FCI’s role in the WTO deadlock cannot be overstated
While India has already won a victory in the WTO with the US assurance that it will not be taken to the Dispute Settlement Board (DSB) on its food security operations until a permanent solution is found, progress on a more permanent solution remain deadlocked. India is undoubtedly correct in its opposition to the WTO calculating subsidies based on 1986-88 prices, but the real problem relates to the procurement operations of the Food Corporation of India (FCI)—for FY11, as per
India’s WTO submission, FCI’s buffer stock operations were around $13.8 billion. Though India continues to argue that such operations should be considered ‘green box’ subsidies, Australia and EU argue FCI operations are distorting global trade and should be considered as part of the ‘amber box’. India is on a weak wicket here since, when FCI sells its stocks of wheat and rice in the open market, there is no way to ensure this grain does not end up in the market for exports. Normally, this should not matter, but FCI offloads the grain at prices lower than its economic cost, and is therefore seen to be distorting global trade.
The reason why FCI has to sell at a discount is the crux of the problem and, surprisingly, successive governments have done little about it—indeed, were this to have been dealt with, even though India’s objections on the 1986-88 prices are valid, it needn’t have taken on the make-or-break shape it took some months ago when India said it would oppose a deal on the trade facilitation agreement (TFA) until its food security concerns were not adequately addressed. The genesis of the problem lies in India’s ration shop-based food security system.
Since India needs a certain amount of grain for the ration shops, it tends to offer high minimum support prices (MSPs) for farmers to grow these crops and combines this with a guarantee that FCI will procure whatever grain is on offer from the farmers. As a result, on an average, FCI has roughly double the grain it needs through the year, and this is typically at a very high cost since FCI’s operations are quite inefficient—while FCI buys wheat at R1,400 per quintal, its economic cost is R2,200 per quintal. So, were FCI to not purchase so much rice/wheat, traders would be able to buy in the market at near the MSP and then, if need be, export it. Thus, FCI’s so-called discount is not really a subsidy, it is just absorbing the cost of its inefficiency—ironically, since FCI failed to offload wheat when global prices were at $300 per tonne, it will have to sell at an even greater discount. So if the government was to reduce FCI’s role—by moving towards more cash transfers, for instance—it would not just save money, it would even fix its WTO problem.