The WTO threat to Indian agriculture’s MSP regime

Procurements done for food security purposes should be exempted from inclusion in Aggregate Measurement of Support, provided such food grains are procured transparently. India, as part of G-33, should bargain hard for this at the WTO’s 12th ministerial conference later this year

Commerce minister Piyush Goyal, while addressing the informal ministerial meeting of a group of 33 countries (G-33), remarked that the Agreement on Agriculture (AoA) at the World Trade Organization (WTO) is riddled with imbalances and tilted against developing countries. The minister is right.

India can move away from price-based support to its farmers to income-based support, which will not be trade-distorting under the Agreement on Agriculture, provided income support is decoupled or not linked to production. However, given the enormous political salience attached to the MSP-based procurement regime, underlined by the ongoing farmer agitations, it is simply not possible for India to dump or even dilute the current system. (HT archive)

An important area of concern for India and other developing countries is the lack of policy space in AoA to run a food security programme that is sponsored by price support. India runs a food security programme where the government procures food grains from farmers at an administered price (minimum support price or MSP), which is higher than the market price. The food grains so procured are stored and distributed through the public distribution system to the poor. It serves the twin objectives of offering remunerative prices to farmers and providing subsidised food to the underprivileged.

The stockholding and distribution components of the food security programme are not affected by AoA because they fall under the “green box”, which covers those measures that have no or minimal trade-distorting effect. However, the procurement of food grains at MSP falls under the “amber box”, which covers those measures that are trade-distorting. One of the central objectives of AoA is to cut trade-distorting domestic support that member-countries provide to their agriculture. In this regard, WTO member- countries are required to compute Aggregate Measurement of Support (AMS), which is the total of product-specific support (such as price support to a particular crop) and non-product-specific support (such as fertiliser subsidy).

Under Article 6.4(b) of AoA, developing countries such as India are allowed to provide a de minimis level of product and non-product domestic subsidy. This de minimis limit is capped at 10% of the total value of production of the product, in case of a product-specific subsidy; and at 10% of the total value of a country’s agricultural production, in case of non-product subsidies. Any State support more than the de minimis limit is trade-distorting, and thus has to be accounted for in AMS.

It is here that India’s MSP-based procurement system runs into rough weather vis-à-vis WTO rules. The MSP at which India procures rice and wheat has to be compared with the fixed external reference price (ERP) — an average price based on the base years 1986-88. Since the fixed ERP hasn’t been revised in the last several decades at WTO, the difference between MSP and fixed ERP has widened enormously due to inflation. For instance, according to the Centre for WTO Studies, India’s ERP for rice, in 1986-88, was $262.51/tonne and MSP was less than this. Consequently, India, unlike several developed countries, didn’t provide trade-distorting subsidies then.

However, India’s applied administered price for rice in 2015-16 stood at $323.06/tonne, much more than the 1986-88 ERP. When this difference is accounted for in AMS, India will overshoot its de minimis limit. This, in turn, makes India vulnerable to a legal challenge at WTO, as it happened in the case of China’s domestic agricultural subsidies from 2012-15, being successfully challenged by the United States.

Arguably, India can move away from price-based support to its farmers to income-based support, which will not be trade-distorting under AoA, provided income support is decoupled or not linked to production. However, given the enormous political salience attached to the MSP-based procurement regime, underlined by the ongoing farmer agitations, it is not possible for India to dump or even dilute the current system.

Currently, India has a temporary relief in the form of a peace clause, agreed in the 2013 WTO ministerial conference at Bali, and strengthened later. The peace clause, subject to certain conditions, bars countries from bringing legal challenges against price support-based procurement for food security purposes. However, the need is to find a permanent solution. Procurements done for food security purposes should be exempted from inclusion in AMS, provided such food grains are procured transparently and not diverted for export. India, as part of G-33, should bargain hard for this at the WTO’s 12th ministerial conference later this year.

Prabhash Ranjan is Professor and Vice Dean, Jindal Global Law School, O P Jindal Global University

The views expressed are personal