5 Issues of concern and implications for agricultural development and food security

From this discussion of India’s experience during the implementation period, it becomes clear that there are some very serious issues for India arising out of the agreement.

First, since India does not subsidize its agriculture, it is in India’s interest that domestic support in those countries that subsidize their agriculture heavily is reduced significantly to the levels that are specified under the agreement as de minimis levels. Export subsidies should be eliminated completely. This is because both domestic support and export subsidies, taken together, make exports from countries such as India uncompetitive and affect them adversely. It is quite evident that reductions in export subsidies and subsidized exports by the developed countries will have greater implications for developing country exports. Because of export subsidies, countries that do not have a comparative advantage are able to maintain their competitiveness at the expense of those that are not able to use export subsidies. It is also important to ensure that greater use of export credits does not substitute for the reduction in export subsidies.

However, as infrastructure facilities in developing countries are generally inadequate, exporters of agricultural commodities in these countries have to bear a very heavy burden of transportation and marketing costs. Subsidies for developing countries under these heads are permitted, and any future attempts to constrain the use of such subsidies would not be in the interest of India.

Second, tariffs peaks, tariff escalation, commodity-specific bilateral agreements and special exemptions remain major issues restricting market access abroad for products in which the country has a comparative advantage. The major product groups where tariff peaks are a problem include dairy products, fruits and vegetables, preparations of fruits and vegetables, meat and fish and food industry products. More meaningful expansion of developed country markets is central to enhance market access for products that are of interest to India.

Third, ambiguities in various parts of the agreement, which basically originate from a lack of clarity, should be taken up so they do not impose restrictions on supporting Indian agriculture in the future. Some of these are related to the calculation of AMS. They are listed here.

(a) In calculating market price support, external reference prices remain fixed based on the years 1986-1988. Thus, if one has to work out the current level of AMS, the gap between the support price and the external reference price must be calculated on the basis of current support price and the base level external reference price. The problem of a fixed external reference price in the calculation of AMS assumes special significance because supporting tables in the original submissions that the member countries have made to the WTO were expressed in domestic currencies. This has created problems in the calculation of AMS for developing countries including India, where inflation rates are generally high compared with developed countries. For example, in the case of India, between the base year, that is TE 1988-89 and the year 2000-2001, the change in the wholesale price index for all commodities works out to be about 146 percent, and depreciation of the Indian rupee is of the order of 214 percent during the same period, respectively. Since the base period submissions were expressed in domestic currency, that is, the Indian rupee, if these changes in inflation and exchange rate are not accounted for, the current AMS would be positive. These problems in the computation of AMS would not have arisen if there were clarity in the agreement on the provisions under which the current total AMS can be adjusted for inflation. The only reference to inflation in the agreement is in Article 18:4, but there is no clarity as to what it implies.^[61]

(b) There is insufficient clarity in the agreement whether the quantity eligible to receive the administered price is total production, or only the marketed surplus which is actually sold in the market, or the quantity which is actually procured by the government through the price support mechanisms. Some member countries such as Pakistan have used quantity procured, whereas other countries have used total production. The logic of using total production in these computations is that the government-designated agency is bound to buy whatever is brought to the market at the pre-announced support price. However, there is a limit on this because the quantity brought to the market will not be more than the marketable surplus given that self-consumption accounts for a very large share of the output of basic foodstuffs in a country like India. This is an issue that needs to be resolved in the current negotiations.

The other important question in this context is: How should the value of output be calculated? Should the output be valued at domestic prices or border prices? Since border prices are considered to be the efficiency benchmarks, these should be used to estimate the value of output and not domestic prices as is being practised currently.

(c) There is a lack of clarity in the interpretation of the negative values of product-specific AMS. The problem with this interpretation has significant implications for India, which does not subsidize its agriculture. It is mentioned in Article 7.2(b): “where no Total AMS commitments exist, the member shall not provide support to agricultural producers in excess of the relevant de minimis level set out in Article 6.4”. This means that countries which do not have reduction commitments are eligible to raise their domestic support up to the de minimis level. But Article 13(b)(ii) states that domestic support that conforms to the provisions of the agreement will be nonactionable provided that such measures do not grant support to a specific commodity in excess of that decided during the 1992 marketing year. Because of this ambiguity, it is not clear whether countries could even avail of the de minimis level of support allowed in the agreement. This also needs clarification in the ongoing round of negotiations.

In addition, by treating large negative numbers of product-specific support in developing countries as zero, the agreement penalizes countries which tax their agriculture relative to those which subsidize their agriculture. They can continue to subsidize their agricultural production to the tune of 5 percent of the value of agricultural output for both product and non-product-specific support in the case of a developed country or 10 percent for both measures in the case of a developing country.

Apart from this ambiguity, the agreement does allow India to maintain the current system of support to Indian agriculture, because there are no reduction commitments on domestic support as the support provided to Indian agriculture is much below the de minimis level which is specified in the agreement. Notwithstanding this flexibility, the agreement does bind the future level of product-specific and non-product-specific support that the government can provide at 10 percent of the value of agricultural output, respectively.

(d) Under Article 6.2, agricultural input subsidies generally available to lowincome or resource-poor farmers in developing countries are exempt from reduction commitments on domestic support. This also applies to domestic support granted to encourage diversification from growing illicit narcotic crops. The problem with this clause is how to define a low-income or resource poor farmer. No guidance is provided in the agreement.

