The United States challenge to India’s export subsidy programs is not really surprising for two reasons. One, the world’s largest economy has been playing hardball on trade ever since Donald Trump took charge. Two, this challenge would have come sooner rather than later, if not from the United States then from some other country. At stake is the future of special economic zones (SEZ), the Export Promotion Capital Goods (EPCG), the Export Oriented Units Scheme and sector specific schemes like the Electronics Hardware Technology Parks.

A bit of background. The grounds for the United States Trade Representative’s (USTR) 14 March move seeking consultations lies in the World Trade Organisation’s (WTO) Agreement on Subsidies and Countervailing Measures. That said developing countries with a per capita gross national income (GNI) above $1,000 would get eight years to phaseout export subsidies.

Under Annex VII of this agreement, 20 countries could continue with their promotional schemes as long as their per capita GNP was below $1,000. But they would lose this protection if the per capita GNI was above $1,000 for three consecutive years. India was among these 20. According to a July 2017 document of the WTO’s committee on subsidies and countervailing measures, India crossed this threshold in 2015 (its per capita income had remained above $1,000 in 2013, 2014 and 2015). That gave the green flag for the USTR action.

But the move raises two questions: Is this sabre-rattling by the United States to get other concessions? Has India been caught napping?

The answer to the first question is an unequivocal yes. The American move has to be seen in the light of Trump’s vocal opposition to the 50 percent duty on Harley Davidson bikes levied by India, the United States increasing the anti-dumping duty levied on Indian shrimp exports and the criticism of India hiking import duties on 50 items in the Union Budget (though commerce ministry officials have pointed out that even after the increase, these duties are within India’s bound rates).

The answer to the second is a bit more nuanced. India may not exactly have been napping but it certainly has been a tad complacent.

Now it can be no one’s case that India came to know it had crossed the threshold only after the WTO certified the fact in 2017. Remember the Trade Policy 2015-2020 (the first FTP of this government) unveiled in April 2015 had spoken about the need to move beyond sops and subsidies to fundamental, systemic measures to improve the competitiveness of Indian exports by addressing infrastructure deficits and reducing procedural hurdles. But, yet it introduced the MEIS, which is now being challenged by the USTR. And months later, it was back to offering fiscal sops when exports declined for nine months.

The FTP Review unveiled in November 2017 frankly admitted that the logistics cost in India is close to double that of what it is in developed countries which shows precious little has been done on that front. And it went back to announcing more sops – Rs 8,450 crore worth of them.

In a media briefing, commerce secretary Rita Teotia said in 2011, India had sought a clarification from the WTO on the time period to phase out subsidies – would countries that were below the threshold when the agreement was signed get eight years from the time they crossed the threshold or would they have to withdraw export promotion schemes immediately? Teotia said India had been constantly seeking clarification on this point. So India knew that these schemes would have to go sooner rather than later, but still it has done precious little to address issues that would improve the overall competitiveness of Indian exports.

This `let’s see how long we’ll get away with it’ attitude is what has brought India to this pass. Now it can do little more than seek time for phase out – do the sops have to end immediately or will it get eight years, and will the eight years start from 2015 (when India crossed the threshold) or from 2017 (when the WTO certified that it had). Teotia indicated that the consultations process would revolve around this.

Not that it has done very much in cases when it was clear that concessions would end. Take the case of textile exports. Under WTO rules , countries with a per capita income of less than $1,000 could provide export subsidies for particular sectors only until their share of exports is below 3.25 percent of global trade. Once a country’s exports crossed this threshold and remained above it for two consecutive years, subsidies for that particular sector would have to be phased out over eight years, even if the per capita GNI of the country was below the $ 1,000 threshold.

India’s textile exports crossed this 3.25 percent threshold in 2010 and export subsidies will have to end this year. But the textile sector is hardly ready for a life without such schemes. It has lost the wage arbitrage advantage to countries like Bangladesh, Vietnam, Myanmar and Laos. When asked about this, all that Teotia would say was that the textile ministry was working on this in consultation with the commerce ministry.

So what of the current dispute? India has 60 days time to respond to the USTR move. Then bilateral consultations will kick in and these will determine whether or not the issue will go to the WTO dispute settlement body. Will India be able to secure a long-enough phase-out period? What price will the United States extract in return?

If talks break down and the matter does reach the WTO dispute settlement mechanism, India will get a breather of just about a year or so, according to Abhijit Das, head of the Centre for WTO Studies in the Indian Institute of Foreign Trade. Disputes relating to exports subsidies, he points out are resolved through a fast-track mechanism.

Withdrawing export subsidies will be politically difficult for the government in an election year and considering the fact that the exports sector as a whole is going through a difficult time. But one thing is clear: India will have to drastically change the way it helps its exporters. Teotia admitted that India had been reviewing many schemes to check if they were WTO compliant. These can be replaced by production subsidies, but, as she pointed out, these require far larger budgetary commitments. Trade policy watchers say the ministry had enough information on how to tweak/phase out schemes but had stopped short of going ahead or even preparing industry for the inevitable.

All this will have to end. The clock has started ticking for India’s export promotion schemes and the government has to now bite the bullet on these. At the same time, it has to work seriously on other issues affecting export competitiveness. There is now no time to waste.

Industry, too, has to get ready to adjust. “No industry wants to prepare for an eventual phase out. The attitude is let us continue as long as it is possible,” laments an official of an export promotion body. This has to change.