In today’s newsletter, we talk about the recent WTO ruling that has sent shockwaves across India's manufacturing circles.

The Story

A couple of days back there were reports coming in that India will have to cease its export subsidy programme thanks to a complaint filed by the US with the World Trade Organization (WTO).

This is a heavy headline. And obviously there’s a lot to unpack here. But first thing’s first. What on earth is an export subsidy program?

Subsidies are monetary benefits that help manufacturers produce goods at cheap prices. This could include direct benefits like cash transfers or it could include indirect support by way of offering cheap loans and tax benefits. Everybody loves subsidies. It helps people to make more, export more and hopefully earn more as well.

Now the World Trade Organization thinks that India (read as the Indian Govt) offering export subsidies to its manufacturers ought to be illegal.

But why?

Developing nations like India need a lot of support to be able to propel their economy and move up the ranks. So the WTO allows for preferential treatment to be meted out to them so long as they are still “developing” so to speak. For instance, most developed nations cannot offer export subsidies to local manufacturers. Developing nations, on the other hand, are exempt from this rule. This allows them to grow their fledgeling export industry and usher in economic prosperity. You get the point.

But India has been harping about its status as an economic superpower. And honestly, this hasn’t gone unnoticed. While there are legitimate arguments about India’s true economic condition and the burgeoning population living below the poverty line, countries that exceed a per capita income of $1000 for three years in a row ought to end export subsidies (to any sector that holds over 3.25% of global export). So while India might contest that it's still developing, our country crossed this threshold in 2015. We should have stopped then. But we didn't, hoping for grace periods and the US took us to court.

Long story short, the World Trade Organization has sided with the US and India will have to stop subsidising exports any time soon. This is bad news for India. A lot of manufacturers were dependant on these subsidies to make their products cost-competitive. We are talking about manufacturers across the board — steel, pharma, chemicals, IT, textiles, you name it. Now they’ll have to export at a much higher price. Will their products still sell as well? I am not so sure.

But why would the US worry about India spending money on its manufacturers? It seems odd for a major economic power to be worried about help accorded to the export industry, right?

Well, it turns out these export subsidies have had a sizeable impact on the US economy. As I have already stated, subsidies artificially deflate the cost of production. What would have cost Rs. 120 could potentially be sold at Rs. 80 with a little help. That’s cheap and when cheap goods from India starts flooding the US markets, it hurts local producers. Eventually this could force them to shut shop, affecting the entire ecosystem.

Think of textiles. Cheap textiles from India start making their way into the US. Local textile manufacturers in the US feel the pinch. They promptly cut production affecting the local yarn manufacturers — the raw material that goes into making nice clothes. Cotton suppliers who were dependant on the homegrown yarn industry now have to look for business elsewhere. This could also, in turn, affect the labour force and so on and so forth. So the impact of export subsidies isn’t just limited to the exporting country. The effects are far-reaching and if left unchecked could have devastating consequences elsewhere.

Of course, India will challenge this judgement but until then, we will just have to wait.

On the flip side, the government will save about $7 Billion dollars if this ruling holds. So..... Yeah.

In an earlier version of this story, we had written that the WTO has refused to uphold India's "developing" country status when in fact that was misleading. The error is regretted.

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