General Agreement on Trade in Services-

Implications for the Indian Financial Sector

Dr. Tarun Das, Economic Adviser, Ministry of Finance

And Consultant, IILM, New Delhi.

1. Main Features of General Agreement on Trade in Services (GATS)

During the last three decades countries gained significantly through the liberalisation of
trade in goods. However, there was no parallel movement of multilateral liberalization of
services trade until the negotiation of the General Agreement on Trade in Services
(GATS) and its entry into force in January 1995. Since the services sector is the largest
and fastest-growing sector of the world economy, providing more than 60 per cent of
global output and, in many countries, an even larger share of employment, the lack of
legal framework for international services trade was anomalous and dangerous. It is
anomalous because services contribute only 20 per cent of global trade although the
potential benefits of services liberalization are at least as high as in the goods sector. It is
dangerous because there was no legal basis to resolve conflict in national interests.

Main features of GATS can be summarized as the following:

(a) It is the first multilateral agreement to provide legally enforceable rights to trade
in all services.
(b) No tariff and other generalised protection mechanisms are allowed for services.
(c) It recognizes four principal modes for services trade- viz. cross border flows,
consumption abroad, commercial presence, and presence of natural persons.
(d) It allows members to have choice of services and to limit the degree of provisions,
in which they allow market access and make national treatment commitments.
(e) It allowed one-time opportunity to members from Most Favoured Nation (MFN)
exemption with a transition period of 10 years and review after 5 years by 2000.
(f) It is based on mutual recognition of qualifications, which should not be
discriminatory and substitute for protection.
(g) There are no restrictions on money transfer for services rendered.
(h) It permits Governments to negotiate on specific commitments in Annexes dealing
with movement of natural persons, financial services, telecom services, basic
telecommunications, maritime transport and air transport services.

The GATS Framework is based on the following principles:

• All services are covered under GATS.
• MFN treatment (i.e. favour one, favour all) applies to all services, except the one-
time exemption.
• National treatment (i.e. equal treatment of foreigners and own nationals) applies in
the areas where commitments are made.
• Transparency in domestic regulations and enquiry points.
• Regulations have to be objective and reasonable.
• International payments are normally unrestricted.

1
 • Individual countries commitments are negotiated and put on binding commitments.
• Progressive liberalization through further negotiations.

The GATS agreement has 29 articles covering all service sectors except those provided in
the exercise of government authority. Services are grouped under 12 sectors, which are
further sub-divided into 155 sub-sectors. The broad groups include the following:

(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.

The Annex on Financial Services applies to insurance and reinsurance related services,
banking and other financial services. It deals with the following broad activities:

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.

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
2.5 Financial 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.

2
The schedule of specific commitments of each Member country involves a positive
listing of sectors/ subsectors and modes of supply where the member country desires to
undertake specific commitments. Those sectors or subsectors, which are not listed, are
not subject to any commitments. Even for the listed sectors/ subsectors and for any
particular mode, Members may keep the commitments as "unbounded" which means no
commitments. In the listed sectors/ subsectors and modes of supply, a Member can
schedule some limitations on market access, national treatment and additional
commitments as permitted under relevant portions of GATS. Thus there is a considerable
degree of flexibility provided to the Members under the GATS.

While the negotiations cover all sectors and modes of supply, the emphasis of developed
and developing countries is different. Developed countries in general press for greater
liberalization in mode 3 relating to commercial presence. On the other hand, developing
countries including India seek for greater liberalisation of mode 4 relating to "Movement
of Natural Persons". India, in particular, has interests in seeking greater market access for
its professional and skilled labour in financial services, health care, computer software,
telecom, construction and engineering, transport and distribution etc.

