Skip to main content

Legal Capsule by Economic Laws Practice


Global trade wars: An opportunity for India to implement long term reforms

Authors: Sanjay Notani, Parthasarathi Jha


While the United States-China trade war has dominated the debate on global trade order and its future, there has been a silent and calibrated attack on India’s domestic policies at the WTO in recent years by several countries (such as the United States, Canada, Australia and Brazil). These countries have been questioning some of India’s export promotion schemes and domestic support measures for agricultural products such as rice, wheat, cotton, pulse and sugarcane and sugar before the WTO Committee on Agriculture (COA).



WHAT ARE THE KEY ISSUES?

In the ongoing dispute DS 541 (India – Export Related Measures), the United States has challenged certain key export promotion schemes including Export Oriented Units (EOU scheme), Merchandise Exports from India Scheme (MEIS), Export Promotion Capital Goods Scheme (EPCG) and Special Economic Zones scheme (SEZ) that offer tax incentives contingent upon export performance. Article 3.1(a) read with Article 3.2(b) of the SCM Agreement prohibits Member States to maintain or grant subsidies contingent upon export performance.

In the agri-sector, most of India’s domestic support measures that are under scrutiny at the WTO pertain to price support programs. The domestic support measures that pertain to market price support for any product are distortive under the WTO Agreement on Agriculture (AoA).  

These are also known as “amber box” subsidies. The developing countries that did not undertake any reduction commitments during the Uruguay Rounds of negotiation cannot exceed product-specific domestic support in excess of 10% of the value of the production of the basic agricultural product. Annex 3 of the AoA provides a formula to calculate market price support which is essentially calculated against a fixed external reference price that existed in the years 1986 to 1988. Most of the counter notifications issued against India contend that India’s market price support for products such as wheat, rice, cotton, sugarcane, are well beyond the 10% limit when compared to the fixed reference price prevailing in base years (i.e. 1986 to 1988).

WHAT COULD BE THE WAY FORWARD FOR THE GOVERNMENT?

While the jury is still out on the merits of the above concerns, India can take this opportunity to reform its domestic policies such that they are sustainable over the long term. In this regard, the government may consider:
  • Export policy revamp by phasing out some of the current export promotion schemes and adopting new policies that are protected under Annex I of the SCM Agreement: To clarify, any subsidy that is contingent on export performance is prohibited. Annex I of the SCM Agreement lists out illustrations of prohibited export subsidies and also provides that certain types of remission/exemption/drawback of indirect taxes or import charges on inputs to be used in production of goods for export would not be considered as export subsidy if they are not in excess of taxes on inputs levied for home market consumption (i.e. the “excess remission principle” under paragraphs (h) and (i) of Annex I) and satisfy conditions set out in Annex II and some of the existing export promotion schemes such as Advance Authorization that are modelled around the excess remission principle.

However, exports under the schemes are repeatedly countervailed by foreign  countries on the grounds of lack of transparency in input-output norms and verification mechanisms. The government may consider remodeling its export schemes to the extent the same is allowed under Annex I and taking appropriate steps to make the input-output norms and verifications mechanisms objective and transparent. 
  • Domestic support to agri-sector by reforming the total subsidy package: While the amber box support may be problematic, the government may consider reforming its total subsidy package in sync with Annex 2 of the AoA which allows for “green box” expenditures. These subsidies are generally not product-specific, and payments include expenditures with infrastructure, research, environment and direct payments not related to production. As an illustration, the PM-KISAN scheme that guarantees direct cash transfer of INR 6,000 annually to farmers is likely to qualify as a green box support. 22

These reforms are not easy given the social and political sensitivities around the medium, small and micro enterprises and agri-sector. However, in view of the concerns raised at the WTO, the government is looking at policy initiatives to reform some of its existing export subsidies and make them WTO-compliant.23 With the government pro-actively looking at change,  this  also may be the right time for businesses to initiate a dialogue with the government on their economic interests, concerns that they might have and the way forward. 

Popular posts from this blog

VC Interview: Shailendra Singh of Sequoia Capital India

In a recent interview to Venture Intelligence, Shailendra Singh discussed some of the firm’s newer investments in the early stage segment including in the online payments space, the progress at a few existing portfolio companies and the active role the firm is playing in helping its portfolio companies scale and succeed in India and globally. Prior to joining the firm in 2006, Singh was a strategy consultant at Bain & Company in New York and before that, an entrepreneur in the digital media industry.

