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India v/s Developed countries- India’s conundrum and stance on agriculture subsidy

, June 12, 2019, 2 Comments

India-agriculture-marketexpressIndia is primarily and widely known as an agrarian economy where the mainstay of a large chunk of the people is agriculture. More than 50% of the population either depends directly or indirectly on agriculture. Agriculture in India contributes significantly to the overall GDP (15.4%) and employs a large proportion of the work force mainly in the unorganized sector.

Developing countries, such as India, are not untouched by the adversities of farmers who spend their entire lives in hope of self-sustenance, the dream of hundreds still unrealised.

Agriculture in India is highly dependent on monsoon behaviour and any shift in climate patterns poses glaring challenges on the farmers of the country, ending them in even sorry state of affairs. Farmers are constantly affected by and vulnerable to volatile price movements in commodity markets. Inadequate produce not only leads to food supply constraints, but also wastage of financial resources of the strata thus leading to food inflation. Also at times of bumper crops, market forces come into play and excess demand drives down the prices of crops, thus leaving farmers with poor prices for their produce.

Hence, in light of the above mentioned factors, the government is faced with the challenge of maintaining a balanced approach while formulating farm policies. Rapid growth of agriculture is essential for ensuring food security and alleviation of poverty and has become inevitable for the socio economic development of India.

The government over the years, has tackled food supplies and prices through procurement, imports, stocking, releases through open market sales and public distribution, export duties and restrictions, stockholding and inter-state movement limits, anti-hoarding raids, and extensive price interventions.

The Indian government subsidizes the farmers by providing them with Minimum support prices. The rationale being if there is a fall in the prices of the crops, after a bumper harvest, the government purchases at the MSP and this is the reason that the priced cannot go below MSP. Another purpose is to incentivize farmer to produce more crops so as to ensure food security in India. This becomes necessary in a nation where the majority of population’s sustenance is directly or indirectly linked with agriculture. Food security is not only of great economic relevance, but also a very important socioeconomic concern in large agrarian economies like India.

Of late, there is a larger debate going around the issue of food security of developing nations in the WTO. Wherein the developed countries have raised the issue of farm subsidies provided by India and other like nations are trade distorting as these are accorded in excess of what is permissible under WTO norms.

The subsidies that developed nations, especially US gives are considered as non-“market-distorting” because the US gives the bulk of its subsidies in the form of cash transfers to the agricultural sector. Such cash transfers fall under Green box subsidies which are considered as non-market distorting. On the contrary, in India subsidies are provided through offering remunerative prices (output subsidies) or cheap inputs (input subsidies) which are believed to involve interference with free market prices, hence are considered as market-distorting subsidies.

WTO norms limit subsidies to 10% of the total value of agriculture production based on 1986-88 prices, which is a point of contention raised by India and some other developing countries which argue that the base year prices are outmoded. India wants inflation to be taken into account when calculating subsidy limits, which is also justified keeping in view the soaring prices.

The task at hand is not easy for the Indian government, which has to meet its criteria of socioeconomic development of its technical rural grassroots. Indian government buys rice and wheat from farmers at minimum support prices (MSP) to provide a reasonable income to producers while the stockpile is used to provide heavily subsidised food to the poor masses.

The developed countries want India to stop buying food grains from the farmers and also to dismantle the public distribution system and adopt the channel of ‘direct cash transfer’ to the beneficiaries of the National Food Security Act. People can use the cash to buy food grains or other necessities from the open markets. This step, if accepted, will have its possible ramifications. If the central government stops buying food grains from the farmers for public storage and also stops, distributing it through PDS, then the food security of the country will come entirely under the clutches of corporate interests. The prices will escalate in India because then the markets will determine the prices of food grains, pulses, oil seeds and other agricultural products and not by the government.

Recently, in an attempt to combat rural distress, the Union budget announced minimum support prices (MSP) of 150% of the cost of production. This led to speculations of ever rising food inflation in the economy. However, latest October figures reveal deflation instead of inflation in food prices. The deflation in the agricultural sector is a sign of continuing farmer distress. Such a trend goes against simple economics of MSP driving food inflation and declining trend is showing that there has been very little procurement happening on the ground.

Future inflation trajectory would depend on the response of Mandi prices with respect of new minimum support prices, and the movement of crude oil price and value of currency. The possible outcomes of rising inflation with regards to hike in MSP are yet to be seen on the surface.

Despite being a country whose GDP may be rising fast, India is a country where a major chunk of its rural population is hunger struck and struggling to find their basic sustenance and its per capita income is much lower than those of rich nations.

In view of this, India should stick to its commitment of having a binding permanent solution for food security and not back down in front of the developed world. The WTO should uphold the development dimension of trade and trade rules as part of the Doha Round, thereby restoring the trusts of developing countries.

  • Soham Seth


    • huma saif

      Thank you for your appreciation.