India is facing all round flak for its decision to oppose approval of Trade Facilitation Agreement (TFA) in meeting of WTO General Council (July 24/25, 2014) unless firm and time bound actions are taken to address concerns of developing countries in regard to support to resource poor farmers for food security.
A pure technical view of the decisions taken at the 9th WTO ministerial held in Bali (December, 2013) would prima facie seem to suggest that India is at fault.
In that meeting, group of developing countries or G-33 had agreed to the so called ‘Peace clause’ [a euphemism for not taking any penal action for violating commitments under Agreement on Agriculture (AoA) )] but with the caveat that this will remain in place until a ‘permanent’ relief is granted.
Under AoA (1995), developing countries cannot maintain agricultural subsidies – or aggregate measurement support (AMS) in WTO parlance – in excess of 10% of agricultural GDP.
Apprehending that their current AMS might exceed 10% level, they wanted tweaking of the rules to ‘exclude’ subsidy granted to resource poor farmers by way of minimum price support (MSP). Until this is done, they should not be penalized for violation.
Initially, G-33 club wanted ‘peace clause’ for 9 years but, under pressure from developed countries this was reduced to 4 years. So, the agreement was that there won’t be any penal action till 2017 when the WTO would work on a permanent solution.
In lieu of this, they agreed to developed countries proposal for TFA that seeks to streamline customs procedures and upgrade infrastructure at ports to enable faster, easier and cheaper trade.
Shorn of jargon, Bali agreement did not promise that tweaked rules on subsidies would be in place by 2017. Even for getting benefit of peace clause, developing countries were required to accept conditions that may be ‘impossible’ to meet (e.g., to demonstrate that our subsidies won’t be trade distorting). This was an exercise in deception.
During the last 6 months, developed countries have acted with alacrity to finalize protocol for TFA and insist that this be sealed by July 31, 2014 so that after necessary ratification by members, it comes in to force by July 31, 2015. But, they have not even bothered to talk about G-33 agenda.
Technically, developed countries may be right in lambasting India for not adhering to what was agreed in Bali. But, plain truth on ground zero is for all to see. The new government led by Modi is trying to precisely correct this wrong.
An impression that India is opposed to TFA per se or it is trying to sabotage WTO is fallacious. All that it wants is that food security concerns of G-33 or protection of resource poor farmers must be addressed concurrent with approval of TFA.
So, what is India asking for? It wants subsidy granted to resource poor farmers by way of minimum price support (MSP) for public stock holding to be excluded while computing AMS. Alternatively, ‘external reference price’ (ERP) which under extant AoA is pegged at 1986-88 level should be updated to current level.
Both the proposals are logical and consistent with the spirit of WTO agreement. 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, however, support 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 about 20% to amber box.
The same logic applied to product specific subsidies. But, it was irrelevant at that stage as during that period, 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 (between 2005/06 and 2010/11, this went up by 72% for wheat and 75% for rice), things have changed. Now, MSP could be higher than even current ERP. When, compared to ERP of 1986-88 (to be used for computing AMS as per extant rules under AoA), the excess would be huge.
We are in 2014. To remain glued to ERP that prevailed almost 3 decades ago for computing current subsidy support is a serious flaw that WTO must remove. However, India should not remain content with this alone, a message it may seem to have given in Geneva. It cannot be either this or that.
It must also ask for exclusion of support to resource poor farmers for arriving at product-specific subsidies. This is clearly driven by logic that such support does not have any ‘trade-distorting’ effect. To assume that food procured from these farmers would be dumped in international market is sheer figment of imagination.
True, in recent years India has emerged as major exporter of food. But, that has nothing to do with food sourced from these farmers and fed in to public stock holding for food security. When, some excess stock is released to private trade, that is at full economic cost; hence no question of dumping.
Subsidy to poor farmers in India to yield a reasonable income is a fraction of billions of dollars that US, EU and Japan give to their rich farmers in forms (green box) that do not even attract WTO penalties. India has every right to defend such support and insist on time bound action by WTO-GC to ensure that both TFA and food security protocols are sealed on the same day.