By Samuel Joseph and Rahul Mazumdar
Recently in Delhi, a few WTO economies met to discuss trade rules in the context of least developed and developing countries. The G20 is going to meet again this month to discuss, amongst others, this issue.
The last few years have been contentious for India as developed countries, led by the US, have upped the ante. Widely used incentives given to Indian exporters have been challenged on the grounds that India has exceeded the time period within which these benefits could be given. These kinds of export contingent subsidies are prohibited under Article 27 of the WTO Agreement on Subsidies and Countervailing Measures (ASCM) for their trade-distorting effects. The basic tenet is that a subsidy that alters the allocation of resources within an economy should be subject to discipline. Under this, select least-developed and developing countries, whose gross national income (GNI) per capita is below $1,000 a year (at the 1990 exchange rate), are allowed to provide export incentives to any sector with a share below 3.25% in global exports. However, they must stop these if the figure is breached for three straight years.
Given that India’s GNI has continued to remain above $1,000 since 2015, the Merchandise Exports from India Scheme (MEIS), which is extended to 7,914 tariff lines, has come under scrutiny. Phasing out subsidies impacts India’s competitiveness, especially of SMEs accounting for 40% of exports.
As far as product share of exports is concerned, ASCM says that if the export share of a product is at least 3.25% in world trade for two consecutive calendar years, subsidies have to be phased out for that product. India’s textile exports crossed the 3.25% mark in 2010, requiring export incentives to the sector to end by December 2018.
Rough estimates show that 1,063 of 6,110 HS code 6-digits products exported by India have already exceeded 3.25% share in world exports—however, not all necessarily receive subsidies. Taking off subsidies in the case of agriculture products and textiles could impact the sectors significantly—around 33% products by value in agriculture and 88% in textiles have breached the share.
While the dichotomy between developed and developing is a foregone conclusion, amongst the developing economies too there is a stark contrast. For example, in 2017, the per capita GNI of India was just $1,800, much below that of China ($8,690). The figures get more dismal for India, with 21.2% of the population being classified as poor, against 7.9% in China. The extent of poverty in India led to almost 15% of the population remaining undernourished, compared to 8.7% in China. In the 2017 HDI Report, India occupied the 130th position, while China ranked 86th.
Most importantly, India needs to continue to up the ante and confront the dichotomy amongst nations. The special and differential treatment flexibilities under WTO, which include various export subsidies to developing countries, are being disputed by the US, EU, and Japan. Benchmarking development assistance against GNI alone, and not including human development, would defeat the aim of the Development Assistance Committee of 1961, which was convinced of the need to help the less-developed countries extend loans and grants on concessional terms.
Secondly, India needs to continue to impress upon the WTO to have an 8 year phase-out period for export subsidies, from the time a country crosses the GNI threshold, which would be the same benefit as what accrued to countries that had benefitted from the same at the time the WTO’s ASCM was implemented in 1994. This would allow Indian exporters in particular to prepare accordingly.
Lastly, policymakers need to work on a contingency plan to replace existing export incentive schemes, with WTO-compliant, production-oriented schemes targeting R&D and modernisation. This could be in the form of establishing technology upgradation funds or capital incentive schemes. At the same time, embedded taxes and unrebated levies outside GST, like electricity duty, duty on petroleum products, and raw materials in agri and allied activities, should be rebated. In fact, the MEIS can be transformed into an embedded duty neutralisation scheme.
Though India is amongst the largest market globally, its social parameters are not encouraging. Much required is such change in the WTO framework—which is almost 25 years old—as would take cognisance of these contradictions. The new government may also like to resolve the WTO conundrum by introducing appropriate solutions in the new trade policy.
Authors are with EXIM Bank, India Views are personal