Earlier this year, India surprised the world by refusing to sign a World Trade Organization (WTO) trade deal because its concerns on trade rules governing agricultural subsidies had remained unaddressed. To address the barrage of criticism from the West over its stand, India recently filed details of its farm support programme.
add_main_imageA Mint analysis of the filings India and other economies have made at the WTO show that India offers lower agricultural subsidies than the European Union and the US.
Why do these economies then have a problem with India’s trade subsidies? NextMAds
Roughly 90% of what the EU and US spend on agri-subsidies takes the form of the so-called green box subsidies, whereas the same proportion for India is 42%. Green box subsidies refer to support for farmers that is not directly linked to production. The two broad categories of green box subsidies are government service programmes and direct payments to producers. While WTO rules frown upon conditional support to farmers (say in the form of minimum support prices for crops), they do not impose limits on green box subsidies. Input subsidies and price support measures are expected to be reined in since they are considered market distorting.
As the chart shows, while other economies have seen a sharp increase in the proportion of green box subsidies, India has seen a decline in the proportion of green box subsidies between 2004-05 and 2010-11.
Developing countries such as India have long opposed this distinction between green box subsidies and uncapped subsidies since even green box subsidies distort global trade by making agricultural production cheaper in developed markets and by providing an artificial boost to agri-output. India’s other problem with WTO rules arises from the fact that the subsidy cap for developing countries are based on international prices of 1986-88, and have not been updated since then.
India’s battle at the WTO is therefore not without justification. Yet, it may be in India’s own interests to reduce the quantum of input and output subsidies, and reform the manner in which such subsidies are provided. As the chart below shows, the past few years have seen an unprecedented increase in input subsidies even as agricultural investments have stagnated. GFC (Public) in the chart refers to gross fixed capital investments in agriculture by the government. While public investments in agriculture raise long-term productivity, subsidies are merely short-term palliatives.
Also, India’s farm subsidies are regressive because they tend to benefit bigger farmers in irrigated regions much more than small and marginal farmers, or those in rain-fed areas. Moving to a regime of unconditional direct cash transfers to farmers can help the state create a more progressive support system for farmers. But such reforms will mean taking on the might of India’s powerful big farmers’ lobby.
According to Pronab Sen, chairman, National Statistical Commission, if fertilizer subsidies could be transferred in the form of cash to farmers’ accounts, India can meet its WTO commitments quite easily.
“There has been significant increase in the input and output based subsidies mainly because oil prices since 2005 have almost doubled and cost of fertilizer is totally linked to price of oil. Hence input subsidies have shot up. The increase in minimum support prices (MSP’s) for farm products has been politically driven as the Congress government (which) kept increasing MSPs during its rule,” Sen said.
Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.