 12%.381 While high by comparison with growth in mature markets, this rate is substantially lower than what would be implied by India's actual and expected annual growth in GDP. 382 This lends credence to the concern that lower than optimal expansion in air transport services could become a brake on overall growth in India.

155. International experience suggests that the main factors preventing an adequate supply-side response to demand growth are typically: regulatory restrictions on entry and/or pricing that deter the entry/expansion of new and existing carriers; and limitations on the availability of infrastructure (especially take-off/landing slots and related services), which have the same effects. Another factor can be the nature of arrangements governing international competition in transnational routes, i.e. whether they represent a genuine commitment to "open skies" or are more in the nature of

377 Ministry of Civil Aviation (2006); and Chattopadhyay (2006). See, for related background, Mukherjee and Sachdeva (2003). 378 See Bisignani (2005). 379 Mukherjee and Sachdeva (2003). See also Bisignani (2005). But note that this challenge is being addressed by various initiatives, discussed below. 380 Bisignani (2005). See also WTO (2005). 381 According to official estimates provided by India, the rate of growth may be even higher. The official projected growth for the period 2006-2015 is 20% growth from 2006-07, 15% growth 2008-10 and thereafter 7.2% till 2015 in domestic sectors. In the international sector, the growth rate has been estimated as 11.6% from 2006-08 and 7.2% thereafter till 2015. 382 Bisignani (2005). India WT/TPR/S/182 Page 143 market-sharing arrangements governed by regulations that limit competition. 383 The application of formal competition rules (i.e. anti-trust legislation) may also be a factor.

Liberalization of the domestic regulatory framework

156. Indications are that India has effectively addressed the first type of potential impediment to competition and growth in service capacity. Since the 1990s, regulatory restrictions on entry and pricing in domestic air transport services (both passenger and cargo services) have been progressively removed. The Directorate-General of Civil Aviation has explicitly adopted a philosophy of facilitating entry by responsible carriers. Regulatory approval of new entrants is now based on criteria such as mechanical fitness, safety, and financial responsibility. This has facilitated significant new entry, including by low-cost carriers providing domestic services.384 Similar liberalization has taken place with respect to pricing: in 2004, the Government abolished the requirement for domestic and international carriers to file their tariffs with the Government.

157. Evidence suggests that these changes have facilitated entry and strengthened competition: in the past three years, seven airlines have entered the Indian aviation market, of which five are low cost carriers.385

158. There are two potentially significant caveats to this positive overall assessment. Although foreign investment by individuals has now been substantially liberalized (up to 49% foreign equity participation is permitted in the domestic sector and up to 100% in the case of non-resident Indians), foreign airlines are not allowed to invest in the domestic sector.386 This constitutes a barrier both to foreign investment and to the technology transfer that it can bring.

159. In addition, domestic air services in India have been subject to an elaborate system of cross-subsidization: carriers providing services in high-value routes linking India's major commercial centres (Category I) have had to provide, as a social obligation, minimum levels of service on routes to the north-eastern regions (Category II) and other low-volume routes (Category III). This has affected the efficiency of services, since aircraft suitable for one set of routes were not necessarily optimal for the others.387 The policy has nonetheless been considered necessary for regional development, in particular the development of backward regions of the country.

Challenges in air transport infrastructure

160. Infrastructure facilities at airport terminals are provided principally by the Airports Authority of India, under the Ministry of Civil Aviation. The availability of take-off and landing slots and other infrastructure is a critical factor in overall air transport capacity and there is wide acknowledgement that this is a critical problem for the future of air transport in India.388

383 WTO (2005). In addition to the availability of infrastructure services, the quality of such services is an important consideration. 384 Ministry of Civil Aviation (2006). 385 Kingfisher (2005) and Paramount Airways (2005); the low cost carriers are: Air Deccan (2003); Spice Jet (2005); Go Air (2005); Indigo (2006); and Indus Airways (2006). 386 For airports in Greenfield areas, FDI up to 100% is allowed. 387 See Mukherjee and Sachdeva (2003), pp. 43-44. 388 In late 2005, the Director-General of IATA made the following observation on the state of India's airports and related infrastructure: "Without massive change, infrastructure will not be able to handle growth. Airports in Delhi, Mumbai, Chennai, Kolkata, and Bangalore are not adequate. Among them, Mumbai is the worst: service levels are not acceptable; delays are common and future growth cannot be accommodated" (Bisignani, 2005). WT/TPR/S/182 Trade Policy Review Page 144

