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WTO and Indian Sugar subsidies

Admin January 17, 2022

WTO system should be accommodative enough. Forcing India to withdraw the support is not the solution. It will only force India to go for more bilateral agreements and not enter WTO supported agreements. — Anil Javalekar


The great news is that World Trade Organization (WTO) is live and is functioning. Recently, it has ruled against India and asked to withdraw within 120 days its prohibited subsidies given to sugar sector. India however, immediately responded stating that there would be no impact of WTO Panel’s findings on Sugar on any of India’s existing and ongoing policy measures in sugar sector and clarified that India has initiated all measures necessary to protect its interest and file an appeal at the WTO against the report. This WTO ruling came after Brazil, Australia and Guatemala complained about India’s alleged domestic support to sugarcane producers and export subsidies to sugar. In the era of bilateral and regional trade agreements, WTO’s role is diminishing. WTO, however,  can get its influential position back only if it modifies its rules to accommodate the reasonable supportive measures to local industries and help multilateral agreements gain its importance in international trade.  

WTO and its rules 

The idea of World Trade Organisation (WTO) emanated from USA and EU and its formation was basically to give a forum for member governments to negotiate trade agreements to free international trade from protective policies. It was supposed to administer all multilateral trade agreements and handle trade disputes, monitor national trade policies as also provide technical assistance and training for developing countries. From 1948 to 1994, the GATT provided the rules for much of world trade. The WTO’s rules — the agreements — are the result of negotiations between the members. The current set were the outcome of the 1986–94 Uruguay Round negotiations which included a major revision of the original GATT. The Uruguay Round also created new rules for dealing with trade in services, relevant aspects of intellectual property, dispute settlement and trade policy reviews. The first and most important principle of WTO agreements is that countries cannot normally discriminate between their trading partners.  Secondly, imported and domestic goods and services need to be treated equally. First principle is known as most-favoured-nation (MFN) treatment. MFN means that every time a country lowers a trade barrier or opens a market, it must do so for the same goods or services from all its trading partners. Second principle however, remained difficult to accept.

WTO ruling against India

The complainants (Brazil, Australia and Guatemala) claim that India is providing domestic support to sugarcane producers more than the de minimis level set out and argued that India should not provide product-specific domestic support to sugarcane producers that exceeds 10% of the total value of sugarcane production. The dispute was mainly with reference to market price support provided by India to sugarcane producers through the Fair and Remunerative Price (FRP), a minimum price for sugarcane, the State-Advised Prices (SAPs) through which State Governments annually set mandatory minimum prices additionally and export subsidies provided for sugar export. WTO panel agreed to arguments of complainants and asked India to withdraw this support.  India, however, submitted that the complainants’ identification of market price support in India is based on a mistaken interpretation of the term “market price support” in the Agreement on Agriculture.  It made a point that market price support can only exist when the government or its agents pay for or procure the product in question. In Indian case, the FRP or SAPs are paid by sugar mills and not by government or its agent.

Sugar in International trade 

About 110 countries produce sugar from either cane or beet, and about eight countries produce sugar from both cane and beet. Sugarcane, on average, accounts for nearly 80% of global sugar production. The top ten producing countries (India, Brazil, Thailand, China, the US, Mexico, Russia, Pakistan, France, Australia) accounted for nearly 70% of global output. As per International Sugar Organisation, world sugar trade averages about 64 mln tonnes/year. Raw sugar accounts for around 60% of internationally trade volumes. Although many countries produce sugar, top five exporters (Brazil, Thailand, EU, Australia, India) were responsible on average for nearly 70% of the world trade. Brazil, as the largest producing and exporting country in the world, dominates world trade, accounting for about 45% of global exports. The FAO,s forecast for world sugar production in 2021/22 stands at 173.7 million tonnes and fall short of demand. The world sugar trade in 2021/22 was pegged at 60.5 million tonnes. India is however in surplus and can export to meet the demand. 

All are protective to their Sugar Industry 

Though countries are members of WTO, they are sovereign countries and strategies to protect their interest. International trade is not an exception. All countries are protective of their industry and support them to survive and compete in the international market. Rich countries provide more and varied type of support. Poor countries provide less because their capacity to protect is limited. The fact is that all products and their background is not similar nor equal in international trade and they differ in their production system, technology adopted and cost structure apart from management efficiency. All countries try to support their industry to cover up these deficiencies and help their industry to stand and survive the international competition. Sugar industry is not an exception nor any country. The international trade expects them to be reasonable in support and not distort the price structure. The problem is not with the support but the methodology applied by WTO for its measurement and fixing of its overall ceiling. 

Indian sugar Sector is weak 

India is the second largest producer of sugar in the world after Brazil and is also the largest consumer. It has produced 4376 lakh MT sugarcane, crushed to the extent of 2989 lakh MT and produced 310 lakh MT sugar in 2020-21. Indian sugar industry’s annual output is more than Rs.80,000 crores. There were more than 700 installed sugar factories in the country, with sufficient crushing capacity to produce around 340 lakh MT of sugar. Sugarcane and sugar production in India have moved on a cyclical upward trend. In the past few years, sugar production in the country has been more than the domestic consumption. Central Government has been encouraging sugar mills to divert surplus sugarcane to ethanol & has been providing financial assistance to sugar mills to facilitate export of sugar, thereby improving their liquidity, enabling them to make timely payment of cane price dues of sugarcane farmers. The fact cannot be ignored that Indian sugar industry including sugar cane farmers are weak compared to other countries and required government support. 

Indian sugar industry vs world industry 

India, though a large producer of sugar, cannot be compared with other countries. The basic factors in export competitiveness of sugar are the difference between the cost of cane and cost of producing sugar in India vis a vis other major sugar-producing countries of the world. The other difference is of the quality of sugar.  As per the Indian sugar industry, cane prices on average account for about 70%–75% of the cost of sugar. In Brazil, Thailand and Australia, the cane price per ton was USD 25.11, 27.45 and 24.05, respectively, while in India it was USD 42.30 (in 2017–18 sugar season). This makes nearly a 65% difference in cost price. As a result, the total cost of producing sugar in India turns out to be Rs. 36 per kilo as compared to Rs. 18.50 globally (NITI Aayog- March 2020). The sugarcane yield per ha and recovery rate of sugar are also low in India compared to other countries. It is to be remembered that the cost of cultivation is high in India not because of FRP alone and there are other reasons like small size of farms and weak resource system at farmer level. Indian sugar sector thus needs support to equalise the cost structure and help sugar sector to survive and compete in the international trade. 

WTO’s rules need modification  

The fact WTO needs to understand is the differences in agriculture related products and Industrial products. Agriculture products are not produced in conditioned manufacturing units as is the case of industrial products. Therefore, the costing of agriculture produce is not like industrial products. And unless the costing structure is equalised, the support system cannot be treated at one level and uniform rules cannot be applied. It is necessary for WTO to reformulate its rules. It is important to equalise base level cost structure by exempting the support gone into this equalisation efforts. It will be then appropriate to measure the support system that may distort the market. The agriculture systems are different in each country and India is no exception. Indian agriculture is of small farms. More support is thus necessary for its survival and international trade system needs to be accommodative. For countries to accept WTO supported system of multilateral trade agreements over the bilateral or regional agreements, WTO system should be accommodative enough.  Forcing India to withdraw the support is not the solution. It will only force India to go for more bilateral agreements and not enter WTO supported agreements.

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