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WTO VERDICT ON SUGAR SUBSIDIES AND INDIA’S SUGARCANE INDUSTRY

17th January, 2022 Agriculture

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Context

  • India has 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.

 

First thing first,

About WTO:

●       Intergovernmental organisation which regulates the international trade

●       Officially commenced on 1st Jan 1995 under the Marrakesh Agreement

●       Signed by 123 nations in 1994

●       WTO had replaced GATT (General agreement on tariffs and trade)

●       It deals with agriculture, textiles and clothing, banking, telecommunications, government purchases, industrial standards and product safety, food sanitation regulations, intellectual property and much more.

FUNCTIONS OF WTO

●       Administering WTO trade agreements

●       Forum for trade negotiations

●       Handling trade disputes

●       Monitoring national trade policies Technical assistance and training for developing countries

●       Cooperation with other international organizations

PRINCIPLES OF WTO

●       Administering WTO trade agreements

●       The basic principles of the WTO (According to the WTO):

●       Trade Without Discrimination:

1.      Most Favoured Nation (MFN): treating other people equally

2.      National treatment: Treating foreigners and locals equally

●       Freer trade: gradually, through negotiation

●       Predictability: through binding and transparency

●       Promoting fair competition

●       Encouraging development and economic reform.

Mechanisms of WTO

●       Trade Related Aspects of Intellectual Property Rights (TRIPS)

●       Trade Facilitation Agreement

●       General Agreement on Trade in Services (GATS)

●       Trade Policy Review Mechanism

Dispute Settlement Body of WTO

●       The General Council convenes as the Dispute Settlement Body (DSB) to deal with disputes between WTO members.

●       It decides the outcome of a trade dispute on the recommendation of a Dispute Panel and (possibly) on a report from the Appellate Body of the WTO. Only the DSB can make these decisions: Panels and the Appellate Body are limited to making recommendations.

●       Such disputes may arise with respect to any agreement contained in the Final Act of the Uruguay Round.

●       The DSB has authority to: Establish dispute settlement panels, Refer matters to arbitration, Adopt panel, Appellate Body and arbitration reports, maintains surveillance over the implementation of recommendations and Authorize suspension of concessions in the event of non-compliance.

Appellate Body of the WTO’s Dispute Settlement Body (DSB)

●       The Appellate Body was established in 1995 to govern the Settlement of Disputes.

●       It is a standing body of seven persons that hears appeals from reports issued by panels in disputes brought by WTO Members.

●       These members are appointed by the DSB to serve for four-year terms.

●       The members can be reappointed once.

●       A panel for appeals comprises three from the seven-member Appellate Body.

●       The Appellate Body members shall be persons of recognized authority with demonstrated expertise in law, international trade and the subject matter of the WTO agreements.

 

WTO and Trade Subsidies

  • The World Trade Organization (WTO) uses some “boxes” for classifying trade subsidies (Domestic Trade Support) to traffic lights. This is to prevent Trade Distortion.
  • WTO basically aims to remove trade barriers and to promote transparent market access and integration of global markets.

 

Trade Distortion

●       Trade distortion is commonly viewed as any interference that significantly affects prices or market behavior.

●       A tax or action that changes the normal characteristics of trade.

●       For example, many governments subsidize the agricultural sector, which sometimes makes farming economically feasible, at least for certain products.

●       The subsidies can mean farmers gain artificially high prices for their products.

●       Some experts believe that trade-distorting agricultural subsidies are partly responsible for increases in global food prices.

 

 

 

 

WTO’s conditions

Domestic Support

  • It calls for reduction in domestic subsidies that distorts free trade and fair price.
  • Under this provision, the Aggregate Measurement of Support (AMS) is to be reduced by 20% over a period of 6 years by developed countries and 13% over a period of 10 years by developing countries.
  • Under this, Subsidies are categorized into:


 

Market Access

  • Tariffs fixed by individual countries need to be cut progressively to allow free trade.
  • It also required countries to remove non-tariff barriers and convert them to Tariff duties.

 

 

Export Subsidies

  • There should be limited subsidies as they lead to dumping of highly subsidized (and cheap) products in other countries and damage the domestic agriculture sector of other countries.

 

Peace Clause (Interim measure at the Bali ministerial meeting)

  • The peace clause protects a developing country’s food procurement programmes against action from WTO members in case subsidy ceilings are breached.
  • This is in case the subsidy ceilings-10% of value of food production in the case of India and other developing countries- are breached.
  • Under the Peace Clause, WTO members agreed to refrain from challenging any breach in the prescribed ceiling by a developing nation at the dispute settlement forum of the WTO.
  • This clause will be there till a permanent solution is found to the food stockpiling issu
  • India was the first country to invoke the peace clause. India had invoked the clause in 2018-19 (13 per cent) and 2019-20 (11 per cent) as it breached the subsidy cap for rice. 

 

Recent Issue: Allegation against India

  • Complaint: 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.
  • Argument: 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.
  • Breach of WTO Agreement: India’s domestic support and export subsidy measures are also inconsistent with various articles of the WTO’s Agreement on Agriculture and the Agreement on Subsidies and Countervailing Measures (SCM), and Article XVI (which concerns subsidies) of the General Agreement on Trade and Tariffs (GATT).

Note: The Agreement on Subsidies and Countervailing Measures (“SCM Agreement”) addresses two separate but closely related topics: multilateral disciplines regulating the provision of subsidies, and the use of countervailing measures to offset injury caused by subsidized imports.

  • Impact: 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.

 

WTO’s ruling and recommendations

  • Ruling: After two years, the WTO ruled in December 2021 that India’s sugar policy was favouring domestic producers through subsidies to the detriment of foreign producers.
  • Recommendation: The panel recommended that India withdraws 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.

 

India’s counter arguments

  • “Erroneous” findings: 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.
  • Compliant with WTO rules: India has maintained its stand that the country’s sugar exports comply with WTO rules.
  • India does not extend a subsidy to its farmers for exports, but instead gives a production subsidy.
  • No evidence of Violation: India said that the “complainants have failed to show that India’s market price support for sugarcanne, and its various schemes violate the Agreement on Agriculture. It argued that “the requirements of Article 3 of the SCM Agreement are not yet applicable to India and that India has a phase-out period of 8 years to eliminate export subsidies, pursuant to Article 27 of the SCM Agreement.
  • MSP Calculation: On the issue of MSP being violative of WTO norms, India has dismissed these allegations and has demanded that MSP should be calculated by using the recent reference period instead of 1986/88 prices, which was factored in at the time of the creation of the WTO.
  • Supports Livelihoods: The price support is to ensure stability in food grain prices and their equitable distribution at affordable prices to the marginalized and vulnerable sections of society throughout the year. India is the second-largest sugar producer in the world after Brazil and it is estimated that more than 5 crore people depend on the cultivation of sugarcane alone for their livelihood.
  • Assumption violates S&DT treaty :India has underlined that special and differential treatment (S&DT) is a treaty embedded right at the WTO and it cannot be taken away based on certain arbitrary assumptions. The basis of S&DT is to give members time and flexibility to integrate into the rules-based system and members with huge differences in economic and social development cannot be put in the same category.
  • Unfair Categorization: To put India, which has an annual per capita income of less than USD 2,500, in the same development category as the United States, with a much higher (may be 25 times) per capita GDP, would be unfair.

 

What lies ahead?

  • Possible Retaliation: 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.
  • Questionable credibility of a Dysfunctional Appellate Body: The appellate body of the WTO is not functioning because of differences among member countries to appoint members, and disputes are already pending with it. The U.S. had blocked the appointment of members.

 

Challenges faced by WTO

  • Stalled Doha Development Round negotiations
  • WTO has been less affective in addressing trade protectionism. This raised questions over WTO’s credibility.
  • There has been unilateral denying of S&DT treatment to developing countries even under the existing WTO agreements like those on subsidies and countervailing measures.
  • New emerging issues: electronic commerce, investment facilitation, domestic regulation in services.
  • Side stepping WTO: countries have turned to free trade agreements to explore new trade-related issues that are currently not addressed within the WTO.
  • WTO has played a very limited role in helping address other global issues related to trade, such as food security, climate change and global trade imbalances.
  • Administrative issues: Some members of WTO established Multi-party Interim Appeal Arbitration Arrangement as contingency appeal arrangement for trade disputes as WTO’s dispute settlement body has become dysfunctional.
  • Lack of Transparency: no agreed definition of what constitutes a developed or developing country, members can currently self-designate as developing countries to receive ‘special and differential treatment’

 

Reforming WTO: The Way ahead

  • Rules-based liberal market order:reaffirmed commitment to the rules-based liberal market order with a development dimensionmust be the foundational starting point.
  • Multipronged reform action: A reformed WTO will have to be constructed on the foundation of
  • liberal multilateralism, resting on open, non-discriminatory plurilateral pillars,
  • an improved Appellate Body,
  • explicit accommodation of regional trade agreements, and
  • appropriate safety valves for rules-based sovereign action.
  • Updated new set of rules: Development of a new set of rules to keep pace with changes in the market and technology. Rules and disciplines on topics ranging from trade-distorting industrial subsidies to digital trade require updates and for dealing with digital trade and e-commerce, aligning trade and environmental sustainability.
  • Credible dispute settlement system:credible trading system requires a dispute settlement systemthat is accepted by all.
  • Covid-19 vaccine Intellectual Property Rights waiver: WTO should work on a Covid-19 vaccine Intellectual Property Rights waiver and the use of flexibilities of the TRIPS agreement and the Doha Declaration on TRIPS Agreement and Public Health.
  • Permanent solution to the public stockholding issue: India, along with the G-33 (group of nations), has been engaging in finding a permanent solution to the public stockholding issue. WTO’s approach is “completely imbalanced” and tilted towards the developed countries. Finding a permanent solution to the public food stockpile issue is linked to the survival of 800 million hungry people across the globe. As the full implementation of food security programme may result in breach of the WTO cap, India has been seeking amendments in the formula to calculate the food subsidy cap.

 

Sugarcane and India: Historical Background

  • India has a long tradition of manufacturing sugar. References of sugar making by the Indians are found even in the Atharva Veda.
  • India is rightly called the homeland of sugar. But in ancient times, gur and khandsari were made.
  • Also, Cane was cut in pieces - crushed under heavy weight - juice thus obtained was boiled and stirred, till it turned solids.
  • Solids of uneven shape and size were called sarkaran, a Sanskrit term of 'gravel'.
  • Modern word 'sugar' is derived from the word Sarkara.
  • Thus, India has been the original home for sugarcane as well as sugar manufacture.
  • Modern sugar industry came on the Indian scene only in the middle of the 19th century, when it was introduced by the Dutch in North Bihar in about 1840.

 

Legislations

  • “Sugar Industry Protection Act” was passed by the Indian Legislature in 1932.
  • Under this act, protection was granted to the indigenous sugar industry.
  • With enforcement of Sugar Protection Act, within a period of four years country became self-sufficient in sugar by 1935.

 

Geographical Distribution of Sugar Industry in India

  • Uttar Pradesh: It is the leading producer of sugar in India and one of the largest sugar industries in the Indian economy.
  • Bihar, Punjab, Haryana, Maharashtra, Karnataka
  • Tamil Nadu: This state is responsible for 10% of the total sugar production in India.
  • Andhra Pradesh: Along with Sugar Production it is regarded as the ‘granary of the south’ and once it was called as 'Rice Bowl of India'.

Top 10 Largest Sugarcane Producing States in India

S.NO

STATE

AREA (LAKH HECTARES)

YIELD (TONNES/HECTARE)

PRODUCTION (LAKH TONNES)

1.

Uttar Pradesh

21.72

62.4

1,333

2.

Maharashtra

9.36

77.4

753

3.

Tamil Nadu

2.32

107

375

4.

Karnataka

4.10

84.6

346

5.

Andhra Pradesh

1.91

78

149

6.

Bihar

2.66

56.8

122

7.

Gujarat

1.80

65

95.3

8.

Haryana

1.30

73

93.4

9.

Punjab

0.96

70

66

10.

Uttarakhand

1.22

61.2

64.3

 

World Trade                                                                                                                              

Largest Sugar Producers

Top 10 sugar importers in 2020.

  1. United States
  2. Indonesia
  3. China
  4. Italy
  5. Malaysia
  6. Bangladesh
  7. Nigeria
  8. Algeria
  9. South Korea
  10. India

North India vs. South India Sugar Industry

  • A brief description of differences between the sugar industry of the northern and peninsular India is given below:
  1. Peninsular India has tropical climate which gives higher yield per unit area as compared to north India.
  2. The sucrose content is also higher in tropical variety of sugarcane in the south.
  • The crushing season is also much longer in the south than in the north.

For example, crushing season is of nearly four months only in the north from November to February, whereas it is of nearly 7-8 months in the south where it starts in October and continues till May and June.

  1. The co-operative sugar mills are better managed in the south than in the north.
  2. Most of the mills in the south are new which are equipped with modern machinery.

Problems of Sugar Industry

  • Sugar industry in India is plagued with several serious and complicated problems which call for immediate attention and rational solutions. Some of the burning problems are briefly described as under:

 

Low Yield of Sugarcane

  • Although India has the largest area under sugarcane cultivation, the yield per hectare is extremely low as compared to some of the major sugarcane producing countries of the world.
  • For example, India’s yield is only 64.5 tones/hectare as compared to 90 tonnes in Java and 121 tonnes in Hawaii.
  • This leads to low overall production compared to capacity or potential.

 

Short crushing season

  • Manufacturing of sugar is a seasonal phenomenon with a short crushing season varying normally from 4 to 7 months in a year.
  • The mills and its workers remain idle during the remaining period of the year, thus creating financial problems for the industry as a whole.

 

Fluctuating Production Trends

  • Sugarcane has to compete with several other food and cash crops like cotton, oil seeds, rice, etc.
  • Consequently, the land available to sugarcane cultivation is not the same and the total production of sugarcane fluctuates.
  • This affects the supply of sugarcane to the mills and the production of sugar also varies from year to year.

 

Low rate of recovery

  • The average rate of recovery in India is less than ten per cent which is quite low as compared to other major sugar producing countries.
  • For example recovery rate is as high as 14-16 per cent in Java, Hawaii and Australia.

 

High cost of Production

  • High cost of sugarcane, inefficient technology, uneconomic process of production and heavy excise duty result in high cost of manufacturing.
  • The production cost of sugar in India is one of the highest in the world.

 

Small and uneconomic size of mills

  • Most of the sugar mills in India are of small size with a capacity of 1,000 to 1,500 tonnes per day.
  • This makes large scale production uneconomic. Many of the mills are economically not viable.

 

 

 

Old and obsolete machinery

  • Most of the machinery used in Indian sugar mills, particularly those of Uttar Pradesh and Bihar is old and obsolete, being 50-60 years old and needs rehabilitation.
  • But low margin of profit prevents several mill owners from replacing the old machinery by the new one.

 

Competition with Khandsari and Gur

  • Khandsari and gur have been manufactured in rural India much before the advent of sugar industry in the organised sector.
  • Since khandsari industry is free from excise duty, it can offer higher prices of cane to the cane growers.
  • Further, cane growers themselves use cane for manufacturing gur and save on labour cost which is not possible in sugar industry.
  • It is estimated that about 60 per cent of the cane grown in India is used for making khandsari and gur and the organised sugar industry is deprived of sufficient supply of this basic raw material.

 

Regional imbalances in distribution

  • Over half of sugar mills are located in Maharashtra and Uttar Pradesh and about 60 per cent of the production comes from these two states.
  • On the other hand, there are several states in the north-east, Jammu and Kashmir and Orissa where there is no appreciable growth of this industry. This leads to regional imbalances which have their own implications.

 

Low per capita consumption

  • The per capita annual consumption of sugar in India is only 3 kg as against 48.8 kg in the USA., 53.6 kg in U.K., 57.1 kg in Australia and 78.2 kg in Cuba.
  • The world average of about 21.1 kg. This result in low market demand and creates problems of sale of sugar.

 

FRP vs SAP 

  • The central government declares a min price of sugarcane that called Fair Remunerative Price (FRP) and state

Governments have also right to declare their own price which is called State Advisory Price (SAP).

Generally SAP is more than FRP which pose the conflict that which is fair price for both farmers and mills.

 

Falling Sugar Prices

  • According to the Indian Sugar Mills Association, the FRP of sugarcane rose 50.9% from Rs 139.12 per quintal in 2010-11 to Rs 210 per quintal in 2013-14.
  • However, sugar prices fell 21% from Rs 3,765 per quintal in January 2010 to Rs 2,962 per quintal in August 2014.
  • Lower margins have made companies heavily dependent on debt.

 

Min Distance Criterion

  • To ensure decent supply of sugarcane to each sugar mill, the central government has prescribed a minimum radial distance of 15 km between any two sugar mills.
  • But this criterion help to create the monopoly of mill owner over a large area as 15 km radial distance is large in number and ultimately led to exploitation of farmers especially where landholding is smaller.
  • Also this regulation prohibits innovation and investment by entrepreneurs.

Unpaid dues to Farmers

  • India’s sugarcane dues accruing to farmers have remained stubbornly high despite. The sugarcane growers are being exploited by not paying their due arrears.
  • For instance, in Uttar Pradesh, sugarcane farmers have not been paid for 20200. Further they get ‘zero price’ receipts for 2021.

 

High Export prices

  • Exporting the surplus from India is not easy because of the burden of very high cost of sugarcane, pushing up the costs of sugar.
  • For a comparison, Indian cane prices are 70-80% higher than that in Brazil. 

Measures to resolve the issues

Implementing Rangarajan Committee Recommendations:

  • Removing Distance Norm: In order to increase competition and ensure a better price for farmers, the Committee recommended that the distance norm be reviewed. Removing the regulation will ensure better prices for farmers and force existing mills to pay them the cane price.
  • Reviewing Revenue Sharing Policy: States should not declare their own SAP. The pricing shall be done on basis of scientific and economically viable principles. The committee suggested that sharing of revenue generated under sugarcane supply chain shall be divided on basis of 70:30 to farmers and mill owners respectively. This method will be applicable for by products as well. The payment shall be paid to farmers in two installments:
  • First Floor or FRP should be paid to farmers at time of purchase of sugarcane,
  • Second, balance should be paid after final price of sugar decided and sold by mill.
  • Duties: Import and export duty should not be more than 10%.
  • Long term agreements: States should encourage development of market-based long-term contractual arrangements, and phase out cane reservation area.
  • Exports and Byproducts: No more outright bans on sugar exports. No restrictions on sale of by-products and prices should be market determined.

Other suggestions

  • Price Rationalization: Cane-pricing policies need immediate rationalization and brought in tune with global practices, for Indian sugar industry to export the surplus successfully.
  • Ethanol Blending: The new national policy on Biofuels 2018, expands the scope of raw material for ethanol production by allowing use of Sugarcane Juice. Ethanol production should be promoted. Such diversion will cut oil import bills and bring profits for sugar industry. A win–win situation. Brazil, the world’s biggest sugarcane producer, depends on ethanol, and not sugar, as the main revenue source from sugarcane and blends 27 per cent ethanol with petrol.

 

  • R&D: Intense Researches should be funded for developing high yielding, early maturing, frost resistant and high sucrose content varieties of sugarcane.
  • Crushing Season: Increase the crushing season by sowing and harvesting sugarcane at proper intervals in different areas adjoining the sugar mill. This will increase the duration of supply of sugarcane to sugar mills.
  • Yield: Intense research is required to increase the sugarcane production in the agricultural field.
  • Production Cost: Production cost can be reduced through proper utilisation of by- products of the industry.

For example, bagasse can be used for manufacturing paper pulp, insulating board, plastic, carbon cortex etc. Molasses comprise another important by-product which can be gainfully used for the manufacture of power alcohol.

  • Technology: There is a dire need of Technological upgradation in age old mills to improve efficiency in production.
  • Export promotion: Tweaking of policies to boost exports when Domestic consumption is less than production.
  • Diversification: Mills should be incentivized to produce more alcohol and its export should be deregulated. This will improve the economic situation of the mills.
  • SSI: More steps like Sustainable Sugarcane Initiative. SSI provides practical options to farmers for improving the productivity of their land, water and labour, all at the same time. SSI is a set of practices based on principles for producing ‘More with Less’ in agriculture. Example: Reducing overall pressure on water resources -- Highly relevant for water guzzling Sugarcane crop.

 

Conclusion

  • Mere infusion of capital will not revive the ailing Industry. The need of the hour is to reform the Sugar industry fundamentally but bringing long term solutions and addressing structural issues.

 

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