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

Detail

1. Trade barriers: the government's tool to control foreign trade

• Trade barrier: a restriction the government sets up to control foreign trade. It decides which goods come in and how much of each.
• Tax on imports (tariff): a tax paid on goods brought in from abroad.
• The tax raises the price of imported goods in India.
• Buyers purchase fewer imported goods.
• Indian makers of the same goods sell more and do well.

• Worked example: a Chinese toy costs ₹100 at the port. A 50% import tax adds ₹50, so it sells at ₹150. An Indian toy at ₹120 is now cheaper, so buyers move to the Indian toy.

• Quota: a limit on the number (quantity) of a good that can be imported, e.g. "only 10,000 tonnes of a good a year". The price is not touched. The supply from abroad is capped directly.

• Quotas are one kind of quantitative restriction (QR), and QRs are a kind of non-tariff barrier (NTB). An NTB is any barrier other than a tax, such as a quota, a licence or a strict standard.
• Tariff and NTB mechanics are covered in detail in international-trade-policy.

2. Why India protected its producers after 1947 (1950s–1980s)

• Infant industries: Indian industries were only just starting in the 1950s and 1960s. Competition from imports would have stopped them from growing.
• So India imported only essential items: machinery, fertilisers and petroleum.
• NCERT's point: all developed countries protected their own producers in their early stages. Protection was normal practice, not an Indian oddity.
• The critique of this import substitution policy (making at home the goods that were earlier imported) is covered in planning-mixed-economy.

3. The 1991 opening: liberalisation

• Why the policy changed: the government felt Indian producers were ready to compete with producers around the globe.
• Competition would push firms to improve their quality.

• This would raise the performance of Indian producers.

• Outside pressure: the change was "supported by powerful international organisations".

• Class 11 explains this. In the 1991 crisis, India took a loan of about US$7 billion from the World Bank and IMF.

• The loan came with conditionalities: conditions that India open up its economy, reduce controls and liberalise trade.

• What changed: barriers on trade and investment were "removed to a large extent".

• Goods could be imported and exported easily.

• Foreign companies could set up factories and offices in India. This is a direct enabler of MNCs.

• Liberalisation: removing the barriers or restrictions set by the government. Businesses can then decide freely what to import or export.

• Link to the parent topic: the movement of goods (trade) and investment (FDI by MNCs) is what joins markets together. That joining of markets is globalisation.

4. The WTO: what it is and how it works

Class 10 view

• World Trade Organisation (WTO): its aim is to liberalise international trade.
• It started at the initiative of developed countries.
• It sets rules for international trade and checks that countries follow them.
• Membership: 166 members since 30 August 2024, when Timor-Leste joined as the 166th member. Comoros joined as the 165th on 21 August 2024 [6]. (NCERT: "about 160".)
• Both countries' membership terms were approved at the 13th Ministerial Conference (MC13), Abu Dhabi, 26 February 2024 [6].

Class 11 view

• GATT (General Agreement on Tariffs and Trade): set up in 1948 with 23 countries. It was a global trade agreement that gave all countries equal chances in the world market.
• The WTO was founded in 1995 as the successor to GATT.
• The WTO came out of the Uruguay Round (1986–94) of trade talks. Its Final Act was signed at Marrakesh on 15 April 1994 [5].
• Aims of the WTO:
• a rule-based trading regime, where no country can put arbitrary (random, unfair) restrictions on trade
• the best possible use of world resources

• protection of the environment

• It covers both goods and services. It seeks to remove both tariff and non-tariff barriers.

• India's compliance:
• India removed QRs on imports fully by April 2001.

• India also brought down its tariff rates.

• WTO agreements are covered in detail in international-trade-policy.

5. The WTO's farm rulebook: the Agreement on Agriculture (AoA)

• The Agreement on Agriculture came into force on 1 January 1995 [5]. It has three pillars:
• market access: tariffs on farm imports
• export subsidies: government money paid to help exports

• domestic support: government money paid to farmers at home [5]

• Agricultural subsidies: government support to farmers through price support, input subsidies (cheap fertiliser, power or water) or direct payments (cash).

• The WTO sorts domestic support into three "boxes":
• 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 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].

• A distortion here means that the subsidy changes what farmers grow, or world prices, because of government money rather than real demand.

• 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 apply product by product, for example to rice alone [2].

