In a notification submitted to the World Trade Organization [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 – India has informed that the value of its rice production during 2018-19 marketing year was US$ 43.67 billion and for that it provided subsidies worth US$ 5 billion. This works out to 11.4% of the value of rice production.
Under the Agreement on Agriculture [AoA] of the WTO, a developing country cannot give aggregate measurement support [AMS] – an acronym for subsidies in WTO parlance – 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 say, 2018-19, ERP is the average of international price prevailing during 1986-88 fixed in rupee terms. The ‘non-product specific’ subsidies is money spent by government on schemes to supply agricultural inputs at subsidized rates.
The compliance has to be ensured both for individual crop as well as at the aggregate level. For instance, the subsidy on rice should remain below 10% of its production value. Besides, the sum total of subsidy on all crops say rice, wheat, coarse cereals etc should not exceed 10% of agri-production value. This rules out a scenario whereby a country gives more on one crop say, 15% on rice and yet keep aggregate subsidy within 10% threshold by giving less on another crop.
Since, the subsidy given to rice farmers 2018-19 at 11.4% of production value exceeded 10%, India has violated its commitment under the WTO. The breach is open to challenge by other members. However, it has invoked the so called ‘peace clause’ to seek immunity from action. The Indian request will come up for consideration in the WTO -Committee on Agriculture [CoA].
What is the ‘peace clause’? Does it provide an effective shield? Will the CoA allow its benefit? Can India explore other options?
India runs a mammoth program of Public Stock-holding for Food Security Purposes. Under it, agencies of the government viz. Food Corporation of India [FCI] etc buy agri-produce from the farmers at MSP [notified by the union] and distribute through a network of fair price shops to meet the food security needs of India’s poor and vulnerable population at affordable price. Since, MSP is higher than ERP, the excess is deemed as subsidy.
The developing countries with India leading from the front have consistently argued at the WTO that since the Public Stock-holding is intended to serve the food security objective and does not cause any distortion in international trade, subsidies given under this program should be exempt from commitment under the AoA. The 9th WTO ministerial in Bali [2013] 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 address their food security concerns’.
The peace clause 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’. Moreover, it intended to cover only the schemes existing at the time of Bali declaration.
The peace clause was intended to be a ‘stop gap’ arrangement that should have ended in 2017 by which time, a permanent solution should have been in place. But, that was not to be. In December, 2014, the WTO-General Council [GC] approved ‘extension of peace clause till a permanent solution was found’. This meant indefinite deferment of the permanent solution and perpetual dependence of developing countries on the ‘peace clause’.
In the WTO-General Council [GC] meeting in Geneva [July 31, 2014], India had insisted on a time bound action plan to find a permanent solution to be executed before the end of 2014 co-terminus with approval of Trade Facilitation Agreement [TFA] – an area of great importance to developed countries. Unfortunately, even as the latter got away with TFA, the former was merely handed out a ‘peace clause’ and that too coming with a plethora of riders!
That permanent solution route was more or less closed, it was evident from the 10th ministerial in Nairobi [December, 2015] when it decided that “negotiations on the subject shall be held in the CoA, which will be distinct from ongoing agriculture negotiations under Doha Development Round [DDR]”. In the 11th ministerial held in Buenos Aires [December 2017], the DDR itself was dumped.
Following India’s notification, the CoA will examine the request in the light of conditions appended to the clause. Considering that USA – a key member – has been lambasting India for alleged under-reporting of its subsidies, it is unlikely to be a smooth sail.
In a notification to WTO in March, 2018, India had reported AMS of about Rs 12,000 crore on rice or 5.45% of production value during 2013-14, whereas, on wheat, AMS was Rs 5000 crore or 3.53% of production value. In a counter-claim made to CoA [May, 2018], the US stated that during 2013-14, Indian AMS on rice was Rs 1,78,000 crore, or 77% of production value and on wheat, it was Rs 96,500 crore, or 65.3% of production value. The gap is due to vastly different methodologies used by India and USA.
For arriving at AMS, India rightly (i) compares MRP with ERP of the same year; (ii) considers quantities procured for public stock holding; (iii) excludes price support provided to resource poor farmers [those with land holding < 2 hectares] who produce food mostly for self-consumption. On the other hand, US (i) uses ERP of over 3 decades back [read: 1986-88]; (ii) considers even quantities not procured by agencies; (iii) ignores exemption to resource poor farmers.
There are inherent flaws in US calculation. Relating current MSP to international price prevailing in 1986-88 is not only illogical but is outright absurd; it inevitably results in ‘artificially’ inflated subsidy. The benefit of MSP is not available to quantities not procured from farmers; yet USA has included these in its calculation. The resource poor farmers produce food for their own consumption; hence, there is no question of subsidy given to them distorting trade. Yet, USA has not excluded subsidy support to them from the calculation.
In the CoA, the USA is bound to stick to its calculation and on that basis argue that the 11.4% reported by India for 2018-19 [in case of rice] is a gross under-statement. The government should pull all stops to counter the American claim. It needs to go a step forward to even challenge the formula that got embedded in the AoA [ERP frozen at 1986-88 level was part of the agreement which unfortunately was allowed to creep in by the developing countries].
Correcting the anomalies in the methodology of calculating AMS ought to have been an integral part of finding ‘permanent solution’ exercise. It needs to be resurrected and taken to its logical end. Post – correction, the subsidy figures will automatically come to much less than 10% [as in 2013-14] or marginally higher [as in 2018-19]. India would be serving its food security objective without having to depend on undependable crutches such as ‘peace clause’.
India also needs to mount a diplomatic offensive to counter US efforts at WTO to do away with the extant Special and Differential Treatment [S&DT] available to developing members which enable less than reciprocal commitments such as 10% threshold for agri-subsidies [for developed countries, this is 5%]. If, S&DT goes, India will have to limit its subsidies to less than 5%.
Meanwhile, the government should take up restructuring its subsisting subsidy regime. Instead of subsidizing agri-inputs and MSP to farmers which are treated as ‘actionable’ subsidies, it should consider direct cash transfers to farmers similar to developed countries of US and EU. While, ensuring compliance with WTO rules, this will also help in eliminating inefficiencies and misuse that are germane to present subsidy and price support regime. A collateral gain will be by way of pruning payments and helping fiscal discipline.