[Revision] GS2: Economy- IR/Diplomacy/Treaties-Agreements affecting India’s ECONOMIC INTERESTS

1. Prologue
2. [Block 1] Economic Bodies-IMF, BRICS Bank, AIIB
   1. Why IMF quota-governance reforms
   2. Why need BRICS, AIIB?
   3. BRICS Bank, Shanghai
   4. AIIB, Beijing
   5. UNICITRAL:
3. [Block-2] WTO, treaties affecting Indian interests
   1. WTO: structure-function
   2. WTO: SPS agreement
4. [Block-3] WTO AoA, Peace Clause, Food subsidies, TFA, Bali
   1. WTO: AoA & De-Minimus
   2. WTO: Bali Summit and Peace clause
   3. WTO: TFA-Trade facilitation agreement
5. [Block-4] US Policy affecting Indian interests
   1. Fed Tapering
   2. Capital account liberalization/Convertibility
   3. What is Capital account liberalization?
   4. Capital acct.liberlization: anti arguments
   5. Special 301 report
   6. US FATCA Act (done)
   7. USA Totalization pact (not done)
   8. OCI-PIO reforms (during Modi visit)
6. [Block-5] ASEAN, SAARC, Pak
   1. India-ASEAN FTA in services and investment
   2. FTAs hurting Indian Economy: yes or no?
   3. SAARC POWER Pact
   4. MFN status in Pak

Prologue

• Revision of selected IR/diplomacy topics affecting India’s Economic interests” in GS2.
• Next revision article: GS3- Planning, budgeting, resource mobilization.
• G20 BEPS agreement=> in the upcoming separate revision note for GS3: money laundering.

[Block 1] Economic Bodies-IMF, BRICS Bank, AIIB

Why IMF quota-governance reforms

Mains-2013 already asked question about world bank vs IMF so chances of another IMF question dim. But IMF-quota reform also serves as fodder for the “why AIIB/BRICS banks setup?” question. Hence useful. Let’s check:

• Post WW2: Bretton Woods conference (’44)=> World bank + IMF + GATT(=>WTO).
• IMF Executive board decides member’s quota on GDP & other parameters.
• Quota decides voting power.
• USA: 18%; China 4% (Even though Chinese GDP running parallel to US); India-Russia 2.5%.
• 2008: Post-Subprime crisis= Western powers’ GDPs weakened.

2010: IMF reforms proposed (bracket shows votes needed to pass it)

• Increase developing countries’ quota. (70%)
• All directors be elected. No permanent chairs to US, Jap etc. (85%)
• But neither passed because US+its allies control ~40% votes.
• 2014: Brisbane G20 communique expressed disappointment & urged Obama to get it done.

Indian interests involved in IMF reform

Present	2.44%	11th largest
After reform	2.75%	8th Largest

Why need BRICS, AIIB?

1. Bretton woods lack of reforms. as stated above.
2. BRICS : 1/5th of GDP; 2/5th population.
3. Yet none of its citizen can hope to become IMF chairman given voting quotas.
4. But in BRICS bank chairman, President will be Russian and Indian respectively
5. Asia needs 800 billion$ every year till 2020. beyond World bank’s aukaat.
6. Subprime crisis, Fed Tapering => Dollar volatility affecting import/export of BRICS. So they want to Reduce dollar domination, loans with less conditions.
7. Same reason for previous Development banks: Latin Bank of America, Chiang Mai initiative, Bank of South, ADB.

BRICS Bank, Shanghai	AIIB, Beijing
6th summit Fortaleza 2014=>ops.to start from 2016	AIIB: Asian infra investment bank 2014: MoU signed. start work from ’15. 2014: China+21 member MoU=>2015 starts.
Five members, equal voting power (not in IMF or AIIB.)	China + 21 members. S.Korea, Aussie did not join.
capital: 10 million x 5 members (hence equal voting)	100 billion capital=>Shareholding based on GDP. Voting power based on shareholding. China:1st, India: 2nd. But, China to dilute shareholding when new members come.
3 function: loan for infra, sus.Development, BoP crisis.	as name suggest: infra. investment projects Structure: Board of governors >> directors >> President (HQ: Beijing)
For BoP crisis: separate contingency reserve: 100 billion. China gave highest.	2013: Jinping ‘s idea: make profit from forex reserve+ Silkroad finance+ U$ domination reduce.

