Services Trade Restrictions and India
By
Dr H A C Prasad
International Trade and Services Consultant and Former Senior Economic Adviser, MOF, GOI
Services Trade Restrictions unlike Merchandise Trade Restrictions are not tariff related, though there are some tariff or tariff equivalent issues in services trade also. The Services Trade Restrictiveness Index (STRI) of the OECD gives a comprehensive list of trade restrictions of OECD and some Non-OECD countries, including India for 22 services sectors. India is considered to be highly restrictive in services sector with the 47th position among the 50 countries despite the reforms in many services areas.. Recent reforms include Privatisation of Air India completed in January 2022. In 2020, India eliminated pricing guidelines for transfers of shares between residents and non-residents, lowering barriers to services trade in several sectors. The same year saw the introduction of regulation on non-discriminatory interconnection rates in the telecommunications sector. While some reforms are sector-specific, some are horizontal in nature covering all sectors. The Telecom Bill 2023, once it becomes an Act could further help in making India’s STRI of Telecom sector less restrictive particularly in the transparency area.
Sector-wise, as per the STRI 2022 Total STRI values are very high in India for Rail Freight transport (1.000), Legal Services (0.899) and Accounting (0.793) and very low in Computer (0.199), Construction (0.263), Sound Recording (0.232), Road Freight Transport (0.228), Logistics Freight Forwarding (0.282) and Engineering (0.195). (Table 1). In 2017 also STRI values were very high for Rail Freight Transport (1.0), Legal Services (0.906) and Accountancy (0.886) and very low in Sound Recording (0.267), Road Freight Transport (0.285), Logistics Freight Forwarding (0.290) and Engineering (0.290). In terms of numbers, in 2022 the highest restrictions are in Legal (87), Rail freight transport (84), Air transport and accounting (82 each). In 2017, the highest restrictions were found in Air Transport (89), Insurance (80), Legal and Accounting Services (74) and Rail Freight Transport (73). Air Transport has now come out of the top list in STRI due to privatisation of Air India in January 2022. In 2022, in terms of numbers, the restrictions are very low in Computer (14), Sound Recording (19), Engineering (17), Construction (22), Road Freight transport (21), Logistics freight forwarding (24), Logistics Customs Brokerage (26) and Courier (26). In 2017 also the restrictions were low in Computer and Engineering services (22), Sound Recording (23), Logistics Freight Forwarding (24), Road Freight Transport (25) and Logistics Customs Brokerage (26).
Among the 50 countries in the OECD database, India has the highest STRI value in Architecture and along with some other countries has the highest STRI value in Rail Freight Transport indicating that these are the Highly restricted sectors. Rail freight transport is the most restricted services sector in India as this sector is completely closed because Indian Railways and its subsidiaries functioning under the Ministry of Railways are the only train operators in India.
The segregation of Horizontal Restrictions from total restrictions shows that in terms of both value and numbers in all the sectors, the major contribution to STRI is due to horizontal restrictions. It is very high in some sectors which implies that in these sectors, the STRIs are mainly due to horizontal restrictions. In terms of numbers also the major restrictions are horizontal restrictions.
In the total STRI and also horizontal restrictions for different Sectors, Policy Area-wise, restrictions on foreign entry and restrictions to movement of people followed by regulatory transparency are the major policy areas.
However, we cannot take these STRIs of OECD at face value as there are methodological issues and issues due to differing perceptions of the importance of the restrictions as pointed out earlier in the studies of Dr H A C Prasad in collaboration with the India Exim Bank.1 However they can be used as a base and corroborated by practical Industry experiences and viewed from our country’s perspective.
These include both removing the lacunae in the OECDs STRI methodology and reducing the restrictions in Services sector of India.
The Horizontal Restrictions get reflected in the total restrictions of each sector and thus are the major contributors in many sectors. The presence of some of the Policy Measures like foreign equity restrictions automatically leads to STRI scores in some other related Policy Measures even if there are no restrictions in these other Policy Measures. While this is also due to the lacunae in the STRI methodology, these need to be examined first and addressed as the STRI values of many sectors will automatically fall If some of the horizontal restrictions are removed or relaxed. India has many horizontal measures related to Foreign Entry, which are comparatively restrictive and given higher weightage in the STRI by OECD. These get reflected in the STRIs of the sectors also, thus resulting in a higher STRI for India. The higher weightage for some parameters related to foreign entry and also the high number of parameters of a similar nature in some Policy Measures for different services have also resulted in India’s STRI values being higher in many sectors.
There are some measures which are just formalities and not really restrictive and need not be included under STRI unless they are really restrictive. These are related to visa processing time, cost to obtain a business visa, etc., which are also found in other countries and are more in the form of Ease of Doing Business Issues.
There are some restrictions which can be streamlined by India, which can help in lowering the STRI score of many sectors and in turn in the total STRI of India. These include the legal obligation to communicate regulations to the public within a reasonable time prior to entry into force; adequate public comment procedure open to interested persons; and the cost to obtain a business visa . Nationals of most countries require a visa to India. Fees vary depending on reciprocity as well as the country they apply from. The fees applicable for a US citizen for up to 10 Years Single or Multiple Entry visa is US$160. In addition, the applicant will be required to pay US$3 on account of Indian community welfare fund. In many countries it is lower and for most of the countries it is below or around US$ 100. This can be lowered for India which can help in facilitating business visitors. The fees could also be made uniform instead of varying depending on reciprocity as well as the country.
Tourism sector has not been included by OECD in its STRI. Though some data is included in OECD STRI database, this sector is not included in the STRI index. Inclusion of this sector could possibly indicate the restrictions in this sector of many countries which have high entry fees for historical monuments and other restrictive conditions. Based on industry sources, our analysis indicates that this sector has few restrictions in India and is quite open. Many of the restrictions are horizontal in nature and some are procedural conditions i.e., Ease of Doing Business issues which needs to be addressed
Thus the restrictions in the different services sectors are varied though there are the common horizontal restrictions related to foreign investment, cross-border M&As, proportion of shares that can be acquired in public controlled companies, conditions on subsequent transfer of capital and investment, restrictions on acquisition and use of land and real estate by foreigners, residency requirements, regulations on cross-border data transfers, employment visa and duration of stay, public procurement, taxes and subsidies, appeal of the decision of regulatory bodies and redressal mechanism, legal obligation to communicate regulations, public comment procedure and procedural regulations related to Ease of Doing Business. Other than horizontal issues, sector-wise issues differ and consequently sector-wise policies also vary.
1 “India's Services Trade Liberalisation and Export Promotion: A Study for Government Policymaking”, (In collaboration with India EXIM Bank), Special publications, India EXIM Bank, March 2019
