6 April 1999
India - Quantitative Restrictions on Imports of Agricultural, Textile and Industrial Products
Report of the Panel
E. Article XIII:2(a) and the Import Licensing Agreement
- In the event that the Panel disagreed with the request to find that India's quantitative restrictions violated Article XI:1, Article XVIII:11 and Article 4.2 of the Agreement on Agriculture, then the United States sought a finding that the challenged measures were not applied in accordance with the requirements of Article XIII:2(a).
- India acknowledged that the legal claims of the United States were within the terms of reference of the panel, because, in its request for establishment of a panel in this dispute, the United States had claimed that it considered the import restrictions maintained by India inconsistent with, among other provisions, Article XIII of the GATT 1994 as well as Article 3 of the Agreement on Import Licensing Procedures (the "Import Licensing Agreement").
- India argued, however, that the Panel should not permit the United States to raise any legal claims in its second submission that it had not raised in its first submission because doing so would be inconsistent with India's due process rights. The United States had not made any request for legal findings under these provisions in its first submission. India, therefore, considered that the United States had withdrawn or waived its legal claims under these provisions because India would not now have an opportunity to respond to any arguments that the United States might make in support of its legal claims under these provisions in its second written submission.
- India recalled that the provisions of the DSU were based on the general premise that fairness and respect for the due process rights of both the complaining party and the responding party were essential to its over-riding objective "... providing security and predictability to the multilateral trading system ..." specified in Article 3:2 of the DSU. More specifically, the provisions of Article 12 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (the "DSU") and the Working Procedures in Appendix 3 of the DSU (the "Working Procedures") also made it clear that the due process rights of the responding party as much as the complaining party must be respected. Article 12:6 of the DSU required the complaining party to submit its first submission in advance of the responding party. Thereafter, although the last sentence of Article 12:6 of the DSU required both parties to submit subsequent written submissions simultaneously, the procedural sequence for submissions and hearings described in paragraphs 4 to 7 of the Working Procedures in Appendix 3 made it clear that this provision was not intended to deprive the responding party of its opportunity to respond in its own written submission to the arguments of the complaining party in support of its legal claims. Paragraph 4 provided that both parties must transmit their written submissions in which they present facts and arguments in support of their case. Paragraph 5 of the Working Procedures provided that the first substantive meeting which took place after the first submissions of both parties required the complaining party to "present its case first" followed by the responding party. Paragraph 6 set out the procedural requirements to be followed in the case of third parties. Paragraph 7 required the second substantive meeting of the panel to be devoted solely to "formal rebuttals".
- India noted that paragraph 12 of the Working Procedures set forth a proposed timetable for panel work that provides for written rebuttals of the parties approximately one to two weeks before the second substantive meeting of the panel. Paragraph 12 item c, made it clear that the second submission was a rebuttal submission implying that legal claims not mentioned in its first written submission could not be made. In light of this, India contended that any procedure that might permit the complaining party to raise in its second written submission legal claims that it had not mentioned at all in its first written submission or made at the first substantive meeting of a panel clearly violated the due process rights of the responding party. Likewise, any procedure that might permit the complaining party to raise in its second submission legal claims in respect of which it had not sought any finding in the first submission would clearly violate the due process rights of the responding party.
- India submitted, further, that the ruling of the Appellate Body in Bananas did not absolve the United States of its duty to present arguments in support of all of its legal claims by the end of the first substantive meeting of the Panel.
252 In that dispute, the panel had ruled that the complaining parties could not introduce in their second submissions arguments in support of legal claims that they had not taken up in their first submission even if these claims were within the panel's terms of reference. The Appellate Body reversed the panel's ruling on the basis that "[a]ny omissions in the arguments contained in the first written submissions of Mexico or Guatemala and Honduras were rectified in their joint representations with the other Complaining Parties made at the first meeting of the parties with the Panel ... ."