Indian interests: BRICS Bank + AIIB

• 12th FYP: need $1 trillion infra investment. FDI alone can’t fill.
• Competition =cheaper loans.
• World bank can focus on Africa=> export, piracy, extremism angles.

UNICITRAL:

As such 50 dozen UN related bodies, but UNICITRAL important due to Vodafone-Nokia tax disputes.

Structure	Functions
United Nations Commission on International trade law Core legal body 60s. (1966), budget from UNGA Decision by consensus rather than voting. 60 elected from UNGA (General Assembly) for 6 years. Geographical quotas in membership. Indian membership to expire in 2016. Annual sessions @New York and Vienna alternatively.	doesn’t appoint arbitrators or private judges Drafts rules for arbitration. Private Parties can use. Drafts model trade laws & Helps member adopt them. Reduce legal obstacles, facilitate trade and investment

[Block-2] WTO, treaties affecting Indian interests

WTO: structure-function

• Post ww2: Bretton Woods conference (’44): Trinity of World bank (cheap loans 4 Development); IMF (BoP and exchange rates); GATT later became WTO (reduce intl. trade barriers).
• WTO Structure: ministerial conference (160); General council (Day2day, dispute res.) ;  DG 4 years, Geneva
• Agreements: goods related; services related; IPR related; dispute

Settlement. A few Plurilateral agreements not signed by all.

• WTO Want to reduce tariff and non-tariff barriers.
• Absurd quality controls= one type of non-tariff barrier. WTO fixes it via SPS agreement for food/bio items and TBT for non-food items.

SPS agreement important because Indian mango & American murgi (poultry)- from two angles:

1. GS2: agreements affecting Indian interest
2. GS3: food processing downstream issues.

WTO: SPS agreement

• Sanitary and phytosanitary (SPS) measures
• Allows members to ban import of xyz item, to protect its own local plant, animal and human lives.
• But QC (Quality control) must be scientific. FAO-Codex standards can be used. Higher QC need scientific explanation.
• Developing countries be given additional time to comply with SPS.

2014: SPS in news because

Mango	Murgi (Poultry)
2014: EU trade commissioner banned Indian Alphonso, eggplant etc. Reason: fruit fly contamination in previous shipment. (2013)	2007: India bans US poultry import Reason: avian influenza danger to local poultry.
Indian challenges ban: Fruit fly in 2013. But since 2014, only APEDA certified Indian mangoes exported. So more imminent danger. SPS permits longer time to Development countries to comply.	USA challenges ban: Even after ban, India saw multiple outbreaks of bird flu. So our poultry not responsible.
Verdict:EU officials will come to inspect then may clear India’s ban.	Verdict: WTO ruled IN US-favour because India couldn’t justify ban scientifically. Although India can appeal further to get taarikh pe taarikh.
Indian Interest: Mango export earns Rs.1.5 billions, thousands of farmers livelihood attached. EU Mango export: only 7% but negative publicity = others may ban us. Then significant export decline. Pak. will steal our clients. (positive) export ban=more mangoes @local market, cheap MRP	Indian interest: More competition for local poultry cos. and farmers. (positive) More choice /cheaper price for Indian customer.

Same points can be used for Food processing industry- downstream issues/agreements in GS3.

[Block-3] WTO AoA, Peace Clause, Food subsidies, TFA, Bali

WTO: AoA & De-Minimus

• WTO agreement on Agreement on Agriculture (AoA).
• Wants members to reduce (1) import duty (2)export subsidy (3) domestic subsidy (amber box)
• Amber subsides: disrupt trade, promote excessive production e.g. fertilizer, seed, electricity
• WTO amber subsidy quota: developed 5% of 86-87’s production; developing: 10% L.D.C: exempt.
• This is known as de-minimum limits.

India opposed because:

• USA’s 5% in 86 higher than our 10% in 86, because our agro production wasn’t that high.
• Food prices doubled since ’86. No provision for Inflation adjustment.
• We need MSP and PDS for supporting farmers and poors respectively. (total subsidy bill 1.15 lakh crore for budget 2014. Out of that 88k for NFSA)

WTO: Bali Summit and Peace clause

9th conference Dec.2013. Bali package= 3 outcomes

1. L.D.C: other nations to give duty free quota free access to their products.
2. Trade facilitation agreement. But India refuses to sign hence third outcome-
3. Peace clause: WTO won’t hear de-minimum quota disputes against developing nations for 4-yrs. till Dec.2017 (11th Conf.). condition: said subsidy only for food security / public stockholding.

