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The thrust of India’s approach in the ongoing services negotiations should be to make a conditional (revised) offer which at least reflects the currently prevailing trade and investment regime in

financial services in the country. This offer can then be confirmed in part or in whole subject to an assessment of offers received from other member countries in our areas of interest. India could also consider taking a forward looking strategy, by possibly pre-committing to liberalization in certain segments if it is able to secure substantively improved offers from other member countries.

Specifically, India should aim at liberalizing its commitments, especially in mode 3, and to refle ct the autonomous liberalization that has been undertaken in various segments like insurance and banking. For instance, in the case of insurance services, India could make a binding commitment in mode 3 subject to a foreign equity ceiling of 26 percent at a minimum, and with a stipulation of foreign presence through joint ventures only, as exists in practice. In the case of banking, India could relax its cap on licenses for setting up foreign bank branches as this ceiling is being breached in practice. It could also relax restrictions on investment by foreign banks in financial companies, in line with the liberalization that has occurred in this regard and with the higher foreign equity ceiling for investments in financial services like stock broking, asset management, and venture capital that has been bound in India’s offer. India could also consider relaxing the restriction of 15 percent on off balance sheet operations by foreign bank branches to facilitate the development of more sophisticated derivative markets and instruments. This limit could be raised to 25 percent or 33 percent in view of the likely future divestment of government ownership in the banking system. The possibility of committing to foreign commercial presence through subsidiaries and joint ventures in banking services could also be considered. The latter would level the playing field between domestic and foreign banks in areas such as profit taxes and access to term deposits of public sector units, although subsidiary status would also make foreign banks subject to provisional lending requirements for different sectors on the same terms as domestic banks.

India could also consider possibilities for trade in mode 1, particularly with the advent of e- commerce and the use of information and communication technologies for delivering a wide range of financial services. For instance, there are cross border possibilities for trade in credit scoring, data mining, and creation and delivery of products via the internet at low cost. Thus, there is a need to move away from the standard across the board unbound entry for mode 1 in India’s financial services commitment schedule. As India gradually moves towards capital account convertibility, binding commitments could be made in mode 1. Of course, it would also be important to inscribe limitations in mode 1 to prevent fraudulent practices, protect privacy of information, and prevent financial instability.

It has been argued that India should take a quid pro quo strategy in its commitments in sector like financial services where many countries are keen on entering the Indian market. Under this approach,

India should hold back on making commitments that reflect its autonomous liberalization in areas like banking and insurance, so as to extract concessions in return in other areas of interest, such as in mode 4. However, such a quid pro quo strategy may not work. The reason is that to the extent that such liberalization is a part of India’s economic reform agenda and is compelled by domestic considerations of efficiency and competitiveness, the threat of going back to more restrictive policies will be perceived as low by foreign investors. Hence, there is little likelihood of India’s being able to extract major concessions in return for future binding of such liberalization in its specific commitments. Instead, it may be worth considering pre-committing in some segments like insurance where the direction of reforms is clear and further liberalization is desirable. Thus, India could commit to raising the FDI cap in insurance to 49 percent after 5 or 10 years or to 74 percent in the case of banking after 3 to 5 years. A strategy of pre-commitment would not only give a clear indication of the direction of future policies but would also enable India to buy time to phase in liberalization and to put in place the required regulatory apparatus, promote further competition, improve the functioning of public sector institutions, and where required divest government ownership in financial institutions. The latter approach could also be used to leverage its interests in other sectors and specific modes of interest and would be much more effective as a quid pro quo strategy than holding back on the status quo.

India could also consider making more meaningful national treatment commitments. As noted, these are mostly entered as unbound across all modes, excepting mode 3 for some financial services. These commitments could be made binding subject to regulatory requirements such as capital adequacy, solvency margins, authorization and registration norms, and tax and subsidy treatment. The national treatment commitments should reflect the extensive regulatory and institutional reforms that have occurred in India’s financial services sector, thus laying down the conditions for ensuring financial stability rather than signaling the absence of predictable policies and guidelines for operating in this sector.

Although India’s negotiating strategy in financial services has to be primarily inward looking in terms of improving upon its own commitments, some focus on potential areas and modes of export interest may be warranted in future negotiations. For example, India could seek market access under mode 1 for services like financial data processing, back office financial operations, share transfers, and processing of insurance claims, where it has export prospects. India’s export interests in the provision of such Business Process Outsourcing (BPO) services through mode 1 should be sought in the larger context of its mode 1 negotiating strategy. Likewise, India could also negotiate the removal of barriers in specific markets, which it is interested in entering, such as in the SAARC countries and South East Asia. Barriers

in the form of unduly restrictive capital adequacy norms and high solvency margins, or restrictions on staffing of overseas operations, could be addressed through the negotiations. Another important segment where India has export prospects is in financial consultancy services, through modes 1 and 4, and the negotiations could be used to gain greater market access under these modes for this subsector. It is important to note, however, that it would be difficult for India to seek such liberalization unless it is willing to open up its own financial markets along similar lines. Thus, India’s ability to address its export interests through the GATS negotiations will in large part rest on its willingness to multilaterally bind more liberal conditions in its own market.