Even as the WTO [World Trade Organization] members are currently engaged in thrashing out a work program for the 10th Ministerial at Nairobi [Kenya] in December, 2015, India is concerned over the delay in reaching a ‘permanent solution’ to the problem of dealing with food procurement subsidies. Its worry stems from the fact that the developed countries [primarily USA and EU] could use it as a bargaining chip for extracting concessions in other areas such as industrial goods and services.
What are food procurement subsidies? What is the genesis of problem associated with these subsidies? What permanent solution India [and other developing countries] have been looking for? What consequences will follow if the solution is delayed? What should be the right strategy mix?
Under Agreement on Agriculture [AoA] signed at the time of WTO coming in to force in 1995, developing countries can give agricultural subsidies or aggregate measurement support [AMS] [as it is called in WTO parlance] up to 10% of the value of agricultural production. AMS has two components viz., (i) ‘product-specific’: excess of price paid to farmers over international price or ERP [external reference price] multiplied by quantum of produce; (ii) ‘non-product specific’: 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’ under the AoA. The rationale for this 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’. 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.
The same logic applied to product specific subsidies. However, it was not explicitly incorporated in the agreement; perhaps, our negotiators did not feel the need for it as the minimum support price [MSP] given to farmers then was substantially lower than ERP resulting in negative ‘product-specific’ AMS. Indeed, this position continued till 2004-06. Thereafter, due to significant increase in MSP, equation has got reversed. For instance, at present for wheat, MSP at US$ 226 per ton (corresponding to Rs 1450 per quintal) is higher than 1986-88 based ERP of US$ 130 per ton.
In view of this and product-specific subsidy going in to positive territory and subsidies on agricultural inputs also increasing substantially, there is a real risk of AMS exceeding the 10% ceiling. The problem can be solved by re-visiting the AoA to (i) update ERP to current level [under the agreement, it was frozen at 1986-88 level which is totally unrealistic and defies logic; it was a serious flaw and ought not to be there in the very first place] and (ii) exclude purchases from resource poor farmers for computing product-specific subsidies. This indeed is a permanent solution that India has been looking for.
At Bali ministerial in December 2013, the developed countries had agreed to a ‘peace clause’ [exemption from penal action for violating commitments under AoA] in exchange for developing countries support to Trade Facilitation Agreement [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.
From above, it is abundantly clear that while peace clause would go in 2017 thereby opening developing countries to challenge for exceeding 10% mark, there is no guarantee that permanent solution would be in place by then. The peace clause too came with a plethora of conditions viz., submission of data on food procurement, stock holding, distribution and subsidies (including their computation) etc. These also included establishing that subsidies are not ‘trade distorting’ which is nearly impossible to comply. In other words, even in the interim, any member could challenge if conditions are not met.
Team Modi recognized that Bali agreement was flawed. So, in the meeting of WTO General Council, Geneva (July 31, 2014), it insisted on time bound actions plan to address food procurement subsidy issue and linked a permanent solution in this regard to approval of TFA. It went to the extent of proposing that both should be approved ‘concurrently’. Since, India did not relent from its position and WTO could not go ahead without India’s consent, there was stalemate and no decision was taken by WTO-GC even on TFA.
During the following 3 months of negotiations between India and US [including Modi’s summit 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. These changed positions were communicated to WTO-GC which in its meeting held on December 10/11, 2014, approved extension of peace clause till such time a permanent solution is put in place besides approval of TFA.
On surface, the deal might appear to be fair to developing countries. But, in reality it may not be so. First, the conditions appended to peace clause have not been dropped. That would continue to keep them in a vulnerable zone. The Damocles sword hangs! Second, the search for a permanent solution has been deferred. Having granted indefinite extension of ‘peace clause’, developed countries will be under no compulsion to work for a solution. Even so, no re-look at AoA suits them as its extant provisions are loaded in their favour and against developing countries. For details, pl read:-
https://www.uttamgupta.com/wp-content/uploads/2013/05/Rewrite-the-Agreement-on-Agriculture.pdf
The fears are coming true. It is over 18 months since Bali declaration and close to an year since the reconciliation was struck between Modi and Obama. The developed countries have shown no interest what so ever in arriving at a permanent solution. At the same time, they continue to ask for all sorts of data from India – as per conditions appended to the peace clause – ostensibly to deny its benefit even in the interim. This will force India to seek expeditious decision on permanent solution from developed countries. The latter are bound to leverage this for extracting concession from the former in other areas like steep reduction in industrial tariff and making offers in services based on voluntary domestic liberalization.
Last year, at WTO-GC, Modi called developed countries bluff and initially made the right moves asking for a time bound action plan for hammering a permanent solution and approving it along with TFA. But, there after the government got carried away by the lure of removing 4 year cap [on immunity from challenge] forgetting that availing the ‘peace clause’ was not un-conditional, nor any effort made to get conditions dropped.
As the government prepares for Nairobi ministerial, ideally it should insist on getting a permanent solution ‘now’ by (i) updating ERP to current level and (ii) excluding purchases from resource poor farmers for computing product-specific subsidies under AoA. The developed countries must not be allowed to run away from this on the pretext of say ‘data is required to examine etc —–’ as the issue concerns removing flaws in the AoA [a 3 decade old international price/ERP cannot be compared with today’s MSP in India to compute current level of subsidy; likewise, if resource poor farmers can get exemption on input subsidies, how can they be denied exemption on product subsidies?].
If, they still dilly dally then, India should insist on ‘un-conditional’ availability of interim ‘peace clause’ till such time a permanent solution is found. And, this must not be linked to any other issue on the table viz., industrial tariff or services etc.