Wto-gats And Indian Financial Sector By Tarun Das

WTO General Agreement on Services and Implications for India’s Financial Services Sectors by Dr.Tarun Das, Eco.Adv.,MOF

1.1 General Agreement on Trade in Services (GATS)- Main Features First multilateral agreement on services trade No tariff and other generalized protection mechanisms are allowed. Four principal modes for services trade- viz. cross border flows, consumption abroad, commercial presence, presence of natural persons Allows members for choice of services and to limit the degree of provisions, in which they allow market access and make national treatment commitment Dr. Tarun Das

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1.2 General Agreement on Trade in Services (GATS)- Main Features Most Favoured Nation (MFN) exemption with a transition period of 10 years and review after 5 years by 2000 Mutual recognition of qualifications, which should not be discriminatory and substitute for protection No restrictions on money transfer for services rendered Govt can negotiate commitments in Annexes dealing with movement of natural persons, financial, telecom and air transport services.

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2.1

GATS Framework

• All services are covered under GATS. • • • • • •

MFN treatment National treatment Transparency in domestic regulations Objective and reasonable regulations Unrestricted International payments Individual countries commitments are negotiated & put on binding commitments • Progressive liberalization

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2.2 Twelve Board Groups of Services Business services (ii) Communication services (iii) Construction and engineering services (iv) Distribution services (v) Educational services (vi) Environmental services (vii) Financial services (viii) Health Services (ix) Tourism and travel services (x) Recreational, cultural an sporting services (xi) Transport services (xii) Other services not included elsewhere (i)

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2.3 Modes of Services Trade For each group there are four modes of global trade: 1. Mode-1: Cross border trade- similar to traditiopnal goods trade 2. Mode-2: Consumption abroadconsumption by tourists, students, persons going for medical treatment etc. in host countries 3. Mode-3: Commercial presence- Foreign direct Investment, branches of foreign banks, universities, hospitals, activities of joint ventures in host countries. 4. Mode-4: Movement of natural persons for short period- movement of consultants, professionals and business persons. Dr. Tarun Das

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2.4 The Annex on Financial Services

1. Insurance and related activities 1.1 Direct insurance including co-insurance: life and non-life; 1.2 Reinsurance and retrocession; 1.3 Insurance intermediation, such as brokerage and agency; 1.4 Services auxiliary to insurance, such as consultancy, actuarial, risk assessment and claim settlement services. Dr. Tarun Das

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2.5 The Annex on Financial Services

2. Banking and other financial services 2 .1 Acceptance of deposits and other repayable funds from the public; 2 .2 Lending of all types, including consumer credit, mortgage credit, factoring and financing of commercial transactions; 2 .3 All payment and money transaction services, including credit, charge and debit cards, travelers’ cheques and bank drafts; 2 .4 Guarantees and commitments

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2.6 Banking & other financial 2.5 Financial services trading, money market

instruments, derivative products, exchange rate and interest rate instruments, transferable securities, other negotiable instruments and financial assets, including bullion; 2.6 Money brokering; 2.7 Assets management, cash or portfolio management; 2.8 Settlement and clearing services; 2.9 Provision and transfer of financial information; 2.10 Advisory, intermediation and other auxiliary financial services Dr. Tarun Das

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2.7 Principles of the services negotiations 1. Public services are excluded. 2. Liberalization does not mean deregulation or privatization. 3. A voluntary process. 4. The right to regulate is a fundamental premise of the GATS. 5. A democratic process. 6. Universal services. 7. Transparency. Dr. Tarun Das

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3.1 Basic Principles guiding India’s Commitments to multilateral agreements • • • • • • •

Gradual approach Human face Sovereignty constraint Political constraint Agency constraint Preference for decentralization Priority reforms Dr. Tarun Das

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Commitments made in 1995 up to 31-121997 (a) Banking • Only a branch presence • 5 licenses for new branches per year. • Entry to new foreign banks may be denied if market share of assets of foreign banks exceeds 15% of total assets of banking system.

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Commitments made in 1995 up to 31-12(b) Non-Banking1997 Financial Services •

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Items allowed include Merchant banking, Factoring, Financial leasing, Venture capital and financial consultancy. Government allows local incorporation with a maximum equity of 51 per cent by foreign financial services suppliers including banks.

