Narayanan - Rungta 2014 Textile Subsidy

Margin—The Journal of Applied Economic Research 8 : 3 (2014): 327–352
Sage Publications Los Angeles/London/New Delhi/Singapore/Washington DC

DOI: 10.1177/0973801014531132
Export Subsidy Reforms and Productivity

Improvements: The Case of the Indian Textile
and Clothing Sector
Badri Narayanan G.
Vasundhara Rungta
The World Trade Organization (WTO) recommends all members to phase out their
export subsidies. While this may render export-oriented industries susceptible to tighter
competition in their import markets, productivity improvements could help offset
such disadvantages. This article explores the interaction between these two different
aspects to evaluate the economy-wide impact of export subsidy reforms and productivity
improvements in the Indian textile and clothing sector. Our analysis stands on various
policy simulations applying the general equilibrium model of the Global Trade Analysis
Project (GTAP; Hertel, 1997). The welfare impacts of the removal of Indian textile
and clothing subsidies in terms of equivalent variation shows that India is expected to
encounter a loss of about 71.5 million US$, while other Asian countries may gain about
218 million US$. In a different scenario, we simulate the impact of a complete phase-out
of subsidies provided to the textile and clothing industry of India and a simultaneous
increase in total factor productivity growth to 3.5 per cent. This leads to a net positive
welfare change and an expected gain of about US$ 13.17 million in terms of allocative
efficiency. We conclude that merely removing subsidies is not enough, as is often argued by
Indian policymakers that such a policy reversal might result in contraction of the sector.
Investments in total factor productivity should come about simultaneously, probably by
employing surplus funds from saved subsidy payments in areas like research and develop-
ment and infrastructure. This conclusion may be qualitatively generalised for any sector
in the world, which is examined for export subsidy reforms, but similar economy-wide
studies are recommended for specific cases.
Keywords: Indian Textile Industry, Export Subsidies, WTO, GTAP, CGE

JEL Codes: F00, F13, C68, L670
Acknowledgements: The authors are grateful to Dr P. Nayak and Mr T.K. Rout from the
Textiles Committee, Mumbai, for their support and resources provided. They also thank
Professors P.G. Babu and Ganesh Kumar at the Indira Gandhi Institute of Development
Research, Mumbai, and the anonymous referee for their valuable comments.
Dr. Badri Narayanan is Research Economist, Center for Global Trade Analysis, Purdue
University, USA, email: badri@purdue.edu
Vasundhara Rungta is a post-graduate student at Indira Gandhi Institute of Development
Research, Mumbai, email: vasundhara@igidr.ac.in
Downloaded from mar.sagepub.com at Australian National University on March 13, 2015
328 Margin—The Journal of Applied Economic Research 8 : 3 (2014): 327–352
1. Introduction
According to World Trade Organization’s (WTO’s) Subsidies and Countervailing

Measures rules, a developing country with per capita income below US$ 1,000
can provide export subsidies to its exporters till the time it reaches the export
competitiveness threshold. This threshold is reached when a country attains a
share of 3.25 per cent of world trade in two consecutive years. India, for example,
has long crossed that threshold (in 2007) according to WTO data.1 In 2008–10,
the country’s share in world textile trade was 3.5, 4 and 4 per cent, respectively.
Since, a country has eight years to remove subsidies after crossing the threshold
India has till 2015 to phase out subsidies.
India has faced enormous external pressure to reform export subsidies
in recent years. The European Union (EU) and Japan in particular have
joined hands with the US and Turkey to demand that India stop giving fresh
subsidies and gradually phase out existing ones as the textiles sector has
already achieved export competitiveness. The issue came up for discussion at
a recent meeting of the WTO Committee on Subsidies and Countervailing
Measures (2012–13). New Delhi is keen on further talks to temper the phase-out
and ensure that the key export sector is not stripped of all support. While the
government agrees in three years it will have to reduce some export subsi-
dies given to the textile industry as the threshold level for qualifying for such
sops has been breached, it will be careful to ensure it removes only those that
are necessary.
The Indian textile industry has an overwhelming presence in the economic
life of the country. Apart from providing one of the basic necessities of life,
the textile sector2 contributes to 14 per cent of industrial production, which is
4 per cent of GDP, employs 45 million people directly and indirectly and
accounts for about 11 per cent share of the country’s total exports basket.3
The Report of the Working Group constituted by the Planning Commission
on boosting India’s manufacturing exports during the Twelfth Five-Year Plan
(2012–17) envisages India’s exports of textiles and clothing at US$ 64.11
billion by the end of March 2017.4 In 2011–12, about 10.7 per cent of India’s
total exports were constituted of textile and apparel products.5
1
http://pib.nic.in/newsite/erelease.aspx? relid=92944.
2
It comprises cotton, man-made fibres, jute, sericulture and silk, wool, a number of specialty fibres
and their products, handlooms, and handicrafts.
3
Annual Report 2012–13, Ministry of Textiles.
4
Annual Report 2012–13, Ministry of Textiles.
5
Authors’ calculations from DGCI & S, Kolkata.

Narayanan and Rungta Export Subsidy Reforms 329
With the downturn in global trade reducing the demand for exports, the
government has been providing several incentives to exporters, in the face of
objections from Turkey, Japan and the EU. India, however, maintains that many
of the subsidies identified by the US and others are not subsidies and merely
a reimbursement of input duties. It claims that before phasing out subsidies,
there has to be a common understanding on what the subsidies are. Also, since
countries are given eight years to remove the subsidies, India has till 2015 to do
so. There is ambiguity over the definition of a product in the WTO rulebook.
It does not clearly define a product according to some Indian negotiators.
In the WTO rulebook, article 27.6 of the Agreement on Subsidies and
Countervailing Measures (ASCM) defines a product as a ‘section heading’ of
the Harmonized System (HS) nomenclature. But there is no such term in the
product category. The WTO rulebook classifies traded products through the
HS of customs classification, which includes section (Roman 2 digit), chapter
(numerical 2 digit), heading (2 digits) and subheading (2 digits). While textiles
as a sector are covered under Section XI of the HS system, different products
are defined under 14 chapters (50–63). These products are further classified
under headings and subheadings.
While India has surpassed the export competitiveness threshold on section-
based calculations, if we calculate on the basis of the 14 chapters, not many
Indian products are likely to fall in the competitive category. Indian negotiators
are depending on Article 3 of the ASCM, which talks about ‘subsidies contingent,
in law or in fact, whether solely or as one of several conditions, upon export
performance’. India runs many other schemes, such as special economic zones
(SEZ), export-oriented units (EOU) and focus market schemes (FMSs), which
may be interpreted as prohibited export subsidies.
These recent discussions can have major implications for the Indian economy
and therefore this issue needs to be understood and opportunities need to
be exploited to make the most of the current state of the economy. Several
studies have focused on phasing out of MFA quotas and other trade policy
reforms in the South Asian textile and apparel sectors (Elbehri and Hertel,
2003; Lips et. al., 2003; Narayanan, 2008), while a few others describe and
analytically examine the issue of export subsidies in India (Ahuja, 2001; Hoda
and Ahuja, 2002); however, no study has made an attempt to rigorously and
quantitatively understand the issue of the removal of export subsidies in the
Indian textile and clothing (T & C) industry. We aim to address this gap in
this study.
The main focus of the article is an understanding of how the phase-out of
subsidies will shape the Indian textile and clothing industry and its implications