2 Principles of the services negotiations

Various NGOs, trade unions and business associations inaccurately portrayed the WTO
negotiations on liberalisations of services trade as facilitating the privatisation of
government services. In a Press Release dated the 28th June 2002 the WTO clarified that:

(a) Public services provided by the government on a non-competitive and non-

commercial basis are beyond the scope of GATS and not subject to negotiation.
(b) Liberalization does not mean privatization. GATS negotiations do not require
privatization, commercialization or deregulation of any service.
(c) A voluntary process. No country is compelled to make any changes to its
services regime, which it is not prepared to concede voluntarily.
(d) The right to regulate is a fundamental premise of the GATS. The Negotiating
Guidelines clearly recognize "the right of Members to regulate the supply of
services" and place due respect for national policy objectives.
(e) A democratic process. Most WTO Members are constitutionally required to
submit their negotiations for ratification to their Parliaments. In addition, the
Swiss Constitution provides for the possibility of popular referendum.
(f) Universal services. If any country opens a service sector to competition, it retains
the right to decide the scope of universal service obligations for social, regional
and other reasons. For example, a government can request a private telecom
company to offer its services also in rural circles and not just in the big cities.
(g) Transparency. All negotiating proposals tabled by WTO Members to date have
immediately been put on the WTO Website at www.wto.org.

3
 3. India’s Commitments under GATS

India is a founder member of WTO and ratified the agreement establishing the WTO on
30-12-1994. As in the case of other multilateral agreements, India’s commitments to
GATS are guided by the following general principles in varying degrees (Das 2004):

(a) Gradual approach: India believes in gradual and step-by-step approach and not a
Big Bang or Shock Therapy approach.
(b) Human face: All our reform programs have strong emphasis on human face and
least sacrifice made by the people.
(c) Sovereignty constraint: Indian government tries to minimize the loss of power for
national policy formulation that could result from international cooperation.
(d) Political constraint: India is a sovereign democratic republic with independent
judiciary, and all external relations are based on general political consensus.
(e) Agency constraint: Policies are influenced by the ideology of the political parties
in power. But once adopted, policies are irreversible.
(f) Preference for decentralization: India prefers national level policies that take into
account external factors, rather than pooled mechanisms at the international level.
(g) Priority reforms: Basic purpose of commitment is to strengthen our economic
position and global competitiveness, but not at the cost of national security, public
health and safety, and environment protection.

India signed the Fourth Protocols in 1997 for telecom services. In general, India's
current policy is more liberal than its scheduled bindings. For example, for voice and
mobile telephone services, commercial presence may be established through
incorporation in India and a license from the designated authority. Total foreign equity
in the company is scheduled not to exceed 25%, although the current policy allows
foreign equity up to 49% for these services. India also declared that it would examine
the issue of allowing competition from the private sector in international long-distance
telecommunication services in 2004; this date was brought forward to 2002.

In financial services, initial negotiations continued till 28-07-1995 when an interim

agreement up to 31-12-1997 was arrived at. India made the following commitments.

(a) Banking
(i) Only a branch presence
(ii) 5 licenses per year.
(iii) Entry to new foreign banks may be denied if market share of assets of foreign
banks exceeds 15% of total assets of banking system.

(b) Non-Banking Financial Services

(i) Items allowed included Merchant banking, Factoring, Financial leasing, Venture
capital and financial consultancy.
(ii) Government allowed local incorporation with a maximum equity of 51 per cent
by foreign financial services suppliers including banks.

4
(c) Insurance
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.

India's offer though appreciated was seen to be restrictive for the following reasons:
(i) Limitation on the number of new branches.
(ii) ATM restrictions outside branch premise as it was regarded as additional branch.
(iii) New branch licenses can be denied when assets of foreign banks exceeds 15% of
the total assets of the banking system.
(iv) National treatment is denied, and investment undertaken by foreign banks
operating in India in other financial services companies is not allowed to exceed
10% of owned funds or 30% of the investee company's capital.
(v) Entry by non-banking financial companies is limited to local incorporation and
the foreign equity is limited to 51%.
(vi) India's commitments omit a number of important non-banking financial services.
(vii) State monopoly on insurance.

India's Enhanced Offer

During negotiations in June-July 1995, India made an enhanced offer, which included 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 and inclusion of Stock Broking in the
schedule with maximum foreign equity of 49%. This offer was made to obtain
improvement from India’s major trading partners in the movement of natural persons.
Consequently, the EU, Norway, Switzerland and Australia tabled an offer on movement
of natural persons for the first time and did not insist on the economic needs test.

