Blog

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ECONOMY

WTO Ministerial Meet

Context

• • A WTO Ministerial meeting of Sixteen developing countries and Six Least Developed Countries (LDC) is being hosted by India in New Delhi
  • This is the second mini-ministerial meet of the World Trade Organisation (WTO).
  • The meeting is to discuss the interests of developing and least developed countries in global trade, this informal meet will also focus on the accusation by the U.S. that these economies benefit from exemptions meant for the poorer nations.

 Issues to be discussed

• The issues on the deadlock in key areas of negotiations and the impasse in the Appellate Body.
• The challenges being faced by multilateral rule-based-trading system.
• Increasing unilateral measures and counter measures by members which threaten the very existence of Dispute Settlement Mechanism of the WTO.
• To build consensus on how to move forward on the WTO reforms.

What is the WTO?

• The World Trade Organization (WTO) is an intergovernmental organization that is concerned with the regulation of international trade between nations.
• World Bank and IMF are called Bretton Wood institutions.
• They were established at Bretton Wood Conference in 1944.
• The WTO officially commenced on 1 January 1995 under the Marrakesh Agreement, signed by 124 nations on 15 April 1994, replacing the General Agreement on Tariffs and Trade (GATT), which commenced in 1948.
• It is the largest international economic organization in the world.

What are the crises in WTO?

• WTO is facing existential crisis during a time when developed economies have adopted protectionist attitude.
• US have blocked appointments of Appellate Body members to force WTO members to negotiate new rules that address US concerns and limit the scope for judicial overreach.
• This has de facto impeded the work of the WTO appeal mechanism.
• With only four working members out of seven normally serving office in July 2018, the institution is under great stress.
• If it is not resolved, the Appellate Body soon will not have enough members to review cases and the vaunted WTO dispute settlement system will grind to a halt.

The U.S.’s stand

• The U.S. drove the agenda to establish the World Trade Organisation (WTO) purely to pursue its own commercial interests.
• The U.S. has been long proven isolationist and has never truly embraced the idea of a multilateral system in which its leadership could be contested.
• The U.S. has refused a reduction in subsidies and also pulled back on its commitment to find a perennial solution to public stockholding.

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Main concerns of developing Countries

 Non-Tariff measures

• The developed countries have designed and implement stringent non-tariff measures (NTMs) which exacerbate the problems faced by poor countries that are willing to export.
• The high cost of trading – NTMs significantly add to the cost of trading.
• These countries are unable to compete in international markets and hardly gain from sectors with comparative advantage such as agriculture, textiles and apparels.
• However, the costs of acquiescence with many NTMs are asymmetrical across exporters because compliance depends on production facilities, technical know-how and infrastructure. These factors are usually inadequate in developing economies.

Agricultural Subsidies

• The disagreements between developed countries (the European Union and the U.S.) and developing countries (Malaysia, Brazil and India) to discipline the farm regime in their favour continue, thereby threatening the WTO’s comprehensive development agenda.
• The expectations of developing countries from trade also get belied due to sizeable support by the developed nations to their farmers in a situation of market failure and other uncertainties.
• The Organisation for Economic Cooperation and Development (OECD) estimates the quantum of subsidies by developed nations to vary from $300 to $325 billion annually, which is much higher than that estimated for developing countries.
• This has become a bone of contention in trade talks as farm lobbies in the U.S., Europe and Japan have steadily exercised political clout to influence officials and lawmakers to continue giving subsidies to farmers.

Dispute Settlement at WTO

• There is a trade war between US and China despite both being a member of WTO. This negates the core non-discriminatory principle of WTO.
• The US here tried to separate trade from development and objected to mention centrality for development at the preparation of the declaration.
• The WTO dispute settlement mechanism is not a world trade court. The process remains political and diplomatic.
• The very existence of an appeal mechanism is now paradoxically questioned at a time the global community criticises the absence of the same mechanism in Investor-State Dispute Settlement.

The Aims of developing countries

• Developing countries, particularly India seeks an amendment of laws on unilateral action by members on trade issues and a resolution of the WTO’s dispute settlement system.
• The meeting may lead to policy guidance on issues such as global norms to protect traditional knowledge from patenting by corporates, protection through subsidies, e-commerce, food security and continuation of special and differential treatment to poor economies.

Past Negotiations in the 11th Ministerial Conference (Buenos Aires, December 2017)

• Buenos Aires summit has highlighted the existential crisis faced by WTO especially during a time when emerging economies have adopted assertive and developed economies have adopted protectionist attitude.
• At the Buenos Aires, the developed countries led by the US and the European Union formed groups on e-commerce, investment facilitation and MSMEs within the WTO with more than 70 members in each group.
• It was agreed to ‘establish a work programme to examine global e-commerce, with a focus on the relationship between e-commerce and existing agreements.
• It generated a sizeable debate on the fringes of the conference as many accredited NGOs opposed it and raised concerns that it was a push by dominant global players.

