Wt/tpr/M/313/Add. 1 31 July 2015

PART I: QUESTIONS ON THE SECRETARIAT REPORT (WT/TPR/S/313)
1 ECONOMIC ENVIRONMENT

1.3 Monetary and Exchange Rate Policy
Page 17, paragraph 1.9
Question 1 The Secretariat’s Report states that the Export Credit Refinance (ECR) facility was replaced by "system-level liquidity". Please explain the meaning of this phrase.
Reply: The RBI provides liquidity on a daily basis to the banking system under its Liquidity Adjustment facility (LAF) to meet the system wide demand for liquidity and thereby anchors the operating target of monetary policy – the weighted average call money rate – around its policy (repo) rate. Earlier banks had the option to access liquidity from the RBI either under the ECR (up to the eligible limit) at fixed repo rate or under the LAF (by participating in auctions, a progressively increasing part of which is available now at variable rates. For market based liquidity management and monetary policy, injection of liquidity at fixed repo rate has been progressively de-emphasized. Accordingly, after the ECR was merged with the LAF, the RBI continues to meet the system wide liquidity needs, but without any sector-specific preference, and through greater emphasis on auctions for its liquidity operations on a day to day basis.
Furthermore, please reply to the following:
Question 2: The Royal Bank of India's (RBI) Sixth Bi-Monthly Monetary Policy Statement, 2014 2015, indicates that the ECR limit was gradually lowered since June 2014 based on a "recommendation to move away from sector-specific refinance." Was the ECF sector-specific? Was it used to target or benefit agricultural export financing?
Reply: The Export Credit Refinance (ECR) facility was a sector-specific window allowing banks additional access to liquidity from the RBI at fixed repo rate. The Dr. Urjit Patel Committee had reviewed the ECR policy and was of the view that sector-specific refinance policies may interfere with monetary policy transmission and also that liquidity should be provided to the system as a whole consistent with the monetary policy stance instead of linking access to liquidity from the RBI to performance of a bank on export credit (The Report is available at https://rbi.org.in/Scripts/PublicationReportDetails.aspx?ID=743). After the introduction on the new liquidity management framework, a large part of banking system liquidity requirement is being met through variable rate auctions (instead of fixed repo rate), and the liquidity earlier provided under the ECR has been merged with normal liquidity operations of the RBI.
Question 3: The RBI's Master Circular on the ECR facility indicates that the interest rate under the facility was the repo rate under the Liquidity Adjustment Facility and the duration was up to 180 days. How do these terms compare to the original export credit financing provided by the banks?
Reply: Access to liquidity under the ECR was available for eligible export credit in Indian rupees (i.e., not export credit in foreign currency), and banks could access liquidity ranging from one day to 180 days (with the option to rollover shorter term liquidity up to a maximum of 180 days against same export credit). As on March 31, 2015, out of the total outstanding (pre-shipment) rupee export credit, about 67 per cent was of less than 180 days, about 20 per cent of 180 to 270 days, and the remaining 13 per cent of above 270 days. The objective of ECR was to promote the export sector and not finance the export sector matching the tenor of export credit extended by a bank. ECR, by providing additional access to liquidity from the RBI at fixed repo rate, was only incentivizing banks to extend more export credit.
Question 4: Does India anticipate that the ECR facility will be made available again in the future?
Reply: As of now, there is no such proposal under consideration.
2 TRADE AND INVESTMENT REGIME

