GS Notes

6. Economics Notes 16

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Elaborate Notes

WTO Ministerial Conferences and India’s Stance

Nairobi Ministerial Conference (10th MC, 2015) The 10th Ministerial Conference of the World Trade Organization (WTO), held in Nairobi, Kenya, in December 2015, was a critical juncture that highlighted the growing divergence between developed and developing nations.

  • Emergence of New Issues and Reclassification of Economies:

    • Developed countries, seeking to move beyond the long-stalled Doha Development Agenda (initiated in 2001), began pushing for the inclusion of “new” or “emerging” trade issues. This was partly an attempt to revitalize the WTO’s negotiating function and adapt its rulebook to 21st-century commerce.
    • These new issues included:
      1. E-commerce: Rules governing digital trade, data flows, and online consumer protection.
      2. Labor and Environmental Standards: Linking trade privileges to compliance with certain labor rights (as defined by the International Labour Organization, ILO) and environmental regulations (under frameworks like the UNFCCC). This is often viewed by developing countries as a form of “non-tariff barrier” or “green protectionism.”
      3. Transparency in Government Procurement: Pushing for open and non-discriminatory access for foreign companies to bid on government contracts.
      4. Supply Chain Management: Rules to facilitate smoother and more efficient global value chains.
      5. Transparency in State-Owned Enterprises (SOEs): Disciplines to ensure SOEs operate on commercial considerations and do not receive unfair subsidies that distort trade.
    • Simultaneously, a narrative was promoted by some developed nations to re-categorize large developing countries like India and China as “emerging economies.” This was a strategic move aimed at graduating them from the benefits of Special and Differential Treatment (S&DT), which provides developing countries with longer implementation periods and more policy flexibility.

  • India’s Stand and Counter-Demands:

    • India, representing the interests of a large bloc of developing and least-developed countries (LDCs), firmly resisted binding commitments on these new issues.
    • Jurisdictional Argument: India argued that issues like labor and environment have their own dedicated international bodies (ILO and UNFCCC, respectively) and should not be brought under the WTO’s trade-centric dispute settlement mechanism, which could lead to trade sanctions for non-compliance.
    • Inclusion of Human Capital Movement: As a counter, India proposed that if new issues were to be discussed, the movement of human capital (often referred to as Mode 4 of the General Agreement on Trade in Services - GATS) should be a priority. This reflects India’s comparative advantage in skilled professionals and seeks easier visa and work permit regimes in developed countries.
    • Focus on the Doha Agenda: India reiterated that the WTO must first conclude the unresolved issues of the Doha Development Round, particularly the reduction of trade-distorting agricultural subsidies by developed nations. These subsidies, as argued by economists like Jagdish Bhagwati, create an uneven playing field and harm farmers in developing countries.
    • Public Stockholding (PSH) for Food Security: A paramount priority for India was securing a permanent solution for its public stockholding programs, which are crucial for the implementation of the National Food Security Act, 2013. The existing “peace clause” was a temporary fix and India sought a permanent exemption from subsidy calculations for its food security programs.
    • LDC Package: India supported the effective implementation of a package for LDCs, including Duty-Free, Quota-Free (DFQF) market access for their products.

  • Key Outcome: The “Nairobi Package”

    • The most significant outcome was the decision on agricultural export subsidies. Developed countries committed to eliminating them immediately. Developing countries were given a transition period until 2019, with an extension until 2023 for subsidies related to marketing and logistics for agricultural exports. This was hailed as a major achievement for leveling the agricultural trade landscape.

Buenos Aires Ministerial Conference (11th MC, 2017) The 11th MC in Buenos Aires, Argentina, was marked by a significant lack of consensus, largely due to the hardened stance of the United States under the Trump administration, which was skeptical of multilateralism.

  • Failure to Reach Consensus: The conference concluded without a Ministerial Declaration for the first time in the WTO’s history, reflecting deep divisions among members.
  • Emergence of Plurilateralism: In the absence of multilateral consensus, “pressure groups” or “peer groups” of like-minded countries began to form and hold discussions on issues like e-commerce, investment facilitation, and gender in trade. This marked a shift towards plurilateral negotiations (agreements among a subset of WTO members) rather than the traditional single-undertaking approach where all members agree on all issues.
  • Key Issues Discussed:
    • Fisheries Subsidies: Negotiations continued on an agreement to prohibit harmful subsidies that contribute to overfishing and illegal, unreported, and unregulated (IUU) fishing. While no agreement was reached, it laid the groundwork for future success.
    • Gender and Trade: For the first time, gender-related issues were formally brought into the discussion, with a focus on making trade more inclusive for women.
  • India’s Stand: India maintained its consistent position that the WTO’s primary mandate is to discuss and negotiate multilateral trade rules. It argued that non-trade issues like gender should be addressed in more appropriate international forums, and plurilateral discussions on issues not agreed upon by the full membership undermine the multilateral character of the organization.

