Meaningless Memoranda

There is, however, another, bigger issue that could make it tough for the government to penalise MoU defaulting firms or even impose the penalty at all: the global trading regime. Stripped of its jargon, the MoU is little better than a non-tariff barrier with its restrictive import conditions. According to the Uruguay Round agreement on trade-related investment measures, TRIMS that are inconsistent with the obligation of eliminating quantitative restrictions include those that restrict imports by an enterprise of products used in, or related to, its local production. This also covers restricting imports by a company to the amount it exports. This apart, imports of semi- and completely-knocked down vehicle kits are on the restricted list and are likely to be among the last items to be removed. These facts have not escaped the attention of the World Trade Organisation (WTO) either. In March this year, a European delegation from the WTO indicated to the Indian government that such a system was at variance with the agreement to phase out quantitative restrictions.

 

Given this, and the developed worlds increasingly hardening stance to Indias plea for a longer time frame in which to phase out quantitative restrictions on imports, it is no surprise that the thinking in Udyog Bhavan has started changing. In the industry ministry, MoUs are increasingly being referred to as a gentlemens understanding rather than an official imposition. And even as talk of action against MoU defaulters does the rounds, there are clear hints that the system is considered to have outlived its utility in any case. There is a strong argument for this. The rationale for the export obligations and indigenisation norms in MoUs was to ensure that foreign exchange-poor Indias new foreign car projects, which were basically assembly jobs from imported kits, would be foreign exchange neutral. That is why the MoU system had acquired a certain political morality. Today, with foreign exchange reserves at a record level of $ 28 billion, there is little need for the government to worry greatly on that score.

So in taking its decision on the MoU system, the Cabinet needs to temper short-term political expediency with long-term pragmatism.