The country has to primarily convince the U.S. that Food Security Ordinance will not violate Agreement on Agriculture

India is preparing to make out a strong case at the World Trade Organisation (WTO) justifying its much higher foodgrain procurement to meet the requirements of the Food Security Ordinance (FSO). The FSO is sure to face resistance at the WTO committee on agriculture. India will primarily have to convince the United States that the FSO would not violate the Agreement on Agriculture (AoA). These issues will formally figure at the WTO ministerial meeting at Bali in December.

At the root of the current impasse is a commitment given by India under the WTO’s Agreement on Agriculture (AoA) that it would offer local farmers a procurement price below the then notified import price fixed in rupee terms in 1988, when the agreement was being negotiated. Under the AoA, the minimum support price India can offer its farmers is the 1988 notified import price with “due allowance” for inflation in the subsequent years. The problem is India has to negotiate to receive “due allowance” for inflation for these intervening years. If the country fails to get a full allowance for inflation, then its procurement price might exceed the notified import price of 1988. Here lies the catch.

The United States may take a tough stand on granting India full inflation benefit on the 1988 notified import price. This might create problems for operationalising the new FSO. The government is likely to explain to Parliament in detail its commitments under the WTO and its current negotiating stance.

The United States’ argument is that if the State agencies start buying from farmers at well above international prices, then it acts as an implicit incentive to the local farmer to produce more than he/she otherwise would. That would squeeze out global grain suppliers, creating a trade distortion. Of course, India is contesting this on the ground that persistently high domestic inflation makes it imperative to raise the Minimum Support Price (MSP) for farmers from time to time. In fact, India will invoke clause 18.4 of the AoA which says that “due allowance shall be given” to the inflation factor while assessing whether the MSP violates the AoA once the FSO becomes law.

Commerce Minister Anand Sharma was recently in the United States and is reported to have taken up the matter with his U.S. counterpart. India’s former Deputy Director-General at the WTO Anwarul Hoda, who was actively involved in the signing of the AoA, is confident that India can easily invoke the inflation clause and justify the increase in the procurement prices given to farmers all these years and to be given in the future.

Mr. Hoda says the only point where there could be a dispute with the U.S. trade representatives is on the interpretation of the term “due allowance” to be given to the farmers on account of rising inflation in the developing countries. “While we would argue full allowance for inflation be given while raising the Minimum Support Price, the U.S. might argue that ‘due allowance’ does not mean full allowance,” said Mr. Hoda. That might seem to be a grey area.

As per the AoA signed in 1988, the international rupee price of wheat which India imported was put at Rs. 354 per quintal. This became the base price and the Indian government could offer local farmers a minimum support price not exceeding 10 per cent above Rs. 354.

Now clause 18.4 implicitly allows India to add the inflation rate for each year to the base price of Rs. 354. According to Mr. Hoda’s calculations, which the government is likely to use, India has had 500% inflation since 1988 when the notified import price of Rs. 354 per quintal was determined. If you add 500% inflation to this, the allowable MSP for farmers in 2010-11 would be Rs.1,740 per quintal. The actual MSP offered to farmers for wheat in 2010-11 was Rs.1,170 per quintal, well below the notified benchmark import price of 1988 after loading inflation. That makes it well within the WTO parameter. The ruling international price of wheat in the same year was roughly Rs.1,300 per quintal.

So if full inflation is taken as an allowance, then the FSO will not fall foul of the AoA at the WTO. The U.S. authorities, however, should agree to interpret “due allowance for inflation” as “allowance for full inflation.” This is the key in the ongoing negotiations between the two countries. If past history is any guide, the United States may allow India the needed leeway but not before extracting its pound of flesh in some other sector, which is par for the course in WTO negotiations.

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