Trade Policy
Image Credits: WTO

Recently, the final session of India’s seventh Trade Policy Review (TPR) concluded at the World Trade Organization (WTO) in Geneva, Switzerland. The TPR is an important mechanism under the WTO’s monitoring function in which member countries’ trade and related policies are examined with an aim to contribute towards improved adherence to WTO rules.

India’s last TPR took place in 2015. Six years later in 2021, India’s trade policy remains largely unchanged. In this article, we’ll delve into why this is problematic, and what it means for India’s agricultural trade going forward.

In 1947, India was a new country racked by pains of the Partition and the dire poverty of her people. The ‘Licence Raj’, an elaborate system of licences and regulations that were required to set up and run businesses in the country, was dismantled with the liberalisation policy introduced in 1991. A lot has happened since then, but the remnants of license raj still remain, and the WTO report agrees: “India continues to rely on trade policy instruments such as the tariff, export taxes, minimum import prices, import and export restrictions, and licensing.

Now, why should we be concerned about this? Licenses, taxes and restrictions are a way of protecting our country’s economy from domestic price fluctuations. “As a result, frequent changes are made to tariff rates and other trade policy instruments, which creates uncertainty for international traders”, said the report.

An example of such a restriction is the Essential Commodities Act that gives the government power to categorise some commodities as essential and control and regulate their supply, production, distribution and price. This list includes farm produce like onions, edible oil, potatoes, sugar and rice. Let’s look closely at onion to understand the implications of this control. Because it’s an “Essential Commodity”, the government bans exports of onion due to rising prices at least once every year. In 2020, for instance, in-transit exports to Bangladesh were stopped and forced to come back. India’s perception as a reliable exporter of goods regularly takes a hit in the international markets. Arbitrary bans also disincentivise other countries to look \ to India as a stable exporter and business partner. Thus, the WTO report rightly recommends that “there must not be a ‘stop and start’ policy on exports and imports of agricultural products because that prevents farmers from taking objective decisions on sowing different crops“.

That brings us to the uncertainty India’s trade policy has created in agriculture markets domestically. Minimum Support Price (MSP) is the rate at which the government procures crops from farmers each year, to ensure that the farmers are not affected by price fluctuations. But the procurement infrastructure is not perfect and differs between states. For instance, states like Punjab and Haryana which were the epicentre of the green revolution in India, have top-notch procurement infrastructure. But other states, not so much.

Thus, the practice of procurement from certain states has resulted in regional disparities in production. The major problem with the MSP is the lack of government machinery for procurement of all crops except wheat and rice, which the Food Corporation of India actively procures under the Public Distribution System (PDS). “Distortion of cropping patterns is in favour of commodities such as wheat, rice, cotton, and sugar that are pro­cured by the central government at MSP and away from other items such as pulses, coarse grains, and oilseeds”, found another report by the WTO Secretariat.

The report also noted that due to fragmentation of agricultural markets and weak infrastructure, farmers rece­ive only a fraction of the price paid by consumers, with the bulk going to intermediaries. The MSP issue is also at the centre of the ongoing farmer protests.

India’s Trade Policy Review rightfully nudges us to think about how our agricultural policy, formulated back when India was a famine hit country, still aims at providing food security through protectionist measures like licenses, tariffs etc. Reform is necessary, as these measures seriously harm not only India’s position as an international trade partner but also our farmers’ livelihoods, which has already suffered enough.

Read more: It’s chiefly rent-seekers who oppose our farm reforms

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The opinions expressed in this essay are those of the authors. They do not purport to reflect the opinions or views of CCS.