Toil for the soil

India's WTO battle on agriculture has been a topsy-turvy one. Sunil Jain explains its complex twists and turns ahead of the Cancun ministerial

A few months ago, India looked like it was in clover as far as the World Trade Organisation (WTO) negotiations on agriculture were concerned.

While the Americans were in favour of what is called the Swiss formula for cutting tariffs (based on the formulation given by the Swiss in 1976, but not supported by them today), India was opposing this by going along with the European-led initiative in favour of the more gentle Uruguay Round cuts of around 24 per cent for developing countries. The US proposal, in contrast, would cut all tariffs to below 25 per cent.

As for cuts in the huge $ 311 billion subsidies given by the Organisation for Economic Co-operation and Development (OECD) countries "" vital if countries like India are to increase their almost stagnant farm exports, the US and the EU were on a collision course "" with the US objecting to certain subsidies given by the Europeans and calling them trade-distorting.

Today, the situation doesn't look quite as rosy. The EU and the US are broadly together on the lack of urgency to tackle the disguised subsidies "" 40 to 50 per cent of support to farmers in the US and the EU are in the form of direct payments (called Blue and Green Box payments) supposedly unrelated to production, and are therefore not even counted as subsidies that need to be cut.

And since the EU was dead against the application of the Swiss formula, the joint EU-US position paper of August 13 gives the EU a way out by stating that the Swiss formula will be used only for a certain number of items (to be negotiated), and for the rest, a Uruguay Round kind of formula of an average 36 per cent cut over five years will be used.

How important cutting the huge OECD subsidies is can be seen from the fact that in several important items, government support to crops are in the range of 50 to 60 per cent of the farmers income from them.

But according to calculations made by economists such as Ashok Gulati, India actually penalises her farmers by around 25 per cent "" by not allowing farmers to sell freely, and other restraints.

Market restrictions in areas like the EU, in fact, are so bizarre that, under something called Headnote 7, for instance, the EU charges a lower import duty for expensive imports and a higher one for cheaper imports, effectively blocking out cheaper imports!

While EU subsidies, in all forms, are currently around $ 82 billion, US subsidies have risen from $ 54 billion in 1995 to $ 74 billion in 1999 "" support for items like wheat, a big Indian export, have gone up by around a billion dollars. Thanks to this, the US share in global wheat trade is around 25 per cent.

With the EU and the US together, India has cobbled together a coalition of countries like China and Brazil as well as the Cairns group (a loose grouping of 17 countries like Australia, New Zealand, Brazil, South Africa and so on), which despite the official position, is not the most cohesive of groups.

The Cairns group, for instance, is very interested in market access for their products in countries such as India (India, clearly, is not too keen on giving market access) "" and it is also an advocate of the Swiss formula. "Many of the interests of the group (India has cobbled together) are dissimilar," concedes Biswajit Dhar, who heads the WTO centre at the Indian Institute of Foreign Trade (IIFT).

Right now, on the eve of the Cancun Ministerial, everything is in the melting pot. Broadly speaking, for developing countries like India, agricultural items will be divided into three categories. One, sensitive items that countries want to protect "" here, tariff cuts will be lower, but a certain market access will have to be guaranteed for imports.

In the other two categories, deeper cuts are to be negotiated. On an average, if you go by the figures discussed earlier (and these are subject to what happens in the negotiations), India will have to make a 24 per cent cut in average import tariffs over five years, with at least 10 per cent in individual items.

This, however, is also subject to qualifications like special products, special safeguards, and so on. A look at the main jargon:

Swiss formula: Broadly speaking, a coefficient is to be agreed upon (the US wants 25, but it may go up to 50), and based on a certain formula, no import tariff can ever be higher than this coefficient. The formula says the final tariff = (coefficient multiplied by current tariff) divided by (coefficient plus current tariff).

So, if the coefficient is 50 and the current tariff is 300 per cent, the final tariff under the Swiss formula will be (50 multiplied by 300) divided by (50+300) and is equal to 42.8 per cent. If the coefficient is 25, as the US wants, the same tariff will come down to 23.1 per cent. The Swiss formula is essentially not mandatory for developing countries, though they have a choice to use it.

Special products: Could be items like rice and wheat for India, where the livelihood of a lot of people is affected. Essentially products where countries are free to keep a higher protection level.

While countries like India want to be free to designate their own special products, the negotiations may lay down specific conditions to define them. The number of such special products is also open right now, though the US wants them to be less than 10.

An Australian study had earlier found that India's top ten farm imports cover more than 76 per cent of total farm imports. So while India is keen on a large number of special products, other countries including some of its allies are of a different opinion.

Special safeguards: To be used in case agricultural prices fall dramatically or in other such emergencies. How these safeguards are to be activated, and how many are to be allowed is a matter of negotiation. It is also not certain if a special product is entitled to a special safeguard.

Once all these tricky issues are negotiated at Cancun, and assuming that an agreement is achieved, the Indian delegation will then begin the process of deciding what farm items are to be put in what category, and the duty cuts on them.

So if, for instance, India is allowed to have five special products, which products are to be included in them? Wheat and rice are obvious, but should the others be groundnut or cotton? This is where India's federal policy comes in "" each state will have its own favourite candidate. Similar exercises will be carried out for choosing products for deeper cuts and those for lighter cuts.

Theoretically, if India has to make a 24 per cent average cut in import duties till 2010, it could choose to keep this at 10 per cent for rice and wheat, and make much sharper cuts in certain oilseeds where the bound rate is close to an absurdly high 300 per cent.

Alternately, it could cut the import duties savagely on some oilseeds, but choose to protect them through special safeguard mechanisms. The combinations are limitless.

Given this possibility to protect at least some major product lines, and the huge gap between the 35 to 40 per cent actual average duties applicable on most farm imports today and the 115 per cent "bound rate" "" this is the rate above which India cannot pitch its import tariffs "" does this then make the ministerial the Cancun cakewalk?

So far, the Indian delegation looks quite self-assured, but a lot depends on whether the coalition will hold "" the EU has already begun its assault on it by publicly saying the members have little in common.

Tariff rate quotas, or the promise of a certain minimum guaranteed level of market access, for instance, is something the Cairns group wants and something India doesn't want to commit to. Some extra market access promises by the US/EU, and it is possible the Cairns group may split.

If that does happen, as it has in the past, and India is left isolated, it will have a tough choice. Commerce minister Jaitley could either "do a Maran" and simply refuse to negotiate "" after all, tariff cuts without a commensurate reduction in OECD subsidies is a sureshot recipe for disaster "" or India could finally buckle down to reforming its agriculture and making it more competitive.