2 India’s commitments under the AoA

2.1 Market access

Commitments on tariff bindings

Under market access commitments in the AoA, member countries were required to replace all types of non-tariff barriers with tariffs, and to reduce tariff levels under a time-bound programme. In addition to these commitments, this measure also called for maintaining current access opportunities and establishing minimum access tariff quotas. For countries such as India, where all agricultural imports were covered by QRs for Balance of Payment (BOP) reasons, only ceiling bindings had to be submitted. For these ceiling bindings, there was no upper limit, provided the tariffs had not been bound in earlier rounds of negotiations. In addition, there was no obligation to reduce these ceiling bindings during the implementation period.

India had previously bound only some of its agricultural tariffs. These included commodities such as rice, coarse grains, dairy products and edible oils - rice and dairy products in the Geneva Protocol (1947), maize and millet in the Torquay Protocol (1951), sorghum during the Dillon Round (1962) and soybean and rapeseed oil in the Tokyo Round (1979). For other products for which no tariffs had been bound earlier, India submitted very high ceiling bindings of 100, 150 or 300 percent.

When the QRs were being removed (discussed in detail below), apprehensions were expressed about the likely impact of these liberalization measures on the domestic market, particularly in the case of those commodities for which the bound levels of tariffs were zero percent. These included commodities such as rice, coarse grains and dairy products, which were bound in the earlier rounds of negotiations. To raise bound rates for these products, India initiated negotiations with its trading partners under Article XXVIII of GATT and renegotiated new bound tariffs, which are shown in Table 1.

In the case of dairy products, the new bound tariff rates were 60 percent, and in the case of cereals, the new bindings range between 70 and 80 percent. The other products for which the bound rates were raised include apples (from 40 percent to 50 percent); rape, colza or mustard oil (from 45 percent to 75 percent); and preparations for infant use (from 17.5 percent to 50 percent). In exchange, bound rates of tariffs for some items were lowered. These included items such as vegetables (peas), fruits (oranges, lemons, grapefruit, pears and quinces, prunes), malt, chewing gum, fruits juices (orange juice) and industrial fatty alcohols.

Table 1. New bound rates of tariffs for selected agricultural products

Source: Government of India (2000).

Distribution of bound tariffs

As a consequence of these changes, the distribution of final bound tariffs on agricultural products has now undergone minor changes. In agriculture, about 692 tariff lines at the six-digit HS classification level are bound. There are only two items (almonds in shell and shelled) for which the rates of duty are specific in nature; for others, the rates of duties are ad valorem. Of the 690 items for which rates of bound duties are ad valorem, the proportion with bound duties below 25 percent has fallen slightly, while the number of tariff bindings in the range of 25 percent to 50 percent was increased after the re-negotiations (Table 2). However, there was very little change in the average bound rate. The overall distribution of final bound tariffs shows that about 82 percent of tariff lines have bound rates which range between 75 percent and 150 percent. Approximately 4 percent of tariff lines have bound tariffs of 300 percent.

Table 2. Distribution of final bound tariffs on agricultural products

Source: Developed from World Trade Organization and Government of India, Customs Tariff of India.

Distribution of applied tariffs

Contrary to these high bound tariffs, the actual applied rates of tariffs on most agricultural products are quite low (Table 3). The distribution of applied tariffs illustrates that, for a little over 89 percent of tariff lines, the applied rates are either below or equal to 50 percent.^[55] There are only 9.4 percent of the tariff lines for which the applied rates of duties range between 50 and 100 percent. For only 1.3 percent of items, mainly alcoholic beverages, are the applied rates excessively high, more than 150 percent.

Table 3. Distribution of actual applied rates of tariffs on agricultural products (basic customs duty as on March 2002)

Source: Government of India, Customs Tariff of India. New Delhi.

There are only a few agricultural products of significance for which bound rates have become a binding constraint. Among edible oils, soybean oil is one item on which the bound rate of duty is 45 percent. The other items likely to be affected because of the lifting of QRs are alcoholic beverages on which the applied rates of above 150 percent exceed the bound rates on liquor (150 percent).

