Column: WTO stand: In the name of God, Why

Written by Surjit S Bhalla | Updated: Jul 31 2014, 07:18am hrs
In my previous article Principled Congress stance at WTO (FE, July 29), I reached three conclusions. First, there was an urgent need for the representative WTO reference price for agricultural products to be made a dynamic price rather than the present outdated average 1986-88 price. Second, with this dynamic price adjustment, the minimum support price paid by the Indian government to its farmers is well in excess of that allowed by the WTO rules. Third, Indias present WTO stance is without logic or empirical support.

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Unfortunately, the computations in my July 29 article contained errors with respect to international reference prices for rice and wheat. In the transformation between statistical programmes, the price for year 2013 was mistakenly taken as the price for 2004, the price for 1990 was the price for 1981, i.e. the price levels were shifted backwards by a uniform 9 years for each data point. My error, my apologies.

I have written close to a 1,000 articles in newspapers over the last 30 years, and this is the first time I am making an empirical errorand for this I must apologise. I have made other important errors, e.g. that I believed that the government had no option but to present a good Budget in 2011, 2012 and 2013, and I had egg on my face, and worse, when the government of the day did not oblige. These were errors of judgement, not errors of calculation.

This error of calculation has allowed me to correct other assumptions which are detailed in the footnotes to the table. When all these corrections are incorporated, there is no material change in any of the conclusions mentioned above (phew!). Indeed, the 32-year average excess price provided to Indian producers of rice increases from minus 17% of the world FOB price to plus 17%. In the case of wheat, there is no change between the earlier calculation and the present onein both cases, our prices have been, on average, 14% above the world price.

One advantage in redoing the numbers is that it allows one to answer some questions. First, how is it that India has been able to export wheat and rice in the last few years when our domestic FOB price has been above the world price For the last three years, India exported each year an average 9 million metric tonnes (MMT) of rice, and 4 MMT of wheat. In value terms, about R40,000 crore per yearnot small.

A further point deserving emphasis is that the FOB price (relevant for exports and relevant for WTO production subsidy calculations) is the minimum support or procurement price plus freight (e.g. from Punjab to the nearest seaport) plus port handling costs. These costs are elastic, and vary according to the self-interests of the estimator. Indian grain organisations will tend to understate this important cost component; foreign organisations will tend to overstate it. The fact remains that this cost is a grey area and can explain apparent anomalies. Such costs are estimated by outside experts (e.g. US Wheat Associates (USW), which promotes US grain sales) as approximating $80 per tonne in 2013-14; according to Indian experts, this extra cost is closer to $50 or 22% of the MSP of $231 in 2013. In my calculations, I have taken the freight etc costs as 25% of the MSP.

Our self-righteousness leads us to point fingers at others, especially the US, when the fault is entirely our own! Many Indians argue that the US exorbitantly subsidises their grain production, so why shouldnt India do so as well Indeed, this is one of the background arguments for Indias stance at the WTO. If the US is the reference FOB price, no calculation can show that the US is subsidising its wheat exports. But what about hidden subsidies provided to the farm sector in the US Such subsidies have totalled $36 billion for the 18 years 1995-2012 or about $2 billion a year. For 2012, US wheat production was 49 MMT, or 18 billion, and the hidden subsidies totalled $1 billion or 5.5% of the total production. WTO agreements allow such subsidies in developed economies to not exceed 5%. Thus, whatever arguments are made against the US not being WTO compliant, wheat production subsidy, hidden or otherwise, is not one of them.

When all else fails, invoke the poor. Indias favourite argument against signing the Trade Facilitation Agreement is: Please dont mess with our Food Security Bill for the poor and consumer subsidies because that offends our sensibilities, our integrity, and our honour. Well, BJP or Congress, dont bleed your hearts, and especially not with such deep cuts. The WTO agreement only involves production subsidies, not consumer subsidies. Indeed, according to the WTO, and most countries in the world, India can do what it wants with its food subsidies. It can buy the food from farmers at R20 per kg and sell it to consumers at R0, 1, 2 or 3 per kg or any food subsidy level it chooses. The rest of the world does not care, as long as India does not pay its producers much above the FOB price.

There is a political economy lesson in food pricing. For example, Thailand lost its treasured place as a rice exporter to Vietnam because of its own populist food policy initiated in 2011. All correlations with political trouble in Thailand with their destructive food policy may not be coincidental. Neither, as pointed out in the July 29th article and several previous ones, is it coincidental that the Congress grotesquely messed up on food prices and this had a major effect on their outsized political loss in the 2014 elections.

This foray into data leads to the following robust conclusions. India has engineered unprecedented food inflation through the UPA belief that such practices will help it win the 2014 election; it obviously did not. Second, India is making itself a laughing stock in the eyes of the world community (perhaps it does not matter) by violating agreements it made just 6 months earlier when it made the WTO accept its unreasonable demands. Third, India cannot make any case for its new unprincipled stance. So, the question arisesgiven that the BJP has just formed a majority government with no obligations, implicit or explicit, to the previous UPA regime; and given that PM Narendra Modi is widely believed, and correctly so, to be his own man, then why, in the name of God and India, is Modi-BJP pursuing an illogical and regressive stance at the WTO

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