Global Services-16!17!18 Prof Tarun Das

8/9/2019 Global Services-16!17!18 Prof Tarun Das

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Global Services- Lectures 16-17-18WTO-GATS and Financial sector

reforms in IndiaProf. Tarun Das, IILM, New India.Formerly, Economic Adviser, Ministry of Finance


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Contents

1. GATS and Financial Services2. Scope of Financial Services

3. Indian Commitment under GATS

4. Financial Sector Reforms in India5. Impact of GATS on Indian Financial

Sector

6. Concluding Observations

7. Review Questions


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1.1 GATS and Financial Services

During the Uruguay Round, specificcommitments to provide market access andnational treatment were made in the sector,but they were not considered enough to

conclude the negotiations. Officially the first set of talks on Financial

services ended in July 1995, and the latestnegotiations under the first round of talks

ended in December 1997. Currently, financial services, like allservices, are included in the new servicesnegotiations, which began January 2000.


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1.2 GATS and Financial Services

Principles of the trade in financialservices are contained, like for allservices, in the GATS.

Included in the GATS, is the Annex onFinancial Services.Paragraph 2 of theAnnex addresses prudential measures.

Seventy countries participated in the

1997 financial services negotiations. Asof November 2003, 3 of them did notratify their commitments.


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1.3 Committee on Tradein Financial Services

The Committee on Trade in FinancialServices looks at the status ofacceptance of the Fifth Protocol whether the Members who participatedin the financial services negotiations in1997 have ratified their commitments.

It also looks at the classification of

financial services and at developmentsin financial services trade.


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1.4 Scope and Definition ofFinancial Services Negotiations

(a) This Annex applies to measures affectingthe supply of financial services.

(b) GATS do not deal with services supplied inthe exercise of governmental authority-

These services include the following:(i) activities conducted by a central bank or

monetary authority or by any other publicentity in pursuit of monetary or exchange

rate policies;(ii) activities forming part of a statutory

system of social security or publicretirement plans; and


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1.5 Scope and Definition ofFinancial Services Negotiations

(iii) other activities conducted by apublic entity for the account or withthe guarantee or using the financialresources of the Government.

(c) Any other activity similar to (i), (ii),(iii) above conducted by privatefinancial service providers in

competition with a public entity andrecognized by the government.


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1.6 Domestic Regulation

(a) A Member shall not be prevented fromtaking measures for prudential reasons,including the protection of investors,depositors, policy holders or persons towhom a fiduciary duty is owed by a

financial service supplier, or to ensure theintegrity and stability of the financialsystem.

(b) A Member is not required to disclose

information relating to the affairs andaccounts of individual customers or anyconfidential or proprietary information inthe possession of public entities.


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1.7 Recognition andDispute Settlement

Recognition: (a) A Member may recognizeprudential measures of any other countryand may have agreements forharmonization of rules and regulations.

(b) Other Members may also be allowed tojoin these agreements on equivalentregulation, oversight, implementation ofsuch regulations.

Dispute Settlement : Panels for disputes onprudential issues and other financialmatters shall have the necessary expertiserelevant to the specific financial serviceunder dispute.


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2.1 Annex on Financial Services

For the purposes of this Annex:(a) A financial service is any service of afinancial nature offered by a financialservice supplier of a Member.

(b) Financial services include all insuranceand insurance-related services, and allbanking and other financial services(excluding insurance).


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2.2 The Annex on Financial Services

1. Insurance and related activitiesi. Direct insurance including Co-insurance:

life and non-life;ii. Reinsurance and retrocession;

iii. Insurance intermediation, such asbrokerage and agency;

iv. Services auxiliary to insurance, such asconsultancy, actuarial, risk assessment and

claim settlement services.


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2.3 Banking and otherfinancial services

(v) Acceptance of deposits and otherrepayable funds from the public;

(vi) Lending of all types, including consumer

credit, mortgage credit, factoring and financing

of commercial transaction;

(vii) Financial leasing;

(viii) All payment and money transmission

services, including credit, charge and debitcards, travelers cheque and bankers drafts;

(ix) Guarantees and commitments;


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2.4 Banking & other financial services(x) Trading for own account or for customers,

whether on an exchange, in an over-the-counter market or otherwise, the following:

(A) Money market instruments (includingcheques, bills, certificates of deposits);

(B) Foreign exchange operations;

(C) Derivative products including, but notlimited to, futures and options;

(D) Exchange rate and interest rate instruments,including products such as swaps, forward rate

agreements;(E) Transferable securities;

(F) Other negotiable instruments and financialassets, including bullion.


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2.5 Banking & other financial services(xi) Participation in issues of all kinds of

securities, including underwriting andplacement as agent (whether publicly orprivately) and provision of services related tosuch issues;

(xii) Money broking;

(xiii) Asset management, such as cash orportfolio management, all forms of collectiveinvestment management, pension fundmanagement, custodial, depository and trust

services;(xiv) Settlement and clearing services forfinancial assets, including securities,derivative products, and other negotiableinstruments;


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2.6 Banking & other financial services

(xv) Provision and transfer of financialinformation, and financial data processing andrelated software by suppliers of other financialservices;

(xvi) Advisory, intermediation and other

auxiliary financial services on all the activitieslisted in subparagraphs (v) through (xv) ,including credit reference and analysis,investment and portfolio research and advice,advice on acquisitions and on corporaterestructuring and strategy.


