What next?

India may use as a bargaining chip extracting concessions from developed countries in getting market access in areas suited to its advantage.

At the same time, by eventually signing the agreement, Modi would be projected as an economic liberaliser before the eyes of the Western investors. That would be like killing the proverbial two birds with one stone.

The BJP government has refused to sign the Trade Facilitation Agreement (TFA) - which basically wants to simplify customs procedures - without the agricultural subsidy issue being simultaneously resolved at WTO.

India has made it clear that it is not opposed to TFA  but it would not sign the agreement unless the entire “Bali Package” which includes taking care of the food security concerns of the developing countries is agreed upon. Since the decision making process at WTO is by consensus – not majority vote – TFA did not go through.

What is this agricultural subsidy issue for India? According to the WTO rules which India accepted as a part of the Uruguay Round of talks, the quantum of trade-distorting agricultural subsidy (which provides preferential advantage to domestic producers over foreign farmers) cannot exceed 10 per cent of the value of production at 1986-88 prices.

The calculation of subsidy has to include both output (like the subsidyto producers given through MSP in India) and input subsidies (like subsidies on seeds, fertilizers, electricity etc). The consumption subsidyprovided to the poor through the PDS in India or food stamps in USA would not count as part of the trade distorting subsidy and hence of the 10 per cent cap. This is because such subsidy to consumers does not provide any differential advantage to domestic producers.

Similarly, income subsidies to farmers not directly linked to production (as is being increasingly done in developed countries) are put separately under permissible “green box” subsidies which do not come under the 10 per cent cap.

However, many studies point out that these “green box” income support schemes also give domestic producers an advantage over foreign producers and hence are also trade-distorting. Nonetheless, these explain why the developed countries like USA and EU can escape the 10 per cent cap while India with much less subsidies to farmers (and even more so, if calculated on a per capita basis) runs the risk of being taken to WTO courts for violating the cap.

India (under UPA administration), as part of the Bali accord, secured a “peace clause”. This provided immunity against any prosecution for violating the cap till 2017 while a permanent solution to the issue of stocking of foodgrains for public distribution along with subsidies to domestic farmers would be worked out at WTO.

Now 2017 is drawing near and the Indian negotiators apprehend that the developed countries are only interested in pushing through the TFA (which will expand their access to foreign markets) and not treating the other issues (including the food subsidy for the poor) with any urgency.

Hence, the current Indian government decided to put its foot down and refuse to sign the TFA unless the food subsidy issue is satisfactorily resolved. They fear that with steady rise in MSP and increasing procurement of foodgrains to implement the Food Security Act, India is likely to exceed the cap in a few years’ time.

Resolving issues

There are several options available to resolve the issue. First and the easiest would be to change the base year from 1986-88 to some more recent year when the global food prices were higher. In that case, the 10 per cent cap in money terms would go up and the chances of India exceeding the cap would be less. The second option would be expressing the cap in per capita terms. Given that the number of (small) farmers receiving the subsidy would be very high in a country like India, the per capita subsidy would be much smaller than in the developed countries.

The developed countries are not keen to open up the issue of agricultural subsidies or working out a new formula as they fear that their massive subsidies (under whatever guise) would be put under the scanner again. So, they want to sweep the issue under the carpet as long as possible by offering temporary peace clauses while promising to talk in future after the TFA (which is their priority concern) is signed.

One major problem that Indian negotiators faced at the recently held WTO talks at Geneva is that no developing country – including its BRICS partners - supported India in its firm stand on refusing to sign TFA, except a few minor socialist countries like Cuba, Bolivia and Venezuela. Thus, globally, India has become the villain which has prevented the WTO agreement on TFA.

What is being forgotten here is that, in any case, USA has been signing preferential trading and investment arrangements with an increasing number of countries. Hence, whether TFA is signed at WTO or not is largely irrelevant as far as the proliferation of regional agreements is concerned. Since the socialist countries of Latin America have no chance of being included by USA in its regional groupings, they were the (only) countries which found it prudent to support India.

What next? India may use this as a bargaining chip in extracting concessions from developed countries in getting market access in areas suited to India’s comparative advantage (like softwares, pharma). It is even possible that in return for a more credible assurance by US that the food stockholding issue would be resolved soon to India’s satisfaction, India may indicate its willingness to sign the TFA when Modi would be meeting Obama in September.

This can be projected as India’s (and Modi’s) victory which would strengthen his image at home as a strong nationalist leader ready to fight for India’s interest without cowering before the powerful West.

At the same time, by eventually signing the agreement, Modi would be projected as an economic liberaliser before the eyes of the Western investors. That would be like killing the proverbial two birds with one stone.