WTO, Agriculture and India

A lot has been written about India’s changed stance at World Trade Organization (WTO). The new Indian government made its "India First" policy absolutely clear, and resolutely stated that unlike the previous governments, it is not going to buckle under the pressure exerted by the developed countries over trade protocols of the WTO. It made no bones about the fact that agreeing to the Trade Facilitation Agreement (TFA) would compromise its own food security and livelihood security, thereby violating its own constitutional provisions which take precedence over any international agreement. This is completely different from the pusillanimous approach of the previous governments and this has forced the developed countries to wake up and look for a compromise.

The problem with TFA, which ostensibly aims to reduce, harmonize and standardize customs tariffs, rules and procedures to ease import-export practices and movement of goods across the world, lies with a clause that limits agricultural subsidies to a maximum of 10 percent of the value of agricultural production. If this cap is breached by any member country, other members can challenge it and also go on to impose trade sanctions on the country.

On the face of it, the position of the developed countries about limiting the subsidies seems a fair argument for increasing trade and growth benefiting the entire world, and the powerful Western media and some governments have painted India as the villain of the piece. But the devil lies in the details (in this case, the base year), and this episode in a prime example of how developed countries, led by US, have continued to derive unfair advantage from multilateral agreements even when truth, logic and ethics are with the other side. Using the façade of democracy, fair trade and free market, they have only furthered their own interests and negated these very concepts which they claim to champion.

The 10% Cap on Subsidies

Let’s first examine the 10% limit on agricultural subsidies for TFA that is at the core of the current disagreement. This is to be calculated on the basis of an External Reference Price (ERP) at 1986-88 prices (which comes to Rs 3.52 per kg for rice). This ERP has remained unchanged since base year as it is a non-inflation-linked and dollar-denominated adjusted proxy for the cost of production. In the meantime, the cost of production as well as food prices have increased several times. Also, during this same time-period INR has depreciated by almost four times from around Rs.12-13 to a US dollar in 1986-87 to Rs. 60-63 per dollar in 2013-14.

Last year the Indian government paid a subsidy of Rs. 260128 cr against a gross agricultural output of Rs. 1720373 cr (2013-14 prices). This subsidy as a percentage of gross output comes to 15.10%. The Indian government purchases food grains at a pre-defined Minimum Support Price which is a mechanism to save the producers (mainly small farmers) from the vagaries of an imperfect market (so that they can get compensated for the increase in production costs), and sell the food grains at an even lower price to the poor who can’t afford higher prices. Some economists have argued that even the MSP doesn’t fully compensate the farmers for the labour costs that they and their family members put into production. (Large amount of subsidies also go to fertilizer manufacturers, pesticide manufacturers and seed companies).

If we convert gross agricultural output to 1986-88 prices (using a discount factor of 8.2%), the gross output would come to 180517 cr on which permissible (TFA mandated) subsidy would be Rs. 18052 cr. What this means is that India will have to cut down its subsidy from its current level by a whopping 93.4%, which no government can afford to do. Such a step will have unimaginable repercussions, since 70 % of the population, most of them surviving on less than $ 2 a day, depend on agriculture for their livelihood. Such a step will also effectively kill the Public Distribution System (PDS), the food security tool that is responsible for providing cheap food to the poor (the numbers likely to go up to 81 cr against the 31.8 cr at present after the implementation of Food Security Act). 

Commonsense would suggest that India’s argument for correction in base year is justified given such a variation in price and currency value, but the developed world would have none of it.  They argue that India would dump its foodgrains in the international market even though the facts on the ground don’t support their contention—the domestic food price in India, for instance of rice, is almost the same as the international price.

Agricultural Subsidies and the Developed World

Even though it is India which has been put into a corner this time (mainly because of the failure of its own negotiators), the fact is that it is the developed world such as US, EU and Japan which are the major culprits of adopting trade distorting practices by providing humongous amount of agricultural subsidies, thereby rendering the products of developing countries uncompetitive, and forcing developing countries to spend substantial amounts on agricultural and food subsidies which could have been spent more productively. Major portion of subsidies that the developed countries are giving to their farmers and to large agricultural conglomerates are well disguised and classified as "non-distorting", thereby escaping WTO monitoring. During the past 3 decades, a few large multinational agribusinesses have increased their domination of global trade and food distribution to almost monopolistic levels on the back of their governmental support. Speculation in commodity futures markets, largely controlled by developed countries, has caused volatile price movements that are decoupled from demand and supply logic, harming the small farmers (and consumers) who lose when prices decline but don’t gain when prices go up. The combination of monopolistic tendencies and uncertainly has affected both food security and livelihood security in developing countries.

Anybody who has followed WTO (and earlier GATT) negotiations won’t be surprised to see the developed countries refusing to rectify such gross anomalies. As history shows, they demand their pound of flesh even for smallest of concessions (which sometimes are only notional and turn out to be paper concessions) and use all instruments at their command to bribe, cajole or force others to fall in line. All their focus is now on enforcing TFA with the usual trumpeting of how this will dramatically increase trade and employment all round the world, without the backing of any proper study. 

