India will ask the World Trade Organisation (WTO) for a reasonable time frame of eight years to phase out its export subsidies, as the country has breached an income threshold stipulated by the multilateral body to end such sops, official sources told FE. According to the special and differential provisions in the WTO’s Agreement on Subsidies and Countervailing Measures, when a member’s per capita gross national income (GNI) exceeds $1,000 per annum (at the 1990 exchange rate) for a third straight year, it has to phase out its export subsidies. There is, however, no clarity over the time-frame of ending such subsidies, said an official. But, even then, the country won’t be in a position to introduce a fresh direct export subsidy, some analysts said. According to the WTO data, India crossed the per-capita GNI threshold in 2013, 2014 and 2015. The 2015 figures, released by the WTO recently, revealed India’s per capita GNI rose to $1,178 in 2015 from $1,051 in 2013.
“We are reasonably convinced that we deserve an eight-year phase-out period. Such subsidy programmes can’t be stopped over night, and a country like ours, with a lot of complexities, needs a reasonable period for compliance,” said an official. “In any case, the export subsidies offered by us are like peanuts, compared with those offered by the developed world in various sectors some way or the other, despite having achieved very high income levels,” he said. Importantly, trade analysts say countries like Indonesia and Sri Lanka had breached the GNI threshold before India did and are yet to stop such subsidies.
The schemes that could face the heat include Merchandise Exports from India Scheme (MEIS), Export Promotion Capital Goods (EPCG) scheme and interest equalisation scheme for the textiles sector under the Foreign Trade Policy (FTP) 2015-20. Globally, zero-rating of exports are a norm and this is WTO compatible, as the idea is to neutralise the tax content in export items, and not to subsidise them. Under the Goods and Services Tax, this is to be achieved via a refund mechanism, as the tax’s structure doesn’t allow exemptions. Zero-rated supplies under the GST law includes export of goods and/or services and supply of goods and/or services to a SEZ developer or an SEZ unit.
Concessional/nil import tax on capital goods under the EPCG scheme is linked to specified export obligations. Although, New Delhi treats them as WTO-compatible, the US and EU reckon the duty relief is an export-contingent subsidy that is actionable under the WTO. In the mid-term review of the Foreign Trade Policy (2015-20), slated to be announced in October, the government is unlikely to suspend abruptly any export subsidy already promised under various schemes, to give exporters the much-required time to adapt to a new regime, said another official.
Under the MEIS, the government doesn’t provide any cash subsidy but rewards merchandise exporters with duty credit scrip at 2%, 3% or 5% of their export turnover, with subject to conditions. The potential revenue forgone by the exchequer on account of this scheme is estimated at `22,000-23,500 crore a year. The government has budgeted `1,100 crore for the interest equalisation scheme, mainly for MSME exporters. The EPCG scheme provides for capital goods imports at zero duty, subject to an export obligation of six times of the duty saved, to be fulfiled in six years from the issue date of authorisation.
The obligation to phase out the subsidies comes at a time when India’s exports of goods and services, as a proportion of its gross domestic product, have hit a six-year low of 19.4% (in Q1, FY18) in real terms despite growing over the past 12 consecutive months following one-and-half-years of contraction. The rupee remains over-valued by around 20% against a basket of 36 currencies of major export partners, and logistics costs are much higher than emerging market peers’.
The country’s merchandise exports dropped for two straight years before inching up a modest 4.7% to $274.64 billion in the last fiscal. However, the recovery still remains uneven, with growth rates having slowed between April and July before picking up again to just over 10% in August.