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Tuesday, Jul 22, 2003

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WTO and agriculture — Will it be advantage India?

S. D. Naik

India must pay greater attention to increase productivity, create exportable surpluses and make agriculture more competitive if the final outcome of the WTO negotiations is to be translated to its advantage. Also, it must garner the support of developing countries to press for genuine reforms, including substantial cuts in subsidies in developed countries and tariff reduction, says S. D. Naik.

DESPITE protracted negotiations, the Doha Development Agenda appears bogged down on the question of moving towards free trade in agriculture. The WTO's Agreement on Agriculture (AoA) has set specific targets and a timeframe for scaling down domestic and export subsidies and doing away with import barriers.

However, largely because of the continuing resistance of the US, the EU and Japan to scale down their support to domestic agriculture, there is uncertainty about arriving at a consensus at the forthcoming ministerial meet at Cancun in September. These countries account for the largest chunk of domestic support and export subsidies provided by the entire developed world and distort agricultural markets worldwide. According to the latest monitoring and evaluation report, the level of support to farmers in the OECD countries has not changed since 2000. Total support to agriculture in these countries was $318 billion in 2002, up from $311 billion in the preceding year, with production-linked support still dominant. What is more, the US Farm Bill and the EU Common Agriculture Policy (CAP) actually promise higher subsidies to their domestic farmers than in the past even as pressure is being maintained on developing countries to allow greater market access and reduce tariffs on agricultural imports.

To avert a breakdown of ongoing negotiations, the EU agriculture ministers adopted a compromise package on June 26, which says that after 2005, the EU will no longer subsidise farm production but will protect farm incomes. However, the overall support given to EU farmers is unlikely to be reduced significantly. Consequently, there will be continued overproduction and dumping of surpluses in developing countries. What is worse, there is no talk of any reduction in export subsidies or EU tariffs on agricultural imports in the CAP reform package.

Not surprisingly, most experts have termed the EU's compromise package eyewash. Mr Sharad Joshi, the founder of Shetkari Sanghatana is among the very few who view the EU decision to reform the 45-year old CAP as a positive development.

For the EU ministers have agreed to delink farm subsidies from production levels and to keep the total amount of support to farmers at $50 billion (euro 43 billion) per annum until 2013 despite the fact that the membership of the EU will be enlarged from 15 to 25 countries next year. Mr Joshi, however, admits that the EU should have done more to scale down the subsidies.

According to most experts, the negotiations so far have failed to address the crucial issues such as tariff reductions, export support, domestic agriculture programmes and assistance to developing countries. What is worse, the rich countries follow discriminatory policies that go against the interest of developing countries. For instance, in the name of reciprocal access, the OECD countries charge much lower tariffs on imports from member countries as compared to those from poorer countries.

The current round of WTO talks, which began in Doha in November 2001, is called the "Development Round" because it is supposed to take care of the special concerns of developing countries. These concerns are mainly in the areas of agriculture, intellectual property rights and market access. However, it now appears that the other issues have now been overshadowed by agriculture since this is a critical sector for developing world for food security, poverty reduction and economic growth. Hence agriculture has become the "make or break issue" for the successful conclusion of Doha round of trade negotiations.

Against this backdrop, what should be India's strategy? It goes without saying that India must strive to garner support of developing countries to press for genuine reforms, including substantial cuts in subsidies in developed countries and tariff reduction. Fortunately, After the Indian Prime Minister, Mr. Vajpayee's successful visit to China, the two countries have agreed to co-ordinate their strategies in support of the developing countries within the WTO. A key aspect of this co-operation should be the search for special safeguard mechanisms in the field of agriculture.

However, as things stand today, India need not be unduly perturbed about WTO conditionalities. Our agricultural subsidies are much less than the 10 per cent of the GDP stipulated by the WTO for developing countries. The agricultural exports are still fairly competitive and have surged in recent years to touch Rs 30,000 crore now from a level of Rs 6,317 crore in 1990-91. Of course, it should be possible for us to do much better if only the developed countries implement the Doha Agenda.

Actually, we should also be more concerned about the non-tariff barriers being put up by developed countries, including product quality and sanitary and phyto-sanitary measures.

