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Whether Indian Agriculture Is Net SubSidized Or Net taxed?

Depends on methodology (AMS & PSE) I- SEMINAR

Presented by: Sowndarya D.C. Sr.M.Sc. PAL 0091


1. History Of The WTO Agreement On
2. 3. 4. 5.

6. 7. 8. 9.

Subsidies AOA In WTO Features, And Uruguay Round Classification Subsidies In Three Boxes Methods To Measure The Level Of Support a) AMS b) PSE Difference Between AMS And PSE Domestic Support In India Implications Conclusion


WTO made an agreement for subsidies called as Agreement on Subsidies and Countervailing (compensating) measures (ASCM). This applies to goods. General principle of the WTO agreement on subsidies is trade without discrimination among member countries Prior to this, subsidies were dealt under General Agreement on Tariffs and Trade (GATT). The SCM agreement divided subsidies into three categories: Amber box, Green box, Blue box. Agriculture was chosen because it is one of the sectors which receives more subsidies .

Agreement on Agriculture (AoA) is opening the economy and removal of discrimination against tradable agriculture. This has immense benefits by increased trade / exports. AoA : Trade Reform through a fair and equitable market oriented agriculture trading system.. AOA: Aim is to reduce domestic support and correct trade distortions to promote efficient allocation and use of world resources But AoA has not been beneficial to India as predicted in early 1990s. Because, distortions, market access barriers in developed countries are affecting agricultural exports of developing countries.

Features, and Uruguay round

Developed countries - share of agriculture sector in GDP is very low; but due to strong lobbies they are providing huge subsidies to agriculture sector. But export competitiveness depends on 1. world prices, 2. domestic prices 3. export subsidy India expected to benefit from Uruguay Round due to comparative advantage in production But AoA has not benefited India as expected Why? Because, since1996, world prices of agriculture commodities began to fall, slowdown of growth in agricultural exports

But Developed nations continue to protect their agriculture

Because they have resources to support farmers Developing countries do not have adequate resources to support farmers Such domestic and trade policies of developed nations have resulted in inefficient agriculture production and distortion of world agriculture trade This has denied rightful share to developing countries.

Figure: 1

Composition of India's GDP: (% )

Absolute Agri output is rising, In fact this year we have a record production of 241 ml tonnes But relative to total value of ouput, agriculture output value is falling, because absolute contribution of services, industry are growing faster than agriculture

Source: world bank

Share in agriculture export

Table: 1
Year World Australia India Japan New Zealand USA

1980 1990 1995 2000 2007 2008

(billion US$) 299

415 589 552 1129 1342

3.29 2.86 2.50 2.98 1.98 1.95 0.95 0.85 1.07 1.07 1.46 1.59 0.98 0.80 0.79 0.80 0.67 0.62 1.30 1.44 1.41 1.38 1.42 1.33 16.99 14.32 13.66 12.94 10.07 10.43

Indias agriculture exports have not increased substantially after 1995

Source: world Trade Profile from WTO, 2010

Table: 2 Year World

Share in agriculture import

Australia India Japan percent 0.51 0.62 0.61 0.71 0.75 0.74 0.47 0.39 0.48 0.66 0.82 0.83 9.55 11.46 12.04 10.38 5.77 5.70 0.13 0.17 0.19 0.20 0.24 0.24 8.65 9.02 8.55 11.54 9.19 8.20 New Zealand USA

1980 1990 1995 2000 2007 2008

(billion US$) 312

443 621 599 1192 1413

Indias agriculture imports on the other hand have increased Source: world Trade Profile from WTO, 2010


Balance of trade (US $ billions)

Figure: 2

Negative balance of trade, Japan is exception


India: key agricultural items Table: 3

Source: Source: FAOSTAT

Produce traded since WTO from India


Indias key items of production, export, import, during WTO

Table: 4


US: Key agricultural items

Table: 6


For AOA, we need to calculate Aggregate Measure of Support (AMS) = annual level of support in Rupee terms for agricultural sector We need to classify subsidies in three boxes: AMBER BOX trade distorting subsidies (These have to be reduced by 20 percent in ) in 6 years: has two components (a) Non-Product Specific subsidies : Subsidies on irrigation, electricity, credit, fertilizers, seed etc. (b) Product Specific subsidies: Production X (Domestic price minus international reference price) Hypothesis: If there is a free market, domestic price will be = world price; and prices differ by shipping cost across countries. This difference in price also gives degree of restrictions in our agriculture