for India’s major trading partners. In investigating this issue, we first attempt to
understand the subsidy mechanism in the Indian textile and clothing industry,
specifically the variety of schemes, and the compatibility of current schemes
with WTO mandates. Based on this background, we conduct a quantitative
analysis to understand how the removal of subsidies affects exports, imports,
prices, input requirements and mainly overall welfare in a multi-region and
multi-sector, general equilibrium framework using the Global Trade Analysis
Project (GTAP) model (Hertel, 1997) and its latest dataset, named GTAP Data
Base version 8.1 (Narayanan et al., 2012).
Our results indicate that the economy-wide welfare gains are negative for
India when the export subsidy reforms are carried out without any change
in productivity. However, a 3.5 per cent growth in total factor productivity
is sufficient to ensure positive gains from export subsidy reforms. This result
suggests that the government could help the industry by using the saved subsidy
expenditure to enhance productivity by developing better infrastructure,
enhancing R&D investments, etc. While this result can be generalised
qualitatively for any sector in the world, the extent of productivity growth
needed to ensure positive gains from export subsidy reforms can vary across
countries and sectors.
This article is organised as follows: Section 2 throws light on India’s recent
export performance and on the subsidies in textiles and clothing; Section 3
proposes the methodology of analysis and data sources; Section 4 presents
the results and Section 5 concludes.
2. Export Subsidies in the Indian Textiles and Clothing Industry
Exports of textiles and clothing products from India have increased steadily
over the last few years, particularly after 2005 when the textiles exports
quota was discontinued. These exports registered a growth of 25 per cent
(US$ 3.5 billion in value terms) in 2005–06 over 2004–05, reaching a level of
US$ 17.52 billion. Growth of these exports, although a bit slower, continued
until a decline by over 5 per cent in 2008–09, with subsequent recovery there-
after, touching US$ 33.31 billion in 2010–11. However, in 2012–13, exports
fell by 4.82 per cent in dollar terms, despite growing at 8.10 per cent in rupee
terms. In 2012–13, readymade garments accounted for almost 39 per cent
of total textiles exports and 74 per cent when combined with cotton textiles
products. The US and the EU account for about two-thirds of India’s textiles
exports. The other major export destinations are China, the UAE, Sri Lanka,

Saudi Arabia, the Republic of Korea, Bangladesh, Turkey, Pakistan, Brazil, Hong
Kong, Canada and Egypt.6
The government, both central and state, plays a major role in the development
of the textile sector. Its role extends to a range of activities such as price sup-
port to cotton and jute, incentives for investment in technology up-gradation
and modernisation, setting up of integrated textile parks and a Technology
Mission on cotton, jute and technical textiles, development of mega-clusters
for power looms, handlooms and handicrafts, development of the sericulture
and wool sub-sectors by implementing a number of schemes, welfare schemes
for handloom weavers and handicrafts artisans and promoting skill develop-
ment of textile workers in collaboration with the industry. The government
also provides a number of incentives for the export of textile products. A large
network of government offices, public sector enterprises, textile research asso-
ciations, textile design and education institutions such as the National Institute
of Fashion Technology (NIFT), various textile industry associations, Export
Promotion Councils and so on, provide a robust institutional framework for
the development of the textile sector.
Export promotion schemes7 can play an important part in the development
strategies of a country, especially a developing country like India that seeks
to make exports an engine for economic growth. Membership in the WTO is
a critical tool for participation in the multilateral trading system. It requires
opening domestic markets to international trade, where exceptions and flexibili-
ties have not only been negotiated but also provides huge market opportunities
for domestic producers. To design successful export development strategies,
it is fundamental that governments and private exporters have a clear under-
standing of the applicable WTO rules and their implications for their specific
individual characteristics.
Subsidies are one of many policy instruments subject to rules in the
multilateral trading system, but they present more complex issues for policy-
makers than many other instruments subject to GATT/WTO rules. One reason
for this is that subsidies can be defined in different ways. Another is that that
they are used in pursuit of a wide array of objectives. Even where they are not
aimed at trade, they can affect trade flows. The challenging task of determining
which sorts of subsidies are problematic from the perspective of the trading
6
Source: http://texmin.nic.in/sector/note_on_indian_textile_and_clothing_exports_intl_trade_
section.pdf.
7
The schemes are summarised in the appendix and contextualised in the WTO negotiations
in the annex of this article.

system, and what can be done, has occupied an important place on the agenda
of almost all countries as well as the WTO/GATT system.
In order to analyse existing data on subsidies it is necessary to understand
the definition used for subsidies and their economic effects.8 Data on the use
of subsidies are scarce in general and difficult to compare across countries
and sectors because of methodological differences and data gaps. Nevertheless,
the limited evidence available indicates that subsidies may have a significant
impact on trade flows. According to some estimates global subsidies may
amount to more than a trillion US$ per year, or 4 per cent of world GDP.
Other estimates indicate that subsidies represent on average around 6 per cent
of expenditure by governments and 1 per cent of their GDP. These values vary
significantly across countries and sectors. The economic inefficiencies created
by subsidies are also potentially significant. Both developed and developing
countries could benefit from reducing those subsidies that are not necessary to
correct for market failures or to pursue valid policy objectives.
From an international trade perspective, concern among trading partners
about subsidy practices rises to the extent that they are perceived to impart
an advantage to beneficiaries, which constitutes a competitive threat in an
internationally contested market. Whether or not such subsidies could be
justified in terms of national welfare, the fact remains that if their trade effects
are perceived as being too severe in the marketplace, they will likely attract a
reaction that would nullify any value from granting subsidies. The WTO subsidy
rules attempt to balance the potential tension between the right to use subsidies
and the imperative that such subsidies are not too disruptive or distorting in
terms of international trade.9
Subsidies may involve budgetary outlays by governments. They might rely on
regulatory interventions with no direct financial implications for the government
budget. They could constitute public provision of goods or services at lower
than market prices. Or they may simply be thought of as the consequence
of any government intervention that affects relative prices. Definitions used
in the literature and by national and international authorities tend to be
determined by the purpose at hand. Most definitions of subsidy, however, entail
a transfer from the government to a private entity that is ‘unrequited’, that is,
no equivalent contribution is received in return. Subsidy definitions often
distinguish between categories of recipients, such as producers and consumers,
or nationals and foreigners as recipients. Subsidy programmes might also
8
Refer to the Agreement on Subsidies and Countervailing Measures, WTO for further information.
9
World Trade Report, 2006, WTO.

