At
WTO, India will face price catch
M. K. VENU July
23, 2013
The country has to
primarily convince the U.S. that Food Security Ordinance will not violate
Agreement on Agriculture
India is preparing to make out a strong case at the World Trade
Organisation (WTO) justifying its much higher foodgrain procurement to meet the
requirements of the Food Security Ordinance (FSO). The FSO is sure to face
resistance at the WTO committee on agriculture. India will primarily have to
convince the United States that the FSO would not violate the Agreement on
Agriculture (AoA). These issues will formally figure at the WTO ministerial
meeting at Bali in December.
At the root of the current impasse is a commitment given by
India under the WTO’s Agreement on Agriculture (AoA) that it would offer local
farmers a procurement price below the then notified import price fixed in rupee
terms in 1988, when the agreement was being negotiated. Under the AoA, the
minimum support price India can offer its farmers is the 1988 notified import
price with “due allowance” for inflation in the subsequent years. The problem
is India has to negotiate to receive “due allowance” for inflation for these
intervening years. If the country fails to get a full allowance for inflation,
then its procurement price might exceed the notified import price of 1988. Here
lies the catch.
The United States may take a tough stand on granting India full
inflation benefit on the 1988 notified import price. This might create problems
for operationalising the new FSO. The government is likely to explain to
Parliament in detail its commitments under the WTO and its current negotiating
stance.
The United States’ argument is that if the State agencies start
buying from farmers at well above international prices, then it acts as an
implicit incentive to the local farmer to produce more than he/she otherwise
would. That would squeeze out global grain suppliers, creating a trade
distortion. Of course, India is contesting this on the ground that persistently
high domestic inflation makes it imperative to raise the Minimum Support Price
(MSP) for farmers from time to time. In fact, India will invoke clause 18.4 of
the AoA which says that “due allowance shall be given” to the inflation factor
while assessing whether the MSP violates the AoA once the FSO becomes law.
Commerce Minister Anand Sharma was recently in the United States
and is reported to have taken up the matter with his U.S. counterpart. India’s
former Deputy Director-General at the WTO Anwarul Hoda, who was actively
involved in the signing of the AoA, is confident that India can easily invoke
the inflation clause and justify the increase in the procurement prices given
to farmers all these years and to be given in the future.
Mr. Hoda says the only point where there could be a dispute with
the U.S. trade representatives is on the interpretation of the term “due
allowance” to be given to the farmers on account of rising inflation in the
developing countries. “While we would argue full allowance for inflation be
given while raising the Minimum Support Price, the U.S. might argue that ‘due
allowance’ does not mean full allowance,” said Mr. Hoda. That might seem to be
a grey area.
As per the AoA signed in 1988, the international rupee price of
wheat which India imported was put at Rs. 354 per quintal. This became the base
price and the Indian government could offer local farmers a minimum support
price not exceeding 10 per cent above Rs. 354.
Now clause 18.4 implicitly allows India to add the inflation
rate for each year to the base price of Rs. 354. According to Mr. Hoda’s
calculations, which the government is likely to use, India has had 500%
inflation since 1988 when the notified import price of Rs. 354 per quintal was
determined. If you add 500% inflation to this, the allowable MSP for farmers in
2010-11 would be Rs.1,740 per quintal. The actual MSP offered to farmers for
wheat in 2010-11 was Rs.1,170 per quintal, well below the notified benchmark
import price of 1988 after loading inflation. That makes it well within the WTO
parameter. The ruling international price of wheat in the same year was roughly
Rs.1,300 per quintal.
So if full inflation is taken as an allowance, then the FSO will
not fall foul of the AoA at the WTO. The U.S. authorities, however, should
agree to interpret “due allowance for inflation” as “allowance for full
inflation.” This is the key in the ongoing negotiations between the two
countries. If past history is any guide, the United States may allow India the
needed leeway but not before extracting its pound of flesh in some other
sector, which is par for the course in WTO negotiations.
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