Eventually, direct income support is the way to go
Given how there has been little or no progress in the 12 years since the Doha Development Round of negotiations was launched and that developed nations have done little to uphold their side of the bargain when it comes to eliminating all forms of export subsidies or open up markets, not much is expected to come from the Bali ministerial next month. Yet, on the eve of India’s ministerial delegation preparing for the meet, the news on what is called the ‘peace clause’ is not good. Broadly, under the agreed rules, countries were supposed to cap their agriculture subsidies to 10% of agriculture output—so, now that India has notified the Food Security Act, the danger is that India could breach this and could, therefore, be open to action under WTO rules. Developing countries have pointed to several flaws in the 10% agreement, not the least is the fact that the subsidy is fixed at 1986-88 prices which are totally outdated today—were inflation to be applied, developing countries argue, their subsidies will all fall within the specified norm. While there is no certainty over what will finally transpire at Bali, the ‘peace clause’ was about giving developing countries a period in which no action can be taken against them—developing countries want a 10-year period, developed countries are willing to concede two.
The danger is that, were even a period of 10 years to be accepted, India could still be unprepared once this period runs out and that is why it needs to start re-looking its policy now. One of the reasons why there has been no attempt to update the 1986-88 prices in the WTO agreement is that, by and large, the developed world has moved away from product-specific subsidies to income-support ones—the beauty of this is that it allows developed countries to retain their subsidies while forcing developing countries to cap theirs. Now that the government is moving on Aadhaar-based transfers, the attempt should be to, within a year or two, migrate farmers to direct income transfers unrelated to the crops they are growing. Over even the short-term, this is where India wants to go since the current MSP-based policies really encourage farmers to grow just certain types of crops, largely wheat and rice, while the need of the day is to move farmers to crops that are less water-intensive and are more in demand. Direct cash transfers, instead of subsidised food, to consumers will also eliminate the 40-50% leakages in the PDS system. The 10% subsidy rule, ironically, will help drive India in the direction it eventually needs to go. Pity the political class doesn’t see it that way.