Answer Writing Practice for UPSC IAS Mains Exam: Paper - IV (General Studies – III) - 25 October 2018


Answer Writing Practice for UPSC IAS Mains Exam


UPSC Syllabus:

  • Paper-IV: General Studies -III (Technology, Economic Development, Bio-diversity, Environment, Security and Disaster Management)

Q. Subsidies related provisions of WTO’s Agreement on Agriculture (AoA) are impractical for developing countries. Examine in particular for India. (250 words)

Model Answer:

Approach:

  • Why in news?
  • Introduction
  • Provisions of AoA – An examination
  • Conclusion

Why in news?

Last week, the United States (US) submitted a document in the World Trading Organization (WTO) questioning the compatibility of India’s agricultural subsidies with the relevant provisions of the Agreement on Agriculture (AoA). The document targets the minimum support price (MSP) granted to wheat and rice, the two key food crops. The US’ contention is that the MSP of these two crops (market price support, according to AoA), are well above the limits set by the AoA.

This is the most serious challenge to India’s subsidies’ regime, coming after the AoA provisions related “public stockholding (PSH) for food security purposes”, almost derailed the implementation of the National Food Security Act in spite of a temporary respite.

Introduction

The subsidies regime included in the AoA has three forms of subsidies, ranging from those that were considered “non-distorting” or “minimally distorting” (the “Green Box” and “Blue Box” subsidies), to those that seriously “distorted” markets (the “Amber Box” subsidies).

The AoA was crafted primarily by the US and the members of the European Union (EU), to serve their interests, while developing countries like India were reduced to mere bystanders.

Provisions of AoA – An examination

  • Developed countries label most of the sops as non-trade distorting (green-box subsidy at the WTO) which, supposedly, have minimal effect on world trade. Due to poor state of farmers and farming, the developing countries are bound to rely more on the so-called “distorting” forms of subsidies.
  • While there is no limit on the spending on the “non-distorting” forms of subsidies, spending on the Amber box of subsidies has to be limited to 10% of the value of agricultural production for the developing countries, and 5% for the developed countries. India’s subsidies protect the livelihoods of small farmers, which should, in fact, be allowed to increase if agriculture faces a crisis akin to what it is facing now. In sharp contrast, the US has been subsidising its corporate agriculture to capture global markets. For example, India is the largest producer of rice, but an overwhelmingly large share of its production is for its domestic market.
  • The AoA provides no means to assess the impacts of these forms of subsidies on the market. In other words, setting these ceilings for subsidies has no genuine basis.
  • Developed countries exercised an option of either accepting a product specific ceiling of 5 per cent, or an overall cap. The product-specific subsidies apply largely to the developing world, whereas the developed world, by having an overall ceiling for all farm products, can manipulate the subsidies for individual products. Compared to such high product-specific subsidies in the developed world, it seems a bit bizarre that India is consistently warned by countries like the US, Australia, the EU and Japan about its rising MSP support to food grains and cereals like rice, wheat and pulses when they are actually all well below the limit of 10 per cent at the moment.
  • In effect, the developed world can give as much as $160 billion of trade-distorting subsidies that affect prices and production every year without attracting penalties. It could go up to 300 per cent or more for certain items in some countries. This exposes the hypocrisy of the rich nations which routinely reprimand countries such as India and China for their minimum support price programmes for poor farmers.
  • Equally unfair is the fact that even with low over-all subsidies, India has to worry about breaching the 10 per cent ceiling for rice once the food subsidy programme is fully implemented as it could then get into trouble. How can subsidies given by developing countries to support their poor be open to challenge when they barely cross 10 per cent, while many rich countries are entitled to trade distorting sops several times the ceiling?
  • Subsidies provided by WTO members are calculated with reference to international prices, assumed to be the competitive prices. In the negotiations leading to the adoption of the AoA, international prices of each individual commodity during 1986-88 were agreed to as the fixedexternal reference price (ERP). Thus, the market price support has to be the difference between the current MSP and the fixed ERP.
  • India’s MSP for common varieties of rice, which was $112 per tonne, had increased to $334 per tonne in 2014-15; all this while, the external reference price remained static at $263 per tonne. Comparing India’s current MSP with the ERP that is three-decades old is simply illogical. India and other developing countries have consistently argued that either the base period for determining the ERP must be brought up to a more recent set of years, or the ERP must be inflation adjusted, but in vain.

Conclusion

This outrageously unfair arrangement came about because at the time when the Uruguay Round was negotiated, very few countries, including India, understood its implications. Back in the 1990s, they did not have either the technical prowess or the human resource to negotiate well, and allowed developed countries and a handful of developing countries get away with high AMS limits. India along with China and LDCs needs to keep up the momentum and adopt a more offensive posture by laying bare more such inequities in the Agreement on Agriculture that is habitually brushed under the carpet by the powerful.

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