Will WTO spoil farmers’ MSP party – Civil Service Essay – 7

Will WTO spoil farmers’ MSP party?

Can other policy initiatives be adopted to assure the farmers of assured and remunerative returns without raising the hackles of the WTO?

After a protracted agitation that ran for close to 15 months, the government revoked the three contentious farm bills marking a huge victory for the agitators. The mood among the farmers is understandably euphoric. In the days to come, the government will sit with bureaucrats, agricultural experts, and farmers’ representatives to deliberate over the matter.

The grounds for not implementing the MSP scheme for all the 23 crops through legal guarantee are as follows.

• The cost of buying all the 23 crops from across the country will be humongous. Some say, it could be around 17 lakh crores rupees annually. Outgo of such a staggering amount will strain the government finances to breaking point.

• Buying, transporting, storing, and distributing all the 23 crops will pose formidable logistical challenges in a country with poor road network, inadequate number of silos, and a lower-level administration plagued by inefficiency and corruption

• Quite significantly, giving a legal guarantee to farmers on MSP will run afoul of the terms of the Agreement on Agriculture (AoA) of the World Trade Organization (WTO).

In the din and bustle of the farmers’ protest, this last crucially important aspect was lost sight of or was conveniently ignored.

How and why AoA could prove to be too much of a hurdle?

As we all know, the main aim of the WTO is to promote fair trade in all items around the world. Ideally, this should result in unbridled flow of goods across borders with minimum paper work, no government mandated barriers, no government subsidy that artificially depress prices, no export subsidies etc. The Agreement on Agriculture (AoA) is a framework under the WTO to which India is a signatory. AoA imposes severe restrictions on governments procuring crops from farmers in fixed prices, giving subsidies, or even playing any part in trade of agricultural products. There is room for concessions, though, for countries where agriculture is not yet robust to combat famines, and endemic food shortages.

WTO classifies government subsidies in three categories such as

• Green box
• Blue box
• Amber box

Green Box ..

Such subsidies are given by the government as direct cash transfers with the purpose of aid during crop failures, to encourage them to safeguard the environment, free food grain distribution, and carrying out research and development activities. Since such cash transfers do not distort prices, they are allowed by the WTO. The United States, and some European countries give such aid generously without inviting censure by the WTO.

Blue Box ..

When the government plans to limit the production of certain items due mainly to a glut in the market, it gives some cash incentives to the farmers to desist from growing those crops. Example .. We all know cane growers are producing sugar cane far in excess of what the country can consume or export in the long run. This leads to a glut in the market. Consequently, the price of sugar falls making it hard for the cash-strapped sugar mill owners to make timely payment to the cane growers. This is a vicious cycle.

One possible alternative is to persuade the cane growers to switch to other crops, or leave part of their land fallow. This can be done by paying cash incentives to them. Such incentives come under ‘Blue box’ category.

Amber box ..

Amber box subsidies are those subsidies which distort the international trade by making products of a particular country cheaper in comparison to same product in another country. Examples of such subsidies include input subsidies such as subsidized rates of electricity, seeds, fertilizers, irrigation, Minimum Support Prices etc.
The crux, therefore, lies in giving MSP to farmers without breaching WTO norms. It’s worth noting that WTO allows MSP to a limited extent.

Measurement of Amber Box subsidy ..

For doing this, countries in question are asked to calculate the Aggregate Measurement of Support (AMS). AMS is the total of product-specific support (price support to a particular crop, like the 2z3 categories of crops covered under MSP) and non-product-specific support (fertilizer subsidy, irrespective of the crops). Developing countries like India experiencing agrarian distress are permitted to provide a minimum level of domestic subsidy in both ‘product’ and ‘non-product’ categories. The limit permitted can’t exceed 10% of the total value of production of the product. Subsidies above 10% are assumed to be distorting trade. When the countries report their AMS, they have to mention this percentage figure correctly.

The production cost of a crop (say, paddy) varies from country to country and year to year. As a result, mere computation of the percentage of subsidy could lead to erroneous conclusions. To obviate this, another yardstick called ‘Fixed External Reference Price (ERP)’ is taken into account. The ERP, which is the average price of the agricultural commodity based on the base years of 1986-88, is incorporated in the AMS calculation statement. Due to unknown reasons, the fixed ERP has not been updated in the last several decades by the WTO. Inflation, in the meanwhile, has pushed up both input and output costs in agriculture. As a result, the gap between MSP and fixed ERP has become unacceptably high.

An example to highlight this flaw ..
In 1986-88, India’s ERP for rice was $262.51/ton. and The MSP fixed by the government for rice was less than this. By 2015-16, India’s applied administered price for rice in 2015-16 shot up to $323.06/ton, exceeding the 1986-88 ERP by a huge margin. Understandably, India will be seen as exceeding the minimum limit allowed in the AMS regime by a big number.

When all the 23 crops are procured from across the country, the figure of India’s breach of the upper 10% cap of subsidy will be staggeringly high. It will attract harsh attention of WTO members leading to undesirable consequences for the country. Obviously, India’s action will be legally challenged in the WTO court. Here lies the danger of mass adoption of MSP in India.
Readers would be interested to know that India is already facing the danger from the WTO in case of sugarcane where the MSP is fixed by the government.

To circumvent WTO objections, India can authorize private companies to do the job. Nonetheless, India will still be considered to have flouted the AoA terms.

The ‘Peace Clause’ –an escape route..

India can join hands with similarly-placed countries to amend the terms of the AOA, so that fixing MSP for more crops and their procurement by government are allowed. But, given the working of the WTO, this seems a distant goal.

Alternately, India can take cover under the ‘Peace Clause’ of the AoA, and demand that no penal action is taken against it for making the procurement of all the 23 crops at respective MSPs acceptable to WTO. Presently, WTO does allow such exemption only for vital food crops that are essential for combating hunger, such as rice and wheat. Developing nations are allowed to buy, store, and distribute the limited variety of grains for public good. But, if India asks for exemption of other items in the 23-product list such as cotton, sunflower oil, groundnut etc., its request for leniency will be turned down by WTO.

The government of India will face a Catch-22 situation, if it has to accede to the farmers’ demand for a legal mandate for MSP for all the 23 crops. Defying the WTO can be catastrophic for India’s external trade.

What’s the solution, then…

Alternative 1 .. Abandon the MSP. Instead, give cash assistance to farmers based on their incomes. Such a policy will bypass WTO scrutiny, since the support will not be linked to production. This is very similar to ‘Green box’ subsidies given by the U.S. and European countries.

Alternative 2 .. Give MSP support to the level of 10% subsidy allowed by AoA. For the shortfall, give direct cash support. Given the climate of mistrust between the farmers and the government, such a hybrid solution may not be acceptable to the former.

In conclusion, the government immediate task is to win back the trust of the farmers by dispelling all their suspicions that have taken root during the agitation. They must be made to realize that agricultural reforms are the crying need of the hour, and profligacy of any sort could ruin the country. After the belligerence among them is replaced by a desire to resolve the issue responsibly, finding a WTO-compatible, farmer-friendly middle course solution could be easy. (With inputs from The Hindu)

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