Impact of Trade Liberalisation under the Information Technology Agreement (ITA)... Asian Electronics Industries: A case study of India

Draft paper not to be quoted
Impact of Trade Liberalisation under the Information Technology Agreement (ITA) on
Asian Electronics Industries: A case study of India
Murali Kallummal*
Email: [email protected]
Mobile no: 09711008068
Smitha Francis†
Email: [email protected]
Mobile no: 09899511608
Paper Code: 14-031
Organized by
Tenth Annual Conference
APEA 2014
Thammasat University
Bangkok, Thailand, July 11-12, 2014
*
†
Dr. Murali Kallummal, Associate Professor, Centre for WTO Studies, Indian Institute of Foreign Trade, B21 Qutab Institutional Area, New Delhi – 110 016. Email: [email protected]
Dr. Smitha Francis, Consultant, Institute for Studies in Industrial Development (ISID), Vasant Kunj
Institutional Area, New Delhi – 110 070. Email: [email protected]
i
Draft paper not to be quoted
Abstract
Information Technology Agreement (ITA), a ‘plurilateral’ agreement designed to achieve lowering/elimination
of all entry barriers on information technology (IT) products that became operational in 1997, has its roots in the
Uruguay Round. The ITA products belong to broadly six product groups: computers; telecom equipment;
semiconductors; semiconductor manufacturing and testing equipment; software and scientific instruments. The
participating countries agreed to bind and eliminate all customs and other duties and charges on these products
by 2000. The developing countries who were the initial signatories of ITA – Costa Rica, Indonesia, India, South
Korea, Malaysia, Chinese Taipei, and Thailand – were granted flexibility in cutting their tariffs on a few
products to zero after the year 2000, but not beyond 2005. But all signatories were mandated to extend the
liberalisation benefits to all the WTO members on MFN basis. Indian tariffs on the 165 ITA tariff lines having
average base tariff of 57.5 per cent were eliminated to zero in two phases between 1997 and 2000, and between
2000 and 2005. However, globally, while the average MFN tariffs have been on the decline over the years, there
has been a corresponding surge in the use of non-tariff measures like Technical Barriers to Trade (TBT).
Providing an overview of the Indian IT sector’s development trajectory, this paper examines the impact of the
liberalisation under ITA on the Indian economy with a view to understanding the reasons behind the dismal
performance of Indian electronics industry in terms of capturing even a minuscule share of the global industry as
compared to other Asian countries. We propose to examine three fundamental questions: firstly, whether trade
liberalization under the Agreement has led to an increase in competition, trade and import dependence in the
Indian electronics industry; secondly, whether the global diffusion of information technology has become a
reality; and thirdly, whether the global market access scenario for ITA products has maintained a balance
between tariff liberalisation and the disciplining of non-tariff measures. These three fundamental questions
would be answered primarily using a case study of the impact of ITA on India. The first of the three questions is
examined by tracing the history of the Indian IT sector and analysing whether there were any major shifts in the
direction of trade (DOT) in these goods. The paper examines ITA trade between 1996 and 2010, highlighting
the changing composition of trade, and profiling ITA trade by product segments. Subsequently, it focuses on the
issue of NTMs. India’s import dependence is examined using firm-level information on raw material use and
domestic sales. The GL-index has been used to understand trends in intra-industry trade at the 6-digit HS level.
This analysis is divided into two phases: the long run analysis was done using the SITC nomenclature, while the
short run analysis was done using the HS nomenclature. The second question of global diffusion is attempted
based on trade data analysis. The last aspect is addressed using the Centre for WTO Studies database on TBT
measures.
The study finds that while two major objectives of trade liberalization under the ITA was to increase trade and
competition for IT products and secondly to achieve global diffusion of IT, both have been only partially
achieved as there has been concentration of trade into a few players after the Agreement came into force. It also
indicates a tacit denial of “market access” by many developed and other emerging developing countries due to
this growing usage of non-tariff measures (NTMs). In the Indian case, there was clear evidence of increased
dependence on imports. There was also a trend of high concentration in the number of suppliers of these
products to India. Another critical aspect which emerges from this study is that there has been a reduction in
local value addition, subsequently leading to an adverse impact on employment generation capacity by this
sector.
Key Words: Information Technology Agreement, Electronics Industry, IT hardware, Plurilateral Negotiations,
Doha negotiations, WTO notifications, Tariff, Non-Tariff Measures, Trade Liberalisation, Technical Barriers to
Trade
JEL Classification: F44, F51, F53, F60, F63
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Draft Paper not to be quoted
Impact of Trade Liberalisation under the Information Technology
Agreement (ITA) on Asian Electronics Industries: A case study of India1
Murali Kallummal and Smitha Francis
1. Introduction
Information Technology Agreement (ITA), a ‘Plurilateral’ agreement that emerged from the
Uruguay Round, came into existence after a proposal for the expansion of world trade in
information technology (IT) products was adopted during the 1996 Singapore Ministerial
Conference of the World Trade organisation (WTO). Considering the key role of information
technology (IT) as an agent of economic and social transformation and recognizing the need
for promoting IT diffusion, the ITA aimed at expanding world trade in information
technology products. It was designed to achieve lowering/elimination of all taxes and tariffs
on identified IT products by signatories. ITA-1 relates to the area of managing technology
and spans a wide variety of areas that include computer software, information systems,
computer hardware, programming languages, but are not limited to things such as processes,
and data constructs. In short, anything that renders data, information or perceived knowledge
in any visual format whatsoever, via any multimedia distribution mechanism, is considered
part of the IT domain. Thus the mandate of ITA-1 was to establish tariff-free trade in six
product groups namely: computers, telecom equipment, semiconductors, semiconductor
manufacturing and testing equipment, software and scientific instruments.
The participants are required to abide by the Most Favoured Nation (MFN) principle, unlike
the Government Procurement Agreement (GPA) under the WTO. Thus the benefits of zero
tariffs are extended to the non-ITA members of the WTO. While the ITA is open to nonWTO members, it is not mandatory on their part to be a signatory of the Plurilateral
agreement. The declaration was adopted by 14 parties including the QUAD Countries (USA,
Canada, Japan and EU), Singapore and Hong Kong, which represented about 80% of the
world trade in these products in 1996.
Two major objectives of the ITA was to increase trade and competition through trade
liberalization for IT products, and secondly, to achieve global diffusion of information
technology. A critical mass of 90 per cent trade coverage by signatories was identified as the
benchmark for its implementation. Thus the agreement became effective once the trade
1
The first author would like to express his sincere gratitude to Prof. Abhijit Das (Head, Centre for WTO
Studies, New Delhi) for his inspiration and comments on an earlier version of this study. The responsibility
for the contents of this paper rests solely with the authors. The mail ID of the corresponding author is
[email protected]
1
Draft Paper not to be quoted
coverage of countries joining the agreement represented 90% of the trade in information
technology products in 1997.
The ITA-1 came into effect in 1997 with only 29 WTO members. But its membership
increased to 72 signatories by 2008, by which time the trade coverage was approximately 95
per cent of global trade in IT products. Colombia became the most recent signatory of the
ITA as the 74th member. Global trade coverage of ITA members – after including Columbia –
was almost 97 per cent.
The participating countries agreed to bind and eliminate all customs and other duties and
charges on information technology (IT) products by the year 2000. Tariff elimination was
carried out in four stages with equal reductions: the first stage was initiated in July 1997; the
second began on 1 January, 1998; the third from 1 January, 1999 and the fourth stage was on
1 January, 2000. However, for developing countries who were the initial signatories of ITA1, tariff elimination schedule was agreed differently under the Special and Differential
Treatment (S&DT) principles: Costa Rica, Indonesia, India, South Korea, Malaysia, Chinese
Taipei, and Thailand were granted flexibility in cutting their tariffs on a few products to zero
after the year 2000, but not beyond 2005. India on its part had eliminated tariffs on 38 per
cent of the ITA products (96 product lines) by 2000 and eliminated the rest (196 product
lines) by 2005. So while tariff reduction began in 1997, the full impact of the agreement on
India was felt by 2005 when tariffs on 62 per cent of the total products were reduced to zero.
However, the important issue of non-tariff measures (NTMs) was left to be investigated by
the parties as part of the ongoing ITA process.
