Indian Economy True/False Questions. Mathematics & Economics Case Study

ECN310
Study Guide
True & False
1 from Lecture 9-11 
2 from lecture 12-15
2 from lecture 16-20
Multiple choice
6 from 9-15
11 from 16-20
18 similar to quiz
 Quiz 1
• In the Nehruvian model, the following was/were emphasized.
a. Higher education.
b. Science to generate high growth.
c. Elementary education
d. Both a and b.
e. None of the above.
• During the period 2006-13, the average economic growth per year in India was roughly
a. 8%.
b. 4%
c. 6%
d. 10%
e. None of the above.
• Independent India’s most socialist phase in terms of its economic policies was 
a. 1950-1965.
b. 1965-1981.
c. 1981-1988.
d. 1988-2006. 
e. None of the above.
• The rationale for public sector’s important role in heavy industry in India during 1950-65 was
a. limited resources of the private sector.
b. lack of technical knowledge in the private sector.
c. the profit maximizing objective of the private sector.
d. all of the above.
e. none of the above.
• The reason for promoting self-sufficiency in India was that 
a. the policy makers were afraid of being drawn into the “whirlpool of economic imperialism.”
b. the policy makers thought that trade was bad for economic development.
c. the policy makers wanted Indians to have food security.
d. None of the above.
• Trade policy in India’s initial phase of development after independence was based on
a. foreign exchange budgeting
b. exchange rate management.
c. tariffs.
d. All of the above.
e. None of the above.
• During the period 1965-81 in India, there was/were
a. two costly border wars with Pakistan.
b. two major drought years
c. high food price inflation for a few years.
d. real exchange appreciation.
e. all of the above. 
• Under the Monopolies and Restrictive Trade Practices Act (1969),
a. there would be approval of investment activity only if it did not lead to an increase in economic concentration..
b. investment applications from Small and Medium Enterprises were favored. 
c. foreign exchange was not provided for investment.
d. Both a and b.
e. None of the above.
• Chapter VB of India’s Industrial Disputes Act 
a. prevents retrenchment of workers in firms with 100 or more workers.
b. leads to more capital-intensive methods of production.
c. leads to a fall in worker efficiency.
d. leads to strikes by workers.
e. All of the above.
• The reason for the nationalization of banks in India during the period 1965-81 was 
to channel loans to small borrowers 
a. to expand banking in rural areas.
b. for the government to acquire control of all funds.
c. None of the above.
d. Both a and b.
• Per capita GDP growth equals
a. GDP growth minus population growth
b. GDP growth plus population growth
c. GDP growth divided by population growth.
d. GDP growth multiplied by population growth.
e. None of the above.
• India is 
a. the third largest economy in the world in terms of its real GDP in PPP terms.b. the third largest economy in the world in terms of its GDP in dollars at the market exchange rate.c. the seventh largest economy in the world in terms of its GDP in dollars at the market exchange rate.d. Both a and c.e. None of the above.• Poverty rates in India and China using the $1.90 poverty line area. roughly 20% and 2% respectively.b. roughly 40% and 4% respectively.c. roughly 2% and 20% respectivelyroughly 30% and 10% respectively. d. None of the above.• Which of the statements is/are true?a. The share of the Indian population in the age group 15-64 years is over twice the share in the age group 0-14 years.b. The share of the Indian population in the age group 15-64 years is over 12 times the share in the age group of over 64 years.c. The share of the Indian population in the age group 15-64 years is smaller than the share in the age group 0-14 years.d. None of the above.e. Both a and b. • Which of the following statements is true?a. Trade policies in India were relatively open in the early 1950s compared to 1975.b. Foreign investment policies were relatively open in the early 1950s compared to 1975.c. Trade policies in India were relatively open in 1975 compared to the early 1950s. d. Foreign investment policies in India were relatively open in 1975 compared to the early 1950s.e. Both a and b.Quiz 2• Import substitution isf. a policy of temporary import protection.g. a policy of permanent import protection.h. supposed to allow domestic firms to experience a “learning curve.”i. Both a and c.j. None of the above.• Trade protection exists becausef. there are winners and losers from free trade as well as protection.g. benefits from trade protection, even though smaller than its costs, are very concentrated among very few individuals.h. it can sometimes deliver entire blocks of votes.i. All of the above.j. None of the above.• In 1950-51, independent India began withf. with a liberal import licensing regime, low tariffs, and a comfortable stock of pound sterling balances.g. foreign exchange budgeting and high tariffs.h. severe restrictions on foreign direct investment.i. None of the above.• A tariff on an imported productf. increases the producer surplus of domestic manufacturers of the product.g. increases the domestic consumer surplus from the product.h. reduces the domestic consumer surplus from the product.i. a and c.j. a and b.• According to the available empirical evidence,a. the impact of an output tariff reduction on productivity is greater than that of the same percentage reduction in an input tariff on productivity.b. the impact of an output tariff reduction on productivity is smaller than that of the same percentage reduction of an input tariff on productivity.c. the impact of an output tariff reduction on productivity is equal to that of the same percentage reduction of an input tariff on productivity.d. the ranking of the impact of an output tariff reduction on productivity relative to that of the same percentage reduction of an input tariff on productivity is unknown.• According to Dani Rodrik,f. the government in South Korea helped coordinate investment in the private sector, which, in turn, led to growth in exports and output.g. export growth led to investment and investment coordination in South Korea.h. replacing markets by the state led to growth of exports and output in South Korea.i. we do not know what led to growth in South Koreaj. None of the above.• According to Paul Krugman, the East Asian miracle happened mainly due toe. technological progress.f. factor accumulation.g. US aid.h. None of the above.