Nippon Keidanren | July 18, 2006
Conclude an Economic Partnership Agreement between
Japan and India at an Early Date
As a member of the so-called BRICs group, India has been on the international spotlight along with Brazil, Russia and China for the role they play in driving the global economy. The relationship between an economically fast-growing India and Japan has also grown rapidly close in recent years. A Nippon Keidanren mission headed by then-Chairman Hiroshi Okuda visited India in November 2005, and since then numerous business missions from Japan have traveled to India. There have also been frequent mutual visits at the government level, with Japanese Prime Minister Junichiro Koizumi paying a visit to India in April 2005.
India, a demographically young country with a population of over 1 billion, is expected to enjoy strong economic growth on a sustained basis. It has great potentials both as a consumer market and as a manufacturing base, and it is important that Japan strives to strengthen economic ties with India. A most effective policy instrument in this regard is to conclude an Indo-Japan Economic Partnership Agreement. An EPA benefits both countries: it will not only expand the potentials of trade and investment between India and Japan but will also increase the attraction of India as a production and export base, as well as enhance its international competitiveness.
Therefore, we strongly urge the Japanese and Indian governments to conclude at an early date a mutually beneficial, comprehensive, high-level EPA and take this opportunity to address the following issues:
1. Trade in Goods
We appreciate India has reduced import tariffs in recent years, but they remain high: the maximum basic rate is 12.5 percent, while the average effective tariff comes to 29.1 percent. India still keeps high tariffs for products such as automobiles (60 percent) and textile/garments (15 percent to 30 percent). India has stipulated a large number of products exempt from tariff reduction in EPA negotiations with other countries. As far as an EPA with Japan is concerned, however, it ought to be consistent with Article 24 of GATT and the two countries should eliminate customs duties covering substantially all trade. A mutual reduction of customs duties will benefit Indian businesses as it gives them a wider choice of suppliers of raw materials and manufacturing parts and widens the marketing channels for their products. In particular, a reduction of customs duties on manufacturing materials and components will help strengthen the competitiveness of Indian manufacturing industries. Therefore, we hope liberalization of trade in goods under an Indo-Japan EPA would cover a wide range of products with substantially reduced tariffs.
2. Investment, Trade in Services
India has been gradually relaxing its policy on the movement of foreign capital amid a shift toward a free economy, and the Indian government has shown that it is ready to open its doors to foreign direct investment. In view of this development, we hope the Indian government would move further ahead and address the following policy issues:
(1) Investment rules
India has yet to draw up investment rules such as those provided in the Japan-Vietnam and Japan-South Korea investment agreements, including the application of National Treatment and the Most-Favored-Nation principle to foreign investors in the process of government licensing on investment, and the banning of performance requirements that could have a restricting effect on investment. In order to attract investment from Japan, which has a track record of promoting economic development in ASEAN countries through direct investment, we hope India would put in place advanced investment rules to ease the anxiety of Japanese investors. Such investment rules will also help create jobs in India.
(2) Non Objection Certificate (NOC) restrictions
Foreign companies that have set up joint ventures in India or formed technical tie-ups with Indian companies are required to obtain a Non-Objection Certificate from their Indian partners when they set up new business in the same business field. We understand that India has removed this requirement for foreign businesses new to the Indian market. We strongly hope that the Indian government would also remove this requirement for established foreign businesses, because retaining such restrictions at a time of high-paced technological innovations could hamper business vitality and kill off job-creating opportunities.
(3) Foreign capital restrictions in the services industry
India currently bans foreign investment in the retail business such as supermarkets and convenience stores. We hope the Indian government would open this business sector to foreign capital as foreign investors can help make India’s distribution industry more efficient.
There are other restrictions on foreign capital in India’s services industry. In real estate, foreign investors are only allowed to participate in housing projects that are larger than 10 hectares in scale. In banking, while restrictions on 100 percent foreign ownership will be lifted by March 2009, foreign ownership is currently capped at 49 percent. In external commercial borrowings, amounts exceeding US$50 million are restricted to a minimum maturity of five years, thus limiting the flexibility of foreign businesses to raise funds. In the insurance industry, foreign businesses can only hold a maximum 26 percent stake. In telecommunications, there is also a cap on maximum foreign ownership, which differs from sector to sector.
To quickly and steadily loosen up and scrap restrictions on the participation of foreign capital in the restricted business fields will help invigorate the services industry, and benefit the public as well as business sector in India. We strongly hope the Indian government will continue to act aggressively in removing capital restrictions.
3. Taxation System
India is highly dependent on import tariffs as a source of government revenue, with customs duties accounting for approximately 10 percent of the central government’s total revenues (including government borrowings). As India has been asked by its potential EPA partners to bring down its tariffs, it is desirable that the Indian government take the opportunity to overhaul its taxation system and adopt a more balanced tax structure that does not excessively rely on income from customs duties.
For the sake of promoting the inflow of foreign investment, we hope India would eliminate the double-tier corporate taxation system for foreign and domestic corporations (the effective corporate tax for foreign businesses is 41.82 percent, compared with 33.66 percent for domestic businesses). India should also reform its complex taxation system i), which differs from state to state ii), make the tax structure more transparent and clear to foreign businesses, and ensure that taxation is enforced properly. We hope India would not levy new taxes or raise existing taxes to compensate for a reduction of tariffs through EPA.
4. Create a Solid Environment for Business Operation
An infrastructure that is vital for smooth business operations — such as electric power, roads, industrial water supply, airports, seaports and telecommunications — is still inadequate in India.
The situation could become a bottleneck for future economic growth. A good infrastructure is not only a prerequisite to attract foreign investment; it also contributes to better living standards and greater business efficiency. While Japan, through ODA and private-sector technology and know-how, will cooperate with India to improve its infrastructure, we hope India would make greater efforts on its own in this respect.
(2) Labor law
In India, businesses that have more than 100 employees are required to obtain permission from the state government before they can retrench a worker. Such a labor law, which is rigid by international standards, hampers scrap-and-build corporate strategies and discourages investment in new business. We hope India would speed up the review of its labor laws from the viewpoint of improving its investment environment for both domestic and foreign businesses.
- For instance, the effective tariff is the basic customs rate (0%, 5%, 10%, 12.5% in principle) plus a Special Additional Duty that is equal in amount to the Excise Tax, which is levied on domestic manufactured products at the point of shipment (mostly at 8% or 16%). In the case of products such as automobiles, the effective tariff further includes a Special Excise Duty, a Countervailing Duty (mostly at 4%) and an Education Cess (which is 2% on top of the import duty).
- For instance, while a value-added tax was introduced in April 2005, some state governments have refused to levy such tax.