Subsidy

 
What is subsidy?
• Subsidy literally means assisting from behind.
• Subsidy is the opposite of tax – it is an instrument of fiscal policies
Objective of subsidies
By means of creating a wedge between consumer prices and producer costs, lead to changes in demand/ supply decisions
Forms of subsidies
• cash payment to producers/consumers  --> visible form
• reduced tax-liability
• low interest government loans
• government equity participation.
P.S: If the government procures goods, such as food grains, at higher than market prices or if it sells as lower than market prices, subsidies are implied.
Need of subsidy: (1)
a) Inducing higher consumption/ production
b) Offsetting market imperfections ( it is a situation where free markets fail to allocate resources efficiently)
c) Achievement of social policy objectives including redistribution of income, population control, etc.
d) can help in controlling the prices to maintain stability.
e) Especially in case of agriculture where food is basic right of all, one cannot leave everything to market, government intervention is needed.
Agriculture subsidy:
First some background--
Indian Government role in agriculture sector development.
• To create self-sufficiency
• employment creation
• support to small-scale producers for adopting modern technologies and inputs
• reduction of price instability and improvement of the income of farm households.
This can be done in forms such as :
• import-export policies
• domestic policies like
- price support programs
- direct payments
- inputsubsidies to influence the cost and availability of farm inputs (like credit, fertilizers, seeds, irrigation water, etc. )
Input subsidies benefit economically, environmentally and socially
Inputs like fertilizers, irrigation water and electricity have a significant share in agricultural subsidies
What is Agricultural Subsidy?
"An agricultural subsidy is a governmental financial  support paid to farmers and agribusinesses to supplement their income, manage the supply of agricultural commodities, and influence the cost and supply of such commodities.
 
Types
• Two major types of subsidies
 fertilizer subsidies
 food subsidy
These  two account for almost 90 percent of agricultural subsidy.
• one more form which is intangible and uncountable is that, agricultural income is not taxed in India.
The agriculture subsidies are distributed by every country but the amount varies. In India, the subsidies provided are very low compared to other countries while number  of dependents is very large. Thus, agriculture subsidy for our poor farmers is one important tool to help our agriculture sector grow
Problems with Agri Subsidy
a) Agri subsidies intended to raise farmer incomes by remedying low crop prices – instead they promote over production and therefore lower crop prices
b) Agri subsidies promote over production of one crop thus other crops are not/less available in the market
c) Distinguishing between the needy and a non needy is difficult . For eg-  In US 90% of farm subsidy goes to largest 25 percent of farms. In European Union, Japan and Canada this figure is 70 percent.
d) Many economists (including Joseph Stiglitz) have argued  in long term the agri-subsidies will affect raising global food prices therefore harming  the poor, increasing malnutrition, etc.
e) Also subsidies hamper terms of trade and so doesn’t allows one country  to take benefits of comparative advantage.
f) Due to extensive government participation,  subsidies may create inefficiencies
g) There are issues like the straining effects of agricultural subsidies on the sub-optimal use of scarce inputs like water and power induced by subsidies, and whether subsidies lead to systemic inefficiencies
Agriculture in WTO
Before the Uruguay Round, agriculture was not included as a substantial part
Need of including agriculture in trade negotiation:

















Therefore, for a fair agricultural trade regime following is necessary–
• reduction of domestic production subsidies given by developed countries (US and EU particularly)
• reduction in the volume of subsidized exports and
• minimum market access opportunities for agricultural producers world-wide.
Following table shows important milestones for agricuture in WTO
Period Round Agreements Important aspects
1986–94
(was supposed to be for 4 years) UruguayRound
Agreement on Agriculture - aimed towards fairer competition and a less distorted sector
- WTO member governments agreed to improve market access and reduce trade-distorting subsidies in agriculture
- these commitments were phased in over a six years from 1995 (10 years for developing countries)
- The Agriculture Committee oversees the agreement’s implementation
2001-till present
(was supposed to be for 3 years) Doha Development Round
  - was planned to finish in January 2005 but prolonged
- US wanted to restrict a new round to market access issues esp. agriculture
- member governments committed themselves to comprehensive negotiations aimed at:
o market access: substantial reductions
o exports subsidies: reductions of, with a view to phasing out, all forms of these
o domestic support: substantial reductions for supports that distort trade


