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In the name of India, why?

Modi-led BJP is pursuing an illogical and regressive anti-trade-facilitation stance at the WTO.

India is making itself a laughing stock in the eyes of the world by violating agreements it made just six months earlier when it made the WTO accept its unreasonable demands. India is making itself a laughing stock in the eyes of the world by violating agreements it made just six months earlier when it made the WTO accept its unreasonable demands.

Modi-led BJP is pursuing an illogical and regressive anti-trade-facilitation stance at the WTO.

In my previous article (‘A “principled” Congress stand at the WTO?’, IE, July 29), I reached three conclusions. First, that there was an urgent need for the representative WTO reference price for agricultural products to be made a dynamic price rather than the present outdated average 1986-88 price. Second, with this dynamic price adjustment, the minimum support price paid by the Indian government to its farmers is well in excess of that allowed by WTO rules. Third, that India’s present WTO stance is without logic or empirical support.

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Unfortunately, the computations in my July 29 article contained errors with respect to international reference prices for rice and wheat. In the transformation between statistical programmes, the price for 2013 was mistakenly taken as the price for 2004, the price for 1990 was the price for 1981, that is, the price levels were shifted backwards by a uniform nine years for each data point. My error, my apologies.

I have written close to 1,000 articles in newspapers over the last 30 years, and this is the first time I am making an empirical error — and for this I must apologise. I have made other important errors, for example that I believed that the government had no option but to present a “good” budget in 2011, 2012 and 2013, and I had egg on my face, and worse, when the government of the day did not oblige. These were errors of judgement and not errors of calculation.

This error of calculation has allowed me to correct other assumptions detailed in the footnotes to the table. When all these corrections are incorporated, there is no material change in any of the conclusions mentioned above (phew!). Indeed, the 32-year average excess price provided to Indian producers of rice increases from minus 17 per cent of the world fob price to plus 17 per cent. In the case of wheat, there is no change between the earlier calculation and the present one — in both cases, our prices have been, on average, 14 per cent above the world price.

One advantage in redoing the numbers is that it allows one to answer some questions. First, how is it that India has been able to export wheat and rice in the last few years when our domestic fob price has been above the world price? For the last three years, India exported each year an average 9 million metric tonnes (MMT) of rice, and 4 MMT of wheat. In value terms, about Rs 40,000 crore per year — not small.

A further point deserving emphasis is that the fob price (relevant for exports and relevant for WTO production subsidy calculations) is the minimum support or procurement price plus freight (for example, from Punjab to the nearest seaport) plus port handling costs. These costs are elastic and vary according to the self-interest of the estimator. Indian grain organisations will tend to understate this important cost component; foreign organisations will tend to overstate it. The fact remains that this cost is a grey area and can explain “apparent” anomalies. Such costs are estimated by outside experts (for example, US Wheat Associates (USW), which promotes US grain sales) as approximating $80 per tonne in 2013-14; according to Indian experts, this extra cost is closer to $50 or 22 per cent of the MSP of $231 in 2013. In my calculations, I have taken the freight, etc costs as 25 per cent of the MSP.

Our self-righteousness leads us to point fingers at others, especially the US, when the fault is entirely our own. Many Indians argue that the US exorbitantly subsidises its grain production, so why shouldn’t India as well? Indeed, this is one of the “background” arguments for India’s stance at the WTO. If the US is the reference fob price, no calculation can show that it is subsidising its wheat exports. But what about the “hidden” subsidies provided to the farm sector in the US? Such subsidies have totalled $36 billion for the 18 years between 1995 and 2012, or about $2 billion a year. For 2012, US wheat production was 49 MMT and “hidden” subsidies totalled $1 billion or 5.5 per cent of total production. WTO agreements allow such subsidies in developed economies to not exceed 5 per cent. Thus, whatever arguments are made against the US not being WTO compliant, wheat production subsidy, hidden or otherwise, is not one of them.

When all else fails, invoke the poor. India’s favourite argument against signing the Trade Facilitation Agreement is: please don’t mess with our food security act for the poor and consumer subsidies because that offends our sensibilities, our integrity and our honour. Well, BJP or Congress, don’t bleed your hearts, and especially not with such deep cuts. The WTO agreement only involves production subsidies, not consumer subsidies. Indeed, according to the WTO and most countries in the world, India can do what it wants with its food subsidies. It can buy food from farmers at Rs 20 per kg and sell

it to consumers at Rs 0, 1, 2, or 3 per kg or any food subsidy level it chooses. The rest of the world does not care, as long as India does not pay its producers much above the fob price.

There is a political economy lesson in food pricing. For example, Thailand lost its treasured place as a rice exporter to Vietnam because of its own populist food policy initiated in 2011. All correlations of political trouble in Thailand with its destructive food policy may not be coincidental. Neither, as pointed out in the July 29 article and several previous ones, is it coincidental that the Congress grotesquely messed up on food prices and this had a major effect on its outsized political loss in the 2014 elections.

This foray into data leads to the following robust conclusions. India has engineered unprecedented food inflation through the UPA’s belief that such practices would help it win the 2014 election; it obviously did not. Second,

India is making itself a laughing stock in the eyes of the world community (perhaps it does not matter) by violating agreements it made just six months earlier when it made the WTO accept its unreasonable demands. Third, India cannot make any case for its new unprincipled stance. So the question arises — given that the BJP has just formed a majority government with no obligations, implicit or explicit, to the previous UPA regime, and given that Prime Minister Narendra Modi is widely believed, and correctly so, to be his own man, then why, in the name of god and India, is Modi-BJP pursuing an illogical and regressive stance at the WTO?

The writer is chairman of Oxus Investments, an emerging market advisory firm, and a senior advisor to Zyfin, a leading financial information company

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