Geneva Ministerial Conference (12th MC, 2022) Held after a five-year gap due to the COVID-19 pandemic, the 12th MC in Geneva, Switzerland, achieved a set of significant outcomes, collectively known as the “Geneva Package.”

  • Context of E-commerce Models: A key tension in e-commerce discussions revolves around different business models. The Marketplace model (e.g., Amazon India) acts as a platform connecting buyers and sellers; India allows 100% FDI in this model. The Inventory-based model involves the e-commerce entity owning the goods and selling them directly to consumers; FDI is restricted in this model in India. The controversy arises when marketplace platforms are perceived to give preferential treatment (e.g., through their algorithms or subsidiary companies) to sellers in which they have a stake, thus circumventing the spirit of the FDI rules. Developed countries advocate for fewer restrictions, while developing nations like India seek to regulate such practices.

  • Key Agreements of the “Geneva Package”:

    1. TRIPS Waiver for COVID-19 Vaccines: WTO members agreed to a temporary, five-year waiver of intellectual property patents on COVID-19 vaccines. This allows countries to authorize the use of a patented subject matter for producing and supplying COVID-19 vaccines without the patent holder’s consent. However, this was a significantly diluted version of the original proposal by India and South Africa in 2020, which had called for a much broader waiver covering diagnostics, therapeutics, and other technologies, not just vaccines.
    2. Moratorium on E-commerce Customs Duties: Members agreed to continue the long-standing practice of not imposing customs duties on electronic transmissions until the 13th Ministerial Conference or 31st March 2024, whichever comes first. India had strongly argued for a review of this moratorium, contending that it leads to revenue loss for developing countries, especially as the digital economy grows.
    3. Agreement on Fisheries Subsidies: A landmark agreement was reached to curb harmful subsidies for illegal, unreported, and unregulated (IUU) fishing. The agreement also prohibits subsidies for fishing in the unregulated high seas. India, along with other developing countries, successfully negotiated crucial concessions, ensuring that subsidies for traditional and small-scale artisanal farmers operating within their Exclusive Economic Zone (EEZ) would not be restricted. The agreement has a four-year sunset clause for certain provisions if comprehensive disciplines are not adopted by then.

  • Unresolved Issues for India:

    • Permanent Solution on Public Stockholding: Despite being a priority for years, a permanent solution to the PSH issue remained elusive.
    • Special and Differential Treatment (S&DT): India continued to advocate for the preservation and strengthening of S&DT provisions as a core principle of the WTO.
    • Export Restrictions on Public Stocks: India highlighted the asymmetry in WTO rules that allow countries to export food from private stocks but restrict exports from government-held public stocks, even for humanitarian purposes to other countries.

Agreement on Sanitary and Phytosanitary (SPS) Measures

This agreement is a crucial part of the WTO framework, balancing the right of countries to protect life and health with the need to prevent protectionism.

  • Purpose and Scope: The SPS Agreement sets out the basic rules for food safety and animal and plant health standards. It allows countries to implement measures to protect human, animal, or plant life and health from risks arising from pests, diseases, additives, toxins, or contaminants in food and feed.
  • Core Principles:
    • Scientific Justification: SPS measures must be based on scientific principles and sufficient scientific evidence. They should not be maintained without evidence.
    • Necessity: Measures should be applied only to the extent necessary to protect health and life. They must not be more trade-restrictive than required to achieve the appropriate level of protection.
    • Non-discrimination: Measures must not arbitrarily or unjustifiably discriminate between countries where identical or similar conditions prevail.
  • International Standards: The SPS Agreement encourages members to base their measures on international standards, guidelines, and recommendations set by three organizations:
    1. Codex Alimentarius Commission: For food safety.
    2. World Organisation for Animal Health (OIE): For animal health.
    3. International Plant Protection Convention (IPPC): For plant health.
  • Example in Practice: A historical example is the European Union’s temporary ban on the import of Indian mangoes in 2014, citing the presence of fruit flies. This was an application of SPS measures. India subsequently improved its certification and inspection processes to meet EU standards, leading to the lifting of the ban. This case illustrates how SPS measures can act as significant non-tariff barriers if not managed properly.

