(c) Information provided by the IMF

164. The Panel put the following questions to the IMF which are relevant to our examination of India's balance-of-payments situation:

"1. (a) (i) As of 18 November 1997, the date of establishment of the Panel, was India experiencing a serious decline in its monetary reserves, or facing a threat thereof? (ii) Was India experiencing an inadequate, or a very low level of monetary reserves? (iii) Was India experiencing a reasonable rate of increase in its monetary reserves?

(b) In connection with responding to these questions, could the IMF indicate what would have constituted a serious decline in India's monetary reserves, what would have constituted an inadequate, or a very low level of monetary reserves for India, and what would have constituted a reasonable rate of increase in India's monetary reserves?"

165. The IMF's replies to the questions show that foreign currency reserves of India's monetary authorities stood at US$25.1 billion (excluding gold) on 21 November 1997, which represented an increase of US$5.6 billion from a year earlier, and of US$2.8 billion from end-March 1997. The IMF indicates that "[a]t about six months of imports of goods and non-factor services, India's reserves appeared to provide sufficient external liquidity and a reasonable degree of protection against unforeseen external shocks. In particular, reserves were sufficient to deal with debt service payments and potential outflows of portfolio investment, covering 2� times the amount of maturing debt obligations in the next twelve months and 1� times the stock of short-term debt and cumulative inflows of portfolio investment. Therefore, it was the Fund's view that India's level of foreign currency reserves on November 18, 1997 was adequate". The IMF notes that the establishment of the panel coincided with a period of turbulence in the foreign exchange market in India, but concludes that "with an appropriate macroeconomic response and the containment of contagion, India's foreign currency reserves on 18 November 1997 did not appear to be under a threat of a serious decline; since there was no threat, the question of whether an imminent threat existed is moot". Having noted that gross foreign currency reserves fell by US$1.9 billion in November 1997, the Fund nevertheless determines that "there has been a reasonable rate of accumulation of reserves since India's balance-of-payments crisis in 1991".
166. In response to question 1 (b), the Fund, noting the considerable degree of subjective judgment involved in an assessment of the adequacy of the level and rate of change of reserves, based its view on "the size of the existing and potential claims on reserves, examined in the context of the country's economic circumstances. In the case of India, policy had prudently aimed at ensuring that reserve coverage is ahead of the outstanding short-term liabilities (by remaining maturity) and potential outflows of portfolio investment. As of November 1997, short-term liabilities (by remaining maturity) and the stock of portfolio investment (after marking to market) were estimated at US$16 billion. A decline in reserves to significantly below this level would be considered serious, and such levels could be deemed inadequate or very low".

Table 1: Evolution of India's level of reserves (1995-1998)

Year	31 March 1995	31 March 1996	31 March 1997	31 March 1998	30 June 1998
Level of reserves (US$ billions)	20.8	17	22.4	26	24.1

(Source: IMF)

167. India comments that the events described by the IMF in its answer to question 1(a)(i) constitute recognition by the IMF of the threat of a serious decline in India's reserves. India notes that the Reserve Bank of India (RBI) had to change its monetary policy goals in order to defend the rupee, and would not have done so had it not felt that it faced a threat of a serious decline in foreign currency reserves which it had been unable to control using other policy instruments. With regard to questions 1(a)(ii) and 1(b), India notes that experts have suggested alternative indicators to evaluate the adequacy of India's foreign currency reserves, which, in India's view, would be more appropriate than the standard measure used by the IMF. ³⁴⁸ Using these measures, India calculated that its reserves should be at higher levels to ensure adequacy.
168. The United States comments that the IMF's replies are fully consistent with the evidence furnished by the United States to the Panel and make it clear that India's balance-of-payments situation does not meet the criteria of the proviso of Article XVIII:9. The United States also points out that the IMF's analysis of India's balance-of-payments situation is more complete than that presented by India, in that it considers the whole balance-of-payments situation, whereas India's analysis focuses mostly on its trade account, which is only one element of the analysis. ³⁴⁹

(d) Assessment of India's balance-of-payments situation in relation to the conditions of Article XVIII:9

(i) Article XVIII:9(a)

169. The issue to be decided under Article XVIII:9 (a) is whether India�s balance-of-payments measures exceeded those "necessary � to forestall the threat of, or to stop, a serious decline in monetary reserves". In deciding this issue, we must weigh the evidence favouring India against that favouring the United States and determine whether on the basis of all evidence before the Panel, the United States has established its claim under Article XVIII:11 that India does not meet the conditions specified in Article XVIII:9(a).
170. The United States relies principally upon the following evidence and argument: it notes in the first instance that in the view of the IMF, as of 18 November 1997 ³⁵⁰ India was not facing a threat of a serious decline in monetary reserves and that the IMF had expressed an identical view to the BOP Committee in January 1997 and June 1997. In addition, the United States notes the statement in the Annual Report of the Reserve Bank of India for the year July 1, 1996 to June 30, 1997 (para. 7.23), where it is stated:

"The level of foreign exchange reserves (including gold and SDRs) rose to US$ 29.9 billion by August 14, 1997 ³⁵¹ equivalent to seven months of imports and well above the thumb rule of reserve adequacy (three months of imports). In the context of the changing interface with the external sector and the importance of the capital account, reserve adequacy needs to be evaluated in terms of indicators other than conventional norms. By any criteria, the level of foreign exchange level reserves appears comfortable. They are equivalent of about 25 months of debt service payments and 6 months of payments for imports and debt service taken together. 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."

171. India responds that its monetary authorities had to change their monetary policy goals in the latter part of 1997 in order to defend the rupee during this period and argues that they would not have taken such actions if there had not been a threat of a serious decline in monetary reserves. Moreover, it contends that there are different ways to measure reserve adequacy. In this regard, it points to the answers of the IMF, where the IMF states that "A considerable degree of subjective judgment is involved in an assessment of the adequacy of the level and rate of changes of reserves". According to India, there are four other methods of assessing reserve adequacy:

1. import coverage of at least 6 months: US$22 billion;
2. import coverage of three months plus 50% of debt service payments plus one months' imports and exports to account for leads and lags: more than US$22 billion;
3. short-term debt and portfolio stock should not exceed 60% of reserves and incremental short-term debt and portfolio liabilities should be accompanied by equivalent increases in reserves: more than US$27 billion; and
4. foreign assets to currency ratio should not be less than 40% and a desirable level would be 70%: US$16 billion (minimum); US$28 billion (desirable).

172. In evaluating the evidence and arguments presented by the parties, we note India's argument that its monetary authorities changed their monetary policy goals in the latter part of 1997 to defend the rupee. However, the Indian authorities' action does not in itself demonstrate that there was a serious decline in India's monetary reserves or a threat thereof during that period, in terms of Article XVIII:9(a).
173. The question before us is whether India was facing a serious decline or threat thereof in its reserves (Article XVIII:9(a)) or had inadequate reserves (Article XVIII:9(b)). In analyzing India's situation in terms of Article XVIII:9(a), it is important to bear in mind that the issue is whether India was facing or threatened with a serious decline in its monetary reserves. Whether or not a decline of a given size is serious or not must be related to the initial state and adequacy of the reserves. A large decline need not necessarily be a serious one if the reserves are more than adequate. Accordingly, it is appropriate to consider the adequacy of India's reserves for purposes of Article XVIII:9(a), as well as for Article XVIII:9(b).
174. In this connection, we recall that the IMF reported that India's reserves as of 21 November 1997 were US$ 25.1 billion and that an adequate level of reserves at that date would have been US$ 16 billion. While the Reserve Bank of India did not specify a precise level of what would constitute adequacy, it concluded only three months earlier in August 1997 that India's reserves were "well above the thumb rule of reserve adequacy" and although the Bank did not accept that thumb rule as the only measure of adequacy, it also found that "[b]y any criteria, the level of foreign exchange reserves appears comfortable". It also stated that "the reserves would be adequate to withstand both cyclical and unanticipated shocks".
175. We have also considered the four alternative methods of assessing reserve adequacy cited by India. We note that India concedes that its reserves of US$25.1 billion would have been adequate under two of the alternatives (a and b). Under a third alternative (d), the reserves of US$25.1 billion were at the higher end of the range between the minimum (US$16 billion) and desirable (US$28 billion) reserve levels. Under the fourth method (c), reserves of US$27 billion would be considered adequate. While it might be following a prudential approach in suggesting method (c), India does not explain why it would be superior to the IMF method or to the other three Indian alternatives under which reserves could be considered adequate. Moreover, India's alternatives do not seem to be consistent with the approach of the Reserve Bank of India quoted above.
176. Having weighed the evidence before us, we note that only one of the four methods suggested by India for measuring reserve adequacy supports a finding that India's reserves are inadequate, and even under that method, the issue is a close one (US$25.1 billion vs. US$27 billion, or less than 10 per cent difference). Overall, we are of the view that the quality and weight of evidence is strongly in favour of the proposition that India's reserves are not inadequate. In particular, this position is supported by the IMF, the Reserve Bank of India and three of the four methods suggested by India. Accordingly, we find that India's reserves were not inadequate as of 18 November 1997.
177. Turning now to the question of whether India was facing a serious decline or threat thereof in its reserves, it is appropriate to consider the evolution of its reserves in the period prior to November 1997. As noted above, as of 31 March 1996, India's reserves were US$17 billion; as of 31 March 1997, India's reserves were US$22.4 billion. We note that at the time of the BOP Committee's consultations with India in January and June 1997, the IMF reported that India did not face a serious decline in its reserves or a threat thereof. As of 21 November 1997, India's reserves had risen to US$25.1 billion and the IMF continued to be of the view that India did not face a serious decline in its reserves or a threat thereof. In our view, in light of the foregoing evidence, and taking into account the provisions of Article XV:2, as of the date of establishment of the Panel, India was not facing a serious decline or a threat of a serious decline in monetary reserves as those terms are used in Article XVIII:9(a). In the event that it might be deemed relevant to add support to our findings concerning India's reserves as of November 1997, we have also examined the evolution of India's reserves after November 1997. We note that India's reserves fluctuated around the November level in subsequent months, falling to a low of US$23.9 billion in December 1997 and rising to a high of US$26.2 billion in April 1998. They were US$24.1 billion as of the end of June 1998.
178. The anticipated evolution of India's reserves after June 1998 shows that no serious decline was foreseen. Indeed, in response to a question as to whether there had been developments since November 1997 that could lead to a modification of the IMF's answers to the Panel's questions, the IMF responded:

"There has been a deterioration in the economic outlook and market sentiment over the past few months, and short-term risks have increased. [�] [O]n the basis of developments thus far, the balance-of-payments situation is expected to worsen and a decline in reserves ($2�-4 billion) is anticipated for 1998/99. Nevertheless, it remains the Fund view that the external situation can be managed using macroeconomic policy instruments and that quantitative restrictions are not needed for balance-of-payments adjustment."

Thus, not only the evolution until June 1998, but also assessments in relation to 1998 as a whole and 1999 support the view that no threat of serious decline existed as of November 1997.

179. As a result, the evolution of India's reserve situation in the seven months after November 1997 does not, in our view, call into question our conclusion that as of the date of the establishment of the Panel, India was not facing a serious decline or a threat of a serious decline in its monetary reserves as those terms are used in Article XVIII:9(a).
180. Accordingly, we find that as of the date of establishment of this Panel, there was not a serious decline or a threat of a serious decline in India's monetary reserves, as those terms are used in Article XVIII:9(a).

(ii) Article XVIII:9(b)

181. The issue to be decided under Article XVIII:9(b) is whether India�s balance-of-payments measures fall into the category of those "necessary � in the case of a Member with inadequate monetary reserves, to achieve a reasonable rate of increase in its reserves". In deciding this issue, we must weigh the evidence favouring India against that favouring the United States and determine whether on the basis of all evidence before the Panel, the United States has established its claim under Article XVIII:11 that India does not meet the conditions specified in Article XVIII:9(b).
182. The United States relies upon the views of the IMF and the statement of the Reserve Bank of India, as cited in paragraph 5.170 above. As noted therein, in the view of the IMF, as of 18 November 1997 an adequate level of monetary reserves for India was US$16 billion. As noted above in paragraph 5.171, India suggests use of four other ways of measuring the adequacy of its reserves, which lead to a calculation of adequate reserves being between US$16 and US$28 billion.
183. For the reasons outlined in paragraphs 5.174-5.176 above, we find that as of the date of establishment of this Panel, India's monetary reserves of US$25.1 billion were not inadequate as that term is used in Article XVIII:9(b) and that India was therefore not entitled to implement balance-of-payments measures to achieve a reasonable rate of growth in its reserves.

(e) Summary

184. We find that, as of the date of establishment of this Panel, India's balance-of-payments measures were not necessary to forestall the threat of, or to stop, a serious decline in its monetary reserves and that its reserves were not inadequate. As a result, its measures were not necessary and therefore "exceed those necessary" under the terms of Article XVIII:9 (a) or (b). Therefore, India would appear to be in violation of the requirements of Article XVIII:11 by maintaining its measures. However, a Note Ad Article XVIII:11 specifies that a Member need not remove its balance-of-payments measures, if such removal would thereupon produce conditions justifying their reinstitution. Moreover, a proviso to Article XVIII:11 states that a Member shall not be required to withdraw balance-of-payments measures on the grounds that a change in its development policy would render them unnecessary. Accordingly, we now turn to an examination of the Ad Note and the proviso of Article XVIII:11.

3. Is India entitled under the Ad Note to Article XVIII:11M to maintain measures for balance-of-payments purposes when the conditions contemplated in Article XVIII:9 are no longer met?

