From UPSC perspective, the following things are important :
Prelims level : Types of subsidies
Mains level : Paper 3- MSP and challenges ahead at WTO
Amid the demand for legal backing to MSP, the question remains about whether India can provide a legal guarantee violating its international law obligations enshrined in the Agreement on Agriculture (AoA) of the World Trade Organization (WTO)?
Classification of subsidies under AoA: Trade distorting and non-trade distorting
- The objective of AoA: One of the central objectives of the AoA is to cut trade-distorting domestic support.
- Three categories: In this regard, the domestic subsidies are divided into three categories: ‘green box’, ‘blue box’ and ‘amber box’ measures.
- Non-trade distorting: ‘Green box’ subsidies (like income support to farmers de-coupled from production) and ‘blue box’ subsidies (like direct payments under production limiting programmes subject to certain conditions) are considered non-trade distorting.
- Countries can provide unlimited subsidies under these two categories.
- Trade-distorting subsidies: Price support provided in the form of procurement of crops at MSP is classified as a trade-distorting subsidy and falls under the ‘amber box’ measures, which are subject to certain limits.
So, how do countries measure ‘amber box’ support?
- Compute AMS: To measure ‘amber box’ support, WTO member countries are required to compute Aggregate Measurement of Support (AMS).
- AMS is the total of product-specific support (price support to a particular crop) and non-product-specific support (fertilizer subsidy).
Understanding the de minimis limit
- Under Article 6.4(b) of the AoA, developing countries such as India are allowed to provide a de minimis level of product and non-product domestic subsidy.
- This de minimis limit is capped at 10% of the total value of production of the product, in case of a product-specific subsidy; and at 10% of the total value of a country’s agricultural production, in case of non-product subsidy.
- Subsidies breaching the de minimis cap are trade-distorting.
Possibility of India overshooting the de minimis limit
- Relation between MSP and AMS: The procurement at MSP, after comparing it with the fixed external reference price (ERP) — an average price based on the base years 1986-88 — has to be included in AMS.
- Widening gap between ERP and MSP: Since the fixed ERP has not been revised in the last several decades at the WTO, the difference between the MSP and fixed ERP has widened enormously due to inflation.
- According to the Centre for WTO Studies, India’s ERP for rice, in 1986-88, was $262.51/tonne and the MSP was less than this.
- However, India’s applied administered price for rice in 2015-16 stood at $323.06/tonne, much more than the 1986-88 ERP.
- Procuring all the 23 crops at MSP, as against the current practice of procuring largely rice and wheat, will result in India breaching the de minimis limit making it vulnerable to a legal challenge at the WTO.
- Even if the Government does not procure directly but mandates private parties to acquire at a price determined by the Government, as it happens in the case of sugarcane, the de minimis limit of 10% applies.
- Peace clause: Although a permanent solution is nowhere in sight, the countries have agreed to a peace clause.
- The peace clause forbids bringing legal challenges against price support-based procurement for food security purposes even if it breaches the limit on domestic support.
- The peace clause is applicable only for programmes that were existing as of the date of the decision and are consistent with other requirements.
- India’s procurement for rice and wheat, even if it violates the de minimis limit, will enjoy legal immunity.
- However, India will not be able to employ the peace clause to defend procuring those crops that are not part of the food security programme (such as cotton, groundnut, sunflower seed).
- Move from MSP to income-based support: Arguably, India can move away from price-based support in the form of MSP to income-based support, which will not be trade-distorting under the AoA provided the income support is not linked to production.
- Supplement price-based support with income-based support: Alternatively, one can supplement price-based support (keeping the de minimis limit in mind) with an income-based support policy.
The Government needs to engage with the farmers and create an affable environment to convince them of other effective policy interventions, beyond MSP, that are fiscally prudent and WTO compatible.