By: Mukesh Butani | Published: November 18, 2019 4:34:32 AM

While the trade policy mandarins of the GoI will look for solutions, the message is clear—time is up for dole-outs for promoting exports, and competitiveness of exports must be driven by quality.

On October 31, a panel constituted under the World Trade Organisation’s (WTO’s) dispute settlement mechanism issued a ruling in response to a complaint filed by the US government against Indian export incentive schemes. In focus was WTO’s covenants on Subsidies and Countervailing Measures (SCM), which prohibit subsidies contingent upon (i) export performance, and (ii) use of domestic over imported goods. SCM carries an illustrative list of such prohibited subsidies. The WTO panel’s decision is based upon an appraisal of the factors determining whether a given policy measure is a prohibited export subsidy.

Accepting most allegations levelled by the US, the panel concluded that fiscal concessions and incentives offered by the government of India (GoI) under its Foreign Trade Policy (FTP) to export oriented units (EOUs), electronics hardware technology parks (EHTPs), bio-technology parks (BTPs), export promotion capital goods (EPCGs), and duty-free imports for exporters scheme (DFIS) constitute “subsidies contingent on export performance”, and thus violate SCM. The panel also declared that GST exemptions extended to special economic zones (SEZs) cry foul of SCM’s mandate. Finally, the panel took objection to tradeable duty credit scrips issued to manufacturing exporters under merchandise exports from India scheme (MEIS), as covered under prohibited export subsidies.

Though WTO has an Appellate Body (AB) which reviews panel rulings, practically, the appellate forum is dysfunctional in view of the imminent retirement of members, and stalemate over appointment of new members. It is common knowledge that the US has vetoed appointment of any new member to the AB. Thus, the panel’s ruling, barring technicalities, is effectively final.

The panel’s ruling puts the focus back on a long-drawn difference between the two governments, adding to the strained trade ties. Its timing pushes India into a precarious situation with respect to efforts to put the economy on a stable growth path as the panel’s findings restrict avenues to promote exports.

Although the EOU, EHTP, and BTP schemes cater to different sectors, they were designed to allow tax-free procurements by enterprises committed to exporting their entire production. While these continue to find place in the FTP, their relevance has come under question since the transition to the Goods and Services Tax (GST) regime. Nonetheless, the panel’s findings is vis-à-vis each such scheme demonstrates that, irrespective of the design and mechanics, they qualify as export incentives, which have been prohibited.

As regards MEIS, policy makers were alive to its vulnerability given the commerce ministry’s desire to replace it with other schemes. The current FTP will expire in a few months, and other options will have to be explored to stay with the panel’s determination of acceptable parameters while incentivising exports.

The real downer comes from the panel’s ruling on SEZs. The 2005 enactment was dubbed as a game-changer—India’s fast-track path to compete with China on export performance. Successive dilution of benefits by way of amendments like introduction of minimum alternate tax and sun-set clause for tax holidays, conditionality attached to indirect tax exemption under the GST laws, and the recent Ordinance on 15{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} corporate tax rate for new manufacturing entities, etc, pose threats to the attractiveness of SEZs. The panel’s ruling incrementally disincentivises SEZs as a business choice.

The panel’s findings reject India’s contention that it is a developing nation. According to the panel, this status, and the exemption, expired in 2003; hence, India is obliged to follow the SCM stipulations. Its finding resonates with recent actions of the US administration to end the preferential duty regime for India. The panel’s ruling has wide ramifications for the exceptions availed by India under other the WTO agreements available to developing countries.

It is easy to get entangled in legal options, and deal with the bruises inflicted by the panel’s findings. While India is likely to pursue legal remedies, adverse findings of the panel should not lead to any knee-jerk reaction. Instead, India must take it as an inspiration to reform its trade policy. The issues are further compounded by the fact that GoI has just refused open access to ASEAN and other significant markets by declining to join the RECP which (had India joined) would have covered half of the global population.

While the trade policy mandarins of the GoI will look for solutions, the message is clear—time is up for dole-outs for promoting exports, and competitiveness of exports must be driven by quality.

These developments must embolden GoI to shed its inclination for half-hearted or temporary solutions, and instead undertake measures that have a lasting impact. Policymakers must start afresh, challenge all assumptions, and undertake detailed analysis of business and trade policies to invigorate them with qualitative superiority and cost-effectiveness. Perhaps, it is time for announcement of a comprehensive ‘New Industrial Policy’ that sets GoI’s long-term vision, and enlists concrete steps to revolutionise industrial growth.

Bottlenecks attributable to policy must be institutionally addressed. Entrepreneurship must be promoted to ensure the adoption of a global outlook.

Stalled labour law reforms must receive undivided attention. The present state of relations between industry and workmen needs recalibration. The recent Honda Manesar-plant closure, and the employee action crisis at Maruti-Suzuki in 2012, for instance, show that we have a long distance to cover. We have been hearing that consolidation and modernisation of all labour laws is on the anvil. Currently, only wage-related laws have been addressed (which oblige minimum wages even for the unorganised sector). However, a review of the Industrial Disputes law, owing to which businesses find their bargaining power stifled, is overdue.

One radical reform can be to obviate all differentiating criteria that plague the fiscal space, and instead promote an exemption-free economic order, akin to the September 2019 measures in the direct tax space. Simultaneously, the myriad rate-slabs in GST can be merged into three rates—standard, merit, and demerit. This will ensure that business decisions are no longer driven by short-sighted tax savings, and genuine business opportunities alone are pursued. Businesses need to appreciate that the role of the government should be confined to providing infrastructural support. Cost-competitiveness owing to tax reasons is, at best, a temporary measure that artificially influences markets, but can never be a sustainable proposition.

Managing partner, BMR Legal