Expectations from Delhi WTO Ministerial meet

• A roadmap may be prepared to the structural reforms in the WTO functioning as multilateral trading system.
• WTO being a democratic organization, there is a need to make it more effective in protecting the interests of small nations against stronger countries.
• The time is opportune for developing countries to voice their concerns and push for a stable and transparent environment for multilateral trade.
• The Delhi meeting provides an opportunity to the developing countries and LDCs to build consensus on how to move forward on the WTO reforms, while preserving the fundamentals of the multilateral trading system enshrined in the WTO.

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GDP ESTIMATION

Context

• A key database introduced in India’s new gross domestic product (GDP) series has now been found by National Sample Survey Organisation (NSSO) to be full of holes, raising fresh questions over the controversial and contested GDP numbers in Asia’s third-largest economy.
• Ministry of Corporate Affairs (MCA) has released a clarification regarding the technicality of NSSO report.

What is the issue?

• A latest National Sample Survey Organisation (NSSO) report has raised fresh questions over India’s gross domestic product (GDP) and national income calculation methodology.
• A study conducted by the NSSO ended June 2017 and released its report in May 2019 has found that as much as 38% of companies that are part of MCA-21 database of companies and are used in India’s GDP calculations could not be traced or were wrongly classified.

What is GDP?

• Gross Domestic Product or GDP represents the total value of all the final goods and services that are produced within a country’s borders within a particular time period, typically a year or a quarter.

 How is GDP calculated?

• The GDP can be calculated by using three methods-

1. The income method
2. The demand or expenditure method
3. Production Method (GVA)

1. Income Method – Based on factor cost

Factor cost = Labor + Capital + Profit + Land

GDP at Current Market Price = GDP at Factor cost + Taxes – Subsidies

GDP at Current Market Price when adjusted for inflation = GDP at Constant prices

2. Expenditure Method

GDP= Private Consumption + Investment + Government + Foreign Expenditure

3. Production Method – Gross Value Added (GVA)

GDP = Total value added at each stage, or

GDP = Total Value of Sale – Cost of intermediate goods

• By definition the value of GDP should be identical, irrespective of the method used.
• This is because one person’s or entity’s income is another person’s spending on expenditure.

What is a “base year”?

• The base year of the national accounts is chosen to enable inter-year comparisons.
• It gives an idea about changes in purchasing power and allows calculation of inflation-adjusted growth estimates.

 When was the new series launched?

• The new series has changed the base to 2011-12 from 2004-05. Every national accounts dataset gives GDP calculations for two years: 2011-12 and the current year.

 The differences in the old and new methods to calculate GDP

• In the previous method, the index of industrial production (IIP) or factory output was the main measure to calculate manufacturing and trading activity.
• The limitation was that this only counted volume and did not give an idea about value.
• Previously, the first GDP estimates were based on IIP data.
• It was updated every two years factoring in data from the Annual Survey of Industries (ASI).
• ASI only gave out goods’ value produced by firms registered under the Factories Act.
• Now, the corporate affairs ministry’s MCA 21 records are used.
• The use of MCA 21 records for national income calculations have brought to light a segment of organised activity, which was earlier, for the most part, invisible.
• This is the lower end of the corporate segment. These are companies which are not listed in stock exchanges, and were virtually left out of national income calculations.

What is Gross Value Added (GVA)?

• GVA, which is GDP minus taxes, serves as a more realistic proxy to measure changes in the aggregate value of goods and services produced in the economy.
• Earlier, the IIP served as the primary metric to gauge manufacturing and trading activity.
• It only counted the number of units produced and did not distinguish, between, say the value of high end and an entry-level product.
• The GVA method factors in value addition and economic action carried out by activities such as marketing.
• Such activity can be of a very high value in case of large FMCG companies.

Latest controversy about GDP data

• A report showed that a latest survey of the National Sample Survey Organisation (NSSO) titled ‘Technical Report on Service Sector Enterprises in India’ found around 38% of companies included in the MCA-21 database either untraceable or wrongly classified.
• This has raised questions whether India has been overestimating its GDP levels and growth.

 The Criticisms about GDP estimates using the new method

• The biggest criticism is about the back series that was launched in November 2018.
• The back series data serves as a link between the old and new formulae.
• The back series is aimed at calculating/updating national accounts using the new formula to help allow inter-year comparisons and enable better economic forecasting.
• Owing to the limitations of the availability of data, in some areas either splicing method or ratios observed in the estimates in the base year 2011-12 have been used for the previous years.
• The Experts questioned that, how can MCA 21 data be extrapolate for previous years when the data itself started getting collated only in 2008 and has undergone several rounds of changes in the later years?

The government Responses

• The statistics ministry has said an official committee will examine the NSS technical report on services sector enterprises.
• The ministry said that the issue of coverage, quality and timeliness of the MCA database vis-a-vis the Annual Survey of Industries (ASI) had been discussed in detail in the various meetings of the Advisory Committee on National Accounts Statistics and adopted only thereafter.
• The Central Statistics Office (CSO) is currently in the process of undertaking the new base revision to 2017-18. The statistics ministry had commissioned the NSSO technical report for this purpose.

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