WTO General Agreement on

Services and Implications for

India’s Financial Services
Sectors
by Dr.Tarun Das,
Eco.Adv.,MOF
1.1 General Agreement on Trade in
Services (GATS)- Main Features
First multilateral agreement on
services trade
No tariff and other generalized
protection mechanisms are allowed.
Four principal modes for services
trade- viz. cross border flows,
consumption abroad, commercial
presence, presence of natural persons
Allows members for choice of services
and to limit the degree of provisions, in
which they allow market access and
make national treatment commitment

Dr. Tarun Das 2

1.2 General Agreement on Trade in
Services (GATS)- Main Features
Most Favoured Nation (MFN) exemption
with a transition period of 10 years and
review after 5 years by 2000
Mutual recognition of qualifications,
which should not be discriminatory and
substitute for protection
No restrictions on money transfer for
services rendered
Govt can negotiate commitments in
Annexes dealing with movement of natural
persons, financial, telecom and air transport
services.

Dr. Tarun Das 3

 2.1 GATS Framework
• All services are covered under GATS.
• MFN treatment
• National treatment
• Transparency in domestic regulations
• Objective and reasonable regulations
• Unrestricted International payments
• Individual countries commitments are
negotiated & put on binding commitments
• Progressive liberalization

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2.2 Twelve Board Groups of Services
(i) Business services
(ii) Communication services
(iii) Construction and engineering services
(iv) Distribution services
(v) Educational services
(vi) Environmental services
(vii) Financial services
(viii) Health Services
(ix) Tourism and travel services
(x) Recreational, cultural an sporting
services
(xi) Transport services
(xii) Other services not included elsewhere
Dr. Tarun Das 5
2.3 Modes of Services Trade
For each group there are four modes
of global trade:
1. Mode-1: Cross border trade- similar to
traditiopnal goods trade
2. Mode-2: Consumption abroad-
consumption by tourists, students,
persons going for medical treatment etc.
in host countries
3. Mode-3: Commercial presence- Foreign
direct Investment, branches of foreign
banks, universities, hospitals, activities of
joint ventures in host countries.
4. Mode-4: Movement of natural persons for
short period- movement of consultants,
professionals and business persons.
Dr. Tarun Das 6
2.4 The Annex on Financial
Services
1. Insurance and related
activities
1.1 Direct insurance including
co-insurance: life and non-life;
1.2 Reinsurance and retrocession;
1.3 Insurance intermediation,
such as brokerage and agency;
1.4 Services auxiliary to insurance,
such as consultancy, actuarial,
risk assessment and claim
settlement services.

Dr. Tarun Das 7

 2.5 The Annex on Financial
Services
2. Banking and other financial
services
2 .1 Acceptance of deposits and other
repayable funds from the public;
2 .2 Lending of all types, including consumer
credit, mortgage credit, factoring and
financing of commercial transactions;
2 .3 All payment and money transaction
services, including credit, charge and debit
cards, travelers’ cheques and bank drafts;
2 .4 Guarantees and commitments

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 2.6 Banking & other financial
2.5 Financial services
trading, money market
instruments, derivative products,
exchange rate and interest rate
instruments, transferable securities, other
negotiable instruments and financial
assets, including bullion;
2.6 Money brokering;
2.7 Assets management, cash or portfolio
management;
2.8 Settlement and clearing services;
2.9 Provision and transfer of financial
information;
2.10 Advisory, intermediation and
other auxiliary financial services
Dr. Tarun Das 9
 2.7 Principles of the
services negotiations
1. Public services are excluded.
2. Liberalization does not mean
deregulation or privatization.
3. A voluntary process.
4. The right to regulate is a fundamental
premise of the GATS.
5. A democratic process.
6. Universal services.
7. Transparency.

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 3.1 Basic Principles guiding
India’s Commitments
to multilateral agreements
• Gradual approach
• Human face
• Sovereignty constraint
• Political constraint
• Agency constraint
• Preference for decentralization
• Priority reforms

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 Commitments
made in 1995 up to 31-12-
1997
(a) Banking
• Only a branch presence
• 5 licenses for new branches per year.
• Entry to new foreign banks may be
denied if market share of assets of
foreign banks exceeds 15% of total
assets of banking system.

Dr. Tarun Das 12

 Commitments
made in 1995 up to 31-12-
(b) Non-Banking1997
Financial Services
• Items allowed include Merchant
banking, Factoring, Financial leasing,
Venture capital and financial
consultancy.
• Government allows local incorporation
with a maximum equity of 51 per cent
by foreign financial services suppliers
including banks.