Fiscal Policy: Introduction and Terminology

Fiscal policy is the use of government revenue collection (mainly taxes) and expenditure (spending) to influence a country’s economy. It is a key tool of macroeconomic management.

  • Core Components:
    • Receipts: The government’s income, primarily from taxes (direct and indirect), but also from non-tax sources like fees, profits from PSUs, and disinvestment.
    • Expenditure: Government spending on public services, infrastructure, salaries, subsidies, defence, and interest payments.
  • Budgetary Stance:
    • Surplus Budget: When total receipts exceed total expenditure.
    • Deficit Budget: When total expenditure exceeds total receipts. This is the norm for developing economies like India, which have large developmental needs.
  • Types of Fiscal Policy:
    • Expansionary Fiscal Policy: Used during an economic slowdown or recession. It involves:
      • Reducing tax rates to increase disposable income and encourage consumption/investment.
      • Increasing government spending on infrastructure, social schemes, etc., to directly boost aggregate demand.
      • The objective is to stimulate economic growth. A potential side-effect is higher inflation and a larger fiscal deficit. This approach is rooted in Keynesian economics, which advocates for government intervention to manage economic cycles.
    • Contractionary Fiscal Policy: Used to cool down an overheating economy and control high inflation. It involves increasing taxes or cutting government spending. This is politically difficult to implement due to its unpopular nature (populist policies, election cycles) and is therefore used less frequently. Fiscal policy’s impact is generally more direct and visible to the public compared to monetary policy.
  • Key Concepts:
    • Fiscal Stimulus: A specific, targeted use of expansionary fiscal policy to revive a struggling economy. It can take the form of tax cuts, increased subsidies, or bailout packages for specific industries (e.g., the stimulus packages announced globally during the 2008 financial crisis and the COVID-19 pandemic).
    • Tax Base: The total amount of assets, income, or economic activity that can be taxed by a taxing authority. For example, the tax base for income tax is the total assessable income of individuals and corporations. Widening the tax base (e.g., by bringing more people and activities into the tax net) is a way to increase tax revenue without raising tax rates.
    • Tax Exemption vs. Tax Rebate:
      • Exemption: An amount of income that is not subject to tax at all. It is available to all taxpayers regardless of their total income. For instance, if income up to ₹3 lakhs is exempt, this benefit applies to someone earning ₹5 lakhs as well as someone earning ₹50 lakhs.
      • Rebate: A reduction in the final tax liability, typically available only to taxpayers whose income is below a certain threshold. For example, a rebate might make the effective tax liability zero for someone earning up to ₹7 lakhs, but a person earning ₹7.1 lakhs would have to pay tax on their entire taxable income (after the basic exemption), without receiving the rebate.
    • Laffer Curve: A theoretical concept developed by economist Arthur Laffer, which suggests that there is an optimal tax rate that maximizes government revenue. Increasing tax rates beyond this point can be counter-productive and lead to a decrease in total tax revenue, as high rates may disincentivize work, encourage tax evasion, and lead to capital flight.

Constitutional Framework of Taxation in India

The Constitution of India provides a clear framework for the division of taxation powers between the Union and the States, primarily through the Seventh Schedule.

