An unreliable shield

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An unreliable shield

Monday, 13 April 2020 | Uttam Gupta

An unreliable shield

Since the subsidy given to rice farmers has exceeded 10 per cent, India has violated its WTO commitment and invoked the ‘peace clause.' But how much immunity will this give to it?

In a notification submitted to the World Trade Organisation (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 $43.67 billion and for that, it provided subsidies worth $5 billion. This works out to 11.4 per cent 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 per cent of the value of its agricultural production. The AMS includes “product-specific” subsidies and “non-product specific” viz. subsidies on agricultural inputs like fertilisers, seed, irrigation and power.

The “product-specific” subsidy is excess of the Minimum Support Price (MSP) paid to farmers over the External Reference Price (ERP) multiplied by the quantum of agri-produce. Whereas the MSP is taken for that very year, say, 2018-19, the ERP is the average of the international price prevailing during 1986-88 fixed in rupee terms. The “non-product specific” subsidies are money spent by the Government on schemes to supply agricultural inputs at subsidised rates. 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 per cent of its production value. Besides, the sum total of subsidy on all crops, say rice, wheat and coarse cereals should not exceed 10 per cent of agri-production value. This rules out a scenario whereby a country gives more on one crop, say 15 per cent on rice, and yet keeps aggregate subsidy within the 10 per cent threshold by giving less on another crop.  

Since, the subsidy given to rice farmers in 2018-19 at 11.4 per cent of production value exceeded 10 per cent, India has violated its commitment under the WTO. The breach is open to challenge by other members. However, it has invoked the “peace clause” to seek immunity from action. The Indian request will come up for consideration in the WTO Committee on Agriculture (CoA).

So, 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 programme of Public Stockholding for Food Security Purposes. Under it, agencies of the Government viz. Food Corporation of India (FCI) and so on, 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.   

Developing countries, with India leading from the front, have consistently argued at the WTO that since the Public Stockholding is intended to serve the food security objective and does not cause any distortion in international trade, subsidies given under this programme should be exempt from commitment under the AoA. The ninth WTO ministerial in Bali (2013) agreed to a “peace clause” under which “if a developing country gives AMS in excess of 10 per cent, 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, stockholding, distribution and subsidies (including their computation) and do on. These also included establishing that subsidies are not “trade distorting.” Moreover, it intended to cover only the schemes existing at the time of the 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 the 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-GC meeting in Geneva on 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 the Trade Facilitation Agreement (TFA) — an area of great importance to developed countries. In December, 2014 GC even as the latter got away with the TFA, the former was merely handed out a “peace clause” and that, too, with a plethora of riders. 

That the permanent solution route was more or less closed, it was also 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 the ongoing agriculture negotiations under the Doha Development Round (DDR).” The mandate of CoA normally being routine matters, it was naive to expect from it a far-reaching policy decision. In the 11th WTO — ministerial held in Buenos Aires (December 2017), the DDR was dumped.          

Coming to India’s request seeking refuge under the peace clause against breach of subsidy ceiling, now the CoA will examine it in the light of conditions appended to it. Considering that the US has been lambasting India for alleged under-reporting of its subsidies, it is unlikely to be a smooth sail.   

In a notification to the WTO in March, 2018, India had reported AMS of about Rs 12,000 crore on rice or 5.45 per cent of production value during 2013-14, whereas, on wheat, AMS was Rs 5,000 crore or 3.53 per cent of production value. In a counter-claim made to the CoA (May, 2018), the US stated that during 2013-14, Indian AMS on rice was Rs 1,78,000 crore, or 77 per cent of production value and on wheat, it was Rs 96,500 crore, or 65.3 per cent of production value. The gap is due to vastly different methodologies used by India and the US.

For arriving at AMS, India rightly  compares MRP with ERP of the same year; considers quantities procured for public stock holding; excludes price support provided to resource poor farmers who produce food mostly for self-consumption. On the other hand, the US uses ERP of over three decades back; considers even quantities not procured by agencies and ignores exemption to resource-poor farmers. There are inherent flaws in the US calculation. Relating the 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 the US has included these in its calculations.

The resource-poor farmers produce food for their own consumption; hence, there is no question of subsidy given to them distorting trade. Yet, the US has not excluded subsidy support to them from the calculation.  

In the CoA, the US is bound to stick to its calculation and on that basis argue that the 11.4 per cent reported by India for 2018-19 (in case of rice) is a gross under-statement. The Government should pull out 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).       

Correcting the anomalies in the methodology of calculating AMS should be at the core of finding a permanent solution; that process should be resurrected and taken to its logical end. Post-correction, the subsidy figures will automatically come to much less than 10 per cent (as in 2013-14) or marginally higher (as in 2018-19). Small variations are more likely to be condoned and even if retaliatory action is sanctioned, that will entail much less pain. In any case, this would be far better than letting anomalies continue leading to inflated subsidy and need to take refuge under an unreliable peace clause.

India also needs to mount a sustained diplomatic offensive to counter US efforts at the 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 per cent threshold for agri-subsidies (for developed countries, the threshold is five per cent). If, S&DT goes, India will have to limit its subsidies to less than five per cent. Meanwhile, the Government should take up restructuring its subsisting subsidy regime. Instead of subsidising 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.

(The writer is a New Delhi-based policy analyst)

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