WTO and Subsidies

WTO dispute settlement panel ruled against India in a trade dispute over its subsidies to exporters under various schemes, stating that the subsidies given are not compliant with the WTO’s norms.

US challenged export subsidies provided by India under 5 sets of schemes which violated WTO’s Subsidies and Countervailing Measures (SCM) Agreement that prohibits subsidies that are contingent upon export performance. 

• 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)
• Merchandise Exports from India Scheme (MEIS)

What are export subsidies?

• foreign trade policies undertaken by the governments to encourage export of goods and discourage sale of goods on the domestic market through direct payments, low-cost loans, tax relief for exporters, or government-financed international advertising.
• seen as trade-distorting as they intend to increase the share of the exporter in the world market at the cost of others.
• may make the world market prices more unstable
• protectionist measure to promote inefficiencies and lead to high costs to consumers in subsidizing country
• WTO prohibits most export subsidies directly linked to volume of exports, except for least developing countries (LDCs).

Rationale behind export subsidies

• Domestic Industrialization & local Employment
• Protecting Infant Industry: while it matures and develops to be able to compete with foreign imports
• Support to least developing countries: where there is little corresponding production of the subsidized products or substitutes.
• Low Foreign Wages: By subsidizing exports of domestic production, developed countries tend to "level the playing field" in international market compared to compete with the goods from countries with lower labour wage costs.
• Unfair trade: Foreign imports might be sold at lower prices in the domestic economy because of unfair trade practices, such as "dumping. Export subsidies intend to counter these.

Ruling & impact on India

• WTO panel recommended that India withdraw certain “prohibited subsidies”
• The panel ruled that India had already graduated from the special and differential treatment provision that was originally under SCM Agreement and now, prohibition on export subsidies was applicable on it.
• It also denied any further ‘transition period’ available to India to stop these subsidies.

Impact on India

• put at risk India’s subsidy programme worth $7 billion and could impact producers of steel products, pharmaceuticals, chemicals, etc. who were the major beneficiaries of the subsidy programme.
• push countries to question India over its policies on sugar, pulses and skimmed milk. For e.g. Concerns on India offering soft-loans to sugar mills and doubling import duties on sugar. This might aggravate the farm income crisis in India.

Way Forward

• India will appeal against the ruling, which may prevent the adoption and implementation of the panel’s decision.
• India can also tweak schemes to support exports while making them more WTO-compliant. E.g. by providing tax concessions (like concessions on GST) on parts & components used in the production of the exported product.