WHAT IS MINIMUM SUPPORT PRICE (MSP)

Minimum price set by the government for certain agricultural products, at which the products would directly be bought from the farmers if the open market prices are less than the cost incurred.

CONTEXT

• The demand of farmers to provide a legal guarantee for the minimum support price (MSP) for their produce has triggered a nationwide debate. Some believe it would be “fiscally ruinous” to procure all the 23 crops for which MSP is announced annually. Others contend that procuring these crops would be a logistical nightmare.
• Question arises Can India provide a legal guarantee for MSP without violating its international law obligations enshrined in the Agreement on Agriculture (AoA) of the World Trade Organization (WTO)

ABOUT AGREEMENT ON AGRICULTURE(AOA)

• One of the central objectives is to cut trade-distorting domestic support that WTO member countries provide to agriculture.
• Domestic subsidies are divided into three categories: ‘green box’, ‘blue box’ and ‘amber box’ measures.
• Subsidies that fall under the ‘green box’ (like income support to farmers de-coupled from production) and ‘blue box’ (like direct payments under production limiting programmes subject to certain conditions) are considered non-trade distorting. Countries can provide unlimited subsidies under these two categories.
• Price support provided in the form of procurement of crops at MSP is classified as a trade-distorting subsidy and falls under the ‘amber box’ measures, which are subject to certain limits.

HOW MSP VIOLATES AOA

• To measure ‘amber box’ support, WTO member countries are required to compute Aggregate Measurement of Support (AMS). AMS is the total of product-specific support (price support to a particular crop) and non-product-specific support (fertilizer subsidy).
• Under Article 6.4(b) of the AoA, developing countries such as India are allowed to provide a de minimis level of product and non-product domestic subsidy. This de minimis limit is capped at 10% of the total value of production of the product, in case of a product-specific subsidy; and at 10% of the total value of a country’s agricultural production, in case of non-product subsidy. Subsidies breaching the de minimis cap are trade-distorting. Consequently, they have to be accounted for in the AMS.
• The procurement at MSP, after comparing it with the fixed external reference price (ERP) — an average price based on the base years 1986-88 — has to be included in AMS. Since the fixed ERP has not been revised in the last several decades at the WTO, the difference between the MSP and fixed ERP has widened enormously due to inflation.
• Even if the Government does not procure directly but 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.
• Very recently, a WTO panel in the case, India – Measures Concerning Sugar and Sugarcane, concluded that India breached the de minimis limit in the case of sugarcane by offering guaranteed prices paid by sugar mills to sugarcane farmers.

PEACE CLAUSE

• Although a permanent solution is nowhere in sight, the countries have agreed to a peace clause.
• The peace clause
  • Forbids bringing legal challenges against price support-based procurement for food security purposes even if it breaches the limit on domestic support
  • Subject to several conditions
  • For example, it can be availed by developing countries for the support provided to traditional staple food crops to pursue public stockholding programmes for food security (procuring food to provide free ration through the Public Distribution System).
  • Applicable only for programmes that were existing as of the date of the decision and are consistent with other requirements

India’s procurement for rice and wheat, even if it violates the de minimis limit, will enjoy legal immunity. However, India will not be able to employ the peace clause to defend procuring those crops that are not part of the food security programme (such as cotton, groundnut, sunflower seed).

Even if the AoA is amended to exclude MSP-backed procurement for food security purposes from the AMS, procurement for other crops at prices higher than the fixed ERP would be considered trade-distorting and thus subject to the de minimis limit. Therefore, India needs to recalibrate its agricultural support programmes to make use of the flexibilities available in the AoA.

SOME ALTERNATIVES

• Arguably, 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 provided the income support is not linked to production.
• Alternatively, one can supplement price-based support (keeping the de minimis limit in mind) with an income-based support policy. However, it will be arduous especially given the climate of high misgiving prevailing between the farmers and the political establishment.
• The recent fiasco with the three repealed farm laws demonstrates that reforms in agriculture, no matter how sagacious, cannot be shoved down the throats of the farmers. The Government needs to engage with the farmers and create an affable environment to convince them of other effective policy interventions, beyond MSP, that are fiscally prudent and WTO compatible.