Generally, land-based definitions are used to define resource-poor farmers. However, a land-based definition may not be appropriate if one goes by the actual definition of poverty line in terms of expenditure. Even this will vary from year to year and the poverty line definition used in these computations. Further, definitions based on an average income of US$1 000 for the developing country members referred to in Annex VII of the Agreement on Subsidies and Countervailing Measures would generate a different set of numbers. This is a key issue for India, because exemptions on non-productspecific support to resource-poor farmers allow quite significant room to support agricultural producers.

Fourth, as far as price stabilization is concerned, India has used a three-pronged strategy: price support, public stockholding of cereals and restrictions on external trade. The calculations for domestic support, which were delineated above, showed that India has sufficient flexibility under the agreement to support prices of agricultural products. But the limitations of such policies are already evident from the excessive build up of stocks of cereals, which have been piling up in recent years. The AoA does permit public stockholding for food security purposes, but the cost-effectiveness of such programmes in the light of the fall in international prices and massive subsidization by the developed countries have put serious question marks on the value of such policies.

As regards restrictions on imports to stabilize prices, the abolition of QRs implies that from now on, this would have to be achieved through tariffs on imports. The distribution of bound tariffs on agricultural commodities, which was discussed earlier, shows that this is a viable alternative because the majority of commodities have sufficiently high tariff bindings. In the future, this flexibility may be constrained if further reductions in tariffs occur after the current round of negotiations. In that case, instruments such as variable import tariffs and SSGs would be more useful. However, there is a lack of clarity in the agreement regarding the legality of price bands in the AoA because the footnote to Article 4.2 prohibits the use of variable import duties. If this band is considered as an “ordinary customs duty”, it is legal, but if it is considered a variable import duty, it is not legal (Sharma, Greenfield and Konandreas, 1999).

The objective of SSG provisions is to allow the use of additional duties over and above bound rates which can be applied if certain conditions relating to import surges or declines in external reference prices are met. Under the safeguard clause (Article 5) of the AoA, the usage of these provisions is available only for those countries that have bound their tariff levels using the tariffication formula and subsequently scheduled it in their commitments. Future negotiations should consider these issues and allow the usage of these instruments for price stabilization purposes. The use of SSGs will become very important for countries such as India.

Fifth, the level of protection currently given to wines and spirits under geographical indications should be extended to other products such as Darjeeling tea and basmati rice. This is a question of market access for agricultural products as product differentiation is an important element of fair competition. It benefits consumers because they are offered more choice with more information about the actual qualities of products. It also benefits producers, who are able to develop quality products and are protected against unfair or deceptive competition in markets abroad.

Sixth, problems that are being faced by exporters under the SPS Agreement are equally important. Though the aim of this agreement is to prevent member countries from using human, animal and plant health standards for protectionist purposes, every country has its own rules regarding these restrictions such as inspection of imported products, specific treatment or processing of products, fixing of maximum allowable levels of pesticide residues or permitted use of certain specific additives in food. To make matters worse, SPS standards are becoming increasingly complex, and even the required technology to do basic testing and certifications is not available on a wide scale. Countries like India will benefit if developed countries would agree to treat the standards specified by the Codex Alimentarius Commission (CODEX) as equivalent.

Seventh, in the case of commitments on technical and financial assistance, there are essentially two types of issues that need to be addressed. One of these issues is that provisions related to such assistance should be legally binding for the developed countries. The current provisions of the SDT on technical and financial assistance are in terms of “best endeavour” commitments. Because they are not legally binding, no dispute settlement cases can be initiated on the basis of their non-delivery. Further, the voluntary assistance which should have been extended has not been forthcoming. The second issue concerns funding arrangements. There is a dire need to set up a special institutional mechanism to support liberalization or globalization and to allocate such funds on a permanent basis so that it does not remain as an ad hoc arrangement. This is essential to build institutions in developing countries to implement reform programmes and also to augment resources to meet the high costs of implementing the provisions needed to make domestic rules conform to international rules and to overcome serious supply-side constraints.

Eighth, the issue of food security remains critical for a country like India, but must be handled with utmost care. There is a risk that groups with vested interests may misuse this concern in an emotive way to continue the use of subsidies and protection. There is no denying that food security has remained, and will continue to remain, a vital issue for both developed as well as developing countries. But there is a difference between the legitimate food security concerns of developing countries, where a majority of the population continues to depend on agriculture for its livelihood, infrastructure is very weak and there are very few avenues for employment outside agriculture for a large mass of illiterates, and developed countries. If developed countries are able to protect their high levels of subsidies and continue their use under the guise of non-trade concerns, it will not be in the benefit of developing countries.

Ninth, under the SDT provisions, the broad framework of the agreement should make provisions that provide real and meaningful market access for the commodities that are produced by countries like India and grants greater flexibility in meeting reduction commitments on domestic support and levels of tariffs. This is essential for sensitive products to address the concerns of the rural population in this sector for the sustenance of their livelihood and employment. Therefore, the new package of SDT provisions should recognize the two main bottlenecks in implementing any reform in a country like India. First, there is a considerable shortage of institutions to implement reform measures and bear the high costs of implementing the changes. Second, there are serious supply side constraints such as poor infrastructure, which create difficulties in building capacities to compete in the international market.