FREE TRADE

India’s WTO position reflects Modi’s desire to emerge as a champion of farmers

Obsession
Modi's Moment
Quartz india
Obsession
Modi's Moment
Quartz india

It appears prime minister Narendra Modi is consciously defying the World Trade Organisation (WTO) on the public procurement of agriculture products from farmers. Perhaps, Modi is seeking to politicise the issue domestically and emerge as a champion of farmers in India. And in that, he is taking a calculated risk.

While current WTO rules explicitly restrict the price governments can pay farmers to procure food grains for creating a buffer stock, the BJP-led government is seeking to create a domestic political consensus on whether a country’s sovereign right to food procurement should even be discussed at the 160-member forum.

It is possible Modi wants to flag this issue before the nation at large ahead of the forthcoming assembly elections in many states. Otherwise there is no explanation as to why the government has suddenly decided to withdraw from signing the WTO’s Trade Facilitation Agreement (TFA) in Geneva when most other countries have agreed to do so. The Trade Facilitation Agreement aims at removing red tape across all customs departments of WTO member countries. The idea is to standardize customs procedures. US trade experts estimate these measures could add $1 trillion to world trade.

Bali Backstory

The result is India’s near total isolation. Usually supportive partners such as China, Brazil, South Africa and Indonesia have distanced themselves, while individually agreeing to move ahead with the TFA signed at the Bali ministerial meeting last December.

India had also agreed to be part of the TFA, but on one condition: No interference with India’s massive food procurement programme until a permanent solution is found to the provisions within the WTO that restrict offering procurement prices to farmers beyond a certain level.

India has previously argued that there can’t be such a cap, as annual inflation must be reflected in the procurement price given to farmers. And if annual inflation is factored in, then India’s procurement price is justified and well within WTO bounds. In fact, a WTO clause says due allowance shall be given to inflation in allowing higher procurement price to farmers.

India had made its case, and found the support of the larger grouping of G-33 nations in Bali. The West—led by the United States and EU— agreed to find a permanent solution to this problem in the next four years before the next WTO ministerial meeting.

The previous government had subsequently informed Parliament about this, and the BJP had implicitly agreed to the formulation that India could sign the TFA if it is allowed to continue with its food procurement programme till a permanent solution was found. And in any case, the TFA and the agriculture subsidy question were never linked historically; they were two entirely separate issues.

Political promises

Now, the NDA government is seeking to bring about a substantive change in that position by arguing India will sign the trade facilitation agreement only if a permanent solution to food procurement is initiated simultaneously. Basically, the indication is that India cannot wait for four years till the next ministerial meeting, and wants some concrete assurance now. New Delhi, as a result, runs the risk of being described as a spoiler.

Actually, Modi’s explicit promise to Indian farmers that the government would ensure a 50% profit margin for them over and above their total costs could be a factor guiding the current knee-jerk response to WTO. Politically, his position has merit. But the way India is pitching it may appear somewhat irresponsible as it jeopardizes the trade facilitation agreement.

Interestingly, under the present WTO rules there is scope to provide cash support and subsidies to farmers that are not directly linked to food production. The WTO’s agreement on agriculture, for instance, has so-called Green Box subsidies that are fully permitted to all member countries. These subsidies could be in the form of direct cash payment to farmers for creating necessary agriculture infrastructure, research and other extension services.

The rules only curb trade distorting subsidies such as the government buying from farmers at prices way higher than the market price. However, nothing prevents the Modi government from helping farmers with better agriculture infrastructure, which can reduce costs and raise profits. In effect, there are many ways of legitimately supporting farmers within WTO rules, and Modi can use this to meet his commitment to farmers of offering a 50% profit margin over costs.

Pakistan, too, has a massive food procurement programme but it pays cash to farmers, thereby avoiding any distortion of market price.

For India, that may not be an immediate solution. But Modi will have to promptly decide the nature of his government’s engagement with the WTO.

India cannot afford not to be part of major trade enhancing protocols such as the trade facilitation agreement.

Follow Venu on Twitter @mkvenu1. We welcome your comments at ideas@qz.com.

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