For a WTO stand with PDS in hand

Deepankar Basu, Debarshi Das
September 4, 2014

India should continue with its stand at the WTO to demand a permanent solution to the issue of public stockholding for food security before the protocol on trade facilitation is signed. It should also resist efforts to dismantle the Public Distribution System

In December 2013, two important items among the many others adopted at the Ninth World Trade Organization (WTO) Ministerial Conference in Bali were the decisions respectively on the Agreement on Trade Facilitation (TF) and on Public Stockholding for Food Security Purposes. The former relates to the reduction of administrative barriers to trade — like dealing with custom barriers, documentation and transparency — while the latter concerns the procurement and storage of food grains by state agencies for the public distribution of food.

Recently, global attention was focussed on these two items as India argued that the adoption of the protocol on trade facilitation should be postponed till a permanent solution to public stockholding for food security had been worked out. Despite intense pressure from the developed countries, including the United States, India stuck to its stand even as the deadline for adopting the protocol on TF passed on July 31.

Even though the developing countries have generally backed measures to enhance food security, support for India’s stand was not easy to come by this time round. Only Cuba, Bolivia and Venezuela stood with India at the WTO. Later the U.N. International Fund for Agricultural Development came out in support of India’s position. Many countries have openly criticised this step as India’s intransigence. But is India’s stand unreasonable?

Hunger and under-nutrition

India faces serious problems of hunger and under-nutrition. According to National Sample Survey data, average calorie and protein intake have been steadily declining over the past few decades. In rural areas, the average calorie intake per person per day declined from 2,221 kcal in 1983 to 2,020 kcal in 2009-10. Over the same period, the average protein intake per person per day declined from 62 gm to 55 gm. One sees a similar pattern in urban India; the average calorie and protein intake declined from 2,089 kcal and 57 gm in 1983 respectively to 1,946 kcal and 53.5 gm in 2009-10. The vast majority of the population remains seriously undernourished.

If we look at more direct measures of malnutrition, this picture is equally grim. According to the latest National Family Health Survey (NFHS, 2005-06), about 40-45 per cent of children under the age of 3 years are underweight and stunted. Close to 80 per cent of children aged between 6-35 months and 58 per cent of pregnant women aged between 15-49 years are anaemic. About 33 per cent of women and 28 per cent of men aged between 15-49 years have a below-normal body mass index. In terms of malnutrition, India fares worse than many sub-Saharan African countries.

Trade collides with food security

Given this enormous burden of hunger and under-nutrition, it is only natural that India places a high priority on food security. A key mechanism to address the problem of hunger and under-nutrition has been the Public Distribution System (PDS). It involves the procurement of food grains from farmers, transporting and storing them in warehouses and then distributing them to consumers. In recent years, the price paid to farmers — known as minimum support price (MSP) — has been higher than open market prices. Also, the price at which the food grains are distributed to consumers — known as the issue price — has been lower than the market price.

Hence, PDS involves providing a subsidy to both farmers and consumers. The subsidy to farmers, estimated to be about 20 per cent of the overall food subsidy, provides income support to poor agricultural families. The subsidy to consumers, by providing staple food grains at affordable prices, is necessary to increase consumption of poor families and address the widespread problem of hunger and under-nutrition.

Being a member of the WTO, India is bound by the agreements that have been signed and ratified by its members, including itself. According to Article 6 of the Agriculture Agreement, providing minimum support prices for agricultural products is considered distorting and is subject to limits. The subsidy arising from “minimal supports” cannot exceed 10 per cent of the value of agricultural production for developing countries.

PDS in India entails minimum support prices and public stockholding of food grains. It is possible that, in some years, the subsidy for producers will exceed 10 per cent of the value of agricultural production. In that eventuality, India would have contravened the Agriculture Agreement and be open to legal action by other members of the WTO. It is here that trade and food security collides for India. On the one hand, India needs to continue with the PDS to address problems of hunger and deprivation — this involves procurement and public stockholding of food grains. On the other hand, its membership in the WTO ties its hands on subsidy.

Possible solutions ignored

As part of the discussions on agriculture in Bali, this conflict between trade and food security came up for intense debate. Two solutions exist. The first comes from a proposal circulated by the G-33 group of countries in November 2012. This proposal argued for amending the Agriculture Agreement so that support for farmers (that comes through procurement) in developing countries is allowed without limits.

The second solution was offered by India at Bali. The current method used by the WTO to compute the subsidy to producers multiplies the amount of procurement with the difference between the procurement price and a fixed reference price, which is the average of prices prevalent during the period 1986-88. This method is absurd because actual prices have increased several-fold since 1986-88. India has argued that the reference price used in the calculation should be moved forward on a rolling basis.

Both these solutions offered by developing countries have so far been ignored by the dominant forces — the developed countries — in the WTO. The developed countries are more interested in trade facilitation. As negotiations proceeded, India saw a reluctance on the part of some developed countries to deal with the issue of public stockholding. The possibility of a permanent solution to the issue of public stockholding by the 11th Ministerial Conference (i.e., within the next four years) would reduce substantially once the protocol on trade facilitation was adopted. Hence, India refused to agree to sign the protocol on trade facilitation unless there was an assurance of finding a permanent solution to the issue.

There is one area where the interests of the vast majority of India’s undernourished population and genuine concerns of WTO members coincide, and the Indian government would do well to recognise and act on this. A major and genuine fear of WTO members is that India will dump its huge stock of food grains on the world market, crashing food prices. The fact that India has an unusually large stock of food grains is the result of the refusal of the government to disburse these food grains — for instance, through food for work programmes — because of the fear of increasing the food subsidy bill. The government could send appropriate signals by continuously releasing the food stocks only in the domestic market, addressing at one go, the genuine concerns of WTO members and the nutrition needs of its citizens.

Cash for food?

While many commentators have been sympathetic to India’s concern with food security, they have also argued for replacing the existing in-kind PDS with a cash transfer system. This would do away with procurement and public stockholding, and automatically solve the WTO issue of subsidy to farmers. Moreover, dismantling the existing in-kind PDS and replacing it with a cash transfer system is also a more efficient way of distributing subsidies. The current system is plagued by corruption and leakage that the cash transfer system will solve. Along similar lines, others have supported the dismantling of the PDS even as they have argued for the continuation of public stockholding to check price instability.

The key thrust of both arguments is to dismantle the existing PDS. Such arguments are problematic because they fail to engage with two important facts. First, the coverage, reach and effectiveness of the existing PDS have improved over time. Second, there is significant variation in the performance of the PDS across States. While some States like Himachal Pradesh, Kerala and Tamil Nadu have consistently performed well, others like Chhattisgarh and Uttarakhand have improved significantly. Thus, arguments for dismantling the PDS are wrong-headed. They are back door arguments for opening up the food economy to big, private capital that can have deleterious effects on the livelihood of peasants and agricultural labourers.

India should continue with its stand at the WTO to demand a permanent solution to the issue of public stockholding before the protocol on trade facilitation is signed. It should also resist efforts to dismantle the existing in-kind PDS; on the contrary, it should make every effort to strengthen it.

(Deepankar Basu is assistant professor in the Department of Economics, University of Massachusetts Amherst, U.S., and Debarshi Das is associate professor in the Department of Humanities & Social Sciences, Indian Institute of Technology, Guwahati.)

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