The NTB work programme2 in the Doha Round was preceded by some work that the WTO
members had done on this issue with regard to the IT sector. Steps have been taken towards
the identification and subsequent development of a harmonized structure on NTBs in this
sector under the WTO work programme. The NTB work programme, which began at the end
of 2000 had three phases. In November 2000, a “Non-Tariff Measures Work Programme”
was launched by the Committee of Participants on the Expansion of Trade in Information
Technology Products (ITA Committee) to identify NTMs and assess their impact on IT trade.
In the 11 submissions to the ITA Committee, the participating countries identified wideranging forms of NTMs. The majority of the identified NTMs fell within the standards and
conformity assessment3 areas, while customs procedures and import licensing were some of
the more prominent among the other forms of NTBs. Following a Canadian proposal, the
Committee took up a pilot project for specific standards-related NTBs related to conformity
assessment procedures for electromagnetic compatibility/electromagnetic interference
2
The terms Non-Tariff Barriers (NTBs) and Non-Tariff Measures (NTMs) mean the same and are used
interchangeably in this paper.
3
Conformity assessment means compliance with a very high standard as indicated by the national compliance
authority under its Electronic Emissions Guidelines. This can be a very tricky issue for firms operating in the
electronics industry.
2
Draft Paper not to be quoted
(EMC/EMI). The EMC/EMI Pilot Project resulted in a set of “guidelines” for EMC/EMI
conformity assessment procedures, prepared by the ITA Committee. In 2003,4 the ITA
committee suggested the following steps: identifying next steps, examining ways to
harmonize the conformity assessment for ITA products on EMC/EMI, and examining other
means to facilitate the market access of ITA products. The successful completion of
EMC/EMI Pilot Project by 2005 raised substantial hope in terms of market access gains in
ITA products, as the pilot project was meant to ultimately contribute to how countries can
choose to facilitate market access of ITA-1 products.
But of the total 74 signatories, only a few have been active participants in this plurilateral
agreement. This is evident from the “Report on Implementation and Monitoring of the WTO
Agreements” of 2010, wherein under ITA-1, only 24 of the 46 participants in the EMC/EMI
project had provided details of their conformity assessment procedures. Other members were
also requested to follow similar conformity assessment procedures. Further, some concerns
of developing countries may not have been addressed in the process of negotiations from the
very beginning. Even in terms of the product choices for the ITA-1 list, the concerns of
developing countries like India were not considered, as it was primarily based on the original
membership of ITA-1 countries. Thus, as visionary as it was, the initial ITA agreement still
did not cover a number of core ICT products such as DRAMs (dynamic random access
memory chips) or dozens of every-day consumer electronic products, including many types
of audio-visual equipment such as audio speakers, DVD players, and video cameras.5
Keeping in view the importance of information technology in international trade,
fourteenparticipants submitted proposals on expansion of trade in IT products (referred to as
ITA-1I). These proposals were discussed extensively in various meetings of the WTO during
April-June 1998 and subsequently. The updated list of products proposed to be covered under
ITA II includes a few consumer electronic items and certain security related products, which
is one of the main reasons why it has not been possible for the members of ITA to come to a
consensus yet.6
The IT hardware and telecommunication sectors are strategic for any country for the simple
reason that it provides further business opportunities for a set of core services to execute
business strategy like business process automation, providing information, connecting with
4
In 2003, after identifying and examining non-tariff measures (NTMs) for ITA products the ITA Committee
suggested a forum for regulators responsible for electromagnetic compatibility/electromagnetic interference
(EMC/EMI) measures and trade policy representatives to discuss the survey results and consider what could
be the next steps in this exercise.
5 Ezell Stephen , 2012, “Boosting Exports, Jobs, and Economic Growth by Expanding the ITA”, Information
Technology
Industry
Foundation,
March
15,
http://www.itic.org/index.php?src=blog&srctype=blog_detail_techelect&refno=180&category=TechElect&
print=y
6 Department of Commerce, GoI, “Brief note on Status Regarding Information Technology Agreement (ITAII)” Department of Commerce, New Delhi.
3
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customers, and productivity tools.7 The other reason could be that in the past, governments
invested in the development of this sector in line with domestic
industrialisation/indigenisation processes - realising the importance of the electronics sector
and its relationship with the other sectors of the economy.
As mentioned already, the two major objectives of the ITA was to increase trade and
competition through trade liberalization of IT products, and secondly, to achieve the global
diffusion of information technology. Against this backdrop, we propose to examine three
fundamental questions in this paper: firstly, whether trade liberalization under ITA-1 has led
to an increase in competition in the IT hardware and telecommunication sectors, or to an
increase in trade and import dependence in these sectors ; secondly, whether the global
diffusion of information technology has become a reality; and thirdly, whether there has been
a balance between tariff liberalisation and the disciplining of non-tariff measures in the
global market access scenario for ITA products.
These three fundamental questions would be answered primarily using a case study of the
impact of ITA-1 on India. This paper provides an overview of the Indian IT sector and
examines the impact of ITA-1 on the Indian economy from the specific point of view of
liberalisation of trade in IT products under the ITA. The first of the three questions is rather
simple and straight forward, and is examined by tracing the history of the Indian IT sector
and analysing whether there were any major shifts in the direction of trade (DOT) in these
goods. The paper examines DOT of ITA trade between 1996 and 2010, highlighting the
changing composition of trade by leading exporting and importing nations and profiling ITA
trade by product segments. Thereafter, the paper focuses on the issue of NTMs. India’s
import dependence is examined using firm-level information on raw material use and
domestic sales. We have also used the GL-index to understand trends in intra-industry trade.
This is done using trade data at the 6 digit HS level, dividing it into a two-phase analysis: the
long run analysis was done using the SITC nomenclature, while the short run analysis was
done using the HS nomenclature. The second question of global diffusion is attempted by
providing some clues based on trade data analysis. The last question on actual market access
is examined based on the Centre for WTO Studies database on TBT and SPS measures
(NTMs). We have extensively used various databases like WITS COMTRADE (both HS and
SITC nomenclatures), PROWESS database of the Centre for Monitoring Indian Economy
(CMIE) and reports by the Planning Commission of India and various ministries of the
Government of India.
The paper is organized into six sections. Section two traces the brief history of the policies
related to India’s hardware and software sectors. Section three presents the schedule of tariff
liberalisation on India’s ITA-1 products and also gives evidence on the growing importance
of non-tariff measures (NTMs) in ITA-1 products at HS 6 digit tariff lines. Section four
presents the trends in Indian ITA trade and highlights the dismal performance of Indian IT
7 The same was also expressed in the India’s Recent “National Manufacturing Policy 2011” press note.
4
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hardware and telecommunication sectors in terms of capturing even a minuscule share of the
global electronics production and trade as compared to her neighbouring Asian countries like
the People’s Republic of China, Taiwan and South Korea etc. Section five focuses on the
growing import dependence of the Indian IT hardware sector at the firm level. Finally,
section six provides an overarching conclusion on the impact of ITA-1 liberalisation on the
Indian IT hardware and telecommunication sectors.
2. A Brief History of India’s IT Sector Development
The advent of information technology (IT) in India began with the import of EVS EM
computers (hardware enabled with software) from the Soviet Union, which were used in large
companies and research laboratories. The concept of IT as an industry began to take root in
India in the late 1960s. The Tata Consultancy Services was established in the Santacruz
Electronics Export Processing Zone (SEEPZ)8 located in Mumbai in 1968. It was the first by
the Tata Group (a private sector group) and it was the country's largest indigenous software
producer.
Figure 1: Evolution of India’s IT Hardware Industry
Source: Figure 3 from the Report Human Resource and Skill Requirements in the Electronics and IT Hardware Industry,
p.7.< http://www.mit.gov.in/sites/upload_files/dit/files/Electronics_IT_Hardware_NSDC_Report_1732011.pdf>
It should be noted that the majority of such efforts were a direct outcome of governmentsupported programmes and policies. There is a long history of government support to IT and
8
Santacruz Electronics Export Processing Zone (SEEPZ) is a Special Economic Zone in Mumbai, India and was created
in 1973. Situated in the Santacruz East area, it is subjected to liberal economic laws as compared to the rest of India to
promote rapid economic growth using tax and business incentives and attract foreign investment and technology. Since
then many other SEZs have been set up in the rest of India. SEEPZ mainly houses electronics companies, software
companies and jewellery exporters of India.
5
Draft Paper not to be quoted
related sectors as they were considered as one of the strategic industries since independence.
