With WTO in view, take up restructuring subsidy regime

There is trouble brewing for India at World Trade Organisation (WTO) – the multilateral body which binds member countries to a common set of rules with regard to trade in goods and services with ‘fairness’ and ‘non-discrimination’ as its underlying principles. To get a sense of where it is heading, let us put things in perspective.

In May, 2018, in a hard hitting submission made to WTO Committee on Agriculture (CoA), the United States had lambasted India for indulging in substantial under-reporting of its market price support (MPS) programme for wheat and paddy farmers alleging that the sops given by government far exceed the permissible limit. This was a counter to the latter’s notification to WTO in March, 2018.

Under the Agreement on Agriculture (AoA), a developing country cannot give aggregate measurement support (AMS) – refers to subsidies in WTO parlance — in excess of 10% of the value of its agricultural production. The corresponding threshold for developed countries is 5% of the production value. The AMS includes ‘product-specific’ subsidies and ‘non-product specific’, that is, subsidies on agricultural inputs such as fertilisers, seed, irrigation, electricity etc. The ‘product-specific’ subsidy is excess of minimum support price (MSP) paid to farmers over the external reference price (ERP) - multiplied by quantum of agri-produce.

In any given year, whereas the MSP is taken for that very year, ERP is the average of international price prevailing during 1986-88 fixed in rupee terms. For wheat, ERP was Rs 3,540 per tonne whereas in case of paddy, this was Rs 2,347 per tonne.

The ‘non-product specific’ subsidies is money spent by government on schemes to supply agricultural inputs at subsidised rates.

Whereas, India reported AMS of about Rs 12,000 crore on rice or 5.45% of production value in 2013-14, the US claimed that this was Rs 1,78,000 crore, or 77% of production value. In case of wheat, while India reported AMS of about Rs 5,000 crore in 2013-14, or 3.53% of the production value, according to US, this was Rs 96,500 crore, or 65.3% of production value.

If, one were to go by US counter-submission, the subsidies given by India are far in excess of the permissible limit (read: 10%). But, this is the inevitable outcome of an inherent flaw in the computation methodology that involves (i) using ERP of over 3 decades back; (ii) using the entire production for calculating price support instead of quantity procured for public stockholding; (iii) ignoring exemption to resource poor farmers.

On the other hand, Indian methodology is free from these flaws as it rightly (i) compares the current MRP with current ERP; (ii) considers quantity procured for public stock holding which alone is eligible for minimum support price and (iii) excludes the price support provided to resource poor farmers who produce food mostly for self-consumption and hence, can’t cause any trade distortion. No wonder, the resulting AMS is well within the permissible 10%.

Even as there was dire need to remove the anomalies in the AoA and find a permanent solution to address the public stock holding concerns of developing countries for food security - as decided in the WTO ministerial in Bali (2013) - the US along with other developed countries has managed to scuttle it.

In fact, it was US intransigence on this contentious issue which led to failure of 11th WTO ministerial held in Buenos Aires in December, 2017.

Now, the US has dropped another bombshell by asking the WTO to bring on its agenda the need for doing away with the extant Special and Differential Treatment (S&DT) available to emerging countries like India.

The S&DT enabled such developing members - who do not have resources to compete on equal terms with developed countries - to give less than reciprocal commitments.

A major plank of this special dispensation is a liberal threshold of 10% AMS for agriculture for developing countries as against 5% applicable to developed countries.

If, this is withdrawn, India will have to limit its subsidies to less than 5% of the value of agricultural production. With this more rigorous bar, the available flexibility for increasing support will reduce drastically.

At the Bali ministerial (2013), member countries had agreed to a ‘peace clause’ under which, if a developing country gives AMS in excess of 10%, no member will challenge this until 2017 when WTO would look for a permanent solution to the problem of food security.

In December, 2014, the WTO-General Council (GC) approved ‘extension of peace clause till a permanent solution is put in place’.

Food procurement

However, the peace clause comes with riders such as submission of data on food procurement, stockholding, distribution and subsidies (including their computation) etc. These also include a demonstration that the subsidies are not ‘trade distorting’. Moreover, it does not permit inclusion of new schemes/products.

These conditions mean that the ‘peace clause’ won’t be available automatically. Now if, the very foundational principle (read: S&DT) under which various flexibilities to developing countries are available is dismantled then, for India, the peace clause will die thereby removing the only shield available against violation.

Given the huge implications, India should strongly resist the move by USA to get the S&DT withdrawn. Further, it should vigorously pursue at WTO removal of anomalies in the AoA.

Meanwhile, the government should seriously take up restructuring its subsisting subsidy regime.

Instead of giving support through subsidising agricultural inputs and minimum support price (MSP) to farmers which come under the banner of ‘actionable’ subsidies, it should consider direct cash transfers to farmers - on lines similar to the developed countries of US and EU.

While, ensuring compliance with WTO rules, this will also help in eliminating inefficiencies and misuse that go with administering present subsidy and price support regime. A collateral gain will be by way of pruning payments and helping fiscal discipline.

(The writer is a New Delhi-based policy analyst)