ISSUES RELATED TO SUBSIDIES

AGRICULTURE SUBSIDIES IN INDIA

  • Introduction of the HYV program in the mid-1960s necessitated a high priority to supplying quality inputs like irrigation, water, fertilizers and electricity to the Indian farmers. These all were classified as essential inputs for the development of the agriculture.
  • To ensure that these inputs are accessible to all farmers at all the times the government decided to subsidised these inputs.

 

 

  • There are two most common ways of subsidising agriculture;
    • Firstly, governments may pay much higher prices for the agricultural products than what the farmers can obtain under free market environment, and
    • Secondly, by supplying the inputs at a price that is below the cost of supplying these inputs or below at the price that would prevail in an open free trade environment.
  • Higher prices for farm products can be provided mainly by insulating the domestic markets from the world economy through a restrictive trade policy.
  • On the other hand, vital inputs like fertilisers, irrigation water, credit, electricity used in the agricultural sector can be supplied to the farmers at prices which are below the open market prices. The prices of these inputs, therefore, do not reflect their true value, i.e, the real cost of supplying these inputs.
  • Of the above mentioned two alternatives, subsidies on inputs are normally preferred because it is believed that benefits of government expenditure can be derived by the farmers only in proportion to their use of inputs. Input subsidisation also avoids raising food and raw material prices, thus avoiding the plausible adverse effect on growing industrial sector or a large mass of poor living in the developing countries.
  • However, most often, it is not just a single mechanism but a combination of both higher output prices and lower input prices which has been used to subsidise agriculture with objectives varying from the need to raise domestic production and protect incomes of the farming community.
  • India also tinkered with both input and output prices, primarily to protect the poor and/or to stimulate the use of modern inputs.

 

WHY SUBSIDISING AGRICULTURE IS NECESSARY?

 

 

BUT WHAT ARE THE NEGATIVE IMPACTS OF AGRICULTURE SUBSIDIES?

 

 

SUBSIDIES IN INDIAN AGRICULTURE

A) Explicit Input Subsidies

  • Explicit input subsidies are payments made to the farmers to meet a part of the cost of an input. These are in the nature of explicit payments made to the farmer.
  • For example, subsidy on improved or high yielding variety seeds, plant protection chemicals and equipments, improved agricultural implements and supply of mini-kits containing seeds, fertilizers and plant protection chemicals for certain crops are the explicit subsidies.
  • These are usually made available to small and marginal farmers and those belonging to scheduled castes and tribes. The objective of such subsidies is to induce the farmers to adopt yield increasing inputs so that they are able to realize the benefits of new technology.
  • The coverage of these subsidies in terms of crops, inputs, regions and target groups has been changing from time to time. Explicit subsidies have formed only a small fraction of the development expenditure of Central/ State Governments

B) Implicit Input Subsidies

  • While there is transparency in explicit input subsidies, implicit input subsidies are hidden in nature. The latter arise on account of the mechanics of pricing of inputs.
  • If inputs whose prices are administratively determined are priced low as compared to their economic cost, it becomes a case of implicit subsidization. As far as the farmer is concerned, he does not receive any direct payment but somebody in the economy accounts for the difference.

C) Output Subsidies

  • Subsidization of agricultural sector through output pricing means that by a restrictive trade policy, the product prices in the domestic market are maintained at levels higher than those that would have prevailed in the absence of restrictions on trade.
  • On the other hand, if the trade policies have resulted in keeping the domestic prices lower than the corresponding border reference price, the policies have taxed the agricultural sector. The border reference price is the free on board prices in the case of exportables and cost, insurance and freight price in the case of importables.

D) Food Subsidies

  • There is an important subsidy linked to the agricultural sector and that is the food subsidy. The twin policy of providing market support to the foodgrains producers and supplying atleast a part of the requirement to consumers at reasonable prices, along with the policy of maintaining a buffer- stock of required quantity for national food security, involves cost in the form of meeting the differences between the economic cost and issue prices of foodgrains.
  • This is what is called the food subsidy and appears explicitly in the Union Budget.