- In the present dispute, however, the United States had not even referred to its legal claims under Article XIII of the GATT 1994 or Article 3 of the Import Licensing Agreement either in its first written submission or at the first substantive meeting of the panel. Accordingly, India requested the Panel not to render a finding on any legal claim that the United States made in its second written submission that was not mentioned in its first written submission.
- The United States noted that India had confirmed that it did not utilize quotas in the administration of the challenged measures by asserting that it would not be practicable for India to administer quotas. In the view of the United States, it was hardly credible that a country that for decades administered a command economy -- i.e., an economy in which all domestically consumed goods had to be planned and tracked 253 -- would not now have the ability to manage a quota system for the smaller number of imported goods.
(i) Industrial Policy
1. After 1991, India had focused on bringing about a more competitive industrial structure by eliminating a number of regulatory barriers to internal competition at the entry, operational and exit stages in the life-cycle of an industrial unit. At the same time, India was also trying to increase infrastructural investment to break supply bottlenecks. The first and most important step consisted of limiting the number of industries in which an industrial licence was required from the Government of India under the Industrial (Development and Regulation) Act, 1951, prior to commencing a new industrial venture. At present, an industrial licence was required only in defence, strategic or environmentally hazardous industries. Industrial location policies were also administered more flexibly now. In addition, the Monopolies and Restrictive Trade Practices Act, 1969 had been amended to permit large companies to establish new units or expand existing ones without governmental permission. This Act was now oriented more towards the model of antitrust regulation common in developed economies where regulators focus on monopolistic, restrictive and unfair trade practices in particular industries. India was also opening up areas of the economy formerly reserved exclusively for the public sector to competition while simultaneously divesting its shareholding in public sector companies. The private sector had been permitted to invest in the provision of infrastructural services formerly restricted to the public sector.
2. India had also substantially liberalized the regulatory regime for FDI. Automatic approval was now available in an extended list of industries for up to 51% foreign equity shareholding and up to 74% in some industries. Up to 50% foreign equity in the mining sector was also permitted under the automatic approval route. The Government of India had delegated to the governments of the States the power to approve wholly foreign-owned power generation subsidiaries in which total investment did not exceed Rs.1,500 crore. Automatic approval for technology transfer arrangements with foreign companies was also available today in all industries including service industries as long as the proposal fell within specified limits, i.e., the royalty was limited to 5% of gross revenues (either inclusive of or net of taxes) and a lump-sum fee of US$2 million. The Reserve Bank of India had also dispensed with the requirement of prior approval of foreign share purchases in Indian companies under the automatic approval route.
(ii) Exchange Rate Related Reforms
3. In August 1994, India accepted the obligation under Article VIII of the Articles of Agreement of the International Monetary Fund to abolish exchange control restrictions for all transactions on the current account. The system of multiple exchange rates and the foreign exchange budget had been abolished in March 1993 and all restrictions on the trade account lifted. A committee set up by the Government of India under the chairmanship of a retired governor of India's central bank (the Reserve Bank of India) to examine the issue of putting India on the road to capital account convertibility has given its report. In accordance with the report, the capital account was being opened up in a phased manner to carefully balance the need for increasing external finance to support domestic investment while also ensuring that the volatility attached to these flows did not make the balance-of-payments situation excessively vulnerable and the monetary management of the economy difficult.
(iii) Fiscal Reforms
4. India had been attempting to reduce the high fiscal deficits of the national and state governments in order to reduce state preemption of domestic savings and to increase the proportion of government revenues that was available for development expenditure. In the case of India, large fiscal deficits usually involved government borrowings from the Reserve Bank of India which in turn was forced to allow the money supply to expand. This fuelled inflation thereby making exports less competitive and encouraging outflows of capital abroad. Accordingly, the Government of India had made determined efforts to achieve fiscal balance, mainly by pruning unproductive revenue expenditure, while also maintaining caution on public borrowings to avoid a slide into a debt trap. However, it had also lowered tax rates to increase the incentives for higher productivity and growth.
5. The 1997-98 national budget continued the tradition of lowering personal and corporate income tax rates. The highest marginal rate for personal income taxes was 30% and for domestic corporate taxes was 35%, thus approaching the levels prevalent in South-East Asian economies. Profits from exports were exempted from the minimum alternative tax and the tax on dividends had been abolished.