These efforts were carried out by the government to emancipate the economically
beleaguered country to build a large scientific workforce. After attaining independence in
1947, owing to the efforts of its visionary leaders, India had invested heavily in science and
technology institutions like the Indian Institute of Technology (IIT).9 This led to the creation
of an army of trained engineers.
A series of government-funded support to institutions in the private and public sectors since
the mid-1960s made India the third country after the US and the Soviet Union to have the
capacity to produce super computers. The National Informatics Centre was established in
1975 and was followed by a boom of indigenous IT companies such as Tata Infotech, Patni
Computers and Wipro.
Subsequently, during 1986-87, the Indian government created three wide-area computer
networking schemes: INDONET – which was intended to serve IBM networks across the
country, NICNET- the network created for the NIC, and Education and Research Network
(ERNET) which was oriented towards educational research.
Inter-linkages between the Development of Indian Software and Hardware
Sectors
The first Computer Policy of 1984 and Software Policy of 1986 had emphasized the concept
of software development and export through data communication links. The objective of this
policy was to develop software in India using Indian expertise, on sophisticated computers
that were being imported duty free. This way, one could make use of the low cost expertise
available in India and avoid the expense of time and cost in travelling abroad. However,
there was substantial cost involved in data communication links. To subsidise this cost,
government sought to assist companies in the following manner. As per the policy,
companies were allowed to establish data communication links with their own initial
investments. But the ownership of the equipment and the operations of the gateway would
remain with the state-owned telecom company VSNL, and VSNL would pay back to the user
over a prescribed period after deducting operating and maintenance costs.
While the government formulated the national vision to promote software industry in India in
the early 1980s, there were deliberate attempts by companies to promote production of
software like compilers, device drivers, operating system, etc. to cater to the domestic
hardware sector. The high tariffs for the hardware sector meant that there was some domestic
production of hardware products and components, including PCs which were introduced in
the same period.
9
In August 1951, the minister of education Maulana Abul Kalam Azad inaugurated the Indian Institute of
Technology at Kharagpur in West Bengal, possibly modeled after the Massachusetts Institute of
Technology.
6
Draft Paper not to be quoted
Subsequently by the mid-1980s, software started coming unbundled with the hardware. This
gave a further fillip to the software industry and exports. India’s strength lay in its availability
of a pool of scientists and engineers, and the quality of maths and science education along
with quality business schools. India also ranked quite high at the time in terms of cluster
development, foreign technology licensing and government prioritization of ICT.
Subsequently, information and communication technologies (ICT) brought about revolution
in India particularly from the 1990s.
Following the economic liberalization program that began in 1991, the Department of
Electronics created Software Technology Parks of India (STPI) in 1991, which is basically an
export-oriented scheme for the development and export of computer software, including
export of professional services.10 One of the industrial policy measures that pushed Indian IT
firms to strive for competitiveness was the fact that these firms were required to export
software in the early days of the industry. This arose in the context of a shortage of foreign
exchange in India in the 1970s and early 1980s. Software firms that needed imported inputs
were required to earn foreign exchange through export of software, because duty drawback
benefits were tied to export requirements. This was applicable to IT firms in SEZs as well to
those in other places. This specific industrial policy measure enabled them to get an idea of
global markets at a very early stage of development.
The early 2000s saw the formation of the Ministry of Information Technology. The role of
the government ranging from facilitator to regulator has continued to remain very vital in any
area of the development of the software sector in India.11
With STPI presence, orderly implementation of STP Scheme and the Govt. initiatives, in
general, the offshore software exports from the country during 1991-92, which was a mere
20-35% grew to more than 70% during 2009-10. The emergence of a strong Indian software
industry occurred due to the concerted efforts on the part of the government, and a host of
related factors like government-diaspora relationships, private initiatives, emergence of
software technology parks, clustering, and public-private partnerships. Meanwhile,
liberalisation under the ITA popularly brought down the tariffs on ITA hardware, which may
be argued to have further promoted the use of imported products by private firms for software
exports. But analysing the year of establishment of top 10 leading exporters of software
services in India, it is seen that the majority of the leading software firms were set-up before
the ITA agreement came into full existence by 2005.
Table 1: India’s Software Exports: A comparison of Pre- and Post-ITA-1 Phases
10
The STP scheme is a 100 per cent export-oriented scheme for the development and export of computer
software, including export of professional services using communication links or physical media. This scheme is
unique in its nature as it focuses on one product/sector, i.e. computer software. The scheme integrates the
government concept of 100 per cent Export Oriented Units (EOUs) and Export Processing Zones (EPZs) and the
concept of Science Parks/Technology Parks as operating elsewhere in the world.
11
Kumar, Mathur, Somesh, 2007, “Indian IT industry: a performance analysis and a model for possible adoption”,
Munich Personal RePEc Archive, RIS http://mpra.ub.uni-muenchen.de/2368/
7
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Growth Rates
Exponential
Average Annual
1985-1997
17,269.0
1.6
53.7
1998-2007
6,92,790.0
1.3
37.4
Source: Authors’ calculation based on NASSCOM and Department of Information Technology, Government of
India.
Phase-wise
Total Value (Rs. Crore)
Further, as Table 1 clearly suggests, at 1.6 per cent exponential growth rate of software
exports was higher during the pre-ITA-1 period compared to 1.3 per cent during the postITA-1 period. Comparison of the average annual growth rates shows a 16 per cent point drop
in the growth rate observed during the ITA liberalised phase (1998-2007). Therefore the
increase in software exports was not associated with the ITA liberalisation; on the other hand,
it is seen that Indian exports suffered under the ITA-1 liberalisation phase. What emerges
from the above is that the argument that the export success of the software sector in India is
directly associated with the ITA liberalisation under the ITA is a myth.
Paradoxically, this so-called superb export performance of the IT software and services sector
in India has coincided with the debacle of the IT hardware production capacities in India.
It is true that the process of industrial de-licensing, which began in 1985, marked a discrete
break from a past of centrally planned industrial development in India. However, it was the
liberalisation policies of 1991 that began leading to large intra-sectoral disparities in growth
performance. By 2001, the scenario of the IT sector was recognised to be grimmer than the
other sub-sectors of the Indian manufacturing sector. This was highlighted in the Planning
Commission Report of 2001, wherein, it called for a clear comprehensive national policy for
the IT hardware manufacturing industry for making the Indian manufacturing sector globally
competitive.12 In the following section, we examine how the rapid tariff-alone liberalisation
of trade in ITA products under the ITA-1 contributed to the erosion of IT hardware sector in
India.
3. ITA-1 Liberalisation and the Actual Market Access Scenario
faced by India
India’s Tariff Elimination and Sequencing under ITA-1
A total of 165 products13 were part of the ITA Agreement in which the members were
mandated to reduce tariffs and harmonise the non-tariff measures. However, as we saw, a
clear-cut schedule was laid out only for tariff elimination, ignoring the issue of NTMs
completely. The average MFN applied tariff for India's 165 ITA-1 products saw scheduled
reduction as per the commitments made under the ITA. India had an average base duty of
12
Planning Commission, 2001, “Report of the Working Group on Information Technology for the Formulation of the
Tenth Five Year Plan”, http://planningcommission.nic.in/aboutus/committee/wrkgrp/wg_it.pdf.
13
Originally, the number of tariff lines under the ITA at the HS 6 digit was 217. Ex-post , some of these lines were found
to belong to the same 6-digit HS classification. The final number of product lines at the 6-digit level is obtained after
removing the duplicate 165 lines.
8
Draft Paper not to be quoted
66.4 per cent in July 1997; this dropped to 37.8 per cent in March 1998, that is, to almost half
of the base rate in July 1997. The average tariff continued to drop at regular intervals to 12
per cent in 2000 and further to 10 per cent in 2004, and was completely eliminated by 2005
(see Figure 2).
Figure 2: Average MFN Tariff of India on ITA Products and the Number of HS 6 Digit
Tariff Lines
Source: Authors’ calculations based on India's commitment under ITA-1.
Exponential growth rate of India's imports of ITA-1 products were 23.7 per cent for the
period between 1996 and 2005. However, imports grew at a slower pace in the first phase
(1997-2000) at 18 per cent, while in the second phase (2001-2005) it almost doubled to touch
nearly 38 per cent. This surge in total imports seen in ITA-1 products can have a detrimental
impact on domestic firms who undertook production of corresponding and similar products,
or even substitutes. This could even have had a long-term impact on total production,
investment and all the other associated activities in the sector.
