WTO & Public Stockholding Issue: Price support must be adjusted for inflation

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March 13, 2018 3:45 AM

Subsidising members should be allowed neutralisation for inflation to the extent of it exceeding 2% per annum, which can be considered the normal rate of inflation.

WTO, Public Stockholding Issue, MSP, farmers, inflationSubsidising members should be allowed neutralisation for inflation to the extent of it exceeding 2% per annum, which can be considered the normal rate of inflation.

Finding a permanent solution to the issue of public stockholding for food security purposes has been hanging fire for five years now. India will get an opportunity to try to work out a solution at the informal gathering of trade ministers of 40 nations, to be convened at New Delhi during March 19-20, 2018. In this context, we take a fresh look at the origin of the problem, the current status of the debate and the possible way forward. One of the main objectives of the WTO agreement on agriculture is to obtain a reduction of domestic support extended to agriculture sector by governments on a product-specific or non-product specific basis. For this purpose, members have to first compute the aggregate measurement of support (AMS) and then make a commitment to reduce it. The AMS is the sum of the annual level of both product-specific support, such as market price support (MSP for wheat and rice in India, for instance), and non-product specific support (such as fertiliser, irrigation or power subsidy in India). For developing countries, if the subsidy level for product-specific support is less than 10% of the total value of production of that product, or the non-product specific support is less than 10% of the total agricultural production, then the support is considered de minimis and is not taken into consideration for the calculation of the AMS. For developed countries, the limits were lower at 5%.

In India’s case, as well as for many other developing countries, the AMS was zero during the base period of 1986-88, and they did not have to undertake any reduction commitments. They, however, have an obligation to ensure that the AMS, calculated either on product-specific and non-product specific basis, remains below the de minimis level in the future. The Agreement on Agriculture provides for market price support to be calculated on the basis of the difference between the fixed external reference price (average FOB unit value for a net exporting country and CIF unit value for a net importing country during the reference period of 1986-88) and the annual administered price (such as the MSP). The root cause of the problem is that the external reference price has been fixed in nominal terms, while the annual administered price is generally raised from year-to-year, inter alia, to take inflation into account. This can result in the product-specific AMS to increase above the 10% limit, which is barred by the WTO agreement. Herein lies the source of the problem. The objective of laying down such a draconian yardstick in the agreement on agriculture was to squeeze further the very high levels of domestic support provided by the developed countries. It was obvious at the time of negotiations that the external reference price fixed in nominal terms would hurt the developing countries in inflationary times. To take this into account, Article 18.4 of the Agreement on Agriculture provides that when a member’s compliance with domestic support commitments is reviewed, consideration should be given to the influence of “excessive rates of inflation”.

The problem is that there is no clarity on what constitutes an excessive rate of inflation. In India’s case, for rice, for instance, the notified external reference price in 1986-88 is Rs 3,520 per MT. Since the MSP for rice at that time, at Rs 2,280 per MT, was lower than the external reference price, India was considered not to be subsidising, and the product-specific AMS was put at zero and there was no need for it to undertake a reduction commitment. In 2016-17, the MSP was Rs 22,050, and the Wholesale Price Index was 583.1, with the base of 1986-88. Unless full adjustment is permitted for inflation, India would have to bring down its MSP to within 10% of the external reference price of Rs 3,520, that is Rs 3,872. Surely, asking for a reduction from Rs 22,050 to Rs 3,872 would be entirely unreasonable. Ideally, the problem of inflation should have been addressed by the Committee on Agriculture under Article 18.4 of the Agreement on Agriculture. But the current environment in the WTO is so contentious that it is difficult to obtain a decision by consensus on any matter. In the past, three WTO members—Tunisia, Turkey and Iceland—sought a solution for the problem confronted by them in market price support programmes on account of inflation, but no decision was taken on the issues raised by them. As a result, the developing countries relying on market price support have been put in the predicament that they cannot fix administered prices without taking inflation into account, and the Committee on Agriculture is unable to take the decision required by the agreement to give due allowance for the level of inflation. As a consequence, developing countries implementing market price support systems are living in permanent fear of a dispute being raised against them at any time. Even though a peace clause has been agreed in perpetuity, the rigorous conditions imposed in the clause have caused discomfort, and their quest has continued for a permanent solution. It is astonishing that although India has adopted a high profile in seeking a permanent solution, it has not submitted a proposal on its own. It has chosen to support the joint proposal of the G33 grouping of developing countries, of which it is a member. This group has made three main proposals.

First, that the acquisition of stocks by developing countries from low-income and resource-poor farmers must not be taken into consideration for the purpose of calculating domestic support in terms of AMS. Second, that developing countries must have flexibility to adjust the administered price for inflation above a low rate of, say, 4%. Third, that administered price below the average international price (excluding both the high and low years) must be considered non-distorting and, therefore, consistent with the obligation of the WTO agreement. The first proposal is excessively ambitious and is unlikely to be accepted. It seeks to give open-ended flexibility to developing countries at a time when there is concern about the levels of domestic support in major developing countries. The second proposal is inadequate. It will put the interest of developing countries with low rates of domestic support in jeopardy. Even in the hypothetical situation of inflation as low as 2%, over a period of 30 years, the cumulative erosion of the fixed external reference price would be around 80%. The third G33 proposal is a good one, worthy of being pursued further. Developing countries like India, with no AMS commitments, have no leg room to make adjustments for even normal rates of inflation. A case by case consideration of the effects of inflation, as the Agreement on Agriculture mandates, is the antithesis of the multilateral trading system and must be given up. What is needed is the automatic application of an across-the-board formula, which can be applied automatically. India needs to propose the adoption of a decision that in an inflationary situation, a member which was not subsidising in the base period must be allowed full neutralisation for inflation while setting the annual administered price from year-to-year. Subsidising members should be allowed neutralisation for inflation to the extent of it exceeding 2% per annum, which can be considered the normal rate of inflation. The third G33 proposal must also be supported that an administered price below the average international price needs to be considered non-distorting and, therefore, consistent with the obligation of the WTO agreement.

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