WTO Agreement on Agriculture India

Keywords: agreement on agriculture india, agriculture agreement

Abstract:

The possible welfare gains and likely beneficiaries for the facilitation of agricultural world trade formulated by the Agreement on Agriculture remains a matter of debate and concerns. Therefore the impact of the Agreement on Agriculture on production, price structure and trade in agricultural sector needs proper introspection and evaluation from Indian perspectives. The paper attempts to evaluate and analysed the impact of the agricultural reforms brought about by the Agreement on Agriculture on the Indian agricultural economy and its position in world trade.

What is Agreement on Agriculture (AOA):

The Agreement on Agriculture was formed on April 1994 at Marrakesh, Morocco as a part of the final Act of the Uruguay Round of multilateral trade negotiations which came into force on 1st Jan. 1995. This was a result of the long drawn talks on General agreement on Tariffs and Trade (GATT) aimed at opening up of International markets and also to reform world trade which was highly distorted. A major reason for the formation of the Agreement on Agriculture was the need to reduce excessive surplus production in agricultural sector in the global commodity markets during the 1980`s and early 1990`s. This was caused by the rising levels of support and protection in a number of developed countries as some of the largest agricultural exporters competed on the basis of their government`s ability to subsidised production and exports of agriculture while limiting access to their markets to keep out foreign agricultural products from their domestic markets. Therefore the core objective of AOA was to establish a fair and market oriented trading system which was to be implemented for a period of 6 years in developed countries and 9 years in developing countries. With this, agriculture was brought under the new rules of world trading system for the first time. There are 3 main features of the Agreement:

1. Market Access
2. Domestic support.
3. Export subsidy.

The market access required that tariffs for agricultural product fixed by individual countries be reduce to equivalent tariff in order to allow free trade and encourage liberalisation in world trade. Under this, the AOA required the conversion of all non tariff barriers into tariff barriers. This process was known as Tariffication. This was to be implemented for a period of 6 years for the developed countries and 10 years for the developing countries, least developed countries were exempted from undertaking such reductions.

Domestic support was targeted to reduce the subsidies given by governments within their country for agricultural production and related activities. The total domestic support should be below the level of de minimis within a maximum period of 3 years for developed countries and 5 years for developing countries. This was to reduce price distortion and unfair competition in agricultural world trade.

Export subsidy aims to reduce subsidies of export related to agricultural products and to ban the introduction of new subsidies. This aimed to protect small and marginal farmers in home countries especially in developing countries.

Another highlight of the Agreement was the provision of special and differential treatment for the protection of the interest of the developing countries. In addition, there are provisions of Special Products and Sensitive Products, which are to be exempted from stringent discipline of the above provisions of tariffication process. Provision of Special Products designates a certain number of products of the developing countries that would be exempt from tariff reduction requirements and other disciplines in order to protect and promote food production, livelihood security and rural development worldwide. The idea was to protect the developing countries and least developed countries from unfair competition in world market and to create a world trading system where each individual country can come together and trade on equal footing without any discrimination and distortion by the more advantageous countries of the world.

However, the possible welfare gains and likely beneficiaries for the facilitation of agricultural world trade formulated by the Agreement remains a matter of debate and concerns. Therefore the impact of the AOA on production, price structure and trade needs proper introspection and evaluation from Indian perspectives. The structure of the Agreement on Agriculture as it exists today seems to be slightly imbalanced, since it enables countries subsidising the agriculture sector heavily to retain a substantial portion of their subsidies up to the end of the implementation period while those countries which were not using these measures earlier are prohibited to use these measures in future beyond the de-minimis [1] limit. Therefore, ways to bring about more equity into the structure of the Agreement has to be sought.

Indian Agricultural Economic scenario:

Until the liberalisation of 1991, India was largely and intentionally isolated from the world markets, to protect its economy and to achieve self reliance. India`s foreign trade was subjected to import tariffs, export taxes and quantitative restrictions. So far it had followed an inward looking economic policy until the attempts to liberalise its economy. The Green revolution which was introduced in 1990`s further brought about reforms in agricultural sector and increase its production. This in a way opened the gate for participation in the world economy through the production of excess agricultural goods. Thus, India`s economy shifted from subsistence economy to production for exports in the world market. At present, Indian agriculture contributes to 24% of GDP, however agriculture exports accounts for less than 1% of world trade in agricultural commodities while a major share of the world`s exports are supplied by developed countries which accounts for around 64%.

Impact of AOA on India:

Indian agriculture is characterised by an overwhelming majority of small and marginal farmers holding less than two hectares of land, less than 35.7% of the land, is under any assured irrigation system. Farmers, therefore, require support in terms of development of infrastructure as well as extension of improved technologies and provisions of requisite inputs at reasonable cost. There is no doubt that during the last 30 years, Indian agriculture has grown at a reasonable pace, but with stagnant and declining net cropped area it is indeed going to be a difficult task to maintain the growth in agricultural production. The implications of the Agreement would thus have to be examined in the light of the food demand and supply situation. The size of the country, the level of overall development, balance of payments position, realistic future outlook for agricultural development, structure of land holdings etc. are the other relevant factors that would have a bearing on India’s trade policy in agriculture. Implications of the Agreement on Agriculture for India should thus be evaluated from the impact it will have on the following:

i) Whether the Agreement has opened up markets and facilitated exports of products; and

ii) Whether India would be able to continue with its domestic policy aimed at improving infrastructure and provision of inputs at subsidised prices for achieving increased agricultural production [2] .

With India being under balance of payments, it has not undertaken any commitments under the Uruguay Round Agreement on Agriculture (AOA) which constrain it from following its developmental policy with regard to agriculture or which entail any action immediately. The only commitment India has undertaken is to bind its tariffs on primary agricultural products at 100%; processed foods at 150%; and edible oils at 300% [3] . However, it is needed to study the implications of removal of quantitative restrictions on market access, subsidy to farmers and tariffs on imports. One of the major impacts of the Agreement was that India has been maintaining Quantitative restrictions (QRs) on certain agricultural import products. Under the provision of the market access, such QRs will have to be eliminated latest by April 1st 2001. Immediate outcome was increased import of cheap and highly subsidized agricultural products which resulted in decline of domestic agricultural prices in India since 1999-2000. This adversely affected small and marginal farmers who resorted to selling off their agricultural lands to corporate and MNC`s at a very nominal prices. This further distorts domestic agriculture and rural structure of the economy that are mostly dependent on agriculture for survival. For example in Andhra Pradesh farmers were then hit by a crash in international prices, low rates of tariff applied on imports of commodities like edible oils, sugar, etc. and the removal of quantitative restrictions. Therefore a separate WTO cell was set up as these states felt that the central government were not doing enough to protect the interest of such states from the adverse impact of the Agreement. It aims to adapt state government policies to changing events and to influence future government negotiating positions. This clearly suggests that the AOA was more beneficial for the developed countries as it furthers opened up new market opportunities for them to exploit with their cheap agricultural products.

However, It is also argued that with the opening up of world markets under the provision of Market access and the lifting of QRs on imports of certain agricultural products, prospects on exports have increased which lead to an increase in price of domestic agricultural commodities, this would mean that farmers would get benefits which in turn would encourage investment in the resource scarce agricultural sector. Also, with the decrease in production subsidies as well as export subsidies, the international prices of agricultural commodities will rise and this will help in making India`s exports more competitive in world market. Given the agro diversity of India, it has the potential to increase agro exports in a big way.

A.V Ganesan [4] , suggested the idea of using the price incentive as a driving force to increase productivity as farmers are introduced to world markets there will be growing pressure from the farmers to gain higher prices for their produce and to narrow the gap between the domestic and external prices. Both the pattern of production and price expectations will increasingly be influenced by the demands and trends in world markets. Therefore, the price incentive could be used to give a strong boost to investment in agriculture as well as adoption of modern technologies and thereby to the raising of agricultural production and productivity. Furthermore, freedom to export agricultural products without restrictions will also need shedding the long-nurtured inhibition against their imports. Thus the Agreement on Agriculture is believed to provide a link between domestic reforms and international reforms by providing constraints that channel domestic policy change in the right direction.

India had a history of food price inflation which makes it difficult to export agriculture processed products. The food price inflation was at the level of 11% during 1991-98, though the level has come down to 4.5% during 1998-2006 [5] . Therefore, if increase in cheap imports further reduces the food price, it will not improve the condition of the farmers but instead their condition will deteriorate unless substantial gains are made through food based manufacturing export-enhancing strategies. However, with agriculture subsidies and export promotions, developed countries still continue to dominate the world agriculture market. More than 67 per cent of world food exports during 2001-03 originated from the high-income countries, while countries such as India where more than 65 per cent people survive on agriculture, contributed only 1.1 per cent of food exports. For example, In India, the dairy sector has been hit hard by subsidized exports from the EU. In 1999-2000 India imported over 130,000 tonnes of EU skim milk powder. This was the result of EUR 5 million export subsidies that were provided to EU producers. EU subsidies to butter exports are also extortionately high. Consequently, butter oil import into India has grown at an average rate of 7.7% annually. This has had a dampening effect on prices of ghee in the domestic market. Ironically, India is the biggest producer of milk in the world. What is more worrying for India is that there are now signs of declining productivity growth for many agricultural products in India which will have severe implications for the majority of the population [6] .

To ensure the welfare of our farmers from the affect of the lifting of Quantitative Restrictions, high import tariffs of commodities has to be maintained. The Agreement does not in any way constrained the ability to restrict the import of commodities since India has already reserved the right to impose high levels of import duties of 100%, 150% and 300% on primary products, processed products and edible oils respectively. Also due to India`s balance of payments (BOP) reasons certain products are allowed to remain under the QR`s category. With appropriate tariffication process, the adverse impact of such QRs can be rectified. In earlier years, a number of agricultural and horticultural products placed on the free list of imports have been brought to the peak rate to ensure adequate protection to Indian farmers.

India has a negative total aggregate measure [7] (below 10%) of domestic support which implies that there is no compulsion to reduce tariff. India is under no obligation to reduce its domestic support. Also, India does not provide any export subsidies which requires reduction commitments under the export subsidy commitment. The Agreement on Agriculture lists several types of subsidies to which reduction commitments apply. However, such subsidies are virtually non-existent in India as exporters of agricultural commodities do not get direct subsidy. The Agreement allows unlimited support to activities such as (i) research, pest diseases control, training, extension, and advisory services; (ii) public stock holding for food security purposes; (iii) domestic food aid; and (iv) income insurance and food needs, relief from natural disasters and payments under the environmental assistance programmes. Moreover, investment subsidies given for development of agricultural infrastructure or any kind of support given to low income and resource poor farmers are exempt from any commitments. Most of our major rural and agricultural development programmes are covered under these provisions. Therefore, the Agreement does not constrain our policies of investments in these areas.

It is expected that reduction in domestic support and export subsidy by the developed countries will lead to a decrease in production in their countries and will eventually give scope for expansion of exports from the developing countries which will create a balanced export and import situation in the world trading system. India, with its cheap labor, diverse agro-climatic conditions and large agricultural sector can definitely gain through expansion of international trade in agricultural product. India`s agricultural exports have been growing since 1995and at present it is a net food exporter constituting greater share for exports in agriculture than manufactured exports. Therefore, India is likely to gain if the EU, the US, Japan and other major agriculture subsidisers significantly reduce their farm subsidies. For example, United States spent US$ 4 billion as subsidy to support its 25,000 cotton producers (US$160, 000 per producer) in 2003. It is also argued that in countries such as United States, subsidies are enjoyed by a selected few; mostly producing corn, wheat, cotton, soybean, and rice, while growers of 400 other crops hardly get any such subsidy. It would benefit India if other countries decrease tariffs to its farm exports on products such as cotton, basmati rice, fish or meat etc. However, the share of Indian exports in agriculture is sliding down as compared to manufacturing. These labour-intensive exports are expected to grow much faster and potential areas include textiles and food processing translating into benefits across a large group of farmers and contributing to stabilising their incomes. India has demonstrated comparative advantage in almost all the products it exports, and even in those products it imports. Therefore, India enjoys a large range of products where it could successfully enhance its capacity to export.

The rural-urban divide is increasing steadily in India but India cannot resort to other balancing measures such as subsidy like the developed countries are doing. This is due to large population of India as majority of the population is dependent upon agriculture for livelihood. Therefore the solution for solving the rural-urban divide lies in large scale employment generation through industrialization and expansion of agriculture processing and exports.

In the short term the Agreement on Agriculture may not affect India much because both its domestic support and export subsidy are negative I,e less than the minimal 10% in product specific domestic support. Moreover, the safeguards provided in the Agreement for the developing countries protect India from any major impact of liberalization of the world trade. However, in the long term, due to advantage of cheap labor that India enjoys, the cost of production are lower than any other countries, therefore in spite of its lower productivity as compared to the developed countries, the prices for agricultural product eg.as in the case of rice, tea, sunflower oil and cotton, will still remain lower than the world price. As a result, import to Indian markets will not be attractive as the domestic market prices in such products remain lower than the international standard. Hence, the impact of large scale imports due to liberalization of the world economy will not be much.

Doha Ministerial conference and the deadlock:

The Uruguay Round of AOA had a built in provision for review and renewal of its policy to consider not just increased trade but also such objectives as food security, diversified rural development and the reduction of inequalities between developed countries and developing countries and the least developed countries. In general, to assess in-depth the effects of the URAA on trade, on agricultural policy and on protection levels. This was to be decided at the next round of multilateral talk to be held at the fourth WTO ministerial conference in Doha, Nov. 2001 which was targeted to be completed by Jan. 2005. India`s stand at the conference included Non trade concerns which include food security and environmental protection. India is particularly concern with food security which includes not only adequate supply of food but also stability in its supply. India was of the stand that no profound change has been made in subsidy position of the developed countries even after the agreement.

When the AoA was introduced in Uruguay there were so many expectations however the results failed to reach the expectations of many countries. In the Doha round, the concerns of the developing countries and the developed countries differed. The developing countries wanted to focus only on the implementation (or non implementations) and review of the Uruguay agreement. Developed countries’ perspective, however, was for new issues ( eg :Singapore issues), viz, investment, competition, trade facilitation and transparency in government procurement, besides environment and internationally recognised core labour standards.

The Doha round clearly shows that India`s interest in the negotiation remain at variance from the interest of the least developed countries as India has a much more favourable agricultural condition than any of these countries. Many of these countries are net importers of food and the subsidy in the exporting countries makes them better off. Moreover, under the Everything But Arms (EBA) initiative of the European Union, the LDCs have quota – and duty-free access to the EU market, a facility that was never available to India. Also, India depends highly on its service sector industry; therefore, the situation has become highly tense for India, particularly in view of the fact that the developed countries have managed to link agriculture subsidy with the market access in services and industry. If the European Union needs to do more on agricultural tariffs, and the US needs to do more on reducing agricultural subsidies, then India also needed to do more on industrial tariffs. This is a tricky situation for India.

The Doha Development Round of trade talks was targeted to be concluded by January 2005. However, the progress thereafter has hardly been in the positive direction. There was a deadlock of Doha Ministerial conference and it was left for further work and resulting negotiations. The reason for the failure of the negotiations mostly falls on the role of the United States, which departed from Cairns group and joined EU, the later having too ambitious agenda on including investment and competition. Countries like Australia, New Zealand and Canada (of Cairns Group) favour a totally market oriented approach and oppose trade distorting subsidies and protectionist regimes of EU and Japan. While EU remained against fast track approached to liberalization. Developing countries like India, Pakistan, Sri Lanka, ASEAN etc highlight significance of role of agriculture in their economies and seek to preserve domestic policy flexibility to guard food security concerns.

Overall assessment:

In India, more than half of the population is still dependent upon agriculture for subsistence even after governments continued attempt to bring about increase in industrialization and technological advancement. Therefore, agriculture remain a core importance for the sustenance of the population and also constitute a major share in the country’s economy. Agricultural self reliance forms a vital underpinning for the growth of the GDP of any agrarian developing economies since good agricultural production provides purchasing power to a large majority of a population, which in turn spurts industrial growth. Self-sufficiency in food production has, therefore, specific developmental perspective as opposed to a purely commercial perspective. Hence, it is important that the developing countries like India need to be provided with the requisite flexibility within the AOA to pursue their legitimate non-trade concerns of food security. More specifically, developing countries need to be allowed to provide domestic support in the agricultural sector to meet the challenges of food security and to be able to maintain the need of rural employment.

Investment in Indian agriculture has been declining for quite some years. In the context of international trade, there is an added urgency to reverse this trend and increase investment in research, integrated market development, storage and ware-housing facilities, road development, creation of facilities for efficient and quicker transport and development of scientific systems of standard setting and grading. Public expenditure on research and technology, infrastructure creation and rural development will raise India’s AMS. More importantly, up-to-date information on domestic and international prices and demand should be made available to farmers through various awareness programmes and training. India also need to raise the quality of agricultural products to internationally accepted standards, i e, those of the Codex Alimentarius Commission (for food additives, veterinary drug and pesticide residues, contaminants, methods of analysis and sampling, and codes and guidelines of hygienic practice).

The AOA is criticised on being insensitive to human development or improving standards of living, and being too insistent on liberalization. The model of agricultural trade liberalization promoted by the AOA also encourages industrialized and export-oriented agricultural production, favouring trans national commodity traders and processors over small-scale farmers thus in spite of all the provisions provided under the Agreement, it is further attacked on not taking into consideration the problems faced by the small and marginal farmers. The success of the agreement to a certain extent also depends on how far the developed countries are willing and committed to the cause of helping the developing countries for development through a process of fair and unrestricted trade in agriculture. It is also argued that the agreement did little to liberalised trade and to improve market access and reduce protection as protection in many countries remain very high and allowable export subsidies still threaten the stability of world markets.

Conclusion:

Global agricultural policies affect many economies in a similar way. Developing countries may be more vulnerable to distortions and changes in global trading policies in the agricultural sector, but they also determine the implications of agricultural trade liberalisation in some countries. Vulnerability of countries arising from global policies and trade liberalisation agenda maybe inherent to their economy such as; Strong dependence on agriculture for income, employment and foreign exchange earnings, heavy dependence on food imports and food aid and relatively high degree of sector openness. These conditions may render a country’s economies vulnerable to trends and instability levels of world agricultural prices, long term changes with respect to access barriers to exports markets and global policies affecting the competitiveness of imports in domestic markets. With liberalisation of agricultural sector much priority is been given for increasing international trade which is no substitute for inducing a domestically oriented agricultural growth. Indeed most food is produced for local consumption in developing countries and only a small proportion is traded internationally, which means that a solely trade-oriented approach has little relevance for many developing countries. Therefore agricultural reforms in International trading system like the AOA may not have much impact on a country’s economic growth particularly the developing countries if the reforms are implemented without proper analysis of own country’s economic strategic position. Since agriculture constitute the major share of many developing economies, the implementation of such reforms and also the participation in world trade without proper precautionary measures may result in crisis which such developing countries may not afford. Therefore, it is necessary to build up a strong domestic market scenario which is in line with external prices, with appropriate policies to ensure the protection of their economies from the unnecessary and unfair competition in world markets. However, if such reforms are disciplined in its implementation and also each country is serious enough to make such commitments for the welfare of the world trading system, it might lead to a balanced and equal world markets. This would in a way solve the problems of poverty, inequalities and lead to increased productivity and improve the standard of living of the world population.