From the point of view of Indian domestic producers, there were two years of shock, 2000
and 2005. In 2000, tariffs on some 96 lines were reduced to zero as per the ITA
commitments. These targeted products were having base tariff duties of 12.0, 31.7, 45.0,
50.0, 55.0, 61.7, 70.0, 83.4 per cent. The second phase targeted products were having base
duty tariffs like 22.0, 32.0, 35.0, 40.0, 42.0, 52.0, 61.7, 66.7, 70.0, 76.7, 90.0, 110.0 and
116.7. This was unprecedented in the history of India as a further reduction of 63.0 per cent
was executed in 2005, over and above the 46.2 per cent reduction that was achieved in 2000.
This scheduling process eliminated tariffs for all the products under the ITA agreement to
zero on an MFN basis.
Table 2: Tariff Reduction Schedules under the ITA-1
9
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Source: Authors’ calculations based on India's commitment under ITA-1.
In terms of tariff reduction commitments, India made no deviations from the scheduled time
under the ITA agreement, barring a few cases of tariff lines. Tariff elimination was
considered successful, as tariffs on the 165 ITA lines (after removing the duplicates) having
average base tariff of 57.5 per cent were eliminated to zero in a period of 10 years. However,
the other side of the coin, namely the market access under non-tariff measures
(standards/regulations) still remained unresolved.14 In next sub-section, we address some
concerns in the context of NTMs.
Technical Standards: TBT Notifications under the WTO
Technical Barriers to Trade (TBT measures) are the most significant standards/regulations
faced by ITA-1 products. These can vary from standards/regulations on
mobile/radio/telecommunication services offered within the domestic market in terms of
frequency, technically referred to in hertz (Hz), to common technical standards such as
labelling text details. Over the years, it is observed that TBT notifications from all WTO
members have been increasing to replace the reductions in tariffs under the ITA
commitments.
Figure 3: TBT Measures: Yearly Notifications on ITA-1 Product Lines by all WTO
Members
14
See the discussion of the status of the pilot project on EMC/EMI under the ITA Committee in Section 1.
10
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Source: Authors’ calculations based on the Centre for WTO Studies Web Portal http://cc.iift.ac.in/tbt/index.asp
As shown in Figure 3, total TBT notifications by WTO member countries (ITA signatories
and non-signatories) on ITA-1 product lines have been increasing since 1996. This is
indicated by the exponential growth rates of year-wise notifications by nearly 3.0 per cent
and on cumulative basis by 15.0 per cent. It is significant that nearly 82 per cent of the total
TBT notifications on ITA-1 product lines were by the ITA signatories. That is, while the ITA
signatories have been reducing their tariffs, the trend in standards/regulations has been going
the other way. This suggests a substantial increase in protectionism by way of domestic
regulations, creating market access barriers despite tariff liberalisation under ITA-1.
Table 3 analyses the TBT notifications made by the top 31 WTO notifying countries on the
basis of national and international standards. It is important to observe that India does not
figure in the top 31 WTO-notified users of TBT measures of ITA-1 products. National
standards/measures are those specific legislations that need to be adhered to by foreign
producers to operate or sell in those markets; these may be different from the internationally
harmonised standards by the ISO.
Table 3: TBT Measures: Product Coverage at the HS Four Digit Level (Top 31
Countries)
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Product Coverage based
on TBT notifications
Japan
Belgium
South Korea
European Communities
China
Canada
Netherlands
The SCT of TPKM
Switzerland
Czech Republic
Mexico*
Israel
Norway
Finland
Brazil*
South Africa*
France
Sweden
Philippines
Argentina*
Thailand
United States
Australia
Colombia
Chile*
Spain
Hungary
Hong Kong, China
Saudi Arabia
Malaysia
Slovak Republic
Total TBT notifications
Developing
International
National
Developed
Sub TotalDev.g
7
490
497
209
206
415
International
212
326
326
2
189
256
197
2
256
199
191
9
89
149
51
158
140
8
123
130
45
131
130
127
82
86
82
45
722
111
107
111
107
93
88
1
36
80
2491
93
88
83
81
80
3213
298
Sub Total- Grand Total
D'ped
669
669
669
636
636
636
497
423
423
423
415
198
410
410
332
332
332
326
317
317
317
256
199
191
191
191
191
163
163
163
158
140
139
139
139
135
135
135
131
130
127
38
124
124
111
111
111
111
107
104
104
104
93
88
83
81
80
3456
3754
6967
National
Note: Countries marked with * and shaded in orange colour are not ITA signatories.
Source: Authors’ calculations based on the Centre for WTO Studies Web Portal http://cc.iift.ac.in/tbt/index.asp
The harmonisation process involves bringing different standards existing in different
countries, to a level which is agreeable by everyone as the international level. Table 3
indicates that 92 per cent of the notifications by developed countries with technological
advantage were national standards, as compared to 77.5 per cent for developing countries.
Only countries like Canada (51.7 %) and United States (69 %) had a greater share of
international standards. If we eliminate these two countries, 100 per cent of the notifications
by the other 11 developed countries consisted of national standards. It is alarming that the
ITA-1 which has been fully implemented in terms of the tariff commitments has seen such an
imbalance in the usage of NTMs like the TBT measures.
However, this moderately high average usage does not prove anything substantively. One
needs to look beyond this, both in terms of usage over the years and the nature of objective in
the use of TBT measures. The long run trends reveal a great deal of information about the
nature of protection in developed members’ markets for ITA-1 products for developing
country members like India who are operating on a very low technological base, especially
when we try to identify industry standards for mass production.15
15
India may be a leader in space technology; however, this has not been translated as successfully like in the US or EC
into the Information technology sector for the benefit of general consumers.
12
Draft Paper not to be quoted
The other aspect is the large product coverage16 of the TBT notifications observed in the
period coinciding with a large share of national measures notified by developed country
signatories of ITA-1. This can be interpreted based on Figure 4 which indicates high product
coverage at the HS 4 digit level, and Annexure 4 which shows a larger proportion of yearly
notifications by the developed countries within the classification of national measures.
Figure 4: Usage of National vs International TBT Measures under the ITA
1200
1000
Product
Coverage
1000
800
800
600
600
400
400
200
200
0
Total Product Coverage of TBT Notif.'s
0
International Measures
National Measures
Source: Authors’ calculations form the Centre for WTO Studies Web Portal http://cc.iift.ac.in/tbt/index.asp
In terms of the usage of TBT measures related to ITA-1 products over the years, Figure 4
analyses the pattern of national and international standards for the complete WTO
membership. The trends clearly suggest the usage of very high levels of national standards in
the initial years when developed countries were required to bring down their tariffs on an
MFN basis. It should also be noted that there was higher product coverage during this period,
suggesting that these countries were in a hurry to notify all the measures before any
disciplines came out of the WTO negotiating process under the ITA Committee.
What is alarming is the very high use of national standards during the early period of 1997 to
2000. Of the total of 456 TBT notifications from 1995 to 2000 by all the WTO members,
developed member had 356 TBT notifications, which represented 78 per cent of the total
notifications. In terms of product coverage, around 3881 products were covered by the 456
TBT notifications, of which 3800 were protected by national measures. This is a telling story
of how ‘market access’ has been denied to developing countries when tariff liberalisation was
16
The product coverage in a single notification is the number of 4 digit HS code tariff lines covered by that notification.
For example, consider the case of the first country in Table 5, Japan, which has 102 notifications (including
additions/revisions/corrigendum) during the period between 1995 and 2011; and a product coverage of 669 products.
In simple terms, 7 products (HS 4 digit) were covered under each notification made by Japan.
13
Draft Paper not to be quoted
supposed to have increased it. It would be useful to have detailed understanding on the
various types of TBT standards.17
A meticulous analysis of the 45 different types of standardised18 standards identified as per
the Centre for WTO Studies database on TBT measures was carried out to derive
observations regarding the nature of objectives. The objectives were as diverse as possible,
incorporating the needs of different countries which were ITA members (See Figure 5). For
example, objectives involved: Technical Regulations/Standards; Safety and Quality
Standards; Labelling; Regulating Market and Consumer Health and Safety; Revitalisation of
Economy and Make use of Private Sector Capacity; Trade Facilitation; Human Safety and
Environmental Protection; Environmental Protection and National Security; Animal and
Human Health; Safety and Environmental Protection & Consumer Protection and Fair Trade.
