Great Indian backtrack

In reneging on the Bali deal, India helps neither itself, nor the world.

Published:August 6, 2014 12:51 am
It is difficult to imagine how any sensible government could be opposed to the TFA. It is difficult to imagine how any sensible government could be opposed to the TFA.

By: Devashish Mitra

At the WTO, India just vetoed the Trade Facilitation Agreement that it had agreed on six months ago along with 159 other countries. The reason being given by the Indian government is food security and concern for the poor in a country that has more than a quarter of the world’s poor. In order to understand what India just did and whether it makes sense, we need to know the answers to a number of questions. What is the TFA and what does it try to achieve? How can India have the power to veto something that affects 160 countries (almost the entire world)? How is food security affected by this agreement? Why did India accept the TFA in the first place in Bali if it wasn’t in its interests to do so? In addition, there are questions about India’s current policies themselves — whether they are efficient or distortionary.

The TFA is about removing red tape from customs procedures in all 160 member countries of the WTO. It aims at reducing customs-related paperwork, making customs procedures more transparent, reducing customs clearance delays at ports, providing clearer and timely information about customs rules, tariffs and procedures through printed publications and the internet, establishing a system of appealing customs decisions, and provisioning for information to be shared with involved parties in case their goods are being detained at ports etc.

In the age of the internet, most of these things can be done quite cheaply. Also, for the implementation of these provisions in the poorer countries, financial assistance would be provided, both through the WTO and the World Bank. It is difficult to imagine how any sensible government could be opposed to these changes, which are primarily aimed at reducing friction in the movement of goods across countries and increasing their flow by minimising inefficiencies and increasing transparency in the “governance” of international trade. It is especially shocking when opposition to such an agreement comes from a government whose motto is “minimum government, maximum governance” and given that over the last few decades trade has been the main engine of growth and has lifted millions out of poverty, especially in China and India.

So what is the problem with the TFA with respect to food security? The government of India guarantees farmers a minimum support price which is higher than the market price, and sells foodgrain to consumers at a price much lower than the market price through its public distribution system. Developing countries are allowed a margin of up to 10 per cent between the MSP and the world market price for their domestic procurement policies to be consistent with their WTO obligations, to which they had agreed in 1994 at the Uruguay round of trade negotiations. The prices being used to calculate the 10 per cent subsidy cap are the prices whose real values equal those in the late 1980s.

There is general agreement within the WTO that those prices are outdated and that this rule needs to be revised. At the Bali meetings of the WTO in December 2013, India, along with other developing countries, was able to negotiate a “peace clause” that would allow it to go beyond the 10 per cent cap for its MSP with immunity from legal challenge from other WTO member countries for the next four years, within which time period a permanent solution would be devised. All 160 member countries agreed to the entire package containing the TFA along with the peace clause. Note here that the WTO works through consensus, which means each member country has veto power. In other words, at Bali, each and every country thought that the package was in its interest.

This happened after several years of discussion and negotiation. Now, India, with support from only Bolivia, Cuba and Venezuela, wants a permanent solution to the public food procurement problem before it signs the Bali TFA package. In other words, India does not trust the seriousness of the rest of the WTO member countries in finding a permanent solution to the problem. The irony is that India is backtracking on an agreement, which it had assured the rest of the world it would sign. This itself constitutes a breach of trust. International agreements cannot keep adjusting to changes of government in member countries. In that case, we can forget any country signing any agreement with another country, especially one with a volatile polity such as India’s.

Finally, let me end by just saying that this is not about food security. It is more about subsidies to farmers through MSPs, the benefits of which are being captured by big farmers. It is about maintaining large stockpiles of foodgrain that India does not have the wherewithal to manage and which keep rotting in the open. While the PDS itself is not related to any WTO provisions, the government is misleading the people of the country by saying its stand is related to food security. The leakages in the PDS are well known and there are serious doubts about its benefits over a system of cash transfers. The four-year temporary provision in the Bali package provides enough time for India to move to a system of cash transfers to poor consumers and farmers, perfectly consistent with its WTO obligations, and to exclude the rich — consumers and farmers — and the bureaucrats who administer the system of public procurement and distribution from the benefits of government subsidies. In fact, by not signing the package, India is also depriving itself of the protection of the peace clause, which might mean it will end up spending valuable resources in unnecessary litigation.

Last but not least, the signal the new government needs to send is that it is reformist and not populist. Unfortunately, both the recent budget and what the government has done at the WTO show that its objective is not reforms but the maximisation of the popular vote by taking advantage of people’s ignorance of complex policy processes and mechanisms.

The writer is professor of economics and Cramer professor of global affairs at the Maxwell School of Citizenship and Public Affairs, Syracuse University, New York

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  1. C
    Aug 6, 2014 at 5:19 am
    It sounds amusing when these experts of Indian origin make comments on India's pplicymaking from western point of view. Firstly there's no dearth of think tanks in those countries. Secondly sitting on other side of the globe they don't really know the political pulse of the electorate. This is quite unlike people from other ethnicities living in the west.
    1. S
      Stephen Stephen
      Aug 6, 2014 at 12:46 pm
      This is about the protection of home grown food producers not security. Until India honors its agreements with the rest of the world no country will take them seriously! This is about the rich farmers losing money and they have put pressure on the politicians to not let it happen. It is always about the money!
      1. T
        Aug 6, 2014 at 6:35 am
        Agreeing to the TFA could have brought lot of good to us in terms of better terms for exports and helped us to contain the CAD which is one of serious concerns. I understand from those more knowledgeable, that the MSP which India pays its farmers for procurement only for PDS is not the same as in other countries like USA, where the subsidy (difference between market and MSP) is paid to the farmers for all, their production.This point could well have been argued during the four years that we have to sort out this subsidy problem. It is also known that the USA pays far more subsidy to its farmers now that what we give and must be more keenly interested it resolving this . Have we made a faux pas in exercising the veto?