Stand firm on farm subsidies

Written by Uttam Gupta | Updated: Oct 9 2013, 09:39am hrs
In the run-up to the WTO ministerial meeting at Bali on December 3-4, the G33 developing countries, led by India, have sought flexibility to continue helping poor farmers through support prices without a limit on subsidy. The US promptly rejected it on the grounds that this will be tantamount to altering the rules of the game. Pascal Lamy, former WTO director general, promptly echoed the US stance.

However, the rejection is without basis. Under the Agreement on Agriculture (AoA) 1995, support to poor farmers was excluded from the calculation of the aggregate measurement of support (AMS) and the decisions regarding subsidy reduction commitments with reference to the 1986-94 Uruguay Round. The reason for this exclusion was that support to poor farmers doesnt have any trade-distorting effect while WTO discipline targets only those forms of support which do (amber box subsidies).

Farmers in developing countries are preponderantly resource-poor small and marginal ones. In India, these two classes of farmers account for 85%, or 117 million of a total of 138 million, farm households. A majority of them are subsistence-farmers producing food for household consumption. Their produce doesnt even enter the supply chain. Others with marketable surpluses are barely able to make a living off selling produce.

Clearly, there is no question of such farmers causing any trade distortion. This fundamental reality was recognised during the Uruguay Round and was duly embedded in the AoA. All the more significant is the substantial increase in their numberit rose by 25 million households between 1995 and 2010.

So, far from rewriting the rules, what the G33 countries are doing is asking for the continuation of a policy that was already in place. It is important that they do not allow themselves to be bulldozed by the developed countries.

The subsidy implications of the Food Security Act (FSA)R6.8 lakh crores in 3 years as per the CACP seem to have generated a bit of a scare among Indian policymakers. They feel this could invite action under WTO rules. This apprehension, too, is without basis.

Under the FSA, the government guaranteesas a matter of fundamental right of an individual supply of 5 kg of cereals per person per month, rice at R3 per kg, wheat at R2 per kg and coarse cereals at R1 per kg, to 67% of the population (50% in urban areas and 75% rural areas).

By mandating sale of foodgrains under the PDS policy/FSA at prices below the costs of production and distribution, the government is actually subsidising consumers of food grain, not the farmers. This must not be mixed up with our WTO commitments.

For determining whether Indian farmers are subsidised, the price paid to them has to be compared with what they would realise by selling in the market. It would be fallacious to fix a near-zero price on sale to the consumer and then say that the resulting subsidy is to the farmer!

AMS has two components, viz. product-specific, and non-product-specific. The product-specific component is the excess of price paid to farmers over international price (external reference price) multiplied by the quantum of produce. The non-product specific component is the money spent on schemes to supply inputs, viz. fertilisers, seed, irrigation, electricity at subsidised rates.

In 1986, Indian farmers were getting much less than prevailing international prices. Consequently, product-specific subsidy given by India was substantially negative at 38% of value of agri-production. Non-product specific subsidy was 7%. Over-all, support was minus 31%.

Under AoA, developing countries were required to undertake reductionby 13.3% over 9 yearsif the AMS was more than 10% also known as de minimis level. Since, the Indian AMS was already much below de minimis (negative, in fact), India was not required to undertake any reduction.

For developed countries, de minimis limit was 5% of value of agricultural production. The reduction commitment for them was 20% over 5 years. When seen in backdrop of very high support already given by them in 1986, that was a farce.

For OECD countries, the AMS in 1986 was 52%. Thus, even after a 20% cut, the actual support would still be 42% or 8.4 times the de minimis! Yet, they did not honour even the token commitment. OECD AMS declined from 52% in 1986 to 42% in 1997 only to be raised to 55% by 1999. Thereafter, they have merely indulged in shifting subsidies from amber to green box while keeping overall levels high.

Meanwhile, the prices paid to Indian farmers have increased substantially. Between 2005/06 and 2010/11, support prices for wheat and rice increased by 72% and 75% respectively. Thus, product-specific subsidy may have moved in to a positive territory though this would still remain below the 10% de minimis.

During same period, subsidies on agricultural inputs increased even more sharply by 214% to nearly $30 billion. This is a matter of serious concern as here, unlike product-specific subsidy, if support exceeds de minimis threshold, all supportnot just support above the thresholdhas to be included in AMS calculation.

Thus, if $30 billion represents the10% threshold and actual support is $30.1 billion, then the entire $30.1 billion (including $30 billion de minimis) would become the target of reduction commitment!

In this backdrop, the criticality of continued exemption of resource-poor farmers from reduction commitments acquires added significance. At Bali, India and other members of the G-33 should vigorously pursue the continuation of the extant dispensation.

During the Uruguay Round, India had submitted that input subsidies given for 79.5% of total land holders (farmers with less than10 hectares) are taken as low-income or resource-poor and therefore, will qualify for exemption under Article 6.2 of AOA. Accordingly, in its notification submitted in 2002 covering 1996/97 and 1997/98 marketing years, India allocated about 80% of input subsidies to Article 6.2 and about 20% to amber box.

Our negotiators must stick to this position countering all attempts by developed countries to put all input subsidies into the amber box. Their argument that benefits of these subsidies are availed of by all farmers cannot controvert the fact that 80% the benefit accrues to low-income or resource-poor farmers. At the same time, they should goad developed countries to bring down their AMS to 5% de minimis level within 5 years. They should also be persuaded to lower their export subsidies and import tariff to pre-fixed targets.

The author is a policy analyst