WTO can’t force India to cut export subsidies in keeping with its norms as the Appellate Body of WTO’s dispute settlement becomes dysfunctional from December 11, 2019
Finance minister Nirmala Sitharaman’s announcement of a slew of measures to boost exports has come at a time when the sector seems to have lost its way. Since the beginning of the decade, exports have grown at an annual average of just 4%, which includes a slump of over 15% in 2015-16. The recovery, since then, has been patchy, and in the previous fiscal, exports grew by an unsatisfactory 8%. In the first five months of the current fiscal, exports have declined by nearly 2% on a year-on-year basis. With the prospects of the global economy looking gloomy, Indian exporters may face serious headwinds going forward.
The finance minister’s announcement, thus, holds out some hope for the struggling export business. The measures are aimed at partly reworking the export incentives regime, introducing export facilitation measures, and providing a roadmap to address the critical issue of conformity of product and process standards in international markets.
India’s export incentives regime came into focus after India was barred from using them by the Agreement on Subsidies and Countervailing Measures (ASCM) of the World Trade Organisation (WTO), after the country’s per capita GNP exceeded $1,000. India continued to use its subsides, like the Merchandise Exports from India Scheme (MEIS), arguing that the ASCM allowed a transition period of eight years to developing countries to remove export subsidies. However, the United States has challenged India’s arguments regarding the use of these export incentives before a WTO dispute settlement panel.
The finance minister has announced a new export incentives scheme, Remission of Duties or Taxes on Export Product (RoDTEP), which will replace MEIS. The announcement says that the scheme will “more than adequately incentivise exporters than existing schemes put together”. The minister has also indicated that the revenue foregone for implementing RoDTEP would be Rs 50,000 crore.
Whether this new scheme will be consistent with the provisions of the ASCM is a moot point. This is because the definition of subsidies that WTO members are not allowed to use, the so-called “prohibited subsidies”, are subsides that are “contingent, in law or in fact, whether solely or as one of several other conditions, upon export performance”. An example of such “prohibitive subsidies” given in the ASCM is “exemption or remission, in respect of the production and distribution of exported products, of indirect taxes in excess of those levied in respect of the production and distribution of like products when sold for domestic consumption”. The provision becomes effective if a product receives incentives when it is exported, and doesn’t when it is marketed in the domestic market; in other words, exported products are preferred over domestically marketed products for the grant of incentives. Thus, RoDTEP can also be challenged in the dispute settlement body of the WTO, as MEIS has been.
There are similar concerns about the Interest Equalisation Scheme (IES) on pre- and post- shipment rupee export credit, providing interest equalisation at 3% to exporters on 416 products, and for all micro, small and medium enterprise (MSME) exporters. The Export Promotion Council of India (EEPC) had given a useful suggestion that IES should be made available to the entire MSME sector, so that the export linkage of the scheme is done away with, thus making it compatible with the provisions of the ASCM.
However, the good news for India is that WTO will be unable to force India to comply with its commitments, should the dispute settlement panel in the on-going dispute with the United States rule that India is in violation of the ASCM by granting export incentives. This is because the Appellate Body of WTO’s dispute settlement body, which enforces the decisions on WTO members, will become dysfunctional from December 11, 2019.
While the government could safely provide export incentives without the encumbrances of the WTO for the reasons stated above, there is a need for an in-depth assessment as to whether export promotion schemes are justified. This is needed for two reasons: One, export incentives have been in place for a very long time, but India’s export performance has remained an area of concern. Two, the revenues of the central government are under considerable stress, and, therefore, the benefits of the revenue foregone on export incentives need greater scrutiny now.
Improving performance of the ports for reducing transactions cost has been on the agenda of successive governments for at least two decades. The critical aspect, here, is investments for port modernisation, including the timely implementation of the Sagarmala project. By doing so, export business would get the intended boost.
The finance minister’s announcement has possibly flagged the most critical area for exports, namely, compliance with standards. Market access barriers have shifted from the conventional instrument of tariffs to standards compliance, and this has hurt Indian exporters. The inability of domestic producers to meet the exacting standards in international markets is a well-established fact. The finance minister has proposed a roadmap for the adoption and enforcement of standards, which seems to be the way forward. It may, however, be pointed out that the issue of standards has been discussed by the Department of Commerce on several occasions in the past. The critical issue now is to examine the non-implementation of past recommendations, in particular, the institutional and other bottlenecks.
Standards must be enforced in every sector, and, therefore, the finance minister’s focus on only the engineering sector is somewhat inadequate. This appears more so because exports of agricultural, and agro-processed products are among the worst performing in terms of standards compliance. Late last year, the government announced the Agriculture Export Policy, in which it was admitted the country was unable to export its vast horticultural produce due to lack of uniformity in quality and standardisation, among others reasons. The potential that India has in improving its exports of agricultural products has long been recognised. Critical support from the government will help realise this potential.
Professor, Centre for Economic Studies and Planning, JNU. Views are personal