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WTO’s agreement on agriculture – can India legally guarantee a minimum support price to its farmers without contravening its obligations under this agreement

September 07, 2021
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This article is written by Oishiki Bansal, a student of Symbiosis Law School, Noida. The article explains the Agreement on Agriculture, as one of the agreements administered under the aegis of the World Trade Organisation (WTO) and its effect on the domestic support given by the government.

Introduction 

The General Agreement on Trade and Tariffs (hereinafter GATT) provided many loopholes in the agriculture trade sector. The non-tariff measures like import quotas and subsidies were still prevalent in the agriculture trade, inducing export subsidies for industrial goods that would have not been provided normally. Therefore, with the aim to provide fairer markets to the farmers the World Trade Organisation came with an agriculture agreement. India is a member of the World Trade Organization and has to comply with the agreement on agriculture. It needs to be analyzed whether the domestic support in the form of minimum support price and the new farm Bills introduced in 2020 comply with the agriculture agreement or not. 

About the agreement

To reform the agriculture trade and to improve the predictability and security of importing and exporting countries, the World Trade Organization came up with the agriculture agreement. 

The three provisions that the agriculture agreement focuses on are – 

  1. Market access
  2. Domestic support 
  3. Export subsidies 

The agreement was a result of a discussion that was held at the Uruguay round of negotiations, 1994. WTO’s agriculture agreement Implementation came into effect on January 1st, 1995. The agreement provided for a reduction on provisions of the agreement by – 

Market access commitment 

Market assessed commitments are mentioned under Article 4 of the agreement on agriculture. It imposes restrictions on the non-tariff barriers by abolishing them and also asking the states to not impose them in the future. The agreement focuses on tariffication, a process where the non-tariff barriers such as quotas, variable levies, minimum import prices, discretionary licensing, state trading measures, voluntary restraint agreements, etc are converted into tariffs. The process has to be implemented by the different countries in the following way – 

Japan, the Republic of Korea, the Philippines (for rice), and Israel (for sheep meat, Whole milk powder, and certain kinds of cheese) asked for special treatment until the implementation period of developing and developed countries.

Domestic support commitment 

Domestic support commitment has been covered in Article 6 of the agriculture agreement. Hereby, the World Trade Organization has differentiated between the domestic support such as subsidies and reduced income tax, which have a direct effect on the production of the agricultural product, and the incentives and policies that do not have a direct effect on the production. through the agriculture agreement the WTO all the countries reduce the domestic support in the following way- 

This commitment refers to the reduction in total support and not just the individual commodities. Some of the policies that are categorized under the green box in the agreement have been excluded from the reduction commitments, this category involves the policies which do not distort trade or have any kind of effect on production, policies that provide benefits to rural communities, agriculture, domestic food aid, etc. The investment subsidies that are generally available to low-income and resource-poor farmers in developing countries are also excluded from the reduction commitments under this provision. 

Export subsidies commitment 

Export subsidies commitment has been covered under Article 8 of the agricultural agreement. This provision requires that the member states reduce the money spent on export subsidies and the quantity of export that are eligible for subsidies. Subsidies provided for export of Agricultural Products have been prohibited except those which are mentioned in the member’s list of commitment. Do countries have to comply with this provision in the following manner – 

The agreement also mentions that the products that do not come under the subsidized export goods category cannot be included in the list in the future. Other than these three commitments other provisions mentioned under the agreement are as follows- 

  1. Special measures for safeguarding the products that have gone through tariffication. (Article 5)
  2. The peace clause Urges the member states not to raise any dispute relating to these commitments during the implementation period. (Article 13)
  3. Developing and least developed countries have different treatment as to implementation period and compliance towards commitments. (Article 15)
  4. A committee on agriculture is to be established. (Article 17)
  5. Application of dispute settlement in accordance with the agreement (Article 19)
  6. And lastly, a mandate for continuous reforms. (Article 20) 

Provisions 

Developed countries 

(period of implementation -6years (1995-2000))

Developing countries 

(period of implementation- 10 years (1995-2014)

Market access(tariffication)

   

Cut for all agricultural products 

(-)36%

(-)24%

Minimum cut per product 

(-)15%

(-)10%

Domestic support (aggregate market support)

   

Total AMS cut (base period: 1986-88)

(-)20%

(-)13%

 

Export subsidies 

   

Value of subsidies 

(-)36%

(-)24%

Quantity of subsidized exports (base period:1986-90)

(-)21%

(-)14%

Provisions for an agricultural committee and continuous reforms

Agriculture committee 

The agriculture committee is established to oversee the implementation of the agreement on agriculture and how the World Trade Organization members are complying with the provisions of the agreement. The committee includes all the WTO members who meet three to four times a year. The agriculture committee oversees the following –

Process of reviewing 

The members share the report about the implementation of the commitments made in the agreement. The members can ask each other about the notifications given by the other members and also about the agriculture policies prevailing in the state. 

To monitor ministerial decisions

The implementation of the decisions by the ministers at the WTO’s ministerial conferences are monitored by the agricultural committee.

