In a report on developments in India’s trade policy on the occasion of the seventh Trade Policy Review of India during January 6 – 8, 2021, World Trade Organization (WTO) has noted “export restrictions and import prohibitions imposed by India seem to be in contradiction with its main trade policy goal, of increasing its share of global exports from 2% in 2015 to 3.5% by 2020”.
Four areas which have come under WTO focus are (i) high import tariff and frequent changes thereof, minimum import prices and other import restrictions; (ii) export taxes, export restrictions/licensing; (iii) frequent use of anti-dumping measures; (iv) high subsidies and need to reduce these to free up resources for investment particularly in development of the infrastructure.
These need to be carefully looked into not just because these have been flagged by the WTO but also keeping in mind India’s own interest of doubling its GDP (gross domestic product) to US$5 trillion by 2024-25 which requires inter alia to doubling its exports from the current over US$500 billion to US$1 trillion and increasing agri-exports 2.5 times from US$40 billion to US$100 billion.
As regards (i), the simple average applied MFN tariff (Most Favoured Nation import tariffs applied on all WTO member countries) increased from 13% in 2014-15 to 14.3% in 2020-21. The average tariff of non-agricultural goods increased from 9.5% in 2014-15 to 10.8% in 2019-20. On the other hand, the average MFN applied tariff on agricultural goods after having declined from a high of 36.4% in 2014-15 to 34.8% in 2019-20, rose back to 36.5% in 2020-21.
Within agriculture, alcoholic beverages, animals and their products, fruit, vegetables and plants, coffee, tea etc attract highest tariffs of 60% and above. In particular, higher import tariff on wheat and sugar have come under scanner wherein WTO argues that India’s higher bound tariff rates (this is the maximum permissible duty that a member country can impose under bound rate agreement; for instance, in case of wheat, its is 80%) permit the adjustment of applied tariffs.
India’s considerably high import tariff on agricultural products is justified on the basis of affording protection to farmers especially million of small and marginal farmers. The argument looks appealing. However, on a close look, it turns out that this protection is not for farmers but helps traders. This is because under the extant archaic arrangements for marketing of agri-produce, a whopping 94% is picked up by the latter from the former at a fraction of the MSP (minimum support price). These traders in turn, sell the products to consumers at much higher price which in most cases even exceeds the MSP.
(The three farm laws enacted by Modi – Government in September 2020 have the potential of helping farmers realize much higher price from sale of their produce but for now, their implementation has been put on hold by the Supreme Court; courtesy, agitation by commission agents/traders from one or two states. So, the status quo continues.)
In this backdrop, a high duty on imported agri – products by correspondingly increasing the cost of import only helps the traders by charging higher price from consumers thereby boosting their profit margin. India can consider lowering of import tariff and leverage this to garner tariff reduction from importing countries – under bilateral as well as multilateral trade agreements – which will help boost Indian exports across a wide spectrum of commodities including agri – products. Meanwhile, efforts should be made to get the hold on three farm laws removed so that farmers are geared to tap the unlimited opportunities offered by the global markets.
Coming to (ii), the Government takes recourse to export taxes/restrictions/licenses mostly in agricultural commodities and other essential/sensitive items to ensure that domestic availability is not affected especially in situations of scarcity (say, due to decline in production). Considering that such restrictions are imposed in a totally unplanned manner (being a knee-jerk reaction to short-term developments), this diminishes the predictability of the trade policy regime and sends a wrong signal to the global community.
It comes in the way of Indian exporters building long-term relationship with their clients in importing countries and bring about quantum jump in exports on a sustainable basis.
On (iii), the WTO has noted that India continues to be an active user of anti-dumping measures and “it is currently the main user of anti-dumping measures in the WTO”. During 2015-19 (as of December 2019), India initiated 233 investigations, as opposed to just 82 in 2011-14 (up to June 2014). Most of the investigations initiated during the review period relate to products originating in China, followed by those originating in the Republic of Korea and the EU-28. At the end of 2019, India had imposed 254 anti-dumping duties.
Anti-dumping duty (ADD) is a tariff imposed on imports manufactured in foreign countries that are priced below the fair market value of similar goods in the domestic market. The government imposes ADD on foreign imports when it believes that the goods are being “dumped” – through the low pricing – in the domestic market. Levied on the invoice value of the goods, the duty is priced in an amount that equals the difference between the normal costs of the products in the importing country and the market value of similar goods in the exporting country or other countries that produce similar products.
The objective behind this is primarily to protect local businesses and markets from unfair competition by foreign imports. Considering that countries such as China are resorting to reckless dumping, the action of Indian Government in initiating investigation leading to imposition of ADDs – following procedure as prescribed by WTO – is perfectly justified. Simply because the number of such cases are large can’t be taken to mean that India has done anything wrong.
As regards (iv), Under the Agreement on Agriculture (AoA) of the WTO, a developing country cannot give aggregate measurement support (AMS) — an acronym for subsidies – in excess of 10% of the value of its agricultural production. The AMS includes “product-specific” subsidies and “non-product specific” viz. subsidies on agricultural inputs like fertilizers, seed, irrigation and power. The “product-specific” subsidy is the excess of MSP paid to farmers over the External Reference Price (ERP) multiplied by the quantum of agri-produce. Whereas, the MSP is taken for the relevant year, the ERP is the average of the international price prevailing during 1986-88 fixed in rupee terms.
After remaining within the 10% threshold for long, in recent years AMS given by India has slightly exceeded it. For instance, during 2018-19 marketing year, value of its rice production was US$ 43.67 billion and for that it provided subsidies worth US$ 5 billion. This works out to 11.4% of the value of rice production. Given the further increase in MSP thereafter and the Government under pressure to hike it further, the slippage could become more.
There are flaws in the methodology prescribed under AoA for calculating AMS; for instance, ERP is taken for the year 1986-88 even as MSP is for relevant year say, 2018-19. Making a correction for these flaws (subject to consensus amongst members at WTO), Indian subsidy will remain within the 10% threshold. However, there is need for better targeting of subsidy, eliminating misuse and curbing wastages. Instead of subsidizing agri-inputs and MSP to farmers, the Government can consider direct benefit transfer (DBT) to farmers. This will also free up resources for investment in infrastructure.
To conclude, of the 4 areas flagged by the WTO, except in case of anti-dumping measures where one can’t find fault with the actions taken by India, in the other three, the Government needs to bring about a fundamental change in its approach. While, fixing tariff it needs to shed its overly protectionist stance; instead of continuing with hike (since 2014, it has raised import duty on 3,500 items), it should aim at lowering duties including on agri-items. It also needs to reduce to bare minimum restrictions on export and import (or non-tariff barriers as these are called in WTO jargon).
This will make the policy environment conducive and more predictable thereby laying the foundation for sustainable growth in exports. There is no reason for lower import tariff to create any scare for the domestic industry and agriculture as there is huge scope for reducing cost of production by reducing cost of power, fuel, logistics, capital etc. If only these costs are lowered, “Made in India” products can compete with the lowest priced goods from anywhere in the world.
India can achieve US$1 trillion target for exports including US$ 100 billion for agri-exports only by proactively engaging with other countries and major economic groupings such as Regional Comprehensive Economic Partnership (RCEP) which has a combined GDP of US$30 trillion of which China alone has plans to import goods and services worth $12 trillion over five years. Modi – government should reconsider its current stance on joining RCEP besides being a part of other groups such as EU.