Why beg at Bali

Written by Uttam Gupta | Updated: Dec 5 2013, 11:04am hrs
The Indian delegation, led by commerce minister Anand Sharma, is approaching the WTO Ministerial in Bali with a begging bowl. The government has agreed to the so-called peace clausea euphemism for not taking any penal action for violating commitments under Agreement on Agriculture (AoA)proposed by WTO Director General but with the caveat that this will remain in place until a permanent relief is granted.

Indias concurrence with the peace clause proposal of DG tantamounts to conceding that India has committed a violation but would want WTO to alter rules to allow developing countries to maintain agricultural subsidies in excess of 10% of agricultural GDP. This has catapulted developed countries to a position from where they resort to aggressive posturing. They are willing to grant immunity from penal action for only four years. But they refuse to promise a time-line as to when the permanent relief will come. They merely say this will be taken up for discussion at the next Ministerial in 2017. In other words, there is no guarantee that immunity will continue beyond four years even as India and other developing countries in the G33 club want it for an indefinite period without any break. Even for granting this interim relief, developed countries are insisting on a plethora of conditionssubmission of data on food procurement, stockholding, distribution and subsidies (including their computations) etc. These also include a demonstration that the subsidies are not trade-distorting.

Juxtaposed with the above conditionssome of these nearly impossible to complyeven the so-called interim relief would become redundant. And we would have a collateral damage of subjecting our entire food security system to monitoring and surveillance by WTO.

So, what is this violation of WTO rules that India is worried about; a worry that has pushed our negotiators/strategists bending backwards and accept conditions that were not there even in AoA

The trigger is the Food Security Act (FSA), which will result allegedly in Indias agricultural subsidyAMS (aggregate measurement support) in WTO parlanceto exceed de minimis 10% that developing countries can maintain under AoA (1995).

We need to be clear what is AMS How it is determined as per WTO formula Which subsidies are exempt from reduction commitment Is subsidy under FSA exempt

AMS has two components: (1) Product-specificthe excess of price paid to farmers over international price (external reference price, ERP) multiplied by quantum of produce; (2) Non-product-specificmoney spent on schemes to supply inputs viz. fertilisers, seeds, irrigation, electricity at subsidised rates. For computing AMS, however, the support to resource-poor farmers is excluded as this does not have any trade-distorting effect, whereas WTO disciplines target only those forms of support which produce such effect (amber box subsidies).

During the Uruguay Round, India submitted that input subsidies given to 79.5% of total landholdings (farmers with less than 10 hectares) are taken as low-income or resource-poor and, so, will qualify for exemption under Article 6.2 of AOA. Clearly, it is the support to farmers (excluding resource-poor farmers) that is subject to reduction commitment. Under AoA, a developing country was required to undertake reductionby 13.3% over 9 years if AMS (as determined above) exceeds 10% of agri-GDP.

During 1986-88 (the reference period for benchmarking reduction commitments), Indian farmers got much less than prevailing international prices. Consequently, product-specific AMS was negative at 38%. Non-product-specific subsidy was 7%. Overall, support was minus 31%. Hence, it was not obliged to cut.

Since then, the prices paid to farmers have increased substantially. The subsidy on agri-inputs, too, increased manifold. Yet considering that ERP too has gone up and 80% of input subsidies can be claimed as green box under Article 6.2, India may still be within 10%, though in a positive territory.

What about subsidy under FSA Under FSA, the government guarantees supply of 5 kg of cereals per person per month at R3 per kg rice, R2 per kg wheat and R1 per kg coarse cereals to 67% of population (50% in urban areas and 75% in rural areas). By mandating the sale of foodgrains at a price below cost of production and distribution, it is actually subsidising consumers of foodgrains and not farmers. Not being support to producers, this cannot be the target of reduction commitment.

The extant WTO rules allow public stockholding for food security purposes and direct provision of food to sections of population in need, at subsidised prices. Expenditure under these is part of Annexure 2 of the Agreement covering all domestic support measures explicitly qualifying for exemption from reduction commitments.

True, the Annexure states that such programmes shall not have the effect of providing price support to producers. This arises when MSP is higher than ERP and is already captured in AMS calculations. Clearly, the support under FSA is not subject to any cap/ceiling under AoA. Yet the government is committing a folly of treating this as amber box subsidy that is subject to reduction commitments.

Can support under FSA distort trade This could happen if stocks are offloaded in international markets at prices lower than the cost of procurement and distribution. Such a scenario is theoretical to say the least as food thus procured is meant for giving to the countrys poor. Far from that, the FSA would only result in conferring excessive gains to other food-exporting countries. Access to food being a fundamental right, in event of shortfall in domestic production (especially in a drought situation), India will have to import, leading to higher prices.

India faces no risk of violating its commitments under WTO. Subsidies under the FSA are permissible under AoA (Annexure 2) without any ceiling. There is no need for seeking any alteration when extant rules already give required comfort. However, in our own interest, the government should implement long-awaited reforms in food and fertiliser subsidy regimes. The need of the hour is to bring in direct income support to the poor, which is a more efficient and transparent route, and would save huge resources.

The author is a policy analyst