• Which of the following statements is true?f. Both South Korea and India were similar in that they had nationalized banking and 5-year plans. g. While the South Korean state relied on their business elite for their development administration, the Indian state relied on bureaucrats skilled at rationing under scarcity.h. The public sector had multiple objectives in India, but in Korea the public sector’s objectives were mainly export expansion & reaping economies of scale.i. All of the above.j. None of the above.• India is f. the third largest economy in the world in terms of its real GDP in PPP terms.g. the third largest economy in the world in terms of its GDP in dollars at the market exchange rate.h. the seventh largest economy in the world in terms of its GDP in dollars at the market exchange rate.i. Both a and c.j. None of the above.• India chose to be a liberal democracy, when it became independent, which means:a. There had to be periodic electoral competition.b. Civil liberties and minority rights had to be assured.c. There had to be free debate and contestation.d. Changes would be slow and cumbersome but when they would be agreed upon, they would be likely to endure.e. All of the above.• Which of the following statements is true?f. Economic growth is a necessary condition for poverty reduction in a low-income country.g. Economic growth is a sufficient condition for poverty reduction in a low-income country.h. Economic growth is a necessary and sufficient condition for poverty reduction in a low-income country.i. Economic growth increases poverty.j. None of the above.• Which of the following is/are true?a. Health and education are underprovided by market.b. The private sector fails to take into account positive external effects of health and education.c. The private sector overprovides health and education, and in the process wastes scarce resources.d. One of the reasons why the state has to step in for the provision of health and education is that the poor often don’t have the money to pay for them.e. a, b and d.• A tariff on an imported intermediate inputa. raises producer surplus of final goods producers at home using this input.b. lowers producer surplus of final goods producers at home using this input.c. raises producer surplus of producers producing the same input at home.d. lowers producer surplus of producers producing the same input at home.e. b and c.• The infant industry argument is an argument for a. temporary protection.b. permanent protectionc. free trade right from the beginningd. None of the above.• Which of the following statements is/are true?a. Goods from other countries come into special economic zones (SEZs) free of tariffs.b. Goods into the domestic tariff area (DTA) from SEZs face Indian trade restrictions.c. Factors of production move freely between DTA and SEZs.d. Public utility status prohibits strikes.e. All of the above.Quiz 31. Which of the following statements is true?a. ID in world GDP is 3%.b. India’s share in world population is 17%.c. India’s share in world GDP is 17%.d. Both a and b, implying India is a labor-abundant country.
2. Increasing import duties on parts and inputs is a. bad for domestic assembly and processing.b. good for domestic assembly and processing.c. does not affect domestic assembly and processing.d. hurts domestic producers of parts and inputs.
3. Which of the following statements is/are true?a. Close to half of the Indian labor force is employed in agriculture.b. Close to a quarter of the Indian labor force is employed in industry.c. Both a and b.d. None of the above.
4. According to the Industrial Disputes Act (IDA),a. permission is needed from government to retrench or lay off workers by firms with 100 or more workers.b. permission is needed from government for task reassignment (changing job description) in firms with 100 or more workers.c. any 7 workers can form a union.d. All of the above.e. None of the above.
5. Labor laws are in the a. Central list of the Indian constitution.b. Concurrent list of the Indian constitution.c. State list of the Indian constitution.d. None of the above.
6. In  2004, Besley and Burgess provided evidence that as labor laws became more stringent,a. state-level formal manufacturing output, investment and productivity declined.b. state -level informal manufacturing output, investment and productivity increased.c. None of the above.d. Both a and b.
7. In India, if we divide firms into three categories (those with 1-49 workers, those with 50-199 workers, and those with 200 or more workers), then most of manufacturing employment is concentrated in a. firms with 1-49 workers.b. firms with 50-199 workers.c. firms with 200 workers or above.d. None of the above.
8. Which of the following statements is/are true?a. Recently, there have been some labor reforms.b. The threshold for the Industrial Disputes Act has been raised to 300 workers at the firm level in some states.c. Self reporting of compliance on a web portal has started for some of the laws.d. All of the above.e. None of the above.
9. The trade policy instrument, that has been used the most since India’s trade liberalization in the 1990s, isa. anti-dumping duty (AD).b. safeguards protection under the escape clause.c. export tax.d. all of the above.e. none of the above.
10. The two countries at the forefront in the GATT/WTO as advocates for developing countries have been a. India and China.b. India and Brazil.c. Russia and South Africa.d. None of the above.
11. India is part of a. TPP.b. TTIP.c. RCEP.d. All of the above.e. None of the above.
12. The following are the top obstacles to the operation and growth of businesses in India:a. shortage of electricity. b. corruption c. tax administration and labor regulations d. inadequately educated labore. All of the above.
13. Which of the following statements is/are true?a. ULCRA ended up creating a shortage of urban land and an increase in land price.b. The Urban Land Ceiling and Rehabilitation Act (ULCRA) was aimed at reducing the concentration of land ownership.c. A very large amount of land was acquired by the government under the ULCRA.d. All of the above.e. a and b.
14. Let’s say that on a 1000 square meter plot of land, four floors are built, each of 600 square meters. The Floor Space Index (FSI) of this building isa. 10.b. 2.4.c. 4.d. 0.4.
15. In India,a. new land is difficult to acquire for expanding manufacturing production.b. new land is easier to  acquire for production than in China, since India is a democracy while China is not.c. there is corruption in land acquisition.d. a and c are both correct.