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2.7 Second annex on Financial Services

1. A Member may, during a period of 60 daysbeginning four months after the date of entryinto force of the WTO Agreement, list inmeasures relating to financial services whichare inconsistent with paragraph 1 of Article IIof the Agreement.

2. A Member may, during a period of 60 daysbeginning four months after the date of entryinto force of the WTO Agreement, improve,

modify or withdraw all or part of the specificcommitments on financial services inscribed inits Schedule.


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3.1 Indias Initial Commitmentsmade 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 bedenied if market share of assets offoreign banks exceeds 15% of totalassets of banking system.


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(b) Non-Banking Financial Services

Items allowed include Merchantbanking, Factoring, Financial leasing,

Venture capital and financialconsultancy.

Government allows local incorporationwith a maximum equity of 51 per cent

by foreign financial services suppliersincluding banks.


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(c) Insurance India made no commitment in life

insurance area. In non-life insurance,India committed to continue with the

current practice, which was quiterestrictive.(d) Reinsurance, Retrocession &

Insurance intermediation relating

to reinsurance.A minimum of 10% of the premium of

overall was committed to be reinsuredabroad.


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3.4 Limitations of Indias 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 thetotal assets of the banking system.

National treatment is denied, Investment by foreign banks operating in

India in other financial services companiesis not allowed to exceed 10% of own funds.

Entry by non-banking financial companies islimited to local incorporation and theforeign equity is limited to 51%.

India's commitments omit a number ofimportant non-banking financial services.

State monopoly on insurance.


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3.5 Indias EnhancedCommitment 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 newbank branches to 8

Inclusion of Stock Broking in theschedule with maximum foreign equity

of 49%.


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3.6 Indias Enhanced Commitmentunder Fifth Protocol in 1998

MFN exemptions for banking services werewithdrawn subject to reciprocity.

Number of new bank branches for foreignbanks increased from 8 to 12 per year.

Liberal policy on ATMs. In insurance, status quo is maintained.

In the area of reinsurance, the existingbinding was aligned to the market.

In NBFCs, national treatment is unboundwhen market access is unbound.

New commitments in stock broking andfinancial consultancy services.


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4.1 Progress of Financial

Sector ReformsStatus in June 1991

CRR 25%

SLR 38.5% Bank Rate 12%

PLR above 21%

Deposit and interestrates are controlled

Capital issues andprices determined bythe CCI in MOF

Status in Sept 2006

CRR 5%

SLR 25% Bank rate 6%

PLR 10.75% to 11.25%

Deposit and interestrates are liberalized

The office ofCCIabolished and SEBIestablished


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4.2 Progress of Financial

Sector ReformsStatus in June 1991

Indian firms notallowed to raise fundsfrom foreign stockexchanges

Portfolio investmentby foreign investors inIndian companies notallowed

Foreigners notallowed to buy G-secs

Status in Sept 2006

Indian firms allowedto raise foreign fundsby GDR, ADR, FCCBs& offshore funds

FIIs, NRIs and OCBsallowed to buy stocksin Indian markets s.t.overall limit of 49%

FIIs/ NRIs/ OCBsallowed to buy G-secs


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4.3 Other Reformsin Financial Sectors

Foreign investment up to 74% in private banks

permitted. Foreign equity in insurance/ banksdoing only insurance services remains at 26%.

New banks allowed to open 25% of theirbranches in rural/semi urban areas.

Foreign banks allowed to establish branchesand 100% subsidiaries in India.

FDI allowed up to 100% of equity in NBFCssubject 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.


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4.4 Reforms in Foreign Exchange

Rupee is fully convertible on current account.

Rupee is almost fully convertible on capitalaccount 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 MultilateralInvestment Guarantee Agency.

India has signed treaties for avoidance of double taxation 66 countries, and also FTA withmany countries.


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5.1 Sectoral growth rates in India (%)Sectors 1980-90 1992-2000 2002-05

Agriculture 3.1 3.3 1.2

Industry 7.2 6.5 7.0Mining 7.7 4.0 6.9Manufacturing 7.4 5.9 7.4Utilities 8.9 5.7 4.4Construction 4.6 8.2 6.7Services 6.5 8.3 8.6Trade,hotels 6.2 8.5 9.4Trans & Telecom 5.8 7.4 13.6Financial services 9.4 8.8 7.6Social,personal 6.0 7.4 5.2 All Sectors 5.5 6.4 6.5


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5.2 Sectoral shares in India (% in GDP)Sectors 1993-94 2003-04 2004-05

Agriculture 32.9 24.0 21.1

Industry 23.9 23.8 27.2Mining 2.1 2.3 2.8Manufacturing 14.9 13.8 16.1Utilities 1.3 1.1 2.1