6. The 1997-98 national budget also slashed peak levels of tariffs from 50% to 40% which brought India's tariff structure significantly closer to the levels of the ASEAN economies. Simultaneously, customs duties had been reduced considerably on a large number of inputs, raw materials and intermediates to make domestic production more competitive in power, chemicals, textiles and information technology. The duty on capital goods had been further reduced from 25% to 20%.
7. Excise duties had been reformed to reduce the diversity of duty rates while radically simplifying the scheme of excise duty concessions for small scale industries. The ambit of the service tax had been widened to include a number of service industries including transportation of goods by road, consulting engineers, shipping and air travel agents.
8. Although the Government of India had planned to reduce the fiscal deficit of the national government to 4.5% of GDP by this year, the deficit had actually deteriorated to 6.1% of GDP for the fiscal year 1997-98. The main causes were a major shortfall in indirect tax revenues such as customs and excise duties which fell because of slower growth in industrial output and an inability to divest government-held equity in public sector corporations as a result of the weak performance of the capital markets over the last year.
(iv) Trade Policy Reforms
9. Trade policy reforms had been a significant component of the reforms process since 1991. To achieve long-term sustainability in the balance of payments, the draft Ninth Five Year Plan prepared by India's Planning Commission estimated that Indian exports would need to grow two percentage points faster than imports in order to keep the trade balance within control and to make adequate provision for future payments streams necessary to service external debt and investment obligations. In order to achieve such a growth rate in exports, the relative prices within the country would need to be reoriented in favour of tradables and away from non-tradables and within tradables, in favour of exportables and away from import substitutes. Such reorientation of relative prices, however, took time to effect particularly if major economic disruptions were to be avoided.
10. Since 1991, the reforms process had been based on reducing tariff barriers, progressively eliminating non-tariff barriers and introducing greater transparency in import and export procedures. As noted above, the 1997-98 budget reduced peak tariff levels from 50% to 40%. In addition, duties were lowered on inputs, raw materials and intermediates to make domestic production more competitive in power, chemicals, textiles and information technology. Duties on capital goods were further reduced from 25% to 20%. The underlying trend of import duties and excise duties had been maintained in the annual budget 1998-99.
11. With respect to the reduction of import restrictions, the reforms concentrated initially on easing access to capital and intermediate goods. More recently, they had focused on easier access also to raw materials and consumer goods. Between 1 April 1996 and 1 April 1997, India had removed 488 items from the restricted list and made them freely importable. In accordance with the time-schedule that India had agreed upon with its trading partners in the WTO, India had removed import restrictions on 460 HS tariff lines at the eight-digit level since 1 April 1997 until 13 April 1998. These covered a wide range of products, namely vegetables, flowers and fruit, dairy products, semi-processed and processed foods, marine products, chemicals and chemical-based products, paper and paper products, textiles and clothing products, metal and metal products, glass and glassware, and mechanical and electrical machinery, equipment and instruments, as well as domestic appliances. By lowering tariffs and removing non-tariff barriers, India hoped to introduce greater dynamism into its domestic industries, so that only internationally competitive industries would flourish.
12. To facilitate international trade, especially exports, India had also introduced a number of supply side reforms including the following:
- streamlining of customs and banking procedures and facilities with a view to reducing transaction costs related to foreign trade;
- implementing Electronic Data Interchange facilities for export facilitation services like banking, insurance, air cargo, shipping, import licensing and customs;
- strategic support to exporters to upgrade marketing and information skills, budgetary resources. standardization of quality and building common facilities for research, development and training;
- developing new instruments specifically for export finance and insurance schemes for various tradable commodities;
- enhancing existing and building new international trade-related infrastructure including ports and air terminals and constructing access roads and railway lines to these facilities.
