People's Democracy

(Weekly Organ of the Communist Party of India (Marxist)


No. 48

December 01, 2013





The WTO and Agricultural Subsidy


Prabhat Patnaik


THE United States and Europe subsidise their agriculture massively. In the US for instance, government expenditure by way of subsidies to the agricultural sector is on average nearly half of the GDP originating from its agriculture. The figures for Europe are broadly similar. In India by contrast, government expenditure by way of subsidies to agriculture is estimated to have been less than 10 percent of the GDP originating from agriculture in the past, and is now just likely to exceed this figure. It comes as a surprise therefore that India should be having problems with the World Trade Organisation because of its subsidy to the agricultural sector!




The reason for this unequal treatment of countries by the WTO lies in an utterly absurd distinction that it makes between “market-distorting subsidies” and non-market-distorting subsidies, the bulk of which fall under what are called “green box subsidies”; and the WTO stipulates that market-distorting subsidies must not exceed 10 percent of the value of output in the agricultural sector. In the United States, even though total subsidies amount to almost half of the GDP from agriculture, “green box subsidies” constitute nearly 40 percent of this GDP, so that the “market-distorting subsidies” lie within the WTO limit, but in India almost the entire subsidy is counted as “market-distorting”, so that notwithstanding the much lower level of agriculture subsidy, India is now likely to fall foul of the WTO.


The US subsidies are considered non-“market-distorting” because the US gives the bulk of its subsidies in the form of cash transfers to the agricultural sector while in India subsidies are provided through offering remunerative prices or cheap inputs which, because they involve interference with “free market prices”, constitute according to the WTO “market-distorting subsidies”.


This distinction which has been foisted upon the WTO by the advanced capitalist countries to serve their own interests, and imposed through it upon the entire world, is invidious for several reasons. First, it lacks any theoretical basis whatsoever. The concept of a “free market price” is a mythical entity. There are so many things that go into the price formation of any commodity, that to single out only a few of them as constituting “distortions” and the rest as “non-distorting” is totally arbitrary. Is advertising for instance a “market distortion”? Is speculation “market distorting”? Is producers’ capacity to hold on to stocks “market-distorting”? Every one of these factors affects the “free market price” but none of them is considered “market distorting” under the WTO guidelines. Since cash transfers certainly affect the producers’ capacity to hold on to stocks and hence the price that would prevail in the absence of such transfers, it is no less “market distorting” than government purchase of stocks at fixed procurement prices which happens in India and which is considered “market distorting” by the WTO. This entire distinction in short lacks any credible theoretical foundation and is introduced by the advanced countries into the WTO rules only to serve their own interests.


Secondly, even if we accept for a moment the theoretical validity of the distinction between “market distorting” and non-“market-distorting” subsidies, there is no reason why the latter should be frowned upon in a sector like agriculture. It is a well-known fact, recognised by every economist, that agricultural prices fluctuate enormously. This happens for at least three reasons: one, unlike manufacturing where the output flow can be regulated continuously, agricultural output in any period is not only given but also subject to wide fluctuations. It is determined by the acreage devoted to particular crops, which is a result of past decisions; by the production technology; and by natural factors like weather, which are the source of fluctuations. Even though inventory changes can in principle offset the effect of output fluctuations on supplies, such offsetting is usually only partial, so that supply-side fluctuations are a fact of life. Two, the demand for agricultural goods is typically price-inelastic, which means that even small shortfalls in supply or small excesses in supply can cause huge swings in prices. And three, precisely for this reason, speculation plays a big role in the formation of agricultural prices; and, far from being price-stabilizing, as neo-liberal theorising claims, it tends to increase the amplitude of price fluctuations.


An obvious consequence of it is that, in the absence of countervailing measures by the government, there is acute distress for producers in years of excess supply and acute distress for consumers in years of excess demand. Expecting speculators operating in the “free market” to even out such fluctuations is an absurdity, which only someone who has had no experience of famines and has not heard of the Bengal famine of 1943 that killed three million people, can pretend to believe. If peasant suicides on the one hand and famines on the other are to be avoided, then it becomes incumbent on the State to interfere in the functioning of agricultural markets. The imposition of “market distortion” in other words is essential in societies like ours.


