Food stocks: How much is too much? Experts debate

In the WTO agreement on agriculture negotiated in the Uruguay round in 1994 India and 122 other countries agreed to limit their price proposed to farmers to 10 percent of the total agricultural output. However, with India’s food stock piles and procurement burgeoning in recent years, the country was in breach of 10 percent limit. India’s contention has been that the country will have to continue procuring even more grains to distribute subsidized grain under the Food Security Act.

The ideological position of civil rights groups has also been that as the end of the Uruguay round, US and European countries agreed to freeze their substantially large farm supports at the prevailing levels but countries like India which didn’t have subsidies then have been prevented by the agreement from supporting farmers by the 10 percent limit. Another sour point is that support prices to farmers are being compared with the yardstick based on global grain prices in 1986-1988, which is patently inadequate today. India appears to have prevailed at Bali meet this time and will not be pulled up for violating the 10 percent limit till a permanent solution is evolved in the form of updating the global benchmark grain prices. In an interview with CNBC-TV18, Prof Ashok Gualti Chairman of the Agricultural Prices Commission and Prof Himanshu Roy of the JNU shared their views on how India should tackle the international community and what it must clean up at its own end. According to them, four key points should be taken a note of; first, India needs to negotiate with the WTO to change the base prices for measuring how much the minimum support price (MSP) subsidises farmers. The MSP cannot be compared to the 1986-1988 global prices of food grains. The WTO needs to urgently change the base price to maybe a three-year current rolling price. Secondly, India in consort to other developing countries may have to renegotiate the limits on how much it spends on subsidies to farmers considering that the USD 30 billion that India spends seems measly compared to the USD 400 billion spent by developed countries, which have smaller populations, but this could be a lot tough. Thirdly, in any case India simply cannot export from the food stock piles procured apparently to support farmers and that too export at below international prices. Fourthly, India should ensure it does not procure recklessly not just for WTO compliance, but in its own interest India needs to ensure that it procures to a plan and offloads the stocks systematically. Also Read: Food Bill will push govt spending to 1.3% of GD, says Moody’s Below is the verbatim transcript of the interview. Q: Are we right in understanding that India violates the WTO rules in the amount of food stocks it is holding and we are not able to given to the WTO because we will have to hold even more stocks when the Food Security Bill kicks in in full swing? Gulati: The issue of giving subsidy to the consumer is not a problem at all. If you want to give to the consumer, you give as much as your pocket can afford. So calling it food subsidiary for the consumer creating a problem, no. The problem comes on the production side because the agreement on agriculture on which India has signed says that you have the limit to subsidise your agriculture to the tune of 10 percent of the value of agriculture. So that is the clause on which we have signed. The idea was that different countries at different points of time had been subsidizing the developed companies. OECD countries had to reduce their support to agriculture because they were at a much higher level. We were at that time having negative support to agriculture that means we were implicitly taxing our agriculture. So, we thought 10 percent is a reasonable buffer at that time. The comparison is in relation to the fixed external reference price of 1986 to 1988. When we want to say that we want to hold as much stock and we want to buy at a price whatever we want to give to farmer and then hold those stocks, the first question comes what is happening to your aggregate measure of support for agriculture. Are you crossing the de minimus level of 10 percent on which you have signed. Q: If you can give me those numbers, when you say 10 percent of aggregate output what is the amount of money India annually spends on minimum support price (MSP) and in procurement and what is the total aggregate output, can we get some idea of those two numbers? Gulati: Let me give you the technicality of how it is calculated because the number will come out of that. The external reference price of 1986-1988 was fixed. So your today’s price that you are giving to the farmer has to be compared with that. In the original submission that India made, that was the external reference price, the base price was given in rupees, which was about Rs 3,050 per tonne. Today you are giving to your farmer Rs 14,000 or so for wheat per tonne. This is four-five times more than what your base price was. If you look at that then you crossed this limit long time back. The issue is that there is an article 18.4, which says that the excessive rates of inflation in the developing countries will be given due consideration. It is that article that needs proper interpretation what is excessive rates of inflation. Now they say alright, you give us, submit us and we will discuss this in committee on agriculture. Those are the fundamental issues. That is one part of the story. This is a product specific part. Q: Even over here, if you had taken a dollar value of Rs 3,050 as of 1986, it would have been less than 15 to a dollar and at Rs 14,000 we are probably not even in breach, is that calculation? Gulati: Wheat we have not breached while we have breached in case of rice. So if you take the case of rice, we have already breached long time back. The question is that that is the product specific part. There is another part of support which is a non-product specific, which is input subsidies. Our input subsidies had been blowing like anything. If you look at that, in that also we went ahead, but then there is another article 6.2, which says that the support that you are giving to low income or resource poor farmers that can be exempt from that. How do you define this low income or resource poor farmers. India said anyone below 10 hectares of land; they are all low income and resource poor. That is an issue that needs proper interpretation and agreement by all the members of the WTO. These are the fundamental issues on which we should be negotiating. The issue of public stock holding - even they say okay, if you want to keep this huge 80 million tonnes or whatever you want to keep, you keep it, do whatever you want to do in your domestic market but don’t export it because that export will not be at a market price. That is where the world is concerned, the rest of the world that you will be distorting the global markets. If for example today ministry is inviting tenders to export wheat at USD 260 or USD 280 or USD 290, these are administrative decisions. This is what the rest of the world would not like to see. They will say let the markets operate rather than this huge administrative decision. _PAGEBREAK_ Q: You have said that the main bone of contention appears to be the export of rice and wheat that was actually intended for public consumption or for procurement, if you can elabourate if that is the bone of contention that India is on a weak wicket you would say? Roy: Dr Gulati also made it very clear that there is obviously some problem that has arisen in the last two-three years. It is not the stock, it is not the procurement. The fact that we are using public subsidies to export at a cheaper price in the international market gets everybody concerned. Particularly, the developed countries do get concerned that in the name of public procurement and giving subsidies to the poor, you are using public stocks to offload in the international market. He has made it very clear that the trade issue has become much more important in that sense. This is also a point where we should ponder and we should use this opportunity to also look at our own foods and management issues. We have been procuring excessive stocks, which we are not in a position to distribute to the people. We are ultimately forced to export it to the international market. So these kind of things, which cannot simply go on and the moment we keep on doing this, it will attract negative attention to our procurement policies. But coming back to the real issue, these are things which can be corrected and these are within the domain of the government of India whether it is to be raising MSP to the excessive levels. There is no point of raising MSP to the level of 15 percent where you don’t need to procure 80-90 million tonne. The second point I want to clarify is that a lot of debate has gone around basically the food security bill. I think the whole thing is misconceived. What we have been doing is something which is crossing the limit even from 2007 onwards. Frankly, India has not submitted the data from 2004 onwards. We are probably crossing the limit from 2007 onwards. But today if the kind of a backlash or negative attention we are getting is because we are saying that we are going to do this for food security, but ultimately using the public stocks to export it in the international market. So that point cannot be ignored and it has to be taken into account for the future food management issues. Q: We have not yet implementing food security in the way the act conceives it but as and when we attempt to do so, we will perforce have to procure a great deal. At that time will we be crossing the limits set by the WTO in terms of public stock holding? Roy: Let me clarify this. The problem is on the amount of subsidy. It is not the amount of procurement. It is the total subsidy which is under the capping things or whatever we are crossing the limits that is on the subsidy not on the amount of procurement. So that is number one. That is something which we have to take into account. The second point that I wanted to know, wanted to tell you is that the whole issue that the limits of what is the subsidy limit is going to be that was decided 25 years back. They certainly need to be upgraded and that was the resolution of the G-33 also which they said that the previous three years’ price as a moving average could be taken as the reference one. That again is a very valid point. India should negotiate for that in the longer run. However, coming to the third point which is that the National Food Security Bill (NFSB) is not going to increase your procurement in a big way compared to what we have been procuring in the last two-three years, nor is it going to cost you additional amount of money. In that sense, what we have been doing for the last four-five years is the same thing that we are going to continue. But even for that to be clear on from the international WTO negotiations or WTO rules is something that India should in any case try and ask for because whatever we call it, we don’t give direct subsidies to the farmers. The only kind of subsidies we give to the farmers is some kind of an input subsidy which again is declining, diesel subsidy is coming down, fertiliser subsidy is coming down. We give it only for two-three main crops, that is the minimum support prices that also for the small and marginal farmers which are exempted from the WTO. There is a moral and there is a political point to argue for these exemptions and in a more long-term and sustainable exemption rather than the peace clauses that we are talking about. But at the same time, we should also be looking back at what exactly we are doing in terms of raising MSPs due to political consideration not based on economic criteria, using the stocks for exporting in the international market; these are things, which definitely are not something which is going to go scot-free. People are going to take notice of this and they are going to use it. There is obviously the geopolitical environment that is going to come out. The OECD countries and the US is going to use this to their advantage and push us on trade facilitation clauses or some other clauses. Q: Just sticking to agriculture, what would your advise be to the government of India on at least on export argument we have to concede but to push primarily for the renegotiation of the external reference price as a three year rolling price, is that the only main point of contention? Gulati: Those are the fundamental things we should be negotiating, but let me correct  and clarify Dr Himanshu Roy two-three times said excessive rates of MSP increases and political consideration and all that - let me tell for his kind information our wheat MSP today is USD 225 a tonne. Pakistan is giving USD 280 a tonne and China is giving USD 380 a tonne. Are we going overboard? We are not insulated from the world. We are one of the lowest MSPs in south and Southeast Asia, so what are we talking here. This is totally misplaced argument that we have gone overboard on giving MSP increases. Our MSPs are the lowest in the region. Secondly, they are well below the FoB price that is how you are going to export 10 million tonne of rice and 6 million tonne of wheat, your FoB price of wheat which 15 days was USD 285-290, your MSP is USD 225. So from where have you gone overboard? This is totally an absurd and totally wrong information that is being created that our MSPs are going through the roof. I want to make it very clear there is no political consideration here. In fact, we are on the lower side and gradually these will have to go up. Q: If we are that below of the international levels or at least the neighbourhood levels of minimum support price, how is it that we are in contravention not they? Gulati: This is what I am saying, the 1986-1988 price is fixed and the world has changed and therefore you need to negotiate or renegotiate the external reference price. That is the whole issue. That is where the salvation will lie. Roy: It is a fact that we have raised our MSPs and these MSPs have increased massively in the last seven-eight years and this is partly a reflection of the increasing cost of cultivation. If we raise the MSPs, I will be the happiest person. The farmers are going to benefit with the MSP increase of 40 percent, let it be. That will be the happiest moment for anybody who is concerned with agriculture in this country. The point is that the Commission for Agricultural Costs and Prices (CACP) as well as the minister of agriculture has to agree that there has been massive mismanagement in the food economy. You have been procuring more than what you can distribute, you are using these public stocks to export in the international markets and these are things which are not going to escape attention from anybody whether in the domestic market or in the international market. Gulati: Let me say that the stock mismanagement, excessive procurement is a result of four years of export ban on wheat and rice. Secondly, there are states, which are giving bonus, 22 percent bonus and we have open ended procurement, the state like Chhattisgarh. There are states which are imposing 14.5 percent taxation on it or the levies like Punjab therefore they have driven the private sector totally out of the market and therefore everything is falling on the state. It is a state takeover of the grain trade in number of states. Those are the fundamental issues for the domestic market to be cleared. But that is from a domestic reform agenda rather than - if you create that type of environment, you will have all these excessive stock. It is not a result of excessive MSP, please remember this.