We must know about the AoA (Agreement on Agriculture) as it is in news currently:
Agreement on Agriculture
• Final Act of the Uruguay Round of Multilateral Trade Negotiations,
• signed in April 1994 at Marrakesh, Morocco
• came into force on 1st January, 1995
• All WTO members, except least developed countries (LDCs), were required to make commitments in all these areas in order to liberalize agricultural trade
• Three ‘pillars’ of AoA:  market access, export subsidy and domestic support.

Before proceeding to the features of AoA- we need to know the boxes mentioned on WTO's site as it is related to the agreement here
The boxes
In WTO, general subsidies are identified by “boxes”  with different colours:
• green (permitted subsidies)
• amber (slow down — i.e. subsidies to be reduced),
• red (forbidden subsidies)
The Agriculture Agreement has no red box (although domestic support exceeding the reduction commitment levels in the amber box is prohibited)
Thus, AoA has the following boxes:
• Amber (de-minimis)
• Green
• Blue (for subsidies that are tied to programs that limit production)
• S&D (exemptions for developing countries)
Salient Features of AoA

Market Access Tariffication of all non-tariff barriers - non-tariff barriers ( quantitative restrictions and export and import licensing etc) to be replaced by tariffs to provide the same level of protection.
- Developing countries given a limited element of special and differential treatment (S&DT).
Setting up of a minimum level for imports of agricultural products - Minimum level will be as a share of domestic consumption.
- Countries required to maintain 1986-88 levels of access for each individual product.
- The market access provision, however, does not apply when the commodity in question is a ‘traditional staple’ of a developing country.
 
Domestic support • identifies acceptable measures that support farmers
• denies unacceptable, trade distorting support to the farmers
• this is done through AMS ( described later)
• Commitment made required a 20% reduction in total AMS for developed countries over 6 years. For developing countries, this percentage is 13% and no reduction is required for the LDC
Export subsidies:. • several types of subsidies to which reduction commitments apply
• eg- direct export subsidies dependent on export performance; sales of noncommercial stocks of agricultural products for export at prices lower than comparable prices for such goods in the
domestic markets; producer-financed subsidies; cost-reduction measurse such as subsidies to reduce marketing costs for exports including handling costs and costs of international freight; internal transport subsidies applying only to exports; subsidies on incorporated products i.e., subsidies on agricultural products such as wheat dependent on their incorporation in export products made of wheat etc.
• such subsidies are virtually non-existent in India as exporters of agricultural commodities do not get direct subsidy (they might get it indirectly as in the form of income tax rebate etc)

 
Very important terms related to this topic
Aggregate Measurement of Support (AMS).
• All domestic support is quantified through the mechanism of total Aggregate Measurement of Support (AMS)
• It is a means of quantifying the aggregate value of domestic support or subsidy given to each category of agricultural product.
• consists of two parts
o Product-specific subsidy refers to the total level of support provided for each individual agricultural commodity, essentially signified by procurement price in India.
o Non-product specific subsidy, on the other hand, refers to the total level of support for the agricultural sector as a whole, i.e., subsidies on inputs such as fertilisers, electricity,  irrigation, seeds, credit etc.
There are three categories of support measures that are not subject to reduction under the Agreement, and support within specified deminimis level is allowed.
1. Measures which have a minimum impact on trade i.e.Green Box criteria
Ex:Government assistance on general services like
(i) research, pest and disease control, training, extension, and advisory services;
(ii) public stock holding for food security purposes;
(iii) domestic food aid; and
(iv) direct payment toproducers like governmental financial participation in income insurance and safety nets, relief from natural disasters, and payments under environmental assistance programmes.


