India should abandon the MSP track now

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India should abandon the MSP track now

Tuesday, 07 December 2021 | Uttam Gupta

India should abandon the MSP track now

The Government should consider direct benefit transfer to farmers. It will help eliminate inefficiencies and misuse that go with current MSP regime

In view of the new Coronavirus mutation Omicron rearing its head, the 12th Ministerial Conference (MC) of the World Trade Organization (WTO), scheduled to have commenced from November 30, has been deferred indefinitely.

The Government should use the interregnum for formulating strategy and coordinate with other like-minded developing countries. The key areas requiring attention are (i) permanent solution to the public stockholding (PSH) program for food security; (ii) a special safeguard mechanism (SSM) for developing countries; (iii) remove the existing inequity in fishery subsidies; (iv) patent waiver for manufacture COVID-19 vaccines; (v) WTO reforms. 

India runs a mammoth program of public stockholding for food security purposes. Under it, agencies of the Government like the Food Corporation of India (FCI) buy agri-produce such as wheat, rice/paddy, coarse cereals from farmers at the minimum support price (MSP) and distribute at a heavily subsidized price of Rs 1/2/3 per kg through a network of fair price shops to meet the needs of India’s poor and vulnerable population.

The excess of MSP plus handling, storage and distribution cost over the realization from sale (read: Rs 1/2/3 per kg) is paid as subsidy from the Union Budget. This includes (a) subsidy to the farmer being the excess of MSP of say, rice over its international price also known as External Reference Price (ERP) in WTO parlance and (b) subsidy to the food consumer - being the excess of ERP over the price paid (Rs  3 per kg rice). The WTO is concerned with (a) branded as “product-specific” subsidies. It is also concerned with subsidy on agricultural inputs like fertilizers, seed, irrigation, power, etc., referred to as “non-product specific” subsidies.

Under the Agreement on Agriculture (AoA) of the WTO, the sum total of product and non-product specific subsidies or aggregate measurement support (AMS) is capped at 10 percent of the value of agricultural production for a developing country. If, a member country gives AMS in excess of 10 percent, it is a violation.

The AoA came into force on January 1, 1995. For India, until 2005, MSP was less than ERP. Thereafter, even as MSP was higher than ERP, in the last decade, this gap widened. For instance, as per a May 2018 submission by the USA to WTO, during 2013-14, Indian AMS on rice was 77 percent.

At present, India enjoys protection under a “peace clause” which was sanctioned in the 9th MC held in Bali (2013). It said “if a developing country gives AMS in excess of 10 percent, no member will challenge this until 2017, when the WTO would look for a permanent solution”In the General Council (GC) held in December 2014, this sanction was modified to say “the peace clause will stay till a permanent solution was found.”

However, the peace clause is not a panacea as it comes with several riders such as submission of data on food procurement, stockholding, distribution and subsidies. These also include establishing that subsidies are not “trade distorting.” This makes India vulnerable which is evident from some countries insisting on ‘safeguards’ and ‘transparency’ obligations after it invoked the peace clause in 2018-19.

Therefore, India is looking for a ‘permanent solution’. It has asked for ‘total exemption for support to PSH for food security’. But this is a tall order as it will render the very concept of cap meaningless and tantamount to re-writing AoA.

A practical option would be to address the flaws in computation of AMS under AoA viz.(a) ERP is taken for the year 1986-88 even as MSP is for relevant year say, 2018-19; (b) subsidy given to resource poor farmers is not excluded; (c) entire output — instead of quantity procured for PSH — is used. If, these flaws are removed, the resulting AMS will be well within the permissible 10 per cent. Thus, for 2013-14, against 77 per cent as per US submission (it suffered from the flaws), AMS for rice works out to only 5.45 per cent.

This alone will not help as with increase in MSP and substantial increase in procurement thereafter, even with flawless calculation, the AMS will exceed the 10 percent threshold. During 2018-19, on rice it works out to over 11 percent.   

India could face a much bigger challenge if Prime Minister Narendra Modi agrees to the demand for legal guarantee to MSP as in that scenario, the Government will have to procure the entire produce of all farmers — up from the present meager 6 per cent — resulting in increase in AMS to astronomical level. This will not even pass muster under ‘PSH program for food security’ as such procurement is not for feeding the poor; instead, it will be only for supporting the farmers.

Looking forward, it should consider direct benefit transfer (DBT) to farmers — on lines similar to the developed countries of US and EU. While, ensuring compliance with WTO rules (assistance in this form is not subject to cap), this will also help in eliminating inefficiencies and misuse that go with current MSP regime.

Coming to SSM,  it allows members to temporarily raise tariffs beyond the “bound levels,” (this is the maximum permissible duty that a member country can impose under bound rate agreement) to deal with surging imports and resultant fall in prices.

The 2015 MC-10 in Nairobi had recognized that developing countries will have the right to take recourse to SSM as envisaged under the Hong Kong Ministerial Declaration. But this comes nowhere near India’s demand to amend an already existing provision in Article 5 of the AoA to provide them the same benefit that developed countries derive from Special (Agricultural) Safeguards (SSG).

On the third issue, during 2018, developed countries gave massive fishery subsidies against just $227 million by India, leading to the former overexploiting world’s fish stocks even as small fishermen struggle to earn their livelihood.

In sync with the principles of “polluter pays” and “common but differentiated responsibilities”, in its submission,India has proposed that developed countries abolish their subsidies over the next 25 years even while exempting developing countries from over-fishing subsidy prohibition within these 25 years. It wants special and differential treatment (S&DT) to be an integral part of the pact. 

As for patent waiver for manufacture of COVID-19 vaccines, India along with South Africa had submitted a proposal in October, 2020 seeking temporary waiver of TRIPS (trade related intellectual property rights) provisions to deal with public health emergencies. Even as it has received support of majority of members including USA, it is facing resistance from EU and the UK.

Finally, the US, under the Trump administration, had blocked the appointment of members of the appellate authority of the WTO Dispute Settlement Body (DSB) - an authority for adjudicating disputes arising from non-compliance with WTO rules. At present, there being just one member in the body against the required strength of seven, the dispute resolution process has come to a grinding halt.

To conclude, India should abandon the MSP track; instead go for DBT to protect farmers. On SSM, fishery subsidies and TRIPs waiver for COVID-19 vaccines, it should garner support from all like-minded developing countries, especially G-33, to get our proposals accepted. As for WTO reform, Modi should persuade Joe Biden to remove the US veto.

(The writer is a policy analyst. The views expressed are personal.)

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