The EU countries want India to be more transparent about its public stockholding (PSH) program and put in place safeguards to prevent illegitimate exports
In a meeting of the Committee on Agriculture (CoA) of the World Trade Organization (WTO) - held on October 2, 2023, in Geneva, the European Union (EU) agreed to consider India’s demand for a permanent solution to public stock-holding (PSH) programme for food security. This is a significant change of stance since March 2023, when the EU along with the USA and Canada had challenged it.
India has urged WTO members to start text-based negotiations on the issue “as soon as possible, preferably in the senior official meeting scheduled during October 23-24, 2023”. Under text-based negotiations, an agreement is finalised around draft texts floated by the chair of a particular committee dealing with the subject. The draft is based on discussions amongst the member countries and is fine-tuned till all the nations are in agreement with it. India is keen to get this deliberated at the WTO ministerial conference (MC) slated to be held in Abu Dhabi in February 2024. What is the PSH program? What is a permanent solution? Why have developed countries opposed it so far? What has led to their change in stance now? Are they serious?
Under the PSH program, government agencies like the Food Corporation of India (FCI) buy agri-produce such as wheat, rice/paddy, and coarse cereals from farmers at the minimum support price (MSP) and distribute it at a subsidised price of Rs 2/3/1 per kg respectively to meet the needs of India’s poor and vulnerable population under the National Food Security Act (NFSA).
The excess of MSP plus handling, storage and distribution cost over the realisation from the sale (that is, Rs 2/3/1 per kg) is paid as a subsidy from the Union Budget. This includes (a) subsidy to the farmer, being the excess of MSP of, say, rice over its international price also known as External Reference Price (ERP) in WTO parlance and (b) subsidy to the food consumer, being the excess of ERP over the price paid (Rs 3 per kg rice). The WTO is concerned with (a) branded as “product-specific” subsidies. It is also concerned with subsidies on agricultural inputs like fertilizers, seeds, irrigation, power, etc., referred to as “non-product specific” subsidies.
The developed countries (most of them also happen to be exporters of agricultural products) argue that such subsidies distort international trade; hence these need to be curbed. Their argument found acceptance at the WTO. Accordingly, Under the AoA, the total of product and non-product-specific subsidies or aggregate measurement support (AMS) is capped at 10 per cent of the value of agricultural production for a developing country. If a member country gives AMS over 10 per cent, it is a violation.
The AoA came into force in 1995. For India, until 2005, MSP was less than ERP. Thereafter, MSP has been higher than ERP and, in the last decade, this gap widened. During 2018-19, in the case of rice, for instance, AMS was at 11 per cent, exceeding the 10 per cent cap. During 2019-20, it was even higher at 13.7 per cent.
For over a decade or so, India along with other developing countries has been making efforts at WTO to wriggle out of the situation. In the 9th Ministerial Conference (MC) held in Bali (2013), it secured sanction for a “peace clause”. It said, “If a developing country gives AMS in excess of 10 percent, no member will challenge this until 2017 when the WTO would look for a permanent solution.”
In the General Council (GC) held in December 2014, this sanction was modified to say “The peace clause will stay till a permanent solution was found.” However, the peace clause comes with several riders, such as the submission of data on food procurement, stockholding, distribution and subsidies. These also include establishing that subsidies are not “trade distorting.”
India has invoked the ‘peace clause’ several times at the WTO for breaching the 10 per cent ceiling in case of subsidy on rice. However, developed countries have objected to such invocation. Their argument is that stocks procured under the PSH program are finding their way to the international market resulting in trade distortion. The US has gone so far as to say that India has become a top rice exporter of rice, courtesy of excessive subsidies given under PSH. India’s stand that it exports premium rice varieties which are not part of public procurement fails to cut ice as exports of non-basmati rice are also substantial (during 2022-23, it was 17.8 million tons valued at US$6.4 billion).
If the EU countries are now open to negotiations, this is because they want India to be more transparent about its PSH program and put in place safeguard mechanisms to prevent illegitimate exports from excessive food stocks. They would also want India to demonstrate conclusively that its “domestic support” doesn’t turn into what they term as ‘trade distortion support’.
In view of the above, it won’t be easy for India to avail of the ‘peace clause’. This is all the more because India’s PSH program is open-ended under which the government’s agencies buy the highest possible quantities of wheat and rice from the farmers at ever-increasing MSP (courtesy, vote bank politics). These purchases being unrelated to the requirement under NFSA, surplus stocks with agencies are unavoidable which they dispose of by auctioning to private traders etc under the Open Market Sale Scheme (OMSS). Under OMSS ‘all the bidders are compulsorily asked to give an undertaking that they won’t export it’. One wonders whether a mere declaration by private traders acquiring such stocks would satisfy the developed countries. This brings us to the need for a permanent solution. In this regard, last year, India spearheaded a proposal by G-33, the African Group, and the ACP (Africa, Caribbean, and Pacific) asking WTO for ‘total exemption for support to PSH for food security’. This coalition of developing countries and LDCs wanted the MC-12 held in Geneva (June 12-17, 2022) to be taken up for consideration. But, the issue was not even put on the table.
The proposal makes perfect sense for a country that produces food essentially to meet the domestic requirements of its population but doesn’t export. However, India is a major exporter of agricultural produce as well. That is where the line between its role as a protector of ‘food security’ and as an ‘exporter’ gets obliterated. So, at WTO it is unlikely to get a blanket exemption.
Now, India has asked for (a) the inclusion of programs implemented after 2013 under the ambit of the ‘Peace Clause’ and (b) amendments in the formula to calculate the food subsidy cap. When agreed to at Bali MC (2013), the ‘Peace Clause’ was meant only for programs existing prior to 2013. It is unlikely that developed countries would agree to the inclusion of programs implemented after 2013. However, India’s best bet lies in (b). The formula for the computation of AMS under the AoA suffers from several flaws. These include (i) taking ERP for the years 1986-88; (ii) not excluding subsidies given to the resource-poor farmers; and (iii) using the entire output instead of quantity procured for PSH. These flaws “artificially” inflate the subsidy beyond the 10 per cent threshold. India should ask for amendments to get rid of these flaws. Meanwhile, the government should rein in open-ended procurement to avoid landing in a situation whereby even as per the amended formula, the subsidy could exceed 10 per cent.
(The writer is a policy analyst, views are personal)
