Why genuflect before WTO?

India is making a big mistake. It is asking the WTO to be flexible about farm subsidy thresholds in view of its commitments under the Food Security Act (FSA), when, in fact, it has no reason to be on the defensive.

The commitments under the FSA, humongous as they are, cannot be included under ‘trade-distorting food subsidy’ as defined by the WTO. The government should do its homework, before seeking favours it does not need.

To be sure, the FSA — enacted in the monsoon session of Parliament — will entail a subsidy outgo of Rs 6,80,000 crore over a period of three years, as per the Commission for Agricultural Costs and Prices (CACP) or Rs 2,27,000 crore per annum. This is bound to upset its fiscal deficit target of 4.2 per cent for 2014-15; 3.6 per cent for 2015-16 and 3 per cent for 2016-17.

But from here, it does not follow that we are running foul of WTO rules. The Government apprehends that FSA would result in agricultural subsidies — AMS (aggregate measurement support) in WTO parlance — exceeding the limit of 10 per cent value of agricultural production. This is what developing countries can maintain under the Agreement on Agriculture (AoA), 1995.

India — along with other developing countries — has approached the WTO, seeking subsidy support higher than 10 per cent in the interest of continued support to poor farmers and food security to poor consumers.

Before these rules are actually altered — to secure permanent relief — these countries want interim relief, described as ‘peace clause’ for nine years. However, India has now lowered its expectation, seeking a peace clause for just four years.

Are we not bending too much?

UNDERSTANDING AMS

AMS has two components viz. (i) ‘product-specific’ (ii) ‘non-product specific’. The first is the excess of price paid to farmers over international price (‘external reference price’) multiplied by quantum of produce. The second is money spent on schemes to supply inputs — fertilisers, seed, irrigation, electricity at subsidised rates.

For computing AMS, however, support to resource-poor farmers was ‘excluded’. The rationale for this exclusion was that such support does not have any ‘trade-distorting’ effect, whereas WTO disciplines target only those forms of support which produce such an effect (‘amber box’ subsidies).

During the Uruguay Round negotiations (leading to the WTO agreement), India had submitted that ‘input subsidies given to 79.5 per cent of total land holdings (farmers with less than 10 hectares) are taken as low income or resource poor and therefore, will qualify for exemption under Article 6.2 of AOA’.

Accordingly, in its notification submitted in 2002 covering 1996-97 and 1997-98 marketing years, India allocated about 80 per cent of input subsidies to Article 6.2 and about 20 per cent to amber box.

During 1986-88 (the reference period for benchmarking reduction commitments), Indian farmers were getting much less than the prevailing international prices.

Consequently, ‘product-specific’ AMS was substantially negative at 38 per cent. Non-product specific subsidy was 7 per cent. Overall, support was minus 31 per cent.

Under AoA, developing countries were required to undertake reduction — by 13.3 per cent over 9 years — if AMS was more than 10 per cent. Since, already Indian AMS was much below de minimis or 10 per cent threshold (in fact negative), India was not required to undertake any reduction.

Meanwhile, prices paid to Indian farmers have increased substantially. Between 2005-06 and 2010-11, support prices for wheat and rice increased by 72 per cent and 75 per cent, respectively. Thus, product-specific subsidy may have moved into positive territory, though this would still remain below the 10 per cent de minimis .

NOTHING’S CHANGED

During the same period, subsidies on agricultural inputs increased even more sharply by 214 per cent to nearly $30 billion.

However, when juxtaposed with exemption under Article 6.2 of AoA for resource-poor farmers (‘Green box’), the subsidy to considered at the WTO level would only be $6 billion [30x0.2(1-0.8)].

Put together — both product and non-product specific — AMS would still be lower than the de minimis 10 per cent. (Since 2003-04, India has not been notifying its subsidies to the WTO.)

Why then are we so desperate to a point of accepting conditions that may be ‘impossible’ to meet (for instance, demonstrating that our subsidies won’t be trade distorting)?

A close look at the manner of calculating subsidy under FSA versus WTO methodology would show that the Government’s apprehension is without basis.

Under FSA, Government ‘guarantees’ supply of 5 kg of cereals per person per month --- at Rs 3 per kg in the case of rice, Rs 2 per kg for wheat and Re 1 per kg for coarse cereals — to 67 per cent of the population (50 per cent in urban areas and 75 per cent in rural areas).

By mandating the sale of foodgrain under targeted PDS/FSA at a price below cost of production and distribution, it is actually subsidising consumers of foodgrain and not farmers. This must not be mixed up with our WTO commitments.

For determining whether Indian farmers are subsidised, the price paid to them has to be compared with what they would realise by selling in the market.

That is why under AoA, ‘external reference price’ (ERP) or international price is used for determining AMS.

Trading nations would have cause to worry only when state support to farmers enables them to sell their produce in international market at low prices, thus conferring an ‘unfair’ advantage. That clearly is not the scenario under FSA.

Flawed comparisons can only lead to astounding results. Subsidy under FSA at $36 billion alone will be 12 per cent of agri-GDP! But that is not the point — the issue is that it is not a subsidy to producers and does not qualify as a trade-distorting subsidy.

The Government should calculate subsidy as per WTO methodology (compare MSP with ERP) and avoid the ignominy of having to seeking special favour when it is not required.

It should also countenance attempts by developed countries to treat all ‘input subsidies’ under amber box, and stick to its stance of treating 80 per cent as accruing to poor farmers. Hence, most of the subsidy outgo is exempt under Article 6.2 of AoA.

(The author is a policy analyst)