2.2 Trade Policy Formulation and Objectives

2.2.1 Trade Policy Formulation
Page 25, paragraph 2.9
The Secretariat's Report references specific ministries with which the Indian Ministry of Commerce and Industry coordinates the development of trade policy, including the Ministry of Steel.
Question 5: How does trade policy in India relate to the Ministry of Steel's Strategic Steel Plan for 2011 2016, which calls for the development of increased steelmaking capacity in India and export capability? What specific trade policies is India formulating for the steel sector?
Reply: There was no specific strategic steel industry plan formulated by the Ministry of Steel for the years 2011-16. However, the erstwhile Planning Commission had set up a Working Group on the Steel to forecast the demand and supply situation for the period of 12^th Five Year Plan and recommended appropriate measures to ensure that the forecast levels in steel and raw materials production are reached. The Working Group was composed of experts from both within and outside the government and the report is advisory in nature. There was no compulsion on the part of the government to accept any of the recommendations of the Group. As steel is a deregulated sector, investors and manufacturers take decision regarding augmenting steel capability or adding export capability based on their economic considerations. Similarly, India's trade policy may not have any direct relationship for the development of increased steelmaking capacity in India and export capability. The steel or general industry specific trade policy measures are brought in time to time as per requirement.
2.2.2 Trade Policy Goals
Page 26, paragraph 2.13: The Secretariat's Report mentions the "Make in India" initiative.
Question 6: Please summarize the specific policies of this initiative, focusing on the aspects that will support India's export competitiveness.
Reply: A detailed note on "Make in India" initiative is at http://www.makeindia.com.
Pages 26-27, paragraph 2.14: India's new Foreign Trade Policy for 2015-2020 does not address the need for fundamental structural reform, particularly with respect to the agricultural sector. In light of this, please explain the following:
Question 7: Given recent reports, such as the IMF's recent annual report on India and the Report of the High Level Committee on Reorienting the Role and Restructuring of Food Corporation of India (Jan. 2015), calling on the need for structural reforms, does India have a specific plan or timeline for introducing structural reforms pertaining to agriculture and agricultural trade policy?
Reply: Structural reforms in the agriculture sector is a constant process and India is making all efforts to enhance the efficiency of the available mechanisms through various policy initiatives.
Question 8: Recognizing the constitutional authority of Indian state governments on matters of agriculture, what specific measures will India undertake to promote sustainable growth, while reducing the incidence of trade disruptions and improving India's integration into the world trading system?
Reply: India is deeply committed to honor its WTO obligations, and the federal system of governance ensure that international obligations are fulfilled while taking care of the requirements of the domestic agricultural sector.
Question 9: Does India plan to continue using ad hoc policy adjustments (i.e., import duties and export controls) to regulate the supply and demand of certain agricultural commodities?
Reply: India does not use ad hoc policy adjustments on Agriculture items. Export and import of most Agriculture items is free. Also duty on most of Agriculture items is stable over the past five years. Adjustments made keeping in view food security requirements are few and are dictated by prevailing market and crop conditions.
Question 10: What specific tax and trade policy measures does India plan to introduce to encourage the development of a more predictable and sustainable agricultural business environment?
Reply: The Foreign Trade Policy (FTP) Statement 2015 details the policy objectives and measures envisaged to encourage a more stable predictable environment for trade in general and also for specific sectors.
Apart from this, the FTP for 2015-2020 announced on 1 April 2015 includes specific measures to achieve this objective. These documents are available on the DGFT website (www.dgft.gov.in).
2.3 Trade Agreements and Arrangements

2.3.2 Regional and Preferential Agreements

2.3.2.1 Regional Trade Agreements
Page 30, paragraph 2.24: The Secretariat's Report states that India "recently conducted an internal analysis of various FTAs, and found that the utilization of several FTAs by India's FTA partners was not significant." The Secretariat's Report goes on to state that "it is not clear what the immediate benefits of existing FTAs are and what if any implications for India's policy there may be on its current RTA negotiations."
Question 11: Please explain whether India has identified specific structural bottlenecks that could help explain why FTA utilization rates among India’s FTA partners are so low. Further, has India considered expanding the trade covered under its FTAs as a means to improve utilization of its FTAs?
Reply: It is for the trading partners to analyze the reason for the level of import utilization rates in FTAs. However, some of the reasons could be the low level of awareness among exporters of the FTA partner, administrative issues such as the procedure for obtaining the certificate of origin, tariff liberalization may not have been completed etc. We have a procedure for review of existing FTAs and the level of utilization, both imports and exports (if available) would be one of the issues that would be a subject of discussions in the review.
2.4 Investment Regime

2.4.1 Legal Framework for Business
Page 31, paragraph 2.30: The Secretariat’s Report highlights India’s development of the e-biz platform.
Question 12: Please explain what services and ministries are currently integrated with the e-biz platform and identify the implementation schedule of future services.
Reply: Out of the 26 Central Services identified for integration with eBiz, 14 services have already gone live. Other 12 services are expected to be integrated in this financial year.
eBiz project is expected to lead to savings in time, cost and efforts for the entrepreneurs. Concerned authorities are attempting a common application form and process for incorporation of a company, allotment of Permanent Account Number (PAN) & Tax Deduction Account Number (TAN) and employer registration with Employees’ State Insurance Corporation (ESIC) & Employees’ Provident Fund Organization (EPFO).
This portal also provides facility to track specific application and to monitor the performance of various government agencies.
2.4.2 Foreign Investment

2.4.2.1 Policy
Page 32, paragraph 2.38: The Secretariat’s Report mentions the two routes for foreign direct investment (FDI) in India.

