India had faced all round flak for its stance in meeting of WTO General Council, Geneva (July 31, 2014) that linked approval of Trade Facilitation Agreement (TFA) with time bound actions to address concerns of developing countries in regard to support to resource poor farmers for food security.
It was accused of allegedly going back on declaration at Bali ministerial in December, 2013 and stampeding progress of work under the Doha Round. Some developed countries were even willing to move forward – without India – to seal the deal on TFA leaving food security issue in the lurch.
Now, USA not only appears to have made a climb down, but also applauded constructive role played by our leadership in ending the impasse. So, what has Modi delivered? Has India got what it asked for? What is the way forward?
At Bali, developed countries had agreed to a ‘peace clause’ [exemption from penal action for violating commitments under Agreement on Agriculture (AoA)] in exchange for developing countries support to TFA which seeks to streamline customs procedures and improve border infrastructure for faster, easier and cheaper trade.
Under the peace clause, if a developing country gives agricultural subsidies in excess of 10% of its agri-GDP, no member will challenge this until 2017 when WTO would look for a permanent solution to address their food security concerns. This meant that while peace clause will go in 2017, there is no guarantee that permanent solution would be in place by then. Clearly, this was a flawed agreement.
The peace clause came with a plethora of conditions viz., submission of data on food procurement, stockholding, distribution and subsidies (including their computations) etc. These also included establishing that subsidies are not ‘trade distorting’ which is nearly impossible to comply. Thus, developed countries made sure that even temporary reprieve won’t not be available.
During WTO General Council (GC) meeting in Geneva (July, 2014), Modi government upped the ante and took a tough stance to undo the wrong done at Bali. It insisted on a ‘time bound’ action plan for arriving at permanent solution to food security concerns and its adoption concurrent with approval of TFA.
During 3 months of hectic negotiations that followed between India and US/EU (including Modi’s meeting with Obama on September 30, 2014) both sides made attempts to accommodate each other’s views. While, former did not insist on seeking a permanent solution right now, latter got reconciled to remove the cap of 4 years on applicability of peace clause.
US has agreed to ‘indefinite’ extension of peace clause till such time a permanent solution is put in place. In return, India has given go ahead for approval of TFA. WTO-GC will put its stamp of approval in its meeting slated for December 10/11, 2014.
On surface, the deal may appear to be fair to developing countries (and a big victory for India), but in reality it may not be so. Reportedly, conditions appended to peace clause have not been dropped. And, that would continue to keep them in a vulnerable zone. The damocles sword still hangs!
But, the big worrying point is that search for a permanent solution has been deferred. An argument that indefinite extension of peace clause will put pressure on US/EU to expedite a solution does not cut ice. Why would they when existing provisions under AoA that are loaded against developing countries, suit them?
The government can still press for a permanent solution now. So, what are we looking for? India wants subsidy to resource poor farmers by way of minimum price support (MSP) for public stock holding to be excluded while computing subsidy or aggregate measurement support (AMS) as it is called in WTO parlance.
Alternatively, ‘external reference price’ (ERP) which under extant AoA is pegged at 1986-88 level should be updated to current level. Both proposals are logical and consistent with spirit of WTO. To understand this, let us take a close look at the methodology of AMS calculation.
AMS has two components viz., (i) ‘product-specific’; (ii) ‘non-product specific’. (i) excess of price paid to farmers over international price or ERP multiplied by quantum of produce. (ii) money spent on schemes to supply inputs viz., fertilizers, seed, irrigation, electricity at subsidized rates.
For computing AMS, support on inputs to resource poor farmers was ‘excluded’. The rationale for this exclusion was that such support does not have any ‘trade-distorting’ effect, whereas WTO disciplines target only those forms of support which produce such effect (‘amber box’ subsidies).
During Uruguay Round negotiations (leading to WTO agreement), India had submitted that ‘input subsidies given to 79.5% of total land holdings (farmers with less than 10 hectares) are taken as low income or resource poor and therefore, will qualify for exemption under Article 6.2 of AOA’.
Accordingly, in its notification submitted in 2002 covering 1996/97 and 1997/98 marketing years, India allocated about 80% of input subsidies to Article 6.2 and 20% to amber box.
The same logic applied to product specific subsidies. But, it was irrelevant then as, MSP given to farmers was substantially lower than ERP resulting in negative ‘product-specific’ AMS. This position continued till 2004-06. Thereafter, due to significant increase in MSP, equation has got reversed.
Currently for wheat, MSP at US$ 233 per ton (corresponding to Rs 1400 per quintal) is higher than 1986-88 based ERP of US$ 130 per ton. To use ERP that prevailed almost 3 decades ago for computing current subsidy support is a serious flaw that WTO must remove. When compared to current international price US$ 333 per ton, price given to our farmer is less by US$ 100 per ton.
By updating ERP to current level, we would no doubt be in a comfortable zone. But, we need to keep in mind future increases in MSP. Therefore, India should ask for exclusion of support to resource poor farmers for arriving at product-specific subsidies in much same way as it is done for allocation of input subsidies.
It does not require much brainstorming for US/EU to make these two very basic alterations viz., (i) updating ERP to current level and (ii) excluding purchases from resource poor farmers for computing product-specific subsidies under AoA. WTO-GC should approve this along with TFA in its ensuing December 10/11 meeting – to result in a win-win for all stakeholders – instead of leaving food security issue un-attended for an indeterminate period.