India’s Marginal Gains At WTO

India needs to assess its behaviour at multilateral organisations if it wants to be recognised as a responsible global power.

WrittenBy:Kunal Singh
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The United States of America finally conceded to India’s insistence on food procurement and stockpiling till a permanent resolution is found and, thus, resuscitated the World Trade Organization’s (WTO) Trade Facilitation Agreement (TFA). If it is about winning the argument, we are emphatic victors. But if it is about serving our interests, we might have lost a bigger battle. A tactical victory, as they say, is not necessarily a strategic triumph.

India had agreed to “Bali Package” at the WTO Ministerial Conference in December 2013, which allowed a relaxation of four years for members to fix their farm subsidy bills. The government support to farmers in India in the form of various input subsidies and Minimum Support Prices (MSPs) exceeds the stipulated 10 per cent cap provided for in the TFA. India’s concern about the caps being based on market prices prevailing in 1986-88 is legitimate. Higher subsidies are doled out by the US and the European Union. However, these subsidies, not linked to production, are a part of the “green box subsidies”, which is exempted from WTO rules. Our argument about the green box subsidies being as trade distorting as Indian support programmes is not off the mark either. However, these are arguments to score points in the debate and do not serve our interests.

Minimum support prices, which are incentives for farmers to grow certain essential cereals, have seen a tremendous jump in last few years. Crops eligible for MSPs form a third of the basket of goods determining wholesale price index (WPI) and half of the basket in consumer price index (CPI). Not surprisingly, the persistently high food inflation made Raghuram Rajan, Governor of Reserve Bank of India, with a mandate to curb inflation, advocate for “limiting the pace of MSP increases”.

In the years 2008-13, food inflation, averaging 10.3 per cent year-on-year, has been a source of chronic headache for policymakers. The availability of MSPs for certain cereals does not help boost the supply of non-cereal items like fruit, vegetables, eggs and milk at a time when their demand has been surging. According to Institute of Economic Growth, one per cent increase in per capita income leads to 0.05 per cent decline in demand for cereals and 0.2 per cent decline in demand for pulses (considered “inferior goods” in economics literature) while the same increase in per capita income drives a demand upsurge of about 0.6 per cent for vegetables, fruit and milk.

We have been artificially incentivising production of cereals whose marginal consumption is decreasing and inadvertently discouraging supply of items whose marginal consumption is increasing. No wonder inflation was a big factor in determining the scale of 2014 election results.

The Food Corporation of India procures and stockpiles grains meant to be distributed at cheap prices to two-thirds of the population as mandated after the passage of the Food Security Bill. It incentivises such water-intensive crops as wheat and rice, leading to unrestrained exploitation of groundwater. Around 61 per cent of Indian farmers are either landless or own less than 0.4 hectares of land.

They are merely able to produce just enough to feed their families and are ineligible to receive the benefit of MSPs on account of no surplus. So who gets these benefits? Relatively rich farmers with large landholdings and better access to irrigation facilities. These farmers have a strong lobby and are better organised. Most importantly, these lobbies also have articulate spokespersons at their service who pretend to speak on behalf of all Indian farmers on our English and Hindi prime-time debates.

Notable economist Ashok V Desai offers an interesting take: “[India] has been claiming special and differential treatment for its agricultural protection. It goes on raising agricultural prices to make its big farmers happy. It goes on buying food grains at those high prices, and then sells them at throwaway prices to those it chooses to call the poor. It gave these shady practices a fancy name: food security.”

If we move from production-based subsidies to a better targeted income support programme, we will not only be able to satisfy the requirements of WTO agreements, but also be able to support deserving beneficiaries of subsidies. As stated earlier, green box subsidies might just be as trade distorting as input- and production-based subsidies. But why should we not move to it given the multiple benefits we are likely to achieve? Income support programmes will not introduce supply distortions, thus, keeping inflation in check and at the same time provide succour to the neediest of farmers.

Consider the fact that we had agreed to reform our subsidy programmes in another four years in Bali (2013). The Aadhar-linked cash transfer would have provided us the best instrument to roll out the income support programme. However, we did not just renege on our international commitment, but also managed to corner the US into submission – a triumph for our clout and a defeat for our interests. Not all is lost though. We can still reform our food procurement and farmer support programmes without a deadline from the international community.

The WTO row, despite its recent resolution, also raised serious questions on India’s commitment to international trade and economic interconnectedness. While many want India to crack Trans-Pacific Partnership, the truth is we are simply not ready for it. Despite the signing of SAFTA (South Asia Free Trade Area) in 2006, the region remains one of the least integrated with the world. Intra-regional trade is below five per cent of the total official trade. In 2011, South Asia’s intra-regional trade was 4.3 per cent.

To put it into perspective, the corresponding figures for ASEAN (Association of Southeast Asian Nations) and ASEAN + 3 (ASEAN, China, Japan, South Korea) were 26 per cent and 39 per cent, respectively. As the pre-eminent power in the region, India has to shoulder a lot of blame and deservedly so – India has the lowest trade-to-GDP ratio in the region.

India’s role in the Regional Comprehensive Economic Partnership (RCEP) – a free trade pact between India, ASEAN, Japan, South Korea, China, Australia and New Zealand – has not won many friends either. India has been insistent on offering different concessions to different players in RCEP. One Japanese official went to the extent of saying: “We should not have included India in the RCEP negotiation framework in the first place.”

WTO deadlock was not one-off. India’s indecision in multilateral fora in general and trade related negotiations in particular are well known. With our economic clout growing, we do not want to be seen as a “rule-taker”. We also have not stepped up our game to become a “rule-shaper”. India needs a paradigm shift in its behaviour at multilateral organisations if it wants to be recognised as a responsible global power. For that to happen, we need not take our facile victory in WTO too seriously.

Disclaimer: These views are the author’s personal opinions and have nothing to do with Centre for Policy Research.

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