161. The Ministry of Civil Aviation and other relevant authorities are aware of these challenges. 389 Efforts are under way to upgrade airports and related infrastructure, such as baggage handling services. The Government is modernizing airports through joint ventures and private participation: at least 35 airports will be covered in addition to Delhi and Mumbai, and Greenfield airports in Bangalore and Hyderabad. Nonetheless, upgrading India's airports and related infrastructure will be a major challenge: past efforts have apparently faltered due to a lack of resolve and follow-through.390

International liberalization and bilateral air service agreements

162. India has signed bilateral aviation transportation agreements with approximately 100 countries. This reflects an explicit commitment to the principles of "open skies" beginning in the winter season of 1999-00. The agreements have been a major factor in enhancing the frequency and quality of passenger services to and from India (Table AIV.1).

163. In India, as in other countries, a policy of open skies does not imply that the market is completely open and competitive. Landing rights are often awarded to the designated carriers of each partner on a reciprocal basis, with limited or no scope for competition from third-country carriers. Cabotage rights are not provided. Nonetheless, India has adopted a progressively more liberal stance toward the designation of multiple carriers and the granting of new points of call to foreign airlines. 391 A question for the future is whether India (and other countries) might be better served by broader regional or multilateral liberalization in the sector.392

Mergers and competition in the sector

164. There is currently, the possibility of one or more major mergers among the existing air carriers in India. The Government is thought to favour a merger between Air India and Indian Airlines, the two national (state-owned) carriers. It is considered that this may lead to scale economies and other efficiencies in services provision (i.e. more efficient coverage of routes, etc.). However, much evidence suggests that the benefits of mergers in the airline sector (e.g. cost savings and efficiencies) are often less extensive than anticipated.393 Mergers can also result in a reduction of competition and the choices available to consumers. This highlights the need for effective application of national competition rules (i.e. the new Competition Act, 2002) in this sector.

(vi) Professional services

(a) Engineering services394

163. The performance of India's engineering subsector is linked to that of industries, power utilities, and petroleum refining, and has been driven by growth in key end-user industries, as well as

389 Ministry of Civil Aviation (2006), Chapter 7; see also Chattopadhyay (2006). 390 Mukherjee and Sachdeva conclude that "Overall, the government's airport privatization policy [has been] marked by indecisiveness, inconsistency and lack of transparency" (Mukherjee and Sachdeva, 2003, p. 45). 391 Ministry of Civil Aviation (2006); and Chattopadhyay (2006). 392 WTO (2005). 393 WTO (2005), and references cited therein. 394 Engineering services (e.g. planning, design, natural resources, civil, building engineering) are found, inter alia, under UN Common Coding System item 512000 and Central Product Classification (CPC) 8672. This section, which is intended to focus on engineering services only, is largely based on online information by: IBEF (2006a); Engineering Export Promotion Council (2005); and Ministry of Commerce and Industry (2006a). India WT/TPR/S/182 Page 145 a preference by global manufacturing companies as an outsourcing destination.395 It employs over 4 million skilled and semiskilled workers (directly and indirectly), and accounts for over 7% of total (formal) employment; this share is increasing.

165. Indian engineering goods and services are gaining acceptance in overseas markets; engineering exports, 40% of which are generated by SMEs, crossed the US$10 billion mark in 2003/04 and are expected to be worth US$23 billion in 2006/07. Engineering companies have a huge potential for exports and outsourcing; according to the National Association of Software and Service Companies (NASSCOM), engineering services outsourced to India have a market potential of US$7-12 billion.396 Furthermore, the authorities envisage that the rapid development of Engineering Process Outsourcing (EPO) services from India will have a far-reaching impact on the domestic engineering industry.397

166. The industry comprises multinational companies, joint ventures, large domestic players, regional players in the organized sector, and a large number of small players in the unorganized sector. Public-sector enterprises play an important role in heavy engineering with 34 companies.

