Explained | Why is India challenging WTO verdict on sugar?

When did Australia, Brazil and Guatemala file a complaint and what are the rules?

The story so far: India this week 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.

What is it?

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 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 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 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.

What is India’s stand?

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. In fact, in August last year, the Centre set the FRP at ₹290 per quintal and called it the “highest ever” FRP for sugarcane procurement. Individual States also set minimum procurement prices that may be higher than the Centre’s price to adjust for conditions at the local level.

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. The low price of sugar has affected the revenues of mills, their ability to pay farmers and also forced many mills to shut down. 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.

State governments and the Centre have also regularly intervened to reduce the debt burden on sugar mills. Earlier this month, the Centre decided to restructure loans worth over ₹3,000 crore offered to sugar mills by the Sugar Development Fund. Without such assistance, it may not be possible for sugar mills to procure sugarcane from farmers at the minimum prices dictated by the government. Further, the Centre also regularly sanctions funds to encourage sugar mills to export sugar depending on sugar prices in the global market. In the budget last year, the Centre allocated a total of ₹3,500 crore to fund the export of 6 million tonnes of sugar.

What lies ahead?

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. It should be noted that the WTO was founded to prevent exactly such tit-for-tat tariffs that shrink international trade.

Incidentally, 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.

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