Changes in quantitative restrictions on imports

As India had maintained QRs for BOP reasons, a few members of the WTO questioned the justification to continue these restrictions with the improvement in the BOP situation in the mid-1990s. Initially, India proposed a time schedule of nine years for the complete elimination of QRs that were maintained owing to BOP reasons. The developing member countries accepted this proposal, but the developed countries were uncomfortable with the time schedule that India had proposed. A group of six developed countries/regions (Australia, Canada, EU, New Zealand, Switzerland and United States) with Japan as a third party initiated dispute settlement proceedings against India. India negotiated a deal with five members with the exception of United States to phase out its QRs over a period of six years beginning in 1997. The United States, however, went ahead and filed a dispute against India. A Dispute Settlement Panel was constituted in November 1997, which ruled against India. India filed an appeal before the Appellate Body, which endorsed the findings of the panel.

As a consequence, an agreement was signed between India and United States under which India agreed to abolish all the remaining QRs that were being maintained because of BOP reasons by April 2001. While these negotiations were taking place with the members of the WTO, India started the process of removing QRs on imports unilaterally. For instance, on the introduction of the eight-to-ten-digit HS in March 1996, imports of 6 161 tariff lines, about 61 percent of the total tariff lines (all imports including agriculture) were already free of QRs. By April 1999, the share of free tariff lines had gone up to around 79 percent. After the agreement between India and the United States, dismantling of the remaining QRs on 2714 items was completed in April 2001. QRs are now maintained on imports of only about 5 percent of tariff lines (538 items) under Articles XX and XXI of GATT on grounds of health, safety and moral conduct.

Implications of the removal of quantitative restrictions on imports

It is premature to speculate on the exact impact of the removal of the QRs on imports of agricultural products, because the last instalment of QRs was removed only in April 2001. The early trends in imports, however, suggest that the surge in imports that was feared after the removal of the QRs has not occurred. This is indicated by the imports of a few selected items which are being treated as sensitive and whose imports are being monitored on a continuous basis (Table 4).

Table 4. Imports of selected agricultural commodities (US$ million)

Source: Government of India (2002).

These somewhat early trends in imports establish that the protection provided to Indian agriculture through QRs was really redundant because, in most years, domestic agricultural prices of the major crops were lower than world prices (Gulati and Sharma, 1994; Gulati and Sharma, 1997). Consequently, the abolition of import controls did not lead to large imports of these commodities. This does not mean that the level of imports will continue to be low in the future as well. At the margin, imports of a few selected commodities, which are either not produced or for which the country does not possess a comparative advantage and for which the bound levels of tariffs are low, will certainly increase.

In addition, during the re-negotiations to raise zero bound rates, India had to grant a few concessions, which led to the establishment of tariff rate quotas for five commodities (Table 5). As the in-quota tariffs for these commodities are low, their imports certainly can go up to the agreed limits of tariff rate quotas.

Table 5. TRQs established for selected agricultural products during the renegotiations of tariffs

Source: Government of India (2000).

To dispel fears linked to the removal of the QRs on imports, applied import duties on some items have been raised in recent years. Import duties on edible oils, cereals, sugar and, more recently, cotton have been revised upwards. Likewise, import duties on plantation crops, which have witnessed a significant decline in their domestic prices owing to a sudden increase in output and fall in international prices, have also been raised.

To safeguard the interests of the domestic liquor industry, the government has proposed countervailing duties that will be imposed on the basis of levies of state excise that are currently prevalent in different states. This means that the effective rates of import duties will be much higher and will be able to provide protection to the domestic liquor industry for some more time.