167. Fiscal and other investment incentives have had a positive impact on the engineering subsector and helped it to become competitive. Engineering services are a significant input in various activities that are open to foreign investment, such as infrastructure projects for power, roads, ports, mining sector (except coal), and construction and development projects. India's GATS commitments for market access in this subsector indicate that commercial presence must be through incorporation, with a foreign equity ceiling of 51%.

168. There is currently no legislation governing engineering but such legislation is being drafted. Regulation is under the ambit of legislation that governs the other industrial sectors. Since 1955, the Engineering Export Promotion Council (EEPC), under the sponsorship of the Department of Commerce, has promoted exports of engineering goods, projects, and services. The EEPC also operates the Indian Engineering Centre, which sends product-specific delegations abroad, participates in specialized trade fairs including engineering exhibitions, and hosts product-specific seminars and conferences. Since 1984, the Project Exports Promotion Council of India (PEPC) has undertaken export promotion initiatives, to support Indian engineering contractors and consultants to set up overseas projects in, inter alia, civil construction projects, and related process and engineering consultancy.

(b) Legal services398

169. India has the world's second largest legal profession, with more than a million lawyers. Indian commercial law practice is estimated at approximately Rs 6-6.5 billion a year

395 Around 36% of total FDI is directed towards the engineering industry. Recently, the authorities permitted 100% FDI in construction and development projects. India has opened up infrastructure projects for power, roads, ports, the mining industry, and pharmaceuticals to private-sector participation and FDI. 396 The five main countries where major services are being outsourced are Canada, India, Ireland, the Philippines, and the Russian Federation. While Canada and Ireland are on the high-cost side, the Philippines, the Russian Federation, and India are the low-cost end. 397 Engineering Export Promotion Council Press release, 10 August 2006. Viewed at: http://www.eepcindia.org/pressrelease/PR-100806.pdf [28 November 2006]. 398 Legal services refer to legal advisory and representation services, legal or juridical procedures, and the drawing up of legal instruments or documentation. They correspond to the United Nations Central Product Classification (CPC) 861 at the three-digit level. This section is largely based on online information by Ministry of Commerce (2006d); and Bar Council of India online information. Viewed at: http://barcouncilofindia.nic.in/disk1/functions.htm [20 November 2006]. WT/TPR/S/182 Trade Policy Review Page 146

(US$135.5-146.8 million). Service providers to the domestic market are individual lawyers, and small or family-based firms.

170. According to a recent report, increasing levels of interest in offshore-outsourcing of legal services to India have been aided by steady growth in demand for legal services worldwide; access to its relatively low wage but high skilled human resources; time-zone advantage, enabling round-the-clock, seven-days-a-week operations; and English language expertise. Law firms are the largest service buyers from the Indian legal offshoring industry, contributing about 49% of the total US$61.6 million revenue; others are corporations and legal publishers. 399 The market potential for legal services outsourceable from the United States alone is estimated at US$3-4 billion.400 Offshore legal services providers include in-house legal departments of large multinationals that have moved some parts of their in-house legal departments to their India-based units, and units of large multinational law firms. Indian lawyers wishing to expand into the international market face competitive challenges from existing global players, principally internationally focussed legal practices operating from the United States, Canada, the United Kingdom, France, Germany, and Spain.

171. The Advocates Act, 1961 and the Bar Council of India Rules, 1975 regulate the legal services sector.401 The sectoral legislation is administered by the Ministry of Law and Justice. The legal profession is regulated by the Bar Council of India (BCI) (the final regulating body), and state bar councils. The bar councils set the standards for legal qualifications, validate foreign degrees, and set standards for professional conduct and etiquette. They also admit advocates on their rolls (thus allowing them to appear in court).

172. FDI is not permitted in the legal services sector. Foreign law firms are not permitted to open offices in India and are prohibited from giving any legal advice that could constitute practicing of Indian law. India has not undertaken any specific GATS commitment in legal services. However, discussion on liberalization has been initiated via a Department of Commerce consultation paper as well as in different bilateral fora such as the India-UK Joint Economic and Trade Committee (JETCO), the Joint India Australia Consultative Committee on Legal Services (JAICCOLS), and the India-U.S. Legal Services Working Group.