Question 13: Please explain whether India has any plans to reduce the number of sectors in the non-automatic route for FDI.
Reply: Review of FDI Policy is an ongoing process. Some of the recent changes in FDI policy are as under;
Press Note 10 (2014), DIPP – GoI liberalized the conditionalities on foreign investment in the Construction Development Sector.
Press Note 2 (2015), DIPP – GoI allowed FDI upto 100% under the automatic route for manufacturing of medical devises.
Press Note 3 (2015), DIPP – GoI increased the ceiling for foreign investment in insurance from 26% to 49%.
Press Note 4 (2015), DIPP – GoI authorized foreign investment in pension funds up to an ownership ceiling of 49% FDI in pension funds are allowed under the automatic route up to 26%.
Page 33, paragraph 2.38: The Secretariat’s Report states that "FDI remains prohibited in certain agricultural activities, gambling and lotteries and real estate."
Question 14: Please explain why India has not liberalized investment in agricultural activities or real estate, and whether it has plans to liberalize investment in these sectors in the future. In particular, given the difficulties with grain storage in India, what measures does India plan to take to encourage FDI in grain storage and handing?
Reply: FDI up to 100% is permitted under automatic route in specified activities of the agriculture and allied sectors. The details as per para 6.2.1 of "Consolidated FDI Policy Circular of 2015". However FDI in real estate business is prohibited, since the sector is crucial with respect to national interest and is of sensitive nature with social and economic implications. 100% FDI is allowed under the automatic route in storage and warehousing including warehousing of agricultural productions with refrigeration (cold storage). The details of FDI in construction development sector are at Para 6.2.11 of "Consolidated FDI Policy Circular of 2015".
Question 15: The Secretariat’s Report also states that brownfield investment in pharmaceuticals requires government approval, but greenfield investment does not. Please explain why India maintains a distinction between greenfield and brownfield pharmaceutical investment and when it plans to allow brownfield investment through the automatic route.
Reply: Foreign Direct Investment (FDI) in the pharma sector was allowed up to 100% on the automatic route, till the policy was amended with the issuance of press note 3 of 2011. The policy amendment made a distinction between green field and brownfield investment whereby FDI up to 100% in existing (brownfield) entities was allowed but under government route. There was no change in the FDI policy on green field investment.
A spate of takeovers of frontline Indian pharma companies/facilities by multinational corporations between 2006 and 2011 necessitated a review of the FDI policy in the pharma sector in the context, primarily, of the imperatives of public health. Government was witnessing extremely worrying trends of MNCs taking over Indian Pharmaceutical companies. This phenomenon was likely to affect very seriously Government’s efforts at making available general versions of drugs which were less priced but of equivalent quality, efficacy and safety as compared to the branded medicines. Essential medicines were bound to become costlier thereby as the companies producing cheaper generic versions would be owned by the MNCs which may increase their costs.
Keeping in mind the above, with a view to exercise oversight on takeovers of existing pharmaceutical manufacturing firms, FDI up to 100% in existing (brownfield) entities was allowed under government route.
Page 33, paragraph 2.40: The Secretariat’s Report states that "for single- and multi-brand retailing other conditions also apply including local sourcing of up to 30% from Indian 'small industries' and establishment only in cities with a population of above 1 million."

Question 16: Please explain why India maintains local content requirements in the retail sector and whether there are plans to remove such requirements. Please also explain whether these provisions disincentivize investment and limit the development of internal supply chains.
Reply: The requirement pertaining to a minimum of 30% procurement from Indian small industries has been included as safeguard for small manufacturers. This has been incorporated to provide the necessary scales for these entities to expand capacities in manufacturing, thereby creating more employment and also strengthening the manufacturing base of the country. They will also derive the benefits of technology up-gradation, which will provide a fillip to productivity and local value-addition, thereby raising the profitability and earnings of the small manufacturer. The sourcing condition will also enable the small enterprises to get integrated with global retail chains, thereby enhancing their capacity to export products from India. In order to boost small-scale industry in the country, 30% sourcing has been made mandatory. The sourcing condition will also enable the small enterprises to get integrated with global retail chains. This in turn will enhance their capacity to export products from India.
3 TRADE POLICIES AND PRACTICES BY MEASURE

