The Minimum Support Price (MSP) is an issue with conflicting viewpoints: farmers demand a legal guarantee for MSP and seek higher rates for various crops, contrasting with the World Trade Organization’s (WTO) stance.

The WTO contends that India’s MSP support exceeds the limits allowed under its Agreement on Agriculture (AOA), highlighting a significant discord between domestic agricultural policies and international trade agreements.

Defending the government’s right to purchase foodgrains from its farmers at the MSP for the Public Stockholding Programme (PSH) will be the most critical issue for India at the 13th Ministerial Conference of the WTO (MC13). MC13 will take place in Abu Dhabi from February 26-28.

The PSH has three components. The government buys foodgrains from farmers at pre-announced MSP stores and distributes these foodgrains to over 80 crore poor people at free or subsidised rates through schemes like the Pradhan Mantri Garib Kalyan Anna Yojana.

While food storage and distribution are consistent with the AOA rules, MSP faces many restrictions.

Let us first understand how the AoA categories subsidies for agriculture through Amber, Blue, and Green colour boxes.

The Green Box includes payments for research, disease control, infrastructure development, and direct payments to farmers unrelated to the volume of production or prices. These are considered to cause no or minimal trade distortion.

Payments similar to MSP, considered to distort production and trade, fall under the Amber box. The total value of Amber Box supports must not exceed the de minimis levels (5 per cent of production value for developed countries and 10 per cent for developing countries) or the agreed reduction commitments. The Blue Box is an exemption to the Amber Box. It covers subsidies that are tied to programs that limit production.

The three-box system looks logical in the first glance, but a significant part of AOA provisions discriminate against developing countries and legalise the higher support given by developed countries to their farmers.

For example, consider the AOA formula for calculating subsidy or Market Price Support (MPS). The MPS is the gap between a fixed external reference price and the applied administered price or MSP multiplied by the production quantity eligible for the MSP.

To calculate price support for rice, the AoA uses a fixed external reference price of $262.51 per tonne. This price is based on the export or import price of rice from 1986 to 1988 and remains unchanged. Comparing the MSP with a 35-year-old reference price results in a higher calculated subsidy share.

The AoA defines “eligible production” as the amount of produce that is fit or entitled to receive the MSP, regardless of whether it was actually bought. Taking the cue, the US argues that since India’s MSP policy doesn’t limit how much rice the Government can purchase, all of India’s rice production should be counted as eligible for subsidy calculations. However, India considers the quantity actually bought under the MSP program.

The exchange rate between the US dollar and the Indian Rupee (INR) has increased from 13.5 in 1986-88 to 83 currently. India calculates its subsidy figures in US dollars, benefiting from the weakening INR. However, the US argues that India should use the INR for these calculations to avoid benefits from currency depreciation. Using the US logic, India initially notified its data to WTO in INR. The AoA does not specify that calculations must be in a specific currency.

Breach of AOA thresholds

Based on the above logic, the US and many other countries argue that India’s MSP support for wheat and rice exceeds the maximum 10 per cent price support permissible under the AoA.

In 2020-21, India reported its price support at about 15 per cent, but the US claims the support was 93.4 per cent. The US alleges that the high support has made India the top rice exporter, with 40 per cent of the global market share.

India has pointed out the flawed AOA methodology for calculating support. The table compares the data used by India and the US for calculating subsidies

India secured some relief through the Peace Clause at Bali (2013), which temporarily allowed developing countries to exceed subsidy limits until a permanent solution was found. A subsequent General Council Decision in 2014 and the Nairobi Ministerial Conference in 2015 also extended the “peace clause” indefinitely with minor modifications.

The peace clause offered some relief but was limited and had strict transparency requirements. India argues that its PSH program is primarily aimed at supporting poor farmers and vulnerable populations, not distorting trade. India and other developing nations are fighting for a permanent solution.

AOA favours developed countries. AOA permits countries that provided high subsidies during 1986-88 to continue providing these subsidies with minimum restrictions.

As a result, today, the US and the EU continue to provide over 50 per cent and 65 per cent support for specific crops and still comply with AoA rules. India is considered non-compliant for providing 15 per cent price support. AoA also permits developed countries to maintain higher export subsidies on similar grounds, resulting in excess production and lower global agricultural prices.

If market prices are higher than the MSP, trade will take place at market price. If market prices are lower than the MSP, no trade of crops brought under MSP will be feasible. So MSP cannot distort trade. The AOA doesn’t follow such simple logic.

The United Nations’ Food and Agriculture Organization predicts cereal imports from developing countries could triple in the next 30 years. The AOA system is designed to force developing countries towards this objective at accelerated pace.

India is lucky to be self-sufficient in all agriculture and food items except vegetable oils. A robust MSP, high import tariffs on sensitive items and resisting pressure to open the domestic agriculture sector to subsidised imports will be crucial for preserving India’s food security.

The writer is the founder Global Trade Research Initiative