173. Legal services can be provided only by natural persons who are citizens of India, and who are on the advocates roll in the state where the service is being provided. The service provider can either be a sole proprietorship or a partnership firm consisting of persons similarly qualified to practice law. To be eligible for enrolment as an advocate, a candidate has to be a citizen of India or a country that allows Indian nationals to practice on a reciprocal basis; hold a degree in law from an institution/university recognized by the BCI; and be at least 21 years of age.

174. Further development of the legal profession is restricted by the current regulatory system, which hinders Indian firms from competing effectively against foreign firms in several ways. For example: law firms may only practice through partnerships and the number of partners may not exceed 20.402 In addition, as the sector is defined as a profession rather than an industry by the Bar Council, there are other restrictions: advertising or listing in a legal directory is not permitted, nor is 399 The Hindu, "Legal services offshoring may earn $600 m revenue by 2010", 1 January 2006. Viewed at: http://www.hinduonnet.com/thehindu/thscrip/print.pl?file=2006010102100500.htm&date= 2006/01/01/&prd=bl& [20 November 2006]. 400 The Hindu, "Playing on a new court", 12 September 2005. Viewed at: http://www.hinduonnet.com/thehindu/thscrip/print.pl?file=2005091200020100.htm&date=2005/09/12/&prd= ew& [20 November 2006]. 401 Advocates Act 1961. Viewed at: http://barcouncilofindia.nic.in/disk1/196125.pdf [27 November 2006]. India WT/TPR/S/182 Page 147 providing multidisciplinary services; and law firms do not have access to finance in the same way as industrial concerns.

175. There is a strong sentiment amongst various members of the profession that permitting even limited access to foreign law firms would lessen opportunities for domestic lawyers; in this respect the BCI has expressed its concerns on various occasions. Given this resistance, the Department of Commerce has published a discussion paper on the state of play in various countries and their expectations from India with regard to liberalization of legal services.403 The stated purpose of this document is "to increase awareness on the main issues, challenges, and, most important, opportunities relevant to the legal services sector".

(c) Healthcare and medical services404

176. According to the authorities, healthcare services in India contribute around 5% of GDP. In addition, the authorities indicate that public spending on health is currently around 1.25% of GDP, up from 0.9% in 1999. The Government plans to increase public spending progressively (by central as well as state governments) on health to 2-3% of GDP by 2012 with a focus on primary healthcare. Public spending is not utilized effectively and access to healthcare services is not uniform due to, inter alia, inefficiencies of the public health system, and poor maintenance of public health infrastructure.

177. Despite India's impressive public health infrastructure, only about 25% of healthcare services are provided by the public health sector, the rest are provided by the private sector. Private-sector participation in health care has been growing significantly over the past few years; it comprises corporations and large hospital groups as well as individuals setting up private practice. Medical services on offer vary from the complex and sophisticated to basic primary healthcare; the latter are provided principally by the Government. Over 70% of medical practitioners are based in urban centres, while approximately 70% of the population live in rural areas. Curative services largely favour the rich over the poor. Only one tenth of the population is covered by any form of health insurance.405 It is estimated that health-related expenditure is one of the causes for rural indebtedness, and out-of-pocket expenditure on hospital care causes almost 25% of hospitalized Indians to fall below the poverty line.

178. The sector has vast potential on account of India's large population, its burgeoning middle class, and medical tourism, which has gained momentum over the past few years. In 2004, 180,000 foreign patients sought treatment in India, a growth rate of 25% over the previous year; the medical tourism industry is worth US$333 million, and is expected to be worth US$2 billion by 2012.406 This trend is underpinned by India's low-cost advantage and the emergence of new high-quality healthcare service providers, as well as long waits for treatment in certain developed

