The Narendra Modi-led government has seemingly scored a diplomatic and political victory by getting the US to agree to an indefinite “peace clause” for its subsidies on public grain procurement and stockholding linked to food security. The peace clause worked out at the World Trade Organisation’s (WTO) Bali ministerial conference last December had allowed a four-year reprieve, during which no country would be legally barred from implementing such programmes even if the resultant subsidies breached the limits under the original Agreement on Agriculture (AoA). The Modi government not only challenged the temporary nature of that peace clause, but also raised valid questions on the methodology of calculating farm subsidies based on global “reference” prices prevailing in 1986-87.
The bilateral deal entered between India and the US, which will have to be endorsed by the WTO’s general council, provides for an open-ended peace clause until a “permanent solution” on the issue of farm subsidies linked to national food security programmes is arrived at. What this also indirectly does is open up the AoA itself to renegotiation, which is certainly welcome. India must, indeed, push hard on reworking agricultural subsidy computations to reflect current world prices that are far higher than the levels in 1986-87 for most crops.
But it should simultaneously acknowledge the market distortions produced by its own subsidy regime. The existing system, wherein the government physically stocks grain procured at artificially high minimum support prices (MSP) and distributes them at way below economic cost, is fiscally unsustainable. The same is true for input subsidies on fertiliser, electricity and water. All these eventually promote inefficient resource use, which isn’t good even for India’s farmers in the long run. They need to be encouraged to become efficient producers, which can happen only if the government replaces market-distorting subsidies with investments in public farm R&D and rural infrastructure. We must move to a regime where all support to resource-poor farmers and low-income consumers takes the form of targeted direct benefit transfers, as opposed to physical grain procurement and distribution by the state.
The good news is that the new government has made a beginning by going in for more measured MSP hikes. Further, it has cracked down on states declaring “bonuses” on top of MSPs or procuring extra rice through up to 75 per cent “levy” imposed on millers. These are probably the most far-reaching reforms carried out by this government, even if it may not want to highlight them for obvious political reasons. But they would definitely strengthen India’s bargaining position in the negotiations leading to a “permanent solution” at the WTO.