While the Narendra Modi regime has built a narrative around how it took on the international system to defend the Indian farmer at the World Trade Organization (WTO), the truth is that India’s hard-nosed tactics over its food subsidy limits have only baffled the world. Given the general high expectations about the Modi government, the WTO subsidy battle has been largely brushed under the carpet as a case of a newly-elected regime’s naiveté.
Thus, the announcement of a compromise agreement between the United States and India on the subsidy issue is welcome. It will allow the Modi government and India’s international friends to focus on a larger, more constructive India economic story rather than an embarrassing side story.
There was always something peculiar about India’s decision to block the trade facilitation agreement (TFA) and, in effect, blackmail the rest of the world into agreeing to a long-term increase in India’s food subsidy limits. One, New Delhi had signed the earlier subsidy agreement with open eyes before suddenly turning around and saying it wasn’t enough.
Two, the TFA had nothing to do with food subsidies and, in theory, was an agreement India itself supported. Three, many of the claims New Delhi made in defence of its decision — that the subsidy levels were fixed at mid-1980s price levels and that it would be taken before the WTO tribunal after 2017 — were little short of specious. Four, much of India’s hue and cry hid the simple fact that it was the Indian government that had failed to file the subsidy data that the WTO required over the years, making it unclear as to what it was basing its complaints on. Finally, the Modi government has been talking about a cash benefit reform of the subsidy system that would, in effect, make the WTO’s subsidy limits irrelevant.
The right way to convert this to India’s interest is for the Modi government to use the domestic political capital it has earned from this ill-conceived action to begin plotting a more strategic trade policy. The last government had signed over a dozen free trade agreements without any serious thought as to how they fitted in with the country’s long-term economic strategy. The Modi government has sketched out such a framework: One that stresses a revival of the manufacturing sector, which seeks to make agriculture more competitive through infrastructure and greater productivity.
This cannot be done in a protectionist environment. In fact, manufacturing success from Japan to China, Germany to Singapore, has been accomplished by a great degree of trade and investment openness. A sensible review of trade policy is required, not one that is obsessed with short-term issues and grandstanding at international fora.