Lecture 9 International Trade: Theory, Evidence & PolicyFactor Proportions & Comparative Advantage• Assume two countries.• Two goods.• Assume now there are two factors of production, capital and labor, that move freely between  goods within a country.• Assume no factor mobility between countries.• Assume perfect competition in goods and factor markets.• Assume identical tastes and preferences between countries. Both countries consume the two goods in the same proportion at a given relative price.Heckscher-Ohlin TheoremThe capital-abundant country has a comparative advantage in the production of the capital intensive good, while the labor-abundant country has a comparative advantage in the production of the labor-intensive good.What happens when there are many factors? (1) Compare the country’s share in world GDP with its share in world stock of a factor (say, capital). (2) If the latter is higher than former, the country is abundant in that factor.(3) It has a comparative advantage in the good whose production is intensive in that factor.Generalized Comparative Advantage• In general, comparative advantage is based on opportunity cost: amount of other good(s) lost for an additional unit of a good.– In a technologically backward country, productivity is especially low in high-tech goods, so its opportunity cost is high, while opportunity cost of low-tech goods is low.• Comparative advantage in low-tech and comparative disadvantage in high-tech in a developing country.Cost of protection & gains from trade    The Case for Free Trade: Theory & Evidence• Gains from specialization and exchange– Example of the individual and the international extension of the idea of division of labor– Trade extends the effective size of the market and promotes division of labor.– 1807 : closure of American ports ordered by President Thomas Jefferson led to static welfare loss of 5% of US GDP– 1859: Japan started trading, starting from virtual autarky (started exporting silk and tea and importing clothing and other goods)• 4% increase in national income as a result of static resource reallocation (Bernhofen and Brown, 2005)– Israeli blockade of the Gaza strip led to an average welfare loss of 14-27 percent of pre-blockade expenditure and labor productivity loss of 36 percent• Free trade is an important component of the system of economic liberty (extended from the individual level) [Adam Smith]• Free trade leads to greater competition– Destroys local monopolies and associated markups and the consequent misallocation of labor.• Empirical evidence very strong (for Turkey, Ivory Coast, India).• Variety Effect – Tariff reductions lead to the entry of more foreign varieties  (there are fixed costs of entry into a market)– Consumers are better off directly due to greater variety of final goods– Producers are directly better off due to a greater variety of intermediate goods that enhances productivity– For the US• welfare is about 2.6 percent of GDP higher during last 3 decades due to the gains from variety alone. (Broda and Weinstein, 2006)• Productivity Gains– Both better allocation of resources across uses as well as greater productivity in each use– Mill (1909) • More extended division of labor• Greater use of machinery• Greater likelihood of inventions and improvement in production processes– Trade serves as conduit for international technology transfer• South Carolina textile magnate Roger Milliken imported more productive and sophisticated textile machinery from Germany and Switzerland, leading to significant productivity increase– Pro-competitive effect on R&D and X efficiency– Foreign research can be imported directly• Team of foreign researchers helped fight a disease called rice blast in China (increased yield)– Import of foreign goods that incorporate the benefits of foreign R&D expenditures• Foreign R&D then increases domestic total factor productivity• Imports of specialized intermediate goods that incorporate new technologies– International competition leads to the exit of less efficient firms and the expansion of the relative share of the more efficient  firms • therefore leads to an increase in industry-level productivity • evidence from the Chilean trade liberalization in the 1970s where the firms weeded out were 8%-10% less productive on average than the firms that stayed (Pavcnik, 2002)– Evidence from Indonesia• 10% reduction in input tariffs increased industry productivity by 3%• final goods tariff reductions in the same proportion increased industry productivity only by 1%.• The firms that actually imported inputs saw an  11% increase in productivity. • Input tariff reduction has a more direct impact on productivity. • Measuring the effect of trade on income and growth– There is positive correlation between Exports/GDP and GDP• Problem of two-way causation• Frankel and Romer (1999) – have addressed this problem • focused on the part of trade openness that is independent of income • explained by geographical and other fundamental characteristics– Making this correction doubles the responsiveness of income to trade openness.– 1% increase in trade openness lead to a 2% increase in income.• Trade and growth: If trade increases income, then during transition growth should go up.– Empirical work shows more open trade policy increases growth, but there are several problems• One summary measure of trade policy is hard to find.• Several simultaneous reforms lead to identification problems.– Within country post liberalization growth on average is 1.5  percentage points higher than earlier.• Post-reform investment rate is also 1.5-2.00 points higher– Compared to non-liberalizers, liberalizing countries saw a much higher GDP increase relative to pre-liberalization period before 1980s.– Effect of input and capital goods tariff liberalization is stronger than liberalization of final goods tariffs.• Trade improves institutional performance– Trade reduces corruption • protection breeds corruption since govt officials control the allocation of import licenses (Dutt, 2009)• Protection increases incentives to bribe customs officials– Trade liberalization led to the reduction in violent crime in India (Prasad, 2012)• Trade restrictions led to smuggling and gang violence in India• Murder rates fell after trade liberalization, especially in the industrialized statesWhy might trade hurt developing countries?