Figure 5: Standardised TBT Objectives by ITA Signatories
Source: Authors’ calculations from Centre for WTO Studies Web Portal http://cc.iift.ac.in/tbt/index.asp
The analysis of TBT standards for ITA-1signatories for the period between 1995 and 2011
suggests that technical regulations or standards, or certification had the highest share of 45
per cent with 489 measures. The second largest category in the list of TBT measures was the
objective of regulating market and consumer health or safety and quality standards with 37
per cent (408). At the third and fourth places are the measures for animal and human health
and safety and environmental protection with 8 per cent and harmonisation with regional
standards at 7 per cent respectively. Harmonisation with international standards or trade
facilitation was the lowest level of measures at 3 per cent. The only other measure which was
17
See Annexure 4 for the detailed illustration of the usage of TBT measures by developed and developing countries into
national and international measures.
18
Standardization was required because of the very large number of different objectives (1065) described by the notifying
WTO members. A marginally lower number of 932 objectives was identified in the case of ITA signatories.
14
Draft Paper not to be quoted
lower in priority was labelling and certification which recorded 4 measures. If the signatories
were serious about market access issues, the issue of harmonisation of TBT measures at the
international level should have received the highest priority from the ITA signatories.
The difference in priorities by developed and developing members belonging to the ITA is
clearly evident in Figure 6. While developed members believed in the usage of technical
regulations or standards or certification (66%), developing members were using the measure
of regulating markets and consumer health or safety and quality standards with 62 per cent.
Figure 6: Developed and Developing Countries’ Usage of Stated Objectives of WTONotified TBT Measures
Source: Authors’ calculations from Centre for WTO Studies Web Portal http://cc.iift.ac.in/tbt/index.asp
Both developed and developing country signatories of ITA were not very serious about the
issue of harmonising their national standards/regulations with the international standards.
Ironically, this issue got the lowest priority recording a share of 4 per cent and 2 per cent
respectively for developed and developing members. In terms of NTM liberalisation, the
ITA-1 is the best example of inaction by both developed and developing countries. This calls
for immediate attention to the area of NTMs (TBT), when we are looking for liberalisation
and market access gains through other Sectoral/plurilateral initiatives. The direct impact of
this growing imbalance on developing country market access process is discussed in detail in
the next section of this paper.
4. Impact of the Trade Liberalisation of IT Products under ITA-1
We discuss the impact of trade liberalisation in ITA-1 products using two nomenclatures
Standard International Trade Classification (SITC) and the harmonised system (HS). The
15
Draft Paper not to be quoted
SITC is used to understand the long-run dynamics in the trade of ITA-1 products and the HS
is to analyse the relatively short-run dynamics. They are then used to draw a common
understanding on the impact of ITA-1 liberalisation on the Indian IT hardware and
telecommunication sectors and generally on the Indian economy.
When we compare the shares of ITA-I exports at the country group level to understand which
category benefited the most from the agreement, it is evident that developing countries (DCs)
gained the most. They were followed by developed countries (D.ped Ctries) and finally the
least developed countries (LDCs). Developing countries increased their share from 10 per
cent in 1996 to 16 per cent in 2011 (see Figure 7). However, it is important to note that while
the original share of ITA products in global exports was 10.1 per cent, after 2000 there was a
slide in the global export shares of ITA products from 13 per cent in 2005 again to 10.4 per
cent in 2011. Meanwhile both developed countries and least developed countries have been
losing market shares. Developed countries’ export share dropped from 10 per cent in 1996 to
about 7 per cent in 2011. The LDCs also experienced a declining trend in shares – from 0.2
per cent in 1996 to 0.1 per cent in 2011.
Figure 7: Total Exports: Country Group-wise Share of ITA-1 products
Source: Authors’ calculation based on online WITS COMTRADE database.
With global exports and imports of ITA-1 products growing at an average annual rate of 12
per cent, the trends in share reflect a growing domination of developing countries
corresponding with tariff liberalisation.
In simple terms, the market access scenario can be captured with the use of global import
scenarios and the trend in the shares of the three country categories. It is interesting to note
that developed countries did not concede any additional market access, as its shares remained
below 10 per cent throughout the period of study. This is clearly indicated in Figure 8.
Developed countries’ shares in global imports rose from 9.8 per cent in 1996 to 13 per cent in
2000. However, we can observe that it dropped in the later years from 11 per cent in 2005 to
16
Draft Paper not to be quoted
7 per cent in 2011. This suggests that the impact of tariff liberalisation under ITA-1 was not
felt in the developed countries, which can related to their increased use of TBT measure to
protect their domestic markets.
Figure 8: Total Imports: Country Group-wise Share of ITA-1 products
Source: Authors’ calculations based on online WITS COMTRADE database.
Figure 8 shows that there was a general declining trend in the overall import shares, with
virtually no additional market access obtained in developed countries. A further deterioration
was seen in the import shares of LDCs in the total world imports of ITA-1 products. Thus the
increasing global trade in ITA-1 products seen in terms of trade values earlier was largely due
to a surge in developing country imports. Developing countries showed an overall increasing
trend in imports of ITA-1 products. Their share almost doubled from 11 per cent in 1996 to
22 per cent in 2000. Although there was a slow downward trend after that, it increased again
to touch 16.3 per cent of global ITA imports in 2011.
Figure 9 analyses the relatively short-run trends (1996 to 2011) in ITA-1 products. India was
clearly a market provider with the import trends suggesting a reluctance to drop. This needs
to be analysed further. The widening gap between India’s exports and imports of ITA
products is a matter of concern for policy makers. So we have analysed these trends based on
a relatively longer time series 1962 to 2010 using the Standard International Trade
Classification (SITC).21, 22
21
While discussing the long run trends, we would be focusing only on first level manufactured imports and exports in the
context of India. We would not be discussing issues related to agricultural and mineral oils. For this purpose we here
introduce the standard international trade classification (SITC. Rev1).
22
The complete set of IT products under SITC 72 (the electrical machinery, apparatus and equipment) are further divided
into six classifications like: SITC 722 Electric power machinery and switch; SITC 723 Equipment for distributing
electricity; 724 Telecommunications apparatus; SITC 725 Domestic electrical equipment; SITC 726 Electrical
apparatus for medical purpose and SITC 729 Other electrical machinery and apparatus. Thus clearly any analysis of
SITC 72 will give some idea about the IT sector in India.
17
Draft Paper not to be quoted
It can be observed from Figure 9 that there are three distinct phases in India's exports and
imports, if we were to ignore the yearly variations observed in Figure 8. Out of the five
decades, two trends stand out, with imports having hovered around the band of 2 to 9 per cent
while exports showed an increasing trend over the years from 0.1 to 4.5 per cent. This is
clearly a good sign in terms of the performance of the industry.23
Figure 9: Trade Shares of Machinery and Transport Equipment (SITC-7) in India’s
Total Trade
Source: Based on data from the WITS COMTRADE online database, extracted on 12-04-2012
As shown in Figure 9, we can analyse these decadal trends in three major phases based on the
interaction between the exports and imports of electrical machinery and telecommunication
equipment sector. During the first phase between 1962 and 1980, imports showed a
decreasing trend from close to 5.5 per cent of India's total imports to 2.0 per cent in 1978. On
the other hand, exports gained in share in India’s total exports from 0.1 per cent in 1962 to
1.0 per cent in 1980. Therefore, the first phase showed a narrowing of the export-import gaps
in these sectors suggesting an improvement in the competitiveness of the electrical machinery
and telecommunication equipment sector.24
In the second phase, which was from 1981 to 199725, there was a widening of this gap
suggesting some reduction in the competiveness of the domestic electrical machinery and
telecommunication equipment sector. Exports shares dropped to a low of 0.4 per cent (1989);
this was the lowest share ever since it recorded a high of 1.1 per cent in 1995. On the other
hand, imports continued to show a rising trend gaining from the decline observed in the first
23
It should be noted that exports are shown on the right hand axis (RHA), while imports are shown in the Figure 8 on the
left hand axis (LHA).
24
It is to be noted that while the discussion of performance of SITC 72 is analysed, it is always relative to other sectors’
performance in terms of exports and imports. So the general mood of India’s exports and imports are captured.
25
It was only is 1997 that the ITA-1 was formally launched, after attaining the critical mass of 90 percentage of the world
trade.
18
Draft Paper not to be quoted
phase, to touch the highest recorded share of nearly 8.1 per cent of total imports. There was
a clear widening of the export-import gap during this phase suggesting continued import
dependence and lack of export competitiveness by the electrical machinery and
telecommunication equipment sector.
