Modi’s MSP hike to face hurdle in WTO

Devinder Sharma
Food and Trade Analyst

There is a popular saying: people living in glasshouses should not throw stones at others. But at the World Trade Organisation (WTO), this adage has little meaning. For several years, India has been under pressure to reduce or limit its support to agriculture, keeping it within the confines of the de-minimis limit ascribed under what is called as the aggregate measure of support (AMS). While India is under tremendous pressure to reduce the minimum support price (MSP) it provides to farmers, the big boys of global trade — the US, the EU and Canada — continue to flout the norms with impunity. 

Most developing countries, including India, cannot provide subsidy exceeding 10 per cent of the total value of production of a crop. For the sake of illustration, let's take the value of wheat produced in the country at Rs 500 crore. In that case, the MSP given to farmers, which for some strange reason is counted as subsidy, cannot exceed 10 per cent of the total value. In other words, the MSP cannot exceed Rs 50 crore if the total value of wheat produced in the country is Rs 500 crore. The market support for procuring wheat and rice in the form of MSP falls in the category of product-specific support. 

The US Trade Representative, Robert Lighthizer, announced recently that it plans to drag India to the WTO for under-reporting its market support for wheat and rice, which appears to be over 60 and 70 per cent, respectively, as against the permissible limit of 10 per cent. The trade confrontation will further escalate when India's latest policy decision to provide 150 per cent higher price over the cost of production for 23 crops for which MSP is announced every year is also questioned at the WTO.  

At the heart of the controversy is the AMS entitlement under the WTO. The 10 per cent limit that was prescribed for developing countries was calculated keeping the average of 1986-88 global prices as the reference price. 

Since then, farm input prices have quadrupled, as a result of which the MSP has also risen accordingly. For India, MSP is a crucial policy instrument of the public policy helping small and marginal farmers. It has implications for the livelihood security for India's 600 million farmers.  

Interestingly, while developing countries have a limit of 10 per cent, for the developed countries the AMS is capped at 5 per cent. This falls under what in trade parlance is called the Amber Box, which is considered to be trade-distorting. 

As per a revised proposal made by China and India before the WTO, the two giants have explicitly stated that the rich counties enjoy 90 per cent of the global AMS entitlements amounting to nearly $160 billion. These subsidies are in addition to more than $200 billion farm subsidies that are provided under the Green Box, which cannot be questioned if it meets the criteria. 

Anyway, based on the domestic support notifications that the developed countries have been providing, it becomes crystal clear that the US, the EU and Canada have themselves been providing a whopping product-specific support.  

From the data presented, it is quite revelatory that while for some commodities/products, farmers in the developed countries are getting subsidies in excess of their value of production, in many cases the subsidies are twice the value of production. 

Take the case of rice. While India is being questioned for its 60 per cent subsidy support, the US provides 82 per cent; and the EU subsidises rice growers to the tune of 66 per cent. In certain years, more than 90 per cent of the total product-specific subsidies in the US were concentrated only for milk and sugar. In the EU, over 64 per cent support for certain years was confined to just two products — butter and wheat. 

In the US, some products for which support exceeds by 50 per cent are wool (215 per cent), mohair (141 per cent), rice (82 per cent), cotton (74 per cent), sugar (66 per cent), canola (61 per cent) and dry peas (57 per cent). In just seven out of the 20 years for which the data was compiled, more than 50 per cent of the product-specific support was confined to milk. 

In the case of the EU, some of the products with subsidies exceeding 50 per cent of the value of production are silkworms (167 per cent), tobacco (155 per cent), white sugar (120 per cent), cucumber (86 per cent), pears for processing (82 per cent), olive oil (76 per cent), butter (71 per cent), apples (68 per cent), skimmed milk powder (67 per cent), tomatoes for processing (61 per cent). 

In Canada, milk, sheep meat and corn have continuously benefited from a very high level of subsidy. In the case of tobacco, the amount of subsidy was three times the value of production. 

Isn't it time for the US, the EU and Canada to first do away with $160 billion of product-specific support in agriculture? Even if it has come late, the joint proposal by China and India will help remove trade distortions which have allowed developed countries all these years to flood developing countries with cheaper imports.