The battle for a permanent solution to Public Stock-Holding programme is a difficult one; India must fight it deftly

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) program 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.

The issue will be taken up for deliberation in the 13th ministerial conference (MC) of the WTO (World Trade Organization), scheduled from February 26-29, 2024 in Abu Dhabi. The MC is the highest decision-making body of the global trade watchdog (read: WTO) that includes 164 member countries. 

While, the USA and EU countries want a comprehensive discussion on agriculture encompassing the value-chain, market access, and export restrictions besides the PSH program, India has categorically stated “it won’t negotiate any other issue in the agriculture sector till a permanent solution on PSH is found”.

It has also conveyed that support measures given to its poor farmers like input subsidies such as on electricity, irrigation, fertilizer and even direct transfers are non-negotiable.

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 subsidized 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) that was enacted in 2013. From January 1, 2023, these staple foods are given to the beneficiaries ‘free’; initially in force till December 31, 2023, this arrangement has been continued for five years till December 31, 2028.     

The excess of MSP plus handling, storage and distribution cost over the realization from the sale (that is, Rs 2/3/1 per kg prior to January 1, 2023, and ‘zero’ thereafter) is paid as a subsidy from the Union Budget. This can be bifurcated into two components (a) subsidy to the farmer, which is 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 which currently is ‘nil’. The WTO is concerned with (a) branded as “product-specific” subsidies. It requires some explanation.

The international price/ERP of any commodity is based on global demand-supply forces and is determined in a competitive manner. All farmers irrespective of their country of location are expected to receive this price. In case, because of the intervention by the government of a member country say India, the farmers therein receive a price/MSP higher than this, they are presumed to have been subsidized to the extent of excess of MSP over ERP.     

The WTO is also concerned with subsidies on agricultural inputs like fertilisers, seeds, irrigation, power, etc., referred to as “non-product specific” subsidies.

The developed countries argue that such subsidies distort international trade; hence these need to be curbed. Their argument found acceptance at the WTO. Accordingly, under the Agreement on Agriculture (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 (for developed countries, this threshold is 5 per cent). 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.” Besides, programs implemented after 2013 are not covered under the ambit of the 'peace clause'.

India has invoked the ‘peace clause’ several times at the WTO for breaching the 10 per cent ceiling in case of subsidy on rice - the latest being for the marketing year 2020-21. However, developed countries have objected to such invocation. They want India to be more transparent about its PSH program and put in place safeguards to prevent ‘illegitimate’ exports But, this can’t go on ad infinitum.

The WTO should go for a permanent solution within a time-bound manner. In fact, the MC held in Bali (2013) had implicitly given a deadline of 2017 “……no member will challenge this until 2017 when the WTO would look for a permanent solution.” Unfortunately, the GC held in December 2014 deferred it indefinitely. India has done right by insisting on a deadline now. However, its stance for the 13th MC isn’t the right way to go. India is trying to delink PSH from a comprehensive look at agriculture. It is attempting to delink things that are intertwined with each other. 

The PSH program involves buying food from the farmers and distributing it to the beneficiaries. Here, we are talking about the entire supply chain involving procurement, handling, storage, distribution and so on. So, the issues of market access, and sale in the domestic and international markets can’t be brushed aside. 

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. Since these purchases are unrelated to the requirement under the NFSA (courtesy vote bank politics), surplus stocks with agencies are inevitable 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. We have also seen instances of heavily subsidized food (now free) being smuggled to neighbouring countries. It won’t come on record but it disturbs the global demand-supply equation.          

India should put everything on the table and talk. It is widely recognized that the formula for the computation of AMS under the AoA suffers from several flaws. The ERP used for comparing with MSP (albeit current) dates back to 1986-88. This is bound to “artificially” inflate the subsidy. By using the current ERP, India’s subsidy will automatically go below the 10 per cent threshold.        

Besides, AoA calculation doesn’t exclude subsidies given to resource-poor farmers. These farmers mostly produce food for self-consumption meaning they don’t have a surplus to sell. So, the question of subsidies to them distorting trade doesn’t arise. Their exclusion will also reduce the AMS.     

Meanwhile, the government should end the open-ended procurement and restrict purchase only to what is required for giving to the NFSA beneficiaries. It should also consider switching to ‘giving subsidy in cash’ using DBT mode.

(The writer is a policy analyst; views are personal)