limit subsidisation to certain sub-groups within these categories. The more

narrowly defined the group of (potential) beneficiaries, the more ‘specific’ a
subsidy programmes is considered to be. Subsidy programmes with a wide range
of (potential) beneficiaries, instead, is often referred to as ‘general’ subsidies.
The WTO Agreement on Subsidies and Countervailing Measures defines a
subsidy to include a public financial contribution that confers a benefit to the
recipient. It takes a broad approach on the possible forms of subsidy, including
direct payments, tax concessions, contingent liabilities and the purchase and
provision of goods and services (with the exception of the provision of general
infrastructure). The definition excludes regulatory measures or other policies,
like border protections that do not consist of government resource transfers.
Another key feature of the WTO subsidy definition is the notion of ‘specificity’,
that is, only subsidies with a limited beneficiary set are subject to the WTO
subsidy rules.
The effect of a subsidy is to shift the supply curve downward by the amount
of the subsidy. Effectively this is an increase in supply. The impact of the subsidy
is to lower prices for consumers but to increase the price received by producers.
The benefit of the subsidy is shared by consumers and producers in a proportion
that depends upon the relative slopes of the demand and supply functions. The
deadweight loss of the subsidy is the amount by which the cost of the subsidy
exceeds the gains in consumers’ and producers’ surpluses. The magnitude of
the deadweight loss of a subsidy depends upon the amount of the subsidy and
change in production that results from the subsidy.
With the help of WTO, the Indian government, Ministry of Textiles and
Textile Committee reports, press releases and circulars, and notifications to
the WTO under the ASCM this study aims to get the required information on
Indian subsidies currently provided, the rules and regulations governing the
provision of subsidies in the international scenario and so on.10
3. Methodology and Data Sources for Modeling
From 2007, the WTO has asked the Indian government to phase out textile
and clothing subsidies as the country has reached export competitiveness
in this sector. Trade ministers, however, are behind in negotiations, lacking
consensus on key elements such as subsidy cutting modalities. Still, years of
negotiations have indicated the direction of a potential deal. This section of
10
This is based on India’s subsidy notification to WTO and other official documents at WTO.

the article explores one such direction, that is, the phase-out of subsidies and
its implications for India’s economy. Specifically, we consider analysing the
impact of the removal of export subsidies on textiles and wearing apparels in
India. Our analysis stands on various policy simulations applying the general
equilibrium model of the GTAP (Hertel, 1997).
Computable general equilibrium (CGE) models bring together econo
mic theory and empirical data to create a practical tool for exploring
economic policies, such as changes in subsidies or taxes and their effects on
economic systems. CGE models use mathematical formulas to represent
the behaviour of numerous economic agents (producers, consumers and
governments), sectors (industry, agriculture and services) and factors of
production (labour, capital and land). These economic structures are then
married to a rigorous accounting system, which ensures that all resource
constraints, such as available land, capital and labour, are accounted for because
a CGE model gathers all the significant elements of an economy, it can account
for, in theory, all the flow-through and feedback effects of policy changes. CGE
models are therefore well suited to exploring the implications of multilateral
trade agreements whose policies cut across many sectors and regions.
The CGE model employed here is the GTAP. The global CGE modeling
framework of the GTAP (Hertel, 1997), is the best possible way for the ex ante
analysis of the economic and trade consequences of multilateral or bilateral
trade agreements. The GTAP model is a comparative static model, and is
based on neoclassical theories (Hertel, 1997). The version of the GTAP model
used in this study is a relatively standard model and is a multi-region and
multi-sector model. Because the GTAP model is a comparative static model,
and it does not model the dynamic effects of policies, its results must be seen
as somewhat conservative. Even so, the model can provide powerful insights
into the underlying data and mechanisms of economic change resulting from
policies being negotiated at the WTO.
A global CGE model requires an enormous amount of data on topics
from trade flows, border protection and industry cost structures to consump
tion and investment, and the GTAP database models these. In a GTAP model,
regional production is generated by a constant-return-to-scale technology
in a perfectly competitive environment, and the private demand system is
represented by a non-homothetic demand system (a constant difference
elasticity function).11 The GTAP model employs the Armington assumption,
11
Hence, the present analysis abstracts from features such as imperfect competition and increas-
ing returns to scale, which may be important in certain sectors. Although these are in a way
some limitations to the analysis, introducing these assumptions may only strengthen our central

to distinguish imports by their origin. Following the Armington approach

import shares of different regions depend on relative prices and the substitution
elasticity between domestically and imported commodities. The bilateral trade
flows and foreign trade structure is characterised by this assumption implying
imperfect substitutability between domestic and foreign goods.
The study applies the GTAP database, Version 8.1 that refers to the base year
2007 and is the latest database released in May 2013. In this GTAP 8 Data Base
(Narayanan et al., 2012), and there are 57 commodities and 134 regions. To
sharpen the focus to our objectives, we aggregated up to a level that highlights
sectors and countries of interest for this particular study. For the analysis
the study employs an aggregation with 134 regions and 57 sectors. They are
presented in the Tables 1 and 2, respectively.
Table 1 Regions in the GTAP Database
Region Description
Asia China, Hong Kong, Japan, Indonesia, Thailand, Vietnam,
Bangladesh, Pakistan
Ind India
EU France, Germany, Italy, the Netherlands, Spain, the United Kingdom
MEA The United Arab Emirates, South Africa
USO The United States of America, Mexico, Turkey
ROW Rest of the world
Source: Authors’ aggregation from Narayanan, Aguiar and McDougall (2012).
Table 2 Sectors in the GTAP Database
Sector Description
Agri Plant-based fibres
Livestock Cattle, sheep, goats, horses, wool, silk-worm cocoons
TextWapp Textiles, wearing apparel
Machines Machinery and equipment nec, manufactures nec, electricity
Transcom Trade, transport nec, sea transport, air transport, communication
Others All other sectors
arguments, as the positive welfare effects of removal of distortions like subsidies are higher with
imperfect competition and increasing returns to scale (Elbehri and Hertel, 2006). Thus, our study
provides conservative estimates in that sense.

The global database combines detailed bilateral trade, transport and

protection data characterising economic linkages among regions, together with
individual country input-output databases which account for inter-sectoral
linkages within regions (Walmsley et al., 2012).
In our analysis, to study the effects of the removal of export subsidies from
the Indian textile and clothing industry, only the relevant countries, that is,
India’s major trading partners and competitors in the textile and clothing
industry are considered. Countries not directly relevant for the purpose of
this study are grouped as ROW. The choice of these countries is governed
by the export trade statistics from DGCI & S, Kolkata, the UN Comtrade Data
(HS 2007 classification) from WITS and the Ministry of Textiles. The study
considers top export partners which account for about 80 per cent of Indian
textile exports and other major players in this industry which pose a competition
to India’s exports.
For our analysis, all textile-related sectors like plant-based fibres (Agri), textiles,
and wearing apparels (TextWapp) sheep and wool products (livestock) are
crucial. The sector ‘Machines’ includes machinery, manufactures and electri-
city required for mechanised segments of the Indian textile and clothing
industry. All trade and transport are in the sector ‘Transcom’. The last sector
‘Others’ includes the remaining sectors in the economy, cutting across
agriculture, manufacturing and services. Our choice of sectors reflects a multi-
region world, the relation between the textiles and clothing (wearing apparel)
sector and other sectors that share forward and backward linkages with it.
Version 8 of the GTAP database has 2007 as the base year. Several pre-
simulations were conducted to update the base year to reflect the situation
in 2007 using updated national, economic and trade data and updated protec-
tion data. The model is solved using GEMPACK software (Harrison and
Pearson, 1996).
For the research presented in this article, the authors updated the 2007
database to include the subsidy in 2012, by modifying the GTAP database to
include updated information on export subsidies (2.5%).12 The GTAP database
consists of observed trade data and macroeconomic data, combined with
the best available data on the domestic economy and policy settings. The
latter are adjusted to represent a common base year, and to be consistent with
the former. Textile export subsidies in the original database are unsuited for
our analysis because we have better information than that used to construct
the original GTAP database. It is therefore useful to change these subsidies in
the initial, pre-simulation database.
12
Data collection format and other details are available from the authors upon request.

