Business News/ Opinion / India’s failed diplomacy at the WTO

The cabinet’s approval of the World Trade Organization’s (WTO) Trade Facilitation Agreement (TFA) on Wednesday is, on the face of it, a relatively innocuous development. As WTO deals go, this is low-hanging fruit. The agreement is to reduce administrative barriers at ports and customs, reducing transactional costs of international trade and consequently—according to various studies—increasing global gross domestic product by $1 trillion. This has found greater consensus between developed and developing economies than most WTO issues manage. But India has played spoiler—until now. The link between the TFA and India’s food security that led to New Delhi using the former as a bargaining chip may have been broken, but the underlying issue remains.

India’s stance across the previous and current administrations has been incoherent. The core issue is India’s public stockholding programme for food security. The price support mechanism this entails falls into the WTO’s so-called ‘amber’ box of agriculture subsidies—those that are considered to have a trade-distorting effect. These are barred beyond a minimum, calculated on the basis of a fixed reference price dating back three decades.

The fundamentally flawed nature of the system—particularly when the US’ massive agricultural subsidies, implemented via direct payments to farmers, fall into the WTO’s permissible green box—places India’s domestic and international commitments at odds. The previous United Progressive Alliance (UPA) administration’s implementation of the populist and economically unsound National Food Security Act in 2013 exacerbated the problem as we had written in these pages. Remarkably, the same administration signed off on the Bali Package at the WTO’s Ninth Ministerial Conference later that year in exchange for a time-limited peace clause—a wholly inadequate four-year amnesty from punitive action for violations on the subsidy front. It thereby approved the TFA and gave up on using it as a bargaining chip to play hardball.

The National Democratic Alliance (NDA) stalled on the UPA’s TFA commitment in 2014—rightfully so. For all that, it found itself internationally isolated and branded the villain of the piece. It managed to win an indefinite extension of the peace clause; however, that is not a long-term option. The conditions attached to the clause have not been dropped and it bars the expansion of the food security programme to new areas.

New Delhi’s push for a permanent solution ran aground at the WTO’s Tenth Ministerial last December with member nations failing to reaffirm the Doha mandate—launched in 2001, and with a focus on development issues. Little wonder New Delhi has finally acceded to the TFA; the cost-benefit analysis no longer favours holding out.

The administration’s implementation of a pilot scheme in Chandigarh and Puducherry to shift to direct cash transfers for food subsidies is a silver lining here. It is a contentious issue with considerable ideological opposition. And it is no magic bullet. There are bound to be missteps and teething problems—inevitable given the scale of the enterprise and of the prerequisite financial inclusion push.

The resources sunk into the public distribution system to date and the lack of commensurate returns by and large, however, mean the administration must push through political opposition. From Devesh Kapur, Partha Mukhopadhyay and Arvind Subramanian’s comprehensive examination of the issue in 2008 in the Economic & Political Weekly to a Reserve Bank of India committee on financial inclusion last year, the benefits of switching to cash transfers such as reducing corruption and leakages in the system and better targeting are apparent. So are the opportunity costs of not doing so.

That said, the incipient move towards reforming the PDS—direct cash transfers as a form of food subsidy would not fall afoul of WTO regulations—don’t mitigate the failure of Indian diplomacy. The reform process is bound to be a lengthy, gradual affair. The timeline of such an essential public policy issue must be decided by domestic, not international, compulsions.

The development agenda has taken a beating of late in Nairobi and then again in Paris. And with the day of the BRICS grouping all but done as their economies tread divergent paths, a splintering of consensus among the leaders of the developing world has already begun to show. WTO negotiations will not get any easier from here on. New Delhi must do better than it has done so far.

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Updated: 18 Feb 2016, 11:16 PM IST
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