• Trade takes place according to comparative advantage, but has long-term dynamic costs for developing countries• Developing countries start exporting primary products (PP – crops, minerals) because they have a comparative advantage there• But, learning by doing is much faster in manufacturing• Workers move from manufacturing to PP industries in the short run, but in the long run, their output is lower since fewer workers in manufacturing• Similar conclusion in related sociology literature that development of the countries on the “periphery” is hindered by their export of primary products to the developed countries at the “core” • Also, known as “dependency” theory• Believed by many to have been the cause of the reversal of fortune of India & UK (de-industrialization of India under colonial rule)• Led to a widely-supported call for “Import Substitution”Lecture 10Import Substitution - Theory• Why Import Substitution?– To protect infant industries• Who are less competitive when they start out (hence “infant”) and have high per unit costs, because they have not had any “learning by doing”• Providing protection from competition can (in theory) allow companies to experience a “learning curve”, reduce costs, and then become competitive• So the idea of “import substitution” is to provide temporary protection to infant industries to let them grow• Multiple ways of doing this in practice– Tariffs, quotas, and other restrictions on imports– Production subsidies for domestic firms• Can illustrate with a tariff exampleImport Substitution in Practice• Did import substitution work? – In theory yes, but:– In practice – quite disappointing.  Why?• Infant industry argument supports a temporary policy to aid import-competing manufacturing• Once learning is mostly accomplished, government help is no longer justified• But, in practice, the protections typically created powerful lobbies who were able to lobby for continued protection• Results in “crony capitalism” where policies that hurt general welfare (like tariffs) create wealthy businessmen, who then pay off politicians to keep the policiesPolitical Economy• The role of politics stems from the presence of losers and winners• Lobbying (political contributions)– Sugar case (US):  Import restrictions on sugar (combination of tariffs and quotas) leads to • a gain of $1b for producers (42 percent to the top 1% sugar producers, 34 percent to the top 0.2 percent producers totaling 33 in number, $30m to one farm alone) and a loss of $1.9b to consumers (dispersed: $10 per person per year)• (lobbying): concentrated benefits vs dispersed or diffused costs of protection (free rider problem)– M&B Metal Products Co. of Alabama • managed to get antidumping tariffs on metal hangers from China – adversely affected dry cleaners• Another example of concentrated benefits vs dispersed costs.– Voting blocks– Steel tariffs: steel workers in swing states, lobbying against it by GM (threat of offshoring)– Wheat farmers in Kansas and Nebraska, tobacco farmers in NC, citrus producers in Florida• Median voter model– Trade benefits the factor that is relatively abundant in the economy – benefits skilled labor in the US– A majority of the people, even in the US, fall in the less educated category – support protection– Surveys in the US show• the support for free trade rises with the education level• Workers with very specialized sector-specific skills are against free trade (high mobility costs)  • blast furnace workers, coal miners, carpenters in the furniture industry etc• People owning property and working in import-competing sector are more opposed to freer trade• Geographical distribution of voters important in winner-take-all legislative system India: Trade PolicySome Turning Points in Policy• 1950-51: Began with a liberal import licensing regime, low tariffs, comfortable stock of pound sterling balances • 1957-58: BoP crisis and the introduction of foreign exchange budgeting and tightening of the import regime• 1965-67: Crisis, devaluation, the failed liberalization giving way to further tightening of the regime• 1977-78: The P. C. Alexander Committee and revived the Open General Licensing (OGL) list – goods (not domestically produced) that could be imported without a license, subject to the actual user condition.• Second half of the 1980s: Devaluation and export incentives (duty drawback –refund of import duties on inputs into export goods, allowing exporters to import some non-OGL raw materials & components, cash compensatory schemes reimbursing domestic taxes)• 1991-92: End to import licensing except for consumer goods• 2001: End to licensing on Consumer goods imports  
Mid 1970s: Trade Policy• “Red Book” containing the import policy issued every six months.  It carried a long list of importable products with restrictions for each product regarding who could import it, up to what proportion of the need as measured by the production capacity, and in some cases which varietiesEarly Reform in 1978-79• P.C. Alexander Committee, 1978, recommended replacing the long list of imports and accompanying conditions by a policy dividing imports into three categories– Banned (not permitted under any circumstances)– Restricted (license required)– OGL (no license required but subject to actual user condition—domestic availability not a condition – govt already knew not domestically available)• This broad framework was implemented in 1978-79.  Consumer goods mostly ended up on the banned list and capital goods mostly on restricted or OGL list.  Raw materials were spread across the three categories.• Imports of several items remained state monopoly through the canalizing agencies” (e.g., crude oil and petroleum through the Indian Oil Corporation)• This broad policy remained in force until the 1991 reforms with liberalization taking place through the expansion of the OGL list and de-canalizationLiberalization in the 1980s• OGL expanded: Capital goods items expanded from 79 in 1976 to 1329 by 1990. Intermediate input items rose from none to 949 by 1988. OGL imports rose from 5% of the total in 1980-81 to 30% in 1987-88.