For introducing new tax rates in the GTAP database, we use the Alter tax
procedure (Malcolm, 1998). The aim of this procedure is to maintain the internal
consistency of the database while minimising the impacts of the tax change on
the value flows in the database. In order to maintain the overall balance of the
database, this procedure allows us to change the tax in question, and lets other
flows in the database adjust to maintain consistency. A general equilibrium
closure ensures that internal consistency is maintained. It should be noted that
the aim of this procedure is to improve the quality of base year data, where
improved information becomes available. We update the database with latest
information on subsidies in the textile and clothing sector.
We define two scenarios (Table 3). In the base scenario, we simulate a
reduction of export subsidies to 0 per cent for the textiles and clothing industry
in India, as it is a possible outcome of on-going negotiations at the WTO. It
includes a complete phase-out of export subsidies on textiles, clothing and
wearing apparel. We simulate the potential impacts of removing all the export
subsidy programmes for textile industry on the Indian textile and clothing
sector as well as on sectors with forward and backward linkages with textiles and
clothing, using the standard multi-region GTAP applied general equilibrium
model (Hertel, 1997). The analysis focuses on the likely impacts of the policy
on textile production, prices, exports and imports, intermediate input demand
and the welfare impacts in India, its trading partners, export destinations and
other major producers.
The new scenario is created with a view to suggesting a policy prescription
to deal with the welfare loss due to the removal of subsidy as we see later. We
do this by increasing the total factor productivity to 3.5 per cent. This scenario
also includes all the changes that we incorporated in the base scenario. This
will suggest to us a possible policy option to protect the textile industry from
the shock.
A CGE model summarises impacts across an entire economy, netting out
positive and negative implications of policy changes for agents (consumers,
producers and governments), and the movement of resources from one sector
Table 3 Scenarios in GTAP Modeling
Scenario
Base Eliminating export subsidies completely.
New Eliminating export subsidies completely and increasing
total factor productivity to 3.5 per cent simultaneously.

to another. In contrast, partial equilibrium models frequently focus on impacts

within a sector or group of sectors without accounting for limited resources
such as capital, land, or skilled labour. Because CGE models at least in theory
represent an entire economy, they also provide a meaningful perspective for
such figures as millions of dollars and thousands of jobs. In the next section
we examine the likely effects on general welfare and trade and production of
two possible scenarios.
4. Results
The simulation results of the removal of textile and clothing subsidies on

output prices of textiles are reported in Table 4. All of this comes from a 1.77
per cent increase in export prices due to subsidy reduction. Accordingly, the
Indian textile and wearing apparel output is expected to fall by 4.1 per cent;
the effects are economy-wide as they affect other sectors as well. The decline
in Indian textile and clothing output is expected to increase the export price
of TextWapp by 1.77 per cent. Consequently, output in the Agri sector in
India, which shares forward linkages with TextWapp, is expected to fall by
2.6 per cent. However, as factors released from textile and clothing produc-
tion move to other sectors, output is expected to increase slightly in the
machines and related sectors. Also, the fall in TextWapp output in India
is accompanied by a rise in TextWapp output in all the other regions by
about 0.2–0.3 per cent (Table 4).
As Textwapp production in India decreases, the demand for imports of
inputs in the TextWapp sector is expected to decrease by about 4–5 per cent,
contracting even the demand for TextWapp imports, which includes unfinished
Table 4 Change in Industry Output (per cent)
Sector/Region à Asia Ind EU MEA USO ROW Total

Agri 0.1 –2.6 0 –0.2 –0.1 0 –2.8
Livestock 0 –0.1 0 0 0 0 –0.1
TextWapp 0.2 –4.1 0.2 0.3 0.2 0.2 –3
Machines 0 0.2 0 0 0 0 0.1
Transcom 0 –0.1 0 0 0 0 0
Others 0 0.1 0 0 0 0 0.1
CGDS 0 0 0 0 0 0 0
Total 0.3 –6.5 0.2 0.1 0.1 0.2 –5.6
Source: Author’s simulation results.

yarn and fabrics (Table 5). Similarly, TextWapp industry’s demand for domestic
inputs is expected to decrease by about 4 per cent (Table 6), while this rises a bit
elsewhere in the world, particularly for Agri, Transcom, Machines and Livestock.
The self-consumption of TextWapp falls as a result of the contraction in India’s
TextWapp exports (Table 7).
Table 5 Change in Import Demand for Textile and Clothing (per cent)
Asia Ind EU MEA USO ROW

Agri 0.5 –6.1 0.2 0.3 0.3 0.3
Livestock 0.2 –4.5 0.2 0.3 0.2 0.2
TextWapp 0.1 –4.8 0 –0.1 –0.1 0.1
Machines 0.2 –4.4 0.2 0.3 0.2 0.2
Transcom 0.2 –4.3 0.2 0.3 0.2 0.2
Others 0.2 –4.3 0.2 0.3 0.2 0.2
Table 6 Change in Industry Demands for Domestic Inputs

by T&C Industry (per cent)
Asia Ind EU MEA USO ROW

Agri 0.094 –3.97 0.19 0.24 0.15 0.20
Livestock 0.21 –4.04 0.22 0.27 0.17 0.22
TextWapp 0.23 –3.99 0.31 0.54 0.26 0.30
Machines 0.21 –3.92 0.22 0.26 0.17 0.22
Transcom 0.21 –4.05 0.22 0.27 0.17 0.22
Others 0.21 –3.97 0.21 0.27 0.17 0.22
Table 7 Change in Aggregate Exports13 (per cent)
R020 Asia Ind EU MEA USO ROW

Agri –1.46 3.81 –0.15 –0.35 –0.34 –0.34
Livestock –0.03 1.12 0.02 –0.02 0.01 0.03
TextWapp 0.39 –11.11 0.36 0.3 0.37 0.37
Machines –0.03 1 –0.01 –0.06 –0.01 0
Transcom –0.02 0.41 –0.01 –0.01 –0.01 –0.01
Others –0.03 0.9 –0.01 0 –0.02 –0.01
13
Aggregated using freight-on-board (FOB) weights.

Table 8 Change in Export Sales of Textile and Wearing Apparel (per cent)
Exporter/Importer à Asia Ind EU MEA USO ROW

Asia 0.22 –1.82 0.47 0.98 0.5 0.38
Ind –11.25 –13.81 –11.15 –10.64 –11.11 –11.14
EU 0.17 –1.87 0.41 0.93 0.45 0.33
MEA 0.13 –1.9 0.38 0.89 0.41 0.3
USO 0.17 –1.87 0.42 0.93 0.45 0.33
ROW 0.17 –1.86 0.42 0.93 0.45 0.33
Table 9 Change in India’s Aggregate Imports14 (per cent)
Agri –5.9
Livestock –0.5
TextWapp –1.8
Machines –0.4
Transcom –0.3
Others –0.2
The elimination of India’s subsidies is expected to lead to a drastic decline in

India’s TextWapp export as prices are expected to increase. The model predicts
that India’s export of TextWapp decreases by about 11 per cent (Table 7) as
export prices rise by 1.7 per cent. Other large producers respond by increasing
their exports to fill the void left by India. An interesting result obtained here
is that aggregate export sales of TextWapp from other regions to India are
also expected to fall (Table 8), probably because India’s input requirement of
unfinished yarn and fabric falls. This is due to lower overall imports (Table 9).
The lower overall imports are in fact driven by the lower demand for inputs
due to a fall in production (Tables 6 and 7).
The market price of textile imports is expected to rise in all regions
except India and Asia. India’s share in the MEA market is about 11 per cent
(Table 10) while in other regions it is less than 5 per cent. We observe that the
market price of TextWapp in the MEA is expected to increase by 0.2 per cent
while in other regions it is expected to increase only by 0.1 per cent. India’s
share is particularly low in Asia, resulting in no effect on aggregate import
prices. India’s share is just 1.5 per cent of their total imports probably because
Asian economies are more likely to be our competitors than trading partners
in terms of the textile and clothing industry.15
14
Aggregated using market price weights.
15
Trade weights x pcif = pim.

