Why do India and US disagree on farm subsidies?

Roots of disagreement lie in how farm support is calculated under WTO, with US blaming India for under-reporting subsidy given for wheat and rice

Dipti Jain
Updated16 Aug 2018
The US has alleged that India had been grossly under-reporting the subsidy it provides for wheat and rice production.
The US has alleged that India had been grossly under-reporting the subsidy it provides for wheat and rice production.

Bengaluru: Farm subsidies seem to have become a major flashpoint in the escalating global trade war. In May, India came under attack from the US for its minimum support price (MSP) policy for foodgrain. India hit back, along with China, to demand that developed nations give up the bulk of their farm subsidies from 2019 onwards, escalating a demand that both countries had made in 2017.

The roots of the disagreement between India and the US lie in the way farm support is calculated and classified under WTO (World Trade Organization) rules, a Mint analysis shows. The US has alleged that India had been grossly under-reporting the subsidy it provides for wheat and rice production.

In its filings, India claimed that the market price support (MPS) it provided to rice was 5.45% of its value of production in 2013-14, well below the prescribed limit of 10%. MPS is the gap between MSP, at which the government procures rice and some other crops, and the “external reference price” (ERP), set by WTO at 1986-89 prices.

The US has alleged that India’s MPS to rice in 2013-14 was much higher at 77% of production value. Similarly, the US alleged that India has been reporting a negative MPS for wheat, whereas the actual MPS is around 65% of production value. There are two main reasons behind the discrepancy between the calculations by India and the US: The choice of the dollar-rupee exchange rates and the choice of quantity considered. Adjusting for these two parameters, we find that there was not much difference between the filings of the two countries.

One big problem with the US calculation is that it uses total production of rice and wheat rather than the quantity procured. Adjusting for that alone, brings down its claims substantially, since less than half of rice and wheat produced is procured by the government.

The other issue is the use of exchange rates. India reports its subsidy numbers in dollar terms.

To illustrate, MSP of around 20,000 per tonne for rice for the marketing year 2013-14 is reported as $325 per tonne, using an average exchange rate of 60.50 per dollar. The ERP set by WTO for rice is $262.51 per tonne. Thus, the subsidy provided to its rice growers is around $62 per tonne or 3,751 per tonne.

The US converts the external price to rupees rather than converting MSP to dollars. The US converted the ERP ($262.51 per tonne) to 2,346.67 per tonne, using the 1986-89 exchange rate (the period when the ERP was set) of 13.4 per dollar.

Subtracting this number from India’s MSP, the per-tonne subsidy for rice amounts to about 17,300 for 2013-14—much higher than India’ figure.

The obvious flaw with the US calculations is that it was using the 1986-89 exchange rate to determine the ERP in rupee terms. The rupee has consistently depreciated since then, and an outdated exchange rate leads to suppression of the ERP and over-estimation of the amount of India’s subsidy. “India notifies its domestic support to the WTO in US dollars,” India said in a response at the WTO.

“The AoA (agreement on agriculture) does not place a binding obligation on India to notify in a particular currency. It only requires taking into account the constituent data and methodology as in Part IV of a Member’s Schedule, which India has done. In order to provide comparable estimates, India has been notifying its domestic support in US dollars since 1995-1996. India has followed a consistent approach in currency used while notifying its domestic support notifications.”

The attack on India’s MSP policy also appears unwarranted given that India’s support prices for rice and wheat have been lower than the global prices in recent years.

“India is a huge market and an influential WTO member and, hence, its MSP policy is being targeted,” said Sachin Sharma, associate professor at the Centre for WTO studies at the Indian Institute of Foreign Trade (IIFT).

The attack on India may also serve to deflect attention from the enormous subsidy packages that developed markets such as the US and EU offer. India’s total farm support is far lower than that offered by the EU and the US.

While current WTO rules frown upon product-specific support to producers, they do not discourage ‘green box’ subsidies, which provide unconditional benefits to farmers. India’s green box subsidies constituted around 40% of the its total farm subsidies in 2016-17 as opposed to the US’s 88% (2015) and the EU’s 85% (2014-15).

Developing countries such as India have long opposed this distinction between green box subsidies and uncapped subsidies since green box subsidies also distort global trade by making agricultural production cheaper in developed markets.

It remains to be seen whether Asia’s rising powers can win this fight at the WTO at a time when the relevance of the multilateral body is being questioned.

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