3.1 Measures Directly Affecting Imports

3.1.1 Customs Procedures and Requirements
Page 35, paragraph 3.6: The Secretariat's Report states that to "import specific goods, in certain instances, certificates of registration and import permits issued by different agencies are required."
Question 17: Please explain how India determines which goods in which instances require certificates and permits.
Reply: Export and import of most of the items is free. However, the items that require certificates and permits are the items considered sensitive predominantly on account of security, Public Health, Public Morals, environment grounds etc. Requirement of certificate and permit, if any, are well documented and available in the public domain.
3.1.1.1 Preshipment Inspection
Page 36, paragraph 3.10: The Secretariat’s Report states that India requires preshipment inspection for "shredded and unshredded metallic waste and scrap, second-hand and defective steel products, and certain textile and clothing articles."
Question 18: Please explain for what purpose or information India requires a preshipment inspection requirement for these goods.
Reply: Presently Pre–Shipment Inspection (PSI) is prescribed for metallic waste and scrap. The purpose behind Pre-shipment Inspection is to confirm that the consignment does not contain any type of arms, ammunition, mines, shells, cartridges, or any other explosive material in any form either used or otherwise. It also checks and ensures that it does not contain radiation level (gamma and neutron) in excess of natural background. For import of seconds/defectives of steel, pre-shipment certificate seeks to ensure compliance to appropriate material quality, chemical analysis of the material, visual inspection, thickness and width of the material. For import of textile and textile articles, pre-shipment certificate ensures that the consignment is permitted subject to the condition that they shall not contain any of the hazardous dyes whose handling, production, carriage or use is prohibited by the Government of India under the provisions of Environment (Protection) Act, 1986.
3.1.2 Customs Valuation
Page 36, paragraph 3.12: The Secretariat’s Report states that India's "Central Board of Excise and Customs is authorized by notification in the Gazette of India to fix reference prices for any type of imported (exported) goods, in accordance with Section 14(2) of the Customs Act 1962."
Question 19: Please explain in what situations reference prices are applied to imported goods, and how this practice relates to the valuation procedures outlined in the WTO Agreement on Customs Valuation.
Reply: Tariff values have been notified for certain goods that are prone to undervaluation. Tariff values are fixed on the basis of prevailing international prices of these goods as observed from various reputed journals and other publications. These values are floating values and are frequently reviewed and revised. As the tariff values on identified goods are computed based on prevailing international prices, that is to say the prices at which these goods are sold or are offered for slae in the ordinary course of international trade under fully competitive conditions, such values are not inconsistent with Article VII of the GATT 1994 read with Customs Valuation Agreement.
3.1.5 Other Changes Affecting Imports
Page 43, paragraph 3.28: The Secretariat’s Report states that "India charges an Education Cess of 2% as well as a Higher Education Cess of 1% on the aggregate of customs duty on all imports."
Question 20: Please explain why India is taxing education imports while at the same time trying to extend educational opportunities across the economy.
Reply: Education Cess and Higher Education Cess charged as a percentage of the Excise Duty for domestic goods was also charged on similar imported goods. However, w.e.f 01.03.2015, Education Cess and Secondary & Higher Education Cess leviable on all excisable goods has been fully exempted. Simultaneously, the standard ad valorem rate of duty of excise (i.e. CENVAT) has been increased from 12% to 12.5%.
It may be noted that Education Cess and Secondary & Higher Education Cess were charged so as to create a fund for enhancing the quality of Secondary & Higher Education system, and not to tax the education sector.
3.1.7 Tariff Rate Quotas
Page 46, paragraph 3.35: The Secretariat’s Report states that India last notified its imports under TRQs to the WTO in 2011 for the marketing years 2003-2004 to 2009-2010.
Question 21: Please identify when India plans to provide an updated notification on its TRQs.
Reply: India will be submitting its notifications shortly.
3.1.9 Import prohibitions, restrictions, and licensing

3.1.9.1 Import Prohibitions
Pages 47-49, paragraphs 3.40-3.41, and Table 3.8: The Secretariat’s Report clarifies which import prohibitions were in place and for what reasons import prohibitions exist.
Question 22: Please clarify whether any import prohibitions exist for products falling under HS0201, HS0202, HS0210120, and HS160250, which are generally classified as meat of bovine animals? If not, does an import protocol and language for a sanitary import permit exist for the import of bovine products into India or into specific Indian states e.g., Kerala, where there are no restrictions on cow slaughter or beef consumption? If the above-mentioned products are prohibited, please indicate the basis or risk assessments as to why the import prohibition exists. Further, please clarify whether the HS line items listed in Table 8 are restricted for health or moral reasons. In regards to rennet, which are listed as prohibited items in Table 8, are products made from or with rennet, both microbial or animal (e.g., cheeses) prohibited from being produced in or imported into India?
Reply: Items covered under HS0201, HS0202,HS 1602 50 00 are Restricted for Imports, which means an authorisation would be required for imports. Items covered under HS0210120 can be imported freely. None of the products mentioned in the question are prohibited for Imports. However, products made from items that are prohibited from being imported into India will also be prohibited.
3.1.9.2 Import Licensing and Restrictions
Page 49, paragraph 3.43: The Secretariat’s Report states that "[r]estricted items subject to conditions require import permits in addition to the specific import licence."
Question 23: Please explain why India requires import permits in addition to the specific import license.
Reply: Import of most of the items is free which means no import permit or authorisation is required. However, in few cases both import permits and specific import authorisations may be required to be obtained. DGFT issues import authorisation for products under restricted category of imports.  An importer may also be simultaneously required to obtain  import permit in few cases to comply with the requirement of different Acts  primarily on grounds of preservation of environment, public health etc.
The Secretariat’s Report also notes that India applies import licensing requirements on several imported products. The United States has the following questions for India with regard to the import licensing regime applied to boric acid: