In today's Finshots we see why India may have to revisit its policies on incentivising sugar production in the country

The Story

Sugar is extremely important to India. Not just because it’s an integral part of our diet, but also because many Indians depend on sugarcane for subsistence. The industry alone employs anywhere between 35–50 million people. We are the second-largest producer of sugar in the world and we are by far the largest consumer.

Needless to say, the government has had good reason to support the industry in any way they can. Apart from favourable policies, the central government has also offered incentives/subsidies to farmers and other stakeholders in the sugar industry alike. Take, for instance, the government’s policy of providing a ‘Fair and Remunerative Price’ (FRP). The policy mandates buyers to compensate farmers by extending a minimum support price. State governments also impose their own support price beyond the FRP and by all accounts, policymakers have done a lot to promote sugarcane farming in India. There’s no denying this aspect.

However, this kind of unabashed support hasn’t exactly gone unnoticed. India’s international rivals have been watching these developments unfold and they’ve been seething in the background. Primarily three countries — Brazil, Australia and Guatemala. All of them have accused India of implementing policies that incentivise overproduction and distort sugar prices. And since they also happen to be sugar-producing countries themselves, you can see why they would be upset.

But isn’t this temper tantrum a futile exercise? How can they stop India from supporting a domestic industry?

Well, technically they can’t do much on their own. Unless that is they get the WTO involved.

WTO or the World Trade Organisation is a multi-nation forum where governments come together to negotiate trade agreements and set out principles that help facilitate global trade. Every member nation decides to abide by these principles because, in theory, this aids their well being. However, if there is an errant country that violates these agreements, then other nations can take them to task.

Which is kind of what happened in this case.

Brazil, Australia and Guatemala have all registered formal complaints against India’s intervention and supported it with documentary evidence. They’ve contended that India has been providing excessive financial support to stakeholders in the industry — beyond what is deemed acceptable according to rules laid out in the General Agreement on Tariffs and Trade (GATT).

And after two years of pitched legal battle, a WTO panel has concluded that India has in fact violated the GATT and they’ve asked India  to make amends and withdraw the controversial financial assistance program within 120 days.

But as things stand India is in no mood to surrender. The government has stated unequivocally that they intend to appeal the ruling while also maintaining that they won’t be tweaking their policies right now.

However, what happens if the appeal also falls flat? What happens if India refuses to toe the line?

Well, as the WTO succinctly puts it —

If a country has done something wrong, it should swiftly correct its fault. And if it continues to break an agreement, it should offer compensation or face a suitable response that has some bite — although this is not actually a punishment: it’s a “remedy”, the ultimate goal being for the country to comply with the ruling.

But what if India fails to course-correct or refuse to compensate these other countries? What happens then?

Well, in such a case, the countries can then retaliate by imposing restrictions of their own. For instance, they can restrict the import of sugar from India by raising duties or they could retaliate in an entirely different sector if they believe such retaliation will be more meaningful.

So yeah, right now India still has a chance to argue its case, but if the appeal doesn’t do much, then we may have to address their concerns.

Until then…

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