Editorials/Opinions Analyses for UPSC 17 December 2021

Contents

1. The WTO’s challenge to MSP is another frontier to cross

The WTO’s challenge to MSP is another frontier to cross

Context:

The demand of farmers to provide a legal guarantee for the minimum support price (MSP) for their produce has triggered a nationwide debate. Hence, it becomes important to the impact of a legal guarantee for MSP on international law obligations enshrined in the Agreement on Agriculture (AoA) of the World Trade Organization (WTO).

Relevance:

GS-II: International Relations (Important International Organizations, Foreign Policies and Agreements affecting India’s Interests), GS-III: Indian Economy

Dimensions of the Article:

1. World Trade Organization (WTO)
2. Functions of WTO
3. About the Agreement on Agriculture at WTO
4. WTO’s categories Under “Domestic Support” Subsidies
5. The Aggregate Measurement of Support (AMS) system
6. What is Minimum Support Price (MSP)?
7. Why is there a need for MSP?
8. What are the issues related to MSP?
9. Arguments in Favour of the Legal Backing of MSP
10. Arguments Against the Legal Backing of MSP
11. WTO’s AMS system and its case with India’s MSP
12. Peace Clause and the issues related with it

World Trade Organization (WTO)

• The World Trade Organization (WTO) is an intergovernmental organization that is concerned with the regulation of international trade between nations.
• It is the largest international economic organization in the world.
• The headquarters of the World Trade Organization is in Geneva, Switzerland.
• The WTO deals with regulation of trade in goods, services and intellectual property between participating countries by providing a framework for negotiating trade agreements and a dispute resolution process aimed at enforcing participants’ adherence to WTO agreements, which are signed by representatives of member governments.
• The WTO prohibits discrimination between trading partners, but provides exceptions for environmental protection, national security, and other important goals.
• Trade-related disputes are resolved by independent judges at the WTO through a dispute resolution process.
• The WTO has 164 members (including European Union) and 23 observer governments (like Iran, Iraq, Bhutan, Libya etc.)
• India is a founder member of the 1947 GATT and its successor, the WTO.

Functions of WTO

1. Trade negotiations: The WTO agreements cover goods, services and intellectual property. They spell out the principles of liberalization, and the permitted exceptions. They set procedures for settling disputes.
2. Implementation and monitoring: WTO agreements require governments to make their trade policies transparent by notifying the WTO about laws in force and measures adopted. Various WTO councils and committees seek to ensure that these requirements are being followed and that WTO agreements are being properly implemented.
3. Dispute settlement: The WTO’s procedure for resolving trade quarrels under the Dispute Settlement Understanding is vital for enforcing the rules and therefore for ensuring that trade flows smoothly.
4. Building trade capacity: WTO agreements contain special provision for developing countries, including longer time periods to implement agreements and commitments, measures to increase their trading opportunities, and support to help them build their trade capacity, to handle disputes and to implement technical standards.
5. Outreach: The WTO maintains regular dialogue with non-governmental organizations, parliamentarians, other international organizations, the media and the general public on various aspects of the WTO and the ongoing Doha negotiations, with the aim of enhancing cooperation and increasing awareness of WTO activities.

About the Agreement on Agriculture at WTO

• The Agreement on Agriculture at the WTO is aimed to remove trade barriers and to promote transparent market access and integration of global markets.
• The WTO’s Agriculture Committee oversees implementation of the Agreement and provides a forum for members to address related concerns.

Three pillars of Agreement on Agriculture:

1. WTO calls for reduction in Domestic Support/Domestic Subsidies that distorts free trade and fair price. Under this provision, the Aggregate Measurement of Support (AMS) is to be reduced by 20% over a period of 6 years by developed countries and 13% over a period of 10 years by developing countries.
2. Market access for goods in the WTO means the conditions, tariff and non-tariff measures, agreed by members for the entry of specific goods into their markets. According to WTO, Market access requires that tariffs fixed (like custom duties) by individual countries be cut progressively to allow free trade. The WTO also required countries to remove non-tariff barriers and convert them to Tariff duties.
3. Export Subsidy on inputs of agriculture, making export cheaper or other incentives for exports such as import duty remission etc., are included under “Export Subsidies” by the WTO. According to the WTO Export Subsidies can result in dumping of highly subsidized (and cheap) products in other countries and damage the domestic agriculture sector of other countries.

WTO’s categories Under “Domestic Support” Subsidies

Green Box

• Subsidies that do not distort trade, or at most cause minimal distortion.
• They are government-funded and must not involve price support.
• They also include environmental protection and regional development programmes.
• “Green box” subsidies are therefore allowed without limits, provided they comply with the policy-specific criteria.

Amber Box

• All domestic support measures considered to distort production and trade (with some exceptions) fall into the amber box as all domestic supports except those in the blue and green boxes.
• These include measures to support prices, or subsidies directly related to production quantities.

Blue Box

• This is the “amber box with conditions”. Such conditions are designed to reduce distortion.
• Any support that would normally be in the amber box is placed in the blue box if the support also requires farmers to limit production.
• At present, there are no limits on spending on blue box subsidies

The Aggregate Measurement of Support (AMS) system

• To measure ‘amber box’ support, WTO member countries are required to compute AMS. It is the total of product-specific support (price support to a particular crop) and non-product-specific support (fertilizer subsidy).
• Under Article 6.4(b) of the AoA, developing countries such as India are allowed to provide a minimal level of product and non-product domestic subsidy.
• This ‘de minimis limit’ is capped at 10% of the total value of production of the product, in case of a product-specific subsidy; and at 10% of the total value of a country’s agricultural production, in case of non-product subsidy.
• Subsidies breaching the de minimis cap are trade-distorting. Consequently, they have to be accounted for in the AMS.

