India's food conundrum and WTO

This year's ministerial conference of WTO at Bali has been in news lately with India has been at its centre stage.The terms like AoA, product specific support , de-minimis level formed the part of daily headlines of leading national or international dailies.

Amidst the cacophony of dissenting voices that lead to WTO ministerial lets try to deconstruct the whole scenario in a piecemeal approach.

To the uninitiated the mjnisterial conference of WTO is its topmost decision making body and it meets every two years.This year's ministerial(9th) was at Bali, Indonesia.

As i write this article a good news ,that India has been able to get the deal at Bali to defend it subsidies is coming in, but we'll focus on it later on.For now we will focus our attention on the contentious issues wrt India and its case of defending subsidies at WTO.

Lets clear some basic terms at the start to facilitate a greater understanding of the issues discussed here.

1).AoA -Agreement on Agriculture or AoA as it is known popularly was negotiated Uruguay round of GATT(General Agreement on Tariffs and Trade)in 1988 and it came into force with commencing of WTO from 1st Jan 1995.It may be noted here that GATT was a preceding body of WTO i.e. it was established in 1948 & after Marrakesh Agreement WTO came into existence in its place.

2).Subsidies under AoA :

Type of subsidies under AoA are as follows ,

(a).Amber Box - These are the measures or subsidies that have a trade distorting effect at international level like the MSP india gives to its farmers fall under Amber box while the funding govt does for training and research in agriculture or likewise are not deemed to be as Amber box category but Green box .The amber box subsidies or measures if exceed their limit, invite penalities .

(b).Green Box - These measures or subsidies are those which do not have a trade distorting effect and are protected from legal challenges.

(c).Blue Box - These subsidies or measure have no limits .

Now,under AoA a minimun threshold has been kept beyond which if domestic support measures that which dont fall into any of the above exempt category of subsidies ,invite penalities.

(3).De-minimis - The threshold level of domestic support measures( that dont fall into any of above exempt category of subsidies ).This level is 5% for developed countries and 10% for.developing countries.

(4).Agrregate measurement of support( AMS) : The reduction commitments are calculated in terms of AMS .The product specific and non-product specific support are calculated as a single figure.In case of members with no reduction commitmments (Currently 30 countries have reduction committments at WTO under AoA)they are required to maintain their domestic support that doesnt fall into any of above exempt categories of amber,green or blue under relevant product-specific and non-product specific de-minimis levels.

Now lets move ahead with the main issue .

Issue :Countries like US and EU or simply developed countries are pushing developing countries like India to cut down on their trade distorting subsidies in agricultral sector.On the other hand G33 countries lead by India are demanding a continual of these subsidies citing reasons of food security and livelihood of poor farmers.

Another major issue that involves india and developed countries ( & WTO too) is its food bill or National Food Security Act(NFSA) as it is known popularly that guarantees 67% of population a quantity of 5kg/person per month at cheap prices of Re. 2-3 resp.

The matter of NFSA deals purely with India but its implications are to be felt at a global scale.As such this issue set the stage for a clash of interests at Bali.If India could take care of its food bill being not in violation of AoA at WTO then the incidental issue of food subsidies for developing countries would be automatically taken care of(As per latest news from Bali India has been successfull in that ).

To implement NFSA successfully would mean India would require 62million tonne of foodgrain in a year so as to give its 82 crore people 5kg of foodgrain per person in a month.For that increased rate of procurement India would have to increase its MSP to incentivise farmers to produce more foodgrain and in the process the subsidy levels will breach the de-minimis levels of 10% agreed to in AoA by India.

Although if procurement is done at current market price then no subsidy will be involved  but procurement at MSP entails subsidies from govt therefore according to AoA the above difference in the acquisition price i.e. procurement price and the ERP(External Reference Price -it is the world price notified by India in the 90s)will be accounted under "domestic support" which is a part of Amber Box measures.In other words,AoA implies that procurement price should be at market price (and not be higher then market price) & should not exceed the world price (Predetermined by ERP)

Concerns of developed countriee and EU wrt India's NFSA :

1).Developed countries fear that India's stockpiling of grains would first soar prices in international market & later on cheap exports will affect farmers' interests worldwide.

2).A case may also arise when monsoon is deficient in India & then India would have to  import grains to support NFSA .This would lead to soaring of global prices.India hence will start exporting inflation to poor countries like BDesh,Nigeria,Indonesia if imports swell during a drought year.

3).Some developed nations that are big commodity exporters believe that India's large stocks of wheat and rice could lead India to dump those in global markets.Also the giving away of foodgrains at cheap throwaway prices would lower local prices & damage demand for their products in one of the world's biggest market i.e. India

What developing countries and G33 say ,

Developing countries including India blame developed countries and EU that they have moved their trade distorting subsidies( or measures) from Amber Box to Green Box ,thereby concealing them & protecting them from legal challenges at WTO.

They also claim that the way de-minimis is calculated (I would show by example how de-minimis is calculated)is also outdated and flawed based on ERP prevailing during 1986-88.The rates have shot up 650% since then.

G33 argues that the illogical way the trade-distorting domestic subsidy is calculated means developing countries are in danger of reaching or exceeding the permissible limits.What matters is how high the govt administered prices i.e. MSP are compared to ERP of 1986-88.and not how much it spends in totality.Eg :-ERP notified by India is Rs.3.52/kg for.paddy while.current year's MSPis Rs.19.65/Kg.This implies an untenable subsidy of over Rs.16/Kg.

US & EU want India to sign a trade facilitaion agreement (trade facilitation looks at how procedures and controls governing the movement of goods across national borders can be improved to reduce associated cost burdens and maximise efficiency while safeguarding legitimate regulatory objectives ).

They also offered a peace clause .Under this clause the trade distorting  subsidies of developing countries in case they rise past de-minimis would not be legally challenged in WTO for a period of 4yrs i.e. till 11th ministerial.

What India can do to ward of concerns of Developed countries ?

1).Continually increasing farm productivity ,maintain consistently high stockpiles of wheat and rice (dont let them rot) which means increased investment in irrigation & creating efficient supply chains .India's food production dropeed from 250 million tonnes in 2011-12 to 250 million tonnes in 2012-13 because of poor rains.

2).Reducing dependence on monsoons and improving agricultural infrastructure is critical in curbing import distortions during drought year.

Challenge before India is to defend its national obligations while giving due credence to policy externalities (consequences of policy that extend beyond policymakers' domain) that may arise during implementation of NFSA.

Calculation for de-minimis

>First we need to calculate AMS

Below example is for wheat

All the figures and values are assumed in below example .

-MSP or procurement price or acquisition price or intervention price =Rs.1920

-Fixed ERP(World Market Price)= Rs.300

-Domestic production of wheat =2,000,000

-Total value of Wheat production =1920*2,000,000 = Rs.3840,000,000

-Wheat AMS would then be calculated as per formula ,

AMS =(MSP-ERP)*Total Domestic production =(1920-300)*2,000,000

         =1620*2,000,000=3240,000,000

Now for de-minimis ,

de-minimis is 5% of total value of production (for developed country it is 5% and for developing countries it is 10%)

          =5*3840,000,000/100= Rs.192,000,000

Hence in above case.,

         AMS1 > de-minimis

Note :.In actuality Current Total AMS is calculated .

Current total AMS =AMS1+AMS2+AMS3 . . . . .

Here AMS1 is for wheat,AMS2 is for rice & AMS3 is for paddy and so on .

Also is to be noted that in above calculation only those AMS ' are taken which have exceeded the threshold of de-minimis so if AMS1 in case of wheat is within de-minimis then it will not be included in final calculation of Current Total AMS