Column: Principled Congress stance at WTO

Written by Surjit S Bhalla | Updated: Jul 29 2014, 07:07am hrs
As is well known and appreciated by now, India has made yet another principled stand at the World Trade Organisation (WTO). Showing its deep concern for the welfare of the poor, India is threatening to defeat the universally agreed commitment to improving trade facilitation between countries. No, this is not some banquet, but rather a mundane agreement which will increase the ease of doing business, and lower prices for all the worlds consumers. What is this great Indian rope trick That the WTO should allow India to pursue the Congresss and Sonia Gandhis dream of the Food Security Bill (FSB). As shown below, this BJP Indian stance has nothing to do with the FSB, or the poor, and everything to do with the bad, bad growth destroying and inflation generating policies of the Congress.

Click here for graph

Thus, the Narendra Modi-led BJP government is allowing itself to be captured by Congress-appointed bureaucratsyet again. The first major capture was in the Budget speechuniversally disliked by all (including chuckle-chuckle, wink-wink, UPA politicians and bureaucrats). The Budget speech, by not emphasising reforms, undermined the authority of the newly elected PM Modi, though as I have argued earlier (Watch what we do, not what we say, FE, July 19 this might not be as bad if the BJP introduces reforms and action for which it was overwhelmingly voted in.

Some facts about the WTO case. First, there are precious few countries that are supporting Indias WTO stance. At last count, there were just three countries, well known for having done wonders for the poorthe venerable states of Bolivia, Cuba and Venezuela. Second, India is attempting to violate the very policy it agreed to in December 2013. Third, contrary to what many believe, the WTO subsidy agreement is only with regard to production and procurement of agricultural goods, and has precious little to do with consumer subsidies. Fourth, India had already agreed to a resolution of the food subsidy issue by 2017, so why are we demanding that agreement be reached now It gets worse.

There is a major flaw in the existing WTO policy on subsidies. The current reference price for the calculation of subsidies is based on an outdated average world price for the three years 1986-88. One of the desirable, and universally accepted WTO policy change is that the reference world (WTO) price for calculation of the production subsidy be some recent price. All countries (even India and Cuba) want the reference price to be a dynamic price, e.g. a moving three-year average. This reference price is reported in the table as the lagged price (by one year). The domestic procurement price for wheat was $131 per metric tonne in 1985; and the three-year (1982 to 1984) international price was $159.9 per tonne. A final note on reference priceif a country is a net exporter then the reference price is the FOB (free on board) price; if a country is a net importer, then the reference price is the CIF (cost + insurance + freight) price. How does this matter The gap between the two is approximately 30%, with the CIF obviously higher.

Just look at the accompanying table in order to understand the folly of the BJP, and the masterstroke by old era and old mindset bureaucrats wanting to protect their mistakes (and backside). For 24 years between 1983 and 2006, our procurement price for rice and wheat was well below the FOB international price; we had droughts and plentiful rainfall; and the PDS food delivery system was well stocked and it worked inefficiently and corruptly. Enter the UPA-2 in May 2009 and both rice and wheat procurement prices go well above international prices. In this UPA-2 period, there is bountiful weather, good food production, and just as inefficient and corrupt food distribution. In addition, inflation, especially food inflation, enters a record double-digit level for six years in a row and RBI begins to worry about entrenched inflation expectations. It keeps interest rates high, thereby making sure that the GDP grows below 5% for the last two years.

Note the irony and the tragedy. The UPA got us into this mess by its irresponsible policies towards a few selected farmers. This mess was voted upon by the Indian population and resulted in the overwhelming rejection of the Congress. Part of this rejection was based on the high levels of consumer price inflation directly engineered and brought about by the large increases in producer prices, both relative to our own and international prices. Modi comes in with a record electoral performance, (almost) no matter what the definition of a record! The Congress obtains only one-fifth of the seats it obtained in 2009. And now Modi wants to support UPAs bad policies

Can anyone find a redeeming feature in the Modi-BJP stand on food security The UPA food policy only helped the large farmers in Punjab, Haryana and western UP. It did not help the poor consumer because she got less than 15% of the food subsidy. So who does India-Bolivia-Cuba-Venezuela WTO policy protect Why, none other than the UPA governments very bad policy on raising wheat and rice procurement prices sky high (dont believe mejust look at the table again). By supporting the Congress policy at the WTO, the BJP will ensure that the Congress is not held accountable for their rotten food policies. Why

There is yet another example of imminent bureaucratic capturethis time by both the ministry of finance and their comrade-in-arms-and-crime, the securities regulator, Sebi. Amid much fanfare, Jaitley announced in his Budget speech that foreign portfolio investors will now be allowed to directly access the Indian stock market via India-based managers. This would help the Indian banking and management sector to grow and provide, through salaries and management fees, much needed jobs and tax revenue for the government. By definition, this would also entail some revenue loss for leading Indian and foreign investment banks, as they would lose the super-normal profits that they obtain from Indian managers in order to route their investments via Mauritius or Singapore.

Guess what, if well informed sources are to be believed, the securities regulator Sebi (also known as a supplicant to the ministry of finance, same old Congress appointments) is about to mandate that an Indian fund manager has to have a prohibitive net worth in order to get a licence to accept foreign money. This graciousness is not for the poor foreign investor, but for the well-heeled investment banks (foreign and Indian) who know how to protect their turf and profits. Everywhere else in the world, big banks are considered bad, especially after the 2008 financial crisis. Except in India, a country whose policies have been dedicated to protecting the rich and exploiting the poor and the middle class.

One had lots of reasons to think that the BJP, especially PM Modi, would not subject itself to manipulation by Congress mindset bureaucrats. We will know by July 31 on both issuesWTO and gifts to a select few investment banks. My bet still remains that Modi will act as the people who elected him expect him to act. But August could be another story.

Surjit S Bhalla is chairman of Oxus Investments, an emerging market advisory firm, and a senior advisor to Zyfin, a leading financial information company. He can be followed on Twitter, @surjitbhalla