2.2 Domestic support

Countries use a number of policy instruments such as support prices and input subsidies, which affect incentives that farmers receive in terms of prices and hence influence resource allocation. In the AoA, the impact of price support and related policies is captured through the AMS. India has a product price support system in the form of minimum support prices announced by the government for different commodities, based on the recommendations of the Commission for Agricultural Costs and Prices. Because official estimates of India’s AMS are available for only two time periods - the base period (1986-88) and the first year of the implementation period, which is 1995-1996, we have made our own calculations.^[56] This is done mainly to make figures comparable over time as our own calculations show slightly different results because of a few adjustments that we have made.^[57] Our analysis shows that for 18 major commodities, the product-specific support, as defined under the AoA during the base period, was (-)US$18.1 billion (Table 6). As a percentage of the value of agricultural output (crop sector), the product-specific AMS is (-)26 percent during this period. In 1995-1996, the estimated productspecific AMS turned out to be (-)34.4 percent of the value of agricultural output, and by 2000-2001, the same stood at about (-)28.6 percent of the value of agricultural output during that year.

The non-product-specific support, which includes subsidies on irrigation, fertilizers, electricity, credit and seeds, was about 1.3 percent of the value of agricultural output during the base period after allowing for exemptions which are granted for resource poor farmers in developing countries. In 1995-1996, the non-product-specific support was roughly 1.9 percent of the value of agricultural output, and by 2000-2001, the same worked out to be about 2.3 percent of the value of agricultural output.

Table 6. Domestic support to Indian agriculture

Source: Computed.

The negative product specific support to Indian agriculture basically shows that various controls on domestic as well external trade have kept domestic prices of major crops below world prices. In the case of domestic trade, these controls included restrictions on the movement of agricultural commodities, compulsory procurement levies, licensing and stocking requirements and credit controls. The controls on external trade comprised export prohibitions, quantitative restrictions, minimum export prices and canalization.

The net result of these policies has been that negative product specific support outweighs the positive non-product specific support. These computations compare external reference prices of the base period (1986-87 to 1988-89) with current support prices. For this reason, these estimates do not show the actual subsidy or the tax which is imposed on the agricultural sector currently. To estimate this, one would have to compare current international prices with current domestic prices, and add the impact of total agricultural and economy-wide policies (Krueger, Schiff and Valdes, 1988).

2.3 Export competition

India does not have a system of direct export subsidies, so it made no commitments on export subsidies. There were a few benefits that were available to the exporters of agricultural commodities through income tax exemptions under section 80 - HHC of the Income Tax Act (1961) on profits from export sales. In 2000, the government decided to phase out these benefits over a period of five years starting from 2000-2001, making profits completely taxable by 2004-2005.

As the agreement allows developing member countries to subsidize costs of marketing agricultural products including handling, upgrading and other processing costs and the costs of domestic and international transport and freight, India is making use of these provisions. The schemes facilitate mainly the exports of horticultural items and are operated by the Agricultural and Processed Food Products Export Development Authority (APEDA). Because the exports of many agricultural items have been adversely hit owing to the fall in commodity prices and aggressive subsidization by those members which are allowed to subsidize their exports, the government is thinking of extending these subsidies, which are permissible under the agreement, to other agricultural products as well.

Although there are no commitments for India on export subsidies, there are restrictions on introducing direct export subsidies in the future that are not compatible with the agreement. This has become a binding constraint in the light of the huge surplus stocks of cereals which are currently much above the stipulated norms for buffer stocks. Managing these surpluses, which are due to a combination of several factors such as domestic policy, good monsoons and low commodity prices in international markets, has become an important issue. The significance of this problem can be gauged from the fact that the stocks of cereals have been swelling for the past five years, and currently stand at about 63 million tonnes (May 2002). This level of stocks is about four times the minimum buffer stock norm prescribed for the month of April.

Holding such a high level of stocks is expensive, but the options are limited. Releasing these stocks in the open market will lead to a significant fall in prices, which may benefit consumers in the short run, but will have significant implications for future output growth and food security in the long run. Similarly, exporting at such low prices is also not feasible without resorting to direct subsidies which are not permissible.

