As incomes rise, exporters pay the price of development

The good news is that India’s per capita income has gone up, and stayed up. The bad news, going by a recent notification of the World Trade Organization (WTO), is that the country can no longer offer export subsidies, as its per capita gross national income (GNI) has crossed $1,000 for the third year in a row.

“The consequence of India graduating out of the list of poorer countries eligible to give export subsidies is serious. It will be open to penal action from other countries, including imposition of countervailing duties on its exports if it does not do away with its incentives soon,” an official told BusinessLine .

The development could deal a further blow to exports from the country, which posted weak growth last year after two consecutive years of decline due to low demand.

“The first scheme that could come under the WTO scanner is the popular Merchandise Export from India Scheme (MEIS), which provides a direct subsidy to exporters based on the value of exports,” the official said.

Almost all exports, ranging from textiles to agriculture products, stand to be affected as the scheme covers more than 7,000 items and costs the exchequer around ₹23,500 crore a year.

A team of officials from the Permanent Mission of India at the WTO held discussions with Commerce and Industry Minister Suresh Prabhu, Commerce Secretary Rita Teaotia and officials from the Trade Policy Division on how the situation could be tackled.

“The government knew all along that the special exemption that allowed India to give export subsidies was likely to go in 2017. In fact, the Foreign Trade Policy also mentions this. It should have prepared the exporters for this,” a trade economist from a Delhi-based thinktank said.

Other schemes that could also get affected, subject to interpretation of the WTO rules, are the interest subvention scheme under which banks charge lower interest on loans given to exporters, which is offset by the government, and the duty-drawback scheme where exporters are refunded duty paid on inputs.

“The WTO rules also consider the revenue that is otherwise due to the government but is foregone or not collected, such as tax credits, as subsidy. Some members may also insist that India’s interest subvention scheme and duty-drawback scheme qualify as subsidies,” said the trade economist.

The Commerce Ministry, which is supposed to announce the mid-term review of the Foreign Trade Policy this month, will be in a fix about whether to make any addition to the MEIS scheme as it could draw immediate criticism from other countries. It would also find it difficult to replace the existing MEIS schemes with production subsidies, which are allowed by the WTO.

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