Thirdly, to believe that the deleterious consequences of the functioning of “free markets” can be overcome through cash transfers in societies like ours is also an absurdity. In the United States, where cash transfers approved by the WTO are the basic means of subsidising agriculture, only 1.1 percent of total employment is in  agriculture (the figure is for 2012), which means that only about 4 lakh households are dependent upon agriculture to earn their livelihood. At the most therefore, cash transfers have to be given to 4 lakh households. Besides, since the bulk of the transfers to agriculture in that country are to big farms and agri-business, effecting such transfers poses no difficulties. In India however the number of households dependent upon agriculture is 12 crores. To believe that cash payments can constitute the sole means of effecting transfers to so many households, is foolish, if not cynical. Likewise at the other end, to believe that crores of consumers of agricultural products can be given cash payments so that they can buy what they wish on the market at whatever prices prevail, without experiencing distress or perishing in famines, is foolish, if not cynical. In conditions like ours in other words the most effective way of providing succour both to producers and consumers is through intervention in prices whose benefits automatically and immediately reach millions of people. 


The real question that arises here is the following: governments in advanced countries are not expected to shed tears over the fate of the Indian peasants or the Indian consumers; on the contrary, they are interested in protecting and promoting the interests of their own agri-business, and if Indian peasants get decimated, giving way to corporate farming, then so much the better from their point of view. But why did the Indian government accept such an unequal treaty which has such damaging implications for the people of this country?


This acceptance, let us also not forget, was behind the back of the Indian parliament. Unlike in the US where all treaties signed by the executive have to be approved by the two elected houses before they take effect, in India the executive has from the beginning arrogated to itself the power to enter into international treaties at its own will and then present these as fait accompli to the legislature. The Constitution which is often invoked to justify this is actually quite ambiguous on the issue, with many eminent jurists (like Justice PB Sawant) holding the view that the Indian Constitution too can be interpreted in a manner that makes legislative sanction for international agreements obligatory. But by-passing the legislature has been the means whereby the government pursuing neo-liberal policies in the interests of the corporate-financial elite has sacrificed the interests of the people in the process of striking deals with metropolitan capital.




Matters however have now come to a head. The food security legislation passed by the parliament, even though it does not have universal coverage but provides security, and a modest one at that, to only 67 percent of the population, will mean procurement of food-grains on a scale and at prices that would almost certainly mean exceeding the 10 percent limit on the so-called “market distorting” subsidies. For the forthcoming Bali meeting of the WTO, India, leading a group of 46 developing countries (the so-called G-33), has been pressing that the 10 percent cap should be made inoperative for countries trying to achieve food security for their populations. But this is not acceptable to the advanced countries like the United States and the European Union, which, even though they themselves provide enormous subsidies to their own rich farmers and agri-business, cry foul when even modest succor is given to impoverished millions in third world countries like India.


A compromise worked out by the WTO officialdom is to postpone the discussion on this issue for up to four years and to ensure that during this period no country should complain against another for providing food security in violation of this 10 percent cap (the so-called “peace clause”). Since the advanced countries are not likely to become more benevolent during these four years, what this compromise means is simply this: “we shall allow you to have your food security arrangement for four years in violation of this cap, but you must wind up this arrangement after four years”. And the government of India, pusillanimous as ever in surrendering to imperialist dictates, willing as ever to sacrifice the interests of the people for keeping alive arrangements that are potentially beneficial for the corporate-financial elite, is reported to be willing to accept this compromise formula. After all, elections will be over by then and the electoral dividends, such as they are, of the food security legislation, would have been already reaped; so, a winding up of food security at that point of time may not matter too much to the neo-liberal luminaries who run the government and who were in any case opposed to the food security legislation in the first place.


Parliament must intervene to prevent such a sell-out. It must intervene to ensure that the Indian government does not accept the compromise of the “peace clause”. It must intervene to ensure that if the WTO insists on the 10 percent cap in violation of India’s food security legislation, then India should simply walk out of the WTO. What is at stake is not just the economic well-being of millions of hungry and malnourished people, but the supremacy of the parliament itself in deciding the affairs of the country, and hence the fate of our democracy.