But what is still more important is the need to pay much greater attention to increase productivity, create exportable surpluses and make Indian agriculture more competitive if the final outcome of the WTO negotiations (whichever way it goes) is to be translated to India's advantage. Today, Indian agriculture needs more public investment and policy support in several areas to overcome the prevailing structural weaknesses such as low scale of operation, poor state of rural infrastructure, lack of product diversification, inadequate R&D spending, low productivity, absence of marketing infrastructure and inadequate financial support.

Largely because of the big decline in public investment in the sector, post-reform, the share of agriculture and allied activities in the country's GDP has steadily declined from 32.2 per cent in 1990-91 to 24.3 per cent in 2001-02. However, more than two-thirds of the country's population continues to depend on this sector even now and it provides employment to 60 per cent of the productive workforce. This means that the overwhelming majority of population, which depends on agriculture for its livelihood, is getting increasingly impoverished.

The slowdown in agricultural growth has accentuated since 1997-98 with the sector's negative contribution to the national GDP in that year, 2000-01 and again in 2002-03. The annual average growth rate of the sector over this six-year period has decelerated to just one per cent against the desired rate of four per cent. This does not augur well for the country's long-term food security, poverty alleviation and export of agricultural commodities. Special efforts are, therefore, needed to reverse this trend.

Because of woefully inadequate infrastructure support, over 30 per cent of our agricultural production goes waste. There is a big shortage of marketing yards, warehouses, cold storages, rural roads and telecommunications. The Government of India's initiative in setting up of the Rural Infrastructure Development Fund (RIDF) under Nabard to facilitate development of infrastructure in rural areas was a welcome step. However, it has failed to make any significant impact so far in improving the state of rural infrastructure.

It is high time the Government re-examines the role of RIDF and makes it more effective and meaningful.

Another area that requires reforms is agricultural marketing. At present, though agricultural production is largely free from controls, the same is not true of marketing of agricultural commodities. Under the APMC Act, State governments alone are empowered to initiate the process of setting up of markets for agricultural products within a defined area. As a result, private and co-operative sectors cannot take initiative in setting up markets equipped with more modern facilities.

High investments together with entrepreneurial skills required for creation and managing market infrastructure for agricultural products will have to come from the private sector. For this to happen, the State Agricultural Produce Marketing Regulation Act would need modifications. For better results in this area, the Government's role should be that of a facilitator rather than that of exercising control over management of markets.

Karnataka Government has already taken some initiative in this direction by providing for the establishment of an `Integrated Produce Market' to be owned and managed by the National Dairy Development Board (NDDB) for marketing of fruits, vegetables and flowers in that State.

An equally important area that needs urgent attention is the flow of institutional credit to agriculture. Unfortunately, the growth of commercial banks' lending to agriculture and allied activities witnessed a substantial decline in the 1990s as compared with the 1980s. Agriculture's share in scheduled commercial banks' total outstanding credit of Rs 6,55,993 crore as on March 31, 2002, was only Rs 64,008 crore or 9.8 per cent. Even if we include loans for food manufacturing and processing (rice, sugar, edible oil, tea, fruits and vegetable processing), this share works out to Rs 84,750.22 crore or 12.9 per cent, way below the stipulated target of 18 per cent.

What is worse, the total agricultural lending by commercial banks is now lower than even their outstanding `personal loans' portfolio comprising loans for housing, consumer durables, and so on. While banks are seen to be chasing customers to offer personal loans because of abundant liquidity, there is continuing apathy to lend to agriculture sector.

Not only is the credit flow to agriculture grossly inadequate, the cost of credit to the sector is also quite high. The rate of interest charged on agricultural loans is around 14-16 per cent compared to 8.5-10 per cent on housing loans now.

Thankfully, the new Agriculture Minister, Mr Rajnath Singh, took up this issue with the Finance Ministry and the Government has now decided to lower the rate of interest on farm loans up to Rs 50,000 to 9 per cent.

Mr Jaswant Singh also indicated that Nabard would start refinancing District Central Cooperative Banks (DCCBs) on a voluntary basis so as to reduce transaction costs. Now, it is up to the Government and the RBI to ensure that this does not make the banks still more reluctant to lend to agriculture.

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