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India, subsidies and WTO: Breaking the vicious cycle

• India has been at the receiving end of a number of cases challenging its subsidy support to specific export sectors.
• The US has questioned India’s right to sustain a subsidy-based regime considering it has crossed the US$ 1,000 GNI threshold and a number of targeted sectors have achieved export competitiveness.
• India’s reliance on subsidies has been more akin to a fire fighting approach, which is less effective in the long term and also exposes the country to relentless scrutiny.
• Instead, India should focus on long-term measures to build industrial competitiveness, especially in the emerging sectors that will define the future of global trade.

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WTO

India has been on the receiving end of a number of cases at the WTO, wherein other members have questioned its subsidy protection to specific industries. In March this year, Guatemala initiated a dispute complaint against Indian sugar subsidies. The US has accused India of contravening the GATT norms under the Jawaharlal Nehru National Solar Mission (“JNNSM”) for solar cells and solar modules concerning certain measures relating to domestic content requirements. What are these issues? How is one issue different from the other?

Then again, US has challenged the Merchandise Exports for India Scheme (MEIS) for exports as being against WTO norms. Is the sugar subsidy issue similar to the MEIS-based export subsidy issue?  After all everything has three things in common: India, WTO and subsidies!

Quick answer is no, barring these three commonalities, little else is the same.

Following the Uruguay round of negotiations in 1986-94, the world entered a rule-based trade order – a system in which no country holds a monopoly on the pretext of its size or institutional or financial capacity; each member of the WTO has only one vote.

WTO functions through various agreements such as Agreement on Agriculture (AoA), General Agreement on Tariffs and Trade (GATT), Agreement on Trade-Related Investment Measures (TRIMS), Agreement on Subsidies and Countervailing Measure (ASCM), etc. These agreements cover various aspects of trade and services and other dynamic exchanges. Few of these agreements deal with countries’ commitments to prune trade barriers and establish a conducive environment to trade. They also set procedures for settling disputes. Dispute Settlement Body (DSB) consists of all WTO members and it makes all its decisions by consensus.

India has been dragged in the WTO dispute settlement body on various occasions. Few of the prominent cases are:

• Export subsidies, primarily MEIS scheme – 2018 – Dispute Order – DS541: USA alleges that India’s export promotion schemes are inconsistent with Agreement on Subsidies and Countervailing Measures (ASCM) since it provides subsidies contingent upon export performance. It claims that India has long surpassed the conditionality of below US$ 1,000 GNI at constant 1990 dollars to continue availing the benefits accorded to annex 6 countries under Special and Differentiated Treatment exception under ASCM.

Furthermore, Indian products have achieved export competitiveness (country’s exports share in world trade is more than 3.25% for two consecutive years) in most of the products for which MEIS has been rolled out. Hence, India does not have the grounds to continue availing benefits under ASCM.

• Sugar subsidies – Dispute Order – 2019 – DS580: Australia, Guatemala and Thailand have accused India of distorting the global sugar market by providing price support in contravention to the Agreement of Agriculture’s Aggregate Measurement of Support (AMS) clause. Under Agreement on Agriculture (AoA), developing countries can give agricultural subsidies or aggregate measurement of support (AMS) of up to 10% of the value of agricultural production. However, these countries claim that the methodology of calculation of subsidy used by India is flawed and non-transparent. Australia has stated that as the world’s second largest sugar producer and fourth largest exporter, the dynamics in India’s sugar market have significant implications for global prices and trade.

WTO

Solar cells and modules – Dispute Order-2013 – DS456: The US has alleged that certain measures of Jawaharlal Nehru National Solar Mission of India are in contravention to the General Agreement on Tariffs and Trade norms. Under GATT, a country is required to follow Non-discrimination obligation wherein a member shall not discriminate: between “like” products from different trading partners and also follow the national treatment obligation. This is a basic principle of GATT/WTO that prohibits discrimination between imported and domestically produced goods with respect to internal taxation or other government regulations.

Steel and Aluminium products – Dispute Order – 2016 – DS518: Japan has dragged India WTO’s DSM for imposing safeguard measures on steel products and minimum import price on iron and steel products. Japan also accused India of misusing the clause of temporary duty on import to shield domestic industries against the threat of a sudden and damaging surge in imports under General Agreement on Tariffs and Trade. However the duty expired even before the verdict.

As understood from the above narrative, these cases, claims and disputes pertain to different agreements hence their resolution is different too. India has strongly defended its policies and special rights such as peace clause 2013 to protect its food procurement-based MSP schemes. However time and again India has come under the WTO radar primarily because most of the trade policies in India are focussed on end product/result based subsidy for example MEIS, fertiliser subsidy etc.

The causal effect of a policy is always evident in the case of India. Asian tigers and China relied heavily on infrastructure development and easy access to liquidity for supporting the industry rather than fire fighting through export-focussed subsidies.

Union Minister of Commerce & Industry Shri Piyush Goyal has rightly pointed out that India needs to move beyond the dependence on subsidies during his meeting with the Board of Trade, “I do not think that any programme or ambitious scheme can run only on subsidies and government help. We have to move out of this continuous effort and demand and make our industry truly competitive and self-reliant.”

Even as an immediate break from subsidies may be unfeasible, India needs to learn the right lessons to boost long term competitiveness i.e. focus on high value products that will determine the future of trade; link Indian producers with global value chains; invest in trade facilitation and trade infrastructure measures and equip the industry to hold long term investment. Otherwise, India will be embroiled in one or the other export-focussed subsidy case at the WTO. Moreover, an overreliance on subsidies will not help India achieve its vision of becoming a dominant player in global trade, consistent with its growing economic influence.

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