Modi’s WTO opportunity

Despite the recent Brics bonhomie and the agreement on the Brics bank, the New Development Bank, and the Contingency Reserve Agreement (CRA), surely no one in the government believes that India can get favourable loans from the Bank or, God forbid, a large standby line from the CRA if there is an escalation in tensions with China? Or even if they remain at current levels of stapled visas.

Few would remember, but something similar happened when the Vajpayee government conducted its nuclear test on May 11, 1998, and the World Bank was forced to put off all loans. Within a year or so, however, the Bank was back giving loans to India; power loans were pushed through as anti-poverty—the poor benefit the most from more power availability in the state, it was argued—programmes. That’s the power of multilateralism; something which, by its very nature can never be available from a Brics-type forum which is driven by the interests of just four countries, not all of whom see eye to eye on most things.

Which is why, despite the attempt to forge better bilateral or regional ties—Brics is not even a region, it is a disparate group, the term for which was coined by a Goldman Sachs economist—India has to be at the helm of multilateral forum. The last thing India wants is to be branded a pariah in global trade talks, yet that is precisely what is in danger of happening with India debating whether or not to ratify the WTO proposal on trade facilitation—a Cabinet meeting is to take a call on this today.

Though trade facilitation measures such as reducing delays at ports, for instance, will benefit Indian importers and exporters immensely, the view emanating from the government is the same as it was in the UPA days—talk of continuity of policy in the great democracy called India!—that India will not sacrifice its food security rights at any cost. In the words of former commerce minister Anand Sharma, at Bali last year, “For India, food security is non-negotiable, need of public stock-holding of foodgrains to ensure food security must be respected. Dated WTO rules need to be corrected.”

And there is little doubt the rules are outdated and need correcting. Right now, the total amount that a country can spend on food subsidies is 10% of the value of agricultural production—any more than that, and WTO countries argue, it distorts global trade.The argument made by India, which could be in breach of this once the Food Security Act is fully rolled out, is that the per unit subsidy is calculated as the difference between the Minimum Support Price (MSP) and an External Reference Price (ERP)—this ERP, however, remains frozen at 1986-88 prices, after which global food prices have soared. So, even if India’s food subsidies are reasonable, given the dramatically low ERP, it will appear as if India is over-subsidising.

There cannot be any doubt that the method of fixing subsidies is outdated and that it is not being fixed as the developed countries at WTO are not really concerned about it since it affects only developing countries. If India has taken upon itself the need to stand up for every wrong—in which case, it needs to look at Russia a bit more closely—its actions are completely understandable. If, however, the guiding principle is to see where India’s interests lie, the approach will be quite different. More important, what the WTO wants India to do is precisely what the Modi government itself wants to do—which is restructuring the Food Corporation of India and the food security system. It is just that it is falling into the UPA trap—food security, in its crudest form, has been made so much of an article of faith, the government is being forced to carry the UPA’s torch.

First, even with the current formulation of ERP, India would not fall foul of WTO rules if it was giving out cash subsidies to the poor instead of stocking grain with FCI and then distributing this to them. If India has 360 million poor, according to the new Rangarajan formula, giving them a R20 per kg subsidy for 5 kg of wheat or rice per month—this is how much the Food Security Act promises to give each family—would mean a total subsidy of R43,000 crore per year versus roughly R2 lakh crore going by the per year estimates by the then Commission for Agriculture Costs and Prices (CACP) chairman Ashok Gulati for the first 3 years of the rollout of the Food Security Act.

Where the problem arises, from the WTO point of view of distorting global trade, is when FCI procures grain and then sells it at a discount—and, invariably, that grain finds its way into global markets. But if FCI didn’t procure so much grain—on average, it has 2-3times the amount of grain it needs—it would not need to dispose it off at a discount. The discount gets amplified by FCI’s inefficiency, so the more inefficient FCI is, the greater the discount that needs to be given—that is, it is not as much a discount to market prices as it is a discount to FCI’s high carrying costs. So, even at current ERP formulations, if the NDA was to, as promised in its manifesto, agree to limit FCI’s purchases to just the offtake from the PDS, that would ensure India didn’t fall foul of the WTO law.

While cash transfers can take care of the consumer-end of the issue, a deeper issue the government has to look at is whether the FCI model is really working. Right now, MSP-based procurement is really restricted to just wheat and rice, in a handful of states, and to just the better-off farmers who sell to FCI. If the idea is, as it must be, to provide subsidies to as many farmers as possible, the only way to do this is to provide acreage-based income support—R5,000 per acre per year, for instance. With farmers not hooked on to wheat and rice, this will also increase production of fruits and vegetables, critical to take care of India’s increasingly perennial fruits/vegetables inflation.

Given how the WTO proposals, unfair as they may appear, are in sync with the policies India needs to be adopting on agriculture, it is difficult to see why such heavy weather is being made of this, and why there is a likelihood India is willing to risk being seen as a pariah in global trade talks. The only possible rationale is the UPA’s rhetoric is so strong, even a Modi finds it difficult to escape it. If true, that is indeed a pity.