2. Developing country measures otherwise subject to reduction i.e. S&D Box criteria
Examples
(i) investment subsidies which are generally available to agriculture in developing countries; and
(ii) agricultural input services generally available to low income and resource poor producers in developingcountries.
3. Direct payments under production limiting programme i.e. Blue Box criteria
These are relevant from the developed countries point of view only.
Also, under Amber box i.e. de-minimis provision - it is not required to reduce support in this category if a product's value in any year remains below 10% for developing countries of the total value of production of the basicagricultural product in question or of the value of total agricultural production in the case of non-product specific support
PEACE CLAUSE
• Article 13 (“due restraint”) of the Agriculture Agreement
• protects countries using subsidies which comply with the agreement from being challenged under other WTO agreements
• Without this, countries would have greater freedom to take action against each others’ subsidies, under the Subsidies and Countervailing Measures Agreement
• The peace clause expired at the end of 2003 but Some countries  (read US/EU) are pushing for extending it to 2014 so that they can enjoy some degree of “legal security”, ensuring that they will not be challenged so long as they comply with their commitments on export subsidies and domestic support under the Agriculture Agreement
• Some others want it to lapse as part of their overall objective to see agriculture brought under general WTO disciplines that deal with governments’ ability to take action against subsidies
• Some countries have proposed variants. Eg: Canada would like to see “green box” domestic supports freed from the possibility of countervailing action under the Subsidies Agreement. India proposes something like the peace clause should be retained but only for developing countries, so that some subsidies are free from the possibility of countervailing duty

G-33
• Coalition of 47 developing countries focused on defending their interests in subsistence agriculture, food security and rural livelihood
• India - has had over 500% inflation since 1988 –Thus, India has made out a case for full inflation allowance which will help the government procure grain from farmers(The Hindu)
• The proposal of the G-33 countries is in line with India’s position but the West will resist this change
• Clause 18.4 of the AoA does mention that developing economies shall receive “due allowance for inflation” in determining procurement prices
• US and EU say that the AoA does not commit full allowance for inflation and thus, “peace clause” must be accepted for the next 3 years
Current scenario
• India is willing to accept Peace clause since it has started the food security program. If India doesn't do this then it will be on back foot as due to NFS Act the procurement price of many grains will shoot up very soon
• For example- in India, procurement price of rice has shot up 24% from 1986-88- but only 10% was allowed (remember de-minimis level) – thus, if Indiadoesn't allow peace clause it would not be able to procure wheat and other grains for food security act.
• But this move by US/EU is a Hippocratic one as US itself provides a large amount of "trade distorting subsidies" but blames India for doing it by launching the food security bill
• In reality, food security bill is not under the radar but India's PDS system will be. Thus, India needs to be careful while putting up any of its point at the upcoming Bali meet in December
• It is still unclear that all G-33 members will support peace clause or not
 

Important links to refer:
What? Link
List of G-33 members http://www.wto.org/english/tratop_e/dda_e/negotiating_groups_maps_e.htm?group_selected=GRP017

Link to various boxes http://www.wto.org/english/tratop_e/agric_e/agboxes_e.htm

Newsletter "India and WTO" published regularly by Ministry of Commerce, a good read for international trade http://commerce.nic.in/trade/international_trade.asp?id=1&trade=i


References:
• http://agricoop.nic.in/statistics/stock2.htm
• http://www.theguardian.com/sustainable-business/agricultural-subsidies-reform-government-support
• http://www.heritage.org/research/reports/2007/06/how-farm-subsidies-harm-taxpayers-consumers-and-farmers-too
• http://www.indianexpress.com/news/subsidies-in-fact/1093243/
• http://www.wto.org/english/docs_e/legal_e/14-ag_02_e.htm
• http://www.ijssbt.org/volume1/pdf/11.pdf
• http://www.wto.org/english/tratop_e/agric_e/negs_bkgrnd13_boxes_e.htm
• WTO AGREEMENT ON AGRICULTURE  - report by ACTION AID
• www.irinnews.org/printreport.aspx?reportid=98972
• The Use of Input Subsidies in Developing Countries – report by OECD

Personal details:
Akanksha Tiwari