WTO’s sugar pricing ruling: India gets a bitter deal

The WTO panel’s interpretation of India’s FRP/SAP regimes as subsidies turns the trade regulator’s ASCM on its head

They had also characterised India’s sugar export promotion measures as violation of AoA.
They had also characterised India’s sugar export promotion measures as violation of AoA.

By Biswajit Dhar

Indian farmers’ efforts to get guarantees from the government for receiving remunerative prices for their produce has been jolted following the rulings of dispute settlement panel of the World Trade Organization (WTO). The panel has ruled that India is violating its commitments under the Agreement on Agriculture (AoA) by granting price support to sugarcane producers and export subsidies to sugar.

The dispute settlement panel was established in 2019 after Brazil, Australia, and Guatemala had complained to WTO’s Dispute Settlement Body that the Fair and Remunerative Price (FRP), the minimum price that sugar mills must pay sugarcane farmers, and the State Advised Price (SAP), which sugar mills in the states must pay to their farmers for supplying sugarcane, were WTO-incompatible. They had also characterised India’s sugar export promotion measures as violation of AoA.

The complainants contended that India can no longer provide market price support on sugarcane as it exceeds 10% of the value of cane production. This is because India had declared while joining the WTO that it had not provided agricultural subsidies during 1986-88, a declaration based on the methodology given in the AoA for calculating subsidies. According to this methodology, the difference between applied administered prices on specific crops and their corresponding international prices prevailing during 1986-88 were considered as subsidies. Since administered prices on most of India’s agricultural crops during 1986-88 were lower than their corresponding international prices, the value of subsidies granted by India during 1986-88 was (-)Rs 19,861 crore or (-)18% of the value of agricultural production. Till date, this methodology remains unchanged, implying that for calculating the subsidies granted in 2021, the current administered prices on specific crops are still compared with their corresponding international prices during 1986-88.

The dispute settlement panel concurred with the views of the complainants that FRP and SAP are forms market price support and are therefore subsidies. However, India contested this view arguing that the AoA states that “subsidy can only exist where there is a budgetary outlay or revenue foregone by governments or their agents”, meaning thereby that governments must be involved in the payment of subsidies. India clarified that the central and state governments do not purchase sugarcane or pay FRP and SAPs to the farmers; these payments are made by the sugar mills, which are private entities.

However, the dispute settlement panel disagreed with India’s argument that FRP and SAPs cannot be treated as subsidies. The panel’s argued that “market price” of an agricultural product is the price of the product in the market, and “price support” refers to the “assistance from a government or other official body in maintaining prices at a certain level regardless of supply or demand”. Therefore, a mandatory minimum price set by the government would seem to constitute “domestic support” to agricultural producers, even if the payment was made by sugar mills.

This conclusion arrived at by the dispute settlement panel that FRP and SAPs are forms of subsidy raises at least two questions. The first is whether the panel had adequate understanding about the raison d’etre for fixing the statutory minimum prices that the farmers receive from the sugar mills. The real reason why the central and state governments direct the sugar mills to pay the farmers is to ensure that the latter receive fair prices from the former. Thus, the intention of the central and state governments is to improve livelihoods of the farmers, who are already in considerable distress. In giving its ruling, the panel seemed to be ignorant of the reality that sugar farmers are in an adverse bargaining position vis-à-vis the sugar mills, and it is therefore imperative for the governments to step-in to ensure that the farmers receive remunerative prices for sugarcane.

A second question against the panel’s ruling against India can be raised from the way it had concluded that FRP and SAPs are forms of price support measures, or subsidies even when the sugar mills were making payments to the farmers for supplying sugarcane. This interpretation by the panel seems to have turned the definition of a subsidy given in the WTO Agreement on Subsidies and Countervailing Measures (ASCM) on its head. The definition of subsidies given in ASCM three basic elements: (i) a financial contribution (ii) by a government or any public body within the territory of a WTO Member (iii) which confers a benefit. All three of these elements must be satisfied for a subsidy to exist. Therefore, when non-government entities like sugar mills pay FRP and SAPs to farmers, why did the panel stretch itself to categorise these payments as subsidies?

A final comment must be made on the methodology for calculating the quantum of subsidisation occurring due to price support provided by a WTO member to its farmers. As explained earlier, the quantum of subsidisation is measured using the difference between administered prices of crops and their corresponding international prices during 1986-88. It is obvious that this methodology is completely bereft of any economic logic since current prices are compared with 35-year-old prices. Yet this irrational methodology continues because developed countries have refused to allow use of more recent international prices, which would have realistically assessed the quantum of subsidisation. If this flawed methodology perpetuates, disputes on India’s agricultural subsidies will become commonplace, as current administered prices of many crops are already above the international prices during 1986-88.

As regards India’s export subsidies on sugar, the complainants made two substantive points. First, India does not have the right to provide export subsidies since it had declared during the formalisation of the AoA that it did not maintain any export subsidy. Secondly, India’s export subsidy schemes were prohibitive subsidies, according to the ASCM, and consequently, they should be withdrawn immediately. India had argued that its export promotion schemes were intended to reduce costs of marketing exports of agricultural products, which it was entitled to use until 2023. The panel did not accept this argument but gave India a period of 120 days from the date of adoption of its report to discontinue its export promotion schemes.

The rulings against the domestic support and export subsidy regimes for sugarcane and sugar respectively, could be a watershed moment for India’s agricultural subsidy regime. The complaints against the FRP and SAPs, shows how adversely India has been impacted by a flawed and discriminatory subsidies’ regime thrust upon it by the AoA. India must strongly argue that international prices existing during 1986-88 cannot be accepted as the basis for calculating subsidies, because, if the existing methodology continues, India’s entire administered price mechanism will be considered WTO-incompatible.

The author is Professor, Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University

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