Baseless case against India’s sugar subsidies

Sachin Kumar Sharma / Adeet Dobhal | Updated on September 06, 2019

Australia, Brazil and Guatemala have falsely argued that India has breached the subsidy limit under WTO rules

At a time when the sugar sector in India is in deep distress, at the WTO, a few countries have accused it of providing subsidy support to the extent of the entire value of production of sugarcane. What explains this paradox, what are the main claims against India at the WTO and what is the reality about India’s sugar subsidies? Let us examine these questions.

At the WTO, Australia, Brazil and Guatemala have initiated dispute proceedings against India. The crux of their claim is that through its sugar-related policies, India provides domestic subsidies exceeding 10 per cent of the value of production of sugar — the ceiling of product-specific support under the WTO’s rules on agriculture.

After an unsuccessful consultation process to resolve the contested issues, the WTO established a panel on August 15 this year to examine the compatibility of India’s sugar policies with the WTO provisions on agriculture. It would take 6-9 months for the WTO panel to give its findings in the dispute. What are some of the alleged subsidy schemes that the panel will examine?

Support measures

Besides certain export subsidy measures, the three countries have challenged various domestic support measures of India such as the Fair and Remunerative Price (FRP), the State Advised Price (SAP), interest subvention, production subsidy, buffer stock subsidy, minimum domestic sale price of sugar and state-level measures.

Confining attention to our domestic support, Australia has claimed that on account of just one measure — the FRP policy — India has provided around ₹74,700-crore subsidies. As this accounted for 99 per cent of the value of sugarcane production in 2015-16, India is alleged to have exceeded its permissible limit of 10 per cent. If budgetary support from other challenged measures are considered, the support to the sugarcane sector would exceed the total value of production.

How do these claims of allegedly high subsidies stack up against the prevailing conditions of sugarcane farmers in India?

It cannot be denied that sugarcane farmers in India are currently facing severe distress due to massive cane arrears on account of the FRP. During 2018-19, arrears at the all-India level were ₹19,129 crore. The human cost of these arrears is faced by millions of Indian cane farmers and their families.

India’s contention is that it provides no market price support to the sugarcane sector on account of the FRP policy. What explains the divergence between the claims on sugar subsidies by the three complaining countries and India?

The divergence between India and Australia on product specific support is mainly due to two factors: First, the nature of support under the FRP; and second, the formula used for calculating the support. Let us examine these in detail.

According to India, while the government announces an FRP for sugarcane, this is paid by the sugar mills and not by the government. Further, there is no procurement of sugarcane by the government. In India’s view, both these factors strongly suggest that no subsidy is provided through the FRP policy. A very similar line of reasoning has also been provided by Pakistan in the WTO regarding the support its sugarcane sector.

Outdated methodology

The view of the three complainant countries is that even if the government does not procure sugarcane, the entire produce is eligible to benefit from the FRP. Hence, the FRP constitutes a price-support measure. Further, the subsidy should be calculated by comparing the current administered price with the so-called External Reference Price (ERP), which is based on the international prices of sugarcane during 1986-88.

Although the methodology for calculating the subsidy based on the price-based measure has been specified in the WTO rules, it is clearly biased against the subsidy-granting country in at least two ways. First, it seems rather outdated to compare today’s prices (₹2,750/tonne) with that prevailing three decades ago (₹156.16/tonne). Second, relying on the findings of a previous WTO dispute — on Korea’s beef imports — the complainants used the entire sugar production for calculating the subsidy. This, again, is problematic, as the findings of the Korea beef cases is not automatically applicable in other situations of subsidy. India’s defence finds support from the US, which argued in the Dispute Settlement Body’s meeting that reports of the WTO panel and the Appellate Body do not carry precedental value. This highlights the constraining provisions of the market price support methodology and therefore, the need to reform it.

In case of an adverse ruling by the panels and the Appellate Body, India would have to modify all the measures which are found to be inconsistent with the WTO rules. In absence of present policies, the sugarcane sector, that employs over 50 million farmers, may face an imminent collapse.

Other options

The relevant question arises whether it is feasible for India to explore other provisions of WTO Agreement on Agriculture (AoA) to notify actual budgetary support due to the FRP/SAP policy, instead of using the market price support methodology. Under the AoA, an alternate method is feasible, provided the FRP/SAP is based on a price gap.

The benefit of this approach is that it will reflect the actual level of support to the sugar sector as opposed to exorbitant claims made by complainant members. Further, this approach would provide considerable policy space for the sugar sector without breaching the 10 per cent ceiling. To illustrate, the total budgetary domestic support to sugar sector was only 0.98 per cent of the total value of sugar in contrast to alleged support of 99 per cent of value of sugarcane in 2015-16. Our policymakers need to think seriously along these lines.

In conclusion, Australia, Brazil and Guatemala are using the WTO dispute mechanism to penetrate India’s huge domestic market. These complainant members have exported more than 70 per cent of their respective sugar production in recent years. Combined exports of these three countries comprise about 53 per cent of total global exports of sugar in 2017-18. While India would certainly defend itself ably at the WTO, the policymakers should be prepared with a contingency plan in case the country gets an adverse verdict.

Sharma is Associate Professor and Dobhal is Research Fellow at the Centre for WTO Studies. Views are personal

Published on September 06, 2019

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