  • Seventh Schedule:
    • List I (Union List): Contains subjects on which only the Parliament can legislate. Major tax handles include taxes on income (other than agricultural income), corporation tax, customs duties, excise duty (on goods other than alcoholic liquor for human consumption and narcotics), and taxes on inter-state trade.
    • List II (State List): Contains subjects on which only State Legislatures can legislate. Major tax handles include taxes on agricultural income, land and buildings, excise on alcoholic liquor and narcotics, and taxes on the sale of goods (pre-GST).
  • Divisible Pool and Fiscal Federalism:
    • The “Divisible Pool” refers to the corpus of central tax revenues that are shared with the states. The vertical (Centre-State) and horizontal (inter-se among States) distribution is recommended by the Finance Commission, a constitutional body set up under Article 280.
    • 80th Constitutional Amendment Act, 2000: Based on the recommendations of the 10th Finance Commission, this amendment significantly enlarged the divisible pool by making almost all central taxes (except those mentioned in Art 270) shareable with the states. This was a major step towards strengthening fiscal federalism.
  • Constitutional Articles Governing Tax Distribution:
    • Article 270: Defines the divisible pool and lists the taxes and duties that are not part of it.
    • Exceptions to the Divisible Pool (Not shared with States):
      1. Article 268: Duties levied by the Union but collected and appropriated by the States (e.g., stamp duties on certain financial instruments).
      2. Article 269: Taxes levied and collected by the Union but assigned to the States (e.g., taxes on the sale or purchase of goods in the course of inter-state trade, pre-GST).
      3. Article 269A (via 101st CAA, 2016): Pertains to the Integrated Goods and Services Tax (IGST) levied on inter-state trade. It is levied and collected by the Centre, but the State’s share (SGST component) is apportioned to the destination/consuming state.
      4. Cess (under Article 270) and Surcharge (under Article 271): These are levies imposed by the Centre for a specific purpose (cess) or as a tax-on-tax (surcharge) and are not shared with the states. The increasing reliance on this route by the Centre has been a major point of friction with states.
  • Cascading Effect and GST:
    • Cascading Effect (Tax on Tax): The pre-GST tax regime suffered from a cascading effect. For instance, the central excise duty was levied at the factory gate. When the product moved to a retailer, the state-level Value Added Tax (VAT) or sales tax was levied on the price which included the excise duty. This meant a tax was being paid on a previously paid tax, increasing the final price for the consumer.
    • GST as a Solution: The Goods and Services Tax (GST) is a value-added tax designed to eliminate this cascading effect. In a dual GST system (CGST + SGST), both the Centre and the State levy tax on the same base value of the good or service. This ensures a seamless flow of tax credit throughout the value chain.
  • GST: Destination-Based Taxation:
    • The pre-GST Central Sales Tax (CST) under Article 269 was an origin-based tax, where the tax revenue was credited to the exporting/manufacturing state.
    • GST, particularly IGST under Article 269A, is a destination-based tax. The tax revenue on inter-state trade accrues to the consuming/importing state. This fundamental shift caused concern among manufacturing states like Tamil Nadu, Gujarat, and Maharashtra, which led to the constitutional provision for compensating states for any revenue loss for the first five years of GST implementation.

Prelims Pointers

  • Nairobi Ministerial Conference: 10th MC of WTO (2015).
  • Key Nairobi Outcome: Developed countries agreed to eliminate agricultural export subsidies immediately.
  • Buenos Aires Ministerial Conference: 11th MC of WTO (2017). It ended without a Ministerial Declaration.
  • Geneva Ministerial Conference: 12th MC of WTO (2022).
  • Geneva Package: Includes a temporary TRIPS waiver for COVID-19 vaccines, continuation of the e-commerce moratorium, and an agreement on fisheries subsidies.
  • TRIPS Waiver: The final agreement was a diluted version of the original proposal by India and South Africa.
  • Fisheries Subsidy Agreement: Prohibits subsidies for Illegal, Unreported, and Unregulated (IUU) fishing.
  • SPS Agreement: Allows countries to set food safety and animal/plant health standards, provided they are based on science.
  • International Standard-Setting Bodies for SPS: Codex Alimentarius Commission (food safety), OIE (animal health), IPPC (plant health).
  • Fiscal Policy: Government’s policy on revenue (taxation) and expenditure.
  • Expansionary Fiscal Policy: Involves cutting taxes or increasing government spending to boost economic growth.
  • Contractionary Fiscal Policy: Involves raising taxes or cutting government spending to control inflation.
  • Recession: Defined as negative economic growth for two successive quarters.
  • Laffer Curve: A theory illustrating the relationship between tax rates and tax revenue.
  • Seventh Schedule: Divides legislative powers, including taxation, into Union List (List I), State List (List II), and Concurrent List (List III).
  • Article 280: Pertains to the constitution of the Finance Commission.
  • Article 270: Defines the divisible pool of taxes to be shared between the Centre and States.
  • Cesses and Surcharges: Levied by the Centre and are not part of the divisible pool.
  • Article 271: Empowers the Parliament to levy surcharges.
  • 80th Constitutional Amendment Act, 2000: Expanded the divisible pool of taxes.
  • 101st Constitutional Amendment Act, 2016: Introduced the Goods and Services Tax (GST).
  • Article 269A: Deals with the levy and collection of IGST on inter-state supplies.
  • Article 279A: Pertains to the constitution of the GST Council.
  • Cascading Effect of Taxes: Refers to the ‘tax on tax’ problem, which GST aims to eliminate.
  • GST: A destination-based, value-added tax.
  • Central Sales Tax (CST): Was an origin-based tax, levied on inter-state sales pre-GST.