13. To conclude, India was making determined efforts to restore equilibrium in its balance of payments and to ensure that greater competition was introduced in its domestic and external sectors. At every consultation since the initiation of the economic reforms process, the Committee had consistently expressed its satisfaction with India's progress. India hoped that the Panel too would conclude that India had not violated its obligations to its trading partners under the first sentence of Article XVIII:11.
IV. Interim Review254
- The interim report of the Panel was issued to the parties on 11 December 1998. On 14 December, India requested additional time to review the interim report, in accordance with Article 12.10 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (hereafter "DSU"). On 15 December, the Panel informed the parties that it had decided to extend the due date for the comments on the interim report from 22 December 1998 to 12 January 1999. On 12 January 1999, the United States and India submitted comments regarding the interim report in accordance with Article 15.2 of the DSU. India also requested the Panel to hold a meeting with the parties to discuss the issues raised in its comments. We met with the parties on 15 February 1999, reviewed the entire range of arguments they presented, and finalised our report, taking into account the specific aspects of the parties' arguments we considered to be relevant.
- During our interim review meeting with the parties, we recalled that we had specified cut-off dates for the submission of new material and new arguments. We also specified that we were of the view that the purpose of the interim review stage was not to provide the parties with an opportunity to introduce new legal issues and evidence or to enter into a debate with the Panel. The purpose of the interim review stage is to consider specific and particular aspects of the interim report. Consequently, the Panel addressed the entire range of such arguments presented by the parties which it considered to be sufficiently specific and detailed. In practice, this meant that the parties should limit their comments to the precise aspects raised in the request for review and refrain from introducing new legal issues and evidence.
A. Comments by the United States
- With respect to the comments made by the United States on the descriptive part of the report, most of them were essentially of a clarifying nature. We took them into account and accordingly modified paragraphs 2.6, 3.82, 3.108 (footnote 98), 3.137, 3.152, 3.279.
- Regarding the findings, we took into consideration the US suggestions which improve the clarity of our findings and accordingly modified paragraphs 5.53, 5.172, 5.178 and 5.179. We also revised our reasoning on burden of proof in paragraphs 5.116 to 5.121 to make it more explicit. We also made minor changes in paragraphs 5.191 and 5.197. Furthermore, we clarified paragraphs 5.206, 5.207, 5.209, 5.210, 5.211, 5.214 and 5.218 to 5.223. With respect to the footnote to paragraph 5.231, we made it clear that we meant a vote in the General Council, not in the BOP Committee. Finally, we slightly amended paragraphs 5.233, 5.234 and 5.235. In reaching our findings, we did not find it necessary to address the request of the United States that we determine which party had the burden of proof in relation to Article XVIII:B in general. The Panel applied the principle recalled by the Appellate Body in the case on United States – Measure Affecting Imports of Woven Wool Shirts and Blouses from India,
255 according to which each party had to support each of its particular claims.
- We declined to expand the scope of our conclusions on the level of India's monetary reserves beyond the date of establishment of the Panel, and we did not follow the US suggestions that paragraphs 5.180 and 5.183 should contain conclusions as to whether India's measures exceeded those that were necessary within the meaning of Article XVIII:9, since these conclusions are contained in paragraph 5.184.
- Regarding our suggestions in paragraphs 7.1 to 7.7, we agree with the United States that the parties did not address explicitly the phase-out issue in terms of the implementation period provided for in Article 21 of the DSU. However, Article 19.1 of the DSU allows panels to "suggest ways in which the Member concerned could implement the recommendations", and it does not seem that such suggestions are dependent on whether they were discussed as such by the parties. While the term "ways" may be interpreted as referring to specific actions that would ensure an appropriate implementation of the recommendations, it cannot be limited exclusively to that. The Panel did not consider that it fell within its role to suggest particular measures which might accompany the removal of the quantitative restrictions at issue, but it feels justified in suggesting that a certain period of time should be granted to India in order to implement the recommendations.
B. Comments by India
- India made both general and specific comments on the descriptive part and the findings of the interim report. India also made comments of a procedural nature during the interim review meeting with the Panel.
