EU's Foreign Subsidies Regulation May Hit India's Exports To Europe: GTRI Report

The Foreign Subsidies Regulation (FSR) of the European Union (EU) is likely to hit India's exports from sectors such as smartphones and information technology-related services to that region, a report by think tank GTRI said on Tuesday.
     
The EU has introduced this regulation which came into effect on July 12.
     
The Global Trade Research Initiative (GTRI) report said that the FSR covers financial contributions from non-EU governments to companies operating in/exporting to the EU market.
     
These contributions include direct grants, interest-free or low-interest loans, tax incentives, state-funded research and development, provision of goods or services at below-market prices, and provision of land or buildings at below-market prices.
     
However, the FSR does not apply to financial contributions provided by international organisations like World Bank and the IMF.
     
"India may be one of the first countries to be hit by FSR. India is currently negotiating a Free Trade Agreement (FTA) with the EU. Indian negotiators must ensure not to agree to any FTA text that prohibits India from taking action against FSR," the report said.
     
India exported goods worth over USD 74.8 billion to EU countries in 2022-23.
     
Key export products include diesel (USD 8.4 billion), aviation turbine fuel (USD 6.6 billion), apparel (USD 5.6 billion), smartphones (USD 4 billion), cut and polished diamonds (USD 2.6 billion), aluminium ingots (USD 1.5 billion), and medicines (USD 1 billion).
     
GTRI co-founder Ajay Srivastava said that because of this regulation, the EU Commission can now investigate these products if they have received any incentives like PLI (production linked incentive scheme), FAME (Faster Adoption and Manufacturing of Electric Vehicles) or export benefits in India.
     
"Most vulnerable are smartphones and other IT-related export of goods and services to the EU. Given India's involvement in exporting services and participating in small ways in public procurement in the EU, the FSR may also impact these areas," he added.
     
Srivastava said that the EU Commission is already investigating the PLI scheme, and a decision is expected soon.
     
"If the Commission finds the PLI scheme violates WTO (World Trade Organisation) rules, it could impose sanctions/fines," he said.
     
Further, the report stated that Indian businesses must identify any subsidies they receive from governments, state-owned enterprises, and other public bodies and notify the EU.
     
It suggested that the government prepare for retaliation and long-drawn battle at the WTO.
     
"FSR shows that EUs hypocrisy knows no limits. While distributing an annual USD 50 billion subsidy to farmers and over USD 100 billion-plus annual subsidies on clean energy transition, EU empowers itself to investigate subsidies given by other countries," the report said.
     
Countries approach the WTO to resolve such disputes through its Subsidies and Countervailing Measures (SCM) Agreement.
     
WTO explicitly prohibits countries from investigating subsidies given by other countries.
     
"Thus FSR is also in violation of the WTO mandate. FSR compromises the integrity of the WTO process," it said.
     
It added that under this regulation, companies have to notify details of relevant transactions involving foreign subsidies starting from October 12, 2023.
     
The commission will publish guidelines on the application of the FSR on December 31, 2023, and release an annual report on the regulation's implementation by June 30, 2024.
     
"The FSR applies to transactions above a certain threshold. Companies must notify the European Commission if their transactions involving foreign subsidies exceed this threshold," it added.