With increasing trade protectionism and trade remedy action, India has come under the radar of the US Department of Commerce a week after the US announced higher tariff on steel and aluminum products. The US has resorted to the WTO dispute settlement mechanism in order to challenge India’s export subsidy programmes—Merchandise Exports from India Scheme (MEIS), Export Oriented Units Scheme, Sector-Specific Schemes, Special Economic Zones, Export Promotion Capital Goods Scheme, among others. The US has alleged that these export subsidies “unfairly” benefit Indian companies by creating an “uneven playing field” for the US-based manufacturers and exporters. The US has, thus, initiated the process of “consultations at the WTO dispute settlement process” and if the two parties do not reach a mutually agreed solution, the US may request the establishment of a WTO dispute settlement panel to review the matter. India’s export-specific subsidies, like MEIS, fall under prohibited category as per the WTO rules and regulations. However, special and differential provisions provide some exemptions for developing countries, keeping in mind their development agenda. Since India graduated from the developing country status as per the WTO definition, India’s explicit subsidies were likely to be challenged.
In the current context, it is important to understand the provisions under the WTO’s Agreement on Subsidies and Countervailing Measures (ASCM). ASCM deals with the rules and provisions pertaining to subsidisation, actionable subsidies and material injury/serious prejudice. It also sets out the remedies that the WTO members can use against injurious subsidisation and incentives. Subsidies contingent on export performance and use of domestic over imported goods are prohibited under the ASCM of WTO. So how does the WTO categorise subsidies? According to the WTO, the subsidies have been categorised under three segment—Red (prohibited), Yellow (permitted yet actionable), and Green (permitted, non-actionable).
However, there are exceptions to this rule for developing countries. The WTO recognises that subsidies play an important role in the economic progress of a developing country. Hence, there is a provision for special and differential treatment under Article 27 of the ASCM. The special and differential provisions are provided to select developing countries based on two critical criteria. First, any developing country with per capita income below $1,000 is eligible to extend the above prohibited subsidies to their domestic industry. However, if their per capita income increases beyond $1,000, then, as per the Doha Ministerial Meeting (2001), an agreement was reached in principle that the developing countries would remain eligible for the exemption until their GNI per capita reached $1,000 in constant 1990 dollars for three consecutive years.
Second, as per the product criteria, export competitiveness in a product is deemed to exist if the developing country’s exports of that product have reached a share of at least 3.25% in the world trade for that product for two consecutive calendar years. Thus, such products are not eligible for subsidies even if the countries GNI per capita is below $1,000. India’s GNI per capita crossed $1,000 level for the three consecutive years, starting 2013 to 2015, and, thus, India is no more allowed the flexibility to provide these subsidies to its domestic manufacturers.
In India, the foreign trade policy (FTP) gives more details about the types of incentives provided to the industries. Under the FTP 2015-2020, the ministry of commerce and industry (MoCI) subsumed five main export-oriented programmes—Focus Market Scheme (FMS), Focus Product Scheme (FPS), Market-Linked Focus Product Scheme (MLFPS), Agri Infrastructure Incentive Scrip and Vishesh Krishi and Gram Udyog Yojana (VKGUY)—into MEIS and Service Exports from India Scheme. Further, under the mid-term review of the FTP 2015-20, last year, the MoCI increased the coverage of its MEIS schemes to 7,914 tariff lines, from 4,914 tariff lines, covering MSME/labour-intensive sectors like leather, agri, carpets, handicraft, marine, rubber, ceramics, sports goods, medical and scientific products, telecom equipment. (goo.gl/kbGDo8).
However, what missed headlines during the review is the fact that the FTP review had also highlighted that “Indian industry needs to adjust to eventual phasing out of export subsidy” schemes, going forward. It highlighted a move “towards more fundamental systemic measures rather than incentives and subsidies alone” as a future strategy to boost exports. Having said that, India is under “careful observation” by various countries for its subsidy programmes. Thus, the US’s reaction to India’s export subsidies and the fact that it has challenged India at the WTO comes as no surprise. This is because, as per the WTO’s ASCM, any developing country, which breaches $1,000 GNI per capita for three consecutive years, will have to phase out its export subsidies.
For India, it is the right time to start phasing out specific export subsidies or recalibrate existing subsidies to the WTO-compatible ones. It can restructure subsidies to include the ones with “legitimate development goals, supporting regional growth, R&D, production diversification and implementation of environmentally sound methods of production” as per the proposals under the Doha implementation decision. Meanwhile, India can also request the WTO for extension or differential treatment with regards to specific subsidies, which looks tough at the moment. If not, India may come under scrutiny from various other developed and developing trading partners. It is high time the Indian industry adjusted to a new trade paradigm.
By Udit Kumar & Prachi Priya
Kumar and Priya are corporate economists based in Mumbai. Views are personal.