By Future Institute Editorial Team February 22, 2018 1811 Views
The recent controversy India has had with the WTO regarding the country’s food security has awakened many questions that require answers. For most, the controversy itself is unclear. For others, the reasons behind the different stands India and the WTO have taken are unclear. This article aims to shed some light on the controversy and its existing and potential problems.
What is a Subsidy?
A subsidy is a form of financial aid or support extended to a sector (or institution, business, or individual). Subsidies come in various forms including: direct (cash grants, interest-free loans) and indirect (tax breaks, insurance, low-interest loans, accelerated depreciation, rent rebates).
Understanding the WTO:
World Trade Organization [WTO] – is the only global international organization dealing with the rules of trade between nations. The goal is to ensure that trade flows as smoothly, predictably and freely as possible.
The WTO Agreement on Agriculture [AoA] provides a framework for the long-term reform of agricultural trade and domestic policies, with the aim of leading to fairer competition and a less distorted sector.
The AoA covers:
Market access — the use of trade restrictions, such as tariffs on imports
Domestic support — the use of subsidies and other support programmes that directly stimulate production and distort trade
Export competition — the use of export subsidies and other government support programmes that subsidize exports.
Under the Domestic Support segment, subsidies and support programmes for production fall under 3 different categories depending upon their nature and trade distortion capabilities- namely Green, Blue and Amber ‘boxes’.
Understanding the Problem:
Based on the aforementioned categorization, India’s subsidies programmes fall under the Amber box cate-gory due to their large trade distortion capabilities. In 2013, the Indian Government implemented the National Food Security Act (NFSA) to replace the earlier Public Distribution System (PDS)- distribution of subsidized food and non-food items to India’s poor through a network of fair price shops (also known as ration shops) established in several states across the country. The Act now covers almost 86 per cent of the country’s population and the legal entitlement under it is granted for subsidies on wheat, rice and coarse cereals. Food grain for this is programme is purchased by the government employing a minimum support price (MSP)- a baseline price fixed by Government of India to protect the producer (farmers) against excessive fall in price during bumper production years- fixed annually by the government and raised regularly. PDS in India entails the use of MSP and public stockholding (PSH) of food grains.
India’s PSH programme- the stock-pile of food the government keeps for ensuring food security in times of drought or food shortage- also falls under the Amber box instead of the Green box as it has a large trade-distortion capability. The 10% cap for subsidies is causing a problem for India, as the NFSA could cause the country to breach the ceiling limit for subsidies in the coming years. This calculation of subsidy has two sides – one is input side and the other is output side. For example, if on the output side (the price fetched by a farm produce) the domestic price is lower than the international price, it is considered a support (subsidy). This happens when grains are purchased under MSP for the Public Distribution System. Similarly, on the input side, if the cost of inputs like fertilizers, seeds, power, etc., is lower than international prices, it is considered support. India believes that the country’s and WTO’s subsidy calculations are not in line, as the reference price set by WTO is 1986-88 and has not accounted for inflation.
A new agreement, the Trade Facilitation Agreement (TFA), was introduced in the 2013 Bali Conference of the WTO to enable easier and smoother trade worldwide. The TFA aims to fast track any movement of goods among countries by cutting down bureaucratic obligations. The problem with TFA runs in a clause that says farm subsidies cannot be more than 10% of the value of agricultural production. If the cap is breached, other members can challenge it and also go on to impose trade sanctions on the country. Although India agreed to sign, it put forward the condition that it would do so when a permanent solution was found to PSH programmes. However, other countries and the WTO are now pressuring India to sign, without providing a permanent solution as agreed upon. India is aware that once the TFA is signed, the country shall be obliged to ease the trade at any cost, under which circumstances the country could be forced to give-up/reduce the provided subsidies as well. India cannot afford to compromise on the current subsidies and the NFSA due to reasons of food security.
The G33- a coalition of developing countries, including India- has proposed for an amendment in the Agreement on Agriculture of the WTO, in regard to public stockholding.
Problems being faced:
But there is opposition from the US, the EU, Australia, Canada, Brazil, among others to provide unlimited market price support under the banner of ‘public stockholding for food security’.
When India entered into WTO negotiations in December 2017, the output subsidy was negative, but on the input side it was positive, as the cost of fertilizers, seeds, etc., was lower than international rates. So, the net subsidy was still negative. However, subsequently, input subsidies rose sharply, and the domestic price of India’s farm produce was much closer to international rates, so the 10 per cent threshold was breached. A ‘Peace Clause’ was introduced by WTO which allowed the country to breach this limit till 2017, however, India wants a permanent solution.
The WTO has accused India of buying grains at a high price from farmers and selling them at very low prices to the poor. This difference is set to cross the 10% threshold of subsidies laid out in the AoA and is also causing extreme trade distortion. The multitude of problems cover:
WTO is not finding fault with India providing food to poor at low prices, but instead finds fault with India for buying huge amount of grain from farmers at highly unsustainable prices and then finding it rot in the non-existent warehouses or being ‘dumped’ on international markets, thereby distorting prices for everyone else.
Given this enormous burden of hunger and under-nutrition, it is only natural that India places a high priority on food security. A key mechanism to address the problem of hunger and under-nutrition is the NFSA. It involves the procurement of food grains from farmers, transporting and storing them in warehouses and then distributing them to consumers. In recent years, the price paid to farmers —MSP — has been higher than open market prices. Also, the price at which the food grains are distributed to consumers — known as the issue price — has been lower than the market price. It also involves providing a subsidy to both farmers and consumers. The subsidy to farmers, estimated to be about 20% of the overall food subsidy, provides income support to poor agricultural families. The subsidy to consumers, by providing staple food grains at affordable prices, is necessary to increase consumption of poor families and address the widespread problem of hunger and under-nutrition.
Indian Government’s NFSA, which is binding by law, implies that the government will provide very cheap food to the most vulnerable part of the population at extremely low prices. Apart from providing subsidies to the consumers, through the PDS, it also provides subsidies to the producers of food grain, so it buys food grains from farmers at a minimum support price and subsidizes inputs like electricity and fertilizer.
India is against the TFA for multiple reasons:
Therefore, India is demanding a permanent solution for PSH programmes so that it can maintain food security for its citizens before signing the TFA.
From the aforementioned standpoints, it is clear that both parties are striving to avoid catastrophic outcomes for a large number of people. A possible way forward has been previously suggested by member countries of the WTO- instead of offering subsidies in the form of crops, a cash subsidy system has been proposed where the poor citizens eligible for subsidies would be given a direct monetary compensation instead of reducing prices of grain. This would mean lesser amounts of food would need to be purchased by the government and distributed to the poor. This would also enable appropriate compensation to be provided to the right consumers and also reduce the amount of food wasted in storage warehouses. This solution could provide food security to India’s citizens and reduce the trade distortion that the WTO is concerned about.
In conclusion, it is up to the WTO and India’s officials to come to an agreement and enforce an appropriate action that benefits all parties involved.