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A version of this article first appeared in The India Cable – a subscribers-only newsletter published by The Wire and Galileo Ideas. You can subscribe to The India Cable by clicking here.
A critical issue affecting Indian farmers is the procurement of foodgrains, predominantly wheat and rice, at the minimum support price (MSP). This procurement system is a bone of contention as it requires countries to limit the level of support they give to farmers. As the procured food grains are distributed under the public distribution system (PDS) to about 813 million people, a decision to scale down procurement is critical for India and other food insecure countries. In the recently concluded 12th Ministerial Conference of the WTO in Geneva, a permanent solution on this issue of public stockholding was not found and a decision was deferred.
But it was agreed that there would be no restrictions on the export of food for the World Food Programme (WFP), which is used for meeting the needs of food-insecure countries. However, in the interest of domestic food security, exports under WFP can also be restricted by food exporting countries.
Under the WTO’s Agreement on Agriculture (AOA), expenditure on the distribution of food grains and holding of stocks is permissible without any limit. It is covered under the Green Box. So, what is the bone of contention for India? There are two major issues.
One, the reference prices are outdated. The methodology to calculate the level of support requires the comparison of MSP of wheat or rice with its external reference price (ERP). The ERP is the average of export or import parity price for 1986-88. This ERP has stayed fixed since then and AOA does not provide any adjustment, not even on account of inflation. Therefore, for the year 2022-23, while the ERP for wheat is Rs 354 per quintal, its MSP (for the Rabi Marketing Season 2022-23) is Rs 2,015 per quintal. This implies that India is providing support of Rs 1,661 per quintal on wheat.
The second problem is with the quantity of production used for estimating support levels. As per WTO’s methodology, the level of support given for a crop is estimated by multiplying the price difference (estimated as excess of MSP over the ERP) with the production of that crop. For developing countries (except China), the AOA provides that such support on any crop cannot exceed 10% of the value of production.
In its May 2018 communication to the WTO, the USA had argued that the Indian subsidy has to be calculated on the entire production of wheat and rice rather than on the quantity procured by the government at MSP. For 2013-14, the USA said that India’s support for wheat was 65.3% of the value of production, and 76.9% for rice. It was mentioned that by providing support in excess of 10%, India is in breach of AOA. The USA did not pursue the dispute, perhaps on strategic considerations.
India has been procuring just about 30-38% of wheat and rice production. So, calculating the support by assuming that the entire production receives support (at MSP) is quite anomalous. In fact, it is well-known that farmers in many places are forced to sell below MSP.
For many developed countries, support is not calculated for each crop and they have the flexibility to provide much higher support to a particular crop. For example, the support for sugar in the USA in 2014 was 59% of the value of production.
The Bali declaration of December 7, 2013, provided that a dispute in WTO will not be raised by any country for public stockholding programmes for food security purposes. The countries using the peace clause are required to comply with provisions relating to notifications, transparency, anti-circumvention and safeguards, which WTO’s Committee on Agriculture monitors. Countries taking recourse to the peace clause are required to ensure that stocks procured under such programmes do not distort global trade or adversely affect the food security of other countries.
This decision was called an “interim mechanism” and a permanent solution to this was to be negotiated in future. On April 8, 2021, India notified the WTO that the limit of 10% support for rice was breached in the marketing year 2019-20.
Despite attempts in India to diversify production of rice in the increasingly water-scarce northwestern states of Punjab and Haryana, production is unlikely to come down drastically. Due to economic stagnation in the last five years, the PDS is also unlikely to be pruned, in spite of experts’ suggestions to reduce its coverage from 67% of the population to about 30%. Therefore, price support operations for wheat and rice are likely to continue. It means that the government will have to carry large stock of food grains and a permanent solution to such stocks is needed so that other countries do not take India to the disputes panel at WTO.
In 2015, India lost its appeal on the import of poultry, eggs and live pigs from the USA. In 2021, a WTO panel ruled against Indian sugar subsidies, including fair and remunerative prices to cane growers. The Indian appeal to the appellate body of WTO is pending.
The Covid-19 pandemic and the Russian invasion of Ukraine have shown the limits of globalisation and several food importing countries face a crisis. Food stocks are not really a luxury for India: they provide food security to 1.35 billion citizens.
Siraj Hussai is former Union Agriculture Secretary and a promoter of Arcus Policy Research. Shweta Saini is an economist and a promoter of Arcus Policy Research.