The third phase spanned the period between the actual implementation of ITA liberalisation
in 1997 to 2011, and is further divided into two periods to better understand whether
complete liberalisation of MFN tariffs in 2005 did make any difference or not. What can be
observed is that import shares continued to be rather stable but increased towards the end of
the phase, while export shares kept on decreasing from 9 per cent recorded in 1997 to 4.5 per
cent in 2008. However, one can observe that thereafter exports have shown a decreasing
trend, this could be due to the global meltdown after the sub-prime crisis in the US.
Figure 10: Import Trends in India’s Manufacturing Sector (percent share)
India's Import trends in Manufacturing Sector (SITC Rev I - 5,6,7,8 and 9)
30.0
25.0
45.0
36.4
39.4
27.7
20.0
32.6
32.6
33.1
24.6
40.0
31.6
27.1
25.8
33.0
27.3
35.0
30.0
25.0
15.0
20.0
10.0
15.0
10.0
5.0
5.0
0.0
0.0
1962
1966
1970
1975
1980
1985
1990
1995
5 Chemicals
6 Manufact goods classified chiefly b
9 Commod. & transacts. Not class. Acc
7 Machinery and transport equipment (RHA)
2000
2005
2010
2011
8 Miscellaneous manufactured articles
Source: Based on data from the WITS COMTRADE online database last accessed on 12-04-2012.
The only category that had an import trend comparable to that of machinery and transport
equipment (SITC 7) was the category of the manufactured goods classified chiefly by
materials (SITC 6). This sector’s share varied in a range of 15 per cent to 25 per cent. The
other prominent sector was the chemicals and related products, n.e.s. (SITC 5), which also
showed some dynamism in total imports.
Table 4 provides insights about the change in the composition of India’s suppliers of import
demand and the main beneficiaries and losers from ITA liberalisation. We have seen some
top players being replaced by China by the year 2010; these were countries like the USA
(22.5%), Japan (18.1%), Singapore (12.1%), followed by Germany (8.5%), UAE (7.2%) and
the UK (5.8 per cent). All these prominent suppliers were replaced by China, which increased
its share of India's total imports under the ITA-1 lines from 1.6 per cent in 1996 to 46 per
cent. The other gainers are the Republic of Korea (6.1%), and Malaysia (3%) whose shares
increased significantly in 2010.
Table 4: Top Thirty Suppliers of ITA products to India
19
Draft Paper not to be quoted
Note: Total import 1996 to 2010 includes all 165 ITA-1 products.
Source: WITS online Database and TRADESIFT Software.
This clearly suggests that with regard to the Indian experience, ITA-1 liberalisation has not
been very positive from the point of view of increasing competition and trade. The evidence
we are staring at is one of increasing monopoly of a single country, which does not support in
any manner global diffusion, as perceived by the proponents of the Information Technology
Agreement. The next table will reveal why the objective of ITA-1 to support greater
diffusion of ITA products was not found to be true in the Indian case.
Table 5: Top 50 Imported Products under the ITA-1 list by India
20
Draft Paper not to be quoted
Note: GL-index average across for the period mentioned.
Source: WITS COMTRADE online Database, extracted on 02-03-2012.
Table 5 analyses the HS code-wise trends over the period of 1996 to 2010. This analysis is
done looking at two components: total import values and the corresponding GL index
(suggesting intra-industry trade). The gist from this table is that the selected top 50 ITA
products had a coverage of 78 per cent in 1996, which increased to 91 per cent by 2010. This
shows an increasing import concentration in India’s imports of ITA products, with very low
average GL index value of 0.21. The increased import concentration does not point to a
process of diffusion of IT products in the case of India’s imports.
21
Draft Paper not to be quoted
Similarly, the trend in India's ITA exports were also analysed to understand the impact of
ITA on Indian exports in the long run, using SITC Rev.1 classification. Manufactured exports
by India is analysed over five decades between 1962 and 2011(see Figure 11).
Figure 11: Export Trends in India’s Manufacturing Sector (% share)
Source: Based on data from the WITS COMTRADE online database, extracted on 12-04-2012.
An analysis of trends among the five major manufacturing categories in terms of SITC Rev.1
suggests that machinery and transport equipment exports has remarkably increased from 1.0
per cent share in 1962 to 14.5 per cent in 2010. In fact, after 1985 the only other category
which showed an increasing trend was the chemicals and related products (SITC 5), which
increased its share in total exports from 1.4 per cent to 13.7 per cent in 2010. All the other
categories showed a decreasing trend in export shares. Categories like manufactured goods
classified chiefly by material (SITC 6) and miscellaneous manufactured articles (SITC 8)
showed a sharp decline in exports, with shares dropping to almost half of their respective
shares in the 1990s. For instance, the export shares of manufactured goods classified chiefly
by material (SITC 6) declined from 40.2 per cent in 1995 to 18.5 per cent in 2010. But within
the category of miscellaneous manufactured articles, the group of professional, scientific and
controlling instruments and apparatus, n.e.s. (SITC 87) avoided the decreasing trend.
Among the manufacturing sector as a whole, the only two major sectors that indicated
competitiveness are the machinery and transport equipment and chemicals and related
products n.e.s. .
Table 6: Top Thirty Exports of ITA products to India
22
Draft Paper not to be quoted
Note: Total Exports 1996 to 2010 includes all 165 ITA-1 products.
Source: WITS and TRADESIFT Software
While in terms of import shares China gained a substantial part in the Indian market, if Indian
electrical and telecommunication equipment industries were competitive, India also should
have had a substantial share of ITA imports in the Chinese market. However, if this does not
hold true then we are looking at a scenario of India’s increased imports from China, a
substantial portion of which is being used for domestic consumption as India is not reexporting these to the world. Further this is validated by simple CAGR for 14 years of
India’s imports from the world, which was 35.6 per cent (1996 to 2010) when compared to
CAGR of India's exports to the world at 16.7 per cent.
Meanwhile, the top 9 export destinations of India have seen substantial change over the ITA
liberalisation period. USA continued to rank first amongst the top export destinations, having
a share of about 11.9 per cent in 2010, despite a sharp drop from the 28 per cent in 1996. It
was followed by Singapore with 4.7 per cent share in 2010, down from 11.04 per cent share.
United Arab Emirates’ share increased from 2.93 per cent in 1996 to 7.15 per cent in 2010.
Germany too increased its share from 2.41 per cent in 1996 to 4.90 per cent share in 2010.
Hong Kong was at the fifth place with 4.33 per cent share in 2010, while its share in 1996
was 6.52 per cent. Netherlands showed marginal gain in shares during the period from 3.01
per cent in 1996 to 5.49 per cent in 2010. United Kingdom showed a sharp decline in the
share of 16.5 per cent in 1996 to 1.94 per cent shares in 2010. Malaysia also showed a decline
in share to 1.31 per cent – in 1996 it had a share of 8.43 per cent. The export share of China,
who topped India’s suppliers’ list of ITA products accounted for only 3.01 per cent share in
2010, although it was an increase from 0.23 per cent in 1996. From India’s point of view, the
23
Draft Paper not to be quoted
bilateral trade between these two fastest growing economies in the 164 ITA-1 products can be
described as follows: India’s exports to China grew by 115 times in comparison to 2075
times for her imports from China.
Table 7: Values and Shares of India’s Top 50 ITA Export Products (out of 164
Products of ITA-1)
Note: columns 3 to 6.
Source: WITS and TRADESIFT Software
Table 7 analyses the HS code-wise trends over the period of 1996 to 2010. This analysis is
done looking at two components; total export values and the corresponding GL index
(suggesting intra-industry trade). It is that while the top 50 ITA-1 products accounted for a
cumulative share of 83 per cent of total TIA exports in 1996, this increased to 92 per cent by
2010. Thus just like in the case of imports, India’s ITA exports have also been getting
concentrated. The top 50 exported items, which accounted for nearly 92 per cent of total
ITA-1 products, had a very low GL index of 0.41.
24
Draft Paper not to be quoted
Figure 13 analyses India’s intra-industry trade in comparison to the world. A bench mark of
GL index more than 0.50 is chosen to count the number of tariff lines which fall under this
criteria.
Figure 10: India’s Tariff lines with IIT (GL index >0.5): Total ITA-1 Products
Source: WITS COMTRADE Online for trade values and TRADESIFT for the calculation of GL-Index.
