Poor trade facilitation (in India and in its trading partner countries) directly and indirectly hurts India’s exports. Thus, the successful implementation of the WTO Agreement of Trade Facilitation would undoubtedly be good for India. Yet, 31st July deadline on trade facilitation passed without India succumbing to the pressure of the developed countries to let it pass through the General Council of WTO.
India insisted that it would not sign onto the Agreement on Trade Facilitation until all issues in Bali package including a permanent solution for public stockholding and food security are taken as a single undertaking. India may be right on principle as developed countries have a history of dilly dallying on the issues of concern to developing countries, but there are some real flaws in India’s argument.
Para 4 (b) of Article 6 of the WTO’s Agreement on Agriculture (AOA) imposes the 10% cap on both – product and non-product specific subsidies given by developing countries. This ratio is 5% for developed countries. 80% of India’s non-product subsidies that cover input subsidies on fertilizer, power and water are given to resource poor farmers and hence will easily escape the WTO subsidy discipline. The problem lies with India’s product specific subsidies, subsidies on rice and wheat in particular.
Under the product specific subsidy, the 10% cap applies to ‘production’ subsidies and not to ‘consumption’ subsidies. Hence, WTO subsidy discipline will not put any limits on India’s ability to sell wheat or rice at prices below their procurement costs. It has nothing to do with, at what prices India’s well-intentioned, but highly inefficient public distribution system (PDS) sells rice and wheat to its poor. It will thus have no bearing on India’s Food Security Act, quite in contrast to the popular belief.
However, 10% subsidy cap will certainly put limits on India’s ability to adjust its minimum support prices (MSPs) for the procurement of rice and wheat for public stockholding purposes. Given India’s overflowing FCI’s go-downs of rice and wheat, India’s MSP-induced production and procurement system has the potential to induce dumping of subsidized food in the international markets at below procurement prices sooner or later and would distort trade in agri. commodities.
WTO’s Agreement on Agriculture (AOA) defines subsidy as the difference between current MSP and International Reference Price (IRP), with IRP being taken as the prices frozen in 1986-88. These prices for rice and wheat are expectedly very low by any standard, but that’s the rule that applies at the moment for the calculation of agri. subsidy or farm support even if it’s outdated and unjust.
Thus, if the MSP for wheat is US$ 250 against a global price of US$ 300, India’s farmers would be negatively subsidized to the extent of US$ 50. However, if we take IRP of 1986-88 that is US$ 150 then the subsidy would be of US$ 100, and India subsidy program will not be WTO-compatible.
Indian government fears that soon its food program will invite WTO sanction for breaching the 10% subsidy cap – that’s why India insists that its food subsidy and procurement program should be exempted from WTO subsidy discipline. Only then it would agree to accept the Agreement on Trade Facilitation. Keeping in mind India’s sensitivity on farm subsidy, Bali Ministerial (Dec 2013) reached a compromise formula – the peace clause for brokering agreement on trade facilitation.
The peace clause provided a four year relaxation on farm subsidy discipline to India (and other developing nations) until 2017, till a permanent settlement to the food program is arrived at. Now, India has refused to accede to ATF unless the question of its food security program is settled simultaneously.
Experts opine that this backtracking on something India agreed a few months back will damage its reputation in international community. Leaving aside the reputational cost, it would be pertinent to ask, is it only about cheap food for the poor or something else? The right question would who benefits from the high MSPs for rice and wheat in India?
Well, high MSPs benefit those farmers who have surplus produce to sell to the government. Obviously, landless farmers and farmers with small and uneconomic holdings are not going to benefit from unrestricted and successive hikes in MSPs. In fact, high MSPs and inefficient procurement methods of FCI are aiding food inflation and hurting the interests of poor. Switching to direct cash transfers based on area and yield that are permitted by WTO and widely practiced in the developed countries would serve the interests of India’s farmers and poor better in a fiscally cost effective manner.
Why then Indian government is so insistent on protecting its MSPs linked procurement programs. It’s nothing but to appease the farm lobby comprised of big surplus farmers, in times of competitive democratic politics. The story is the same in developed (the EU, Japan, Korea and the US) as well as developing (India for example) countries. No political party wants to antagonize the farm lobby. That remains the bitter truth.