Under the Fifth Protocol signed in 1998, India made the following commitments:

(i) MFN exemptions relating to banking services were withdrawn subject to other
WTO members undertaking MFN-based commitments.
(ii) Number of bank branches to be opened per year for both existing and new
foreign banks increased from 8 to 12 per year.
(iii) Banks were allowed to install automatic teller machines (ATMs) at branches
and at other places identified by them.
(iv) In insurance, status quo is maintained.
(v) In the area of reinsurance, the existing binding was aligned to the market.
(vi) Both national treatment and market access are unbound for NBFCs.
(vii) New commitments in stock broking and financial consultancy services.

At present, in actual practice, new bank branches for foreign banks being allowed by the
RBI are 15 per year though our commitment is only for 12 branches per year. The
guidelines issued by RBI so far go also beyond the commitments made in NBFC sector.

5
 3. Reforms and Liberalisation in Banking and insurance

Several measures were taken since 1991 to strengthen the banking system and to improve
the functioning of money and capital markets. Policy package included decontrol of
lending and deposit rates, reduction of CRR from 25 percent in 1991 to 4.75 percent in
2003, reduction of SLR from 38.5 to 25 percent, reduction of prime lending rates from
over 21 percent to 10.5 - 11.5 percent in 2003, tightening of prudential norms for capital
adequacy and provisioning for non-performing assets, an active open market operations
and abolition of selective credit controls. An array of capital market reforms was
introduced for primary and secondary markets, equity and debt, and foreign investment.

Indian firms were allowed to raise funds abroad through Global Depository Receipts,
Foreign Currency Convertible Bonds and offshore fund. Foreign Institutional Investors
(FIIs), Non-resident Indians (NRIs) and Overseas Corporate Bodies (OCBs) were
allowed to operate in India’s capital markets subject to limits of individual holdings and
collective holding up to 49 percent of paid up capital. In regard to tax rates, FIIs are
currently taxed on a preferential basis on long-term capital gains at the rate of 10%
compared with 20% for short-term capital gains.

Foreign investors are permitted to pick up disinvested shares of public enterprises, dated
government securities and treasury bills and shares of unlisted companies. The Foreign
Exchange Regulation Act (FERA) removing various restrictions on foreign companies,
who can now own real estate, use their trademarks and brand names for domestic sale.
India has become a member of the Multilateral Investment Guarantee Agency and signed
treaties for avoidance of double taxation with many countries.

Entry requirements for banks were changed in January 2001. Among the changes made,
minimum capital requirements for new banks were raised to Rs.2 billion and to rise
further to Rs.3 billion three years latter and minimum capital adequacy ratio requirement
of 10%, which was latter increased to 12% with effect from April 2003. Foreign
investment of up to 74% of a bank's equity is now permitted. However foreign equity in
insurance and banks doing only insurance services remains at 26%. New banks are also
allowed to open a quarter of their branches in rural/ semi urban areas. Foreign banks are
also allowed to establish branches and 100% subsidiaries in India.

In order to regulate the activities of non-bank financial companies, the RBI Act (1934)
was amended in 1987, under which NBFCs are required to obtain a Certificate of
Registration from the RBI prior to commencing any financial operations. Foreign direct
investment is allowed up to 100% of equity subject to minimum capital requirements.
Investment by foreigners, non-resident Indians and Overseas Corporate Bodies (OBCs)
are permitted in 18 NBFCs activities. Following amendments to the RBI Act, the RBI set
up a regulatory framework for NBFCs in January 1998 to ensure that only financially
sound and well managed NBFCs were allowed to access public deposits.

100% foreign owned NBFCs would act as a holding company and specific activities
would be undertaken by step-down subsidiaries with minimum 25% domestic equity.
Investment proposals in NBFS sector for activities which are not fund based and only

6
 advisory or consultancy in nature are subject to a minimum capitalization norm of US$
0.5 million, irrespective of the foreign equity participation level.