 

AGRICULTURE SUBSIDIES ON THE BASIS OF MODE OF PAYMENT

 

A) Direct Subsidies

  • Direct subsidies are money transfers by the government that reach the ultimate beneficiary through a formal predetermined route. In the agriculture and allied sectors, subsidies are given for crop husbandry, agricultural implements, minor irrigation, soil conservation, horticulture, animal husbandry, pisciculture, sericulture and also for loss in agriculture during natural calamities like droughts or floods.
  • The various subsidy schemes in agriculture and allied sectors are routed through the departments of Agriculture, Horticulture, Animal Husbandry and Fisheries.

Merits of Direct Subsidies

  • Direct benefit transfer has been successful in many schemes such as PAHAL in LPG and MGNREGA.
  • There would be no problem of identification, pilferage and corruption etc. as through JAM trinity or Aadhaar, payments can be made directly to the beneficiaries.
  • This would increase efficiency, as well as promote regional balance, and crop diversification.
  • People can decide for themselves which crop they would want to grow, according to the profits and their local requirements. They can also use the amount in value addition, mixed farming and other beneficial activities for their farms/lands.
  • It is likely to control Inflation and decrease prices of fertiliser, and other agricultural produce as well.
  • Behavioural change, as farmers will stop using excessive water or fertiliser in their fields.
  • Better Nutrition as cereal centric food policy (Calorie based intervention) ignores micronutrients requirement of human body.

Demerits

  • India is a poor country facing hunger, diseases, malnutrition etc. There is a huge chance that the cash may get used in some non-priority activities or for some non-productive works e.g. on marriage of girls, alcohol, etc. rather than being used for the right purposes.
  • The country may not be able to reach its desired goals such as food grain production may not be enough to support the huge population and create the problem of food security instead.
  • This will also open the country to volatility of market mechanisms.
  • Widespread illiteracy and lack of awareness may also hamper the prospect of Agriculture in the country.

B) Indirect Subsidies

  • Indirect subsidies are provided through price reduction, welfare and other ways but do not include a direct cash payment. They reach the farmers along with the use of inputs.
  • Therefore, these are highly correlated with the amount of use of inputs by farmers. Generally, those farmers who use more inputs would naturally enjoy higher subsidies. Example cheaper credit, farm loan waivers, reduced tariffs for electricity and irrigation etc.

Merits of Indirect Subsidies

  • In developing economies such subsidies help development of priority area.
  • These subsidies were introduced in India to provide incentives to the farmers to grow food grains. Hence, generally the indirect subsidies are meant to fulfill some targets fixed by the Government or to guide people to move towards required goal set by the government.
  • Training support and technological assistance helps in enhancing the farmers’ knowledge.

Demerits

  • It takes away incentives from other areas, such as Indian agriculture has become cereal centric, regionally biased, and input intensive. Indirect subsidies are one of the main reason towards such a state.
  • Farmers do not feel the incentive to save resources such as over exploitation of ground water, indiscriminate use of fertilizers, etc. are resulting due to it.
  • Indirect subsidies are not successful in reaching the target beneficiaries because of several lacunas in identification, corruption, lobbying by rich farmers etc.
  • It is liable for misuse for gaining political mileage especially during time of elections.

 

