Indian rebuttal to the claim of developed countries on food security is logical as India’s public stockholding (PSH) has helped food security around the world
Last month, in a meeting of the Committee on Agriculture (CoA) of the World Trade Organization (WTO) – it oversees the implementation of the Agreement on Agriculture (AoA) – developed countries including the USA and Canada challenged India’s public stockholding (PSH) programme saying “it is highly subsidized, especially for rice, and that this is affecting the food security of other countries”. India countered their claim by saying that far from any adverse effect, its PSH program was helping other countries ensure their food security. This is how its argument goes.
In 2021, India distributed 58 million tons of rice to 800 million beneficiaries. It was able to feed such a mammoth number because the government maintained sufficient stock under the PSH program. But, for this, we would have been depending on the rest of the world to meet our requirements. The global exports of rice in that year were only 56 million tons, this would have led to skyrocketing prices of rice thereby affecting the food security of smaller countries. The Least developed countries (LDCs) - would have been in grave danger. Thus, by ensuring our food security, we have rather ensured the food security of other countries.
Indian rebuttal to the claim of developed countries on food security is logical and convincing. But, what about their other charge that our PSH program is highly subsidized which is what they have been trumpeting for several years now at the WTO and the government hasn’t been able to counter it successfully? To understand the reason and how it can go about for better results, let us see how the PSH program works and what is its connection with the AoA.
Under the PSH program, government agencies like the Food Corporation of India (FCI) buy agri-produce such as wheat, rice/paddy, and coarse cereals from farmers at the minimum support price (MSP) and distribute it at a subsidised price of Rs 2/3/1 per kg respectively to meet the needs of India’s poor and vulnerable population under the National Food Security Act (NFSA).
The excess of MSP plus handling, storage and distribution cost over the realisation from the sale (that is, Rs 2/3/1 per kg) is paid as a 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 subsidies on agricultural inputs like fertilizers, seeds, irrigation, power, etc., referred to as “non-product specific” subsidies. Under the AoA, the total of product and non-product-specific subsidies or aggregate measurement support (AMS) is capped at 10 per cent of the value of agricultural production for a developing country. If a member country gives AMS over 10 per cent, it is a violation.
The AoA came into force in 1995. For India, until 2005, MSP was less than ERP. Thereafter, MSP has been higher than ERP and, in the last decade, this gap widened. During 2018-19, in the case of rice, for instance, AMS was at 11 per cent, exceeding the 10 per cent cap. During 2019-20, it was even higher at 13.7 per cent.
For over a decade or so, India along with other developing countries has been making efforts at WTO to wriggle out of the situation. In the 9th Ministerial Conference (MC) held in Bali (2013), it secured sanction for a “peace clause”. It said, “If a developing country gives AMS in excess of 10 per cent, 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 comes with several riders, such as the submission of data on food procurement, stockholding, distribution and subsidies. These also include establishing that subsidies are not “trade distorting.”
India has invoked the ‘peace clause’ several times at the WTO for breaching the 10 per cent ceiling in case of subsidy on rice. But, developed countries have objected to such invocation and insisted on ‘safeguards’ and ‘transparency’ obligations.
Put simply, they want India to put its entire data under the PSH program under scanner at the WTO. We can’t ignore it as it is a requirement for availing of the immunity from challenge. The diciest rider is that the member country exceeding the subsidy ceiling (read: India) will have to demonstrate these are not “trade-distorting”.
When, can a situation of trade distortion arise?
It could arise if the quantities lying with the government agencies which are meant solely for supplying to beneficiaries under the NFSA instead find their way to the international market. The way the PSH scheme operates, this possibility is not ruled out. This is because often the agencies conduct an auction to dispose of excess stock under the Open Market Sale Scheme (OMSS) in which private players, traders etc also participate. Having acquired foodgrains from such auctions, the private traders are free to sell it in the manner they like which includes export. An argument on these lines resonates during deliberations in the CoA of the WTO. The developed countries argue that India has created large stocks and is exporting the surplus. India’s stance that under OMSS ‘all the bidders are compulsorily asked to give an undertaking that they won’t export it’ may not cut ice. Meanwhile, India is spearheading a proposal by G-33, the African Group, and the ACP (Africa, Caribbean, and Pacific) asking WTO for ‘total exemption for support to PSH for food security’. Posited as a “permanent solution” as decided in the MC-9 (2013) and GC (December 2014), this coalition of developing countries and LDCs wanted the MC-12 held in Geneva (June 12-17, 2022) to take it up for consideration. But, the issue was not even put on the table.
The G-33 proposal could expose vulnerabilities in the way India runs its PSH program all the more when we consider that currently, the government is running an open-ended procurement scheme, particularly for wheat and rice whereby its agencies buy the highest possible quantities from the farmers at ever-increasing MSP (courtesy, compulsions of vote bank politics). These purchases being unrelated to the requirement under NFSA, surplus stocks and some of it entering the global market is unavoidable.
Instead of seeking blanket exemption which it will never get, India should address the root cause. This has to do with the flaws in the formula for the computation of AMS under the AoA (these were allowed to creep in at the time agreement was signed in 1995). The flaws include (i) taking ERP for the year 1986-88; (ii) not excluding subsidies given to the resource-poor farmers; (iii) using the entire output instead of quantity procured for PSH.
These flaws “artificially” inflate the AMS thereby pushing the Indian subsidy beyond the 10 per cent threshold. India should aggressively push for the removal of these flaws. Concomitantly, in our interest, the government should rein in open-ended purchases from the farmers and bring about agri-market reforms to help them realize a good price for their produce obviating the need for state support.
(The author is a policy analyst)
