OECD for opening up of Indian market, raps SEZs

Written by ASHOK B SHARMA | New Delhi, September 21: | Updated: Sep 22 2007, 00:52am hrs
A report prepared by the Paris-based Organisation for Economic Cooperation and Development (OECD) has described India as a closed economy both in absolute terms and relative to other developing countries, including China.

This is despite the on-going reform process in the country, it said.

OECD, the inter-governmental body of 30 developed countries, suggested further opening up and removal of tariff barriers to usher in a manufacturing-led growth. Current protection levels on imports of both goods and services are still much higher when compared to other BRICs,

Arguing for opening up, the OECD study Indias Trade Integration, Realising the Potential authored by Przemyslaw Kowalski and Nora Dihel said that the overwhelming majority of Indias imports (between 72% and 100%) were not imported for domestic consumption, but were used as intermediate inputs by domestic manufacturing and service sectors. The remaining trade barriers combined with domestic red tape, infrastructure bottlenecks and factor market rigidities restricted new entry and competitiveness particularly in agriculture and manufacturing at relatively low levels.

Indeed, the 2005 trade-weighted average tariffs of close to 52% in agriculture and 12% in manufacturing still imply a significant wedge between domestic and world prices and act as an indirect tax on exports through imports. This puts many Indian producers that rely on imported inputs at a competitive disadvantage, while shielding uncompetitive domestic producers from competition, it said.

The OECD paper clearly indicates the developed countries insistence for opening up of markets in the developing world on the pretext of growth. It is particularly relevant when the discussions are due in Geneva on Don Stephensons draft on non-agricultural market access (NAMA).

According to the OECD paper the recent growth in Indias trade has been led by services rather than manufacturing and that manufacturing trade was highly concentrated in low-technology goods and the share of high-technology manufactured goods in the total exports barely changed since mid-1990s and remained under 5% as compared to 30% for China.

Regarding services sector, the study said that barriers in India still remain high and the sector suffers from domestic constraints in terms of burdensome regulatory measures and state monopolies.

However, the study admitted that India has emerged as a global player in information technology, business process outsourcing and pharmaceuticals. Mode-4 related trade represented over 90% of total cross-border service exports, but achieved marginal gains in market shares in some OECD markets. In terms of Mode-4, half of total remittances received by India sent by Indian expatriates in the US, represents almost 2% of Indias GDP. Foreign direct investment (FDI) inflows have rapidly grown and shifted away from manufacturing to services sectors, but remain negligible to what the BRICs received. In 2004, India attracted less than 10% of the inflows into China, it said.

Saying that Indias path of development has been different from that of China and from the paths followed in the earlier decades by Japan, Korea and other Asian tigers, the OECD study criticized the setting up Special Economic Zone (SEZ) in the country which is essentially a Chinese model.

However, in China there is a limited number of SEZs about six in number and are highly regulated by the government. In India the number of SEZs have run into hundreds. There is popular resistance by farmers and the local people in different parts of the country against the governments SEZ policy which causes diversion of farmlands.

Raping Indias SEZ policy, the OECD study observed : In an effort to offset the high taxation of intermediate products and barriers to services trade, India has opted to maintain and cultivate an extremely complex system of duty exemption schemes, special investment and establishment rules and SEZs that provide incentives particularly to exporting firms.

Further questioning the SEZ policy on promoting economic efficiency and growth, the study said the discriminatory export-oriented policies may in some circumstances bring more harm than good. It criticized it as negative incentive.

The study noted that Indias growth has been concentrated in capital-intensive sectors with high productivity growth rates that are relatively more reliant on skilled labour. In this context, it suggested that dynamic, sustained and balanced economic growth can continue if India manages to harness the growth of its human capital by sustaining the improvements in investment and productivity.