Subsidized exports and agricultural trade

  1. Export subsidies. 
  2. Export finance support.
  3. Enterprises relating to agriculture state trading.
  4. International food aid.

Net food-importing developing countries 

The negative effects of agriculture reforms. on poor countries and the net food-importing developing countries, by the developing and developed countries is monitored by the agriculture committee. A list of net food-importing developing countries is updated regularly by the World Trade Organisation and background notes are prepared by the WTO’s Secretariat on the implementation of ministerial decisions.

Access to market in agricultural trade 

The implementation of “Bali decision on tariff quota administration” is monitored by the committee on agriculture.

Stockholding by the public for the security of food

The work of the committee also includes monitoring the information provided by the members about the public stockholding for the security of food purposes. 

Continuous reforms on the agreement on agriculture 

The agricultural reforms are not a static process. Since 2000, there have been discussions to negotiate the agricultural reforms under the original mandate of the agriculture agreement. The agricultural negotiations are stated below – 

Nairobi package

The Nairobi Ministerial conference was held in 2015 where WTO members decided to eliminate the export subsidies on agriculture and to make new rules on export measures that have a covalent effect. To implement this decision, the developed countries will remove all the subsidies on export immediately and developing countries will have a little longer period to eliminate the subsidies except for a few agricultural products.

The decision was taken to give effect to the sustainable development goal on zero hunger and also help the farmers of the poor countries who face intense competition against the rich countries and the artificially boosted exports by the help of subsidies.

Members also collectively agreed to engage in finding a permanent solution for developing countries to use the public stockholding programs for food security purposes. Negotiation on a special safeguard mechanism, which allows the developing countries to raise tariffs temporarily on agricultural products in cases of import surges or price falls, was also agreed upon by the ministers.

Bali package 

The Minister agreed to include agricultural decisions in the ministerial conference in Bali, Indonesia in 2013. These decisions were as follow-

Trade dialogues on food

To encourage a debate on the role of International Trade in food security, the World Trade Organisation launched trade dialogues on food. Various experts in the field of food security and trade are called upon to have the top on the role of International Trade in food security. 

India’s commitment towards the agreement on agriculture

Market access

India did not have to comply with the tariffication rule as India was maintaining quantitative restrictions due to balance of payment problems. Although India bound its primary agriculture product to comply with some of the commitments. It bound processed food at 150% and edible oils at 300%. The products whose bound rates were low or zero such as skimmed milk powder, Maize rice, spelt wheat, millets, etc were substantially raised after the negotiation under Article XXVIII of the General Agreement on trade and tariff were completed.

Export subsidies 

Only the exporters of Agricultural commodities that have been mentioned under Articles 9.1(d) and 9.1(e) of the World Trade Organisation’s agreement on agriculture are given export subsidies. According to the agreement the subsidies can be provided till 2023 and after that, the export subsidies will be illuminated according to the Nairobi package that was agreed in the Nairobi ministerial decision on export competition, 2015.

Domestic support 

The World Trade Organisation introduced the concept of de minimis which set a limit for developing and developed countries to a certain percentage. if these countries exceed their domestic support beyond a certain percentage then the countries have to comply with reduction commitments. The percentage set for developing countries for both product services and non-product services is 10% and for developed countries is set at 5%.

The indicator that decides whether the countries have to comply with the reduction commitment is, ‘ aggregate measure support’(Hereinafter AMS).

 (International price – domestic price) X quantity of production

Summation of all the subsidies given for fertilizers, water, seeds, credit, and electricity, etc.

The domestic support that India gives to its farmers is the minimum support price. According to the Ministry of Commerce of India, the value of product AMS Is (-) 38.47%, and non-product AMS Is 7.52% which is below the De minimis level as stated in the agreement. Therefore the Indian government can continue to give domestic support without the need to comply with the reduction commitments under this provision. A detailed discussion on the minimum support price is discussed below.

All about Minimum Support Price 

What is Minimum Support Price – domestic support

Minimum support price (hereinafter MSP) is a ceiling provided by the government of India to protect the interest of farmers in case the price of crops falls excessively during bumper production years. The government agencies procure the crops from the farmers in case of a fall in the market price of crops due to bumper production at the MSP set by the government each year. 

Who sets MSP

The central government sets the MSP every year with the recommendation of the Commission for Agricultural Costs and Prices (hereinafter, CACP). 

How is MSP determined

The CACP determines the MSP using a formula given by the Swaminathan committee that was formed in 2004. Some of the factors taken into consideration are – 

Are Indian MSPs ultra vires the agreement?

Minimum support price comes under the pillar of domestic support under the agreement of agriculture. Since the MSP is not covered under the green box( the support which does not distort trade) they have to comply with the reduction commitments. The World Trade Organization also laid down in the agreement that the countries do not have to comply with the reduction commitments if the total aggregated measure of support(AMS) is below or up to 10% for developing nations. 