Disciplines on exports

As regards export controls, there were two broad groups of commodities which were treated differently. One group consisted of traditional and newer export products such as tea, coffee, spices, tobacco, oil meals, hides and skins, jute, fish and fruit and vegetables. In the 1960s and early 1970s, exports of these commodities were restricted by export taxes and other controls, but during the late 1970s and the 1980s, policies became more supportive of exports, for example, by removing most export taxes. At the time of the 1991 reforms, a number of complex export regulations to which these products were subject were abolished or simplified.

The other group, which is much larger in terms of production, employment and domestic consumption, includes the main cereals, pulses, sugar, oilseeds and cotton. Exports of all these products have been controlled, in most cases directly by state agencies, and in others, through export prohibitions and minimum export prices. These prohibitions were widespread in the past and even now continue to be an important tool to ensure commodities in the domestic market in case of shortages. The examples include onions, cotton and niger seeds.

For most of these commodities, these controls have now become meaningless in the light of excessive supplies and the removal of QRs on imports. The government constituted a panel of members of parliament, which recommended the abolition of such controls. This recent shift in policy has been notified in the new export-import policy, which was announced in April 2002.

2.4 Sanitary and phytosanitary standards

The provisions of the SPS Agreement state that “measures taken to protect human, animal or plant life or health, must be based on scientific principles and shall not be applied in a manner that would constitute a disguised trade restrictions.” Indian products which have been particularly affected by SPS measures include marine products, groundnut and egg powder. Some cases have also been reported for mango pulp and sugar. In the case of marine products, the EU imposed a comprehensive ban on all fish exports from India in 1997 after some consignments were found to be contaminated with Salmonella and Vibrio cholera bacteria. The differences in the application of rules regarding such restrictions are evident from the fact that marine products were being exported to the United States throughout the period when there was a ban imposed by the EU.

In the case of groundnuts, aflatoxin was found in shipments of groundnut to the EU. The EU had issued a regulation in 1994 setting down maximum limits to certain contaminants in foodstuffs. In July 1998, the EU added limits for aflatoxin content and also elaborated further the sampling procedures for testing the lots for aflatoxins through a directive. Regarding egg products, a Japanese importer reported the presence of BHC (beta isomer), a contaminant, far in excess of the permissible level which affected exports of egg products.

These cases brought into focus several issues including lack of awareness and the problem of consistency of domestic SPS standards with the standards of the importing countries. To handle the problems originating from these cases, the government has taken several steps. For marine products, the rules for quality control and inspection of exports under the “Export of Fresh, Frozen and Processed Fish and Fishery Products (Quality control, inspection and monitoring) Order and Rules, 1995” have been modelled on the basis of the directives given by the importing countries. These rules also comply with the HACCP quality control methodology. More units are being encouraged to comply with these standards.

The Government of India also set up a National Codex Committee under the Department of Health, Ministry of Health and Family Welfare. The Export Inspection Council and its agencies under the Ministry of Commerce, such as APEDA, have started framing standards for the products and packaging of meat, poultry, dairy and honey, grading and packing standards for spices, walnuts, vegetables, fruits and flowers. The State Departments of Animal Husbandry & Dairying under the respective State Governments have set standards for meat and meat products, poultry and milk and milk products. The commodity boards such as the Spices Board, Tea Board, Coffee Board, Tobacco Board and Cashew Export Promotion Council are independently involved in framing and implementation of standards for their mandated products.

There is no doubt that, ultimately, better SPS standards should lead to the lessening of health risks and should benefit consumers, but the manner in which these standards are being enforced gives an idea of the many problems that are being faced by the exporters of developing countries. Broadly, there are three types of problems. First, there are institutional problems such as what should be the point of inspection and conformity (internal or the point of entry) and who should provide the scientific basis to settle disputes. Second, costs of compliance are becoming highly prohibitive because SPS standards are being changed periodically, which makes it difficult to attain the prescribed norms since the norms are becoming more stringent and are moving targets. As opposed to these periodic changes in SPS measures, the technical assistance to help exporters to match these requirements is simply lacking. Third, regardless of the fact that the agreement encourages multilateral agreements on mutual recognition of equivalence of specified SPS measures, member countries enter into bilateral mutual equivalence agreements. This practice favours imports from some countries over others, which results in discrimination against other members.

