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GATS, financial services and India

India has a huge potential for cross-border supply of various professional services


An analysis of the commitments made in financial services indicates that very limited liberalisation has been realised under GATS.



INSURANCE THROUGH ATM: In both insurance and banking, foreign parties seek full market access and national treatment commitments as well as lifting of caps on equity participation.

THE GENERAL Agreement on Trade in Services (GATS) is an offshoot of the Uruguay Round of negotiations and came into force on January 1, 1995, with the establishment of the World Trade Organisation. It is part of the whole package. GATS covers 12 areas which are further divided into 161 sub-sectors.

It provides for four modes of supply of services: cross-border supply (Mode 1), consumption abroad (Mode 2), commercial presence (Mode 3), and presence/movement of natural persons (Mode 4).

The obligations under GATS may be categorised into two groups:(i) general obligations that apply directly and automatically to all member countries of the WTO, and (ii) conditional obligations that apply to sectors where the member country has assumed market access and national treatment obligations.

The general obligations include most favoured nation (MFN) treatment and transparency. Under conditional obligations, GATS follows a positive list approach under which each member is expected to undertake specific liberalisation commitments through a process called "scheduling". Any commitment can be added or improved at any time autonomously by the member concerned but it becomes a binding commitment only if it is scheduled. The Request-Offer approach is the main method of negotiations, with the starting point for negotiations being the current schedules of commitment.

In general, for obvious reasons, the main mode of supply of particular interest to developed countries is Mode 3 or commercial presence. On the other hand, the mode of supply of particular interest to India and other developing countries is Mode 4, that is, the movement of natural persons.

India's commitments

Existing commitments made by India under financial services include the following:

Insurance for export or import has to be taken by the contracting parties in accordance with a mutual contract. However, if insurance has to be taken by the Indian party as per the contract, it must be through an Indian company.

Overseas brokers are allowed to have resident representatives and offices that procure re-insurance business from Indian insurance companies and place such business from abroad with Indian insurance companies.

In banking, no commitment is allowed in Modes 1, 2 and 4. In Mode 3 grant of branch licences to foreign banks is subject to a cap of 12 licences per year both for new and existing banks.

Licences for new foreign banks may be denied if the share of the assets of foreign banks in the total banking assets (on and off balance sheet) in India exceed 15 per cent.

In both insurance and banking, requests received from other countries include allowing full market access and national treatment commitments as well as removal of limitations on foreign equity participation.

Present scenario

Indian insurance companies may be started by domestic entities in joint venture with foreign entities, with the latter holding a maximum of 26 per cent of the equity.

According to the latest data, in both life and non-life insurance, the new entities have already managed to garner more than 20 per cent of the new business premium.

In banking, foreign banks in India now have a share of only around 7 per cent of total banking assets. Recently, the RBI released an ambitious road map for increasing the presence of foreign banks in India. As per the guidelines, the aggregate foreign investment from all sources will be allowed up to a maximum of 74 per cent of the paid up capital of the private bank.

The roadmap is divided into two phases. In the first phase, between March 2005 and March 2009, foreign banks will be permitted to establish presence by way of setting up a wholly owned banking subsidiary (WOS) or conversion of the existing branches into a WOS. Further, during this phase, permission for acquisition of shareholding in Indian private sector banks by eligible foreign banks will be limited to banks identified by the RBI for restructuring. During the second phase commencing in April 2009, the RBI may permit merger/acquisition of any private sector bank in India by a foreign bank.

The public sector at present dominates the Indian financial services sector. The Government does not have enough money to sustain the expansion plans of the present public sector enterprises.

For example, the recent public issue by Punjab National Bank has brought down the Government's stake from 80 per cent to 57 per cent. On the other hand, foreigners hold more than 70 per cent of the equity in the two leading private sector banks in India, namely ICICI Bank and HDFC Bank.

Limited progress

An analysis of the commitments made in financial services indicates that very limited liberalisation has been realised under GATS. For the most part, the commitments only bind the status quo and often back track even on the status quo. Even the recent reforms in several areas have not been reflected in the scheduled commitments. Therefore, for India, the GATS commitments fail to expand market access for India's exports of labour intensive services. India has a huge potential for cross-border supply of various professional services, especially through back-office and outsourced activities and via electronic delivery.

Given our requirement of additional equity for the financial services sector as well the potential for providing labour intensive services, it is perhaps time to be more ambitious and improve our offers under GATS, including financial services. Of course we need to have a good regulatory system in place.

ABHIJIT ROY

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