More accurately, the rural sector hasn’t done well, regardless of the indicator used. There is a long list of pending reforms required to reverse this trend—land markets, degradation issues, irrigation, efficient water usage, encouragement of commercialisation and diversification, creation of off-farm employment, credit, insurance, futures markets, disintermediation of distribution chains and removal of unnecessary controls, public investments as opposed to input subsidies, scrapping price signals that artificially favour rice and wheat, improving research and extension and development of rural infrastructure. This is a domestic reform agenda. And these reforms are mostly state subjects. Yet, the travails of Indian agriculture are invariably ascribed to the World Trade Organisation. The WTO is a convenient scapegoat here too, as it is in France, South Korea or Japan.
Before the Uruguay Round (1986-94), there was no attempt to liberalise agriculture through multilateral agreements. Indeed, developed countries sought to keep agriculture out of the purview of all free trade agreements. The Uruguay Round brought in some discipline on domestic support, export competition (including export subsidies) and market access (tariffs and quantitative restrictions on imports). Unfortunately, the way the Uruguay Round’s agreement on agriculture (AOA) was drafted, it contained plenty of devils in the details, including exemptions (the multi-coloured boxes) from reduction commitments. Not only did the promised market access liberalisation not happen, export subsidies in developed countries actually increased.
This has a bit to do with the way WTO agreements work. They involve reductions on bindings, and bindings can be higher than applied levels. The Doha Work Programme (DWP) of negotiations attempts to bring in additional disciplines on all three strands of agricultural liberalisation. Indeed, the success of DWP hinges on what happens to agriculture. If all goes well, and this is unlikely, we will have an agreement by the end of 2006. Otherwise, we knock DWP back to beyond 2010, perhaps beyond 2013, when EU should be ready to reform agriculture. But one shouldn’t be completely negative. The world has been trying to liberalise trade in manufactured products since 1947-48. And agriculture has been placed on the agenda only since 1986.
India’s approach to agricultural trade negotiations exhibits a schizophrenia, because there is both an export side and an import side, and these are linked through the quid pro quo of negotiations. It is easy to argue that developed countries should reduce domestic and export-related agricultural subsidies. It is also easy to argue that if subsidies distort markets, market access liberalisation alone is misleading.
At a general level, removal of subsidies should increase global agricultural prices. While this has an adverse effect on net food-importing developing countries and erodes benefits for developing countries that gain from special duty preferences, does India score much from such liberalisation, were it to happen? After all, there are supply-side constraints in the absence of domestic agro reforms. Productivity has been declining, at least for rice and wheat, and competitiveness has also been eroded because of increases in procurement prices. Splice that with declining trends in global prices. Maybe there will be potential in floriculture and horticulture, but that is in the realm of the possible, not the probable.
In pushing for market access liberalisation in developed countries, India thus adopts a G-20 position, to side with Brazil, which has substantial agro export interests. There is little for India. So runs the argument and there is some truth in it. However, one shouldn’t forget that between 10 per cent and 13 per cent of India’s export basket of goods (excluding services) comes from agriculture, amounting to around $7 billion a year. India’s global marketshares are large for tea, coffee, tobacco, spices, sugar, rice and fish preparations, though fish is outside the AOA.
This leaves imports, where the paranoia about losing self-reliance in foodgrain production never fades. Thus, quantitative restrictions on imports having gone, we want to resist reductions in tariffs. The argument that DWP requires less than full reciprocity for developing countries, with lower than proportionate tariff reductions, is a slightly different—and a valid—one. We want tariff rate quotas. Together with the G-33 group of developing countries, we want special products to be exempted from reduction commitments. We want a special safeguard mechanism in case of sudden import surges. National, as opposed to individual, food security should be about being able to pay for one’s imports, not about producing everything domestically. But because this distinction will not be made and because the PL-480 spectre remains, we will exempt agricultural tariff reductions from the domain of unilateral reform recommendations also. This is precisely what the Kelkar Task Force on Indirect Taxes also did.
Today, imports of agro products account for between 4.5 per cent and 5.5 per cent of India’s import basket of goods (excluding services) and most imports are pulses, cashew, other fruits and nuts and edible oils. WTO data tells us that India’s simple average of agricultural tariff bindings (not applied tariffs) is 114.5 per cent, with detailed bindings of 105.4 per cent for fruits and vegetables, 133.1 per cent for tea and coffee, 124.7 per cent for sugar and confectionery, 126.5 per cent for spices, cereals and other food preparations, 86.3 per cent for grains, 105.0 per cent for animals and products, 168.9 per cent for oilseeds and fats, 85.1 per cent for cut flowers and plants, 125.8 per cent for beverages and spirits, 65 per cent for dairy products, 133.3 per cent for tobacco, 101 per cent for other agricultural products, and 36.5 per cent for wood, pulp, paper and furniture.
Any artificially high tariff for agriculture creates distortions in resource allocation. Plus, there will be protection through special products and the special safeguards clause. Not to speak of developed country resistance in reducing tariffs, which means that India also has to reduce tariffs by proportionately less. The right question to ask is: do we need such high tariffs, even if agriculture has to be protected? As the bridge between bound and applied tariffs tells us, we don’t. The sensitive products are probably edible oils, milk and milk products, fruits and vegetables, rubber, cotton and silk, tea and coffee and alcoholic products, with edible oils and dairy products the most important. Even there, 20 to 25 per cent of tariff protection should be enough. But in some areas of edible oils and dairy, we are probably uncompetitive and there will be transition pains.
The short point is that India can afford to be much more aggressive in agricultural trade negotiations. And as the manufacturing, services and intellectual property experiences illustrate, the faster the domestic reforms, the easier it is to exercise bargaining clout. Contrary to popular perception, WTO agreements don’t trigger reforms, at least for agriculture. But domestic reforms make wto agreements easier to handle. The commerce and agriculture ministries should make this their mantra.
(Bibek Debroy is secretary-general, PHDCCI.)
