Trade Liberalization and Agriculture: Challenges before India Biswajit Dhar and Murali Kallummal

The increasing economic integration of the Indian economy with global processes has brought considerable challenges at the door of its agricultural sector. These challenges have arisen from two broad sets of problems. In the first place, a number of major crops have been witnessing a decline in productivity growth, in particular over the past decade. Second, and perhaps more important from a short run perspective, is the fact that Indian agriculture faces unfair competition from cheap imports, which poses an enormous threat to the livelihoods of the farming communities. It is quite clear, therefore, that a comprehensive framework needs to be evolved, one that addresses the specific problems that the agricultural sector faces at the present juncture.

One of the ironies of the reforms programme introduced in the beginning of the 1990s was that it failed to cast a glance at the sector that supports the largest share of the country’s workforce. An eloquent testimony of the relative neglect suffered by agriculture during the past decade is its steadily decreasing share in the country’s capital formation. Throughout the 1990s, the share of agriculture in gross capital formation (at constant prices) has remained in single digits, which explains the slackening of its growth momentum during the past decade. This has contributed to the decline in the share of the sector in GDP, from just less than a third in the early 1990s to below a fourth a decade later.

That there has been a steady deterioration in the agricultural situation during the past decade can also be seen from the fact that while the share of rural population has seen very little change, there has been some decrease in the share of population dependent on agriculture. These trends could be a pointer to the threat to their livelihoods that the agricultural population has been facing in the more recent years.

The livelihood threats facing the Indian agricultural population could in fact increase manifold if the country is forced to undertake reductions in tariffs of the kind that is being demanded by the United States in particular in the ongoing negotiations in the WTO. The magnitude of the problems for domestic agriculture that any drastic reduction in the existing levels of tariffs can cause would be clear from the trends in the international prices of some of the major commodities in the second half of the 1990s. International prices had slumped to their lowest levels during this period primarily because of the weight of the subsidies granted by the major players in the markets for agricultural commodities, in particular the United States and the members of the European Union. A feature of the subsidies being granted by these countries has been the targeting of subsidies on products that are of export interest to them. The members of the European Union have traditionally been using very high does of subsidies on specific products which include wheat, corn and sugar besides dairy products. In case of wheat, for instance, the production-related subsidies that the producers received in 2002 were almost 84 per cent of the total value of output. The corresponding figures for sugar and milk were 51 and 50 per cent respectively. In addition to these subsidies, the EU members were also using export subsidies to gain control over the global markets.

The United States, on the other hand, increased the subsidies it was granting to specific commodities, after the WTO was established in 1995. Wheat, rice, corn and soybeans were some of the commodities in which subsidies were increased quite considerably. In case of rice, subsidies increased from close to US $ 12 million to more than US $ 700 million between 1995 and 2001, while for soybeans, the increase was from US $ 16 million to more than US $ 3.6 billion during the same period. These tendencies displayed by the countries controlling the global agricultural markets shows the levels at which distortions are being introduced in these markets, leading to increased levels of uncertainties. It is not surprising therefore that the international prices for at least the major commodities are expected to remain sticky at relatively low levels for most of the present decade.

The ongoing agriculture negotiations in the WTO have brought to the fore the severe pressures on India to reduce its tariffs. These pressures are higher given that India is among the very few countries for which the bound tariffs (i.e. maximum tariffs allowed under the WTO regime) are at levels that are significantly higher than most developing countries. It is, however, important for India to maintain tariffs on products that are critical from the point of view of maintaining food security and livelihoods, given that the international prices of many of these commodities have remained sticky at low levels in recent years, a point that was made earlier.

What also needs to be mentioned in this context is that India is the only country among those having significant interests in agriculture, which has not taken recourse to various forms of non-tariff measures (NTMs) whose use has been legitimized by the WTO. Two of the more prominent forms of these NTMs are the Sanitary and Phytosanitary (SPS) measures and Technical Barriers to Trade. While SPS measures have been used to ensure protection to human, animal and plant life and health, a significant proportion of the TBT measures have also been used for the same purpose. It is interesting to note that the use of both SPS measures and TBT have increased during the past decade. Further, the largest users of SPS measures and TBT have been countries that have, on an average, relatively low levels of tariffs. Thus, the United States, the country that is aggressively pushing for a lowering of agricultural tariffs, has the largest number of SPS measures, accounting for more than a fourth of the total put in place by all WTO members. And, Brazil and Thailand, the two developing countries whose agricultural markets are more open those in than most others, have notified large numbers of SPS measures. This trend in the use of SPS measures and TBT by the WTO members only reinforces a point that has been made in the past which is that as countries reduce their tariff levels, they develop the tendency to employ non-tariff measures. In other words, effective market access continues to remain a major problem in most markets.

The above-mentioned trends in the use of SPS measures and TBT hold significance for India for yet another reason. Suggestions have been made in some quarters that Indian agriculture should focus on exports to provide impetus for its growth. These suggestions are based on the assumption that the relatively low cost agriculture in India will have the competitive advantage in the global market place, which can help generate additional markets. However, as food standards become increasingly important in the larger markets, mere price advantages that countries like India enjoy, can contribute precious little in obtaining additional market access. India would therefore have to invest heavily in upgrading its production facilities – from the farm to the processing units – to have a look-in into the larger markets. But with investments in agriculture decreasing steadily from the mid-1980s, it would require a complete turnaround in the government’s priorities to reverse the trend. The larger issue that needs to be addressed in the context of the suggestions for an “export-oriented” agricultural sector in India is the impact such a policy orientation would have on the country’s food security. Arguments advanced in this respect have been that the increase in the stocks of foodgrains is an indicator that the country has solved its problems relating to food security. As a corollary it was suggested that diversification of Indian agriculture should take place rapidly so as to better utilise the available resources.

However, the reality has time and again proved otherwise. There is enough and more evidence that poverty and malnutrition are the grim realities facing India even in the 21st century. That India has to go some distance in making its population food secure can be seen by comparing the availability of foodgrains in India and China. In 2002, production of cereals in China was 400 million tonnes, which was required to meet the demands of a population that was touching 1.3 billion. In sharp contrast, India’s cereals production was about one-half of China’s, which supported the food needs of a population that was just over one billion.

Under the prevailing circumstances, it is vital for India to adopt a two-pronged strategy in respect of the agricultural sector. In the first place, India has no option other than to protect its domestic market with appropriate levels of bound tariffs. The bound tariffs, particularly in respect of products that are extremely sensitive from the point of view of food security and livelihood concerns, need to be so determined that they are able to protect the domestic producers against the downward pressure in international prices. It is therefore imperative for the Indian government to resist pressures for tariff reductions that have been mounted by its major trading partners like the United States.

The second part of the strategy, one that is equally important for ensuring sustainable livelihoods, is to ensure that adequate resources are provided to this resource-starved sector in order that it is able to gather the necessary growth momentum. At the same time, however, there is need for bringing about meaningful institutional reforms domestically with an eye to reaching the benefits to the lower rungs of the farming communities.

(The authors are respectively Professor & Head and Consultant, Centre for WTO Studies, IIFT Bhawan, New Delhi-16.)