An agricultural subsidy is a governmental subsidy paid to farmers of all group and agribusinesses to supplement their income, maintain the supply of agricultural commodities, and influence and reflect the cost and supply of those commodities. Agricultural subsidy is considered to be the most effective mechanism for accelerating the growth of agricultural sector. They have become a tool for the developed countries to maintain their supremacy. Examples of commodities mentioned above are: wheat, feed grains, cotton, milk, and meat products etc. Farm subsidies are extremely controversial because of their intense and complex effect and also because of their political origin.
IMPACT OF FARM SUBSIDIES: AN INDIAN EXPERIENCE
In accordance with the Indian purview, farm subsidies have the direct effect of transferring income from the general tax payers to farm owners.
Poverty in developing countries
The impact of farm subsidies in developed countries upon developing countries is well documented and subjective. Farm subsidies can help drive prices down to benefit consumers, but also mean that unsubsidized farmers of developing countries like India have a more difficult time competing in the world market. The effects on poverty are particularly negative when subsidies are provided for crops that are also grown in developing countries as that of developed countries. Since, the developing-country farmers should compete directly with subsidized developed-country farmers
The IFPRI (international food policy research institute) has estimated in its report in 2003 that the impact of subsidies costs developing countries $24 billion in lost incomes going to agricultural and agro-industrial production. Least developed countries have a higher proportion of GDP dependent upon agriculture, at around 36.7%, more vulnerable to the effects of subsidies. The subsidised agriculture in the developed world is one of the greatest obstacles to economic growth in the developing world.
Public economics implication
Through agricultural subsidies, the intervention of government with the price mechanism which normally determine commodity price often creating crop over production and market discrimination. For example: American wheat is available in Chennai at a landing price much lower than compared to the domestic grown grain. Food processing units in south India therefore find it economical to import wheat than to transport it from northern parts of the country. Wheat growers in the north India suffer and most of them have gone bankrupt for a continuous period.
Environmental and nutritional implications of farm subsidies
Bee pollination is an essential ecosystem service necessary for the production of varieties of vegetables and fruits. Subsidies often go towards subsidizing meat production which has other environmental implication. Farmers producing fruits and vegetables received no direct subsidies from the concerned authorities. The environmental effect of meat production is high due to the resource and energy requirements that go into production of feed for livestock throughout their lifespan.
AGRICULTURAL INPUT SUBSIDIES: Indian perspective
Agricultural input subsidies are the common subsidies employed as policy instruments in the agricultural sector in order to lower the prices that farmers pay for their inputs (such as fertilizer, seed, and equipment) below their market prices.
Input and output subsidies in Indian agriculture have increased over the last two decades. Food subsidies alone increased by more than 10 times (at current prices) between 1990-91 and 2004-05 (GOI 2004, 94), while the wholesale price index for all commodities roughly doubled during this period (food subsidies therefore increased by more than 5 times). The components of this increase include rise in minimum support prices, accumulation of huge stocks of grains, and the increasing economic cost of operations of the Food Corporation of India.
The growth rate varied constantly across decades. During the 1960s subsidies grew at a rate of 12.62 percent per year; during the 1970s the rate of increase turned two times more than the earlier, averaging 22 percent a year. The growth rate in subsidies fall down to 7.31 percent in the 1980s and further down to 4.74 percent in the 1990s (Figure 1)
There exists great variation of input subsidies across states (Figures 2a, 2b, and 2c). As a
Percentage of agricultural GDP, Madhya Pradesh, Andhra Pradesh and Tamil Nadu received the most subsidies in 1997-99 ranging from and between 15 to 21 percent. Assam and West Bengal received among the lowest often less than even 5 percent. In terms of subsidies/hectare of cropped land, Tamil Nadu, Punjab, Gujarat, and Andhra Pradesh were among the top recipients, receiving any wherefrom Rs 2,400 to 3,400 per hectare. Assam and Orissa received the least, less than Rs 550 on a per hectare basis. However, when subsidies are seen and calculated per agricultural person or worker, the picture is quite different, showing the largest variation across states. In 1996-1999, every person in Punjab’s agricultural population benefited from input subsidies by almost Rs 1,500 (1993 prices), while agricultural Assamese benefited by only Rs 43/-, a 35-fold major difference. In general the western states, including Haryana and Gujarat benefited the most actually topping the national average, while the eastern states, including Bihar, and Orissa benefited the least per agricultural person. This strongly implies that input subsidy policy may have increased inequality within agriculture across states.
The eligibility for farm subsidies is determined not by income or poverty standards but by the crop that they grow and own. Since 1991, subsidies for large farms have nearly doubled and tripled but there have been no increases in subsidies for small farms in India. So, agricultural subsidies are largely seen as corporate welfare programme rather than a common man programme.
Subsidies provide an unfair advantage to the farmers in the developed countries to sell their goods at lower price, while the countries in south do not have enough resources to subsidize their farmers in a similar fashion.
The United States proposed to ban several kinds of subsidies, but it wants to exempt the agricultural sector from banning of subsidy.
United Nation (UN) and European Union (EU) have provided huge support to their farmers plus the surplus obtained by this has been disposed of in the international market all over. They are releasing grain by selling at prices far below the production cost which is unfair to developing countries.
INDIA AND THE WTO’s AGREEMENT ON AGRICULTURE (A-o-A)
The principal objective of the agreement was to encourage fair and market oriented trade in agriculture by omitting trade distortions resulting from differential level of input subsidies, market support and price, export subsidy and other kind of trade distorting support. The principal achievement of the agreement was to create a framework for further systematic liberalization of trade in agricultural products.
