- [Block 1] Economic Bodies-IMF, BRICS Bank, AIIB
- [Block-2] WTO, treaties affecting Indian interests
- [Block-3] WTO AoA, Peace Clause, Food subsidies, TFA, Bali
- [Block-4] US Policy affecting Indian interests
- [Block-5] ASEAN, SAARC, Pak
- 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.
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.
|After reform||2.75%||8th Largest|
- Bretton woods lack of reforms. as stated above.
- BRICS : 1/5th of GDP; 2/5th population.
- Yet none of its citizen can hope to become IMF chairman given voting quotas.
- But in BRICS bank chairman, President will be Russian and Indian respectively
- Asia needs 800 billion$ every year till 2020. beyond World bank’s aukaat.
- Subprime crisis, Fed Tapering => Dollar volatility affecting import/export of BRICS. So they want to Reduce dollar domination, loans with less conditions.
- Same reason for previous Development banks: Latin Bank of America, Chiang Mai initiative, Bank of South, ADB.
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.
As such 50 dozen UN related bodies, but UNICITRAL important due to Vodafone-Nokia tax disputes.
- 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:
- GS2: agreements affecting Indian interest
- GS3: food processing downstream issues.
- 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.
|Indian challenges ban:
||USA challenges ban:
|Verdict:EU officials will come to inspect then may clear India’s ban.||Verdict:
Same points can be used for Food processing industry- downstream issues/agreements in GS3.
- 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)
9th conference Dec.2013. Bali package= 3 outcomes
- L.D.C: other nations to give duty free quota free access to their products.
- Trade facilitation agreement. But India refuses to sign hence third outcome-
- 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.
Following Picture worth 200 words:
- 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.
- 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:
|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 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.
|more $$ inflow to India via FDI, FII, ECB=>Biz.expansion, GDP, jobs||
- If companies allowed to borrow infinite $$ (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.
- Malaysia, Thailand tried this in late 90s, epicfail even their large forex reserve couldn’t save economy.
- China got largest forex reserve in world, yet they’re not trying so we shouldn’t try either.
- 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.
- These conditions not yet met, hence TIME NOT RIPE for India to adopt full capital account convertibility OR begin capital account liberalization.
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.
- 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
- 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: 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.
- 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
- 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.
- 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.
|Yes because||No because|
|Imports increased but exports did not.||Commerce ministry expert Committee says following:|
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 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.
- 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.