Table 10 Relative Share of India in Different Markets (per cent)
Exporter/Importer à Asia Ind EU MEA USO ROW

Asia 65.57 64.16 29.08 62.45 50.01 36.46
Ind 1.55 0 4.71 11.23 5.65 3.42
EU 6.94 7.88 23.71 9.28 6.89 28.32
MEA 0.15 1.02 0.29 0.11 0.33 0.64
USO 2.91 4.38 8.94 2.41 10.31 8.99
ROW 22.88 22.56 33.26 14.52 26.81 22.17
Source: GTAP 8.1 database.
The welfare impacts of the removal of Indian textile and clothing

subsidies in terms of the equivalent variation (EV) of millions of US$ are
presented in Table 11. It is expected that India will encounter a loss of about
US$ 71.5 million, and the major beneficiary from the removal of the subsidy
programmes will be Asia whose gain is estimated at about US$ 218 million.
When we look at the decomposition into the sources of the welfare, for India,
the loss comes mostly from inefficiency in resource allocation in the textiles
and clothing sector although there are some gains in the agriculture sector,
and modest gains from export taxes (xtax); all the other losses stem from
reduced output.
The US, the EU, Middle East and other textile importers lose from this
policy. While losses to importers are from terms of trade effects as the world
price of textiles rises, losses to India are mostly a result of inefficient resource
allocation as textile producers probably try to lure resources from other
efficient sectors and attempt to expand output in textile production in order
to remain cost effective. Although there exists some allocative efficiency gain
due to the removal of export subsidies in terms of increased export taxes, the
loss from reduced output of TextWapp arising from higher export prices far
outweighs the benefits. Also, the gain in terms of trade is mostly driven by higher
export prices.
Therefore, the removal of subsidies is not beneficial till we figure out a
way to minimise lost output by preparing the industry to deal with the
phase-out.
In the new scenario, we simulate the impact of a complete phase-out of
subsidies provided to the textile and clothing industry of India and a simul-
taneous increase in total factor productivity growth to 3.5 per cent. This
leads to a net positive welfare change and an expected gain of about US$
13.17 million in terms of allocative efficiency although the terms-of-trade
(TOT) effect turns out negative as expected with the fall in export prices

Table 11 Equivalent Variation (million US$)
Base New
Asia 217.68 –303.91
Ind –71.63 2,702.22
EU –63.49 78.24
MEA –5.62 6.41
USO –84.09 113.49
ROW –48.17 59.4
arising from productivity gains (Table 12). Despite a huge TOT loss, in the
new scenario the net gain is positive since other sectors benefit from forward
and backward linkages with a more productive and less distorted textile and
apparel sector.16
Merely removing subsidies is not enough and investments in total factor
productivity should take place simultaneously. Also, once the government
undertakes a phase-out of subsidy-related schemes, it will have a pool of surplus
funds that can be deployed into research and development in enhancing total
factor productivity and other areas to provide the textile and clothing industry
a cushion to mitigate the effects of the shock (of the removal of subsidies on
which the industry is currently highly dependent).
Table 12 Allocative Efficiency and TOT Effects in the TexWapp Sector:

Commodity Summary (million US$)
Allocative Efficiency Terms of Trade

Base New Base New
Asia 101.89 –137.61 –17.92 17.73
Ind –69.49 13.17 376.31 –481.76
EU –5.88 3.45 –116.38 148.75
MEA 0.03 –0.08 –15.67 18.93
USO –28.56 36.28 –104.99 132.36
ROW –11.16 9.32 –130.97 168.97
Total –13.17 –75.47 –9.63 5.00
Source: Authors’ simulation results
16
We do not show the detailed results on other sectors for lack of space, but this is readily
available from the authors.

5. Conclusions
The welfare impacts of the removal of Indian textile and clothing subsidies in
terms of the EV of millions of US$ show that India is expected to encounter
a loss of about US$ 71.5 million. And the major beneficiary from the removal
of the subsidy programmes is Asia whose gain is estimated at about US$ 218
million. When we look at the welfare loses for India, the loss comes mostly from
inefficiency in resource allocation in the textiles and clothing sector although
there are some gains in the agricultural sector, and modest gains from export
taxes. All other loses stem from reduced output.
The US, the EU, Middle East and other textile importers lose from this
step. While the losses to importers are from the terms-of-trade effects as
world price of textiles rises, losses to India are mostly a result of inefficient
resource allocation as the textile producers probably lure resources from other
efficient sectors and attempt to expand output in textile production. Although
there are some allocative efficiency gains from the removal of export subsidies
in terms of increased export taxes, the loss from reduced output of TextWapp
arising from higher export prices far outweighs the benefits. Also, the gain in
terms of trade is mostly driven by higher export prices. Therefore, the removal
of subsidies is not beneficial till steps to prepare industry to deal with the
phase-out accompany it.
In the ‘new’ scenario, we simulate the impact of a complete phase-out of
subsidies to the textile and clothing industry of India and a simultaneous
increase in total factor productivity growth to 3.5 per cent. This leads to a
net positive welfare change and an expected gain of about US$ 13.17 million
in terms of allocative efficiency, although the TOT effect turns out negative
as expected.
Some prerequisites for India to remain a major player in the global textile
industry are imbibing global practices, adopting rapidly changing technologies
and efficient processes, innovation, networking and better supply chain
management and linking-up with global value chains. We explore a few
alternative uses of resources that shall be freed up upon the removal of subsidies.
Investments in productivity improvement should happen simultaneously with
the removal of subsidies.
Apart from ginning and spinning, India is largely dependent on imported
technology for machineries. Productivity improvements simulated in the
‘new’ scenario, introduced in this article, may come from investment in
research and development in the textile machinery sector, so that the costs
of such machineries may fall due to their domestic production in the future.
Further, the interest subsidy for spinning offered under the TUFS scheme