Amendments were also made to the Life Insurance Corporation Act, 1956, the General
Insurance Business (Nationalisation) Act, 1972, and related sections of the Insurance Act,
1938, to remove the exclusive monopoly operated by the LIC and the GIC in life and
general insurance services, respectively. As a result of the change in legislation, by
February 2001, the IRDA had issued Certificates of Registration to 17 private Indian
insurance companies, of which ten are in life insurance, six provide general insurance
services, and one is a reinsurer.

In international categorizations by the International Monetary Fund (IMF), India is

regarded as one of the countries having independent floating exchange rate arrangement.
The day-to-day fluctuations in the exchange rate of Indian rupee are determined by free
market forces for supply and demand for foreign exchange; such fluctuations reflect both
economic fundamentals and short-term speculation. The rupee is also fully convertible on
current account and almost fully convertible on capital account for the non-residents.

These liberalizations led to a build up of foreign exchange reserves from $1 billion in June
1991 to $102 billion in January 2004 despite India prepaying $5 billion of external debt,
retiring $5.5 billion on account of redemption of Resurgent India Bonds (RIBs) and
making a contribution of $0.5 billion towards the financial Transactions Plan (FTP) of
International Monetary Fund in 2003. To moderate the monetary impact of reserve
accumulation, government prepaid part of multilateral and bilateral external debt,
liberalized external commercial borrowing and outward foreign investment. Monetary
authority phased out Foreign Currency Non-Resident Deposits, which benefited from
exchange rate guarantee.

4. Assessment of the Impact of GATS

4.1 Assessment by Developing Countries

An assessment of trade in services made jointly by some developing countries viz. Cuba,
Dominican Republic, Haiti, India, Kenya, Pakistan, Peru, Uganda, Venezuela and
Zimbabwe (WTO 2001b) made the following observations:

(a) Developing countries have not received benefits from their commitments

Developing countries made substantial commitments under GATS for many services,
often binding recently adopted legislation or pre-committing future policies without
having much experience in implementation. They undertook a higher share of full
bindings under the cross-border and commercial presence modes of supply. In contrast,
they have not received much under the movement of natural persons mode of supply. As
a result, most developing countries have a deficit in services trade except in the areas of
tourism, travel and worker remittances.

7
(b) Market power of big corporations wipe out developing countries small suppliers

In spite of GATS, developing countries’ share of services export is only 20%, even
though they make up 90% of WTO membership. Developing country providers (mostly
SMEs) face competition from large service multinationals with massive financial
strength, sophisticated technology and worldwide networks. Liberalisation without level
playing fields has aggravated the divide in supply capacity between developed and
developing countries.

(c) Technical assistance

The developing countries recommended that a comprehensive assessment must be carried

out by the WTO members and international organizations on the impact of GATS on
services production, employment and exports in developing countries before undertaking
further liberalizations. Demand driven technical and financial assistance should be
provided for this purpose to developing countries, especially to the LDCs.

4.2 Assessment made by the WTO Secretariat

A note from the WTO Secretariat (WTO 2001b) appears to argue that the developing
countries have benefited significantly from liberation of trade in services. The note points
out that while a partial approach with a strong focus on sectors may appear to be
attractive, from an analytical angle the sector-specific reforms may imply awkward trade-
offs. Since the services universe is very diverse- structurally, economically and
politically- it would be naïve to assume that one single, detailed blueprint could be
applied for assessment purposes across all sectors. The secretariat emphasized that there
had been significant benefits to the developing countries as indicated below:

Direct Economic Impact: GATS has led to reduction of prices with increased
supply and improved quality and reliability in services. Growth of mobile phones
and international credit cards ("consumption abroad") are the best examples.

Indirect Economic Impact: There had been significant industrial

diversification, improvement in performance (profitability, production,
employment) of user industries, development of skill and technology, and
cyclical resilience of growth.

Social benefits: There was distributional equity, general improvement in

environment, public health, safety and national security.

4.3 An impartial view

An examination of both the views indicates that the truth lies somewhere in between the
extreme views held by the groups of developing and developed countries. It is true that
many developing countries have not been able to reap the benefits of liberalisation of

8
trade in services due to some inherent structural problems. But it is also equally true that
the developing countries as a group and some developing countries gained significantly
in production and trade in services (Das 2003b).