According to the Ministry of Commerce, the only product service provided by India is the MSP. The total product service AMS was calculated to be (-) Rs. 24,442 crores during the base period(1986-88). Negative figures are the result of the high international prices for agriculture crops as compared to the domestic price during the base year(1988-86) except for few crops. The total non-product service AMS was Rs. 4581 crore.

Therefore the percentage of the product service AMS was (-) 38.47% and non-product AMS was 7.52% which is way less than the minimum levels of domestic support agreed by the World Trade Organization. 

Therefore, India contended that it did not have to comply with the reduction commitments under the agreement. Thus, MSP guaranteed by the government is not ultra vires to the agreement.

India’s defense of MSPs at the WTO

In 2018, the United States took the issue to the World Trade Organization that India provides for domestic support to rice and wheat that is 60-70% higher than the de minimis level of 10% stipulated by the World Trade Organization.

To justify the Indian stand on the issue raised by the United States we need to consider the following rules that bind India under the domestic support provision of agreement on agriculture.

While calculating the aggregated measure support given by India, the US accounted for the MSP for years 2011-14 as the starting point and deducted the external price as set in accordance to a base year without taking into account the inflation during this period. Hence, ignoring the provisions of Article 18.4 of the agreement.

The external reference price during the base year for agriculture products was more than the applied domestic price for Indian agriculture products. For wheat, whose external price was fixed at Rs 3,540/MT, the MSP was Rs 1,740/metric tonne, much lower than the external reference. For common rice, the external reference price was Rs 3,540/MT whereas the MSP was Rs 2,280/MT. 

Hence, in the case of both the crops the support is given by the government was much lower and the Indian government was basically taxing the crops rather than subsidizing them. Therefore, India argued that the reasoning of the USA, that India has exceeded the domestic support by a large amount is flawed and it should have considered the inflation effects on the prices as provided by including Article 18.4 of the agreement.

WTO agreement and new Indian farm laws – in consonance

In June 2020 the government of India enacted three farm laws namely –

  1. The Farmer’s Produce Trade and Commerce (Promotion and Facilitation) Act, 
  2.  The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Service Act
  3. The Essential Commodities (Amendment) Act.

To deregulate the Indian agriculture market. These new laws are driven by the demands by the United States and the European Union in the World Trade Organization to reduce subsidies provided to the farmers. 

The Farmer’s Produce Trade and Commerce (Promotion and Facilitation) Act 

This Act came into effect from 5th June 2020, allowing the farmers to sell their products beyond the ‘mandies’ set up by the agriculture produce marketing committees(APMC). The Indian farmers can sell their produce directly to the buyers, therefore, are protected against the brokers that used to take all the profits. It aims to eliminate all the brokers by enabling direct communication between the buyers and the producers. Under this bill, the farmers are not required to pay any market fees to sell their products nor do they have to pay any kind of transportation fee. Since this bill provides for green box support to the farmers it does not come under the preview of the agreement on agriculture. But the farmers fear that after the implementation of this bill, the APMC mandis will eventually close resulting in the eradication of the MSP program as guaranteed by the government.

The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Service Act

This Act provides for legalizing the contract between sponsors and farmers. Under this Act, the companies can directly contract with the farmers for agricultural produce. Hence, making farming a profit-making occupation. In addition to a permanent contract, the sponsors or companies can provide extra training for the farming process and help in procuring better inputs for farming. The interest of the farmers is also protected by the government if any dispute arises by establishing a dispute redressal mechanism. Also, a provision is laid which states that the companies cannot recover the loss from the farmers if the default is due to any force majeure( Act of God, or any unforeseeable or unpredictable Act) events. The major concern under this Act is the illiteracy rate among the farmers. The threat of being conned by the sponsors and companies is a great factor contributing to the farmers’ hesitancy in accepting this bill. Lack of awareness and illiteracy can put the farmer in a disadvantageous situation.

The Essential Commodities (Amendment) Act

This Act amended the original Essential Commodities Act. Some of the agricultural commodities that are included under this bill are cereals, pulses, oilseeds, edible oils, onion, potatoes, etc. it provides that the government can put a cap on the storage limit of the essential commodities if the prices rise severely. Therefore, the Act provides space for the market forces to play freely and boosts business Activities by eradicating unnecessary government intervention and also provides the government with sufficient powers to put price caps in case the prices rise due to stock holding creating a deficiency of commodities in the market.

However, the critics are of the view that the Indian farm laws have no relation to the distortion in the international agricultural trade. It is the exploitation by the developed nations such as the United States and the European Union that exploits the global market. In India, subsidies are provided to secure food security in the Indian market as well as farmer’s livelihood. 

Conclusion

India is said to be an agrarian country. Most of the livelihood in India is still in the rural areas. The WTO introduced the agreement on agriculture to provide a fair market to the farmers and create a predictable international agriculture market. Since 1995 there have been many changes in the agreement to facilitate international trade in agriculture. India provides a minimum support price to its farmers to ensure food security in the state and also protect the farmers from an unexpected slump in the market. The new bills passed by the government in 2020 were in consonance with the WTO’s guidelines after the US and EU raised issues over the domestic support given by the government. 

References


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