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Commitments made in 1995 up to 31-12(c) Insurance1997

• India made no commitment in life insurance area. In non-life insurance, India committed to continue with the current practice, which was quite restrictive. (d) Reinsurance, Retrocession & Insurance intermediation relating to reinsurance. • A minimum of 10% of the premium of overall was committed to be reinsured abroad. Dr. Tarun Das

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• • • • • • • •

3.5 Limitations of India’s Offer Limitation on the number of new branches. ATM restrictions outside branch premise New branch licenses can be denied when assets of foreign banks exceeds 15% of the total assets of the banking system. National treatment is denied, Investment by foreign banks operating in India in other financial services companies is not allowed to exceed 10% of own funds. Entry by non-banking financial companies is limited to local incorporation and the foreign equity is limited to 51%. India's commitments omit a number of important non-banking financial services. State monopoly on insurance.

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3.6 India’s Enhanced Commitment made in 1995 • A liberalized policy on ATMs • i.e. an ATM will not be treated as a separate branch, • An increase in the number of new bank branches to 8 • Inclusion of Stock Broking in the schedule with maximum foreign equity of 49%.

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3.7 India’s Enhanced Commitment under Fifth Protocol in 1998

• MFN exemptions for banking services were withdrawn subject to reciprocity. • Number of new bank branches for foreign banks increased from 8 to 12 per year. • Liberal policy on ATMs. • In insurance, status quo is maintained. • In the area of reinsurance, the existing binding was aligned to the market. • In NBFCs, national treatment is unbound when market access is unbound. • New commitments in stock broking and financial consultancy services. Dr. Tarun Das

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3.8 Progress of Financial Sector Reforms Status in June 1991 • CRR 25% • SLR 38.5% • Bank Rate 12% • PLR above 21% • Deposit and interest rates are controlled • Capital issues and prices determined by the CCI in MOF

Status in Sept 2006 • CRR 5% • SLR 25% • Bank rate 6% • PLR 10.75% to 11.25% • Deposit and interest rates are liberalized • The office of CCI abolished and SEBI established Dr. Tarun Das

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3.9 Progress of Financial Sector Reforms Status in June 1991 • Indian firms not allowed to raise funds from foreign stock exchanges • Portfolio investment by foreign investors in Indian companies not allowed • Foreigners not allowed to buy G-secs

Status in Sept 2006 • Indian firms allowed to raise foreign funds by GDR, ADR, FCCBs & offshore funds • FIIs, NRIs and OCBs allowed to buy stocks in Indian markets s.t. overall limit of 49% • FIIs/ NRIs/ OCBs allowed to buy G-secs

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3.10 Other Reforms in Financial Sectors

• Foreign investment up to 74% in private banks permitted. Foreign equity in insurance/ banks doing only insurance services remains at 26%. • New banks allowed to open 25% of their branches in rural/semi urban areas. • Foreign banks allowed to establish branches and 100% subsidiaries in India. • FDI allowed up to 100% of equity in NBFCs subject to minimum capital requirements. • Investment by foreigners, NRIs and OBCs are permitted in 22 NBFCs activities. • Government allowed overseas banking units in SEZs; exempted from prudential requirements. Dr. Tarun Das 20

3.11 Reforms in Foreign Exchange

• Rupee is fully convertible on current account. • Rupee is almost fully convertible on capital account for non-residents. • Foreign investment is allowed almost in sectors with caps on foreign equity. • FERA is replaced FEMA. • India is now a member of the Multi­lateral Investment Guarantee Agency. • India has signed treaties for avoidance of double taxation 66 countries, and also FTA with many countries. Dr. Tarun Das 21

4.1 Assessment of the Impact of GATS by the Developing Countries Cuba, Dominican Republic, Haiti, India, Kenya, Pakistan,Peru, Uganda, Venezuela, Zimbabwe made the following observations: • (a) Developing countries did not receive benefits from their commitments • (b) Market power of big corporations wipe out developing countries small suppliers • (c) Comprehensive studies with Technical assistance before making further commitments.

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4.2 Assessment made by WTO Secretariat (i) Direct Economic Impact: Reduction of prices, increased supply, improved quality and reliability in services. Examples-Growth of mobile phones and international credit cards. (ii) Indirect Economic Impact: Significant industrial diversification, improvement in exports, profitability, production, employment of user industries, development of skill and technology, and cyclical resilience of growth. (iii) Social benefits: Distributional equity, general improvement in environment, public health, safety and national security.