Dr. Tarun Das 13

 Commitments
made in 1995 up to 31-12-
(c) Insurance1997
• India made no commitment in life
insurance area. In non-life
insurance, India committed to
continue with the current practice,
which was quite restrictive.
(d) Reinsurance, Retrocession &
Insurance intermediation
relating to reinsurance.
• A minimum of 10% of the premium
of overall was committed to be
reinsured abroad.
Dr. Tarun Das 14
 3.5 Limitations of India’s
•
Offer
Limitation on the number of new branches.
• ATM restrictions outside branch premise
• New branch licenses can be denied when assets of
foreign banks exceeds 15% of the total assets of the
banking system.
• National treatment is denied,
• Investment by foreign banks operating in India in
other financial services companies is not allowed to
exceed 10% of own funds.
• Entry by non-banking financial companies is limited
to local incorporation and the foreign equity is
limited to 51%.
• India's commitments omit a number of important
non-banking financial services.
• State monopoly on insurance.

Dr. Tarun Das 15

 3.6 India’s Enhanced
Commitment made in 1995
• A liberalized policy on ATMs
• i.e. an ATM will not be treated as
a separate branch,
• An increase in the number of new
bank branches to 8
• Inclusion of Stock Broking in the
schedule with maximum foreign
equity of 49%.

Dr. Tarun Das 16

 3.7 India’s Enhanced
Commitment
under Fifth Protocol in 1998
• MFN exemptions for banking services were
withdrawn subject to reciprocity.
• Number of new bank branches for foreign
banks increased from 8 to 12 per year.
• Liberal policy on ATMs.
• In insurance, status quo is maintained.
• In the area of reinsurance, the existing binding
was aligned to the market.
• In NBFCs, national treatment is unbound when
market access is unbound.
• New commitments in stock broking and
financial consultancy services.

Dr. Tarun Das 17

 3.8 Progress of Financial
Sector Reforms
Status in June 1991
• CRR 25%
• SLR 38.5%
• Bank Rate 12%
• PLR above 21%
• Deposit and interest
rates are controlled
• Capital issues and
prices determined by
the CCI in MOF
Dr. Tarun Das
Status in Sept 2006
• CRR 5%
• SLR 25%
• Bank rate 6%
• PLR 10.75% to 11.25%
• Deposit and interest
rates are liberalized
• The office of CCI
abolished and SEBI
established
18
 3.9 Progress of Financial
Sector Reforms
Status in June 1991 Status in Sept 2006
• Indian firms not • Indian firms allowed
allowed to raise funds to raise foreign funds
from foreign stock by GDR, ADR, FCCBs
exchanges & offshore funds
• Portfolio investment • FIIs, NRIs and OCBs
by foreign investors in allowed to buy stocks
Indian companies not in Indian markets s.t.
allowed overall limit of 49%
• Foreigners not • FIIs/ NRIs/ OCBs
allowed to buy G-secs allowed to buy G-secs

Dr. Tarun Das 19

 3.10 Other Reforms
in Financial Sectors
• Foreign investment up to 74% in private
banks permitted. Foreign equity in
insurance/ banks doing only insurance
services remains at 26%.
• New banks allowed to open 25% of their
branches in rural/semi urban areas.
• Foreign banks allowed to establish
branches and 100% subsidiaries in India.
• FDI allowed up to 100% of equity in NBFCs
subject to minimum capital requirements.
• Investment by foreigners, NRIs and OBCs
are permitted in 22 NBFCs activities.
• Government allowed overseas banking
units in SEZs; exempted from prudential
requirements. Dr. Tarun Das 20
 3.11 Reforms in Foreign
Exchange
• Rupee is fully convertible on current
account.
• Rupee is almost fully convertible on
capital account for non-residents.
• Foreign investment is allowed almost in
sectors with caps on foreign equity.
• FERA is replaced FEMA.
• India is now a member of the Multi­lateral
Investment Guarantee Agency.
• India has signed treaties for avoidance of
double taxation 66 countries, and also FTA
with many countries.
Dr. Tarun Das 21
4.1 Assessment of the Impact of
GATS by the Developing
Countries
Cuba, Dominican Republic, Haiti, India,
Kenya, Pakistan,Peru, Uganda, Venezuela,
Zimbabwe made the following observations:
• (a) Developing countries did not receive
benefits from their commitments
• (b) Market power of big corporations wipe
out developing countries small suppliers
• (c) Comprehensive studies with Technical
assistance before making further
commitments.

