In a hard hitting submission made to the WTO [World Trade Organization] Committee on Agriculture [CoA], the United States has castigated India for indulging in substantial under-reporting of its market price support [MPS] program for wheat and paddy farmers alleging that the sops given by the government far exceed the permissible limit.
Under the Agreement on Agriculture [AoA], a developing member country cannot give aggregate measurement support [AMS] – WTO nomenclature for subsidies – in excess of 10% of the value of its agricultural production.
The AMS includes ‘product-specific’ subsidies and ‘non-product specific’ viz. subsidies on agricultural inputs viz., fertilizers, 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, the ERP is the average of international price prevailing during 1986-88 fixed in rupee terms. For wheat, ERP was Rs 3,540 per ton whereas in case of paddy, this was Rs 2,347 per ton.
The ‘non-product specific’ subsidies is money spent by government on schemes to supply agricultural inputs at subsidized rates.
In March, 2018, India notified to the CoA of WTO, MPS of about Rs 12,000 crore for rice in 2013-14, which amounts to 5.45% of the value of production. Against this, in a counter-notification submitted on May 4, 2018, the US has claimed that the MPS for rice in that year was Rs 1,78,000 crore, or 77% of the value.
Similarly, in the case of wheat, while India had notified MPS of about Rs 5000 crore in 2013-14, or 3.53% of the value of production, according to US, this stood at Rs 96,500 crore, or 65.3% of output value.
The highly inflated numbers in the US submission is the inevitable outcome of an inherent flaw in the methodology under the AoA. How can the current MSP given to the farmer be compared with ERP of 3 decades back that too fixed in rupee? This reference price does not capture the inflation over time besides the value of rupee versus dollar today is 1/5th of what it was then. Yet, its use is bound to ‘artificially’ inflate the MPS.
As per the US calculation, for wheat, the excess of MSP of Rs 13,500 per tonne over ERP of Rs 3,540 per ton multiplied by the output gives AMS [in some states which offer a bonus over the MSP, higher price is used]. As a percentage of the value of wheat production, this works out to 65.3%. Logically, global price of wheat for the relevant year i.e. 2013-14 should be used as the reference price. That being around Rs 16,900 per ton which is higher than MSP of Rs 13,500 per ton, India’s price support was negative.
Likewise, in the case of paddy, the US uses an MSP of Rs 13,100 per ton vs a reference price of Rs 2,347 per ton for arriving at the AMS which works out to 77%. If instead, the international price is used for relevant year 2013-14 which is Rs 19,500 per tonne, India’s price support would turn out to be negative. This is because the MSP given to Indian farmers Rs 13,100 per ton is lower than the external reference price.
The US numbers also get inflated because they use the entire production instead of the quantity procured for public stock-holding which is the right way to go as price support is limited only to this quantity. The implicit assumption – underlying US calculation on the total – that on the remaining quantity [not picked up by state agencies] also farmers would realize MSP, is fallacious. The reality is that on such quantities, they normally get much less than the MSP.
But, keeping logic aside, the US would stick to its calculation and WTO may even lend credence as it is based on the methodology [albeit flawed] embedded in the AoA. This is precisely what pushes India in to a vulnerable zone despite giving negative subsidy [if only a flawless computation is done]. Against this, there is a ‘peace clause’ agreed to in 9th WTO ministerial held in Bali [2013].
Under the ‘peace clause’, if a developing country gives AMS in excess of 10% threshold, no member can challenge this until 2017 when WTO would look for a permanent solution to address their food security concerns. However, in its December, 2014 meeting, the WTO-General Council [GC] approved ‘extension of peace clause till a permanent solution is put in place’. Will it help India?
The answer may not be an unambiguous yes. This is because the peace clause comes with a plethora of conditions viz., submission of data on food procurement, stock-holding, distribution and subsidies [including their computation] etc. These also include establishing that subsidies are not ‘trade distorting’. Moreover, it does not permit inclusion of new schemes/products.
Now, if the conditions are not met [a volley of questions raised by US regarding our subsidies are aimed precisely at establishing this], then, India may not be immune from the challenge. In such a scenario, the case could be taken to the WTO panel for adjudication. So, what is the way forward?
India simply cannot afford to bank on the ‘peace clause’. It should vigorously pursue at WTO removal of anomalies in the AoA. It should insist on comparing MSP with current ERP to arrive at AMS. Besides, in calculation, only the quantity procured for public stock-holding need be taken.
Alternatively, the government may consider giving unconditional cash transfers to farmers not related to a particular crop on the lines US and EU countries give subsidy to their farmers. The advantage here is that the subsidies given in this manner are not actionable; hence, the threshold [10% in case of developing countries] is not applicable. This will also help in eliminating the endemic inefficiencies and misuse that go with administering subsidies via price support mechanism.
India needs to rework its strategy at the WTO to defend its farm subsidies which are well within permissible limit and much below the mammoth subsidies given by developed countries to their farmers.