The impact of liberalisation of trade in services cannot be examined simply by sectoral

developments in services trade or production. Since services provide basic infrastructure
for industrial production and trade and also for other services, we have to examine the
development and growth of the overall economy.

Levine (1997) examined the link between financial services and economic growth and
identifies five major functions of the financial systems, which help in minimizing
transactions costs and improving the allocation of resources. These include risk sharing,
mobilizing savings, allocating capital for productive sectors, monitoring corporate
performance, and easing the exchange of goods and services. Francois and Schuknecht
(1999) also found a strong positive relationship between economic growth and financial
sector competition.

Matto et.al. (1999) analysed static and dynamic effects of services liberalization on
economic growth and drew two broad conclusions. First, services liberalization is
different from merchandise trade because the former involves factor mobility and leads to
scale effects that are distinctive. Second, there is some evidence to suggest that openness
in services has a positive impact on the long run growth potentials. The estimates suggest
that countries with fully open telecom and financial services grew up to 1.5 percentage
points faster than other countries.

5. Global services production and exports

The decade of 1990s witnessed higher growth rate of services production than any other
sector and its increasing share in GDP for almost all regions and countries irrespective of
vast differences in their economic size and social development (Das 2002). Services now
account for more than 50 per cent of GDP in all regions except for East Asia. In 2000
global service sector output valued at $19.7 trillion constituted 64 per cent of world GDP.
Although the developed countries accounted for three-fourths of world services output,
the contribution of services also increased significantly in developing countries.

During 1990s, South Asia achieved the highest growth rate of services value added at 7.1
per cent per annum, followed by the East Asia and Pacific at 6.4 per cent and the Middle
East and North Africa at 4.5 per cent (Table-1). Consequently, the share of services in
GDP increased for all regions in 1990s. The share of the service sector to world GDP was
64% in 2000, compared to 57% in 1990 (Table-2).

External trade and foreign investment in services had grown at a faster speed than that in
goods in 1990s. Today, service sector accounts for 40 per cent of the global FDI stock
and 50 per cent of the world FDI flows. In 1985-2000 the average annual growth rate for
services exports was over 9 per cent compared with 8.2 per cent for merchandised
exports. Services trade more than trebled in volume in 15 years to $1.4 trillion in 2000
and accounted for 25 per cent of all cross border trade.

9
Developing countries witnessed the fastest increase (about four folds) in service exports
and consequently increased their share in world service trade from 14 per cent in 1985-90
to 18 percent in 1995-2000. Europe and Central Asia and East Asia and the Pacific
increased service exports six times, South Asia and Latin America and Caribbean kept up
with the world growth, and Sub Saharan Africa and Middle East and North America
lagged behind.

During last two decades, the share of transport in total services exports declined from one
third to one fifth due to a decline in the relative prices of transport services. The share of
travel in total services exports remained around 30 per cent, while that of other services
increased to 50 per cent. In 1990s, among the other services, royalties and license fees
accounted for 12%, banking services 10%, construction 7%, insurance 5%,
communications 5%, computer and information 5%, personal, cultural and recreational
services 3%, and other businesses 53%.

Another advantage of global services trade was significant reduction in user charges for
telecom and ocean cargo and hardware prices of computers (Table-3).
Table-1: Average sectoral growth rates in India and different regions in 1980s and 1990s
Country GDP growth GDP growth Agriculture Industry Services
per annum per annum Growth pa Growth pa growth pa
1980-1990 1990-2000 1990-2000 1990-2000 1990-2000
India 5.8 6.0 3.0 6.4 8.0
Low & middle income 3.5 3.5 2.2 3.7 4.1
East Asia & Pacific 7.9 7.2 3.1 9.3 6.4
Europe & Central Asia .. -1.5 -2.3 -3.8 1.6
Latin America & Caribbean 1.7 3.3 2.3 3.3 3.4
Mid. East & N.Africa 2.0 3.0 2.6 0.9 4.5
South Asia 5.6 5.6 3.1 6.2 7.1
Sub-Saharan Africa 1.6 2.5 2.8 1.6 2.6
High Income 3.3 2.5 0.0 0.7 ..
World 3.3 2.7 1.4 1.5 2.9