could be extended to weaving and knitting, including a requirement for

matching investment in these sectors when a loan is offered for spinning
machinery. Labour development is another area of productivity improve-
ment. Until 2000, most of the Indian apparel industry was reserved for the small-
scale sector; this policy has a residual effect on the structure of this sector even
today. Scaling up, therefore, is a way to improve productivity, by exploiting
economies of scale.
Infrastructure bottlenecks remains a serious handicap affecting the
development of textile industries in India. Some of the subsidy expenditure
saved may be directed towards reducing these infrastructure constraints faced
by the textile industry. The roads and power sectors need special attention.
Product diversification from cotton-oriented textile industry to one with a
more dominant man-made fibres sector, and from apparel-focused industry
to one that ventures into technical and industrial textiles, is required. This is
already happening, based on government initiatives. Some of this expenditure
may be funded by the saved export subsidies. We therefore conclude that merely
removing subsidies is not enough and should be accompanied by investment
in total factor productivity, some of which may be funded by resources freed
by reduced subsidy expenditure.
In this article, we have made a fresh attempt to quantify the effects of removing
export subsidies in the Indian textile and apparel sector. However, there are
several possible research extensions to this work. First, it will be an interesting
and useful exercise to econometrically estimate the past effects of export
subsidies on the exports of these commodities. In other words, we do an ex-ante
analysis in this study, while the ex-post analysis has not yet been attempted in
the literature. One reason for such a gap is the lack of sufficient policy variations
in the past to help infer such effects. This issue may be addressed by choosing
a sector that has seen continuous changes in export subsidies over the years.
Second, a study that considers multilateral reduction of export subsidies across
the world may give a more realistic picture of winners and losers if ASCM is
strictly enforced. This would, in turn, involve enormous data requirements on
policies in many countries, although the framework employed in this article is
well suited for such a study.
Appendix 1: Overview of Export Subsidy Schemes in the Indian Textiles

and Clothing Sector
The following is an overview of 41 schemes promoting textile and clothing

exports by the Indian government:

1. Technology oriented: [Technology Upgradation Fund Scheme (TUFS)17,

Scheme for Integrated Textile Parks (SITP)18, Technology Mission on
Technical Textiles (TMTT)19, Technology Mission on Cotton]20 and
Development Schemes [Integrated Scheme for Powerloom-cluster
Development21, Comprehensive Powerloom Cluster Development
Scheme (CPCDS)22, Comprehensive Handicrafts Cluster Development
Scheme (CHCDS)23, Comprehensive Handloom Cluster Develop-
ment Scheme (CHCDS)24, Revival, Reform and Restructuring Package
for handloom sector25, Integrated Handloom Development scheme
(IHDS)26 and Scheme for Growth and Development of Technical Textiles
(SGDTT)]27;
2. Welfare (labour-oriented) schemes: [Textile Worker’s Rehabilitation
Fund Scheme (TWRFS)28, Integrated skill Development Scheme
(ISDS)29, Scheme of Fund for Regeneration of Traditional Industries
17
Adopted by the Ministry of Textiles, http://www.txcindia.gov.in/html/GR_on_restructured_
TUFS.pdf.
18
Adopted by the Ministry of Textiles, ‘Guidelines of the Scheme for Integrated Textile Parks dur-
ing the 11th Five Year Plan’ available at http://texmin.nic.in/policy/guidelines_SITP.pdf; See also
‘Compendium of Schemes’ http://pib.nic.in/newsite/erelease.aspx?relid=76869.
19
http://technotex.gov.in/TMTT%20book%20upload%2019012011.pdf. http://pib.nic.in/newsite/
PrintRelease.aspx?relid=75190 See Annual report 2012–13, Ministry of Textiles.
20
Adopted by the Ministry of Textiles http://cotcorp.gov.in/TechnologyMissiononCotton.aspx;
http://dcd.dacnet.nic.in/TMCMM_II.htm.
21
http://www.texmin.nic.in/policy/SchemeDecentralisedPowerloomSector.pdf.
22
Adopted by the Ministry of Textiles, http://texmin.nic.in/policy/Guidelines_of_development_
of_mega_cluster_scheme_Powerloom_nmcc_cs_20090312.pdf.
23
Adopted by the Ministry of Textiles, http://texmin.nic.in/policy/Guidelines_of_development_
of_mega_cluster_scheme_Handicrafts_nmcc_cs_20090312.pdf.
24
Adopted by the Ministry of Textiles; http://handlooms.nic.in/CHCDS-FINAL.pdf.
http://pib.nic.in/newsite/PrintRelease.aspx?relid=95221.
25
Adopted by the Ministry of Textiles. Refer to http://handlooms.nic.in/hl_guidelines_rrr_pack-
age.pdf; http://pib.nic.in/newsite/erelease.aspx?relid=83427; http://pib.nic.in/newsite/erelease.
aspx?relid=90972.
26
http://handlooms.nic.in/hl_ihds.pdf. http://pib.nic.in/newsite/erelease.aspx?relid=92954.
27
http://www.texmin.nic.in/sector/note_technical_textiles_ammt.pdf; http://pib.nic.in/newsite/
erelease.aspx?relid=33180.
28
Adopted by the Ministry of Textiles, Source ‘Textile Workers’ Rehabilitation Fund Scheme
‘(TWRFS) available at http://www.texmin.nic.in/policy/TextileWorkersRehabFundScheme.pdf;
http://pib.nic.in/newsite/erelease.aspx?relid=90801.
29
http://texmin.nic.in/policy/ISDS_guideline_booklet_dir_mg_20100729.pdf; http://isds-mot.
com/; http://pib.nic.in/newsite/erelease.aspx?relid=64243

(SFURTI)30, Group Insurance Scheme for Powerloom Workers31 and

Apparel Training and Design Centres]32;
3. Market oriented: Focus Market Scheme (FMS)33, Focus Product Scheme
(FPS)34, Market Linked Focus Product Scheme (MLFPS)35, Utilisation of
Duty Credit Scrip36 and Market Access Initiative (MAI)37;
4. Reimbursement of import duties: Duty Free Import Authorization
(DFIA)38, Advance License/Advance Authorisation scheme39, Duty
Entitlement Passbook40, Duty Drawback Scheme41, Duty-Free Import for
Garment Exporters; adopted by the Ministry of Commerce & Industry42
and Refund of CENVAT Credit (Excise Duty)43;
5. Direct export promotion: SEZ44, Export-oriented units (EOU)45, Zero
Duty Export Promotion Capital Goods (EPCG)46, Post-Shipment
30
http://www.sfurtikhadi.org/index.html
31
http://pib.nic.in/newsite/erelease.aspx?relid=81193 http://www.texmin.nic.in/policy/
SchemeDecentralisedPowerloomSector.pdf
32
http://pib.nic.in/newsite/erelease.aspx?relid=91590
33
Adopted by the Ministry of Commerce & Industry, Chapter 3.14 of the Foreign Trade Policy
(2009–14) and Chapter 3.8 of Handbook of Procedures http://commerce.nic.in/publications/
anualreport_chapter3–2011–12.asp.
34
(2009–14) and Chapter 3.9 of Handbook of Procedures.
35
Adopted by the Ministry of Commerce & Industry, Chapter 3.15.3 of the Foreign Trade Policy
(2009–14) and Chapter 3.9.2 of Handbook of Procedures.
36
http://pib.nic.in/newsite/erelease.aspx?relid=94761.
37
Adopted by the Ministry of Commerce & Industry, Chapter3.2 of the Foreign Trade Policy
2009–14; See also No.11/11/2006-E&MDA Ministry of Commerce & Industry, E&MDA Section
New Delhi, 4 January 2007. http://commerce.nic.in/trade/international_tpp_cis_6.asp.
38
(2009–14) and Chapter 4.31 of Handbook of Procedures.
39
Adopted by the Ministry of Commerce & Industry, Chapter 4.1.3 of the Foreign Trade Policy
(2009–14) and Chapter 4 of the Handbook of Procedures.
40
Adopted by the Ministry of Commerce & Industry, Chapter 4.3 of the Foreign Trade Policy (2009–
14) and Chapter 4.37 of the Handbook of Procedures. This scheme has been already withdrawn.
41
42
http://www.leatherindia.org/dfis/Document/dfis-comperhesive-guidnes-2013.doc
43
http://www.servicetax.gov.in/notifications/notfns-2012/st41-2012.htm
44
Adopted by the Ministry of Commerce & Industry, Chapter 6 of the Foreign Trade Policy
(2009–14) and Chapter 6 of the Handbook of Procedures; http://www.sezindia.nic.in/goi-
policies.asp.
45
Adopted by The Ministry of Commerce & Industry, Chapter 6 of the Foreign Trade Policy
(2009–14) and Chapter 6 of the Handbook of Procedures. http://eouindia.gov.in/eou_scheme.htm
46
Adopted by the Ministry of Commerce & Industry, Chapter 5 of the Foreign Trade Policy
(2009–14) and Chapter 5 of the Handbook of Procedures.

