To subsidise or not: All you need to know about food security

  • B Sundaresan, Hindustan Times
  • Updated: Nov 26, 2015 01:37 IST

Commerce minister Nirmala Sitharaman has said that the WTO will have to give a permanent solution to India’s food security issue. HT explains.

What has WTO got to do with food security?

The World Trade Organisation was established in 1995 to facilitate trade among members, who now number at 161. The WTO facilitates trade through rounds of negotiations — there have been nine rounds till now, the latest being the Doha Round that began in 2001 — which restrict member countries from imposing trade barriers, such as export or import duties, subsidies etc.

How is globalisation related to trade barriers?

Globalisation is being able to trade goods, services and ideas freely. Under the WTO, countries should not discriminate between trading partners. The WTO wants every member to treat others on most-favoured-nation (MFN) principle — giving these countries the best-possible treatment in terms of trade or the least amount of tariffs. Free trade leads to economic growth as it results in more exchange of products.

So how do tariffs and subsidies act as impediments?

Tariffs such as import duties make exporting to a country costly, thereby discouraging trade. In September, India imposed a 20% import duty on steel to counter cheap imports from China. According to the WTO, subsidies in the form of stockpiling and financial benefits to firms and consumers such as tax sops “distort international trade”. For example, high minimum support prices for US cotton farmers can affect producers in Africa, who rely mainly on exporting cheap cotton to the US.

How are subsidies categorised?

The WTO divides subsidies into amber, blue and green box subsidies. Amber box are trade-distorting subsidies, blue box are subsidies with restrictions designed to reduce distortion and green box subsidies are non-trade distorting subsidies. Direct cash transfers, coupons and subsidies that do not impact production are not considered trade-distorting subsidies and categorised as green box.

Member countries can challenge such subsidies imposed by trading countries in the WTO dispute settlement procedure. If the WTO feels the subsidy is harming international trade, it can ask the country to withdraw the subsidy. Countries with per capita gross national product of less than $1,000 are exempt from these conditions, while developing countries are given time to phase out these subsidies, called the “peace clause”. The current peace clause expires on December 31, 2015.

Where does India’s food security programme stand amidst this?

India procures foodgrain from farmers primarily to run its public distribution system (PDS) in accordance with the National Food Security Act and also maintain reserve stocks. The WTO pegs the maximum value of subsidies for the Amber Box at 10% of the total value of a county’s agricultural production. India’s agricultural subsidies fall into this category.

For instance, India procures wheat and rice at `14,500 and `13,800 per tonne respectively, while the external reference price (ERP) (at 1986-1988 prices) for the two crops are `3,540 and `3,520 per tonne. The minimum support prices (MSPs) are over four times the ERP, which means India will have to reduce subsidies to confirm to WTO norms.

What is India’s stand?

The government has time and again emphasised that it will not compromise the interest of Indian farmers at the WTO. The G33 grouping, which includes India, had proposed changes in the methodology used to calculate subsidies by increasing the allowance to 15% and using current prices instead of the ERP, which is indexed in dollars and does not account for inflation.

Also, developing countries have expressed discomfort with the developed countries being able to get their subsidies categorised as ‘green box’ and escape legal action. At present, it has been agreed that the “peace clause” will remain in force until a permanent solution to the food stockpiling issue is agreed upon, even if that meant going beyond the 2017 deadline.

What is the way forward?

The Nairobi ministerial from December 15-17 will be key as developing nations are joining hands to lobby for retaining their subsidies. A cutback in subsidies can have disastrous political consequences in India were 57% of the labour force is engaged in agriculture. A permanent solution therefore may involve relaxations of norms by the WTO.

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