Dr. Tarun Das 22

 4.2 Assessment made by WTO
Secretariat
(i) Direct Economic Impact: Reduction of
prices, increased supply, improved quality and
reliability in services. Examples-Growth of mobile
phones and international credit cards.
(ii) Indirect Economic Impact: Significant
industrial diversification, improvement in exports,
profitability, production, employment of user
industries, development of skill and technology,
and cyclical resilience of growth.
(iii) Social benefits: Distributional equity,
general improvement in environment, public
health, safety and national security.

Dr. Tarun Das 23

 5.1 Average growth rates of world
production in 1990s (per cent)
Overall Agriculture I ndustry Services
GDP
I ndia 6.0 3.0 6.4 8.0
Developing 3.5 2.2 3.7 4.1
East Asia & 7.2 3.1 9.3 6.4
Pacific
Europe & -1.5 -2.3 -3.8 1.6
Cent Asia
Lat,America. 3.3 2.3 3.3 3.4
& Caribbean
Mid. East 3.0 2.6 0.9 4.5
South Asia 5.6 3.1 6.2 7.1
Sub-Saharan 2.5 2.8 1.6 2.6
Africa
Developed 2.5 0.0 0.7 2.5
World 2.7 1.4 1.5 2.9
Dr. Tarun Das 24
 5.2 Structure of world output (% to
GDP)
Country Agriculture Industry Services
1990 2000 1990 2000 1990
2000
India 31 25 28 27 39 49
East Asia 20 13 40 46 40 41
Europe 17 10 44 35 39 57
Latin Am 9 7 36 29 55 64
Mid. East 15 14 39 37 47 48
South Asia 31 25 27 26 43 49
SS Africa 18 17 34 30 48 53
World 7 5 36 31 57 64

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5.3 Trend of service charges
Year Ocean freight Airfare per PKM
1920=100 (in 1990 US$)
1960 28 0.24
1970 29 0.16
1980 25 0.10
1990 30 0.11
2000 27 0.08

Dr. Tarun Das 26

5.4 Trend of service charges
Year Cost of 3-Min Computer Price
Telephone call (Base 2000=100)
New York -London
(In 2000 US$)
1960 60.42 186,900
1970 41.61 19,998
1980 6.32 2,794
1990 4.37 728
2000 0.40 100

Dr. Tarun Das 27

 6.1 India emerged as one of the fastest grow ing economies
in 1990- 2001
1 2.0
10 .0
1 0.0
Average growth rate in 1990s

8.0 7.7
6 .7
7.4 6 .5
(% )

6.0
6.3
6.8
4.0
6.2 6.0 5.9
2.0

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Dr. Tarun Das 28

 6.2 Sectoral growth rates in India
Sectors
(% )
1980-90 1992-2000
1. Agriculture 3.1 3.3
2. Industry 7.2 6.5

--Mining 7.7 4.0

--Manufacturing 7.4 7.4
--Utilities 8.9 5.9
--Construction 4.6 5.7
3. Services 6.5 8.2
--Trade and hotels 6.2 8.3
--Trans & Telecom 5.8 8.5
--Financial services 9.4 8.8
--Social sectors 6.0 7.4
4. All Sectors 5.5 6.4
Dr. Tarun Das 29
 6.3 Sectoral shares in India (% in
GDP)
Sectors 1993-94 2002-03
Agriculture 31.0 22.2
Industry 26.3 27.1
Mining 2.6 2.2
Manufacturing 16.1 17.1
Utilities 2.4 2.5
Construction 5.2 5.3
Services 42.7 50.7
Trade 12.7 15.6
Trans & Telecom 6.5 8.6
Financial services 11.5 12.7
Social 12.0 13.8
• All Sector 100.0 100.0
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6.4 Employment growth rate in India
(%)
Sectors 1983-1993 1993-2000
Agriculture 2.2 0.0
Mining 3.7 -1.9
Manufacturing 2.3 2.6
Utilities 5.3 -3.6
Construction 4.2 5.2
Trade 3.8 5.7
Trans & Telecom 3.4 5.5
Financial 4.6 5.4
Social 3.6 -2.1
All Sector 2.7 1.1

Dr. Tarun Das 31

 6.5 Sectoral Employment as % of
Total
Sectors 1983 1993-94 1999-2000
Agriculture 63.2 60.4 56.7
Industry 15.6 15.9 17.5
Mining 0.7 0.8 0.7
Manufac. 11.6 11.1 12.1
Utilities 0.3 0.5 0.3
Construction 3.0 3.5 4.4
Services 21.2 23.7 25.8
Trade,hotels 7.6 8.3 11.1
Trans/Telecom 2.9 3.2 4.1
Fin. services 0.9 1.1 1.4
Social /per 9.8 11.1 9.2
All Sectors 100.0 100.0 100.0
Dr. Tarun Das 32
 6.6 Composition of sectoral GDI (%)