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5.1 Average growth rates of world production in 1990s (per cent) I ndia Developing East Asia & Pacific Europe & Cent Asia Lat,America. & Caribbean Mid. East South Asia Sub-Saharan Africa Developed World

Overall GDP 6.0 3.5 7.2

Agriculture I ndustry

Services

3.0 2.2 3.1

6.4 3.7 9.3

8.0 4.1 6.4

-1.5

-2.3

-3.8

1.6

3.3

2.3

3.3

3.4

3.0 5.6 2.5

2.6 3.1 2.8

0.9 6.2 1.6

4.5 7.1 2.6

2.5 2.7

0.0 1.4

0.7 1.5

2.5 2.9

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5.2 Structure of world output (% to GDP) Country 2000 India East Asia Europe Latin Am Mid. East South Asia SS Africa World

Agriculture

Industry

1990

2000

31 20 17 9 15 31 18 7

25 13 10 7 14 25 17 5

1990 28 40 44 36 39 27 34 36

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27 46 35 29 37 26 30 31

Services

2000 39 40 39 55 47 43 48 57

1990 49 41 57 64 48 49 53 64

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5.3 Trend of service charges Year Ocean freight 1920=100 1960 28 1970 29 1980 25 1990 30 2000 27

Airfare per PKM (in 1990 US$) 0.24 0.16 0.10 0.11 0.08

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5.4 Trend of service charges Year

1960 1970 1980 1990 2000

Cost of 3-Min Telephone call New York -London (In 2000 US$) 60.42 41.61 6.32 4.37 0.40 Dr. Tarun Das

Computer Price (Base 2000=100)

186,900 19,998 2,794 728 100 27

6.1 India emerged as one of the fastest grow ing economies in 1990- 2001 10 .0

1 0.0 8.0

7.7

6 .7

7.4

6.0

6 .5 6.3

6.8

4.0

6.2

6.0

5.9

2.0

Ind ia

Do m. Re p

Lib er ia

Ch ile

Mo za mb i qu e Ma l ay sia

Ug an da

My an ma r

Ire lan d

0.0 Ch i na

Average growth rate in 1990s (% )

1 2.0

Cou ntr y

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6.2 Sectoral growth rates in India (% ) Sectors 1980-90 1992-2000 1. Agriculture 2. Industry --Mining --Manufacturing --Utilities --Construction 3. Services --Trade and hotels --Trans & Telecom --Financial services --Social sectors 4. All Sectors

3.1

3.3 7.2

7.7

6.5

4.0 7.4

7.4

8.9 4.6

5.9 5.7 6.5

6.2 5.8 9.4 6.0 5.5

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8.2 8.3

8.5 8.8 7.4 6.4

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6.3 Sectoral shares in India (% in GDP) Sectors 1993-94 2002-03 Agriculture 31.0 22.2 Industry 26.3 27.1 Mining 2.6 2.2 Manufacturing 16.1 17.1 Utilities 2.4 2.5 Construction 5.2 5.3 Services 42.7 50.7 Trade 12.7 15.6 Trans & Telecom 6.5 8.6 Financial services 11.5 12.7 Social 12.0 13.8 • All Sector 100.0 100.0 Dr. Tarun Das

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6.4 Employment growth rate in India (%) Sectors 1983-1993 Agriculture 2.2 Mining 3.7 Manufacturing 2.3 Utilities 5.3 Construction 4.2 Trade 3.8 Trans & Telecom 3.4 Financial 4.6 Social 3.6 All Sector 2.7

1993-2000 0.0 -1.9 2.6 -3.6 5.2 5.7 5.5 5.4 -2.1 1.1

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6.5 Sectoral Employment as % of Total

Sectors 1983 1993-94 1999-2000 Agriculture 63.2 60.4 56.7 Industry 15.6 15.9 17.5 Mining 0.7 0.8 0.7 Manufac. 11.6 11.1 12.1 Utilities 0.3 0.5 0.3 Construction 3.0 3.5 4.4 Services 21.2 23.7 25.8 Trade,hotels 7.6 8.3 11.1 Trans/Telecom 2.9 3.2 4.1 Fin. services 0.9 1.1 1.4 Social /per 9.8 11.1 9.2 All Sectors 100.0 100.0 100.0 Dr. Tarun Das

