Set back to Indian Exports to USA: Dispute on Export subsidies

When India is going through a period of economic slowdown, it faces another setback as the World Trade Organisation (WTO) dispute settlement panel has held that the country’s domestic export subsidy programmes under Foreign trade policy are illegal and violates, WTO rules.

The three member dispute settlement panel rejected India’s claims that it was exempted from prohibition on export subsidies under the special and differential treatment provisions of the WTO’s Agreement on Subsidies & Countervailing Measures (SCM).

Background:

In 2018, USA filed a case in WTO alleging that India provided export subsidies, prohibited under the subsidies and Countervailing Measures Agreement (SCM Agreement).

The schemes through which India is providing benefits in the form of subsidies are as below.

1. Export Oriented Units (EOUs)
2. Electronics Hardware Technology Park and Bio-Technology park (EHTP/BTP)
3. Special Economic Zones (SEZs)
4. Export Promotion Capital Goods Scheme
5. Duty Free imports forExporter scheme and Merchandise Exports from India Scheme

In first four schemes, subsidies were in the form of exemptions and deductions from custom duty and taxes, while in the case of fifth scheme, Government issues scrips that are freely transferable and can be used to pay for certain liabilities.

While the panel ruled in favour of US and urged India to withdraw the subsidies without delay.

“Accordingly, we recommend that India withdraw, without delay, the subsidies we have found to be inconsistent with Articles 3.1(a) and 3.2 of the SCM Agreement,” the panel said.

“We conclude that, to the extent the measures at issue are inconsistent with the SCM Agreement, India has nullified or impaired benefits accruing to the US under this agreement,” it added.

While the panel upheld most of the claims made by the US, considered EOU, it rejected some points pertaining to subset of exemptions from customs duties and an exemption from excise duties.

WHAT NEXT?

The WTO dispute settlement panel has asked India to withdraw the concerned export subsidy schemes within a time period of 90 days from the adoption of the report.

It also asked India to withdraw prohibited subsidies under the EOU/EHTP/BTP schemes, EPCG and MEIS, within a period of 120 days and SEZ scheme within 180 days.

However, India has the right to challenge the ruling before the appellate body of the WTO dispute settlement mechanism with regards to export subsidy schemes. India has a month to appeal against the WTO’s order.

On the other hand, India could rework the export incentives to comply with the WTO ruling, but experts indicate that any change to the export subsidies will impact traders and the government will have to immediately look at working out alternatives.

Under the various schemes, domestic companies are currently receiving billions in subsidies on an annual basis. Withdrawing the subsidies may have a significant effect on the performance of such companies.

Implications on Indian Exporters:

The Government will have to amend the Foreign trade policy and withdraw the schemes within 6-9 months in case India looses the case in further appeal. In that sceneraio, Indian Exporters would need to evaluate their long term supply contracts and negotiate the price of their products as they will loose the benefit of taxes/subsidies.