Farm subsidies: the coming fight at the WTO

In an attempt to combat rural distress, the Union budget announced this year by finance minister Arun Jaitley promised a new deal to farmers—minimum support prices (MSP) that would be 150% of the cost of production.

The government is expected to announce the first set of support prices under the new policy in the coming weeks, just before the kharif sowing season begins. The second phase, to be rolled out in October, would ensure that MSP benefits the farmers of 23 notified crops. The details are being worked out by NITI Aayog.

However, the new MSP policy could pull India into a confrontation at the World Trade Organization (WTO). Higher MSPs will likely make Indian farm subsidies breach the limit that the WTO finds acceptable. The Narendra Modi government should roll up its sleeves to fight back, especially given the recent face-off between India and the US over farm subsidies.
After taking on China, US President Donald Trump seems to be shifting some of his attention to India. The US has announced that it will be dragging India to the WTO because it claims India has under-reported the market price support (MPS) for rice and wheat. According to the US, the MPS for wheat and rice, respectively, appears to be over 60% and 70% of the total value of production, against the permissible cut-off of 10%. India is planning to officially respond at the WTO’s committee on agriculture meeting in June.
India needs to question the foundation of the entire subsidy regime defined by the WTO. The relevant question is not how much support a government can provide to farmers to avoid distorting trade. It is how much it should provide to feed a country that is home to a fourth of the world’s hungry population.

Also, small farmers and poor consumers in developing countries are the most vulnerable to volatile price movements in commodity markets. The Union government needs to begin making its case by questioning the way WTO calculates subsidies, as well as the way the rich countries support their farmers. For example, for the purpose of calculating current subsidies, the WTO uses the average of 1986-88 global prices as the base. Therefore, the difference between the ongoing MSP and these reference prices looks too high.

India, along with other developing countries, should make persistent efforts to fight the way WTO rules have been rigged to suit the developed countries. Last year, before the 11th ministerial committee meeting of WTO at Buenos Aires, India and China jointly submitted a paper, Elimination Of AMS To Reduce Distortions In Global Agricultural Trade, to the WTO. The paper highlighted the subsidies that developed countries dole out to their farmers. The six industrialized nations are entitled to an overall cap for their farm subsidy called aggregate measurement of support (AMS), which entails subsidy up to 10% of the value of total production. This gives them an opportunity to manipulate the subsidies for individual products. For instance, product-specific support in the US and the European Union crosses over 50% for a number of crops and reaches as high as 89% for rice in the US. Developing countries, on the other hand, are trapped with a product-specific de minimis limit of 10%—for no crop can the AMS be higher than 10% of its value of production.

Interestingly, as noted by Mint columnist D. Ravi Kanth in November 2015 (goo.gl/a5TDfV), the US hands over about an average of $50,000 to every farmer, while India gives only around $200 per farmer. According to Scientific American (goo.gl/2mBy32), the agricultural subsidies support given to grain producers by the US government is insane enough to fuel obesity in the country. The European Union’s common agriculture policy takes up 40% of its budget.

The US has also launched a case against India’s export promotion schemes. These schemes—market access initiative (MAI), market development assistance (MDA) and merchandise exports from India scheme (Meis)—are primarily aimed at promoting better export-oriented infrastructure facilities, capacity building, and export competitiveness. They also assist exporters of agriculture and processed food products, thereby indirectly benefitting small and marginal farmers. These schemes are, therefore, critical in keeping agriculture remunerative in India and hence are worth defending at the WTO.

Therefore, India needs to make it clear at the WTO that it needs to stand by its poor at this stage of development, and that trade law should not meddle with the fight against poverty and hunger.

How should India respond to the US allegations in agriculture?