BLUE BOX AND GREEN BOX subsidies are not covered in AMS, hence no restrictions
BLUE BOX: Direct or indirect support to encourage agricultural and rural development, investment subsidies and agricultural input subsidies to low income farmers in developing countries. Direct payments under production limiting programmes GREEN BOX: Subsidies in the long term maintaining natural resources, environmental protection and improving the farmers income. (Watershed programs, Irrigation reservoirs, keeping clean nice ecosystems,., Agroforestry, farm forestry, organic cultivation

But then why India is unable to support farmers through blue and green box provisions adequately?

1. Political economy only popular schemes are accepted by the Govt since it reaches most farmers easily and Govt can get farmers support: Eg. Fertilizer subsidy, electricity subsidy is a sensitive issue and Govt does not wish to meddle with 2. High transaction costs- of targeting subsidies (if you target subsidies, it is very difficult to reach all farmers since they are marginal, small and scattered.)



There are two ways to measure the degree of subsidization or taxation of the agricultural sector : 1. Aggregate Measure of Support (AMS) : calculate a market price support
estimate for each commodity + subsidy not exempted from reduction commitments (Amber box).

2. Producer Support Estimate(PSE).


PSE methodology
The PSE is calculated as the difference between the domestic price and the world market price multiplied by the volumes of domestic production plus budgetary support. PSE = (Pd Pw).Qd + B Where, Pd - domestic price Qd domestic production Pw-world price B - budgetary support. Hypothesis: If there is free market, domestic price = world price and prices differ by shipping cost across countries. The gap also gives how restricted is our 19 agriculture on export, transport, sale

Difference between AMS and PSE

Aggregate Measure of Support(AMS) (WTO prefers this method) Compares administered prices to 1986-88 world prices (Because 8688 prices were considered FreeMarket prices acc to WTO. Uses annual international prices Producer Support Estimate (PSE)

Compares current domestic prices to current world prices

Uses seasonal international price of a commodity

Assumes all production of a given commodity is sold at administered price

Assumes all production is sold in market price


Domestic Support In India Table 7: Aggregate Measurement of Support

India(US$ million) Coarse cereals (bajra, jowar, maize and barley) Cotton Groundnut Jute 1995 (-4,530) (-2,106) (-1,809) (-388) 1996 (-1.5) 1997 (-2.9)

Pulses (gram, urad, moong and tur)

Rapeseed and mustard toria Rice Soya bean Sugar cane Tobacco Wheat Non-product-specific support

(-1,689) (-7,577) (-192) 184.0 (-181) (-9,625) 5,772.1 (-1,280.8) 930.3 (-1,266.4) 1,003.5



Table 8:Composition of Domestic Support (million US$)

1995 AMS de minimis 1996 de minimis 1997 de minimis

Blue box
Green Box




Ref: RS Ratna, SK Sharma, M Kallummal, A Biswas, Agriculture under WTO Regime: Cross Country Analysis of Select Issues, Centre for WTO Studies, New Delhi, 2010 India s notifications -1995-96, 1996-97 and 1997-98 (WTO notification G/AG/N/IND/1 and G/AG/N/IND/2).

Product specific subsidies are negative Non product specific subsidies are huge (eg. Irrigation, electricity, Fertilizer..) Low or Zero blue box subsidies (for agricultural and rural development, investment subsidies and agricultural input subsidies to low income farmers in developing countries low or zero) Low Amber box subsidies we are giving below the minimum level. So we can raise these subsidies.

Product specific subsidy was negative for all commodities (except sugarcane) during 1995-1997. Non-product specific subsidy was within the de minimis limit . Thus, India has no obligation to reduce domestic support to agriculture sector. Rather we can increase the support to agriculture (Blue and green boxes)