Export Financing47, Pre-Shipment Export Financing48, 2 per cent Interest

Subvention Scheme on rupee export credit is available to certain specific
export sectors.49, Incremental Export Incentivisation Scheme50, Market
Development Assistance Scheme51 and Marketing & Export Promotion
Scheme (2007–08 to 2011–12)52;
6. Input related: Mill Gate Price Scheme53, 10 per cent subsidy on Hank
yarn54 and Subsidy Scheme for Distribution of Certified Seeds55
In addition, there is a plethora of state-level schemes by the governments

of Gujarat56, Maharashtra57, Jharkhand58, Bihar59, Karnataka60, Punjab61 and
47
Adopted by the Reserve Bank of India, Master Circular on Export Credit in Foreign Currency.
http://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=7377#pos
48
Adopted by the Reserve Bank of India, Master Circular on Export Credit in Foreign Currency.
http://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=7377#pos
49
http://commerce.nic.in/publications/anualreport_chapter4-2009-10.asp (EXPIRED LAST
FISCAL)
50
51
Revised Guidelines w.e.f 1.4.2006); (Adopted by Ministry of Commerce & Industry, Department
of Commerce, Government of India; http://commerce.nic.in/trade/international_tpp_cis_5.asp;
http://pib.nic.in/newsite/erelease.aspx?relid=96163; http://commerce.nic.in/trade/mda-guidelines.
pdf.
52
http://handlooms.nic.in/hl_sch_meps.pdf; http://pib.nic.in/newsite/erelease.aspx?relid=83176.
53
http://handlooms.nic.in/hl_sch_mgp_a.htm.
54
http://handlooms.nic.in/hl_price_subsidy_guidelines.pdf.
55
http://texmin.nic.in/annualrep/ar_12_13_english.pdf.
56
Several sources of Government of Gujarat, for example: Industries & Mines Department,
Resolution No. INC/1095/2000(1)/1, 11 September 1995, ‘New Incentive Policy-Capital Investment
Incentive Scheme 1995-2000’; See also the Government of Maharashtra, Industries, Energy and
Labour Department, Resolution No. IDL 7079/(2043)/IND-8, 5 January 1980.
57
Several sources of the Government of Maharashtra, for example: Industries, Energy and Labour
Department, Resolution No. IDL 7079/(2043)/IND-8, 5 January 1980; See also ‘Maharashtra
Industrial Policy (MIP of 2001–07);’ available at http://globalmaharashtra.org/Downloads/
incentive%20schemes.pdf.
58
Several sources of the Government of Jharkhand, for example: Department of Industries
‘Industrial Policy of Jharkhand 2001’available at http://unpan1.un.org/intradoc/groups/public/
documents/apcity/unpan015038.pdf.
59
Several sources of the Government of Bihar, for example: ‘Industrial Incentive Policy 2006’
available at http://industries.bih.nic.in/Archive/IndPolicy2006en.pdf.
60
Several Sources of the Government of Karnataka, for example: ‘New Industrial Policy and Package
of Incentives and Concessions (2006-2011 KIP)’ available at http://www.karnatakaindustry.gov.
in/documents/Industrial per cent 20Policy%202006-11.pdf.
61
Several Sources of the Government of Punjab, for example: Department of Industries &
Commerce, No. 5/58/2002/51B/1263, 11 July 2006; available at http://www.pbindustries.gov.in/
downloads/NotificationTextilePolicy2006.pdf.

Andhra Pradesh62. Of the several schemes provided by the government to

support the textile and clothing industry, only a few are aimed at promoting
exports. Since subsidies aimed at export promotion are prohibited in light of
the textiles and clothing industry achieving export competitiveness, we identify
the following schemes as pertaining to exports.
1. Direct Export Subsidies: SEZ, EOU, Zero Duty EPCG, Pre and Post
Shipment Export Financing, 2 per cent Interest Subvention Scheme
on rupee export credit is available to certain specific export sectors,
Incremental Export Incentivisation Scheme, Market Development
Assistance Scheme and Marketing & export promotion scheme (2007–08
to 2011–12)
2. Indirect Export Subsidies: TUFS, FMS, FPS, MLFPS, Utilisation of
Duty Credit Scrip, MAI, DFIA, Advance License/Advance Authorisation
scheme, Duty Entitlement Passbook, Duty Drawback Scheme, Duty-
Free Import for Garment Exporters and Refund of CENVAT Credit
(Excise Duty).
Appendix 2: India’s Textile and Clothing Subsidies in the WTO Context
Since subsidies can distort international free trade, they are regulated by WTO
agreements and only permitted under limited and strict conditions. Rules on
subsidies were first laid down in the GATT and then further developed for
industrial goods in the Agreement on Subsidies and Countervailing Measures
(ASCM) and for agricultural products in the Agreement on Agriculture
(AOA). Both agreements, which are part of treaties setting up the WTO in
1995, provide some specific rules applicable only to developing countries. The
latter are known as special and differential treatment. The Uruguay Round
ASCM was a major step forward in rule making. A definition of subsidies was
introduced, along with the concept of specificity. The new Agreement applied to
all Members, with far-reaching consequences for many countries that hitherto
had effectively been exempt from most subsidy disciplines. The approach in
the legal texts towards ‘specificity’ reflects the expectation that subsidies carry
the potential to be more trade-distorting the more specific they are. Indeed,
62
Andhra Pradesh Industrial Policy; adopted by the Government of Andhra Pradesh, Industries
& Commerce Department, ‘Incentives for setting up of New Industrial Enterprises in Andhra
Pradesh- Industrial Investment Promotion Policy (IIPP) 2010–15- Orders Issued;’ available at
http://sisihyd.gov.in/Documents/Left%20Panel/2.MSME% 20Policy/State%20Industrial%20
Policy/New%20Industrial%20Policy%20of%20AP%202010 -15.pdf.