WTO: TFA-Trade facilitation agreement

Following Picture worth 200 words:

TFA-Controversy

• Deadline to sign: 31st/Jul/2014. WEF from 2015
• Modi doesn’t sign. Wants permanent solution to food subsidy quota.
• Nov 2014: Obama Modi settlement. Peace clause extended for infinite time till solution reached. India’s food programs won’t be challenged in WTO disputes. In return Modi to sign TFA.

[Block-4] US Policy affecting Indian interests

Fed Tapering

Meaning:

• QE: US Fed Reserve begins purchase of bonds and subprime toxic assets=>new dollars created=>help US-economy to bounce back.
• Later unemployment rate down, inflation rise=> meaning US economy bounced back. No need to create more dollars.
• Fed Tapering: gradual cutting down in bond purchase program by US Fed.Reserve from Jan 2014. It Reduces creation of new $$ money in system.

Fed tapering: impact

• FIIs exist from India, to re-invest in USA. Rupee weakens. (Rs.65 in Sep2013 just on rumor)
• Rupee weakens=> Crude expensive, inflation, gold investment, CAD, rupee weakens. Vicious cycle.
• When Capital account surplus is less than Current account deficit=BoP crisis.
• To combat BoP crisis, RBI has to sell its Forex reserve $$. In 91’s BoP crisis, India did not have enough forex, had to borrow $$ from IMF by pledging gold.
• So to immunize India agaist Fed tapering’s negative impact, WE must augment forex reserve and $$ inflow.

Steps taken to protect India

• Currency swap with Japan; Dollar swap with OMC.
• BRICS  bank contingency fund ($100 bn.)
• RBI raised interest rates on FCNR deposit (NRIs get more interest)
• Fast track environment clearances to attract FDI (Moily-POSCO)

+ve Angle: Fed Taper=US economy improving=Indian Exports to improve. So, perhaps FT-fears are exaggerated.

Some Hindu columnists even suggest we should begin Capital account liberalization to save India against FT. Hence next topic becomes imp. for exam:

Capital account liberalization/Convertibility

Current Account C.	Capital Account C.
When Rupee is fully convertible into another currency, for CURRENT account transactions. And vice-versa.	When Rupee is fully convertible into another currency, for CAPITAL account transactions. And vice-versa. = capital account convertibility.
Indian rupee fully convertible on current account. eg. Convert as many rupees as you want for buy Ferraris in dollars.	Partial because quota restrictions eg. Individual Airline Company can borrow only $300 million per year via ECB. so even if Kingfisher got $400 million loan from America, it can’t covert it to $400 x 60 =whatever rupees, ELSE ED will arrest them for FEMA violation. Same way, Indian person can’t invest more than $75k abroad. So, even If you have Rs.60 crore=> you can get them converted to $1 crore dollar to park in American bank/share market. ELSE ED will arrest under FEMA violation.

What is Capital account liberalization?

• Indian rupee is only partially convertible on capital account transactions with foreign currency.
• The process of reforming system to make partial=>full convertibility=>that’s called Capital account liberalization.
• Steps: reforming FEMA, ECB, FDI and FII norms.

Do we need full capital account convertibility?

Yes	No
more $$ inflow to India via FDI, FII, ECB=>Biz.expansion, GDP, jobs	IMF study didn’t find such correlation India’s inflation and GDP bottlenecks are from monsoon,  political reasons. And not because of dollar$$ starvation.

Capital acct.liberlization: anti arguments

1. If companies allowed to borrow infinite $$ (and convert them to indian rupees) => bubble=> will burst during volatility, war. Because company’s cash flow in Rupee, but they’ve to pay EMI in $$ => bubble burst like subprime crisis.
2. Malaysia, Thailand tried this in late 90s, epicfail even their large forex reserve couldn’t save economy.
3. China got largest forex reserve in world, yet they’re not trying so we shouldn’t try either.
4. Tarapore committee recommended full capital account convertibility by 2000. but He gave preconditions like reduce Fiscal deficit to 3.5%, NPA to 5%, CRR to 3% etc.
5. These conditions not yet met, hence TIME NOT RIPE for India to adopt full capital account convertibility OR begin capital account liberalization.

Special 301 report

US trade act Section 301=> US trade rep. (USTR) have to prepare list of nations with IPR policy negatively affecting US companies.