The number of ITA-1 products with more than 0.50 GL index rose to 49 during 2006-10 from
33 during 1996-2000. This signifies that there is an increasing trend in intra-industry trade in
the ITA products after liberalisation under the ITA.
Figure 11: World Tariff lines with IIT (GL index >0.5): Total ITA-1 Products
Source: WITS COMTRADE Online for trade values and TRADESIFT for the calculation of GL-Index.
While the global GL index average for 1996 to 2010 was close to 0.74, India's Intra-industry
trade index was very low at 0.34, suggesting that most of India's trade was for domestic
consumption purposes (see Figure 14). The number of ITA-1 products (165 total lines) in the
case of world it was 157 products between 1996 and 2000, however it fell to 109 products
25
Draft Paper not to be quoted
only to rise again to 140 products. In comparison to world, India had far less number of tariff
lines with intra-industry trade index value more than 0.5.
Figure 12: Intra-Industry Trade: Comparison of GL Indices of World and India
Source: Calculated by the Authors based on WITS COMTRADE online Database.
There is a clear evidence of shifting of a significant portion of India’s ITA trade to China
while ignoring Europe, Japan and the United States.
Figure 13: Comparative Exports and Imports of China and India to World
Source: WITS online database.
India's domestic demand is indicated by surge in its imports from the world, if this result has
to be read with the trends in GL indices. Such an interpretation needs to be carried out across
the 165 ITA products and for the top 50 products. It would suggest that while India
eliminated the tariffs on ITA products on the one hand, but it did not have sufficient
industrial standards in place to protect and maintain the national electronics hardware
production platforms. This happened because Indian policymakers were not sufficiently
grounded in the realities of the hardware industry. The gap in ITA trade between India and
26
Draft Paper not to be quoted
China increased also due to ITA-1 implementation, as India could not find standards for these
that could be applied on a national treatment basis in the ITA products. Hence, it could be
said that there has been clearly a replacement of Indian electronic products with externally
imported products mainly from China (see Figure 18).
5. Scenario of Indian Hardware Sector - Dependence on Imports
The Growing Role of Imported Raw Materials in India
In this section, we have used the Centre for Monitoring Indian Economy (CMIE) PROWESS
corporate firm level data. This dataset has total coverage of 27,000 unique corporate firms in
India out of which close to 5000 are listed companies. It gives a common sample size of
17000 companies that can be obtained with minor data loss for the last five years.
Indian hardware sector has a total of 483 firms belonging to organised/listed companies, of
these, 39 companies had merged status. The total raw material used in the production of the
final good is divided into two parts: the imported and indigenous raw materials. Disclosure
on total raw material usage has continued to increase over the years. This is especially true
after 1999-00 when this crossed 106 firms from a low of 12 firms in 1995. Therefore, we
have taken a set of 147 firms for the purpose of our analysis as common sample. Our main
purpose is to understand the dynamics in the import content of India’s IT hardware and
telecommunication sectors and to understand whether there was any dynamic shift after the
ITA-1 was implemented. Even though the India’s exports in these sectors grew marginally
since the liberalisation of 1991 (see Figure 9), this did not lead to increase in imported
contents in total raw material – its share was lower than 27 per cent. One major reason could
be due to low disclosures during the period, which averaged around 16 firms out of the 147
common sample firms selected for analysis. This was less than 11 per cent of the total
sample size.
Figure 14: Indian Hardware Sector: Trends in Disclosure and Imported Contents
27
Draft Paper not to be quoted
Source: Authors’ calculation based CMIE PROWESS.
However, with India signing the ITA in 1997, the situation dramatically changed within two
years. The share of imported contents to total raw material consumed by these firms shot up
to 45.1 per cent, which increased further to 57.8 per cent in 2002.
The year of total elimination of tariffs, 2005, saw a rather moderate imported content of total
raw materials of close to 50 per cent; but by 2008 it went up to nearly 80 per cent. This
clearly indicates the direction of the organised Indian IT hardware and telecommunication
firms: that is to import intermediate/capital goods and assemble within the country leading to
very low value addition and even lower employment creation.
Figure 18 provides detailed unadjusted trends of the share of total imported raw material in
the sales of 147 firms as common sample of the hardware sector. The results are to
crosscheck the trends in order to understand its relationship with total sales. The complete
analysis is undertaken without taking into consideration the impact of exchange rate
variations on the sample firms.
Figure 15: Trends in Imported Raw Material Content to Total Sales (Unadjusted)
28
Draft Paper not to be quoted
Source: Authors’ calculation based on CMIE PROWESS.
This showed that there was a gradual increase in the sales from 1997 to 2005 at an average
rate of 15 per cent annually. When tariffs were eliminated completely in 2005, sales showed
an annual average increase of nearly 30 per cent – almost ten percentage points higher.26 It
would be wrong to conclude that liberalisation of a portion of the ITA sector provided a boost
to the whole Indian electronics sector, without looking at the import share in sales.
While sales increased, so did the share of raw materials imported to sales. During ITA-1,
there was spurt in the share from around 5 per cent to 20.2 per cent in 2000. The raw
material imported to sales per cent was about 18.4 per cent in 2004, which was the lowest
value seen for the rest of the period of analysis. So clearly, while comparison is drawn on the
proportion of imported raw materials to total raw materials and total sales, the per cent to
sales have been lower (see Figures 18 and 19).
We removed exports from the total sales of each firm to arrive at domestic sales. Exports are
then deflated using the currency deflator to arrive at adjusted exports. The adjusted exports
when added to the domestic sales would give the final adjusted sales. A similar exercise is
carried out on the total raw material consumed to arrive at adjusted raw materials. Then we
calculated the proportion of deflated imported raw material to adjusted total raw material
consumed, and deflated imported raw material to adjusted total sales (see Figure 19).
Figure 16: Adjusted Trends in Imported Raw Material and Total Sales
26
The total sale is inclusive of domestic sale and exports.
29
Draft Paper not to be quoted
Source: Authors’ calculation based on CMIE PROWESS.
A relatively similar trend is observed in deflated raw material consumed to total adjusted raw
material imported to sales, as seen in Figure 20. However, the trends seen in the case of
imported raw materials to total raw materials in rupees (seen in Figure 17 as line graph) and
the deflated imported raw material to the total adjusted raw material consumed (seen in
Figure 19 in bar graph) are completely different. The difference is primarily due to low rate
of disclosers by the firms operating in the Indian electronics sector - an average of 16 -for the
period 1994-05 to 1998-99. Otherwise, the industry average of deflated imported raw
material to adjusted total raw material consumed by the Indian IT hardware sector was at 37
per cent, with the exception of the initial few years having an average of 44 per cent.
However, the deflated imported raw material to adjusted total sales, which is represented on
the right hand axis, was very low in the initial years but later it increased in 1999-2000 to
10.1 per cent. This again could be a problem with very low disclosure. The average after
this was around 11 per cent. What can be concluded is that while average imported raw
material to sales have shown an increasing trend, its share in per cent to total adjusted raw
material consumed have remained almost stagnant.
We have used independent sources to verify our results of increasing import content in Indian
exports. Using the UN International Standard Industrial Classification (ISIC), the OECD has
calculated the quantum of imported content in total exports across all sectors for different
sectors. We have used the ITA part in order to understand the results and put things in
perspective in the Indian context. From the report we used only portions concerning ITA
segments like: (ISIC-C30) Office, accounting and computing machinery; (ISIC-C31)
Electrical machinery and apparatus n.e.s; (ISIC-C32) Radio, television and communication
equipment; and (ISIC-C33) Medical, precision and optical instruments are analysed.
Figure 17: STAN Input-Output Import content of Exports (India)
30
Draft Paper not to be quoted
Source: Authors’ calculation based on the OECD Stat Extracts iLibrary.
These results show an increase in the import content of Indian exports across product
segments between the periods of mid-1990 and mid-2000s. For the office, accounting and
computing machinery it increased by 24 percentage points. This was the highest import
dependence across the ITA products exported from India. It was followed by medical,
precision and optical instruments wherein the imported content showed a 20 percentage point
increase. The third category was electrical machinery and apparatus n.e.s, wherein imported
contents increased by 18 percentage points. The last category was consumer electronics like
radio, television and communication equipment wherein the increase was about 10
percentage points.
Certainly, this is strong evidence of replacement of domestic
manufacturing production in India by imported products, which is a direct outcome of ITA
tariff alone liberalisation.