in economic terms the more closely targeted a subsidy towards its intended
beneficiaries, the more concentrated its relative price effect will tend to be. In
many circumstances, this could be taken to imply a higher probability that the
subsidy is distorting. A subsidy to a single industry, for example, rather than
too many industries could impart a narrow advantage. The more broadly based
subsidy recipients are defined, then, the more ‘spread out’ and shallower will
be the likely subsidy impact.
The extent and form of export incentives vary from country to country.
Within its overall budget constraint, each WTO member country must
decide how best to structure its export incentives so they are consistent with
WTO rules and at the same time achieve the objective of export promotion.
Not all export incentives are regarded as subsidies under the WTO Agreement.
The Agreement on Subsidies and Countervailing Measures (SCM Agreement),
framed in the most recent round, namely Uruguay Round (1986–94) governs
the conduct of member countries with respect to all subsides. The SCM
Agreement clearly specifies what export incentives constitute a subsidy and
hence, subjected to the disciplines of the SCM Agreement. This Agreement is
a considerable improvement over the plurilateral ASCM agreed in the Tokyo
Round (1973–79).
In the SCM Agreement, the disciplines over subsidies and countervailing
duties were made stronger and clearer, and the term ‘subsidy’ was clearly defined.
A measure is defined to be a subsidy if it contains the following three elements
(i) it is a financial contribution (ii) the contribution is by a government or any
public body within the territory of a Member and (iii) the contribution confers
a benefit. A financial contribution could take the form of direct transfers or of
income or price support. Direct transfers could take the form of grants, loans
and equity infusion or could also be in the potential sense when government
provides for loan guarantees. Government is deemed to have made financial
contribution if revenue otherwise due to government is not collected. For
example, fiscal incentives such as tax credits or where government provides for
goods and services other than general infrastructure, or purchases goods on
favourable terms. A government may either itself carry out these functions or
may entrust these to any private agency. The Agreement provides examples of
a number of measures that represent a financial contribution. It is important to
note that remission or drawback of duties on the inputs used in the production
of exports is not considered a financial contribution, and so also government’s
financial contribution for general infrastructure such as rail, roads and ports.
Hence, these do not qualify as subsidy. However, excess of remission or drawback
is considered to be a financial contribution, and is also considered a subsidy.
The Agreement categorically mentions:

… the exemption of an exported product from duties or taxes borne by the like
product when destined for domestic consumption, or the remission of such duties
or taxes in amounts not in excess of those which have accrued, shall not be deemed
to be a subsidy.
All subsidies have been categorised into the following three types:
1. Prohibited Subsidies: these are subsidies that are contingent upon export
performance (or export subsidies), or upon the use of domestic over
imported goods (local content subsidy).
2. Actionable Subsidies: Most domestic subsidies come under the category
of actionable subsidy if they are specific to an enterprise or group of
enterprises. These subsidies although not prohibited, can be challenged,
either through multilateral dispute settlement or through countervailing
action, if such subsidies cause adverse effects to the interests of another
member.
3. Non-actionable subsidies: These subsidies relate to research subsidies,
assistance to disadvantaged regions and environmental subsidies. These
subsidies are either unlikely to cause adverse effects or are considered
to be of some merit and thus not to be discouraged. However, five-year
period, under which the subsidies were to be reviewed and further
decision taken, lapsed on 1 January 2000. So, now only non-specific
subsidies are non-actionable. The basic idea here is that such subsidies
should not be seen as being given to any particular product. For example,
investment subsidies and tax subsidies given to small-scale industries,
defined in terms of its investment in plant and machinery, could be given
without inviting any CVD action because the term ‘small-scale industry’
is objectively defined.
The following part of this annex examines the status of export incentives within
the SCM Agreement.
1. Special Economic Zones (SEZ): Free zones typically provide a package

of advantages that range from tax holidays to up-to date infrastructure
and simplified import/export procedures, etc. Many of these advantages
but not all are subsidies in the context of ASCM.
2. Export-oriented units (EOU): These are exempted for various input
duties, taxes and income taxes. Many of these advantages are subsidies
in the context of ASCM.
3. Zero Duty Export Promotion Capital Goods (EPCG): Under the scheme,
reduced customs duty on import of capital goods amounts to foregoing

revenue otherwise due to the GOI and thereby conferring a benefit on

the recipient. Therefore it is a subsidy as defined under the SCM
Agreement.
4. Post-Shipment Export Financing-Subsidy and Pre-Shipment Export
Financing: The unit stands to benefit from government-provided loan
guarantees to the extent of the difference between the actual amount
and the amount it would have paid in the absence of government
loan guarantee. It is also a financial contribution by the government
as per Article 1 (a) (i) of the Agreement. Hence, the programme is
countervailable under Annex I (j) of the Agreement.
5. Market Development Assistance Scheme: Some of the benefits under
this scheme are not compatible with the WTO Agreement on Subsidies
and Countervailing Measures.
6. Duty Entitlement Passbook Scheme: To the extent to which the exporters
use indigenous inputs, this scheme may be considered a subsidy whereby
instead of refunding excise on the indigenous inputs, refund of the
customs duties is made. However, where exporters import all their inputs
the scheme cannot be considered countervailable. Therefore it is not the
scheme per se that is countervailable but the use made of it by exporters.
7. Duty Drawback Scheme: Brand Rate Drawback is non-countervailable
since it is based on the actual utilisation data provided by an exporter
and these data are subject to verification. However, all industry rates,
which are essentially average rates, can often be too much off the actual
duties paid by a particular manufacturer exporter, especially the efficient
manufacturers. Hence, all industry rates can be countervailable if it is
shown that the manufacturer exporters have received excess drawback
based on all industry rates. Hence, all industry rates can be problematic
under the WTO.63
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Margin—The Journal of Applied Economic Research 8 : 3 (2014): 327–352

Sage Publications Los Angeles/London/New Delhi/Singapore/Washington DC

Export Subsidy Reforms and Productivity

Keywords: Indian Textile Industry, Export Subsidies, WTO, GTAP, CGE

According to World Trade Organization’s (WTO’s) Subsidies and Countervailing

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Margin—The Journal of Applied Economic Research 8 : 3 (2014): 327–352

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2. Export Subsidies in the Indian Textiles and Clothing Industry

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Margin—The Journal of Applied Economic Research 8 : 3 (2014): 327–352

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limit subsidisation to certain sub-groups within these categories. The more

3. Methodology and Data Sources for Modeling

Margin—The Journal of Applied Economic Research 8 : 3 (2014): 327–352

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to distinguish imports by their origin. Following the Armington approach

Table 1 Regions in the GTAP Database

Table 2 Sectors in the GTAP Database

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The global database combines detailed bilateral trade, transport and

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Table 3 Scenarios in GTAP Modeling

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to another. In contrast, partial equilibrium models frequently focus on impacts

The simulation results of the removal of textile and clothing subsidies on

Table 4 Change in Industry Output (per cent)

Sector/Region à Asia Ind EU MEA USO ROW Total

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Asia Ind EU MEA USO ROW

Table 6 Change in Industry Demands for Domestic Inputs

Asia Ind EU MEA USO ROW

Table 7 Change in Aggregate Exports13 (per cent)

R020 Asia Ind EU MEA USO ROW

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Exporter/Importer à Asia Ind EU MEA USO ROW

Table 9 Change in India’s Aggregate Imports14 (per cent)

The elimination of India’s subsidies is expected to lead to a drastic decline in

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Table 10 Relative Share of India in Different Markets (per cent)

Exporter/Importer à Asia Ind EU MEA USO ROW

The welfare impacts of the removal of Indian textile and clothing

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Table 11 Equivalent Variation (million US$)

Table 12 Allocative Efficiency and TOT Effects in the TexWapp Sector:

Allocative Efficiency Terms of Trade

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could be extended to weaving and knitting, including a requirement for

Appendix 1: Overview of Export Subsidy Schemes in the Indian Textiles