The Far-Reaching Ramifications of WTO’s Ruling Against India’s Sugar Subsidies

By Biswajit Dhar | Briefing Paper # 49 | January 10, 2022

After they forced the government to repeal the three controversial farm laws, and thus to ensure the continuation of the minimum price support mechanism, India’s farmers face yet another challenge, this time from World Trade Organization (WTO). On 14th December, a WTO dispute settlement panel concluded in its report that India was violating its commitments under the Agreement on Agriculture (AoA) by granting price support to sugarcane producers and export subsidies to sugar during the period 2014/15 to 2018/19.

This is the first time that the government’s policies to support the country’s farmers have been challenged in the WTO. The implications of this dispute can be far-reaching for India’s agricultural subsidy regime.

The dispute settlement panel was established in 2019 after Brazil, Australia, and Guatemala had complained to WTO’s Dispute Settlement Body that the Fair and Remunerative Price (FRP), the minimum price that sugar mills must pay to the farmers, as well as the State Advised Price (SAP), which sugar mills located in the States must pay to their farmers for delivering sugarcane to the mills, were WTO-incompatible. FRP is fixed based following the recommendations of the Commission for Agricultural Costs and Prices in consultation with the State Governments and the sugar industry associations, while the State governments fix SAP. 13 WTO members, including Canada, China, the European Union, Indonesia, Japan, the Russian Federation, and the United States, joined the dispute as third parties.

India’s Support Measures Scrutinised

The complainants targeted the Central and 12 State governments’ measures between 2014/15 to 2018/19 to ensure unhindered implementation of the FRP/SAP mechanisms. These measures, according to complainants, were in contravention of India’s commitments under the AoA. Their view was that while India had agreed to limit the subsidies granted to any agricultural commodity to 10 percent of its production value (the de minimis level), subsidies on sugar during the years mentioned had exceeded this threshold. Therefore, India had violated its commitments under the AoA. This was the basis of initiating the dispute against India.

In addition, the complainants argued that the Central Government and State Governments were also granting subsidies for exporting sugar. By doing so, India had violated its commitments under the AoA further as it did not have the right to grant direct export subsidies. Australia questioned the following four schemes that the government has in place for promoting exports: (i) Production Assistance Scheme, (ii) Buffer Stock Scheme, (iii) Marketing and Transportation Scheme, and (iv) the Duty-Free Import Authorization Scheme for sugar. The complainants held that India had provided subsidies contingent upon export performance, which are WTO-inconsistent subsidies.

Arguments Against Fair and Remunerative Price and State Advised Price for Sugarcane

The main argument of the complainants against the grant of FRP/SAP to sugarcane farmers was that the disciplines on domestic support measures introduced by the AoA applied to these measures and that India had violated the disciplines. What are the claimed violations of the domestic support disciplines of the AoA by India?

The complainants’ arguments were the following. When the AoA was being formalised, India had declared that it gave no subsidies to its agriculture during 1986-88, the reference period adopted to introduce the domestic support disciplines. This declaration was based on calculating subsidies adopted in the AoA. The administered prices that India had announced for 17 crops, including major cereals, pulses, oilseeds, cotton, jute, tobacco, and sugar, were compared with their corresponding international prices. The difference between the two sets of prices was considered as subsidies. Since the administered prices were below the international prices, the value of subsidies that India had granted as per the AoA methodology was (-) Rs 19861 crore or (-) 18 percent of the value of agricultural production. This figure also included subsidies on agricultural inputs, like fertilisers, credit, electricity, and irrigation. In other words, rather than subsidising agriculture, India was deemed to be taxing its farmers since their price realisations were below those prevailing in the international markets. It may be mentioned here that this methodology remains unchanged to date, meaning thereby that for calculating the subsidies granted in 2021, the current administered prices are still compared with the prices in the reference period of 1986-88, or the prices prevailing nearly 35 years back.

Based on this methodology, the AoA introduces two sets of disciplines. The first is that developing countries cannot give subsidies more than 10 percent of the value of agricultural production. And secondly, for countries like India, which had declared that they gave no subsidies during 1986-88, subsidies granted to individual crops cannot exceed 10 percent of their value of production. The complainants against India’s sugar subsidies argued that the value of subsidies on sugarcane granted between 2014/15 and 2018/19 had exceeded this 10 percent threshold, thus violating AoA disciplines.

The dispute settlement panel concurred with most of the complainants and those having third party rights in the dispute that FRP and SAP are forms of market price support, which should be considered subsidies. However, India contested this view arguing that Annex 3 of the AoA states that “subsidy can only exist where there is a budgetary outlay or revenue foregone by governments or their agents,” implying that governments must be involved in the payment of subsidies. India clarified that the Central and State Governments do not purchase sugarcane or pay … FRP and SAPs” to the farmers; these payments are made by the sugar mills, which are private entities.

However, the dispute settlement panel disagreed with India’s argument that FRP and SAPs cannot be treated as subsidies. The panel’s contention was that “market price” of an agricultural product is the price of the product in the market, and “price support” refers to the “assistance from a government or other official body in maintaining prices at a certain level regardless of supply or demand.” Therefore, a mandatory minimum price set by the government would seem to constitute “domestic support” to agricultural producers, even if sugar mills paid it.