• Several export incentives (e.g., tradable replenishment licenses for imports of inputs in twice the amount needed)• Depreciation of the rupee: import-weighted real exchange rate depreciated 30% between 1974-75 and 1978-79; it appreciated marginally in the following two years and remained more or less unchanged until 1984-85; and then it depreciated steadily during the second half of the 1980s (under R. N. Malhotra as the governor RBI: Feb 1985 to Dec 1990)• Tariffs: Tariffs were raised with tariff revenue as a proportion of imports rising from 27% in 1977-78 to 62% in 1987-88.  But the hike did not imply increased protection; instead it allowed the government to mop up the quota rents associated with licensing.  Tariffs were not hiked on the OGL items.Assessment of Liberalization in the 1980s• Pursell (1992):– “The available data on imports and import licensing are incomplete, out of date, and often inconsistent. Nevertheless, whichever way they are manipulated, they confirm very substantial and steady import liberalization that occurred after 1977–78 and during 1980s.” Unilateral Liberalization: 1990s and Beyond• 1991: Licensing on capital goods and raw materials ended• Tariffs: In 1990-91, the highest tariff rate stood at 355 percent, simple average of all tariff rates at 113 percent and the import-weighted average of tariff rates at 87 percent. With licensing gone, tariffs became the binding constraint.• The 1991-92 budget reduced the top basic plus auxiliary duties of customs to a maximum of 150%. In the years that followed, this top rate was steadily compressed.Compression of the Top Rate1991-92: 150%1992-93: 110%1993-94: 85%1994-95: 65%1995-96: 50%1996-97: No change1997-98: 40%1998-99: No change1999-2000: No change but rates unified from seven to five (5, 15, 25, 35 and 40)2000-01: 35% (four rates with 40% dropped)2001-02: No change 2002-03: 30%2003-04:  25%2004-05: 20%2005-06: 15%2006-07: 12.5%2007-08: 10% (current top rate on industrial goods with some peaks on auto and textiles & clothing)Agriculture remains highly protected, howeverUnilateral Reforms• Tariff Peaks in some manufactures and in agriculture• Flowers (60 percent), Natural rubber (70 percent), automobiles and motorcycles (60 percent to 75 percent), raisins and coffee (100 percent), alcoholic beverages (150 percent), and textiles (exceeding 300 percent)• Large differences between bound rates and applied rates - • Bound rate in agriculture is greater than 100 percent, applied rate is about 35 percent – policy uncertainty : Eg. In 2003, the duty on edible oils was doubled. • Tariff InversionUnilateral Reforms: Some Recommendations• Top tariff needs to be brought down to 5%.• Needless to say, the extremely high tariffs on some goods mentioned earlier need to be got rid of.• Liberalization in agriculture in exchange for the same from OECD.• India should get rid of its export subsidies, since, with countervailing tariffs under the WTO there are no benefits. - Only foreigners benefit.Special Economic Zones (SEZs)• Goods from other countries come into SEZs free of tariffs.• Goods into the domestic tariff area (DTA) from SEZs face Indian trade restrictions.• Factors of production move freely between DTA and SEZs.• Old export promotion zones (EPZs) were converted into SEZs in 2001. New SEZs were added.• Can be established by private, public or joint sector enterprise or central/federal or state government• Minimum land area, based on whether it is multiproduct or single product. – A minimum fraction has to be devoted to processing.• Domestic laws (law & order, taxation, labor etc) apply.• Tax breaks for a fixed number of years (10 consecutive years within the first 15 years)• Public utility status prohibits strikes.• Headed by development commissioner appointed by the central government. He/She can allow more flexibility in employment adjustment.• Demerits: Ideal location often not chosen and revenue loss to government.• Merits: Easy movement of goods and getting around onerous labor laws.Antidumping and Safeguard Measures• After 1991 trade liberalization, India needed a safety  valve – in case import surges led to losses in profits or employment.• Temporary Safeguards protection under the GATT/WTO Escape Clause – was augmented by the Govt of India with the need for a restructuring plan along with application.• Therefore, AD measures used more– 425 AD cases initiated during 1995-2005, compared to 366 in US, 327 in EC, 204 in Argentina and 197 in S. Africa.• Currently, determination of AD margin and injury done both by the AD Directorate in the Ministry of Commerce. – Should be separated between two agencies, as in the US.
Lecture 11Antidumping and Safeguard Measures• After 1991 trade liberalization, India needed a safety valve – in case import surges led to losses in profits or employment.• Temporary Safeguards protection under the GATT/WTO Escape Clause – was augmented by the Govt of India with the need for a restructuring plan along with application.• Therefore, AD measures used more– 425 AD cases initiated during 1995-2005, compared to 366 in US, 327 in EC, 204 in Argentina and 197 in S. Africa.• Currently, determination of AD margin and injury done both by the AD Directorate in the Ministry of Commerce. – Should be separated between two agencies, as in the US.Multilateral Trade Negotiations• India: one of 23 founding members of GATT.• India & Brazil at the forefront as advocates of developing country interests.• Led to – Inclusion of “Trade and Development” (Part IV) in GATT in 1965 – Adoption of General System of Preferences (GSP) in 1971 by GATT membership– Adoption of Enabling Clause (allowing developing countries to exchange partial preferences) in 1979 by GATT membership.• The Uruguay Round created the WTO in which developing countries would be part of its reciprocal bargains. – Since a new organization was being formed, any country not willing to reciprocate tariff cuts could opt not to join it. – India signed to be a member at the last moment.• India & Brazil were able to push services into the optional negotiating track in the UR.• But agreement on including intellectual property rights, agriculture and Multi-Fiber Arrangement in the general agreement.