What is Minimum Support Price (MSP)?

• Minimum Support Price is the price at which government purchases crops from the farmers, whatever may be the price for the crops.
• Commission for Agricultural Costs & Prices (CACP) in the Ministry of Agriculture recommends MSPs for 23 crops. These include 14 grown during the kharif/post-monsoon season (see table) and six in rabi/winter (wheat, barley, chana, masur, mustard and safflower), apart from sugarcane, jute and copra
• CACP consider various factors while recommending the MSP for a commodity like cost of cultivation, supply and demand situation for the commodity; market price trends (domestic and global) and parity vis-à-vis other crops etc.
• MSP seeks to:
  • Assured Value: To give guaranteed prices and assured market to the farmers and save them from the price fluctuations (National or International).
  • Improving Productivity: By encouraging higher investment and adoption of modern technologies in agricultural activities.
  • Consumer Interest: To safeguard the interests of consumers by making available supplies at reasonable prices.

Why is there a need for MSP?

• The MSP is a minimum price guarantee that acts as a safety net or insurance for farmers when they sell particular crops.
• The guaranteed price and assured market are expected to encourage higher investment and in adoption of modern technologies in agricultural activities.
• With globalization resulting in freer trade in agricultural commodities, it is very important to protect farmers from the unwarranted fluctuation in prices.

What are the issues related to MSP?

• Low accessibility and awareness of the MSP regime: A survey highlighted that, 81% of the cultivators were aware of MSP fixed by the Government for different crops and out of them only 10% knew about MSP before the sowing season.
• Arrears in payments: More than 50% of the farmers receive their payments of MSP after one week.
• Poor marketing arrangements: Almost 67% of the farmers sell their produce at MSP rate through their own arrangement and 21% through brokers.
• According to NITI Aayog report on MSP, 21% of the farmers of the sample States expressed their satisfaction about MSP declared by the Government whereas 79% expressed their dissatisfaction due to various reasons. Although, majority of the farmers of the sample States were dissatisfied on MSP rates, still 94% of them desired that the MSP rates should be continued.

Arguments in Favour of the Legal Backing of MSP

• MSP’s legal status will ensure that all farmers are protected against price rise.
• It will ensure that farmers’ food is purchased at the declared MSP, either directly or through private players.
• MSP will be required to cover all crops and all producers in order to guarantee the Right to MSP.

Arguments Against the Legal Backing of MSP

• “Economic theory as well as experience implies that the price level that is not supported by demand and supply cannot be sustained by legal methods,” writes NITI Aayog’s agricultural economist Ramesh Chand in a policy study.
• If MSP becomes a legal right, procurement will skyrocket in terms of volume.
• It may result in the formation of a vast black market in which small dealers buy grains from farmers in unofficial ways.
• Legalizing MSP will have an influence on the country’s macroeconomic prospects by raising the chance of an unexpected surge in inflation.
• MSP is classified as a bad subsidy by the WTO since it has an impact on the market. India’s subsidising programmes will spark outrage among developed countries.
• The Centre indicates that states are allowed to guarantee MSP rates if they desire, but it also provides two instances of policies that have failed.
• One example is the sugar industry, where private mills failed to make full payments to farmers, resulting in thousands of crores in unpaid dues that had been accumulating for years.
• Another example is a 2018 Maharashtra legislation modification that penalizes traders who buy crops below MSP with severe fines and prison sentences.

WTO’s AMS system and its case with India’s MSP

• The procurement at MSP, after comparing it with the fixed external reference price (ERP) — an average price based on the base years 1986-88 — has to be included in AMS.
• Since the fixed ERP has not been revised in the last several decades at the WTO, the difference between the MSP and fixed ERP has widened enormously due to inflation.
• For instance, according to the Centre for WTO Studies, India’s ERP for rice, in 1986-88, was $262.51/tonne and the MSP was less than this. However, India’s applied administered price for rice in 2015-16 stood at $323.06/tonne, much more than the 1986-88 ERP.
• When this difference is accounted for in the AMS, the possibility of overshooting the de minimis limit becomes real.
• Procuring all the 23 crops at MSP, as against the current practice of procuring largely rice and wheat, will result in India breaching the de minimis limit making it vulnerable to a legal challenge at the WTO.
• Even if the Government does not procure directly but mandates private parties to acquire at a price determined by the Government, as it happens in the case of sugarcane, the de minimis limit of 10% applies.
• Very recently, a WTO panel in the case, India – Measures Concerning Sugar and Sugarcane, concluded that India breached the de minimis limit in the case of sugarcane by offering guaranteed prices paid by sugar mills to sugarcane farmers.

Peace Clause and the issues related with it

• High subsidies are seen to be distorting global trade. The peace clause protects a developing country’s food procurement programmes against action from WTO members in case subsidy ceilings are breached.
• In the month of April 2020, India informed the World Trade Organisation (WTO) that the value of India’s rice production was $ 43.67 billion in 2018-19 and India had given subsidies worth $ 5 billion.
• India was the first country to invoke the peace clause for breaching the subsidy limit for rice for the marketing year 2018-19. The limit is pegged at 10% of the value of food production (called de minimis) in the case of India and other developing countries.
• European Union (E.U.), United States of America (USA), Japan, Canada, Brazil and Paraguay have questioned India for invoking the World Trade Organization (WTO) peace clause for exceeding the ceiling on the support it can offer its farmers for rice. The European Union has asked India for all the information on the products covered by the public stockholding programme to assure that only rice support exceeded the limits.

-Source: The Hindu