A figure below 10% is acceptable according to the WTO negotiations for developing countries, and below 5% for developed ones. How the US and India get such remarkably different numbers is at the heart of the problem with how the WTO operates.
Few things symbolise the WTO’s failure as evocatively as the developing world’s fight over food subsidies does. This has stalled various trade rounds because, while developing countries like India want more time to phase out their subsidies, especially since the Europeans and the US spend billions of dollars every year to subsidise their farmers, the latter give “data” to show this isn’t true. Most lay observers are swayed by the “data” and think countries like India are indeed guilty. Perhaps the best example of this is the latest submissions by India on its subsidies—Aggregate Measure of Support (AMS) in WTO jargon—and the US response to this. The US submission says that while India claims its AMS for rice was 5.45% in 2013-14, the actual number was 76.9%—that is, while India says its support to rice farmers adds up to 5.45% of the value of the crop in that year, in reality, India gave farmers more than three-fourths extra by way of price support. The corresponding figures for wheat are 3.53% and 65.3%. A figure below 10% is acceptable according to the WTO negotiations for developing countries, and below 5% for developed ones. How the US and India get such remarkably different numbers is at the heart of the problem with how the WTO operates.
Apart from the price that India guarantees its farmers, what obviously matters is the proportion of the crop that this applies to. Since India’s minimum support price (MSP) is, theoretically a price at which every farmer can sell to the government, the US assumes India’s price support extends to 100% of the crop; India, however, buys only 25-30% of the crop, so, logically, the price support should only apply to that amount. The fact that wheat/rice prices in India are way below MSP in most parts of the country is testimony to the view that MSP is not an effective price support to 100% of the crop. Indeed, while the US calculates India’s AMS for just wheat and rice as Rs 274,515 crore in 2013-14, the entire budget for the ministry of consumer affairs, food and public distribution that oversees all MSP and ration shop functions was Rs 92,927 crore! Just correcting for this distortion will reduce the US estimate of Indian subsidies from the 65-77% range to 16-19%.
This, it turns out, is the minor part of the story. When you look at the US calculation, it talks of the MSP of Rs 13,500 per tonne for wheat in most parts of the country. It then takes a “reference price” of Rs 3,540, multiplies the difference (13,500-3,540) by the 71 million tonnes of crop and arrives at the AMS; the same exercise is done at a higher price in some states that offer a bonus over the MSP. Given value of wheat was Rs 147,795 crore, the US arrives at an AMS of 65.3%. In the case of paddy, the US takes an MSP of Rs 13,100 per tonne and a “reference price” of Rs 2,346.67. But, and here’s the catch, the current global price of wheat is not Rs 3,540 per tonne, it is around Rs 16,900—in 2013-14, prices were 25-30% higher. With India’s MSP lower than the international price, its price support is negative, not a positive 65.3% as the US alleges! In the case of paddy, the US uses an MSP of Rs 13,100 vs a reference price of Rs 2,346.67, and uses this to arrive at a 77% AMS. Yet, when you look at the current price of Rs 19,500 per tonne, it is obvious India’s price support is negative —indeed, it is because India’s prices are lower than global prices that it is able to export in large quantities.
So, why is the US using the wrong “reference price”? When the WTO reached its agreement, it needed a “reference price” to avoid disputes based on annual fluctuations in global prices. It used the average global price between 1986-88 for this. Logically, this price should have been revisited regularly or adjusted by, say, the level of inflation or the exchange rate. India’s WPI, for instance, is up 5.6 times since then; not surprisingly, the exchange rate to the dollar which was 13.4 then is also up 5-6 times. Such is the rigidity in the WTO process, in 2018, we are using 30-year-old prices to calculate market support. But, the serious question is, why doesn’t this trip up the US and Europe who spend a lot more on farmers? Because, when the WTO focussed on trade-distorting subsidies—that meant anything like MSP that affected the domestic price—the US and Europe simply converted their price support to unconditional cash transfers to farmers which were not related to a particular crop. Each system gave, say, Rs 100 to a farmer, but the Indian one required him to grow wheat or rice while the US/EU didn’t.
Now that India has got Aadhaar-based cash transfers, it too can follow EU/US and stop its MSP while ensuring the farmer gets the same amount of subsidies. Indeed, there are attendant benefits to doing this since higher MSPs mean Punjab and Haryana grow too much wheat and rice and that hurts their soil and lowers the water table. But at a more basic level, why does India need to change its system of MSPs just because the WTO is unable to learn basic maths?