Venture Intelligence: How does Sequoia go about identifying potential early stage investments in India? Is there anything different you are doing today than, say, a couple of years back?

Shailendra Singh: There is a lot more focus on technology investing and early stage investing. In general, as you might remember a few years ago, we were doing primarily growth investing but in the past 18-odd months, we have had a very strong focus on early stage and that’s continuing. In terms of how…

PE investments in 2018 crosses $33-B to set new all-time high

Big Ticket investments in consumer apps Swiggy & Byju’s dominates year-end activity, even as investments in Core Sectors slow down
Private Equity (PE) investments in India rose to their highest ever figure of $33.1 billion in 2018 (across 720 transactions), according to data from Venture Intelligence (http://www.ventureintelligence.com), a research service focused on private company financials, transactions and their valuations. While PE investments have already surpassed the previous high - $24.3 Billion across 734 deals in 2017 - in the first nine months of 2018, the mega investments in Consumer Internet & Mobile startups such as Swiggy and Byjus towards the year-end, helped the 2018 total vault by 36% year-on-year. (Note: These figures include Venture Capital investments, but exclude PE investments in Real Estate.) The year witnessed 81 PE investments worth $100 million or more (accounting for 77% of the total investment value during the period), compared to 47 such transac…

ChrysCapital and Sequoia Capital India grab two awards at APEX’19 PE-VC Awards

Mumbai, India, Feb 27, 2019: ChrysCapital and Sequoia Capital bagged two awards each as part of the “Awards for Private Equity Excellence” (APEX)event organized by Venture Intelligence. 

ChrysCapital bagged the Private Equity Fund Raise of 2018 Award (Closed $850 M Fund VIII within 4 months of launch) and the Private Equity Investor of 2018 Award (for its Exits from LiquidHub with 4x in dollar terms (within 4 years of its $53-M investment), AU Small Finance Bank with 11.5x return,  Torrent Pharma with 2.95x, City Union Bank with 2.83x, L&T Infotech with 2.56x)

Sequoia Capital India won the Early Stage VCInvestor(the firm registered 10x+ exits in Byjus Classes and SCIOInspire) and VC Fund Raise of 2018 (the firm closed an almost $700-M Fund VI).


Award Winners at APEX'19 PE-VC Awards

The event opened with a Fireside Chat with Kiran Reddy, CEO of SPI Group interviewed by his long time friend and colleague Vineeth Vijayraghavan.



Snapshots of the Awards Ceremony: (L-R) Gopal Srinivasan, …

Private Equity investments up 26% to $10-B in Q1’19

Press Release
Private Equity and Venture Capital firms invested a record $10.1 Billion (across 159 deals) during the quarter ended March 2019, according to data from Venture Intelligence, a research service focused on private company financials, transactions and their valuations. The investment value increased 26% compared to the $8.0 Billion (across 208 transactions) recorded in the same period in 2018 and 39% higher than the immediate previous quarter (which had witnessed $7.3 Billion being invested across 178 transactions). (Note: These figures include Venture Capital investments, but exclude PE investments in Real Estate).
The latest quarter witnessed 23 PE investments worth $100 million or more (with 6 of them $500-M or above) compared to 17 such transactions in the same period last year. Infrastructure related companies (especially in Energy, Roads and Telecom) accounted for 48% of the investment value during the period - accounting for $4.9 Billion (across 16 deals), compared t…

EY tops League Table for Transaction Advisors to Private Equity deals in 2018

Avendus, JP Morgan claim the No.2 & No.3 slots; PwC claims top spot including other advisory services
EY topped the Venture Intelligence League Table for Transaction Advisor to Private Equity Transactionsin 2018. EY advised PE deals worth $4.9 Billion (across 17 qualifying deals) during the period. Avendus ($2.9 Billion across 18 deals) and JP Morgan ($2.2 Billion across 2 deals) took the second and third spot. Barclays ($2 Billion across 3 deals) and KPMG ($1.7 Billion across 7 deals) completed the top five in 2018.
The Venture Intelligence League Tables, the first such initiative exclusively tracking transactions involving India-based companies, are based on value of PE and M&A transactions advised by Transaction and Legal Advisory firms.
EY advised deals during the year include Macquarie's $1.5 Billion investment in NHAI Toll-Operate-Transfer (TOT) Bundle and Blackstone's investment in Indiabulls' commercial assets in Mumbai. Avendus advised deals include the Nasp…