India’s Coffee Export Growth/ What is Foreign Subsidies Regulation (FSR)?

 India’s coffee exports rose to a record high of $1,146.9 million between April and November in FY24, compared to $803.8 million during the same period last year, registering a 29 per cent rise.

Key Points:

1. India’s Coffee Export Growth:

• India, traditionally a tea exporter, has made significant progress in the global coffee market.
• Coffee exports during April-November FY24 reached a record $1.15 billion, marking a 29% increase from the previous year ($803.8 million).
• This figure is almost double the exports in FY21, which were $460 million.

1. Robusta Coffee Price Surge:

• A significant factor driving this growth is the sharp increase in Robusta coffee prices, which account for over 40% of global coffee production.
• The price of Robusta beans soared to $4,667 per metric ton in June, marking a 63% increase from the previous year.

1. Supply Issues in Major Coffee-Producing Countries:

• Major coffee producers like Brazil (the world’s largest producer) and Vietnam have faced supply issues due to adverse weather conditions like drought and high temperatures.
• Brazil’s coffee yields have fallen below projections, leading to a forecasted decrease in exports by 2.6 million bags.
• Vietnam’s coffee production is also expected to recover but remain below the record crop of 2021/22.

1. India’s Coffee Export Performance:

• India has succeeded in capturing the premium segment of the global coffee market, unlike its tea exports.
• Karnataka (Chikkamagaluru, Kodagu, and Hassan) is the largest producer of Arabica and Robusta coffee in India, followed by Kerala and Tamil Nadu.

1. EU’s Deforestation Regulation (EUDR):

• The European Union’s new Deforestation Regulation (EUDR), scheduled for December 2024, aims to prevent products like coffee from being sourced from deforested land.
• This regulation could increase the cost of coffee and other agricultural exports to the EU.
• European buyers have been stockpiling coffee ahead of the regulation’s implementation, leading to short-term gains for India.

1. Impact of the EUDR on Indian Exports:

• The Global Trade Research Initiative (GTRI) forecasts that the EUDR will impact India’s agricultural exports to the EU (valued at $1.3 billion) more severely than exports from competing countries, due to India’s higher deforestation rate.
• Products likely to be affected include coffee, leather, oilcake, paper, and wooden furniture.
• The complexity of the EUDR’s compliance requirements could increase the cost of Indian exports to the EU.

1. Top Export Destinations:

• Italy, Belgium, and Germany were the top destinations for India’s coffee exports, accounting for nearly half of total exports during the period.
• Other significant markets include Russia, the UAE, and the US.

1. Long-Term Challenges:

• Indian exporters will face challenges with the EU’s stringent regulations, including the Foreign Subsidies Regulation (FSR), which will impose additional compliance costs.
• The process for compliance, even when products are sourced from non-deforested land, will be complicated and costly for exporters.

In summary, while India has experienced remarkable growth in coffee exports, the EU’s new deforestation regulation poses a potential long-term challenge. The rising prices of Robusta coffee and supply issues in Brazil and Vietnam have provided an opportunity for India to capitalize on the global coffee market. However, compliance with European regulations could add complexity and costs to Indian exports.

About FSR :

Foreign Subsidies Regulation (FSR) is a regulatory framework established by the European Union (EU) to address the impact of foreign government subsidies on the internal market. The regulation aims to ensure a level playing field for businesses operating within the EU by investigating and mitigating the distortions caused by foreign subsidies in EU markets.

1. Objective:
   • The FSR seeks to prevent foreign subsidies from distorting competition in the EU market. Foreign subsidies are financial aids, incentives, or support provided by governments outside the EU to businesses or sectors that may distort trade or competition within the EU.
2. Scope:
   • It applies to both EU and non-EU companies that benefit from subsidies, primarily targeting foreign companies (non-EU) operating or planning to operate within the EU market.
   • The regulation covers a broad range of activities, including mergers, acquisitions, and public procurement, where foreign subsidies may be involved.
3. Investigative Powers:
   • The European Commission has the authority to investigate cases where foreign subsidies may be causing market distortions. The Commission can review transactions such as mergers, acquisitions, and state aid schemes that involve subsidies from non-EU governments.
   • Companies receiving significant foreign subsidies in these contexts must notify the European Commission, which can carry out investigations.
4. Threshold for Notification:
   • The regulation sets thresholds above which foreign subsidies must be disclosed to the European Commission. For example, large acquisitions or mergers involving foreign subsidies above a certain threshold will trigger an investigation.
5. Possible Actions:
   • If the Commission determines that a foreign subsidy distorts competition within the EU, it can take corrective actions. These actions can include demanding the repayment of subsidies or imposing conditions on the business operations.
   • The Commission may also prohibit certain mergers or acquisitions if the foreign subsidies involved are deemed to cause significant harm to the competition in the EU market.
6. Exemptions:
   • The FSR does not cover all forms of foreign subsidies. Certain subsidies, like those aimed at achieving environmental goals or promoting public health, may not be subject to scrutiny under the regulation.
   • The regulation aims to balance the protection of the EU market with the need for businesses to receive support for legitimate purposes.
7. Impact on Global Trade:
   • The FSR could have significant implications for countries and businesses outside the EU. Countries with state-supported industries or businesses could face stricter scrutiny when those businesses engage in activities in the EU market.
   • It aims to level the playing field by ensuring that foreign subsidies do not undermine EU companies that are not receiving similar support from their governments.