ISSUES RELATED TO AGRICULTURE SUBSIDIES AND THEIR POSSIBLE RESOLUTION

  • Heavy Fiscal Burden: The total outgo on fertilizer subsidy alone in 2017-18 was Rs. 70,000 crore.
    • Possible Resolution: A better targeting of subsidies with the usage of JAM (JanDhan – AADHAAR- Mobile Number) trinity can reduce the fiscal burden.
  • Excessive use of Ground water: The power subsidy has led to overuse of ground water which has further resulted into dramatic fall in ground water levels. In several villages, wells have gone dry. Water extracted from deep inside earth has shown contamination of Arsenic and other heavy metals.
    • Possible Resolution: Separate agriculture feeder network (under Deen Dayal Upadhayay Gram Jyoti Yojna). This separate agriculture feeder will supply electricity only for a few hours a day. The process has shown positive results in arresting decline of ground water levels in Gujarat.
  • Environmental Effects and decline in Soil Fertility: Indiscriminate use of fertilizers (recommended ratio of NPK fertilizer is 4:2:1 while actual usage is 8:3:1. Similarly, urea consumption has increased to 60% in 2017 from 55% in 2010-11) harm the soil fertility, biodiversity, and also leads to eutrophication (increased nutrients in water bodies, eventually leading to decreased oxygen concentration in them) and bio-accumulation/biomagnifications (increasing concentration of toxic material in tissues of living organisms at successively higher levels in a food chain).
    • Possible Resolution: Creating awareness among farmers, increasing penetration of soil health card scheme, promoting organic farming and innovative products like neemcoated urea will go a long way to check the issue.
  • No benefits to the targeted groups: Fertilizer subsidies are generally cornered by the manufacturers and the rich farmers of Punjab, Haryana and Western UP.
    • Possible Resolution: Nutrient based subsidy and Neem-Coated Urea has been introduced by Government. There should be Direct Benefit Transfer of fertiliser subsidy through Aadhaar authentication, organic farming should be encouraged and there should be phased increase in the price of urea.
  • Cereal Centric, Regionally Biased, and Input Intensive: Price subsidies has affected Indian agriculture negatively. This has made Indian agriculture cereal centric, and neglectful towards pulses, oil seeds and coarse cereals. This has led to import of these crops and food insecurity in lower strata which depend upon coarse cereals. Also, most of the subsidies go to the rich farmers, and the rich states which are able to grow marketable surplus and have well developed infrastructure.
    • Possible Resolution: Crop diversification by including more crops under MSP, Mission on Integrated Development of Horticulture, Organic and Cooperative farming, food processing, mixed farming, Direct Benefit Transfer.

 

 

 

 

 

AGRICULTURE SUBSIDIES AND WTO

Historical Background

A. Uruguay Round, 1995

  • It led to the formation of WTO. One of the main objectives of Uruguay round was to reduce agricultural subsidies. The Agreement on Agriculture (AoA) was signed by the WTO members.
  • The agreed long-term objective of the reform process initiated by the Uruguay Round reform programme is to establish a fair and market-oriented agricultural trading system.
  • The reform programme comprises specific commitments to reduce support and protection in the areas of domestic support, export subsidies and market access.
  • The Agreement also takes into account non-trade concerns, including food security and the need to protect the environment, and provides special and differential treatment for developing countries, including an improvement in the opportunities and terms of access for agricultural products of particular export interest to these members.
  • The implementation period for the country-specific commitments is the six-year period commencing in 1995. However, developing countries have the flexibility to implement their reduction and other specific commitments over a period of up to 10 years.
  • Special Agricultural Safeguard (SSG) was provided to developing economies under which they can impose an additional duty in case of import surge (volume) or fall of import price below a specified reference price.
  • Uruguay Round created two categories of domestic support
    1. Support with no, or minimal, distortive effect on trade on the one hand (often referred to as “Green Box” measures). For example, government funded agricultural research or training.
    2. Trade-distorting support on the other hand (often referred to as “Amber Box” measures). For example, government buying-in at a guaranteed price (“market price support”) falls into the Amber Box.
      • Green Box: These measures are exempt from reduction commitments and, indeed, can even be increased without any financial limitation under the WTO. The Green Box applies to both developed and developing country members but in the case of developing countries special treatment is provided in respect of governmental stockholding programmes for food security purposes and subsidized food prices for urban and rural poor. But, they must not involve transfers from consumers and must not have the effect of providing price support to producers (India’s PDS does not come under Green Box). Following programs come under Green Box:
        • Government service programs such as Research Programs, Pest and Disease Control, training, infrastructure etc.
        • Direct Payment to producers but it must not influence type or volume of production, also called Decoupled Payments.
      • Blue Box: These are basically Amber Box subsidies but they tend to limit the production. . Any support that would normally be in the amber box, is placed in the blue box if the support also requires farmers to limit their production. These measures are also exempt from reduction commitments. It includes direct payments under production limiting programs, made on fixed areas and yield or a fixed number of livestock. Such payments also fit into this category if they are made on 85 per cent or less of production in a defined base period. While the Green Box covers decoupled payments, in the case of the Blue Box measures, production is still required in order to receive the payments, but the actual payments do not relate directly to the current quantity of that production.

 

 

 

 

 

B. Doha Round

Doha round or Doha Development Agenda is the trade negotiation round of WTO which started in 2001. For agricultural negotiations, Bali Ministerial Conference (2013) and Nairobi Ministerial Conference (2015) has been important.

  1. 2013 Bali Ministerial Conference:
    • An agreement to negotiate a permanent solution to Public Stockholding for food security purposes and to refrain from challenging breaches of domestic support commitments resulting from developing countries’ public stockholding programmes for food security provided certain conditions are met.
    • A declaration to reduce all forms of export subsidies and to enhance transparency and monitoring.
    • A temporary peace clause was added in Bali. It stated that no country would be legally barred from food security programmes even if the subsidy breached the limits specified in the WTO agreement on agriculture. This clause will remain in force for four years until 2017, by which time the members will find a permanent solution to the problem. However, the permanent solution is still elusive after the 11th Ministerial Conference.
  2. 2015 Nairobi Package:
    • WTO members adopted a historic decision to eliminate agricultural export subsidies. Developed countries to eliminate immediately, except for a handful of agriculture products, while developing countries to end it by 2018. This step has been taken to fulfill the key target of Sustainable Development Goal on Zero Hunger by 2030.
    • WTO members agreed to engage constructively in finding a permanent solution to developing countries’ use of public stockholding programmes for food security purposes.
    • Ministers also agreed to continue negotiations on a special safeguard mechanism (SSM) that would allow developing countries to temporarily raise tariffs on agriculture products in cases of import surges or price falls.

 

INDIAN AGRICULTURE SUBSIDIES AND WTO

India had signed Agreement on Agriculture of WTO expecting that it would:

  • Reduce the domestic support given by OECD countries to their respective agricultural sectors
  • increase the prices of agricultural products in international markets
  • Improve export prospects for India.

But, to its surprise, the agricultural prices went down, putting agricultural countries like India at disadvantage.

The agreement is heavily loaded in favour of developed countries due to following reasons:

  • Developed countries have put their agricultural subsidies under Green Box. Highest green box support to agriculture is provided by USA which spends more than third of its GDP from agriculture on this support, while India provides support of only 2.34% of its GDP from agriculture in 1995. Investment in agriculture has been between 8% to 12% of agri-GDP.
  • The developed countries are not ready to admit that there exists variation in capacity and structural composition of the economies of developed and developing countries. A developed country might need only 1-2% of its GDP to subsidise 50% of its agriculture. Hence, distortions arising out of Green Box subsidies are significant but are inadequately addressed.
  • Developed countries were required to reduce their volume of subsidised export by 21% and budgetary allocation for export subsidies by 36%. But, it favoured the developed countries only, as they were already providing such huge subsidies over their exports that even this much reduction are not likely to make any impact.
  • Post Uruguay (1994-98), the export of agricultural products from Asia actually declined steeply to 0.5% from 8.2% in 1990-94. For India, the share in 1990-91 was 18.5%, it fell to 2% in 2015-16. Also, because of the high subsidies given by developed countries, the agricultural products sell below the cost of production in international market, and also results in export dumping of products.
  • The developed countries also make use of Agreement on Sanitary and Phytosanitary Measure (SPS) and Agreement on Technical Barriers to Trade (TBT) to selectively ward off imports from developing countries by imposing higher standards than those imposed by international bodies.
    • Agreement on Sanitary and Phytosanitary (SPS) Measures: 1995, Uruguay Round.It sets out the basic rules for food safety and animal and plant health standards. It allows countries to set their own standards. But it also says regulations must be based on science. They should be applied only to the extent necessary to protect human, animal or plant life or health. And they should not arbitrarily or unjustifiably discriminate between countries where identical or similar conditions prevail.
    • Agreement on Technical Barriers to Trade: 1995, Uruguay Round. It aims to ensure that technical regulations, standards, and conformity assessment procedures are non-discriminatory and do not create unnecessary obstacles to trade. At the same time, it recognises WTO members’ right to implement measures to achieve legitimate policy objectives, such as the protection of human health and safety, or protection of the environment. The TBT Agreement strongly encourages members to base their measures on international standards as a means to facilitate trade. Through its transparency provisions, it also aims to create a predictable trading environment.

 

VIDEOS AND DEBATES TO WATCH FOR

Dispute Over Subsidies

 

 

Standoff at WTO Talks

 

 

 

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