Preferential Trade Area (PTA) Arrangements• PTA: Two or more countries lower trade barriers against imports from each other, keeping them unchanged against other countries.– Free Trade Agreement: Elimination, within a group of countries, of substantially all trade barriers, along with Rules of Origin (RoO), eg, NAFTA– Customs Union: common external tariff, so no RoO required.• Trade creation and destruction, and the welfare impact of PTAs.• Overlapping PTAs: “spaghetti bowl” (Bhagwati)• India-Sri Lanka FTA, India-Singapore FTA, South Asian Free Trade Area (SAFTA), India-South Korea Trade Agreement• Exchange of partial preferences on a limited number of commodities with Chile, Mauritius and South Asian Association for Regional CooperationTrends in the World Trade System• Multilateral Trade System (WTO)– Failure of the Doha Round – General paralysis – considerable liberalization already achieved, too many players (nations), divergent interests– Current US administration does not care about the WTO – takes matters into its own hands– Trade war• Spread of Preferential Trade Agreements (Free Trade Areas and Customs Unions)– Hundreds of PTAs signed since 1990– PTAs covered about 35-40 percent of world trade (50 percent with intra-EU trade) by 2010.– Recent break down of trade agreements and coming up with new ones after long deliberations• Mega-Regional Agreements– Pacific Partnership (TPP) – US walked away– Transatlantic Trade and Investment Partnership (TTIP)– Regional Comprehensive Economic Partnership (RCEP)Main Points• Multilateral environment is a challenging one – limited success• Developed countries-led regional agreements (such as TPP) pose significant “membership” challenges for China and India • Exclusion from TPP costly but not overwhelming; • Potential in RCEP? India recently opted out. Dorr is still open for the future.• Unilateral reforms and domestic trade–related productivity improvements will remain important for IndiaMega-Regional Agreements– Trans Pacific Partnership (TPP)– Transatlantic Trade and Investment Partnership (TTIP)– Regional Comprehensive Economic Partnership (RCEP)– The TPP and TTIP were US-led initiatives (no longer), while the RCEP is characterized by “ASEAN-centrality”Rules of Origin• Rules of Origin – Complexity• Raise transaction costs to a degree that makes utilization of preferences uneconomical• Lower degree of liberalization than is suggested by reduction in trade barriers.• Inefficiency:– Firms exporting to multiple countries with different ROOs– Overlapping agreements – with changes in future agreements• ASEAN+1 Agreements: Only a third of the goods (tariff lines) share Rules of Origin across FTAsTrans Pacific Partnership (TPP)• TPP  -- 11 countries throughout the Asia Pacific region (Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam)– No US now, and also excludes China, India and Korea– When US was included, TPP countries represented 40 percent of global output and 35 percent of world trade – significant agreement• However, a number of TPP countries already have free trade agreements with each other. So, gains to most TPP members expected to be modest.Trade Liberalization through TPP• Liberalization of trade the most traditional component of TPP, CPTPP (CP denotes Comprehensive and Progressive agreement)• Tariffs were already quite low on average (2.6 percent), but there was still room for tariff liberalization by Malaysia, Mexico, Peru and Vietnam• Upon implementation, three quarters of the currently non-zero tariffs have been reduced to zero • Long run (30 years phase in period) 99 percent of tariffs reduced to zero• Substantial liberalization expected in the most restrictive countries: Vietnam – simple average tariffs reduced from 10.6 to 6.1 percent immediately and 0.4 percent in a decade • Effects on non-TPP countries modest due to the fact many TPP members are already part of free trade agreements“Non-Trade” Issues Within TPP• In addition to trade liberalization, TPP includes substantial disciplines in a number of areas that are indirectly related to trade, many of which of significant concern to India and China, such as:• Labor Standards• Environmental Standards• Intellectual property protection• Operation of State Owned EnterprisesRCEP• RCEP is a free trade agreement currently being negotiated between ASEAN nations and ASEAN’s FTA partners. – 16 participating countries, which include: Australia, Brunei, Cambodia, China, India, Indonesia, Japan, Laos, Korea, Malaysia, Myanmar, New Zealand, the Philippines, Singapore, Thailand and Vietnam.– India opted out but the door remains open.• The trade group constitutes about a third of the world’s trade with a total population of 3 billion and a gross domestic product (GDP) of about US$20tn; it will be the largest trading bloc in the world in terms of population. – India’s trade with RCEP nations currently stands at around 150 billion USD (approximately 20 percent of India’s trade).• RCEP -- the deliberate avoidance of contentious issues, such as labor standards and environmental standards –issues that are championed by the US in TPPRCEP Negotiations• The fundamentals of the negotiating agenda cover trade in goods and services, investment, economic and technical cooperation, intellectual property, competition policy and dispute settlement.  • However, RCEP’s primary focus appears or be the liberalization of trade, rather than modification of standards associated with the production of traded goods (such as labor or environmental standards)• It was anticipated that agreement over RCEP will be easier to reach; it will not engage domestic political considerations beyond those that are generally involved with trade liberalization itself.  India-China Bilateral Relationship• India-China total trade in goods for 2012 stood at US$ 66.57  - less than 3 percent of their trade with the world.