India is right to support its agriculture, but is going about it the wrong way, says Arvind Subramanian.
India is threatening to block the World Trade Organization (WTO)'s trade facilitation agreement (TFA) reached at Bali last year unless its agricultural policies are permanently excluded from multilateral scrutiny.
Is the objective - on agriculture - valid? Are the tactics - blocking Bali - sensible?
The short answers, elaborated below, are, respectively: yes, supporting agriculture is valid, but no, the tactic may be less so.
Objectives: preserving agricultural policies
India wants to head off potential challenges by its trading partners to its policy of minimum support prices (MSPs) for rice and wheat, which could potentially breach India's obligations undertaken in the Uruguay Round. There, India agreed to limit support to farmers via domestic subsidies (called "aggregate measurement of support", or AMS). Trading partners also want India to curtail any potential exporting of excess food stocks at subsidised prices.
The root of the problem is the gap between the structure of India's polices and the structure of its WTO obligations. This gap owes to a sharp rise in world agricultural prices since 2007, combined with a major expansion of India's domestic commitment to subsidise consumers of foodstuffs.
India's agricultural policies used to consist of protecting farmers via tariffs and subsidising consumers via the public distribution system. India provided little support for farmers via the MSPs, which remained well below international prices until very recently.
The Uruguay Round essentially codified these policies, giving India leeway to raise tariffs on rice to between 70 and 80 per cent and on wheat 100 per cent without breaching the WTO obligations.
The generous freedom to protect farmers via tariffs that India had obtained and the fact that India at that time had few domestic subsidies led it and other developing countries to pay less attention to their obligations on domestic subsidies, which were set at a relatively constricting 10 per cent of output.
Advanced countries, by contrast, had tighter obligations on tariffs, which they had to reduce by 36 per cent from levels that were generally lower than that for developing countries. They were also obliged to reduce export subsidies by 36 per cent. But they were allowed more space to support their farmers via domestic subsidies reflected in smaller reductions (only 20 per cent) in their domestic subsidies.
When the food-price shock hit the world, the focus in India and elsewhere shifted dramatically from the producer to the consumer. India slashed its tariffs (from about 30-50 per cent to near-zero for rice and wheat), raised the MSPs for farmers, and expanded food subsidies, culminating in the food subsidy Bill enacted by the previous United Progressive Alliance government.
Using tariffs to protect farmers was eliminated because the cost to consumers would be too high, as would the cost to the government of subsidising consumers. So the government had to switch to domestic subsidies via generous MSPs that also enabled it to procure stocks for food security purposes.
In structure, therefore India's agricultural policies - on the producer side - started to resemble that of advanced countries a few years ago. (Of course, the food-price increases of 2007 have led to some automatic reductions in production-related subsidies in advanced countries; they have over time also moved toward more direct support for farmers decoupled from production, the so-called "green box" of permissible subsidies in the WTO.)
But these policy changes were not reflected in the structure of India's WTO obligations. The oddity is that India is permitted by the WTO to adopt the inefficient policy of raising tariffs but unable to pursue the less inefficient policy of the MSPs.
There are two ways out of this dilemma: changing domestic policies or changing WTO obligations. India's domestic agricultural policies have improved considerably but remain inefficient: food subsidies and even income support to poor farmers should gradually be replaced by cash transfers (which would be WTO-consistent "green box" subsidies). But implementing such changes takes time - several decades in the case of even the United States and Europe. India's concern to not be prematurely forced into such ideal policies is, thus, not unreasonable.
So India must attempt to change the structure of India's WTO obligations. The experts, Ashok Gulati and Anwarul Hoda, have suggested that the WTO change the way it calculates domestic subsidies, giving India more wiggle room to continue its current policies.
Such an approach makes sense, especially because the current calculations are, absurdly, based on international prices that prevailed nearly three decades ago. This change in measurement is desirable but India's problems may well go beyond the measurement of subsidies.
India should offer to change its WTO obligations to make them less inefficient and trade-distorting. To show its good faith, it should offer to restrict its ability to impose tariffs in return for greater - but not open-ended - freedom to grant domestic subsidies. India would be saying to rich countries, "Our agricultural policies are similar to yours, so we want our WTO obligations to be similar to yours, too." It could argue further that the structure of obligations is biased against India, because rich countries can subsidise agricultural exports while India cannot.
India's offer would codify more efficient and less distorting policies than India's current WTO obligations. India would not just be seeking more freedom; on balance it could accept new limits to its freedom on agriculture, especially on tariffs. Of course, the exact details of the new level of tariffs and subsidies will need to be worked out, but the fair principles underlining the offer would be key.
Tactics: blocking the TFA
Is holding up the TFA the best way for India to secure its objectives on agriculture?
The July 31 deadline for adoption of the Bali agreement does provide India some leverage to advance its broader objectives on agriculture.
Despite the criticism, India is not standing in the way of great global trade advancement. Gains from the TFA have been grossly overstated. Reforming Customs administration, a key ingredient of trade facilitation, is important, but the TFA neither adequately provides incentives nor forces such reforms that will be politically difficult within member countries.
Nevertheless, opposing the TFA is perceived as obstructionism. The reputational costs for the new government that is trying to project an image of being investor- and market-friendly and constructive in its international engagement are potentially high.
Moreover, India seems isolated in its current position, with China, Brazil, Russia - the band of BRIC brothers - and other emerging market countries distancing themselves from New Delhi. A policy that has limited support in the WTO looks weak and lacks legitimacy, and, hence, is unlikely to succeed.
Indeed if India succeeds in its opposition, and the Bali deal collapses, the blow to an already weak WTO would be significant and India would bear much of the blame. And the costs of a weak multilateral trade system are greater for countries such as India, which is excluded from the emerging Asian trade architecture underpinned by the United States-led Trans-Pacific Partnership.
India should, thus, withdraw its opposition to the TFA, reformulate its position on agriculture, proceed to persuade its partners of the merits and fairness of its new position over the next few months, and revisit this issue at the WTO in the near future.
Reculer pour mieux sauter (draw back to jump farther), as the shrewd French say.
The writer is senior fellow, Peterson Institute for International Economics and Centre for Global Development.