EMEP08_EE_TermPaper_WTO Agreement on Agriculture_Strategies for Indias Succes

8/14/2019 EMEP08_EE_TermPaper_WTO Agreement on Agriculture_Strategies for Indias Succes

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Benzeer Bava AP eMEP08-022

Rajesh K eMEP08-078

Rajesh Kumar Singh eMEP08-079Sandeep Gopinathan eMEP08-093

Sanjeev Kumar eMEP08-097

Sunil Jesso eMEP08-117

EMEP08

WTOAGREEMENT ON AGRICULTURE

STRATEGIES FOR INDIAS SUCCESS

Indian Institute of management, Kozhikode

Under Guidance of

Dr. Sthanumoorthy Ramachandran

November, 2009


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Contents

1. BACKGROUND ............................................................................................................................................... 3

2. EVOLUTION OF WTO AND INDIAS STAND ..................................................................................................... 3

3. INDIA, WTO AND AGREEMENT ON AGRICULTURE (AOA) ............................................................................... 5

3.1 MARKET ACCESS ............................................................................................................................................... 5

3.2 EXPORT SUBSIDY............................................................................................................................................... 6

3.3 DOMESTIC SUPPORT MECHANISMS ...................................................................................................................... 7

3.3.1 Amber Box ................................................................................................................................................ 7

3.3.2 Green Box ................................................................................................................................................. 7

3.3.3 Blue Box ................................................................................................................................................... 7

3.4 SANITARY &PHYTO SANITARY (SPS)MEASURES .................................................................................................... 8

4. INDIAN EXPERIENCE - PRIOR TO AND POST AOA ........................................................................................... 8

4.1 PRIOR TO AOA ................................................................................................................................................. 84.2 POST AOA ....................................................................................................................................................... 9

5. CRITICAL ANALYSIS OF WTO AOA .................................................................................................................. 9

6. INDIAN AGRICULTURE - POTENTIAL SUCCESS ELEMENTS ............................................................................. 10

6.1 FOOD BASED MANUFACTURING EXPORTS ............................................................................................................ 10

6.2 FOOD SAFETY ................................................................................................................................................. 11

6.3 ENTREPRENEURIAL FARMING............................................................................................................................. 11

6.4 ECONOMIES OF SCALE ...................................................................................................................................... 11

7. CONCLUSION ............................................................................................................................................... 12

FIGURES AND SUPPORTING DATA ....................................................................................................................... 13

EXHIBIT1INDIASHARE OF AGRICULTURE TRADE............................................................................................................. 13

EXHIBIT2COMPARATIVE ADVANTAGE OF INDIA IN DOMESTIC SUBSIDY ................................................................................ 14

EXHIBIT3.ANNUAL FOOD PRICE INFLATION RATE:INDIA,CANADA,USA,JAPAN ............................................................. 14

EXHIBIT4.PERCENTAGE OF WORLD FOOD EXPORT SHARES............................................................................................... 15

GLOSSARY ............................................................................................................................................................ 16

REFERENCES ......................................................................................................................................................... 16


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3 WTO AoA Strategies for Indias Success IIM Kozhikode 2009

Abstract: This paper inspects the growth strategies for agriculture sector in the post WTO India. This

paper attempts to identify the challenges and the potential advantage of entrepreneurial farming,

cooperative farming, and mass production in addressing these challenges.

1.BackgroundAfter World War II, there was a growing concern to eliminate the economic causes of war in

future. Wars are mostly fought as a means for expanding the accessible market and resources for

production. In addition, since the great depression of 1930, many of the developed nations

imposed protectionist measures like tariffs and import regulations to help the domestic

businesses from outside competition. This had an adverse impact on the growth prospectus of

multinational trade establishments. As a result, the need for a neoliberal economic development

model strengthened in developed nations. The neoliberals favored trade liberalization,

deregulation of foreign investment, privatization of state enterprises and fiscal orthodoxy across

the globe. Three international economic institutions IMF, World Bank and ITO were formed

under United Nations, with a supporting objective. GATT, a multilateral treaty to provide a

forum and framework to negotiate trade barriers among the member nations, was evolved as the

flagship agreement for forming ITO.

2.Evolution of WTO and Indias standThough ITO was short lived, GATTs membership grew dramatically from 1948 to 1993.

Through a series of trade rounds in these years, there was a substantial reduction of tariffs and

regulations among member nations. In 1995, GATT was replaced with a new organization

WTO. Unlike GATT which is a provisional and revocable agreement without a formal


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organization to enforce it, WTO is a permanent agreement. India is one of the founding members

of WTO, along with 128 countries. WTO is featured as a reciprocal and mutually advantageous

agreement that aims at improving living standards, employment, sustainable development and

enhancing the international trade share of developing nations.

The initial 7 rounds of negotiations conducted by the GATT were aimed at stimulating cross

border trade through reduction in tariff barriers and also in reduction in non-tariff reduction on

import imposed by member nation.

The 8th

round of multilateral trade negotiation popularly known as Uruguay Round, under took

negotiations in 15 areas spread over 2 parts. The 1 st part negotiated Trade in Goods on 14

areas, while the 2nd

part negotiated exclusively on Trade in services.

These negotiations were to closed in 4 yr period, but there were immense differences among

participating nations on critical areas like Agricultural, Textiles and Trade Related aspects of

Intellectual Property Rights (TRIPS).

To break the dead lock the then Director General of GATT, Sir Arthur Dunkel compiled a

detailed document termed as Dunkel Draft which finally culminated into the WTO which was

established on 01-01-1995.

WTO succeeds GATT and is the only global international organization governing the rule of

trade between nations.

Presently WTO has over 150 member nations, a vast majority of them being developing

countries, accounting for over 97% of World trade.


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3.India, WTO and Agreement on Agriculture (AoA)On the grounds of consideration like national food security, agriculture had an exceptional status

in GATT. Conditional quantitative restrictions (QRs) and export subsidies were permitted among

GATT countries. AoA addresses following broad areas of agricultural trade.

1. Market access

2. Export Subsidies

3. Domestic Support Mechanisms

4. Sanitary and Phyto-sanitary Measures (SPS)

3.1 Market AccessAs per AoA, all the member countries are obliged to eliminate all non-tariff trade barriers like

ban, quota or quantitative restrictions on import of agricultural products, and convert them into

tariffs (tariffication). The tariff rate should be that of the restrictions imposed in the base

period 1986-88 in the respective countries. The member nations should reduce these tariffs

progressively from their initial bound rate in 1995 till the implementation period. The average

bound rate reduction for developed nations is 36% within a period of six years and that for

developing nations is 24% within ten years. Exceptions are allowed in bound rate reduction of

commodities which are subjected to tarrification, under the special safe guards and special

treatment clause for specific commodities. These clauses allow the member nations to temporary

increase the import duty, for situations like sudden surge of imports or price falls. Unlike


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developed nations, the developing nations can invoke these safeguards only if they could

establish the adverse situation, before WTO.

India is a net exporter in agriculture and is expected to benefit from the increased level of market

access due to AoA. However the success is less than the expected.

EXHIBIT 1illustrates Indias growth ofagricultural trade.

3.2 Export Subsidy

AoA member nations are obliged to reduce the direct subsidies from their 1986-1990 average

level. The developed nations are obliged to reduce these subsidies by 36% percent in value and

21% in volume over six years (1995-2000). Developing nations are bounded to reduce the

subsidies by 24% in value and 14% in volume over ten years (1995-2004). Also, nations which

do not have any subsidies are not allowed to introduce them in future. While the developed

countries has to reduce export subsidy by 36% over a 6 year period ranging from 1995-2000, the

developing countries has to reduce it by 24% over a 10 yr period (1995-2004).

In terms of volume, developed countries need to reduce subsidized exports by 21%

during the period 1995-2000, whereas developing countries have to reduce by 14% during the

10yr period of 1995-2004.


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3.3 Domestic Support MechanismsAny domestic subsidy that promoted agricultural sector was subjected to reduction commitments

under AoA. Domestic/local subsidies subjected to such reduction commitments could be broadly

divided into 2 categories 1) Product Specific support and 2) Non-Product Specific Support. Both

categories together formed the amber box subsidies. AoA categorizes domestic support measures

into three types Amber Box, Green Box, and Blue Box.

3.3.1 Amber BoxAmber box measures are considered as trade distorting elements, and are subjected to reduction.

Measures like price support, export subsidies, cheap loans etc comes under this category. The

subsidies categorized under Amber box are calculated using AMS (aggregate measure of

support) and are subjected to be reduced during the AoA implementation period.

3.3.2 Green BoxGreen Box measures are not considered as trade distorting and are acceptable under AoA.

Measures like support for research, infrastructure services, domestic food aid etc comes under

this category.

3.3.3 Blue BoxBlue Box measures are intended to limit production. Measures like direct payment to farmers,

cattle limiting programs etc. These measures are acceptable under AoA.

In India, product specific subsidies are minimal. The non-product subsidies like subsidies on

power irrigation and fertilizers are well within the permissible 10% level. Hence India is not

under obligation to reduce the support prices. India will benefit a comparative advantage of 7%


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domestic subsidy rate, in the post AoA Implementation period, as against many of the OECD

and developed nations. Around 60% of Indian population depends on farming as lively hood,

against 2-3% in OECD countries.

EXHIBIT 2shows the comparative advantage of India in domestic subsidy.

3.4 Sanitary & Phyto Sanitary (SPS) MeasuresOne of the most unique aspects of AoA has been the SPS, which dealt with food safety and

plant and animal health standards. The objective has been to protect consumer and plant &

animal health against known danger and potential hazards that existed in many ways but in a

dormant form.

4.Indian Experience - prior to and post AoA4.1 Prior to AoA

- Extreme import restriction clubbed with high levels of Tariff for agricultural

Products.

- Import of mass consumption items like cereals and edible oil were canalized

through state trading bodies.

- Existence of cash compensatory support for select exporters.

- All export profits were exempted from income tax under section 80 HHC.

- Farmers availed inputs at subsidized prices and minimum support price was

guaranteed.


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4.2 Post AoA- India is almost out of Quantitative Restrictions and is now fully in the tariff

regime.

- But India continues to maintain high tariff on several commodities with a view to

checking expected surge of imports

- Post 1991 Economic Reforms, cash incentives for exports were abolished and so

were IT exemptions for export profits.

- AoA did not object to India's MSP Programmes. Therefore MSP coverage was

increased to several other agricultural products.

- There was a surge in non-product support because of increased power subsidy,

irrigation subsidy and concessional loans

5.Critical Analysis of WTO AoA Though the primary intention was to eliminate trade barriers, Agricultural Tariffs

continue to be 6 times as high as industrial tariff. High Tariffs continue to exist in

both developed and developing countries.

Provisions regarding Specific Safeguard Mechanism (SSM) were only available to

developed and Tariffied countries. India could not be benefited from SSM as we had

opted for ceiling bindings.

Developed countries continued with very high domestic support that artificially

increase production and distort trade affecting developing nations like India badly.

Developed countries deny market access to the developing countries on the grounds

of poor implementation of SPS norms.


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Developing nations (including India) see the AoA tilted in the favor of developed

countries benefiting the latter highly at the cost of the former.

6.Indian Agriculture - Potential Success Elements6.1 Food Based Manufacturing Exports

Historically food price inflation is higher in India. The recent data shows a drop in the food price

inflation rate. Through subsidies and export promotions, developed nations so far dominated the

agricultural market. India has a comparative advantage of lesser domestic supports. If food

prices continue to fall, due to increased imports and yields drop by adverse weather, Indias

farming sector may face severe damage in coming years. The temporary safe guards require

approval from WTO members, and are not a long term option.

EXHIBIT 3illustrates comparison of food price inflation rate between India, Canada, USA and

Japan.EXHIBIT 4illustrates comparison of food export shares across nations.

Indias agricultural export growth rate shows a declining trend in the recent past. But, as

developing countries experience income increase, the demand for processed food is expected to

grow. Complemented by the rise of growing middle class population, the demand for

convenience and specialty food products are increasing in both domestic and foreign markets.

Refocusing the Agro industry to food based manufacturing provides opens potential

opportunities for India.

EXHIBIT 5illustrates the growth of agricultural product export share for india


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6.2 Food safety

Complemented by the growing rate of urban middle class, the concerns on food safety have

increased in recent years. For instance, the Asia Pacific Economic Cooperation Forum (APEC),

created a Food Safety Forum in 2007 with this view. Organic farming is gaining significance in

recent past.

India has a higher potential to explore this niche. One of the growth prospects is to exploit this

premium market segment.

6.3 Entrepreneurial FarmingIndias arable land is constantly decreasing. This is mainly accounted by higher Industrialization

and population growth. Indias population is expected to reach 1.5 billion by 2050. The growing

population and measures to feed them imposes enormous challenge. Conversion of Indias

present day family farming to surplus farming and there on to entrepreneurial farming is required

to address these challenges.

6.4 Economies of scale

As per 2001 census, 60% of Indian population depended on agriculture, which provides a

potential for higher economies of scale in the sector. But, the higher transaction costs on credits,

scattered locations, and higher costs of maintaining inventory, factors the lesser capital formation


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and lower production surplus. The average size of small holding had dropped to 0.6 hectares

against 2 hectares.

An institutional approach is necessary to overcome these problems. Unlike the earlier approach

of concentrating only on marketing and distribution, producers cooperative should add

production also in the list. State intervention is also equally important in institutionalizing the

sector. The state support for a higher level of decentralization to the local governance bodies and

encouraging formation of NGOs & cooperative societies is very essential.

After AoA, the Indian agriculture sector is under constant pressure from cheaper imports. To

address this challenge, India needs to strategize for higher economies of scale and sustainable

growth in the sector. Cooperative or group farming could result in achieving higher economies of

scale. Usage of mass production technologies will increase the surplus at a lower marginal cost,

and provide a comparative advantage to compete against cheaper imports.

7.Conclusion India faces equal challenges (if not more) from other developing countries rather than

developed countries in the export of its traditional items like rice and wheat.

India would find it difficult to continue to export raw products like Cotton, Coffee and

Tea due to stiff competition. India should work out to strengthen up its stand in these areas.

India should be broad minded in going out and making a mark for itself in the

international market rather continue to sustaining self-sufficiency.


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India should continue to export high value products to developed countries. It should also

give attention to Horticultural products, Marine products and processed products and Target

costs and Quality that are globally competitive.

India should continue to fight for reduction in domestic and support subsidies in

developed countries that can lead to rise in international prices which would indirectly benefit us.

Figures and Supporting Data

EXHIBIT 1 India Share of Agriculture Trade


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EXHIBIT 2 Comparative Advantage of India in Domestic

Subsidy

EXHIBIT 3. Annual Food Price Inflation Rate: INDIA, CANADA,

USA, JAPAN


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EXHIBIT 4. Percentage Of World Food Export Shares

EXHIBIT 5. Agricultural export PERCENT SHARE for India. Data Source: World

Bank WDI Indicators


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Glossary

AoA WTO Agreement on Agriculture

GATT General Agreement on Tariff and Trade

WTO World Trade Organization

ITO International Trade Organization

IMF International Monetary Fund

References1. www.wto.org

2. www.worldbank.org

3. http://en.wikipedia.org/wiki/General_Agreement_on_Tariffs_and_Trade

4. http://eh.net/encyclopedia/article/aaronson.gatt

5. http://www.naasindia.org/ - Policy paper from National Academy of Agricultural

sciences

6. Amrita Narlikar, World Trade Organization A very short Introduction, OXFORD Press

2005

7. http://www.maths.tcd.ie/local/JUNK/econrev/ser/html/eugatt.htm

Joanna ORiordan, Agriculture and GATT: How the Compromise was reached

8. http://www.fao.org/docrep/005/y4632e/y4632e0f.htm#bm15

Anil Sharma, National Council of Applied Economic Research (NCAER)

9. Kaliappa Kalirjan,Kanhaiya Singh- India and the WTO's Agreement on Agriculture, 2006

10. Prema-Chandra Athukorala, Kunal Sen - Processed Food Exports from Developing

Countries: Patterns and Determinants

11.http://india.gov.in/sectors/agriculture/index.php

12. Class PPTs & Lecture Notes
http://www.wto.org/http://www.wto.org/http://www.worldbank.org/http://www.worldbank.org/http://en.wikipedia.org/wiki/General_Agreement_on_Tariffs_and_Tradehttp://en.wikipedia.org/wiki/General_Agreement_on_Tariffs_and_Tradehttp://eh.net/encyclopedia/article/aaronson.gatthttp://eh.net/encyclopedia/article/aaronson.gatthttp://www.maths.tcd.ie/local/JUNK/econrev/ser/html/eugatt.htmhttp://www.maths.tcd.ie/local/JUNK/econrev/ser/html/eugatt.htmhttp://www.fao.org/docrep/005/y4632e/y4632e0f.htm#bm15http://www.fao.org/docrep/005/y4632e/y4632e0f.htm#bm15http://india.gov.in/sectors/agriculture/index.phphttp://india.gov.in/sectors/agriculture/index.phphttp://india.gov.in/sectors/agriculture/index.phphttp://india.gov.in/sectors/agriculture/index.phphttp://www.fao.org/docrep/005/y4632e/y4632e0f.htm#bm15http://www.maths.tcd.ie/local/JUNK/econrev/ser/html/eugatt.htmhttp://eh.net/encyclopedia/article/aaronson.gatthttp://en.wikipedia.org/wiki/General_Agreement_on_Tariffs_and_Tradehttp://www.worldbank.org/http://www.wto.org/

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EMEP08_EE_TermPaper_WTO Agreement on Agriculture_Strategies for Indias Succes