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Crash course?

EVER SINCE THE MoU approach was adopted (on September 17, 1997) with regard to foreign investments in the Indian automobile sector, important car-manufacturing countries -- especially the US -- have been clamouring for a change in the policy citing `violations' of WTO guidelines on trade-related investment measures (TRIMs).

Washington was first off the mark when it asked, in June 1999, for consultations on the issue with New Delhi. In the discussions, held the following month, interestingly the EU and Japan too participated. After keeping quiet for a year - - during which time Seattle happened -- the US formally requested the setting up of a disputes settlement panel, in June. Now, the EU has made a similar request to the WTO's disputes settlement body, and the question on everyone's mind is if Jap an and South Korea will follow suit, though this seems improbable.

The principal target of the moves by the US and the EU is, of course, the MoU stipulation on compulsory exports to neutralise the foreign exchange outgo necessitated by the import of components, etc., and the indigenisation levels of the cars manufacture d in India. According to the US, these and other measures of the MoU investment-route are inconsistent with India's WTO obligations under Articles III:4 and XI:1 of GATT 1994 and Articles 2.1 and 2.2 of the Agreement on TRIMs. Briefly, Article 2 refers t o the two GATT 1994 articles relating to non-discrimination in treatment of investment in a member-country along `national' and `foreign' lines and the ruling out of extra-tariff ``prohibitions and restrictions...on the importation of any product of the territory of any contracting party or on the exportation or sale for export of any product destined for the territory of any other contracting party.''

The point is that the EU move, in particular, comes at a time when New Delhi is recasting its automobile sector investment policy, the clear inference being that Brussels (as also Washington) -- from under the shadow of the WTO panel proceedings -- is trying to pile pressure on the Vajpayee Government to liberalise the policy as much as possible. In fact, it has been officially stated that the MoU route will cease to be operative next year when import quantitative restrictions are lif ted. This is just as well. At a time when the Government has waived the forex neutrality clause for MNCs in the consumer goods sector, there is little justification for retaining it in the case of automobiles. The demands of both the US and the EU would have been conceded once the MoU stipulations cease to exist. However, as the Heavy Industries Minister, Mr Manohar Joshi, said recently in New Delhi, investors who have set up shop under the old policy would still have to discharge their co mmitments which, among other things, will place them at a disadvantage vis-a-vis the new entrants.

It is possible that the EU move at the WTO, to find common cause with the US, is nothing but a bargaining ploy to ensure that such `anomalies' do not find a place in the post-MoU investment policy adopted by New Delhi for the automobile industry. Indeed, Mr Joshi has also indicated that the new policy may mandate the setting up of R&D facilities by investors (not included in the existing MoU variant), which is certain to be staunchly opposed by the US and the EU, as also Japan. This apart, there is the issue of second-hand car imports -- likely to be effected from 2001 -- which has all the makings of becoming a new battleground between New Delhi, on the one hand, and Washington, Brussels, Tokyo and Seoul, on the other. There is, in fact, lit tle doubt that Indian automobile manufacturers have a tough task on their hands trying to keep the second-hand car threat under control despite the fact that cars older than three years are not likely to be allowed into the country under the new policy and also the fact that there are no bound (maximum) WTO import duty rates. The problem is that an aggressively protective policy adopted by New Delhi vis-a-vis the domestic automobile industry is certain to be challenged in Geneva, and may ultimately lead to the door being prised open a bit more, in the process making the going even tougher for the domestic automobile industry.