402 The Companies (Amendment) Bill 2003 proposes that the limit on the number of partners be raised to 50. 403 Ministry of Commerce (2006d). 404 Health and medical services are wide-ranging and found, inter alia, under UN Common Coding System item 936000 and Central Product Classification (CPC) 9312 and 9312. This section is largely based on online information by: IBEF (2006b); Healthcare Market Review (2003); and Ministry of Health and Family Welfare (2006). 405 According to some estimates, only 3% of India's population is covered under some form of voluntary health insurance (Watson Wyatt online information. Viewed at: http://www.watsonwyatt.com/Europe/pubs/healthcare/render2.asp?ID=11384 [13 March 2007]. 406 The bulk of patients come from the United States, the United Kingdom, south and west Asia, and Africa. Tanzania and Mauritius have signed agreements with hospitals in India whereby treatment of their citizens is paid for by their respective governments. WT/TPR/S/182 Trade Policy Review Page 148 countries, lack of adequate medical facilities in developing countries, and agreements signed by health insurance companies with hospitals and hotels in India.407 Many hospitals in India have created specialized international patient departments and offer special packages for patients from abroad, including visa facilitation, and excursions and board and lodging for people accompanying the patient.

179. The National Health Policy 2002 encourages foreign patients via the introduction of paid treatment packages. Treatment of foreigners paid in foreign exchange is treated as exports and thus eligible for all tax incentives extended to export earnings. Indian hospitals are seeking accreditation from international organizations so as to be on an equal footing with hospitals abroad. 408 The Government, in collaboration with the Confederation of Indian Industry (CII), is working on accreditation of hospitals; the CII is also formulating minimum quality standards for hospitals. It plans to set up a National Accreditation Board of Hospitals and Healthcare Providers, which is to issue accreditation to public and private hospitals. Furthermore, the Government is planning a Clinical Establishment Act, which would ensure the quality of healthcare provided. Other policy aims include increasing the use of public health facilities from the present 20% to 75% by 2010. This is to be achieved, inter alia, through injecting more funds, allowing and training nurses and paramedics to perform basic public health functions, increasing the prevalence of doctors in rural areas, and encouraging the use of non-traditional medical techniques in rural and remote areas.

180. As indicated earlier, spending on health has not been a priority for successive governments, and they have subsidized the private sector by, inter alia, allowing tax and tariff exemptions for imported drugs and high-tech medical equipment, and selling land at lower-than-market prices as long as a quarter of patients are treated free of charge, a condition that is rarely met. The Government undertook to institutionalize a public-private partnerships (PPP) mechanism in healthcare, from the district level up.409 It is in the process of developing guidelines for PPPs.

181. Allowing 100% ownership for FDI, subject to approval by the Foreign Investment Promotion Board has assisted in opening up the Indian healthcare market to international investors. Indian private-sector operators have been setting up hospitals as joint ventures in collaboration with foreign investors (e.g. from Singapore and Malaysia). So far India has not undertaken any GATS commitments in medical and dental services. Foreign doctors and nurses are not allowed to practice in India except for charitable purposes. Indian doctors trained abroad can practice in India after seeking necessary registration from the regulatory body concerned. There appear to be no plans to lift these restrictions. The authorities believe that, despite a lack of doctors in rural areas, there is no shortage of qualified medical professionals.

182. The Medical Council of India (MCI), an autonomous body under the Ministry of Health and Family Welfare, is entrusted with establishing uniform standards of higher qualifications in medicine and recognition of medical qualifications in India and abroad.410 In 2005, under a Medical Council of India (Amendment) Bill, the Government proposed to change the composition of the MCI and bring in more of its own appointees, reducing elected members to a minority. 411 The Government claimed this would increase the MCI's accountability. It is not clear what progress has been made in this area.

407 These companies are BUPA from the United Kingdom, and Blue Cross Blue Shield from the United States. 408 The accrediting agencies are the Joint Commission International, and the Joint Commission of Accreditation of Hospital Organisations. 409 The health policy of 1983 stressed the need to encourage private initiatives in health services. 410 Medical Council of India online information. Viewed at: http://www.mciindia.org/ index.htm [30 November 2006]. 411 India Together online information. Viewed at: http://www.indiatogether.org/2006/mar/law- imcamend.htm [30 November 2006]. India WT/TPR/S/182 Page 149 WT/TPR/S/182 Trade Policy Review Page 150

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