This conclusion arrived at by the dispute settlement panel that FRP and SAPs are forms of subsidy raises at least two questions. The first is whether the panel had an adequate understanding of the factors behind the fixation of the statutory minimum prices that the farmers are entitled to receive from the sugar mills. Contrary to the panel’s view that the FRP and SAPs are intended to disregard the market mechanism of supply and demand, the real intent of the prices that the Central and State Governments direct the sugar mills to pay the farmers is to ensure that the latter receive fair prices from the former. Thus, the intention of the Central and State Governments is to improve the livelihoods of the farmers, who are already in considerable distress. In giving its ruling, the panel seemed to be ignorant of the reality that sugar farmers are in an adverse bargaining position vis-à-vis the sugar mills. Therefore, it becomes imperative for the governments to step in to ensure that the farmers receive remunerative prices for sugarcane. Developing countries have long argued that the subsidies’ disciplines of AoA do not factor in the realities of their agriculture. This situation is worsened by the rulings given by dispute settlement panels such as the one discussed here.

A second question against the panel’s ruling against India can be raised from the conclusion that FRP and SAPs are forms of price support measures or subsidies. As mentioned above, the panel rejected India’s argument that according to the AoA, a subsidy can only exist where there is a budgetary outlay or revenue foregone by governments or their agents. Instead, it maintained its view that the mandatory minimum price set by the government, which was paid by private entities, would “seem” to constitute “domestic support” to agricultural producers. This interpretation by the panel turns the definition of a subsidy given in the WTO Agreement on Subsidies and Countervailing Measures (ASCM) on its head. ASCM defines subsidies as follows: (i) a financial contribution by a government or any public body within the territory of a Member; (ii) a government practice involves a direct transfer of funds, potential direct transfers of funds or liabilities; and (iii) government revenue that is otherwise due is foregone or not collected.

Furthermore, the meaning of subsidy given by the Oxford Dictionary is as follows, “a sum of money granted from public funds to help an industry or business keep the price of a commodity or service low.” It is clear from these definitions that subsidies can arise only when the government or its agents make a payment. Thus, when non-government entities like sugar mills pay FRP and SAPs to farmers, why did the panel stretch itself to categorise these payments as subsidies?

A final comment must be made on the overall methodology to calculate the extent of subsidisation that occurs when a WTO member relies on price support measures. As explained earlier, the extent of subsidisation arising from price support measures is measured by the difference between the current prices of commodities and the international prices prevailing during 1986-88. This methodology is completely bereft of any economic logic: why should the current administered prices be compared with a set of prices that are 35 years old? Yet this irrational methodology continues because developed countries have refused to use more recent international prices, which would have realistically assessed the quantum of subsidisation. If this flawed methodology continues, disputes on India’s agricultural subsidies will become commonplace, as the current administered prices of many crops are already above the international prices during 1986-88. Therefore, it is vital for India to make a strong pitch in the WTO for amending this methodology for calculating subsidies.

Arguments Against India’s Export Subsidies

The complainants argued that India was providing WTO-inconsistent export subsidies on sugar through the following four schemes: (i) Production Assistance Scheme, (ii) Buffer Stock Scheme, (iii) Marketing and Transportation Scheme, and (iv) the Duty-Free Import Authorization Scheme for sugar. In addition, the Central Government had adopted the policy of fixing Minimum Indicative Export Quotas (MIEQ) for each sugar mill to reduce the inventory levels with the sugar industry and facilitate achievement of its financial liquidity. Further, under the Maximum Admissible Export Quantity (MAEQ) scheme, the Central Government was implementing a scheme for the export of sugar by providing a lumpsum export subsidy towards expenses on marketing costs, including handling, upgrading, and other processing costs and costs of international and internal transport and freight charges on the export of sugar. The complainants argued that since they were schemes for promoting exports, MIEQ and MAEQ were both prohibitive subsidies as defined by the Agreement on Subsidies and Countervailing Measures (ASCM).

These arguments raised two sets of problems for India. First, India does not have the right to grant export subsidies since it had declared during the formalisation of the AoA that it did not maintain any export subsidy. Secondly, since India’s export subsidy schemes were prohibitive subsidies, they had to be withdrawn without any delay. However, the panel gave India 120 days from the date of adoption of its report. Given the weight of the arguments, India has little option but to eventually withdraw its export subsidies on sugar.

The Road Ahead

The rulings against the domestic support and export subsidy regimes for sugarcane and sugar could be a watershed moment for India’s agricultural subsidy regime. These complaints, especially against the FRP and SAPs, show how India has been adversely impacted by a flawed and discriminatory subsidies’ regime thrust upon the AoA. The extent of subsidization caused by price support measures uses a methodology that defies economic logic, as mentioned above. India must raise the issue that international prices in the fixed base period of 1986-88 cannot be accepted to calculate the subsidies. If the fixed base period remains unaltered, sooner than later, the entire administered price mechanism that India has in place will be considered WTO-incompatible.

The most recent domestic support notification that India has submitted to the WTO shows that price support provided to rice during the marketing year 2019-20 (1 October 2019 to 30 September 2020) was nearly 14.5 percent of the value of agricultural production, in other words, was more than the de minimis level of 10 percent.  In 2018, the United States had already raised questions about what it described as “India’s Provision of Substantial Market Price Support” for rice and wheat, arguing that the price support provided to these two commodities was significantly more than India’s commitments.

The immediate response of India should be to appeal against this decision of the panel against sugar subsidies. Currently, the Appellate Body that would hear the appeal is non-functional because it does not have the personnel to function normally. The United States, under Donald Trump’s Presidency, had refused to appoint new members to the 7-member Appellate Body, and the Biden Administration has continued to block the appointment of new members. The delay in the appeal process should be given India two sets of advantages, which it must use to the fullest. One, it must make a strong case against the flawed and discriminatory agricultural subsidies regime of the WTO, which, as mentioned above, could significantly jeopardise its price support policies. And two, it would also provide a chance for the government to comprehensively review the agricultural subsidies regime with proper consultation with the farmers’ representatives.

Biswajit Dhar is a Professor of Economics at the Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University, New Delhi.

Image courtesy of the WTO