Table 2: Structure of output in India and different regions in 1990 and 2000

Country GDP Agriculture Industry Services

billion US$ % of GDP % of GDP % of GDP

1990 2000 1990 2000 1990 2000 1990 2000

India 317 457 31 25 28 27 39 49
Low & middle income 4404 6561 16 12 38 35 46 54
East Asia & Pacific 927 2059 20 13 40 46 40 41
Europe & Central Asia 1253 942 17 10 44 35 39 57
Latin America & Caribbean 1133 2001 9 7 36 29 55 64
Mid. East & N.Africa 401 660 15 14 39 37 47 48
South Asia 405 597 31 25 27 26 43 49
Sub-Saharan Africa 298 323 18 17 34 30 48 53
High Income 17414 24927 .. .. .. .. .. ..
World 21817 31493 7 5 36 31 57 64

10
 Table -3 Trend of transport, communications and computers cost in 1960-2000

Year Ocean freight Average revenue per Cost of 3-minute Price of computers
1920=100 PKM on air telephone call, relative to GDP
(in 1990 US$) New York -London (2000=100)
(in 2000 US$)
1960 28 0.24 60.42 186,900
1970 29 0.16 41.61 19,998
1980 25 0.10 6.32 2,794
1990 30 0.11 4.37 728
2000 27 0.08 0.40 100
Source: U.S. Commerce Department, Bureau of Economic Analysis.

6 Impact on India’s Services Sectors in 1990s

6.1 Growth of Services Production and Employment

In India the services output registered an average growth rate of 8 per cent in 1990s and
its share in GDP increased from 39 per cent in 1990-91 to 51 per cent in 2002-03 at the
cost of both agriculture and industry (Table-4). Services sectors employed 19% of the
total workforce in 1999-2000, implying that the sector's labour productivity is
considerably higher than the national average.

As regards employment, in the period 1993-2000, overall employment increased by only

1.1 per cent per annum and the employment in agriculture was almost stagnant.
Employment declined in mining and public utilities and employment growth in
manufacturing was only 2.6 per cent per annum. However, services sectors such as
financial and real estate, trade and hotels, transport a communications achieved growth
rates exceeding five per cent (Table-5).
Table-4 Trend of sectoral shares in GDP in 1993-2003 (in per cent to total GDP)

Sectors 1993-94 1995-96 2000-01 2001-02 2002-03

Agriculture 31.0 28.0 23.8 23.9 22.2
Industry 26.3 28.1 27.2 26.6 27.1
 Mining & quarrying 2.6 2.6 2.3 2.2 2.2
 Manufacturing 16.1 17.9 17.2 16.8 17.1
 Public utilities 2.4 2.5 2.5 2.5 2.5
 Construction 5.2 5.1 5.2 5.1 5.3
Services 42.7 43.9 49.0 49.5 50.7
 Trade, hotels, restaurant 12.7 14.0 14.6 15.1 15.6
 Transport & telecom 6.5 6.9 8.3 8.4 8.6
 Financial services 11.5 11.4 12.6 12.5 12.7
 Community, social 12.0 11.6 13.5 13.5 13.8
All Sector 100.0 100.0 100.0 100.0 100.0

11
 Table-5 Sectoral Employment during 1983 to 2000
Sectors 1983 -1993 1993-2000
Agriculture 2.2 0.0
Mining & quarrying 3.7 -1.9
Manufacturing 2.3 2.6
Electricity, gas and water supply 5.3 -3.6
Construction 4.2 5.2
Trade, hotels and restaurant 3.8 5.7
Transport and communication 3.4 5.5
Financial and real estate 4.6 5.4
Community and personal services 3.6 -2.1
All Sectors 2.7 1.1

6.2 Services Trade of India

The statistics on international trade in services of India are compiled by the Reserve Bank
of India following the recommendations of the IMF's Balance of Payments Manual.
Services exports are broadly classified as travel, transportation, insurance, government
not included elsewhere, and miscellaneous services (comprising financial, software and
computer, communication, construction, news agency, and management services,
royalties and license fees and others).

