India has started work on an array of export promotion schemes that leave out subsidies, which have been targeted by the US in a complaint with the WTO.
The trouble for India has deepened with a host of nations, including the European Union, Brazil, Russia, China, Japan, South Korea, Sri Lanka, Canada and Egypt, joining forces with the US at the WTO over New Delhi's export subsidies, which possibly violate rules as the country's per capita income has been over $1,000 a year for several years now.
The WTO mandates that a country can offer export subsidies as long its per capita income is below $1,000 a year.
India crossed that mark in 2010 but, according to extant rules, it had a cushion of eight years.
However, another rule states that if the per capita income is above $1,000 for three years in a row, the cushion will not apply. The WTO has notified that India's per capita income had been above $1,000 for three successive years - 2013, 2014 and 2015. At present, it stands at nearly $2,000.
The schemes have to be redesigned so that they do not function as export subsidies.
"Duty drawbacks are basically taxes foregone and that is considered a 'prohibited subsidy' by the WTO. We will have to rework our whole duty regime now," said Biswajit Dhar of JNU, formerly Director-General of RIS (Research and Information System for Developing Countries).
Duty drawbacks are post-export remission of duty on inputs used in exported products. In other words, many governments, particularly those of the highly protected economies, refund all taxes paid, including customs duty, service tax or excise duty paid by an exporter to make his product more competitive in the global market.
"The only way out now is to rework the import tariff rates so that those imports which usually go into exports are made cheaper," said Finance Ministry officials.
Dhar agrees and says that in any case India needs to rework its inverted duty structure which often taxes raw materials at higher rates than finished products.
However, such a move would hit efforts to encourage manufacturing of electronics, cars and other products in India. Cheaper import of parts would mean they could continue to import them and simply go in for screwdriver assembly factories.
"This has implications for the steel industry, electronics and defence manufacturers among others," said Finance Ministry officials.
However, experts such as Dhar feel there is no way out.
"It would be better to concentrate on export facilitation measures, which we have never bothered about. These would make our exports and production competitive, attracting investors to manufacture in India."
Export facilitation is a way to reduce cost and time. India has a poor record in this field with huge delays, red tape in moving goods within the country and through ports and land boundaries.
In contrast, Bangladesh gives trucks carrying garments for export a special status such as a separate highway lane and check-free movement to ports. At ports these shipments are prioritised so that they sail out in record time.