At a time when the Centre is offering enhanced minimum support prices (MSP) to the farmers for the Kharif crops, India’s farm subsidies’ regime has come under intense scrutiny in the World Trade Organization (WTO).

This is not the first time that WTO members have questioned India’s agriculture subsidies; over the past few years, the implementation of the National Food Security Act has been questioned in the WTO, as several members argued that India’s agricultural subsidies were violating the disciplines of the Agreement on Agriculture (AoA). After considerable remonstration, India obtained a temporary respite after being assured that no WTO member would initiate a dispute against India, even if its subsidies were in excess of its commitments.

But over the past few months, the questioning of India’s farm subsidies has become more systematic. In May, the US questioned the basis for the grant of MSP to wheat and rice and more recently subsidies for cotton.

Subsidies provided by WTO members are calculated with reference to international prices, which are assumed to be the competitive prices. In the negotiations leading to the adoption of the AoA, the international price of each commodity was a fixed “external reference price” (ERP), taken as the average of the international prices during 1986-88.

For calculating the total value of subsidies given to each crop (called “market price support”), the difference between the current MSP and the fixed ERP must be multiplied by the quantity procured by the agencies (called “eligible production”). AoA fixes the market price support that countries can provide to each crop. For developing countries like India, the market price support for a crop cannot exceed 10 per cent of the total value of its production.

India’s MSP for common varieties of rice, which was $172 per tonne in 1986-87, had increased to $334 per tonne in 2014-15 (current prices); but the ERP remained fixed at $263 per tonne. Thus, MSP for rice, which, in 1986-87, was well below the ERP (negative subsidy) is now well above this reference price. Comparing India’s current MSP with the ERP that is three-decades old is simply illogical, but this is being imposed as the “subsidies discipline” by the AoA. Despite this illogical formulation, India’s market price support to its crops never exceeded 10 per cent of their value of production. However, the US has challenged India arguing that its market price support to the major crops are well above this threshold.

In its submission to the WTO, the US has shown India’s market price support for rice was consistently above 70 per cent of the value of production since 2010-11 and above 60 per cent for wheat during the same period, while for cotton it varied between 53 and 81 per cent.

It is important to understand how the US arrived at these exaggerated estimates of market price support. The US has calculated India’s market price support by measuring the MSP and the “external reference price” in Indian rupees, while India had measured both these prices in terms of US dollars. This means that when India reports the figures, the depreciation of the rupee plays a part, which is not the case with the figures provided by the US.

It must be pointed out that the AoA gives the freedom to the WTO members to calculate their market price support using any currency; the tacit understanding is that the data presented by a country must be consistent. India has been consistently submitting these figures to the WTO in US dollars from the very first notification it had made in 1998.

A second issue that the US has raised is regarding the quantity procured or “eligible production”. India has maintained that “eligible production” must be that part of the total production of a crop that is actually procured by the agencies.

However, the US has been hinting that India must declare its “eligible production” before the actual procurement takes place. Announcing “eligible production” prior to actual procurement can have two adverse implications for the farmers. If “eligible production” is set at a higher level, it can either influence their decision to produce a particular crop, and if it is set a relatively low level, they would be denied the benefit of the MSP.

Both these options are completely untenable for India as its agricultural system is fraught with uncertainties and procurement must be in sync with the actual production.

Australia has followed the US to challenge India’s price policy for sugarcane. Its main argument is that India provides implicit subsidies but has not declared this to the WTO. This is despite India’s long-standing position that it only sets Fair and Remunerative Price for sugarcane, according to the Sugarcane (Control) Order, 1966, which the sugar mills are expected to pay to the farmers.

The assured price paid by the mills to the farmers cannot be taken as subsidies, since any such support according to the AoA must be provided through a “publicly-funded government programme”, in other words, from the government budget.

Farm export subsidies

In recent weeks, various facets of India’s agricultural policies came in for close scrutiny by several WTO members, including Australia, Brazil, Canada, European Union, Japan, Russia and the US. India has been questioned on its supply management policies for skimmed milk powder, sugar and pulses, in particular, the export subsidies granted to all these products/commodities and the import restriction on pulses.

AoA does not allow India to use direct export subsidies, but subsidies for reducing the costs of marketing exports of agricultural products and for internal transport and freight charges on export shipments can be provided. This window has been used to provide support for the exporters of the commodities mentioned above.

However, this window would close at the end of 2023. The Nairobi Ministerial Conference held in 2015 had taken a decision that developing countries would be allowed to use indirect export subsidies only up to the end of 2023. This would mark the end of all policy instruments to support export subsidies in agriculture.

The higher production of pulses in the previous agricultural season and the consequent recalibration of policies to meet the emergent situation was also examined by WTO members.

The major concern for countries like Australia and Canada was the loss of a stable market for pulses that India had provided for a number of years. Australia’s view was that the measures India had taken to stabilise its domestic market for pulses, including by providing domestic support and restricting imports, had affected global markets and export interests of others including developing countries. This argument was in keeping with a view held by several commentators that the WTO rules are fundamentally aimed at ensuring that world markets function in a predictable and transparent manner and that policies adopted by the members of the organisation should meet these objectives.

The recent scrutiny of India’s agricultural policies by WTO members provide several critical pointers. The first is that the creeping crisis in Indian agriculture requires flexibility in the use of policy instruments, which the framework provided by the AoA does not provide.

In India’s view, this policy space should have been one of the major outcomes of the Doha Round. There is, therefore, a strong impetus for India to focus on the revival of the Doha Round.

A second, and a more important pointer, is that the Centre must get its act together for undertaking a structural transformation of the agricultural sector, one that puts the interests of the small and marginal farmer and the landless labour at the centre-stage. The WTO rules have little tolerance for ad hoc policy making in agriculture; only a coherent set of policies that result in sustained improvement of peasant agriculture, can stand scrutiny.

The writer is Professor, Centre for Economic Studies and Planning, JNU