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6.6 Composition of sectoral GDI (%)

A. Agriculture & allied B. Industry C. Services --Trade, hotels --Transport, comm. --Finacial sectors -- Govt, social D. Total GDI Dr. Tarun Das

1990-91 8.4 53.0 38.5 3.9 11.7 14.4 8.5 100.0

2002-03 8.9 46.9 44.2 0.6 10.8 13.6 19.2 100.0 33

6.7 Sectoral GDI as percentage of GDP

1990-91 1995-96 2002-03 A.Agriculture 2.4 1.7 2.1 B.Industry 12.1 16.1 10.9 C.Services 9.6 9 10.3 6. Trade, hotels 1 0.8 0.1 7. Transport & comm. 2.9 2.8 2.5 8. Finacial sectors 3.6 3.4 3.2 9. Govt., social 2.1 2 4.5 10. Total GCF 23.1 26.8 23.3

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6.8 Average Growth rates in India (per cent) Decade Services Services exports imports 1950s 4.5 1.9 1960s 0.0 1.1 1970s 22.7 17.6 1980s 4.4 8.8 1990s 17.7 17.0

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6.9 Composition of service exports of India (per cent) Period Travel Trans Insurance Govt Misc 1950s 8.6 32.9 7.7 23.4 27.3 1960s 10.5 34.6 5.2 29.7 19.9 1970s 25.5 37.3 4.7 10.8 21.8 1980s 5.9 17.1 2.4 3.1 41.1 1990s 33.0 20.3 2.3 1.8 42.6 Note: Misc includes financial, software and other modern services.

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6.10 Composition of service imports of India (per cent) Period Travel Trans Insurance Govt Misc 1950s 18.3 22.6 6.7 22.6 29.8 1960s 9.5 29.5 2.4 16.9 39.0 1970s 7.5 36.9 1.1 9.4 40.8 1980s 11.8 31.5 0.5 4.2 49.6 1990s 14.6 30.6 0.3 2.7 49.8 Note: Misc includes financial, software and other modern services.

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6.11 Impact on Financial Sectors Item Mar-96 Mar-98 Mar-04 1.No.of foreign banks 33 42 33 2.New private banks 9 9 10 3.Gross NPA ratio 24.8 16.0 7.2 4.Net NPAs ratio 10.7 8.2 3.0 5.Op. profits ratio 1.6 1.8 2.7 6.Net profits ratio 0.2 0.8 1.1 7.CRAR (Capital adequacy ratio) No. of Banks -- Below 9% 31 6 2 -- 9 to 10% 10 16 1 -- Above 10% 43 71 87 8.Number of banks 84 93 90 . Dr. Tarun Das

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7.1 Concluding Observations • India has gained significantly from WTO commitments. • There had been significant growth of services production, employment and exports. • India's focus area in WTO negotiations on GATS should be to provide effective market access to its professionals and skilled labour force in various sectors and to bring about a symmetry in the movement of capital and labour. Dr. Tarun Das

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7.2 Concluding Observations • India has comparative advantages in health care, software, construction and engineering, legal and accountancy, and it would be advisable to negotiate greater market access for its professionals in these sectors. • The availability of market access alone would not be fruitful if the qualifications to provide these services from Indian Institutions are not recognized abroad. • At negotiations, it needs to be ensured that standardization of these qualifications are sorted out to protect our interest. Dr. Tarun Das

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7.3 Concluding Observations • Social obligations in the case of services such as telecom and banking (serving rural areas) and air transport (linking far-flung areas) have to be carefully nurtured. • For effective market access to professionals, India should negotiate for the following: • Economic Needs Test should be eliminated. • Social security contributions required for temporary persons needs to be corrected. • Administration of visa regimes may be made more transparent. • Specific sectoral commitments in line with requirements of developing countries.

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7.4 Concluding Observations • As the first generation reforms take root and second generation reforms unfold, India is emerging as a favourite destination for foreign investment, and a land of immense opportunity for all. • India should maintain its open door policy in goods and services production, investment and trade. • Carried to their logical ends, reforms would make India as one of the most dynamic and fastest growing economies of the world.

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Thank you

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