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India stands to gain from preserving the WTO as a viable framework for trade

Director-General of the WTO Ngozi Okonjo-Iweala. India stands to gain from a rules-based multilateral order and a functional mechanism to enforce the rules (Photo: AP)Premium
Director-General of the WTO Ngozi Okonjo-Iweala. India stands to gain from a rules-based multilateral order and a functional mechanism to enforce the rules (Photo: AP)

India has gained the reputation of a trade talks wrecker, all in the name of food security for the poor. India refuses to accept any constraints on public stockholding of food grains, even as much of the world sees state takeover of cereals and pulses (the two together are dubbed food grains) as trade-distorting

At her opening address at the 12th Ministerial of the World Trade Organization, WTO, Director-General Nkozi Okonjo-Iweala made an appeal to the assembled trade ministers to protect the multilateral trading system, which has been under attack from within and without. India stands to gain from preserving the WTO as a viable framework for trade, and the least contribution it can make is to stop blocking agreements in the name of food security for India’s multitudes.

US President Donald Trump began the unravelling of the WTO, when he stopped letting people be appointed to its dispute settlement mechanism and its appellate body. The WTO is superior to its predecessor body, the General Agreement on Tariffs and Trade, GATT, in that it has a mechanism to settle disputes among members, complete with an appellate body. Minus this, it becomes toothless against big players who act on the principle, ‘might is right’. India stands to gain from a rules-based multilateral order and a functional mechanism to enforce the rules.

The WTO is under threat from geopolitics. With the Ukraine war and the West’s response to it, in the form of sanctions against Russia, and pressure on those who have commercial transactions with Russia to step away from them, normal trade stands disrupted. Attempts by the United States and its allies to contain China’s aggressive rise have resulted in the formation of assorted trading blocs — the Chinese-dominated Regional Comprehensive Economic Partnership, RCEP, from which India has stayed away, and the US-led Indo-Pacific Economic Framework, IPEF, which excludes China and has been welcomed by India. Such trading blocs have overlapping membership and need not necessarily kill multilateralism. But if trade flourishes within the blocs and declines across them, multilateralism would be at risk.

India has gained the reputation of a trade talks wrecker, all in the name of food security for the poor. India refuses to accept any constraints on public stockholding of food grains, even as much of the world sees state takeover of cereals and pulses (the two together are dubbed food grains) as trade-distorting.

It is relatively simple for India to both insulate food security from the vagaries of trade and international limits on trade distortions, but that calls for spending quite a bit of political capital. India has been unwilling to make that effort.

India’s food security system and the budgetary allocation for food security, by way of food subsidy, conflates both producer subsidy and consumption subsidy. What is required for India’s trade negotiations to be spared the pressure to cut food subsidy is to separate consumption subsidy from producer subsidy.

What the Indian Budget calls food subsidy is the payment the Government of India makes to the Food Corporation of India (FCI) to make good its loss, the difference between its total expenditure and total income. The expenditure is on procuring grain, transporting it, which entails loading and unloading the grain, and storing it, the cost of financing the storage, of underwriting the losses on spoilage and pilferage. The income is from selling the grain, apart from at limited open market sales to the grain trade, at a rate below a level that would cover all its costs, to state civil supplies corporations, which, in turn, distribute them to fair prices shops (rebranded ration shops), the embodiment of the Public Distribution System, PDS, as far as the consumer is concerned.

The higher the procurement prices, the higher the subsidy. The higher the handling costs, the higher the subsidy. The higher the open market sales, the lower the subsidy. High procurement prices are a way of rewarding the producer. Handling costs and volumes of open market sales reflect FCI’s operational efficiency. Clearly, India’s food subsidy bill subsumes both producer subsidy, FCI’s operational inefficiency and the subsidy that goes to lowering the cost of food for beneficiaries of the public distribution system.

Now, there are elements of the food subsidy that are not quantified at all. Fertilizer subsidy has the merit of being accounted for. But there are no rigorous estimates of the subsidy on irrigation and the subsidy on power, distributed to farmers, via unmetered connections, in very many states, that are also used by unscrupulous operators to draw free power for non-farm activities.

The political economy dictates that the government ratchet up minimum support prices, MSPs, year after year. MSP has been reified as the government’s commitment to farmer welfare. Regardless of the quantity of grain required for the PDS and assorted welfare programmes that distribute grain, the government procures all the grain that is supplied in some parts of the country. Some other parts of the country see little to nil procurement.

When the buffer stocking norm calls for 40 million tonnes of grain, it is not uncommon for the FCI to hold more than 100 million tonnes of grain. The money spent on this excess holding of food stocks has to do more with buying the farmers’ goodwill than with the food security of the vulnerable. But this, the government would never admit. The net result is for India to claim that a very large food subsidy is required to ensure the food security of India’s vulnerable masses.

What is required to be done is conceptually straightforward. Limit government stocks to the buffer stocking norm. Bring in private efficiency to minimize the cost of grain handling — quality checks at the time of procurement, loading and transporting grain, unloading it at storage sites, storage in modern silos rather than in piles of sacks exposed to the elements, rodents and fungi. Even a portion of the buffer stock can be held in the form of enforceable futures contracts, rather than physical stocks, to be delivered at distributed sites across the country.

Buy state requirements at prices that are higher than MSP, leaving MSP at levels that just about avoid distress sales. In tandem with functional forward markets for farm produce, this would encourage crop diversification away from superfluous grain to more remunerative crops that the economy today imports from other countries. Help this crop diversification away from unwanted grain with an incentive system for the crops that India needs, such as edible oil and assorted tree nuts.

Reorient producer subsidy as income support, which is not considered under the WTO rules to be trade-distorting, thanks to lobbying by the Europeans.

Indians will continue to have access to subsidized grain, farmers will continue to get state support and India’s formal outlays on food subsidy would come down drastically, even proportionate shares of the outlays on fertilizer, irrigation and power subsidies are added to the budgeted food subsidy bill. India would be able to pursue its real interest at multilateral trade negotiations, without sabotaging agreement at the altar of food security.

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