Its implementation period was six year for developed countries and nine for developing countries. The A-o-A comprises of three sections referred as the pillars of the agreement:
a) Market access
b) Domestic support and
c) Export subsidies
v Market access
Ø No tarrification ; ceiling bindings of
· 100% for primary commodities.
· 150% for processed agricultural products
· 300% for edible oils
v Domestic support
· Price support for 19 products
· AMS is negative by a large margin
v Export subsidies
· India does not have these
· No commitments
Initially, India was not able to afford the balancing strategy as practiced by the developed countries of providing subsidy to the agriculture sector as its rural population is very large.
Rural-urban divide in India is increasing steadily and it has to face the same problem as other developed country has faced or facing. This scenario can be explained with the table given below:
Therefore, the solution to reduce the rural-urban divide in India lies in employment-generating large-scale industrialization and expansion of agriculture processing and exports, so that each percentage point shift in the share of agriculture value added to other sectors leads to at least two percentages points shift in the labour force from farm sector to non-farm sector. Maintaining
This target itself will inherently lead to a comparable growth in per capita income of the farm sector.
Food price inflation in India has been traditionally much higher than those in developed countries Canada, Japan or US which makes it harder for India to export agricultural processed products. The general inflation in India during 1998-2003 has been about 4.5 per cent and a similar trend continued during the later periods of 2004-2006. Clearly, if imports were going to reduce the food prices further, it would not be increasing the welfare of farmers, unless substantial gains are made through food based manufacturing export-enhancing strategies.
However, with agriculture subsidies and export promotions, developed countries have dominated the world agriculture market historically. More than 71 per cent of world food exports during 2001-04 obtained from the high-income gaining countries while other countries such as India where more than 65 per cent of the population survives on agriculture and farming contributed only 1.5 per cent of food exports.
WHY AGRICULTURAL SUBSIDIES ARE CRITICIZED?
Effects on developed countries:
· Non-conformity with the actual goals to facilitate the economic viability of small farms and to ensure as well as secure national food security.
· As the prices are falling, farmers are forced to leave the sector which leads to consolidation of land in farms across the country.
· The distribution of support is uneven not demarcated properly and is significantly skewed in favor of larger farmers.
Effects on developing countries
· A fall in prices constraints agricultural growth and development opportunities in non-OECD countries.
· Overproduction in developed countries compared to developing countries leads to release in the world market and subsequent reduction in the world market prices.
· The Developing countries in southern and Central America lost about 11 to 15% of total agriculture and agro industrial incomes due to developed countries subsidies less than that of developing countries.
Below given are some of the data obtained by world trade organization and its authorities regarding the agricultural agreement:
THE WTO’s AGREEMENT ON SUBSIDIES AND INVALIDATE MEASURES
It disciplines the use of subsidies, and regulates the actions that the countries can take to counter the effect of subsidies.
In accordance with this agreement a country can use the WTO’s dispute settlement procedure to seek the withdrawal of the subsidy or the removal of its adverse effects or a country can launch its own investigation and ultimately charge “countervailing duty” on subsidized imports.
The case of brazil-U.S. farm subsidies
Brazil alleges that almost from 1999, the U.S. has more often exceeded its WTO spending limits for heavily trade-distorting agricultural subsidies. The dispute resolving panel of WTO ruled that the U.S. endure in violation of world trade rules. So, Brazil has reserved the right to impose annual sanctions.
Doha round and agricultural subsidies
On 29th July the Doha round (2006) stalled.
The principal objective of this round was to straighten out some of the kinks in agricultural trade. This activity, which account for only 8.5% of world merchandise trade is the one, most heavily distorted by misbegotten policies.
The U.S continued to demand and argue for much bigger cuts in farm import tariffs to open up markets for its farmers. Big brother asked the developing countries to make a more generous offer for reducing trade distorting domestic support. But, ultimately this demand of U.S. was rejected by India, Japan and European Union. Conclusively, dead lock is created on agricultural tariffs and subsidies.
· Substantial reduction in trade distorting domestic support
· Improvement in market access substantially
· Reduction of all forms of export subsidies
· International decisions would be effective only if domestic policy reforms directed at making agriculture pro-poor and pro- environment.
The question of whether or not to implement farm subsidies of agriculture has long been inciting vehement arguments from both the developed and developing countries that is why the solution to this issue should be very specific in nature.
I. For Least Developed Countries (LDCs):
1. Eliminate the “bias against agriculture” in economic policies
2. Deregulate inputs of agriculture (fertilizer, machinery, pesticides)
3. Allow price stabilization policies, but not so much as to curb profits of farmers/producers
4. Minimize subsidies, and give priority to infrastructure subsidies; gradually eliminate subsidies as the agriculture economy becomes self-sustainable
5. Expand emergency subsidies and crop reserves in case of disasters
6. Encourage more investments in agriculture, and set up innovative crop insurance mechanisms
II. For Most Developed Countries (MDCs):
1. Greatly reduce/eliminate any subsidies aimed for increased production and domestic agricultural protectionism, especially for biofuel production
2. Regulate investments in foreign agriculture of LDCs so as to ensure fairness of those partnership and sustainability of affected farm practices.
The proposal largely involves convincing nations to follow provided guidelines for their domestic policies of crop subsidies and price controls, the funding required should consists of advertising campaigns in reluctant developed nations.
The developing countries should unite and cooperate among themselves, which may help in advancing the cause of their own scaling down the agricultural subsidies and dilute the negative side-effects.