1990-91 2002-03
A. Agriculture & allied 8.4 8.9
B. Industry 53.0 46.9
C. Services 38.5 44.2
--Trade, hotels 3.9 0.6
--Transport, comm. 11.7 10.8
--Finacial sectors 14.4 13.6
-- Govt, social 8.5 19.2
D. Total GDI 100.0 100.0

Dr. Tarun Das 33

 6.7 Sectoral GDI as percentage of
GDP
1990-91 1995-96 2002-03
A.Agriculture 2.4 1.7 2.1
B.Industry 12.1 16.1 10.9
C.Services 9.6 9 10.3
6. Trade, hotels 1 0.8 0.1
7. Transport & comm. 2.9 2.8 2.5
8. Finacial sectors 3.6 3.4 3.2
9. Govt., social 2.1 2 4.5
10. Total GCF 23.1 26.8 23.3

Dr. Tarun Das 34

 6.8 Average Growth rates in
India (per cent)
Decade Services Services
exports imports
1950s 4.5 1.9
1960s 0.0 1.1
1970s 22.7 17.6
1980s 4.4 8.8
1990s 17.7 17.0

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 6.9 Composition of service
exports
of India (per cent)
Period Travel Trans Insurance Govt Misc
1950s 8.6 32.9 7.7 23.4 27.3
1960s 10.5 34.6 5.2 29.7 19.9
1970s 25.5 37.3 4.7 10.8 21.8
1980s 5.9 17.1 2.4 3.1 41.1
1990s 33.0 20.3 2.3 1.8 42.6
Note: Misc includes financial, software and other
modern services.

Dr. Tarun Das 36

 6.10 Composition of service
imports
of India (per cent)
Period Travel Trans Insurance Govt
Misc
1950s 18.3 22.6 6.7 22.6 29.8
1960s 9.5 29.5 2.4 16.9 39.0
1970s 7.5 36.9 1.1 9.4 40.8
1980s 11.8 31.5 0.5 4.2 49.6
1990s 14.6 30.6 0.3 2.7 49.8
Note: Misc includes financial, software and
other modern services.

Dr. Tarun Das 37

 6.11 Impact on Financial Sectors
Item Mar-96 Mar-98 Mar-04
1.No.of foreign banks 33 42 33
2.New private banks 9 9 10
3.Gross NPA ratio 24.8 16.0 7.2
4.Net NPAs ratio 10.7 8.2 3.0
5.Op. profits ratio 1.6 1.8 2.7
6.Net profits ratio 0.2 0.8 1.1
7.CRAR (Capital adequacy ratio) No. of Banks
-- Below 9% 31 6 2
-- 9 to 10% 10 16 1
-- Above 10% 43 71 87
8.Number of banks 84 93 90
.

Dr. Tarun Das 38

 7.1 Concluding Observations
• India has gained significantly from WTO
commitments.
• There had been significant growth of
services production, employment and
exports.
• India's focus area in WTO negotiations
on GATS should be to provide effective
market access to its professionals and
skilled labour force in various sectors
and to bring about a symmetry in the
movement of capital and labour.
Dr. Tarun Das 39
 7.2 Concluding Observations
• India has comparative advantages in health
care, software, construction and engineering,
legal and accountancy, and it would be
advisable to negotiate greater market access
for its professionals in these sectors.
• The availability of market access alone would
not be fruitful if the qualifications to provide
these services from Indian Institutions are not
recognized abroad.
• At negotiations, it needs to be ensured that
standardization of these qualifications are
sorted out to protect our interest.

Dr. Tarun Das 40

 7.3 Concluding Observations
• Social obligations in the case of services such as
telecom and banking (serving rural areas) and air
transport (linking far-flung areas) have to be carefully
nurtured.
• For effective market access to professionals, India
should negotiate for the following:
• Economic Needs Test should be eliminated.
• Social security contributions required for temporary
persons needs to be corrected.
• Administration of visa regimes may be made more
transparent.
• Specific sectoral commitments in line with
requirements of developing countries.

Dr. Tarun Das 41

 7.4 Concluding Observations
• As the first generation reforms take root and
second generation reforms unfold, India is
emerging as a favourite destination for
foreign investment, and a land of immense
opportunity for all.
• India should maintain its open door policy in
goods and services production, investment
and trade.
• Carried to their logical ends, reforms would
make India as one of the most dynamic and
fastest growing economies of the world.

Dr. Tarun Das 42

Thank you

Dr. Tarun Das 43