185. India argues that it should not be required to remove its quantitative restrictions immediately, even if it were found that it currently does not experience balance-of-payments difficulties within the meaning of Article XVIII:9, because immediate removal would create the conditions for their reinstitution. India's argument is based on the Note Ad Article XVIII:11. The United States argues that those conditions are not met and that, since India does not experience any current balance-of-payments difficulties, it should disinvoke Article XVIII:B, with the possibility of invoking it again if such difficulties were to occur in the future. The United States recalls that the terms of Article XVIII:4 show that balance-of-payments measures must be temporary.
186. The arguments of the parties raise three questions: (a) Does the Ad Note cover situations where the conditions of Article XVIII:9 are no longer met? (b) What conditions must be met in order to allow for the maintenance of measures under the Ad Note? (c) Are these conditions met in the present case? We examine these three questions successively.

(a) Does the Ad Note cover situations where the conditions of Article XVIII:9 are no longer met?

187. We recall that the Note Ad Article XVIII:11 reads as follows:

"The second sentence in paragraph 11 shall not be interpreted to mean that a Member is required to relax or remove restrictions if such relaxation or removal would thereupon produce conditions justifying the intensification or institution, respectively, of restrictions under paragraph 9 of Article XVIII."

188. It seems clear to us that the use of the word "respectively" in this provision allows the sentence to be read to refer to two situations, so that the second sentence of paragraph 11 should not be interpreted to mean (i) that a Member is required to relax restrictions if such relaxation would thereupon produce conditions justifying the intensification of restrictions under paragraph 9 of Article XVIII or (ii) that a Member is required to remove restrictions if such removal would thereupon produce conditions justifying the institution of restrictions under paragraph 9 of Article XVIII.
189. The ordinary meaning of the words therefore suggests that the Ad Note could cover situations where the conditions of Article XVIII:9 are no longer met but are threatened. This would make it possible for a developing country having validly instituted measures for balance-of-payments purposes and whose situation has sufficiently improved so that the conditions of Article XVIII:9 are no longer fulfilled, not to eliminate the remaining measures if this would result in the reoccurrence of the conditions which had justified their institution in the first place.
190. This appears consistent with the context of the provision, in particular with the general requirement of gradual relaxation of measures as balance-of-payments conditions improve, under Article XVIII:11. The notion of "gradual relaxation" contained in Article XVIII:11 should itself be read in context, together with Article XVIII:9. Article XVIII:9 requires that the measures taken shall not "exceed those necessary" to address the balance-of-payments situation justifying them. The institution and maintenance of balance-of-payments measures is only justified at the level necessary to address the concern, and cannot be more encompassing. Paragraph 11, in this context, confirms this requirement that the measures be limited to what is necessary and addresses more specifically the conditions of evolution of the measures as balance-of-payments conditions improve: at any given time, the restrictions should not exceed those necessary. This implies that as conditions improve, measures must be relaxed in proportion to the improvements. The logical conclusion of the process is that the measures will be eliminated when conditions no longer justify them.
191. The Ad Note clarifies that the relaxation or removal should not result in a worsening of the balance-of-payments situation such as to justify strengthened or new measures. It thus seeks to avoid a situation where a developing country would be required to remove the measures, foreseeing that in doing so, it will create the conditions for their reinstitution. In light also of the need to restore equilibrium of the balance-of-payments on a sound and lasting basis, acknowledged in the first sentence of Article XVIII:11, it appears that removal should be made when the conditions actually allow for it. In this sense, we can agree with India that the developing country Member applying the measures is not required to follow a "stop-and-go" policy. It is worth noting, however, that in circumstances where the balance-of-payments situation has gradually improved, if measures have been gradually relaxed as conditions improved under the terms of Article XVIII:11 and maintained only to the extent necessary under the terms of Article XVIII:9, it could be anticipated that only a minor portion of the measures initially instituted would remain to be removed by the time the balance-of-payments conditions have improved to the extent that the country faces neither a serious decline in monetary reserves or a threat thereof, or inadequate reserves. The elimination of these measures would thus constitute the final stage of a gradual relaxation and elimination.
192. We therefore conclude that the Note Ad Article XVIII:11 could apply to both situations where balance-of-payments difficulties still exist and when they have ceased to exist but are threatened to return. It is therefore possible for India to invoke the existence of such risk in order to justify the maintenance of the measures. However, this possibility is available only to the extent that the conditions foreseen in the Ad Note are fulfilled. We must therefore determine what these conditions are before examining whether they are fulfilled in this instance.

To continue with Conditions to be met

³⁴⁸ For a description of these methods, see para. 5.171 infra.

³⁴⁹ For a detailed description of the arguments of the parties, see Section III.D.9.(c)(iii) supra.

³⁵⁰ The IMF relied on Indian balance-of-payments data as of 21 November 1997, which was closest date to the date of the establishment of the Panel for which the relevant Indian balance-of-payments data were available.

³⁵¹ The IMF statistics exclude gold.