India's fight for food security at WTO

Amid scrutiny of its market support for rice, India must remain vigilant in signing future trade deals to safeguard its interests

The 13th Ministerial Conference of the World Trade Organization (WTO) will be held in Abu Dhabi from February 26 to 28. India’s main focus at this conference will be to defend its right to purchase food grains from its farmers at minimum support prices (MSPs) without violating the WTO’s Agreement on Agriculture (AoA) rules. India buys grains for later distribution to the poor under its public stock holding (PSH) system.

India breaching AoA limits

The AoA permits price support up to 10 per cent of the market value of a product in developing countries like India. In 2020-21, India reported a jump in its price support for rice to about 15 per cent. However, the US and other countries claim that India’s support is much higher, around 94 per cent.

The US argues that this high level of support has led to India becoming the top rice exporter, holding 40 per cent of the global market share.

Understanding the difference in calculation

The flawed methodology of the AoA causes the significant difference in Indian and US calculations. The AoA discriminates against developing countries, allowing the US to take liberties with the AoA text.

Here is the AoA formula for calculating subsidy or market price support (MPS): The MPS is the gap between a fixed external reference price and the applied administered price multiplied by the production quantity eligible for the MSP.

We must understand these terms to know how the AoA is designed against developing countries. The AoA uses a fixed external reference price of $262.51 per tonne to calculate price support for rice. This price is based on the export or import price of rice from 1986 to 1988 and remains unchanged. Comparing the MSP with a 35-year-old reference price results in a higher calculated subsidy share. The MSP is the applied administered price in India.

The AoA defines “eligible production” as the amount of produce that is entitled to receive the MSP, regardless of whether it was actually bought. The US argues that since India’s MSP policy doesn't limit how much rice the government can buy, all of India’s rice production should be counted as eligible for subsidy calculations. However, India considers the quantity actually bought under the MSP programme.

Currency use

The exchange rate between the US dollar and the Indian rupee (INR) has increased from 13.5 in 1986-88 to 83 currently. India calculates its subsidy figures in US dollars, benefiting from the weakening INR. However, the US argues that India should use the INR for these calculations to avoid benefits from currency depreciation. The US approach is irrational. The AoA does not specify that calculations must be in a specific currency.

The US and India interpret the above terms differently, so the US estimated India’s rice price support at 94 per cent, while India’s own estimate is 15.2 per cent.

Bali relief

India strongly advocated at the WTO to address the PSH issue, leading to the adoption of a “peace clause” at the 2013 Bali Ministerial Conference. This happened after India insisted on resolving the PSH issue before agreeing to the Trade Facilitation Agreement. The peace clause prevents WTO members from challenging a country that exceeds the set price support level for a commodity. In 2018-19, India used this clause to defend its rice PSH programme when its support exceeded the 10 per cent limit. Although the Bali decision offers some relief, it is limited and requires detailed reporting from countries using it, and hence India is insisting upon a permanent solution to the PSH issue. However, even if no progress happens, India can continue its MSP programme using peace clause flexibilities for a long period.

The AoA favours developed countries

Countries that provided higher than minimal price support during 1986-88 are allowed to continue exceeding the limit of 5 per cent, according to the AoA. As a result, the US and the EU today offer over 50 per cent and 65 per cent support for specific crops and still comply with AoA rules. However, India is considered non-compliant for providing 15 per cent price support. The AoA also permits developed countries to maintain higher export subsidies on similar grounds.

Two options on PSH

At the 13th Ministerial Conference, India seeks the explicit classification of the PSH programme as “Green Box” support as this would exempt it from obligations to reduce support levels. Chances of any success are remote as the US and many developed countries do not want this.

India may undertake not to export rice commercially from its PSH stock for a permanent solution to the PSH issue. India will not lose from cuts in rice exports. China, with higher rice productivity, does not encourage the export of rice. However, as every kg of rice produced may require an average of 800-1,200 litres of water, production in many Indian states may not be viable without free electricity.

India can also consider setting higher production targets for some crops and limit its support to only 75 per cent of the output. This strategy fits into the AoA’s Blue Box category, a method China has used to avoid AoA limits. However, this approach requires careful consideration, as setting a production limit might not be politically agreeable.

In hindsight, today, India would not sign the AoA or the ITA-1, which sealed its fate in the computer hardware sector. India must be cautious in negotiating current FTA deals, especially the new issues.

The United Nations Food and Agriculture Organization predicts cereal imports into developing countries could triple in the next 30 years. They will import most food from developed countries via large traders. Just four traders handle 90 per cent of the international grain trade.

Countries breaching the subsidy limits risk the closure of their MSP and food safety programmes, increasing their reliance on imports. Could that not be the hidden agenda of the AoA? It is rumoured that former Cargill Vice-President Dan Amstutz prepared the first draft of the AoA. India needs never to lower its guard on anything related to agricultural trade.

Finally, India should expand its team of experts. It currently seems to have fewer specialists focusing on agricultural trade issues compared to the number of US experts handling Indian agricultural trade matters.

The writer is the founder of Global Trade Research Initiative