A stark reality unfolds in India’s agricultural ecosystem. While we have achieved self-sufficiency in food production, the challenges lie in the hardships faced by farmers, which is almost half of India’s workforce. Farmers grapple with alarmingly low incomes, poor welfare, and high suicide rates. India’s success will be incomplete without effectively addressing issues related to farmer welfare.
International trade agreements, by dismantling barriers, provide a crucial opportunity to catalyse the growth of farmer incomes. Cross-border trade in agricultural and food products skyrocketed to around $2 trillion in 2023; India’s modest 2.5 per cent share calls for more ambitious goals. India should negotiate Free Trade Agreements (FTAs) that open doors, making it easier for farmers to substantially enhance their earnings.
Impediments to trade
Historically, food products were amongst the first products to be traded. However, due to the unique nature of food in contrast to other traded commodities, it remains amongst the most difficult products to trade globally.
Countries often resort to imposing tariff barriers on the import of agricultural produce. This is rooted in the desire to shield domestic farmers from foreign competition, which are often perceived as unfair. The assumption is that this restriction ensures that farmers receive adequate prices for their produce.
This is reflected in the higher tariffs that are prevalent for agricultural products in contrast to other commodities. Based on global WTO data, the simple average MFN tariff for agricultural products was 14.7 per cent vis-à-vis 8 per cent for non-agricultural products. This makes global trade in agricultural produce, costly and creates an artificial shortage in supply. In India, the difference is significant, there is an addition on already high average tariffs. The simple average MFN tariff for agricultural products is a shocking 39.2 per cent vis-à-vis 14.9 per cent for non-agricultural products.
Trade in agricultural and allied products come with additional safety regulations which vary by country. Sanitary and Phytosanitary (SPS) measures, are regulatory standards, established by countries to protect human, animal, and plant life from risks associated with the import of agricultural products. Technical Barriers to Trade (TBT), encompass a range of norms, including product standards, labelling requirements, and certification procedures.
The divergence in SPS and TBT regulations among countries, results in increased compliance costs for producers and exporters, disruption of supply chains and a limit of market access. Moreover, there is no identifiable single source of information for these diverse norms. It is particularly painful for smaller producers to adhere to multiple, stringent standards.
Role of trade agreements
Cross-border trade in agricultural and allied products is costly and complicated. Trade agreements are aimed at reducing these barriers amongst participating countries. They allow countries to set lower tariff rates and provide concessions on non-tariff barriers. This results in the opening up of new markets and increased export opportunities for farmers. The expansion of consumer markets enables a concentration on specific crops, prompting nations to emphasize their respective strengths. This focused approach improves efficiency and productivity, thereby, contributing to the economic growth of the agricultural sector.
The positive impact of trade agreements is evident from historic case studies. The ASEAN FTA, the EU agreements and the Southern African Development Community agreements have led to substantial growth in agricultural trade. A study found that the ASEAN FTA, also improved food security of its member nations. There has been a gradual improvement in the per capita daily calory intake, in member countries over time.
Agricultural supply chains are intricate webs involving numerous stages, diverse stakeholders and unique features. Within this already convoluted environment, trading of agricultural and allied products face aheightened complexity, due to restrictions imposed by countries. High tariff barriers and non-tariff barriers hinder competitive trade, preventing access to global markets and adversely impacting the domestic ecosystem.
FTAs have the potential to bypass these constraints. They reduce trade barriers and help in shaping a more robust supply chain, benefitting both producers and consumers. They also strengthen India’s position in global value chains, a common factor in our success in the services sector. Moreover, in the context of climate change, the interconnected nature of agricultural supply chains is even more crucial. It provides India a strategy for risk diversification, contributing to global resilience in food systems.
Notably, benefits from trade agreements are only reaped, if created alongside complementary domestic policies. This means artificial barriers that prevent competitiveness, need to being eliminated (e.g. price floors) and laws that allow efficient production, must be developed (e.g., improved agricultural land leasing regulations). Policy stability is also essential – ad-hoc restrictions on storage and sale of agricultural products must be avoided. Together with FTAs, these will enhance international trade and the incomes of nearly half of our workforce – our farmers. Farmer welfare is, after all, contingent on bolstering India’s growth.
The author is Team Lead, Foundation for Economic Development