Priority foreign countries	only 1 Ukraine. (Stick approach: Trade sanction, WTO approach)
Priority watch list	India, China, Russia etc. (carrot approach: Grant, donation, training, joint-raids.)

India in watch list from 1989. This is our 25th anniversary.

Why does US feels her IPR won’t be protected in India:

• Movie piracy: No anti-camcording law
• Net piracy: No take down procedure
• 1.5lakh + cases pending for Trademark-patent infringement. Taarikh pe Taarikh.
• Novartis’s Glivec case. India did not permit ever greening its patent.
• German Nexvar tablets: too expensive tables. India gave permission to an Indian co. to produce cheaper generic version.

Latest Development: Out of cycle review in Oct.2014 after Modi meet. We may be dropped from the watchlist.

US FATCA Act (done)

• 2010: Foreign Account Tax compliance Act (FATCA). To catch American tax-evaders doing offshore investment.
• 2014: India and USA sign FATCA-Intergovt. agreement. (IGA)
• Indian Financial intermediaries (Banks, mutual funds, insurance cos etc.) will have to keep record of American investors=>(CBDT)=>American IRS.
• If record not kept=>Penalty 30% tax

USA Totalization pact (not done)

• US social security system: 5 lakh NRIs give $1 billion in taxes.
• But NRI without full visa, return in 3-7 years, can’t reclaim those contribution.
• India wants totalization pact to help them. USA did not agree because Indian EPFO format not compatible with theirs.

OCI-PIO reforms (during Modi visit)

• OCI: you/your parents Indian. Lifelong visa free travel; no registration @any office
• PIO: parent/gp/spouse india; 15 years valid; registration at office after 180 days
• Modi to combine them both. PIO no need to visit police.
• Online visa, outsourcing to reduce delay.
• Other: Visa on arrival for American tourists, PBD-2015 to be held in A’bad.

[Block-5] ASEAN, SAARC, Pak

India-ASEAN FTA in services and investment

• 2009-10: FTA in goods signed and implemented.
• 2014, Sep: FTA in services & investment signed. (talks since 2012).

It has 8+1+1 pattern

• 1: with Philippines to safeguard their IT/BPO.
• 1: with Indonesia to safeguard their service sector
• 8: agreements with remaining

Benefits?

• Easy movement of money (investment) and manpower.
• By 2015: trade to reach $100 billion
• Joint review, dispute settlement
• Stepping stone for future RCEP (regional comprehensive) with Assies, Chinese, Koreans, Japs and NZ.

Challenges?

• Philippines yet to ratify. It fears from Indian IT sector competition.
• Mutual recognition of degrees not yet done.  Easy movement of manpower difficult. Modi plans a treaty to fix it.

FTAs hurting Indian Economy: yes or no?

Yes because	No because
Imports increased but exports did not.	Commerce ministry expert Committee says following:
Inverted duty structure: items coming from FTA countries are cheaper than local. Hurting coconut, pepper, groundnut farmers; Hurting desi soap-palm oil mfg.	Already have Sufficient safeguards to prevent dumping. We found no proof that ASEAN nations dumping goods at cheaper price. Desi stuff expensive because inflation, expensive raw material, and NO EASE OF DOING BUSINESS.

Conclusion: To get max. benefit from FTAs, India needs to become part of ASIAN value chain i.e. import raw/intermediate goods=>process=>export elsewhere.

SAARC POWER Pact

• SAARC nations import 30% energy requirements.
• Increase per capital energy consumption=> HDI improves. (more education, mfg)
• India imports hydel-energy from Bhutan; exports to Nepal-Bangladesh.
• Grid connectivity= attach light-wires with each other for better electricity buying and selling among nations. Further energy-integration with BCIM corridor of China.
• SAARC Market for electricity agreement (SAME) signed @Delhi in 2014. Yet to be ratified thou.
• will setup SAARC energy grid including underwater line to Sri Lanka.
• + Power trade agreements + Renewable energy.

MFN status in Pak

• WTO’s GATT and GATS =MFN concept. If trade barrier lowered for most favored country than it has to treat all its trading partners in same manner.
• 97: India gave MFN status to Pak.
• But pak still keeps ~1000 items India can’t export- textile, agro, automobile parts.
• 2012: new talks but stalled. 40% Paki workforce in textile, hence vote bank-lobbying against India.

Next revision article: GS3- Planning, budgeting, resource mobilization.