2.5 Trade-related intellectual property rights

Following the URA, member countries were required to provide protection to plant varieties, by patents, by an effective sui generis system or by a combination thereof. The agreement also called for a review of the provisions of this system, four years after the entry into force of the WTO agreement. In contrast to a more strict patent regime, a sui generis system of plant variety protection is a special form of protection which provides both breeder’s exemption as well as farmer’s exemption. Many developing countries used to exclude plant varieties from patent protection, but in the case of developed countries, plant breeders’ rights are often available since most of these countries are members of UPOV. Plant varieties have so far been protected by UPOV, which provides for recognition of rights of plant breeders.^[58]

India did not have its own sui generis system for the protection of plant varieties. In 1990, the policy planning committee of the Indian Council of Agricultural Research set up an Expert Group to formulate a suitable sui generis system. This expert group recommended the formulation of a draft Plant Varieties Act, which was completed in 1993. After consulting numerous experts in the field, the government finalized the Draft Plant Varieties Act 1994. The revised draft went through several further revisions to become, in 1995, the Draft Plant Variety Protection Act, which was later modified to become the Protection of Plant Varieties and Farmers’ Rights Bill in 1998.

This was introduced in Parliament in 1999 and was finally passed by the Parliament in 2001. It will come into force from the date of notification by the government. This legislation, apart from stimulating appropriate returns on investment for plant breeders, also recognizes the role of farmers as cultivators and conservers, as well as the role of traditional rural and tribal communities in preserving biodiversity, by rewarding them through benefit-sharing and protecting their rights. The bill also has a provision for setting up an authority for Protecting Plant Varieties and Farmers’ Rights.

When these changes were being discussed, India faced a number of difficulties arising from the TRIPS Agreement. These problems mainly originated from the lack of preparation on the part of the government to face the new world order under the TRIPS regime. Not only is India well endowed with biodiversity, but there is a great amount of indigenous knowledge that has been accumulated over the ages. Most of this knowledge has not been documented, and there have been a number of claims to patent preparations, for example of garlic, ginger, coriander and neem. Several plants such as neem have been cultivated in the country for their medicinal value, and products of these plants have been used in either primary or semi-processed forms. A European company, W R Grace and Co, obtained a patent for the “anti-fungal properties“ of neem. The company claimed to have developed a “novel” insecticide and fungicide derived from a neem seed extract comprising neem oil. This was challenged at the European Patent Office on the grounds that the anti-fungal properties of neem for which the company had obtained the patent had been known in India for centuries, and neem is, in fact, a source of cheap medicine in India. The European Patent Office agreed to proceed with the cancellation of patents.

Basmati rice, which is the most expensive variety of rice and is an important export item, has also suffered because of claims by a US seed company, Rice-Tec, that they have invented novel rice lines whose grains have qualities of Indian basmati rice. The company had already been selling this rice under the names of “Texmati” and “Kasmati”. After much research and documentation, the Indian government, through APEDA and the Rice Exporter’s Association, successfully filed a “re-examination” application with the US Patent Protection Office, contesting some of the claims in the patent. The company was later forced to withdraw quite a few crucial claims.

As mentioned earlier, these problems largely stemmed from the lack of preparedness on the part of the government to face the new system under the TRIPS regime. The government has now started documenting this traditional knowledge and has also recently enacted “The Geographical Indication of Goods (Registration & Protection) Act”. This has become quite an important issue because neither basmati rice nor Darjeeling tea, the two most famous agricultural items, had been accorded protection under the TRIPS Agreement in the WTO. As for basmati rice, the Indian tea exporters’ association has also noticed several trademark violations with respect to Darjeeling tea.