Agricultural subsidies

Also called: Farm subsidies · Topic: Globalisation and MNCs · NCERT: Class 10, Ch 4 "Globalisation and the Indian Economy"

Meaning

Agricultural subsidies (also called farm subsidies) are government support to farmers. It comes in three forms: price support (a fixed, assured price for crops), input subsidies (cheap fertiliser, power or water) or direct payments (cash).

They matter because the WTO decides which subsidies are limited and which are not. Heavy subsidies in rich countries let their farm goods sell abroad at abnormally low prices, and this hurts small farmers in developing countries like India. The same WTO rules also put a limit on India's MSP procurement. The WTO measures price support with this formula [3]:

Market price support = (Administered/support price − External reference price) × Eligible production ≤ 10% of the value of production

Explanation

Three forms of farm support

• Price support: the government promises to buy a crop at a fixed price. In India, this is the MSP (minimum support price).
• Input subsidies: the government makes fertiliser, power or water cheaper for farmers.
• Direct payments: the government pays cash straight to farmers.
• The WTO's Agreement on Agriculture (AoA) came into force on 1 January 1995. It has three pillars [5]:
• market access: tariffs on farm imports
• export subsidies: government money paid to help exports
• domestic support: government money paid to farmers at home

The WTO "boxes": which subsidies are capped

• The WTO sorts domestic support into three boxes. The test is trade distortion: does the subsidy change what farmers grow, or world prices, because of government money rather than real demand?
• Amber Box: support that distorts production and trade, such as price support and input subsidies. It is defined in Article 6 of the AoA, and it is capped [2].
• Blue Box: support that would otherwise be Amber, but that requires farmers to limit production. It is set out in Article 6.5 and is not capped [2].
• Green Box: support that causes no trade distortion, or at most minimal distortion, such as research, environmental programmes and income support not linked to output. It is defined in Annex 2 and is not capped [2].
• De minimis limit (a small amount of Amber support that is allowed without any cut):
• 5% of the value of farm production for developed countries
• 10% for most developing countries, including India [2]
• The same limits also apply crop by crop, for example to rice alone [2].

Measuring price support: the frozen reference price

• The external reference price in the formula is fixed at 1986–88 levels. It is never adjusted for inflation [3].
• So a normal MSP today looks like a huge "subsidy" when it is compared with a price from almost 40 years ago.
• Worked example (numbers for illustration only):
• MSP for rice: ₹2,300 per quintal. Reference price (1986–88): ₹350 per quintal.
• Gap: ₹2,300 − ₹350 = ₹1,950 per quintal.
• Eligible production: 5 crore quintals. So support = 1,950 × 5 crore = ₹9,750 crore.
• Value of rice production: ₹80,000 crore. The 10% limit is ₹8,000 crore.
• ₹9,750 crore is more than ₹8,000 crore, so India breaks the limit on paper.
• Most of this "subsidy" comes from the old reference price, not from generous support.

Why rich-country subsidies hurt poor-country farmers

• The US farm case (NCERT Class 10):
• Agriculture is only about 1% of US GDP and about 0.5% of US employment.
• Yet US farmers get huge sums from the government for production and for exports.
• So they can sell farm products at abnormally low prices.

• The extra output is dumped (sold abroad below its real cost) in other countries. Farmers there lose out.

• Example: a large US cotton farm owned by a corporation sells cotton abroad cheaply. A small Indian cotton farmer cannot match that price.

• Unfair rules, not only broken rules:
• Much of the support in rich countries is legal, because Green Box and Blue Box payments are not capped [2].
• Rich countries can afford large direct income payments, which fall in the Green Box.
• Poor countries mostly support farmers through price support, which falls in the Amber Box and is capped.

In India

• Main form of support: MSP procurement for the PDS. The government buys rice and wheat from farmers at a fixed price and stores them to feed the poor. This is called public stockholding (PSH).
• WTO treatment: this procurement counts as market price support, so it falls in the Amber Box. It is measured against India's 10% de minimis limit [2].
• Peace clause:
• It was agreed at the Bali Ministerial Conference (MC9), 2013. Under it, members will not challenge developing countries' PSH programmes through WTO dispute settlement, even if their support crosses the limit [3].
• Conditions: the programme must not distort trade or harm other countries' food security, and the country must share information [3].

• In November 2014, the WTO General Council decided that the clause will stay in perpetuity, until a permanent solution is agreed [4].

• India invokes it: India was the first country ever to invoke the peace clause (notified in 2020). India said the clause covered its breach of the de minimis limit for rice. Other members registered 25 questions on India's notification [6].

• Still pending: members have not yet agreed a permanent solution on PSH [3].

Don't confuse with

• Amber Box vs Green Box: Amber support (price support, input subsidies) distorts trade and is capped. Green Box support (research, income support not linked to output) is not capped.
• Tariff (import tax): a tariff makes imports costlier to protect home producers. A subsidy pays home farmers directly or indirectly.
• De minimis limit vs peace clause: the de minimis limit is the ceiling on Amber support (5% or 10%). The peace clause only stops legal challenges when a developing country's PSH crosses that ceiling. It does not raise the ceiling.
• Export subsidies vs domestic support: these are two separate pillars of the AoA. Export subsidies help goods sell abroad. Domestic support goes to farmers at home, and only domestic support is sorted into the boxes.

Prelims Hooks

• The AoA came into force on 1 January 1995, with three pillars: market access, export subsidies and domestic support [5].
• Green Box = Annex 2 (uncapped). Amber Box = Article 6 (capped). Blue Box = Article 6.5 (support linked to production limits, uncapped) [2].
• De minimis: 5% of the value of production for developed countries and 10% for developing countries, including India [2].
• The external reference price for market price support is fixed at 1986–88 prices [3].
• Peace clause: agreed at Bali (MC9) in 2013, and extended in perpetuity by the General Council in November 2014 [4]. India was the first to invoke it, for rice.
• NCERT trap: US agriculture is only about 1% of GDP and 0.5% of employment, yet it gets heavy subsidies. NCERT's anti-WTO protest is Hong Kong, 2005 (6th Ministerial Conference), not Seattle.

Mains Points

• "Is WTO trade free and fair?": the rules themselves are unequal.
• Uncapped Green Box and Blue Box support suits rich countries, which can pay farmers directly.
• Capped Amber Box rules hit developing countries, which support farmers through price support.

• Subsidised dumping lowers world prices and hurts small farmers in India, for example cotton growers.

• Food security vs WTO rules: the frozen 1986–88 reference price turns inflation into a fake "subsidy".

• India wants the formula updated for inflation.
• It also wants a permanent solution in place of the peace clause.

• This links WTO rules to MSP, the PDS and the National Food Security Act (GS-III).

• Remedies for developing countries:

• anti-dumping duties (extra import taxes on goods sold below their real cost)
• special safeguards
• a stronger WTO voice through coalitions such as the G-33
• NCERT also points out that today's developed countries once protected their own producers, so the demand for policy space is fair.

Read more

• Enablers II: liberalisation, WTO pressure and the farm-subsidy debate