• Chinese imports from India amounted to $16.4 billion or 0.8% of its overall imports, and 4.2% of India's overall exports in 2014. The 5 major commodities exported from India to the China were:• Cotton: $3.2 billion; Gems, precious metals, coins: $2.5 billion; Copper: $2.3 billion; Ores, slag, ash: $1.3 billion; Organic chemicals: $1.1 billion• Chinese exports to India amounted to $58.4 billion or 2.3% of its overall exports, and 12.6% of India's overall imports in 2014. The 5 major commodities exported from China to India were• Electronic equipment: $16 billion; Machines, engines, pumps: $9.8 billion; Organic chemicals: $6.3 billion; Fertilizers: $2.7 billion; Iron and steel: $2.3 billion; Plastics: $1.7 billionRCEP Goals – India• Three important outcomes for India– Greater exports to RCEP countries– Greater participation in Global Value Chains– Services exportsGlobal Value Chains• Potential for India to participate in GVCs with China– Electrical and non-electrical machinery and parts (less than 2 percent of Chinese imports supplied by India)– Auto Parts– Electronics• Indian electronics output less than that of Vietnam• Indian export share in the world is only about 0.5 percent• GSTServices• A value chain exists in services as it does in manufacturing - in the same way that the global value chain and openness to inputs permit efficient manufacturing in China • Inputs from Indian service sectors like the IT sector can improve productivity of Chinese service providers in sectors like Banking, Financial services and Telecommunications• KPMG Study: The IT outsourcing market in China is estimated to be 140 Billion USD in 2020, of which domestic Chinese outsourcing will constitute nearly 50%Conclusions• Multilateral Environment is a challenging one – limited success• Exclusion from major US initiatives (TPP) costly but not overwhelmingly so– Low likelihood of major trade initiatives from the US– Significant potential in RCEP – GVCs, Services - to be explored!• Unilateral Reforms and domestic trade –related productivity improvements will be important for India
Outcomes: Performance at the aggregate level An India-China Perspective• India’s share in the world merchandise exports grew from 0.5 percent in 1990-91 to 0.7 percent in 1999-00 and to 1.5 percent in 2010-11.  • In services exports, the share has grown to a respectable 3.3 percent in 2010-11.• In 2008-09, the increase in China’s merchandise exports was larger than India’s absolute level of exports• China’s share in the world goods and services exports rose from 2.6 percent in 1994 to 5.8 percent in 2004 and 9.2 percent in 2010.• If we restrict ourselves to the world merchandise exports, China’s share rose from 2.8 percent in 1984 to 6.5 percent in 2004 and to 10.4 percent in 2010.Lecture 12Failure to Grasp Comparative Advantage• India– 17% share in world population– 3% share in world GDP– Low average education levels• Thus a low-skilled labor abundant country.• Recent doubling of tariffs (2017 & 2018)– Beauty aids, watches, toys, furniture, footwear, kites and candles• Further tariff increases in 2020• Lack of competitiveness in entry-level labor-intensive products.– Failure to grasp its comparative advantage• Also doubled duties on electronics & telecommunication devices and related parts and inputs in 2018.– Hurts input processing & assembly – low skilled tasks• Further increases in tariffs recently• China has industrialized through large scale input processing and resulting exports• India has failed to grasp its natural, factor abundance based comparative advantage • It has been outperformed by Bangladesh and Vietnam in labor-intensive textile and apparel exports• India uses relatively capital-intensive techniques of production and specializes in relatively capital-intensive products (Hasan, Mitra and Sundaram, 2013)– relative to countries at comparable stage of development– more capital-intensive techniques compared to China in paper & printing, leather, rubber & plastics, chemicals etc.
 Labor Laws• India has 200 labor laws, 52 of which are central (federal) acts (Bhagwati & Panagariya, 2013)• Three most restrictive labor laws.• (1) Industrial Disputes Act (IDA)– Permission needed (rarely granted) from government to retrench or lay off workers by firms with 100 or more workers• (2) Industrial Employment (Standing Orders) Act– Permission needed from government for task reassignment (changing job description) in firms with 100 or more workers (50 or more in some states)• (3) Trade Union Act – Any 7 workers can form a union, leading to multiplicity of unions within a firm– Valuable managerial time lost dealing with them.• Another restrictive labor regulation – Contract Labor Act– Restricts and even prohibits using contract labor for certain tasks– Increases cost of getting around labor laws to keep production techniques labor intensive.– Some improvements have been made recently in this regard in that in some cases fixed-term contract workers are being allowed.• Labor issues lie within the “concurrent list” of the Indian Constitution– While the main acts come from the Center (federal government), states can make amendments and pass their own laws.– Implementation of labor laws lies with states.• Thus, there is considerable variation in labor laws and its implementation across the various Indian states.– Opportunity for studying impact.– Beasley & Burgess (2004)– Quantified labor regulations across states.– Findings: – (1) State level formal manufacturing output, investment and productivity declined with stringency of labor laws (more pro-employee nature of laws).– (2) State level informal formal manufacturing output, investment and productivity increased with stringency of labor laws – Hasan, Gupta & Kumar (2013)– Output and employment growth in labor-intensive industries was relatively slower in states with more restrictive labor regulations.– Hasan & Jandoc (2013)– In the restrictive labor law states, 60% of employment in labor-intensive industries was concentrated in firms with 0-9 workers, while only 10% in firms with over 200 workers.– In the flexible labor law states, these proportions were 40% and 25% respectively– Dougherty, Frisancho-Robles and Krishna (2014)– Plant-level productivity in labor-intensive industries and those with volatile demand was 11-14% higher in flexible labor-market states.– Thus, there is evidence of better exploitation of static and dynamic economies of scale in the flexible labor market states.Impact of Trade in Interaction with Labor Laws• Mitra & Ural (2007)– Industry productivity, output, value added, employment, capital stock and investment improved with tariff reduction.– Productivity improvement was 33% higher in relatively flexible labor market states.