US body calls for policies to tackle price shock

The country must retain flexibility to respond to international price shocks in agricultural products, especially rice and wheat, before committing to a multilateral trade set up, a study has said.

"In the Doha negotiations, it would be most advantageous for developing countries such as India to have the flexibility to respond to price shocks based on their own specific conditions at the time of the shock, rather than having rigid disciplines imposed in advance," the US's Carnegie Endowment for International Peace said in a study on 'Trade Policy Choices'.

Concerned over the impact of price shocks, India and a coalition of developing countries, G-33, have proposed that they be allowed to designate a certain number of agricultural items as special products (SP) that could be shielded from tariff reductions or subjected to smaller tariff cuts because of their importance for livelihood security, food security, or rural development.

They have also proposed that a special safeguard mechanism be created whereby they could temporarily raise tariffs to counter a sharp change in the price or volume of imports that could threaten local livelihoods.

The CEIP study suggested that in the case of rice and wheat, the ability to use SP designation and invoke a special safeguard mechanism would be important instruments for the Indian government to avoid negative effects on the incomes of the poor in the face of global price changes.

It warned that India may have less scope for offsetting world price swings if it binds its agricultural tariffs at lower levels in Doha Round of negotiations.

"Agricultural price changes would have the strongest effects on India under Doha agreement, as compared with bilateral trade agreements, because Indian tariffs will be lowered toward all trading partners, including the lowest-cost producer of each agricultural product," the CEIP study said.

Based on different simulations of changes being discussed in the World Trade Organisation, a 50 per cent decrease in the world price of rice could have a negative impact on India's real income.

Even a 25 per cent decrease in the price of rice would have negative effects on all major components of the Indian economy, including private consumption, investment, exports and imports.

Both agricultural and non-agricultural tariff could see a reduction of 36 per cent by developed countries and 24 per cent by developing countries, including India.

Besides, there could be a one-third reduction in domestic agricultural subsidies and complete elimination of agricultural export subsidies, it said.

It also warned that India's domestic production may decrease as a result of reduction of agricultural tariffs, processed food tariffs, and domestic agricultural subsidies.

"The risks posed by agricultural trade liberalisation are high and must be carefully managed because the majority of Indians depend on agriculture for their livelihoods. Sharp changes in world prices could have potentially strong effects on household income and poverty," it pointed out.

India remains one of the less open economies among the large developing countries with average applied tariffs of 40.8 per cent on agricultural products and 12.1 per cent on non-agricultural products, it said.