With the US triggering the dispute at WTO on export subsidies, policymakers should focus on strengthening the trade-related infra and investing in trade facilitation measures to boost the sector.
After keeping India’s export promotion schemes under its scanner for a number of years, the United States Trade Representative (USTR) finally went a step ahead last week to lodge an official complaint to the Dispute Settlement Body of the World Trade Organization (WTO). In its complaint, the USTR has targeted the five largest export promotion schemes that are currently in place, namely, the Export Oriented Units Scheme and sector specific schemes, including Electronics Hardware Technology Parks Scheme, Merchandise Exports from India Scheme, Export Promotion Capital Goods Scheme, Special Economic Zones and Duty Free Import Authorisation Scheme.
The nub of the complaint lodged by the USTR is that India is violating the provisions Articles 3.1(a) and 3.2 of the Agreement on Subsidies and Countervailing Measures (ASCM), which do not allow WTO members to use export subsidies. Until 2015, this was a non-issue since India was among the 20 developing countries included in Annex VII of the Agreement that were allowed to use export subsidies until their per capita GNP had crossed $1,000, at constant 1990 dollars, for three consecutive years. These Annex VII provisions were an exception to the special provisions for all other developing countries (the so-called “special and differential treatment”) for phasing out export subsidies. All other developing countries were allowed a period of eight years from the entry into force of the WTO Agreement, i.e., 1995, to eliminate export subsidies.
As per the calculations of the WTO Secretariat, India’s GNP at constant 1990 dollars had reached the threshold of $1,000 for the three consecutive years, ending in 2015. This was revealed in a note prepared by the WTO Secretariat in 2017. A 2001 report of the Chairman of the Committee on Subsidies and Countervailing Measures (CSCM), which is considered as the document providing the methodology for implementing Annex VII of the ASCM, has interpreted that countries like India are required to discontinue using export subsidies immediately after they cross the above-mentioned threshold.
India, and several other Annex VII countries, has, however, been making a case for an eight-year transition period for phasing out export subsidies, the same as that enjoyed by developing countries not included in Annex VII. In a submission made in 2011, these countries argued that Annex VII countries should enjoy the provisions applicable to the other developing countries, which were required to phase out their export subsidies within eight years of joining the WTO. Additionally, they were allowed to enter into consultations with the CSCM, not later than one year before the expiry of the transition period, to determine if there was a justification for the extension of this transition period, after examining all of their relevant economic, financial and development needs. But, this proposal, like all other proposals made as a part of the Doha Round negotiations, has remained unaddressed.
What would be the impact of the elimination of India’s five major export promotion schemes? In FY17, the Indian government had spent close to Rs 42,000 crore on these five export schemes, nearly 72% of the entire outlay on export promotion. The largest amount, almost a fifth of the total, was spent on Merchandise Exports from India Scheme (MEIS), which was introduced by the present government on April 1, 2015. The MEIS seeks to promote exports by offsetting the infrastructural inefficiencies faced by exports of specified goods , and provide a level playing field. The scheme initially covered 4,914 tariff lines, and was subsequently increased to cover 7,914 tariff lines. In recent months, there has been a two-fold expansion of the scheme, increasing the total outlay on the scheme to nearly 60% over the level in 2016-17. The first of these was to enhance the MEIS rates of readymade garments from 2% to 4%, and secondly, MEIS benefits for all labour intensive and MSME sector products were increased by an additional 2%. The latter component was extended to a number of sectors, ranging from agriculture, leather, and carpets, on the one hand, to rubber products, medical and scientific products and electronic and telecom components, on the other. Given the level of spending, the immediate withdrawal of export incentives could introduce negative sentiments in some sectors.
It is a long accepted view that export incentives are not the best way of promoting exports, especially because, more than anything else, it provides fillip to rent seekers. The Foreign Trade Policy, 2015, as well as its mid-term review, revealed that the government was aware of the need to reduce these incentives; in other words, there is some degree of preparedness. Therefore, this is the opportune moment for the policymakers to shift their focus on areas like strengthening the trade-related infrastructure and investing in trade facilitation measures that would help in delivering better results on the export front. With the US triggering the dispute, the shift in the government’s priorities could come much faster.