• Ahluwalia, Hasan, Kapur and Panagariya (2018)– MFA expiration (2005) effects: Wage and employment effects in textile and apparel firms relatively greater in flexible labor market states• Sundaram, Ahsan and Mitra (2013)– Informal-sector firms experience bigger increases in employment, output and value added due to trade reforms in rigid labor law states relative to other states• Gains from trade– Through inter- and intra-industry reallocation of resources• Prevented by rigid labor laws• Share of labor-intensive exports (beverages, apparel, textiles, furniture etc) has fallen slightly during 1990-2008• Share of capital- and skill-intensive goods in exports (automobiles, petroleum refining, engineering goods, finance and software) has risen from 41% to 65%.Bunching Issue & New reform steps• No bunching of firms at 100 workers– Choice between discrete technologies, eg, small-scale and large-scale– Imperfect enforcement• Small steps at the state level– IDA threshold raised from 100 to 300 workers in Andhra Pradesh, Haryana, Madhya Pradesh and Uttarakhand– Rajasthan has raised the number threshold of a union to 30% of a firm’s employment• Central-level unified web portal for self-reporting of compliance with central acts– Inspections can be triggered by built-in algorithms– Reduces harassment by inspectorsRecommendations• Further reforms needed– Exclusion of non-confirmation of a worker under probation from definition of retrenchment (Bhagwati & Panagariya, 2013)– Also needed is exclusion of downsizing in response to demand and technology shocks from definition of retrenchment. (Bhagwati & Panagariya, 2013)– More flexibility in task assignment within Standing Orders Act.– No more than a single union within a firm– More labor laws should be covered in self-reporting portals.Lecture 13Why do we need labor reforms?• Labor reforms are essential for increasing labor intensity of growth• More labor-intensive techniques will be used then.• More labor-intensive products will be produced• Consequence of labor laws:– 90% of employment is informal: low productivity and low wages, and no job security.• Firms hire informal workers to the extent possible to get around labor laws• Organized-sector firms hire very few regular workers as they wont be able to fire them if they don’t need them later or in case of delinquency or incompetence– so most people look for jobs in the unorganized sector (mostly informal employment)Other factors Constraining Firm Size and the Manufacturing Sector• World Bank Survey of Firms (2000-2010)• The following were the top 5 obstacles to the operation and growth of a business:– Electricity (40% of firms had to generate their own electricity)– Corruption (cost: bribes to obtain various permits)– Tax administration (cost: time spent by managers with officials and inspectors)– Labor regulations (cost: time spent by managers with officials and inspectors)– Inadequately educated labor• Other important factors– Deficient transport facilities– Prevalence of crime– Lack of access to land• The World Bank Survey of Firms (2000-2010) does not identify all constraints, especially those faced by potential entrants• World Bank’s Ease of Doing Business is aimed at that.– Measure of business regulation that apply to small and medium sized enterprises in 10 areas• Starting a business, getting construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and resolving insolvencies– Judgement by local experts– 2014 rank: India 142nd out of 189 countries– 2018 rank: India 77th out of 190 countries– 2019 rank: India 63rd out of 190 countries– Comparisons:  US 6th, China 31st   • “India does not offer an enabling environment for enterprises to enter the market and grow.” Joshi• Too many permits, no-objection certificates etc required• Red tape• Delays in getting tax refunds• Large variety of inspectors to be encountered & bribed• Problems with land access and conversion• Considerable difficulties with securing services such as water, sewage, electricity etcTwo other important constraints on the growth of manufacturing• Constraints on moving land to its most efficient use.– Land, like labor, should easily be taken out of unproductive uses and moved to its most productive use.– It is a factor of production that needs to be adjusted in response to long-term (or even medium-term) changes in technology and demand.– Indian land regulations put constraints on the movement and adjustment described above.– Therefore, reforms are needed in laws governing the movement and adjustment of land.• Similar arguments hold for other productive assets such as capital and the reform of laws governing insolvency and bankruptcy.Land Regulations• Urban Land Ceiling & Regulation Act (ULCRA), 1976– Placed a tight ceiling on vacant urban land held by individuals & firms: 500-2000 sq. meters.– Holders of excess vacant land had to sell to the government at a nominal price or develop it for specific purposes.– Objective: prevention of the concentration of land holding.– Result: firms held on to their land (their most precious asset) by not exiting – led to urban land shortage & increase in land price.– By 2002, only 19020 acres of land was acquired by the government under ULCRA.– ULCRA repealed in 1999-2000.– However, land was on the concurrent list. • Many states (eg, Maharashtra, whose capital is Mumbai) decided not to repeal ULCRA.  • Other states such as Punjab, Uttar Pradesh, Madhya Pradesh, Rajasthan, Gujarat and Haryana repealed– Jawaharlal Nehru National Urban Renewal Mission• Funds provided to states for city modernization conditional on repeal of ULCRA– Rent control laws discourage putting apartments on rent  • lead to unused space, leading to shortage of apartments and exorbitant rents.• No incentive to maintain of renovate apartments– Apartments can’t be used as collateral– Constraints on tearing down & constructing new buildingsLecture 14Land Regulations• India lacks a system of clear, state-guaranteed land titles– Therefore, land can’t be used as collateral– Has been difficult to privatize public-sector enterprises as even government entities didn’t have titles • eg, privatization of ITDC hotels under Vajpayee government.• Public sector entities are not allowed to sell land at market price.– So they hold on to excess land• Becomes an unproductive asset• Floor Space Index (FSI) has been fixed at low levels– Mumbai • fixed at 4.5 for CBD in 1964• Later reduced to 1.33 for entire island city and 1 for suburbs– NYC’s FSI is 15.• Nobody in Mumbai wants to tear down old buildings as FSI of 1.33 would then apply• Rigid laws on land conversion from one use to another (including from agriculture to industry at periphery of cities)• Law of eminent domain (taking of land by government for public use by itself or third parties) is not transparent– Delays in public projects (road construction & building of city transit systems)– In the case of land acquisition by government for SEZs, there were protests, even leading to deaths.• Stamp duties on land transactions are extremely high.– Results: Official price is kept low and there is disincentive for land sale.• Land markets in India – thoroughly distorted.• Land titles are extremely unclear.– Not easy to transfer land, sell it or use it as collateral for borrowing.– Land doesn’t move to its best use.• Land Records Modernization Program– Clarifying titles and computerizing land records.– Slow