(c) The balance-of-payments situation (Cont.)

280. India argued, with respect to the evidence submitted by the United States in the press releases, that the objective of the statements of the Finance Minister had been to provide an assurance to businessmen, investors and opinion-makers in the United States that his Government supported the process of economic reforms initiated in India in 1991, and that his Government would give the reform process itself a further boost. The presumption underlying this advocacy of the reforms process was that India had seen gains from the economic reforms carried out thus far. However, the Finance Minister himself in these statements cautioned that problem areas remained and that India�s economic development and re-structuring process had as yet not run its course. In recognition of the complementarity between domestic policies and trade reforms, the Finance Minister had pointed out the need for a carefully calibrated approach on globalization. The progressive elimination of import restrictions by India in the recent past, and India�s commitment to phase out import restrictions over a period of time, had been specifically noted by the Finance Minister. India submitted that a Finance Minister was the steward of his nation�s finances and was required to emphasize the positive approach of the new Government with respect to foreign inflows and the balance-of-payments situation. Finance markets would react adversely if a Finance Minister emphasized the negative aspects of the balance-of-payments situation. Accordingly, the statements of the Finance Minister should be read in the above context and not literally. Moreover, they also related to a situation existing at a particular point of time.
281. Similarly, according to India, in the press release of India�s Central Bank, the Reserve Bank of India (the "RBI") simply announced that India�s foreign currency assets had increased as a result of "a number of monetary measures to stabilize the forex market". This statement must be read in its proper context. It revealed both the extreme volatility in the foreign exchange market and the beneficial impact on India�s reserves of a number of monetary measures designed to address this volatility. India wished the Panel to note that the monetary measures included increases in interest rates that necessarily had an impact on economic growth and development. Further, India�s time-schedule was premised upon such improvements in its monetary reserves and balance of payments. In India's view, the United States had not shown in what way these statements by the Finance Minister and the RBI had a bearing on the criteria specified in Article XVIII:11 and the interpretative note thereto. Accordingly, India urged the Panel to put the United States to strict proof that India�s balance of payments and reserves situation did not meet the criteria laid down in Article XVIII:11 read with the interpretative note thereto.
282. India noted that in support of its claim that India no longer met the conditions under Article XVIII:11 for maintenance of its import restrictions the United States had produced evidence from publicly available data from the IMF that, according to the United States, confirmed the strength of India�s reserves and balance of payments position. India considered that such data could not rise, as a matter of law, to the level of the determinations required to be made by the Committee under Article XVIII:11. The fact that India's reserves situation had improved did not necessarily mean that India�s monetary reserves did not face a threat of a serious decline in the medium term or that its monetary reserves were adequate over the medium term in relation to its programme of economic development. Such "publicly available data from the IMF" did not quantify or evaluate potential threats to India's balance of payments that in turn could result in a drawdown of reserves. Further, such data also did not in any way reflect the determination required to be made under Article XVIII:11 that removal of import restrictions would not result in a recurrence of a threat of a serious decline in its balance of payments.
283. India commented that all the statements quoted by the United States referred to the recent foreign exchange reserves position. These figures did not relate to medium- and long-term perceptions of the threat to India's monetary reserves or balance of payments or India�s medium- and long-term economic development needs. Earlier, India had included evidence relating to its trade balance figures after 1991. The latest figures, as indicated in the Economic Survey of 1997-98 indicated that the trade deficit, as presently estimated, were as high as US$11,359 million, representing 3.4 % of GDP in 1995-96 and US$14,299 million, representing 4% of GDP in 1996-97. It was almost impossible to predict accurately the effect on India's trade deficit of immediately eliminating import restrictions on items in the remaining HS-lines at the 8-digit level that constitute a large proportion of India's total annual consumption. Rules of thumb about the adequacy of India's current monetary reserves with respect to current imports became instantly irrelevant in light of the impossibility of making such predictions.
284. India contended that the current account deficit had remained within manageable proportions only because of a substantial increase in basic capital inflows on private account. According to the Economic Survey of India, 1996-97, net flows on private account rose from about US$2.2 billion in 1992-93 to an average of US$6.3 billion during the period between 1993-94 and 1995-96, and further to US$10.4 billion in 1996-97. In a developing economy, excessive reliance on private capital inflows posed a serious danger of a balance-of-payments crisis. Recent experience in the East Asian economies had clearly shown the disastrous effect on the entire process of economic growth of a balance-of-payments crisis. The United States had quoted a work by former economic advisor to the GATT Secretariat, Dr. Jagdish Bhagwati, on India's regulatory regime for international trade. India invited the Panel's attention to a recent article entitled "The Capital Myth: the Difference between Trade in Widgets and Dollars" by Dr. Jagdish Bhagwati, which appeared in the journal Foreign Affairs, May/June, 1998. Dr. Bhagwati had pointed out in this article that in 1996, total private capital inflows to Indonesia, Malaysia, the Republic of Korea and the Philippines were US$93 billion, up from US$41 billion in 1994. In 1997, that suddenly changed to an outflow of US$12billion. According to Dr. Bhagwati:

"Each time a crisis related to capital inflows hits a country, it typically goes through the wringer. The debt crisis of the 1980 cost South America a decade of growth. The Mexicans, who were vastly overexposed through short term inflows, were devastated in 1994. The Asian economies of Thailand, Indonesia and South Korea, all heavily burdened with short-term debt, went into a tailspin nearly a year ago, drastically lowering their growth rates."

285. India also quoted the 7-13 March 1998 issue of The Economist:

"The financial crisis might seem to be over: currencies have steadied and stock markets are recovering. But the economic crisis has barely begun."

286. Given the recurring trade deficit, India considered that it must necessarily follow a policy of great caution while progressing steadily towards its ultimate goal of total economic liberalization. A large country such as India with a huge population and a potentially huge market could run into a serious economic crisis unless the march towards liberalization was carefully calibrated. It was vital to note, therefore, that, when the Finance Minister of India and the Governor of the Reserve Bank of India talked about the adequacy of levels of foreign exchange reserves, they were talking in the context of the present situation -- a situation in which quantitative restrictions on consumer goods and controls on capital mobility exist. Nowhere had they made any statement regarding the adequacy of reserves in a situation in which such controls were dramatically removed overnight. On the other hand, the latest official publication of the Ministry of Finance, which was placed before the Indian Parliament in the last week of May 1998, clearly brought out the view of the Government of India. According to the Economic Survey of India, 1997-98:

"While India's current level of reserves appears comfortable by traditional yardsticks, it is important to recognise that with an increasingly open economy, on both current and capital accounts, the need for reserves to cushion orderly development of the economy from changes in the external environment rises. Furthermore, the recent crisis in East and South East Asia has brought into sharper focus the need to maintain high levels of reserves to counter the increased volatility in short term capital flows. Inflows and outflows need to be carefully monitored and calibrated at all times to forestall the threat of a serious decline in resources."

287. The United States noted that India had argued that Members should not be compelled to replace import restrictions taken for balance-of-payments measures with other macro-economic policies, because such policies always could, "in a technical or economic sense," replace import restrictions, and Article XVIII:11 did not permit a developing country Member to be required to change its development policies. However, India had said to the Balance-of-Payments Committee, this Panel, to the financial community and to potential investors that its Government was in fact utilising a full set of macroeconomic tools to carry out a development policy of trade liberalization. Furthermore, India was implying that the IMF was not able to make judgements about whether a particular country, such as India, had a full range of macroeconomic tools actually available to it. This was incorrect; the IMF had responsibility to review and assess every Fund member's economy once a year. As the IMF had determined, India did not have a serious decline or a threat of a serious decline in its balance-of-payments situation and there was no basis for the Panel to find that it would be in difficulty if the challenged measures were removed. Therefore, the point was that, in a real sense, not a technical sense, India did not now have balance-of-payments difficulties.
288. The United States further considered that the material laid before the Indian Parliament in May of 1998 as referred to in paragraph 3.286 above did not change the analysis. For example, the quoted statement conceded that the level of reserves appeared comfortable by the traditional yardsticks. Although it said that the level needed to be carefully monitored, the United States had not argued that India should not monitor its external position. Nothing in the quoted material suggested, however, that there had been a serious decline in reserves, that they were inadequate by any measures (including for India's development program), or that there was any threat to them. The fact that a Member monitored its reserves did not establish the existence of a threat to its reserves.
289. The United States went on to note that India had suggested that its trade deficit was a reason for "caution," and presumably meant to imply that the challenged measures should be maintained out of "caution." That was not the legal standard in Article XVIII:B. In any event, India�s own Basic Document to the Balance of Payments Committee had made it clear that over the last five years India�s balance-of-payments situation had been well managed despite a growing trade deficit:

"In spite of an increasing trade deficit the favourable trends on invisible transactions resulted in improvements in the current account deficit from 3.2 per cent of GDP in 1990-91 to 1.7 per cent in 1995-96. During 1993-94 and 1994-95, the improvements in the current account were reinforced by favourable trends in the capital account, and foreign exchange reserves grew from a low of US dollar one billion in 1991 to almost US dollars 21 billion at end March 1995." ²⁰⁹

290. In fact, contrary to India�s arguments, it was India, not the United States, that was arguing from a technical and theoretical position. India seemed to be suggesting that it would never be possible to establish whether or not the test of the Note Ad Article XVIII:11 is met. That would render the Ad Note a nullity, and therefore could not be the correct interpretation. No guarantee could be given that the economy of any country -- developed or developing � would remain free of balance-of-payment difficulties forever. The Note Ad Article XVIII:11 could not be interpreted to require such a guarantee. The Ad Note must instead be interpreted to require an examination of the actual circumstances: is there a threat of a serious decline now? are reserves inadequate now? The IMF had answered these questions: reserves are adequate, and there is no such threat. The Reserve Bank of India agreed:

"By any criteria, the level of foreign exchange reserves appears comfortable. ... Thus, even if exchange market developments accentuate the leads and lags in external receipts and payments, the reserves would be adequate to withstand both cyclical and unanticipated shocks." ²¹⁰

291. In short, the evidence the United States had provided about India's particular situation met any reasonable burden that the Ad Note could have been intended to contain.
292. The United States also noted that India had stated that this Panel should not take the statements of the Indian Minister of Finance or the Reserve Bank of India literally, according to India, because they were responsible for talking up the economy. The United States considered that assertion extraordinary, particularly if India was suggesting that their statements could not be relied upon by others. No one questioned the fact that Indian and world financial markets listened very closely to what the Minister of Finance and the Reserve Bank said. The consequence of that fact, however, was that the Minister and the Reserve Bank must speak with particular care and precision, not that what they said should be treated as unreliable. If the financial markets could depend on what they said, so could this Panel.
293. With respect to India's quotation of Dr. Bhagwati's article in Foreign Affairs, the United States pointed ou that Dr. Bhagwati's had said nothing about India's debt situation causing difficulties. Dr. Bhagwati had mentioned Mexico, Thailand, and Indonesia, the first three of which had been discussed in the Reserve Bank of India's assessment submitted to the Panel by the United States. The Reserve Bank had said:

"Furthermore, in the context of the fluctuating capital flows, it is useful to assess the level of reserves in terms of the volume of short-term debt which can be covered by the reserves. At the end of March 1997, the ratio of short-term debt to the level of reserves amounted to a little over 25 per cent. The strength of our foreign exchange reserves can be gauged from the fact that the ratio of short-term debt to reserves was 220 per cent for Mexico, 150 per cent for Indonesia, 64 per cent for Argentina, 50 per cent for Thailand and 30 per cent for Malaysia at the end of 1995. Furthermore, the level of reserves exceeds the total stock of short-term debt and portfolio flows which taken together, constitute a little less than 75 per cent of the level of reserves."

To continue with Article XXII consultations

²⁰⁹ WT/BOP/16, Op. Cit., para. 3.

²¹⁰ The Annual Report on the Working of the Reserve Bank of India (for the year July 1, 1996 to June 30, 1997), Chapter VII "Assessment and Prospects," paras. 7.23 and 7.24 (emphasis added).