RBI data indicate that a strong growth of India’s services trade occurred in the 1970s,
with the decadal growth of payments at 18 per cent and growth of receipts at 23 per cent.
However, the high growth could not be sustained in the 1980s. With structural reforms
and liberalization of external sector, the growth rates of both services exports and
services imports accelerated in the range of 17 to 18 per cent in the 1990s (Table-6).

Table-6 Decadal Growth Rates of Services Receipts and Payments (in cent)

Decade Services receipts Services payments

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
Source: Pattanaik, Sahoo and Dhall (2002)

12
 Table-7 Composition of Services exports (as percentages in total services)

Period Travel Transport Insurance Government n.i.e. Miscellaneous

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 41.5
1990s 33.0 20.3 2.3 1.8 42.6

Table-8 Composition of Services imports (as percentages in total services)

Period Travel Transport Insurance Government n.e.i. Miscellaneous

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
One of the striking examples of a developing country service export success story is the
Indian software industry. Indian software exports increased from $225 million in 1992 to
$1.75 billion in 1997 and further to $6 billion in 2002.

Composition of services trade indicates that miscellaneous receipts comprising of

financial, software and other modern services had a predominant share in the 1990s. The
share of travel in services exports increased to 33-36 per cent in 1980s and 1990s
compared with 26% in 1970s. The transport sector had a structural break in 1980's with
significant decline in its share in total services trade from 33-37 per cent in 1950s to
1970s to 18% in 1990s. However, its share improved marginally to 20 per cent in 1990s.

6.3 Impact on financial sectors

Scheduled commercial banks (SCBs) improved their performance in 1990s. The ratio of
operating profits to total assets improved from 1.6 per cent in 1995-96 to 1.9 per cent in
2001-02 and further to 2.4 per cent in 2002-03 and the ratio of net profits to total assets
improved from 0.2 per cent in 1995-96 to 0.75 per cent in 2001-02 an further to 1.03 per
cent in 2002-03. There was also a decrease of net non-performing assets (NPAs) of the
commercial banks, which amounted to 4.4 per cent of net advances at the end of March
2003 compared with 10.7 per cent at the end of March 1996.

91 commercial banks out of 93 banks attained the minimum capital adequacy ratio
(CAR) of 9 per cent by end March 2003. The ratio is to be raised to 10 per cent by end
March 2004. 26 banks out of 27 public sector banks and 61 banks out of 66 private sector
banks had already achieved CAR exceeding 10 per cent by end March 2003.

In 1990s along with reforms Government gradually introduced competition in banking.

As a result, the number of private banks increased from 46 in 1990 to 73 in 2001. The
public sector, however, controls some 80% of total bank assets (2001). In the Export-

13
Import Policy 2002-2007, the Government permitted overseas banking units (OBUs) in
the special economic zones; these banks are exempted from prudential requirements such
as minimum capital asset ratios and statutory lending requirements.

Table-9 Performance of banks

Item 1995-96 1997-98 2002-03
1. No. of foreign banks 33 42 36
2. New private banks 9 9 9
3. Gross NPA/Advances 24.8 16.0 8.8
4. Net NPAs/Advances 10.7 8.2 4.4
5. Op. profits ratio 1.6 1.8 2.4
6. Net profits ratio 0.2 0.8 1.0
7. Number of banks having CRAR (Risk weighted capital adequacy ratio)
-- Below 9% 31 6 2
-- 9 to 10% 10 16 4
-- Above 10% 43 71 87
Number of banks 84 93 93

7 Concluding observations
7.1 Statistics on Trade in services

Given the growing importance of trade in services, the need for reliable information on
services trade is crucial. The only source of information on trade in services is the IMF
balance of payments (BOP) statistics. However, there are difficulties in using these
statistics to study the impact of WTO agreements on trade in services, as the framework
of WTO negotiated commitments donot match the IMF structure of statistics.

First, the General Agreement on Trade and Services (GATS) goes far beyond the trade
flow statistics and requires information on production, sales, employment, foreign direct
investment and activities of foreign affiliates for meaningful impact analysis.

