Mains paper 3:Indian Economy|Issues related to direct and indirect farm subsidies and minimum support prices
From UPSC perspective, the following things are important:
Prelims level: Bali conference, Peace clause
Mains level: PDS transfer vs Cash subsidy (the never ending debate!)
The impasse at the recently concluded 11th ministerial conference of the World Trade Organization (WTO) in Buenos Aires is casting doubts over the future of developing countries’ food procurement programmes
What is a bone of contention?
- US allegedly reneged on its promise to not block food stockholding policies in return for India, the country with the world’s biggest stockholding programme, signing the trade and facilitation agreement (TFA).
- US support is important because India’s Food Security Act, passed in 2013, ran into WTO rules that keep a country’s domestic policies from distorting international trade.
- The law forced a significant ramping up of food procurement by the government to provide coverage to two-thirds of its population. Simultaneously, the government supports farmers through minimum support prices.
- The cost of these programmes—basically a country’s food subsidy bill—says the WTO, must not exceed 10% of the value of production based on the reference price of 1986-88.
- At the Bali conference in December 2013, India secured a ‘peace clause’ that protected it from legal action should it breach the 10% limit.
- However, the concession was limited to programmes running in 2013 and it comes with onerous reporting requirements about food subsidy levels.
Why is India complaining?
- Given that food subsidy is calculated at 1986-88 prices, many countries are limited to less than 10% of production in practice on account of inflation.
- Due to the obligation to reduce trade-distorting subsidies, rich countries have redesigned their programmes to give unconditional cash transfers to farmers—a policy that does distort trade by lowering international prices.
Cash transfer as a model for delivering food subsidy in India
- India’s current food and farmer support programme is distortionary, leaky and unsustainable.
- If the currency appreciates or either one of MSP or procurement increases, India could breach its 10% limit and face hostile litigation by other countries for violating WTO rules.
- It is, perhaps, wise to keep our food-support schemes under WTO-prescribed limits and gradually transition to a cash-based transfer for both consumers and farmers.
- That way, we will preserve our political capital for other issues like trade rules on electronic commerce, services trade, fisheries and the TFA.
- India can utilize this situation to make a virtue out of a necessity. Government policies have increased bank account coverage to 99% of households, and more than 90% of adults are linked to the UID scheme, Aadhaar.
- A move to cash transfers, for both consumers and producers, is more practical today than it was four years ago.
- Cash transfer provides beneficiaries flexibility as well as convenience and choice in terms of quality of food;
- Cash transfer allows them to buy better quality grains than what they got through the PDS or could diversify their diet by adding dairy products or local grains (b) Challenges
- cash-transfer pilot in three Union territories, conducted from January 2016, showed that 20% of the beneficiaries reported not receiving the transfer, even though the government reported 99% success.
- Beneficiaries spent more time and money in obtaining the cash and food from the market. Also, grievance redressal mechanisms are inadequate.
- The op-ed therefore, favours a choice-based transition to cash transfers so that people continue to have the option to remain in the present system until they’re comfortable with the quality of implementation in their region.
- This could continue for a couple of years after the capability of starting universal cash transfers is achieved.