Government’s huge expenditure plan to boost agriculture:
- The government has fixed itself the target of doubling farmers’ income by 2022.
- The government plans to spend Rs 25 lakh crore on agriculture and rural development to this end.
But should be in sync with WTO rules:
- But this cannot be spent through sharp hike in farm subsidies or in PM Kisan-type income transfer schemes.
- Otherwise, it will be in breach of WTO rules.
WTO cap on government support to agriculture to prevent distorting export markets:
- The WTO principle is that government policy shouldn’t distort export markets.
- For example, due to the high MSPs fixed by the government, FCI accumulates stocks far in excess of what is needed.
- In order to clear the stock, FCI usually sells them at a discount later.
- If this stock is bought by traders who export it, this gets counted as distorting export markets through subsidies.
India’s agriculture support already crosses WTO caps:
- India’s WTO commitments put a cap on how much farm support the government can give.
- WTO norms have 10% subsidy/support cap in crops like wheat and rice.
India’s support looks high due to poor WTO methodology:
- India is already in breach of that. For example, current support as per WTO methodology is 26% in the case of rice.
- However, agriculture economists like Ashok Gulati have pointed out that the WTO is not taking into account inflation since the agreement was signed.
- If inflation is taken into account, India’s support levels for rice fall dramatically, from 26% to 2.9%.
But for now India needs to respect the caps:
- However, for this to be implemented, WTO will have to accept India’s interpretation.
- Till then, India will feel the pressure to reduce subsidies to agriculture.
Alternate ways to boost agriculture without breaching WTO commitments:
- Increasing subsidies—such as those on MSP-based procurement—is not the only way to boost farmer income.
- If spent wisely, the Rs 25 lakh crore plan can coexist with India’s WTO commitments.
Investment in agriculture:
- Public capital formation in agriculture fell from 3.9% of agri-GDP in 1980-81 to 2.2% in 2014-15, before recovering a bit to 2.6% in 2015-16.
- Meanwhile, during the same time, input subsidies rose from 2.8% to 8%.
- So, if the government switches expenditure from subsidies towards investment, that would help raise farmer incomes while not affecting the WTO equation.
- This is because investment in infrastucture and R&D does not count as subsidy as per WTO rules.
- According to some estimates, every rupee spent on agricultural R&D adds Rs 11.2 to agriculture GDP.
- In comparison, the same amount spent on on fertiliser subsidy just adds 88 paise.
- That means if the government spends on R&D instead of on various input subsidies, doubling farmers’ income while staying WTO-compliant is achievable.
Freeing agriculture produce prices:
- Governments in India, by not allowing farmers to get global prices, has caused a loss in farmers income by 14% (of gross farm receipts) for the years 2000-01 to 2016-17 (as per ICRIER-OECD study on agricultural policies in India).
- This means, for the mentioned period, farmers lost Rs 45 lakh crore (at 2017-18 prices), or around Rs 2.6 lakh crore per year.
- In this regard, the push for a pan-India electronic or eNAM market was welcome, but so far has not been successful.
- If prices of produce are freed up, farmers can get 10-14% more income right away.
Collateral benefits of cutting subsidies – better cropping practices:
- There is another advantage of supporting farmers the smart way.
- For instance, if subsidies aren’t given on water and electricity, and MSPs are not used to dictate what farmers grow, this will also ensure farmers don’t grow the wrong crop.
- As a result, with less damage to the soil, overall productivity will rise.
- Agriculture reform is a big agenda item for the government, and, if is done right, the impact on farmers and the economy will be huge.
GS Paper III: Economy