As is well-known, the point of contention is that in countries in which the safety net is provided to farmers through market price support, the benchmark for determining the level of their subsidisation is the fixed external reference price from 1986-88 for each product. These prices were notified by the WTO members on the basis of the free-on-board (fob) unit value for net exporting countries and the cost-of-insurance-and-freight (cif) unit value in net importing countries prevailing during the reference period. The level of subsidisation during a particular year is determined by subtracting the fixed external reference price from the applied administered price (such as the Minimum Support Price in India). For a country like India, in which there was no subsidy during the reference period, or in which the level of subsidy was less than de minimis level of 10%, the obligation is that the subsidy should remain below that level in the future.
The crucial point is that the benchmark is fixed in nominal terms. There is no room for flexibility for inflation when the member concerned notifies its level of subsidy to the WTO from year to year to enable reviews by the Committee on Agriculture. However, Article 18.4 of the Agreement on Agriculture of the WTO does provide that, in the review process, Members shall give due consideration to the influence of excessive rates of inflation on the ability of any Member to abide by its domestic support commitments. What seems to be envisaged here is a case-by-case approach, which is the antithesis of a transparent, rules-based multilateral trading system that the WTO framework embodies.
It is true that the idea behind fixing the benchmark in nominal terms was to allow the commitments on Aggregate Measurement of Support (AMS), mainly of the developed countries, to be eroded by inflation. Little attention was paid at that time to the predicament in which many developing countries were being put. Clearly, the participants had a short time-horizon in mind, as the next round of negotiations was scheduled to begin in five years time, in 2000. Surely, the aim could never have been to fix the benchmark in nominal terms in perpetuity!
In light of the above, the attention at Geneva must shift towards a search for solutions for addressing the problem caused by the fixed external reference price. In the run up to the Bali Ministerial Meeting, the G33 had proposed inter alia that the normal rate of inflation should be defined and the member concerned granted the flexibility to reduce the administered prices by a factor based on the difference between the actual and normal rate of inflation. Some G33 countries have also made proposals for raising the de minimis limit of 10% for developing countries. Another proposal, also favoured by a subset of developing countries is to allow a revision of the base years for determining the fixed external reference price in order to take into account the change that has taken place in the world food economy. A number of other suggestions have emerged from the writings of scholars on the subject. The most promising is the one that proposes that administered prices that are set at rates that are not above international market prices should be deemed to be in compliance with the WTO commitments.
In its advocacy of the alternatives, India must bear in mind a number of considerations. First, any proposal that seems to suggest that developing countries should be given greater flexibility to subsidise would be seen as a retrograde move and would be a non-starter. Similarly any proposal, which seems to alter the balance of rights and obligations or require an amendment in the WTO Agreement, even if it makes sense in economics, is not likely to go forward. Only those proposals that entail an interpretative decision are likely to succeed. A proposal to adopt a decision that interprets Article 18.4 as allowing an automatic adjustment for inflation while comparing the annual administered price with the fixed external reference would fit in very well here. The main problem here is interpretation of what might be construed as excessive rates of inflation. In proposing that adjustment should be considered if the rate of inflation is above the normal rate of, say, 4%, the G33 nations missed the point that neutralisation of even a modest rate of inflation over a long period of 10-15 years could result in the support price being completely out of line with the external reference price fixed in nominal terms.
India has recently submitted its latest notification on domestic support, which includes the one for 2010-11. As in the past, India has notified values in dollars, even though its original notification (for the period 1986-88) was in rupees. A strict interpretation of the rules might seem to suggest that India has an obligation to make its notifications in rupees. However, the other members who have taken recourse to Article 18.4 have also switched currencies, and a big issue has not been made of it. The apparent justification for the switch is that depreciation in exchange rates is a surrogate for taking inflation into account. But even if submission of notification in dollars may be acceptable to other members, the question arises if it is Indias interest to do so.
Analysis shows that India might be overstating its subsidy by using dollars. For instance, Indias notification for 2010-11 shows a positive subsidy on rice in terms of dollars, while studies by ICRIER, on the basis of rupees, adjusted for inflation, show that India has no product-specific subsidy on rice in that year. Interestingly, projections up to the year 2013-14 show that if calculated in rupees, the subsidy is still negative while it is not only positive in dollar terms but well above the de minimis limit. The underlying reason for this is that the exchange rate movement reflects not only the differential rates of inflation but also such factors as foreign capital inflows. In light of this, it may be better for India to consider notifying its support levels in the local currency and adjusting the fixed external reference price for full inflation.
Anwarul Hoda & Ashok Gulati
The authors are Chair Professors at ICRIER