India stands up to the WTO on agricultural subsidies

India often gets scolded at the World Trade Organization (WTO) for its agricultural subsidies. But last week, India put its foot down. We told the WTO that we wouldn’t discuss any new agricultural agenda unless this subsidy matter is resolved. So in today’s Finshots, we explain what’s really going on.

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The Story

First, we need some context.

After independence in 1947, India was looking at a dire future. We didn’t have enough food to feed our population. We had to rely on imports and this required a lot of dollars. Or we had to wait for aid from bigger countries. It wasn’t a pretty sight. So in the 1960s, the government finally decided that we needed to become self-sufficient. We embarked on a massive agricultural revamp — we brought in higher-yielding varieties of seeds, began extensive use of fertilisers, and improved our machinery.

We also did something else to incentivise farmers to sow paddy and wheat — we offered them a minimum support price (MSP). Basically, it was a government guarantee to buy the crops just in case they couldn’t find a better price elsewhere in the market. After all, growing these crops was labour-intensive and wasn’t lucrative either. So it made sense to offer a safety net to incentivise production.

Slowly, we became self-sufficient.

Of course, it didn’t end there. The Green Revolution was so successful in a couple of decades that we could even begin to export our produce. And one fine day India became the largest rice exporter in the world.

But all this progress wasn’t making other countries happy. They felt that India was resorting to unfair trade practices. That the Indian government was buying crops at an artificially low price, and then exporting the same crops at low prices into the world markets. So the demand for Indian rice and stuff kept going higher. As a consequence of this, they said that it hurt the prospects of farmers from other regions who couldn’t afford to sell their crops this cheaply.

So they went to the WTO and complained that India was flouting trade rules.

But what are these rules, you ask?

Well, the thing is that the WTO allows governments to dole out subsidies to farmers. It’s just that there’s a limit. For instance, for a developed country, the subsidy should be below 5% of the value of the crop’s production. And there’s a little more leeway for developing countries like India — we can offer 10%.

But how can we calculate this?

Okay, here's a simplistic way to think about this. Imagine that the Indian government offers ₹2,000 for one quintal (100 kilos) of wheat. Think of this as the ‘intervention price’ or the MSP. The WTO will first compare how much this price exceeds the average price of wheat in international markets during 1986–88. Don’t ask why that’s chosen as a reference point but the WTO says it’s because prices were stable back then. Anyway, let’s say that the average price for one quintal of wheat was ₹1,000 back then. Next, the WTO will look at the total production of wheat in the country. Say it was 20 quintals of wheat. That means the total value of wheat is now calculated at ₹40,000 (20 x ₹2,000).

Technically, the subsidy can be worth only 10% of this value i.e. ₹4,000. It’s called the ‘de minimis’ level. And in effect, the government can buy just 2 quintals of wheat if they want to stick to the WTO rules.

Now remember, there's a lot more to these subsidy calculations but let's leave it at this for now.

However, the complaint from developed countries is that India has overstepped this mark multiple times in the past. They claim we’ve even offered subsidies worth 60–70% of the total value. And we’ve vehemently denied this showing our own set of calculations. In other cases, we’ve invoked something called the ‘peace clause’ which is a legal way out and offers temporary immunity against complaints by other WTO members. We can say that we are left with no option but to provide higher subsidies to protect our food security. That we have to stockpile these grains to meet the needs of our people. And that we don’t export these subsidised grains. In fact, we’ve shown data to prove that it's the government and not private companies that buy these crops at subsidised prices.

But here’s the thing. India has been answering these questions at the WTO for decades now. We’re tired of this charade. And we’ve decided to put our foot down till this problem is resolved. To achieve our goals, we’re trying to drum up support from other countries who’re in a similar position too. Together, India wants to change the rules.

And one of the simplest requests is to change the reference point from 1986 to something more recent. Maybe the WTO should change the price and make it an average of the past 5 years. Or otherwise, we should simply consider the excess inflation over the years and adjust the price accordingly. It’s simple really.

So yeah, we don’t know how it’ll all turn out. It does seem like India has the support of a few other countries to make its case. And now we’ll just have to see if the big WTO members finally agree to this reasonable demand.

We certainly hope so.

Until then…

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