America doesn’t like India’s farmer subsidies and that’s unlikely to change anytime soon

• The US has said that India’s price support schemes for rice and wheat violate the WTO’s 10% cap on subsidies for agricultural products.
  
• India has refuted the claims and will challenge the notification at a WTO meeting in June 2018.
  
• However, the situation is unlikely to be resolved in the foreseeable future due to India’s domestic policies with respect to food security as well as the fundamental flaws of the WTO’s agriculture agreement.
  

Earlier this week, the Office of the US Trade Representative, Robert Lighthizer, said that it had issued a counter-notification - the first ever of its kind - against India for violating the WTO’s Agreement on Agriculture. The US government alleged that India underreported its subsidies and that its scheme of minimum price support (MSP) for wheat and rice was against the rules of the agreement.

The US explained that India’s price support for wheat and rice constituted more than 60% and 70%, respectively, of the value of total production between 2010 and 2013 - the years that India provided data for. The WTO’s agriculture agreement stipulates a 10% cap on market price support as a proportion of total production.

In response, India’s trade envoy J.S Deepak debunked the claims, explaining that the US had used “flawed assumptions and erroneous methodologies” in its calculations.

Limited scope for resolution

The Indian government is expected to challenge the notification at the next meeting of the WTO’s Committee on Agriculture, which is scheduled for June 2018. While it remains to be seen what its argument will be, it can seek to differentiate the support given by the central government and state government (the WTO rules only cover central support) or even point to discrepancies in currency conversions.

Despite India’s justifications, however, the situation is unlikely to be resolved in the foreseeable future. Not only does this have to do with India’s domestic policies with respect to its farmers and food security, but also due to the fundamental flaws of the WTO’s Agreement on Agriculture.

Domestic policies vs international trade commitments

The Indian government is faced with a choice of either keeping its citizens and farmers happy or abiding by the WTO’s rules. It is obvious that it will side with its electorate.

The government spends a lot of money on food subsidies and price support schemes. It has allocated nearly ₹1.7 trillion, or 7% of its total budgeted expenditure, in its Union Budget for 2018-19 to food subsidies. These subsidies are an important component of the country’s National Food Security Act of 2013, which is aimed at providing essential grains at subsidised prices.

Rice and wheat constitute the bulk of government procurement and are hence, given the most price support. Under the act, rice and wheat are priced at ₹2/kg and ₹3/kg, respectively.

Even though the price support schemes are for domestic purposes and not for trade, India has consistently drawn the ire of the US and other developed members of the WTO. Due to India’s status as one of the world’s top exporters of rice, these countries are concerned that its domestic policies have led to excessive production and consequently, a spill into global markets.

Given India’s emphasis on food security for its people, it does not look like the country will curb its support for rice and wheat production anytime soon. In fact, in February, the BJP government also announced a universal minimum price support scheme for all kharif and rabi crops at 1.5 times their total production cost as part of a plan to double farmer’s incomes by 2022.

An outdated and unfair WTO agreement

Despite being drawn up in 1995, the WTO’s Agreement on Agriculture is still enforceable today. And it does not take into account current market prices when measuring subsidies.

Rather oddly, the agreement measures a country’s minimum support price scheme in comparison to prices of agricultural products between 1986 to 1988. Simply put, under the agreement, if the minimum support price of a product is more than what its price was 30 years ago, the difference is calculated as a subsidy. Furthermore, this subsidy should not exceed 10% of the crop’s production value.

Additionally, the agreement separates agricultural subsidies into three categories- green box, comprising non-trade distorting schemes; blue box, comprising subsidies that are slightly trade-distorting; and amber box, which comprises subsidies that are significantly trade-distorting and need to be phased out.

This system fails to take the needs of developing countries fully into account. While the subsidies that rich countries mostly provide, like direct income support to farmers, come under the green box category, minimum price support schemes, which are used by many developing countries for food security and public stockpiling, go under the amber box.

The unfair nature of the Agreement on Agriculture was a key talking point at the WTO meeting in Bali in 2013. Following the passage of its National Food Security Act that year, India realised that its food subsidies would exceed the 10% cap. Hence, a “peace clause” was implemented wherein developing countries like India were given an additional four years to comply with the norms. In December 2014, the time period for the peace clause was made indefinite until a permanent solution was reached.

Which leads us to now

It does not look like India will compromise on its domestic policies. A possible solution could be the revision of the Agreement on Agriculture.

And what would this entail? Subsidies should be calculated in accordance with current prices and the public stockpiling programmes of developing countries should be excluded from consideration or given lesser weightage.

But it is unlikely that this will happen anytime soon. There doesn’t seem to be any danger of a trade war as it would be significantly worse for all parties involved than the current state of affairs - an indefinite stalemate. So the US and India will keep squabbling in the hope that one of them relents.