The government’s eagerness to gift-wrap the 30% sourcing being given to Indian micro and small enterprises in its efforts to push through FDI in retail can land India in international arbitration, say officials dealing with the issue in finance and commerce ministries.
This mandatory sourcing will be in violation of provisions of General Agreement on Trade and Tariff (GATT), the bilateral investment protection agreement (BIPA) India has signed with 71 countries as well as the World Trade Organisation's Trade Related Investment Measures (TRIMS).
Once a signatory to these pacts, Indian domestic laws cannot come in the way of products from these countries getting treatment that “is no less favourable” than treatment given to similar domestic products.
The sourcing restrictions can go against the provisions of “national treatment on internal taxation and regulation” mentioned in paragraph 4 & 5 and article iii of GATT and article 2 of TRIMS.
“The national-treatment rule enshrined in GATT requires that products of other countries be treated the same way as like products manufactured in the importing country. No domestic laws should be applied to protect domestic producers from competing products. And imported products should receive treatment under national laws that “is no less favourable" than the treatment given to like or similar domestic products,” said an official in the commerce ministry.
Some sections argued that the TRIMS covers only trade in goods and retail is dealing with services. But the fine print shows that even though the restriction is on investor services, it can hurt trade in goods and therefore violate TRIMS.
Even one of the most celebrated pacts in recent times, the India-Japan Free Trade Agreement (FTA) prohibits the local content rule, as enshrined in article 89 of the pact.
What could also open floodgates of trouble are the provisions of BIPA. India has BIPA with 71 countries, including China, which too provides for national treatment for each others’ firms.
With inputs from Gaurav Choudhury