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Why is India challenging WTO verdict on sugar?

Published: 24th Jan, 2022

Context

India recently  filed an appeal with the Appellate Body of the World Trade Organization (WTO) disputing a verdict by the WTO’s dispute settlement panel last month on sugar subsidies. 

  • The WTO’s dispute settlement panel had ruled that India, by subsidising sugar producers, was breaking rules framed under the General Agreement on Tariffs and Trade (GATT) which govern international trade.

Background

Who determines Sugarcane prices in India?

  • Sugarcane prices are determined by the Centre as well as States.
  • The Centre announces Fair and Remunerative Prices(FRP) which are determined on the recommendation of the Commission for Agricultural Costs and Prices (CACP) and are announced by the Cabinet Committee on Economic Affairs(CCEA), which is chaired by Prime Minister.
  • The State Advised Prices (SAP) are announced by key sugarcane producing states which are generally higher than FRP.

What factors are considered for determining FRP?

According to the provisions of the Sugarcane (Control) Order 1966, fixation of FRP of sugarcane is done keeping in mind the following factors:

  • Cost of production of sugarcane
  • Return to the growers from alternative crops and the general trend of prices of agricultural commodities
  • Availability of sugar to consumers 
  • Price at which sugar is sold by sugar producers
  • Recovery rate of sugar from sugarcane
  • The realization made from the sale of by-products such as molasses, bagasse, press mud etc.
  • Reasonable margins for the growers of sugarcane on account of risk and profits.

What are the Agreements of WTO, for which India is being charged as violator?

  • WTO’s Agreement on Subsidies and Countervailing Measures:
    • The WTO Agreement on SCM regulates the use of subsidies, and it regulates the actions countries can take to counter the effects of subsidies.
    • Under the agreement, a country can use the WTO’s dispute-settlement procedure to seek the withdrawal of the subsidy or the removal of its adverse effects. Or the country can launch its own investigation and ultimately charge extra duty (countervailing duty) on subsidised imports that are found to be hurting domestic producers.
  • WTO’s Agreement on Agriculture:
    • It is aimed to remove trade barriers and to promote transparent market access and integration of global markets.
    • The WTO’s Agriculture Committee oversees implementation of the Agreement and provides a forum for members to address related concerns.
  • General Agreement on Tariffs and Trade:
    • GATT traces its origins to the 1944 Bretton Woods Conference, which laid the foundations for the post-World War II financial system and established two key institutions, the International Monetary Fund (IMF) and the World Bank.
    • GATT signed by 23 countries in Geneva in 1947 came into force on Jan 1, 1948 with the following purposes:
      • To phase out the use of import quotas
      • To reduce tariffs on merchandise trade,
  • GATT became the only multilateral instrument governing international trade from 1948 until the WTO was established in 1995.
  • The Uruguay Round of GATT, conducted from 1987 to 1994 culminated in the Marrakesh agreement, which established the WTO.

Analysis

What is the complaint against India?

  • In 2019, Australia, Brazil, and Guatemala complained against India at the WTO arguing that subsidies offered by the Indian government to sugar producers were against the rules governing international trade. 
  • They argued that these subsidies, which include both domestic subsidies as well as export subsidies, exceed the limits imposed by WTO trade rules. According to WTO rules, subsidies cannot exceed 10% of the total value of sugar production. 
  • These countries believe that subsidies offered by India have led to increased production of sugar and caused the price of sugar to drop significantly in the global market. 
  • After two years, the WTO ruled in December that India’s sugar policy was favouring domestic producers through subsidies to the detriment of foreign producers. 
  • The panel recommended that India withdraw its alleged prohibited subsidies under the Production Assistance, the Buffer Stock, and the Marketing and Transportation Schemes within 120 days from the adoption of this report. 

What is India’s stand?

  • India has stated that the WTO’s dispute panel ruling has made certain “erroneous” findings about domestic schemes to support sugarcane producers and exports and the findings of the panel are completely “unacceptable” to it.
  • India has argued at the WTO that it does not offer direct subsidies to sugarcane farmers and thus doesn’t break any international trade rule. 
  • This argument, however, has not convinced other countries who point out that, among other things, the Centre and the State governments in India mandate the minimum price (the Fair and Remunerative Price, or FRP) at which sugar mills can buy sugarcane from farmers. 
  • The high procurement price for sugarcane set by the Government is believed to have led to a supply glut that in turn has caused sugar prices to drop. In fact, several sugar mills are caught in a debt trap as consumer demand for sugar has remained stagnant. 
  • To help the sugar sector, the Centre has even mandated the compulsory blending of ethanol derived from sugarcane with fuels such as petrol and diesel. According to the Food Ministry, the country’s sugar production is likely to remain flat at 30.5 million tonnes in the next 2021-22 season as more sugarcane will be diverted for ethanol making.

Way forward

The WTO Appellate Body’s decision will be considered final on the dispute. In case India refuses to comply with the decision, it might have to face retaliatory action from other countries. This could be in the form of additional tariffs on Indian exports and other stringent measures. 

Such retaliatory measures may benefit producers in these countries but affect consumers who have enjoyed lower sugar prices due to subsidies offered by India.

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