Economics Prelims cum Mains

How India subsidised certain exports, why WTO panel ruled against it

In News

  • A World Trade Organisation (WTO) panel recently ruled against India in a trade disputeover its subsidies to exporters under various schemes.
  • If the panel’s ruling is adopted, the decision is expected to put at risk export subsidies claimed to be worth over $7 billion.
  • These subsidies benefited producers of steel products, pharmaceuticals, chemicals, information technology products, textiles and apparel.

Subsidies under question

  • The US in March 2018 challenged export subsidies provided by India under five sets of schemes
    • Export-Oriented Units, Electronics Hardware Technology Park and Bio-Technology Park (EOU/EHTP/BTP) Schemes
    • Export Promotion Capital Goods (EPCG) Scheme
    • Special Economic Zones (SEZ) Scheme
    • Duty-Free Imports for Exporters Scheme (DFIS) and
    • Merchandise Exports from India Scheme (MEIS).
  • The export subsidies under most of the challenged schemes, except for MEIS, consist of exemptions and deductions from customs duties and other taxes.
  • The subsidies under MEIS consist of government-issued notes (“scrips”) that can be used to pay for certain liabilities vis-à-vis the government and are freely transferable.

Why was India taken to the dispute settlement panel?

  • The US had alleged these schemes violated certain provisions of WTO’s Subsidies and Countervailing Measures (SCM) Agreement that prohibit subsidies that are subject to export performance.
  • According to the agreement, India was only exempt from this provision until its Gross National Product per capita per annum reached $1,000.
  • The US argued these subsidies were a detriment to American workers and manufacturers.
  • When consultations with India did not work out, the US in May 2018 requested that a dispute settlement panel be set up.

What was India’s defence?

  • India argued that certain provisions under the SCM Agreement, excluded it from the provisions prohibiting export subsidies.
  • It also argued that all the challenged schemes, except the SEZ scheme, adhered to a provision of the SCM Agreement.

On what grounds did the panel rule against India?

  • According to the panel, the US was able to show that India had foregone revenue through exemptions and deductions from duties and other taxes to the benefit of exporters in most schemes.
  • In the case of MEIS, it was able to establish that exporters benefited from a direct transfer of funds through the provision of scrips.
  • The panel found that the US had established that most of the measures under the other four schemes (EOU/EHTP/BTP, EPCG, SEZ and DFIS) were “contingent in law upon export performance”.
  • It also found that, as there was no dispute that India had graduated from the special and differential treatment provision.

Decision of the panel

  • It recommended that India withdraw certain “prohibited subsidies” as follows
    • Under the DFIS scheme within 90 days
    • Under the EOU/EHTP/BTP, EPCG and MEIS schemes within 120 days and
    • Under the SEZ scheme within 180 days
  • It concluded that “no further transition period” was available to the country to stop these subsidies.
  • However, not all the US’ arguments were accepted. The panel rejected some of its claims regarding certain customs duty exemptions provided under the DFIS scheme and excise duty exemptions under the EOU/EHTP/BTP schemes.

Possible way around the decision

  • While there will be no retrospective impact, India would have to stop providing the subsidies in this form.
  • However, some experts say India can tweak the schemes to support exports while making them more WTO-compliant.
  • According to experts, India can do so by providing tax concessions (like concessions on GST) on parts and components used in the production of the exported product.
  • Further, the government has already begun work on making some of the debated schemes more WTO-compliant.
  • In September, it announced the Remission of Duties or Taxes on Export Product to replace the MEIS as a more WTO-compliant scheme.
  • The overall duty foregone under this scheme is expected to be “more or less the same” as MEIS (around Rs 40,000 crore-45,000 crore annually).
Image result for WTO

Way Ahead

  • India plans to appeal the report on some aspects of law and legal interpretation before the panel’s report is adopted within 60 days of it being circulated with all members.
  • While the US is expected to push for early adoption, if India’s notice to appeal the report is submitted before this, it stands a chance of challenging this ruling.
  • Further, the dispute panel’s appellate mechanism is expected to become dysfunctional after December 11 when two of the three remaining members of the body will retire.
  • Due to which, India may not be obligated to implement the panel’s current ruling. This is because, if its appeal is submitted on time, it will join a pipeline of 10 other appeals in other WTO dispute cases that have been filed since July 2018.
  • Until those appeals are cleared and India’s own appeal is resolved, the country will be under no legal compulsion to make the changes recommended in the dispute settlement panel’s current report.

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