Mains Insights

GS Paper II: International Relations / Governance

  1. The WTO: A Battleground of Competing Development Models:

    • Developed vs. Developing World Divide: The debates at WTO Ministerial Conferences reflect a fundamental conflict. Developed nations push for ‘new issues’ (e-commerce, environment, labor) to set global rules that favor their technology and capital-intensive economies. In contrast, developing countries, led by India, insist on first resolving the legacy issues of the Doha ‘Development’ Agenda, such as unfair agricultural subsidies and market access, which are critical for their large agrarian populations.
    • India’s Shifting Role: India has traditionally been the voice of the G77 and the developing world. However, as its economy grows, it faces pressure to graduate from S&DT provisions. This creates a complex diplomatic challenge: balancing its role as a leader of the Global South with its aspirations as an ‘emerging’ global power.
    • Multilateralism under Strain: The failure at Buenos Aires and the rise of plurilateral negotiations indicate a crisis in multilateral rule-making. This trend could fragment the global trading system and sideline the interests of smaller developing countries that lack the bargaining power to engage in multiple parallel negotiations.

  2. Fiscal Federalism and the Erosion of Cooperative Spirit:

    • The Spirit vs. Letter of the Constitution: The 80th CAA was a landmark step towards strengthening cooperative federalism by expanding the divisible pool of taxes. However, the Union government’s increasing reliance on cesses and surcharges, which are kept outside this pool (as per Articles 270 and 271), is seen by states as a violation of the spirit of this amendment.
    • Cause and Effect: This practice reduces the funds available for unconditional transfer to states, making them more dependent on centrally sponsored schemes and discretionary grants. It undermines the fiscal autonomy of states and strains Centre-State relations, a key theme in GS Paper II. The 15th Finance Commission also commented on this trend, recommending higher grants to states to offset the impact.

GS Paper III: Indian Economy

  1. The Fiscal Policy Trilemma in a Developing Economy:

    • Indian policymakers constantly navigate a trilemma between stimulating economic growth, maintaining price stability (controlling inflation), and ensuring fiscal consolidation (controlling the deficit and debt).
    • Expansionary Bias: As noted, there is a political bias towards expansionary fiscal policy (fiscal stimulus, populist schemes). While this can provide short-term growth, excessive and untargeted spending can lead to high inflation, crowd out private investment by raising interest rates, and increase the public debt burden.
    • Fiscal-Monetary Policy Interaction: The summary correctly notes that excessive fiscal stimulus can make monetary policy ineffective. If the government runs a very high fiscal deficit, the RBI may be forced to ‘monetize’ it or keep interest rates high to control the resulting inflation, which conflicts with the goal of promoting investment. Achieving policy coordination between the government (fiscal) and the central bank (monetary) is crucial for macroeconomic stability.

  2. GST: A Transformative but Challenging Reform:

    • From Origin to Destination: The shift from an origin-based tax (CST) to a destination-based tax (GST) is a fundamental restructuring of fiscal federalism. It aims to create a ‘common national market’ and improve tax efficiency.
    • Federal Tensions: This shift inherently creates winners (consuming states) and losers (manufacturing states). The GST compensation mechanism was a political necessity to bring all states on board, but its recent conclusion has reignited debates about the revenue security of states.
    • Efficiency vs. Equity: While GST eliminates the cascading effect and improves efficiency, its implementation raises questions of equity. The structure of GST rates and the functioning of the GST Council, where the Centre has a de-facto veto, remain areas of ongoing debate regarding the balance of power between the Centre and the states.

  3. Non-Tariff Barriers as the New Frontier of Protectionism:

    • The SPS Agreement is a prime example of how technical standards can be used as non-tariff barriers (NTBs). While the agreement insists on scientific justification, determining what constitutes “sufficient” scientific evidence can be subjective and lead to disputes.
    • Developing countries like India often lack the sophisticated laboratory infrastructure and technical capacity to meet the stringent SPS standards of developed markets, effectively shutting their agricultural products out. This highlights the need for capacity building and ‘Aid for Trade’ initiatives to help developing countries overcome these technical barriers and participate more fully in global trade.

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