17 Dec Legal Guarantee to MSP: The Demand of farmers and Obligations under AoA of WTO (GS 3, Economics, The Hindu, Indian Express)
Legal Guarantee to MSP: The Demand of farmers and Obligations under AoA of WTO- Today Current Affairs
Context: The demand of farmers for the legal guarantee of MSP has many dimensions of debate. For example, will it not be heavy fiscal burden on the government to procure all 23 crops for which government announces MSP?, what about logistic and storages if procured by the government, and what about obligations made under Agreement on Agriculture (AoA) under WTO regarding de minimis limit of trade distorting domestic support, like MSP.
The WTO endeavors for faily competitive international trade practices. It does not favor the support from the governments to their respective producers. The logic behind is that if a government directly supports its producer, the producer would be making more products, resulting in a production surplus which ultimately results in cheap export, and thus the domestic producer of this country can capture the international market. All this became possible only due to support from the government (domestic support) to its producer. Hence this kind of support is considered as trade distorting and against the principle of free and fair market system, which is advocated by WTO.
These kinds of domestic support (Subsidies) restrictions are mentioned in the Agreement on Agriculture (AoA), which is one of the many agreements under WTO. In AoA, the domestic support from the governments or Subsidies are categorized in terms of green boxes, blue boxes, amber boxes and development boxes.
Green Box : under green box subsidies are not considered as trade distortive. These subsidies must not be products specific and must not involve price support ( such remunerative price or MSP). They can include environmental protection and regional development programmes. Examples of green boxes are domestic policies dealing with research, extension, inspection and grading, environmental and conservation programs, disaster relief, crop insurance, domestic food assistance, food security stocks, structural adjustment programs, and direct payments not linked to production. At present there are no limits on spending on blue box.
Development Box : Agriculture Agreement allows developing countries additional flexibilities in providing domestic support. The type of support that fits into the developmental category are measures of assistance, whether direct or indirect, designed to encourage agricultural and rural development and that are an integral part of the development programmes of developing countries. They include investment subsidies which are generally available to agriculture in developing country members, agricultural input subsidies generally available to low-income or resource-poor producers in developing country members, and domestic support to producers in developing country members to encourage diversification from growing illicit narcotic crops.
Blue Box : It is also called as “amber box with condition”. These are subsidies which tend to limit the production. Here farmers are given support to limit/reduce the production so as to neutralize the production distortion. Actually the story behind is that in the 1970s and 1980s the US and European countries were hugely incentivizing their agriculture production by directly supporting the farmers which was later seen as trade distortive. These countries got enough fixed resources like land and others behind agriculture production because of huge government incentives. The crux is that now to fix the trade distortion problem, they shall not be using all resources for production, maybe sometimes like leaving the land fallow. This will obviously reduce the income of the farmer. Here if farmers are given some support/benefits from the government to balance their reduced income, then this support/benefits/subsidies will be counted in blue box. For example subsidies linked with capping of acreage or number of animals. There is no WTO cap for blue box subsidies.
Amber Box : Nearly all domestic support measures considered to distort production and trade (with some exceptions) fall into the amber box, which is defined in Article 6 of the Agriculture Agreement as all domestic supports except those in the blue and green boxes. These include measures to support prices, or subsidies directly related to production quantities.
These supports are subject to limits. “De minimis” minimal supports for both product-specific and non-product-specific support are allowed, defined as a share of the value of agricultural production. This threshold is generally 5% of the value of agricultural production for developed countries, 10% for most developing countries.
The issue in legalizing MSP : 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. Very recently, a WTO panel in the case, India – Measures Concerning Sugar and Sugarcane, concluded that India breached the de minimis limit in the case of sugarcane by offering guaranteed prices paid by sugar mills to sugarcane farmers.
Way forward / alternatives : India can shift the support system from Price-based (in the form of MSP) to Income-based, which will not be trade distorting under the AoA provided the income support is not linked to production. Or alternatively, Price-based (in the form of MSP) can be given to the de minimis limit and can be supplemented with Income-based support policy. But in the backdrop of three repealed farm laws, whatever is to be done in the near future regarding agriculture reforms, the government has to engage and convince the farmers priorly.