The WTO’s challenge to MSP is another frontier to cross

News: A legal guarantee for MSP will violate international law obligations enshrined in the Agreement on Agriculture (AoA) of the World Trade Organization (WTO)

What is Agreement on Agriculture (AoA) of the World Trade Organization (WTO)?

Read more here: https://forumias.com/blog/wto-terminologies-aoa-blue-green-amber-box-peace-clause/

How a legal guarantee for MSP will violate WTO rules?

Firstly, the price support provided through MSP will be classified as a trade-distorting subsidy because India’s applied administered price for rice is much more than the 1986-88 External Reference Price(ERP). This overshoots India’s de minimis limit.

For instance, according to the Centre for WTO Studies, India’s fixed ERP for rice, in 1986-88, was $262.51/tonne and the MSP was less than this.

However, India’s applied administered price for rice in 2015-16 stood at $323.06/tonne, much more than the 1986-88 ERP.

Further, procuring all the 23 crops at MSP, as against the current practice of procuring largely rice and wheat, will result in India breaching the de minimis limit.

Even if the Government does not procure directly and mandates private parties to acquire at a price determined by the Government, as it happens in the case of sugarcane, the de minimis limit of 10% applies.

For example, Very recently, a WTO panel, concluded that India breached the de minimis limit in the case of sugarcane. Because India is offering guaranteed prices paid by sugar mills to sugarcane farmers.

Secondly, the Peace clause cannot be used to support India’s case if the MSP system is legalised for 23 crops because the peace clause is subject to several conditions.

The peace clause is applicable only for programs that were existing as of the date of the decision and are consistent with other requirements.

Peace clause can be availed by developing countries for the support provided to traditional staple food crops to pursue public stockholding programs for food security.

Hence, India will not be able to employ the peace clause because crops such as cotton, groundnut, sunflower seed are not part of the food security program.

Therefore, India needs to recalibrate its agricultural support programs to make use of the flexibility available in the AoA.

What can be done?

First, India can move away from price-based support in the form of MSP to income-based support, which will not be trade-distorting under the AoA. But the income support should not be linked to production.

Second, India can supplement price-based support with an income-based support policy without breaching the de minimis limit.

Finally, the Government needs to engage with the farmers and convince them of other effective policy interventions, beyond MSP, that are fiscally prudent and WTO compatible.

Source: This post is based on the article “The WTO’s challenge to MSP is another frontier to cross” published in The Hindu on 17^th Dec 2021.