ContentsWhat is subsidy?2Objective of subsidies2Forms of
subsidies2Need of subsidy: (1)2Agriculture subsidy:3What is
Agricultural Subsidy?3Types4Problems with Agri Subsidy4Agriculture
in WTO5Need of including agriculture in trade
negotiation:5Agreement on Agriculture7The boxes7Salient Features of
AoA8Very important terms related to this topic10Aggregate
Measurement of Support (AMS).10PEACE CLAUSE11G-3312Current
scenario12Important links to refer:13References:13
What is subsidy? Subsidy literally means assisting from behind.
Subsidy is the opposite of tax it is an instrument of fiscal
policies Objective of subsidiesBy means of creating a wedge between
consumer prices and producer costs, lead to changes in demand/
supply decisions Forms of subsidies cash payment to
producers/consumers --> visible form Invisible formsreduced
tax-liability low interest government loans government equity
participation.P.S: If the government procures goods, such as food
grains, at higher than market prices or if it sells as lower than
market prices, subsidies are implied.
Need of subsidy: (1)a) Inducing higher consumption/ productionb)
Offsetting market imperfections (it is a situation where free
markets fail to allocate resources efficiently)c) Achievement of
social policy objectives including redistribution of income,
population control, etc.d) can help in controlling the prices to
maintain stability.e) Especially in case of agriculture where food
is basic right of all, one cannot leave everything to market,
government intervention is needed.Agriculture subsidy: First some
background--Indian Government role in agriculture sector
development. To create self-sufficiency employment creation support
to small-scale producers for adopting modern technologies and
inputs reduction of price instability and improvement of the income
of farm households. This can be done in forms such as :
import-export policies domestic policies like price support
programs Most commondirect payments input subsidies to influence
the cost and availability of farm inputs (like credit, fertilizers,
seeds, irrigation water, etc. )Input subsidies benefit
economically, environmentally and socially Inputs like fertilizers,
irrigation water and electricity have a significant share in
agricultural subsidiesWhat is Agricultural Subsidy?"An agricultural
subsidy is a governmental financial support paid to farmers and
agribusinesses to supplement their income, manage the supply of
agricultural commodities, and influence the cost and supply of such
commodities.
Types Two major types of subsidies fertilizer subsidies food
subsidyThese two account for almost 90 percent of agricultural
subsidy. one more form which is intangible and uncountable is that,
agricultural income is not taxed in India. The agriculture
subsidies are distributed by every country but the amount varies.
In India, the subsidies provided are very low compared to other
countries while number of dependents is very large. Thus,
agriculture subsidy for our poor farmers is one important tool to
help our agriculture sector growProblems with Agri Subsidya) Agri
subsidies intended to raise farmer incomes by remedying low crop
prices instead they promote over production and therefore lower
crop prices b) Agri subsidies promote over production of one crop
thus other crops are not/less available in the market c)
Distinguishing between the needy and a non needy is difficult . For
eg- In US 90% of farm subsidy goes to largest 25 percent of farms.
In European Union, Japan and Canada this figure is 70 percent. d)
Many economists (including Joseph Stiglitz) have argued in long
term the agri-subsidies will affect raising global food prices
therefore harming the poor, increasing malnutrition, etc. e) Also
subsidies hamper terms of trade and so doesnt allows one country to
take benefits of comparative advantage. f) Due to extensive
government participation, subsidies may create inefficiencies g)
There are issues like the straining effects of agricultural
subsidies on the sub-optimal use of scarce inputs like water and
power induced by subsidies, and whether subsidies lead to systemic
inefficienciesAgriculture in WTOBefore the Uruguay Round,
agriculture was not included as a substantial part Need of
including agriculture in trade negotiation:
Massive domestic subsidies given by industrialized countries
Leads to
excessive production and its dumping in international markets +
import restrictions to keep out foreign agricultural products from
their domestic markets.
Leads to
distortion of international trade in agricultureTherefore, for a
fair agricultural trade regime following is necessary reduction of
domestic production subsidies given by developed countries (US and
EU particularly) reduction in the volume of subsidized exports and
minimum market access opportunities for agricultural producers
world-wide. Following table shows important milestones for
agricuture in WTOPeriodRoundAgreementsImportant aspects
198694(was supposed to be for 4 years)Uruguay Round
Agreement on Agriculture aimed towards fairer competition and a
less distorted sector WTO member governments agreed to improve
market access and reduce trade-distorting subsidies in agriculture
these commitments were phased in over a six years from 1995 (10
years for developing countries) TheAgriculture Committee oversees
the agreements implementation
2001-till present(was supposed to be for 3 years)Doha
Development Round
was planned to finish in January 2005 but prolonged US wanted to
restrict a new round to market access issues esp. agriculture
member governments committed themselves to comprehensive
negotiations aimed at: market access: substantial reductions
exports subsidies: reductions of, with a view to phasing out, all
forms of these domestic support: substantial reductions for
supports that distort trade
We must know about the AoA (Agreement on Agriculture) as it is
in news currently:Agreement on Agriculture Final Act of the Uruguay
Round of Multilateral Trade Negotiations, signed in April 1994 at
Marrakesh, Morocco came into force on 1st January, 1995 All WTO
members, except least developed countries (LDCs), were required to
make commitments in all these areas in order to liberalize
agricultural trade Three pillars of AoA: market access, export
subsidy and domestic support.
Before proceeding to the features of AoA- we need to know the
boxes mentioned on WTO's site as it is related to the agreement
hereThe boxesIn WTO, general subsidies are identified by boxes with
different colours: green (permitted subsidies) amber (slow down
i.e. subsidies to be reduced), red (forbidden subsidies) The
Agriculture Agreement has no red box (although domestic support
exceeding the reduction commitment levels in the amber box is
prohibited)Thus, AoA has the following boxes: Amber (de-minimis)
Green Blue (for subsidies that are tied to programs that limit
production) S&D (exemptions for developing countries)Salient
Features of AoA
Market AccessTariffication of all non-tariff barriers non-tariff
barriers ( quantitative restrictions and export and import
licensing etc) to be replaced by tariffs to provide the same level
of protection. Developing countries given a limited element of
special and differential treatment (S&DT).
Setting up of a minimum level for imports of agricultural
products Minimum level will be as a share of domestic consumption.
Countries required to maintain 1986-88 levels of access for each
individual product. The market access provision, however, does not
apply when the commodity in question is a traditional staple of a
developing country.
Domestic support identifies acceptable measures that support
farmers denies unacceptable, trade distorting support to the
farmers this is done through AMS ( described later) Commitment made
required a 20% reduction in total AMS for developed countries over
6 years. For developing countries, this percentage is 13% and no
reduction is required for the LDC
Export subsidies:. several types of subsidies to which reduction
commitments apply eg- direct export subsidies dependent on export
performance; sales of noncommercial stocks of agricultural products
for export at prices lower than comparable prices for such goods in
thedomestic markets; producer-financed subsidies; cost-reduction
measurse such as subsidies to reduce marketing costs for exports
including handling costs and costs of international freight;
internal transport subsidies applying only to exports; subsidies on
incorporated products i.e., subsidies on agricultural products such
as wheat dependent on their incorporation in export products made
of wheat etc. such subsidies are virtually non-existent in India as
exporters of agricultural commodities do not get direct subsidy
(they might get it indirectly as in the form of income tax rebate
etc)
Very important terms related to this topicAggregate Measurement
of Support (AMS). All domestic support is quantified through the
mechanism of total Aggregate Measurement of Support (AMS) It is a
means of quantifying the aggregate value of domestic support or
subsidy given to each category of agricultural product. consists of
two parts Product-specific subsidy refers to the total level of
support provided for each individual agricultural commodity,
essentially signified by procurement price in India. Non-product
specific subsidy, on the other hand, refers to the total level of
support for the agricultural sector as a whole, i.e., subsidies on
inputs such as fertilisers, electricity, irrigation, seeds, credit
etc.There are three categories of support measures that are not
subject to reduction under the Agreement, and support within
specified de minimis level is allowed. 1. Measures which have a
minimum impact on trade i.e. Green Box criteria Ex: Government
assistance on general services like (i) research, pest and disease
control, training, extension, and advisory services; (ii) public
stock holding for food security purposes; (iii) domestic food aid;
and (iv) direct payment to producers like governmental financial
participation in income insurance and safety nets, relief from
natural disasters, and payments under environmental assistance
programmes.
2. Developing country measures otherwise subject to reduction
i.e. S&D Box criteria Examples(i) investment subsidies which
are generally available to agriculture in developing countries; and
(ii) agricultural input services generally available to low income
and resource poor producers in developing countries.3. Direct
payments under production limiting programme i.e. Blue Box criteria
These are relevant from the developed countries point of view only.
Also, under Amber box i.e. de-minimis provision - it is not
required to reduce support in this category if a product's value in
any year remains below 10% for developing countries of the total
value of production of the basic agricultural product in question
or of the value of total agricultural production in the case of
non-product specific support PEACE CLAUSE Article 13 (due
restraint) of the Agriculture Agreement protects countries using
subsidies which comply with the agreement from being challenged
under other WTO agreements Without this, countries would have
greater freedom to take action against each others subsidies, under
the Subsidies and Countervailing Measures Agreement The peace
clause expired at the end of 2003 but Some countries (read US/EU)
are pushing for extending it to 2014 so that they can enjoy some
degree of legal security, ensuring that they will not be challenged
so long as they comply with their commitments on export subsidies
and domestic support under the Agriculture Agreement Some others
want it to lapse as part of their overall objective to see
agriculture brought under general WTO disciplines that deal with
governments ability to take action against subsidies Some countries
have proposed variants. Eg: Canada would like to see green box
domestic supports freed from the possibility of countervailing
action under the Subsidies Agreement. India proposes something like
the peace clause should be retained but only for developing
countries, so that some subsidies are free from the possibility of
countervailing duty
G-33 Coalition of 47 developing countries focused on defending
their interests in subsistence agriculture, food security and rural
livelihood India - has had over 500% inflation since 1988 Thus,
India has made out a case for full inflation allowance which will
help the government procure grain from farmers (The Hindu) The
proposal of the G-33 countries is in line with Indias position but
the West will resist this change Clause 18.4 of the AoA does
mention that developing economies shall receive due allowance for
inflation in determining procurement prices US and EU say that the
AoA does not commit full allowance for inflation and thus, peace
clause must be accepted for the next 3 years Current scenario India
is willing to accept Peace clause since it has started the food
security program. If India doesn't do this then it will be on back
foot as due to NFS Act the procurement price of many grains will
shoot up very soon For example- in India, procurement price of rice
has shot up 24% from 1986-88- but only 10% was allowed (remember
de-minimis level) thus, if India doesn't allow peace clause it
would not be able to procure wheat and other grains for food
security act. But this move by US/EU is a Hippocratic one as US
itself provides a large amount of "trade distorting subsidies" but
blames India for doing it by launching the food security bill In
reality, food security bill is not under the radar but India's PDS
system will be. Thus, India needs to be careful while putting up
any of its point at the upcoming Bali meet in December It is still
unclear that all G-33 members will support peace clause or not
Important links to refer:What?Link
List of G-33
membershttp://www.wto.org/english/tratop_e/dda_e/negotiating_groups_maps_e.htm?group_selected=GRP017
Link to various
boxeshttp://www.wto.org/english/tratop_e/agric_e/agboxes_e.htm
Newsletter "India and WTO" published regularly by Ministry of
Commerce, a good read for international
tradehttp://commerce.nic.in/trade/international_trade.asp?id=1&trade=i
References: http://agricoop.nic.in/statistics/stock2.htm
http://www.theguardian.com/sustainable-business/agricultural-subsidies-reform-government-support
http://www.heritage.org/research/reports/2007/06/how-farm-subsidies-harm-taxpayers-consumers-and-farmers-too
http://www.indianexpress.com/news/subsidies-in-fact/1093243/
http://www.wto.org/english/docs_e/legal_e/14-ag_02_e.htm
http://www.ijssbt.org/volume1/pdf/11.pdf
http://www.wto.org/english/tratop_e/agric_e/negs_bkgrnd13_boxes_e.htm
WTO AGREEMENT ON AGRICULTURE - report by ACTION AID
www.irinnews.org/printreport.aspx?reportid=98972 The Use of Input
Subsidies in Developing Countries report by OECD
Personal details:Akanksha Tiwari