Anomalies in Agreement on Agriculture

The Agreement on Agriculture (AoA) came into force on 1^st January 1995 with the establishment of WTO. The agreement which was negotiated during the Uruguay Round of General Agreement on Tariffs and Trade (GATT), was a child of the peculiar circumstances of its times, selfish demands from diverse quarters, and consequently suffers from severe anomalies.

The practice of offering direct payments to farmers instead of price support had its origins in the 1958 Haberler Report in US. Whatever the logic given at the time, today it seems like an uncanny anticipation of the stance (or like preparatory steps) that the developed countries would take in future negotiations on farm subsidies. By 1980s, huge government doles to farmers in wealthy countries had resulted in huge surplus of farm produce, which were offloaded in the world markets with export subsidies, pushing prices down and making poorer countries uncompetitive in the only field in which they could be efficient producers.

Since 80s were a time of recession, the developed countries felt that opening up the world markets would give the required impetus to their moribund economies, bring in the much needed efficiency gains and get them out of the recessionary cycle. This led them to negotiate with the developing countries for measures to usher in free trade among countries.

As the pampered and electorally powerful farm lobbies in the West strongly resisted any compromise on agriculture, US first proposed in 1987 the idea of exempting production and ‘trade-neutral’ subsidies from WTO commitments. EU and Japan soon agreed as this step would let them pose as champions of free trade even while retaining their historical level of support to their farmers. So from the time of its birth itself, the Agreement ensured that developed countries would be allowed to continue with their subsidies that cause “not more than minimal trade distortion” for the “concession” of bringing agriculture within the disciplines of the WTO and committing to future reduction of trade-distorting subsidies, which has proved to be mere chimera. As we have seen, in course of time, instead of reducing support in developed countries or ensuring fair trade practices which was the logical need, AoA has become an instrument to force developing countries to reduce their subsidies.

The Three Pillars of AoA

The Agreement on Agriculture stands on three pillars or concepts-- domestic support, market access and export subsidies.

Domestic Support: The AoA agreed to classify subsidies into three categories or “boxes” depending on their supposed effect on production and trade. These are Amber (most directly linked to raising production levels), Blue (linked to production limiting programs that distort trade), and Green (causing “not more than minimal distortion of trade or production”). As per agreement, payments in the Amber box and Blue box had to be reduced but those in the Green box were exempt from reduction commitments.

The AoA's domestic support system currently allows EU, US and Japan to spend hundreds of billions of US $ every year (more than 1 billion every day by one count) on agricultural subsidies alone, apparently for protecting its poor farmers. But as one World Bank report has proved, this argument is only for public consumption. More than 50% of agriculture support in EU goes to 1% of its farmers while in US, 70% of support is meant for 10% of farmers and large agri-businesses. Apart from representing a net transfer of money from relatively less prosperous average tax-payer in developed world to the far richer farmers in their own countries, this has resulted in further impoverishment in developing countries and devastation to these economies.

Market Access: This refers to reduction of tariff (and non-tariff) barriers to trade by member countries of WTO. This provided for reduction commitment by member countries by certain percentage (different for developed and developing countries) whereas exempting the Least Developed Countries (LDCs), who were committed to either bind their tariffs to a ceiling rate or convert no-tariff barriers to tariffs.

Export Subsidies: This pillar required member countries to progressively reduce export subsidies over a certain number of years. As in the case of Market Access, the reduction targets were different for developed and developing countries.

It is the Domestic Support system that has attracted the maximum criticism. It is contended with empirical proof that the division into Amber, Blue and Green boxes has no logical basis and most of the exemptions based in Green box are also trade distorting. It is now a well documented fact that Green box subsidies do in fact distort trade, and not only harm the interests of developing countries but also harm the environment. While some Green box support has less impact on production and trade, others have high impact. The developed countries have progressively increased the support given under Green Box even while forcing other countries to reduce their Amber and Blue box support.

As Third World Network says, "This has allowed the rich countries to maintain or raise their very high subsidies by switching from one kind of subsidy to another... like a magician’s trick. This is why after the Uruguay Round, the total amount of subsidies in OECD countries have gone up instead of going down, despite the apparent promise that Northern subsidies will be reduced."

Conclusion

In conclusion, we can say that subsidies and disguised subsidies to agriculture in the developed countries is one of the greatest obstacles to free and fair trade and consequently to economic development in the developing countries. These subsidies result in overproduction in developed countries and depress world prices by flooding markets with surplus produce. Poorer countries which can’t afford to pay such subsidies to their farmers and agribusinesses are unable to compete with the developed countries. This has harmed their economic growth and negated their efforts to eradicate poverty. In addition, these subsidies have had a devastating impact on environment too by encouraging indiscriminate use of chemical fertilizers, pesticides and unprecedented exploitation of water resources. 

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Published: Current Affairs Survey, April 2015