6. Conclusion
Trade liberalisation under the ITA-1 is unique in the way it has proceeded over the years. The
ITA-1 was meant to be an agreement under the WTO to eliminate tariffs and non-tariff
measures; however, it has simply remained another tariff cutting mechanism like all the other
WTO Agreements. Its product coverage was also restricted to those products that were in the
interest of developed countries.27 As we understand, liberalisation at the MFN basis would
necessitate reduction/elimination of tariff and non-tariff measures at different speeds by
developed and developing countries, given that developing countries continue to enjoy the
benefit of S&D Treatment. The ground reality is that tariffs have been bought down to zero
27
The initial proponent countries of the ITA were QUAD Countries (USA, Canada, Japan and EU) the few
developing countries proponents in list were Singapore and Hong Kong.
31
Draft Paper not to be quoted
on an MFN basis in all the 7428 ITA member countries. The sticky issue since 1996 has been
how to address the issue of non-tariff measures (TBTs), which till date remain to be
harmonised at the multilateral level under the International Standards Organisation (ISO).
This exposes the weakness of the WTO negotiation process, in addressing the harmonisation
of non-tariff measures in correspondence with tariff elimination, even under a Plurilateral
setup like the ITA-1. Such harmonisation of NTMs was important from the point of view of
the negotiations on non-agricultural market access for the leaders and laggards in IT
technology to be brought to a minimum common platform. It seems to have miserably failed
in this process as discussed in the paper. The negotiations on the NTMs were disassociated
with tariffs, for a simple reason that tariffs in the developed countries were a non-issue and it
was all about national standards.29
While the tariff elimination that began from 1 July 1997 was carried out on an MFN basis,
the NTMs deliberations continued even after 2010.30 Even in 2014, the ITA-1 is an
agreement under which only tariff cutting has happened successfully, as the status of national
level harmonisation of non-tariff barriers has been inconclusive.31
Meanwhile, the trends in WTO-notified Technical Barriers to Trade (TBT) suggest an ever
increasing usage of non-tariff measures.32 It has been observed that developed countries have
put in mandatory measures like technical regulation/standards/certification, which has led to
a “domino effect” in developing countries. It was supported well by the increasing role of
global supply chains (GSCs) in this sector and the need to create enabling conditions for
MNCs in developing countries. Developed countries have been increasingly using national
standards, many of which were introduced even before 2004. The other aspect is the large
product coverage observed in the period coinciding with a large share of national measures
notified by the developed country signatories of ITA-1. On the other hand, the highest used
standards among developing countries were the so-called “regulating market and consumer
health/safety and quality standards. Developing countries have been attempting to introduce
many such measures, but due to the consideration of “National Treatment” (NT) principle,
these standards are introduced in a much diluted manner in these countries. Thus tariff
liberalisation under ITA-1 has proved fatal for the home grown IT hardware and
telecommunication sectors in developing countries like India with no industry level standards
vis-a-vis developed countries (who have been the technology leaders) or those developing
28
EC has been taken as individual countries and not as a block.
29
See Annexure 4 for a detailed understanding on negotiations on NTMs under the ITA Committee on
EMI/EMC and yearly notifications of National Standards Vis-a-Vis International Standards over the time.
30
In 2010, the committee continued its deliberations on the non-tariff measures (NTMs) work programme, in
particular, a pilot project relating to conformity assessment procedures for electromagnetic compatibility
(EMC) and electromagnetic interference (EMI).
31
Refer to footnote 4 of this paper.
32
Only one project has been initiated in 2001 on the harmonization of EMC/EMI standards.
32
Draft Paper not to be quoted
countries already linked to the international production networks - the classic case being the
East Asian countries).
The paper clearly establishes that while the ITA-induced liberalisation in the late 1990s was
partial for India and that liberalisation was total only from 2005, imports have surged in India
beginning in the late 1990s. There is strong evidence of replacement of domestic
manufacturing production in India by imported products, which is a direct outcome of ITA
tariff alone liberalisation.
It has been clearly demonstrated in the paper that the global trading arena for Indian ITA
products was highly imbalanced, especially after 2005 when complete elimination of tariffs
was carried out. It is also evident that India has been denied “market access” by many
developed and many other emerging developing countries. Gradually, with the influx of
imports into the domestic markets under zero tariffs of the ITA-1, the existing domestic
producers have become domestic assemblers/traders in the IT products. 33 This will have a
major socio-economic impact. The minimal value addition through the assembling activity
will have an adverse impact on the organised sector, but more importantly it may adversely
impact the unorganised and Small and Medium Enterprises (SMEs). We feel this is exactly
what could have happened in the case of India as a direct outcome of the unbalanced
approach to market access issues under the sectoral agreement of the ITA-1. Unfortunately,
we do not have regular information flow for the unorganised sector to assess the impact.
Another aspect which came to light in the context of trade is the increased concentration of
both export markets and import suppliers of Indian ITA products. Thus the original goal of
the ITA Agreement was to create competition by increasing trade, which has not been true in
the case of India. Rather than diversification of suppliers and exporters of ITA products, there
has been an increase in concentration of India’s trade partners.
The last and most critical aspect which emerges from this study is the decrease in the
indigenous content in India’s ITA exports, which leads to a reduction in value addition and
also to an adverse impact on the employment generation capacity of this sector. It has been
noticed that during the period of mid-1990s to the mid-2000s, the import content in Indian
exports increased substantially. Our examination of the IT hardware industry in India
suggests that there is an increasing tendency of manufacturers turning into assemblers of the
same products. This could have a devastating impact on the employment status of the people
employed in the ITA sector, increasing casualisation of labour force. A study by Joseph and
Abraham (2007) indeed showed a marked decline in the growth rate of output in all the
product segments wherein tariffs got reduced - for both ITA and non-ITA products. In the
case of ITA-1 products, where tariff reduction was faster, the rate of deceleration in
production was also faster.34
33
Empirical evidence based on firm level data provided in Section 6.
34
Joseph K J. and Vinoj Abraham, 2007, “Information Technology Agreement of the WTO and India’s IT
Sector”, Centre for Development Studies, Mimeo.
33
Draft Paper not to be quoted
The “Source India” campaign was launched by Electronics Industries Association of India
(ELCINA) in 2009 to accelerate development of the Indian electronics supply chain.
ELCINA recognises that a strong supply chain is the back bone of any engineering
manufacturing industry and more so of the electronics industry due to the huge variety of
materials and components required for electronics equipment manufacturing. The growth of
India's industry and to some extent market expansion has been restricted due to the lack of
supply chain support. This situation needs urgent correction by the government.
Development of local supply sources and increased value addition is necessary and
imperative if this market is to be serviced efficiently. The “Source India” scheme proposed
for the electronic industry by the industry association was an outcome of these initiatives and
reflected a new direction of thinking by the industry association and policy makers.
However, even as the National Manufacturing Policy of 2011 press note stressed the role for
having a strong IT hardware sector as that one of “strategic significance” and in the interest
of national security,35 initiatives like “Source India” by the industry association like
ELCINA may have been introduced too late to have any real impact unless effectively
coordinated with other sectoral efforts and within a strategic industrial development policy.
35
Government of India Ministry of Commerce & Industry Department of Industrial Policy & Promotion (Manufacturing
Policy Section), “National Manufacturing Policy 2011”, Press Note no. 2 (2011 SERIES).
34
Draft Paper not to be quoted
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Annexure 1: Broad Measures: Category-wise TBT notifications
Source: Centre for WTO Studies Web Portal http://cc.iift.ac.in/tbt/index.asp
Annexure 2: Developing Countries with Broad Criteria for ITA Products (Notifications)
Note: This list has been arrived at after removing all the other products which are not relevant
while addressing issues of ITA.
37
Draft Paper not to be quoted
Annexure 3: Total Membership TBT Measures – (yearly notifications & Avg. Coverage
per Notifications)
Source: Centre for WTO Studies Web Portal http://cc.iift.ac.in/tbt/index.asp
Annexure 4: Detailed Year-wise Usage of National Vs International Standards in ITA-1
Products
Developed Vs Developing Members of WTO
800
700
600
500
400
300
200
100
0
1995
1996
1997
1998
National Measures (DGs)
1999
2000
2001
2002
National Measures (Ped)
2003
2004
2005
2006
2007
International Measures (DGs)
2008
2009
2010
2011
International Measures (Ped)
Source: Authors’ calculations based on the Centre for WTO Studies Web Portal
http://cc.iift.ac.in/tbt/index.asp
38