Construction 5.6 6.6 6.2Services 43.2 52.2 51 .7Trade,hotels 13.8 16.3 16.3Trans & Telecom 5.4 7.4 7.5Financial services 11.5 13.6 13.7Social 12.5 14.9 14.2 All Sectors 100.0 100.0 100.0


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5.3 Employment growth rate in India (%)

Sectors 1983-1993 1993-2000Agriculture 2.2 0.0Mining 3.7 -1.9Manufacturing 2.3 2.6

Utilities 5.3 -3.6Construction 4.2 5.2Trade 3.8 5.7Trans & Telecom 3.4 5.5

Financial 4.6 5.4Social 3.6 -2.1All Sector 2.7 1.1


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5.4 Sectoral Employment as % of TotalSectors 1983 1993-94 1999-2000

Agriculture 63.2 60.4 56.7Industry 15.6 15.9 17.5Mining 0.7 0.8 0.7Manufac. 11.6 11.1 12.1

Utilities 0.3 0.5 0.3Construction 3.0 3.5 4.4Services 21.2 23.7 25.8Trade,hotels 7.6 8.3 11.1

Trans/Telecom 2.9 3.2 4.1Fin. services 0.9 1.1 1.4Social/per 9.8 11.1 9.2

All Sectors 100.0 100.0 100.0


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5.5 Composition of sectoral GDI (%)

Sectors 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


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5.6 Sectoral GDI as percentage of GDP

Sectors 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 0.17. 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


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5.7 Composition of service exportsof India (per cent)

Period Travel Trans Insurance Govt Misc1950s 8.6 32.9 7.7 23.4 27.31960s 10.5 34.6 5.2 29.7 19.91970s 25.5 37.3 4.7 10.8 21.81980s 5.9 17.1 2.4 3.1 41.11990s 33.0 20.3 2.3 1.8 42.62000-01 21.5 12.6 1.7 4.0 60.32005-06 12.9 10.4 1.7 0.5 74.5Note: Misc includes business, professional,financial, software and other modern services.


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5.8 Composition of service importsof India (per cent)

Period Travel Trans Insurance Govt Misc1950s 18.3 22.6 6.7 22.6 29.81960s 9.5 29.5 2.4 16.9 39.01970s 7.5 36.9 1.1 9.4 40.8

1980s 11.8 31.5 0.5 4.2 49.61990s 14.6 30.6 0.3 2.7 49.82005-06 12.7 14.6 1.9 0.9 69.9Note: Misc includes business, financial, software

and other modern services.


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5.9 Impact on Financial Sectors

Item Mar-96 Mar-98 Mar-06

1.No.of foreign banks 33 42 292.New private banks 9 9 8

3.Gross NPA ratio 24.8 16.0 3.2

4.NetNP As ratio 10.7 8.2 1.0

5.Op. profits ratio 1.6 1.8 2.16.Net profits ratio 0.2 0.8 0.9

7.CRAR (Cap.adequacy ratio) No. of Banks

-- Below 9% 31 6 3-- 9 to 10% 10 16 3

-- Above 10% 43 71 79

8.Number of banks 84 93 85

.


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6.1 Concluding Observations

India has gained significantly from WTOcommitments.

There had been significant growth of servicesproduction, employment and exports.

India's focus area in WTO negotiations onGATS should be to provide effective marketaccess to its professionals and skilled labourforce in various sectors and to bring about a

symmetry in the movement of capital andlabour.


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India has comparative advantages in healthcare, software, construction and engineering,legal and accountancy, and it would beadvisable 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 providethese services from Indian Institutions are

not recognized abroad. At negotiations, it needs to be ensured that

standardization of these qualifications aresorted out to protect our interest.


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Social obligations in the case of services suchas 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 mademore transparent. Specific sectoral commitments in line with

requirements of developing countries.


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As the first generation reforms take root andsecond generation reforms unfold, India isemerging as a favourite destination forforeign investment, and a land of immense

opportunity for all. India should maintain its open door policy in

goods and services production, investmentand trade.

Carried to their logical ends, reforms wouldmake India as one of the most dynamic andfastest growing economies of the world.


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7.1 Review Questions

1. (a) Discuss the status of negotiations onservices trade under WTO-GATS.(b) Discuss the functions of the Committeeon Trade in Financial Services, andarrangements for disputes settlements.(c) Discuss the GATS views on recognitionof prudential norms by member countries.

2. (a) Discuss the scope and definitions offinancial services under WTO-GATS.

(b) Discuss the GATS views on domesticregulations on financial services.


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7.2 Review Questions

3. (a) Discuss the commitments of India forfinancial services under WTO-GATS.

(b) What would be your suggestions forfurther liberalisation of services trade ofIndia?

4. (a) Discuss the extent of financial sectorreforms in India since the inception ofWTO-GATS.

(b) What have been their impact on

production, trade and investment infinancial services, and the operations ofcommercial banks in India?


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Thank you

Global Services-16!17!18 Prof Tarun Das

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