Introduction

The Agreement on Agriculture forms a part of the Final Act of the Uruguay Round of Multilateral Trade Negotiations, which was signed by the member countries in April 1994 at Marrakesh, Morocco and came into force on 1st January, 1995. The Uruguay Round marked a significant turning point in world trade in agriculture. For the first time, agriculture featured in a major way in the GATT round of multilateral trade negotiations. Although the original GATT – the predecessor of the World Trade Organisation (WTO) – applied to trade in agriculture, various exceptions to the disciplines on the use of non-tariff measures and subsidy meant that it did not do so effectively. The Uruguay Round agreement sought to bring order and fair competition to this highly distorted sector of world trade by establishment of a fair and market oriented agricultural trading sector.

The root cause of distortion of international trade in agriculture has been the massive domestic subsidies given by the industrialised countries to their agricultural sector over many years. This in turn led to excessive production and its dumping in international markets as well as import restrictions to keep out foreign agricultural products from their domestic markets. Hence, the starting point for the establishment of a fair agricultural trade regime has to be the reduction of domestic production subsidies given by industrialised countries, reduction in the volume of subsidised exports and minimum market access opportunities for agricultural producers world-wide.

The obligations and disciplines incorporated in the Agreement on Agriculture, therefore, relate to (a) market access;(b) domestic subsidy or domestic support; and

(c) export subsidy.

Salient Features

The Agreement on Agriculture contains provisions in the following three broad areas of agriculture and trade policy:

(a) Market Access: On market access, the Agreement has two basic elements:

(i) Tariffication of all non-tariff barriers. That is to say, non-tariff barriers such as quantitative restrictions and export and import licensing etc. are to be replaced by tariffs to provide the same level of protection. Tariffs, resulting from this "tariffication" process together with other tariffs on agricultural products, are to be reduced by a simple average of 36% over 6 years in the case of developed countries and 24% over 10 years in the case of developing countries. With India being under balance of payments cover (which is a GATT-consistent measure), we had not undertaken any commitments with regard to market access and this has been clearly stated in our schedule filed under GATT. The only commitment India has undertaken is to bind its tariffs on primary agricultural products at 100%; processed foods at 150%; and edible oils at 300%.

(ii) The second element relates to setting up of a minimum level for imports of agricultural products by member countries as a share of domestic consumption. Countries are required to maintain current levels (1986-88) of access for each individual product. Where the current level of import is negligible, the minimum access should not be less than 3% of the domestic consumption, during the base period and tariff quotas are to be established when imports constitute less than 3% of domestic consumption. This minimum level is to rise to 5% by the year 2000 in the case of developed countries and by 2004 in the case of developing countries. However, special Safeguards Provisions allow for the application of additional duties when shipments are made at prices below certain reference levels or when there is a sudden import surge. The market access provision, however, does not apply when the commodity in question is a ‘traditional staple’ of a developing country.

(b) Domestic support: Provisions of the Agreement regarding domestic support have two main objectives – first to identify acceptable measures that support farmers and second, to deny unacceptable, trade distorting support to the farmers. These provisions are aimed largely at the developed countries where the levels of domestic agricultural support have risen to extremely high levels in recent decades.

All domestic support is quantified through the mechanism of total Aggregate Measurement of Support (AMS). AMS is a means of quantifying the aggregate value of domestic support or subsidy given to each category of agricultural product. Each WTO member country has made calculations to determine its AMS wherever applicable. Commitment made requires a 20% reduction in total AMS for developed countries over 6 years. For developing countries, this percentage is 13% and no reduction is required for the least developed countries. The base period external reference price on which the reductions were calculated was 1986-88.

AMS consists of two parts—product-specific subsidies and non-product specific subsidies. Product-specific subsidy refers to the total level of support provided for each individual agricultural commodity, essentially signified by procurement price in India. Non-product specific subsidy, on the other hand, refers to the total level of support for the agricultural sector as a whole, i.e., subsidies on inputs such as fertilisers, electricity, irrigation, seeds, credit etc.

There are three categories of support measures that are not subject to reduction under the Agreement, and support within specified de-minimis level is allowed. These three categories of exempt support measures are:

1. Measures which have a minimum impact on trade and which meet the basic and policy specific criteria set out in the Agreement (the so-called Green Box measures in the terminology of WTO). These measures include Government assistance on general services like (i) research, pest and disease control, training, extension, and advisory services; (ii) public stock holding for food security purposes; (iii) domestic food aid; and (iv) direct payment to producers like governmental financial participation in income insurance and safety nets, relief from natural disasters, and payments under environmental assistance programmes.

2. Developing country measures otherwise subject to reduction which meet the criteria set out in paragraph 2 of Article 6 of the Agreement (the so-called ‘Special and Differential Treatment’ or the S&D Box). Examples of these are (i) investment subsidies which are generally available to agriculture in developing countries; and (ii) agricultural input services generally available to low income and resource poor producers in developing countries.

3. Direct payments under production limiting programme which conform to the requirement set out in paragraph 5 of Article 6 of the Agreement (the so-called Blue Box measures). These are relevant from the developed countries point of view only.

Under the de-minimis provision of Article 6.4 of the Agreement, there is no requirement to reduce support in this residual category whose value in any year, in the case of product specific support does not exceed 10% for developing countries of the total value of production of the basic agricultural product in question or of the value of total agricultural production in the case of non-product specific support. Where the support is below 10 per cent, as in the case of India, product-specific and non-specific de-minimis ceiling may be raised to those levels.

(c) Export subsidies: The Agreement on Agriculture lists several types of subsidies to which reduction commitments apply. However, such subsidies are virtually non-existent in India as exporters of agricultural commodities do not get direct subsidy. Even exemption of export profits from income tax under Section 80-HHC of the Income Tax Act is not among the listed subsidies. It is also worth noting that developing countries are free to provide three of the listed subsidies, namely, reduction of export marketing costs, internal and international transport and freight charges.

In general, it may be noted that the virtual explosion of export subsidies in the industrialised countries in the years leading to the Uruguay Round was one of the key issues addressed in the agricultural negotiations. While under GATT 1947, prohibition of export subsidies for industrial products has been effective since 1956, in the case of agricultural primary products, such subsidies were only subject to limited disciplines which, moreover, did not prove to be operational or effective. As a result, in the 1970s and 1980s, success in international markets for agricultural products was increasingly determined by the financial power and largesse of national treasuries rather than the efficiency and marketing skills of agricultural producers and exporters. Export subsidies also became a major factor in depressing or destabilising world market prices for many agricultural commodities. The Uruguay Round marked a radical departure from the earlier GATT disciplines in the areas of agricultural export subsidies. