Negotiating the birds and the bees

Rational Expectations

Despite the EU's ridiculously protectionist policies, India's rice traders have been very effective in finding ways to get into this market

Meet R.S. Seshadri. As director of United Riceland Private Limited, one of India's top exporters of basmati rice, he, along with other basmati rice exporters, is aware of just how badly the $ 311 bn farm subsidies in rich OECD countries like the US and EU distorts global trade in farm goods "" indeed, at $ 913 per cow per year, the EU's dairy subsidy is more than double the average income in sub-Saharan Africa.

Increasingly under attack for its unjustifiable subsidy, given the limited number of farmers in these countries, the Europeans have even coined a new buzzword, 'multifunctionality', to protect their farm subsidy "" we need to subsidise rice in Spain because the Spanish rice fields nurture the birds and bees that migrate from North Africa, is something the EU agriculture commissioner Franz Fischler actually told an Indian delegation!

Yet, Seshadri isn't exactly fazed by the extent of the subsidy, indeed his advise to the government is not to focus only on the macro-sermonising ('subsidies distort trade'), but to concentrate on the nitty-gritty instead, with the help of various commodity-groups like the rice one.

Seshadri recalls a US negotiator who once told him that Indians talk on principles, and then see if they can get some commercial advantage out of this as well "" the US and the EU find a commercial angle, and then look around for a principle to wrap around it!

In case you think Seshadri's just mouthing generalities, it's worth keeping in mind that it is precisely these kind of pragmatic policies, and a lot of homework from the rice traders, that saw India's basmati rice exports to the EU jump from around 40,000 tonnes in 1995 to around 170,000 tonnes last year. And while it is true that the EU imposes import duties of around 50-80 per cent, import duties on Indian basmati are in the region of just 3-4 per cent!

Anyway, here's the rice story. Long before the Uruguay Round negotiations even finished, in 1994 itself, United Riceland, which was working very closely with the government, went to Geneva looking for ways to crack the EU market, and that's when they ran into what's called Headnote No.7.

Essentially, since the EU's idea was to completely (or as completely as possible) close the market to foreign products, a unique formula was devised. What this formula said was that there would be a flat EU intervention price "" much like India's minimum support price, where farmers sell to the government if the market price goes below this "" and so all imports should take place at only this price.

Point is, however, how do you translate this into policy? The EU came up with a devilishly clever formula "" the cheaper the product, the higher the import duty, and conversely, the more expensive the product, the lower the import duty.

Based on this formula, the EU calculated the import duty on American rice was 320 euro (the same was to be applied to Indian basmati) in 1995, a figure high enough to ensure no one could afford basmati.

That's when the basmati exporters and the government argued, successfully, that since Indian basmati was at least 250 euro more expensive than US rice, this amount should be deducted from the duty "" based on the same principle of 'the more expensive you are, the lower the duty you pay'.

It worked, and the import duty on Indian basmati was lowered to 70 euro, or around ten per cent, at a time when the US was paying around 120 per cent duties. By 1997, India's import duty was just a couple of percentage points, and it remains at around that level even today. The US duty is today around 110 per cent.

While this strategy may seem an obvious one in hindsight, the fact is that the Pakistani delegation was not able to argue its case equally strongly, and for many years, continued to pay 200 euro per tonne more as import duties "" even today, the same dispensation is not available to most varieties of Pakistani basmati.

The Europeans, by the way, have been trying to reverse this policy for some years to keep Indian basmati out, but each time, the rice exporter-cum-Indian-government delegation has beaten them back citing the EU principle.

In fact, now that the EU has lowered its intervention price by half (thanks to absurdly high prices, the EU's grain stock has more than tripled in eight years to around 7 lakh tonnes today), according to Seshadri, the import duty on even non-basmati Indian rice will be 70 euros or less, and so Indian rice has a great export potential in the EU.

With their own tariff policy working against them, how have the Europeans reacted? By trying to find other ways to stop basmati imports, that's how. At one point, the idea of a Cumulative Recovery Scheme (CRS) was floated "" essentially, this proposed that the Indian rice pay the same import duty paid by other countries, and then after it was able to prove it had sufficient aroma (to qualify as basmati), this duty would be refunded.

The entire process, needless to say, would take 16-18 months. This proposal too, was beaten back, as was the proposal to begin DNA fingerprinting for imports.

How were they beaten back? When the Food Standards Agency of the UK first began talking of developing DNA fingerprints, the rice trade in India was completely taken aback at this obvious non-tariff barrier coming their way.

That's when United Riceland set up its own DNA lab "" this lab quickly came up with the relevant markers for DNA testing to distinguish different strands of basmati, and passed these on to the British. The lab, which has even more markers than the FSA has, is today in a position to even challenge any FSA test that seems unfair.

Also key in this entire effort is funding "" all research of the DNA type, hiring of expensive lawyers abroad, even travel is an expensive business. The rice trade decided to set up a Basmati Development Fund with a cess of Rs 50 per tonne of export "" today the corpus of this fund is Rs 25 crore.

With standing counsel like Linklaters & Paine in the UK, India's basmati rice exporters are now seen as a force to reckon with in the EU, as they now have both the research and the money to face up to any challenge.

Not surprisingly, the number of fresh patent and other cases they're fighting was just four last year, from 40 a few years ago.

Moral of the story: If India's exports are to succeed in markets abroad, each industry has to fund itself, to find the chinks in the protectionist armour, and use its own legal expertise to fight expensive lawsuits if need be.

The government of India does not have the expertise/domain knowledge the private sector has, and it certainly won't hire the best lawyers. After all, why should the taxpayer fund what is essentially a private enterprise?

suniljain@business-standard.com