6. The asymmetry: "Is this free and fair trade?"

• NCERT's charge: developed countries kept their own barriers unfairly. At the same time, WTO rules forced developing countries to remove theirs.
• The US farm case (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. This hurts farmers there.

• Picture: a US cotton farm of thousands of acres, owned by a big corporation, sells cotton abroad cheaply. A small Indian cotton farmer cannot match that price.

• Nuance: unfair rules, not only broken rules

• Much developed-country support is legal under WTO rules, because Green Box and Blue Box payments are not capped [2].
• Rich countries can afford large Green Box programmes, such as direct income payments. Poor countries mostly support farmers through price support, which falls in the Amber Box and is capped.

• So the complaint is as much about how the rules were written as about countries breaking them.

• Other Class 11 critiques

• Most world trade takes place among developed nations.
• Developing countries must open their markets. But high NTBs block their entry into developed markets.

• The US kept quotas on textile imports from India and China. (NCERT is outdated here: the textile quotas under the Agreement on Textiles and Clothing (ATC) ended on 1 January 2005.)

• Protests: farmers and activists held an anti-WTO demonstration at Hong Kong in 2005, during the 6th Ministerial Conference.

7. India's food-security fight at the WTO: public stockholding

• Public stockholding (PSH): the government buys staple grains (rice, wheat) from farmers at a fixed price and stores them to feed the poor. In India this is MSP procurement for the PDS.
• How the WTO measures this support: it counts as market price support, which falls in the Amber Box. The formula is [3]:

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

• The catch: the external reference price is fixed at 1986–88 levels, the first three years of the Uruguay Round. It is never adjusted for inflation [3].

• So even a modest MSP today looks like a huge "subsidy" when 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: ₹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 greater than ₹8,000 crore, so India breaches the de minimis limit on paper. Most of the "subsidy" is created by the old reference price, not by generous support.

• The peace clause

• At the Bali Ministerial Conference (MC9), 2013, members agreed an interim "peace clause". Under it, members will not challenge developing countries' PSH programmes through WTO dispute settlement, even if support crosses the limit [3].
• Conditions: the programme must not distort trade or harm other countries' food security. The country must also share information (transparency) [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 became the first country ever to invoke the peace clause (notified in 2020). India said its breach of the de minimis limit for rice was covered by the clause. Other members registered 25 questions on India's notification [7].

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

Prelims Hooks

• Quota limits the quantity of imports. An import tax (tariff) raises their price. Both are trade barriers.
• GATT: 1948, 23 countries → WTO: 1 January 1995. The WTO came out of the Uruguay Round (1986–94), whose Final Act was signed at Marrakesh, 15 April 1994.
• WTO membership: 166. Timor-Leste became the 166th member on 30 August 2024, and Comoros the 165th on 21 August 2024. (NCERT: ~160.)
• India removed all QRs on imports by April 2001. The ATC textile quotas ended on 1 January 2005.
• Green Box = Annex 2 (minimal or no distortion, uncapped). Amber Box = Article 6 (distorting, capped). Blue Box = Article 6.5 (linked to production limits).
• De minimis limit: 5% of production value for developed countries, 10% for developing countries.
• The external reference price for market price support is fixed at 1986–88 prices.
• Peace clause: Bali (MC9), 2013. Made to last until a permanent solution by the General Council in November 2014. India was the first to invoke it, for rice.
• NCERT's US farm data: agriculture is about 1% of US GDP and 0.5% of employment, yet US farmers get heavy subsidies.
• Anti-WTO protest in NCERT: Hong Kong, 2005 (6th Ministerial Conference). Trap: this is not Seattle (1999).

Mains Points

• Unfair rules, not just unfair players
• 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.

• Use this to answer "Is WTO trade free and fair?" (GS-III, Agriculture and Trade).

• Frozen reference price

• The 1986–88 external reference price turns inflation into a fake "subsidy".
• India's demand: update the formula (adjust for inflation) and make the peace clause a permanent solution.

• This links WTO rules to MSP, the PDS and the National Food Security Act.

• 1991 liberalisation cut both ways

• It raised efficiency and enabled MNC entry.
• But it was partly shaped by IMF–World Bank conditionalities, not purely by domestic choice.

• Compare this with NCERT's point that today's developed countries once protected their own infant industries.

• Subsidised dumping

• Dumping by developed countries lowers world prices and hurts small farmers in India, for example cotton growers.
• Remedies: anti-dumping duties, special safeguards and a stronger WTO voice for developing countries (the G-33 coalition).