Second, GATS definition of trade in services deals with transactions between residents
and non-residents. For example, local sales by resident foreign entities are regarded as
services trade under WTO definition, while such transactions are not classified as
services trade according to the IMF Balance of Payments Manual.

Third, the scheduled commitments are based largely on the UN Central Product
Classification (CPC). However, the available services statistics for different countries
follow the IMF-BOP classifications, which are not based on the UN-CPC.

Fourth, GATS distinguishes between four distinct modes of supply viz. (i) cross border
supply, (ii) consumption abroad, (iii) commercial presence and (iv) presence of natural
persons. Commitments under each service category are classified according to these
modes of supply, but such disaggregated information are not available.

Efforts should be made to improve the database for trade in services and to provide data
on more disaggregated levels according to WTO classification of trade in services.

14
 7.2 India’s comparative advantage

India's main interest and focus area in WTO negotiations on GATS should be to provide
effective market access to its professionals and skilled labour force and bring about
symmetry in the movement of capital and labour. 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 recognised abroad. At the time of
negotiations, it needs to be ensured that standardisation of these qualifications are sorted
out to protect our interest. Moreover, social obligations in the case of services such as
telecommunications and banking (serving rural areas) and air transport (linking the
northeast states and other far-flung areas) have to be carefully nurtured.

In order to provide effective market access to professionals, India should try to get the
following commitments from the developed countries:

(a) Economic Needs Test should be totally eliminated for at least in certain specified
categories. At a minimum, it should be based on transparent and objective criteria.
(b) Social security contributions required to be made by temporary persons, even though
they are not eligible for receiving benefits of such contributions, affect their
comparative advantage and needs to be corrected.
(c) Administration of visa regimes may be made more transparent. Notion of a separate
GATS visa for personnel covered by horizontal and sectoral commitments scheduled
by a Member, different from the normal immigration visa, may be considered.

(d) Specific sectoral commitments in line with requirements of developing countries

need to be taken. For this purpose, more detailed sub classification of categories of
personnel and their inclusion in sectoral/horizontal commitments may be required.

REFERENCES

Das, Tarun (2002) Implications of Globalisation on Industrial Diversification Process and

Improved Competitiveness of Manufacturing in ESCAP Countries pp.ix+1-86, ESCAP,
ST/ESCAP/2197, UN, New York, March 2002.

Das, Tarun (2003a) Economic Reforms in India- Rationale, Scope, Progress and
Unfinished Agenda, Planning Department, Bank of Maharashtra, Pune, February 2003.

Das, Tarun (2003b) An Assessment of Trade in Services- A Case Study for India, Indian
Council for Research on International Economic Relations (ICRIER), New Delhi.

Das, Tarun, Rajaram Dasgupta, Rohit Parmer and Ashis Saha, (2003) Preparation of An
Index of Services Production, National Institute for Bank Management, Pune.

15
Das, Tarun (2004) Financing International Cooperation- A Case Study for India, UNDP,
New York.

Francois, J.K. and Ludger Schuknecht (1999) Trade in financial services: procompetitive
effects and growth performance, CEPR Discussion Paper 2144, May 1999.

Levine, Ross (1997) Financial development and economic growth: views and addenda,
Journal of Economic Literature, June 1997.

Matto, Aaditya and Ludger Schuknecht (1999) explaining liberalisation commitments in

financial services trade.

Pattnaik, R.K., Ashok Sahoo and S.C. Dhall (2003) Methodological issues and growth
linkages of trade in services: Indian perspectives, in Preparation of An Index of Services
Production, edited by Tarun Das et. Al, National Institute for Bank Management, Pune.

Reserve Bank of India (2003), Report on Trends and Progress of Banking in India 2002-
03, Reserve Bank of India, Mumbai, December 2002.

WTO (2001a) Assessment of Services Liberalisation: Potentially relevant consideration

and criteria, S/CSS/W/117, 15 November 2001.

WTO (2001b) Assessment of Trade in Services, Communication from Cuba, Dominican

Republic, Haiti, India, Kenya, Pakistan, Peru, Uganda, Venezuela and Zimbabwe,
S/CCS/W/114, 9 October 2001.

WTO (2002), Trade Policy Review – India, Geneva, June 2002.

16