- With respect to the comments made by India on the descriptive part of the report, India wished to add further information regarding its BOP Committee consultations, including selective references to consultations held in 1992, although these points were not included in the arguments presented to the Panel. The Panel considered that ample history of discussions held in the Committee was provided as of 1994. India also wished to add to paragraph 2.6 that "others agreed that India's residual import restrictions were justified under Article XVIII:B". However, the paragraph refers to the June 1997 consultation and the report of those consultations (WT/BOP/R/32), which records the different views expressed, does not include any such citation; rather, three delegations – including one with observer status - suggested that India had fulfilled its obligations. India also considered that a description of the licensing regime that gives effect to the quantitative restrictions under dispute should not be included under the "Factual Aspects" section. However, the Panel considered that a factual description should be included in this section. It nevertheless took into account some of India's suggestions on that part of the descriptive part of the report and modified paragraphs 2.14, 2.15, 2.18, 2.19, 2,.20, 2.21, 2.23, 2.24, 2.25, 2.26, 2.28. On the other hand, India wished to include a specific section on consultations under Article XXII of GATT 1994 held with other trading partners, during which mutually agreed solutions were reached, as "Procedural Events Leading to the Dispute". We deemed that these consultations were not facts directly related to this panel procedure; a full account of these consultations is included in the Section III.D.8(d). India also wished that its basic legal claims be presented in more details in reply to the presentation of the US claims found in Section III.A of the interim report called "Scope of the Complaint". In order to accommodate India's request, we added a summary of India's claims as found in its submissions in paragraphs 3.5, 3.6, 3.7 and 3.8. Finally, we also added paragraph 3.39 and modified paragraph 3.70.
- During the interim review meeting with the parties, India also claimed that, after the IMF had, in the view of India, predicated removal of India's quantitative restrictions on specific changes in India's development policies, India had had no opportunity to present any facts with respect to these aspects of its development policy for purposes of the proviso to Article XVIII:11. India claims that only after the IMF gave its response to the questions from the Panel could India complain that it was being forced to remove its restrictions on the ground that a change in its development policy would render its restrictions unnecessary. However, at that time, the Panel had explicitly instructed the parties that they could not introduce new facts in their comments. We recall that, at the organization meeting, we had reserved our right to set a cut off date for the submission of evidence. At that time, we had considered that the date for receipt of rebuttals would be the cut off date. We also recall that, when we communicated to the parties the replies of the IMF to our questions, we specified that "Parties shall not include in their comments any material or reference that is not yet part of the record". Moreover, we cannot agree with India that it could address this issue only after the IMF replied to the Panel. The IMF's answers on the removal of the measures and the suggestions made in its replies to the Panel were not new to India. During the consultations that took place in January 1997, the representative of the IMF had already presented the Fund's view in terms similar to those used in the replies to the Panel.
256 India also claims that it addressed the issue of development policy as early as its first written submission and its replies to the second series of questions from the Panel. We therefore consider that India had several opportunities to address the question of the impact of the removal of the measures on its development policy and was not denied an opportunity to introduce any facts on its development policy in relation to the proviso to Article XVIII:11.
- Regarding the findings, India's general comments emphasize two themes. Firstly, India objects to the Panel's conclusion that the Panel is competent to review the balance-of-payments justification of India's quantitative restrictions under Article XVIII:B. Secondly, it claims that the Panel is wrong in making a finding that would require the immediate removal of the measures at issue by India.
To continue with Review of the balance-of-payments justification of India's measures
252 WT/DS27/AB/R, Op. Cit., paras. 145 to 147.
253 See, e.g., the description of the Indian trade and planning regime in J. Bhagwati and P. Desai, India: Planning for Industrialization; Industrialization and Trade Policies Since 1951, Oxford University Press, 1971.
254 According to Article 15.2 of the DSU, "the findings of the final report shall include a discussion of the arguments made at the interim review stage". The following section entitled "Interim Review" is therefore part of the findings of our report.
255 WT/DS33/AB/R, adopted on 23 May 1997.
256 WT/BOP/R/22, Annex II, paragraph 12.