EU’s new subsidy rule could hit India’s PLI

India’s exports to the European Union (EU) and the country’s flagship production-linked incentive (PLI) scheme could attract a higher degree of scrutiny in the EU after the world’s largest trading bloc came out with a regulation prohibiting foreign subsidies that distort competition, the Global Trade Research Initiative (GTRI), a New Delhi-based think tank, said in a report.

The new Foreign Subsidies Regulation is among a series of regulatory changes by the EU that may disrupt trade, and minimizing the impact of such regulation is crucial for India as the 27-member bloc is one of its largest export markets. India’s total exports to the EU in FY23 were worth nearly $75 billion.

The regulations, which came into effect on 12 July, said companies must start notifying the details of relevant transactions on foreign subsidies starting 12 October.

In cases where the European Commission finds that a foreign subsidy is distorting competition, it can impose various remedies, including fines of up to 10% of the company’s annual aggregated turnover, requiring the company to repay the foreign subsidy if competition distortion is confirmed, or banning the company from participating in public procurement, GTRI warned.

“FSR covers financial contribution from non-EU governments to firms operating in/exporting to EU’s market. The contributions include direct grant, low-interest loan, tax incentives on goods or services at below-market prices, and provision of land or buildings at below-market prices,” the report said.

It’s worth noting that FSR applies to transactions above a certain threshold. Companies must notify the European Commission if their transactions involving foreign subsidies exceed this threshold. For mergers and acquisitions, notification is mandatory if the combined value of the merging companies’ assets exceeds €500 million, but not necessary if the value of foreign subsidies is less than €1 million.

Ajay Srivastava, a former Indian Trade Service officer and founder of GTRI, referred to FSR as hypocrisy on part of the EU.

“While distributing an annual $50 billion subsidy to farmers and over $100 billion plus annual subsidies on clean energy transition, the EU empowers itself to investigate subsidies given by other countries,” Srivastava added.

Countries go to World Trade Organization (WTO) to resolve such disputes through the WTO’s Subsidies and Countervailing Measures (SCM) Agreement. The 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, Srivastava further stressed.

The GTRI report further said that India exported goods worth over $74.8 billion to EU countries in FY2023, with key products being diesel, jet fuel, apparel and makeup, smartphones, cut and polished diamonds, aluminium ingots, medicines and turbochargers.

“The EU Commission can now investigate these products if they have received any incentives like PLI, FAME or export benefits in India. Most vulnerable are smartphones and other IT-related exports 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,” the report added.

The European Commission is already investigating the PLI scheme, and a decision is expected soon.

If the commission finds the PLI scheme violates WTO rules, it could impose sanctions or fines.

Indian businesses must identify any subsidies they receive from governments, state-owned enterprises, and other public bodies and notify the EU, Srivastava added.