From UPSC perspective, the following things are important :
Prelims level : Not much.
Mains level : Paper 3- Designation of India as developed country by the US and its implications for India-Strategy to counter the impact.
The United States’s annual exercise of designating developing, and least developed countries has assumed importance for India this year: it has been dropped from the list of developing countries.
‘Developing’ or ‘developed’ country designation by the US
- Last week, the United States officially designated developing and least-developed countries for the purposes of implementing the countervailing measures.
- The division is provided by the Agreement on Subsidies and Countervailing Measures (ASCM) of the World Trade Organisation (WTO).
- Why the designation matters?
- The higher level of subsidies allowed: According to the ASCM, developing countries are allowed to grant higher levels of subsidies as compared to the developed countries before countervailing duties (CVD) can be imposed.
- What are the limits? The maximum limit of the subsidy is-
- For developed country: Limit is maximum 1% of the import value of the investigated product.
- For developing country: Limit is a maximum 2% of the import value of the investigated product.
- If the limit is breached the importing country can impose a countervailing duty on the product.
India as a target by the US
- Provision of self-designation: Under the WTO rules, any country can “self-designate” itself as a developing country.
- No criteria specified by the WTO: The WTO does not lay down any specific criteria for making a distinction between a developed and a developing country member, unlike in the World Bank where per capita incomes are used to classify countries.
- Arbitrary criteria used to designate India: Despite this clearly laid down criterion in the WTO rules, the United States Trade Representative (USTR) employed an arbitrary methodology that took into consideration-
- “Economic, trade, and other factors, including the level of economic development of a country (based on a review of the country’s per capita GNI) and a country’s share of world trade” to exclude India from list of designated developing countries.
- Second such instance after denying GSP: Excluding India from the lists of developing countries for the purposes of using countervailing measures or denying benefits of GSP are but two of the more recent initiatives that the U.S. has taken to challenge India’s status as a developing country in the WTO.
What would the impact on India?
- Loss of Special and Differential Treatment (S&DT): India would lose the ability to use the special and differential treatment (S&DT) to which every developing country member of the WTO has a right.
- What is S&DT? In short, S&DT lessens the burden of adjustment that developing countries have to make while acceding to the various agreements under the WTO.
- How S&DT benefited India?S&DT has been particularly beneficial for India in two critical areas: one, implementation of the disciplines on agricultural subsidies and, two, opening up the markets for both agricultural and non-agricultural products.
- Limits on subsidies: The WTO Agreement on Agriculture(AoA) provides an elaborate discipline on subsidies.
- Subsidies are classified into three categories, but two of these are virtually outside the discipline since the WTO does not limit spending on these categories of subsidies.
- Limits on price support measures: The discipline exists in case of price support measures (minimum support price) and input subsidies which is the more common form of subsidies for most developing countries, including in India.
- Limits on spending on prices support measures: For developing countries, spending on price support measures and input subsidies taken together cannot exceed 10% of the total value of agricultural production.
- In contrast, developed countries are allowed to spend only 5% of their value of agricultural production.
Shifting to DBT
- Why shifting to DBT necessary? India is a major user of price support measures and input subsidies.
- And given the constraints imposed by the AoA, the government has spoken about its intention to move into the system of direct benefit transfer (DBT) for supporting farmers.
- No limit on spending through DBT: A shift to DBT is attractive for India since there are no limits on spending, unlike in case of price support measures and input subsidies.
- Rework subsidies’ programme: Faced with on-going farm distress, the government has had to rework its subsidies’ programme in order to extend greater benefits, especially to small and marginal farmers.
- Challenges in the implementation of DBT
- Implementation of DBT in agriculture has several insurmountable problems.
- Difficulty in identifying the beneficiary: Targeting potential beneficiaries of DBT seems difficult at this juncture for a number of reasons, including inadequate records of ownership of agricultural land on the one hand, and the presence of agricultural labour and tenants on the other.
- This implies that in the foreseeable future, India would continue to depend on price support measures and input subsidies.
- How it matters: Given this scenario, the government needs the policy space to provide adequate levels of subsidies to a crisis-ridden agricultural sector.
- And therefore it is imperative that continues to enjoy the benefits as a developing country member of the WTO.
Issue of tariffs
- The issue of market access, or the use of import tariffs, is one of the important trade policy instruments.
- Provision of no reciprocal tariff cuts: It has some key provisions on S&DT, which the developing countries can benefit from. The most important among these is the undertaking from the developed countries that they would not demand reciprocal tariff cuts.
- Over the past two years, the government of India has been extensively using import tariffs for protecting Indian businesses from import competition.
- With the increasing use of tariffs, almost across the board, India’s average tariffs have increased from about 13% in 2017-18 to above 17% at present.
- Why it matters? Developed country members of the WTO have generally maintained very low levels of tariffs, and, therefore, India’s interests of maintaining a reasonable level of tariff protection would be well served through its continued access to S&DT, by remaining as a developing country member of the WTO.
With the changing stance of the US towards India, the government must ensure its international trade and agriculture at home is not adversely impacted.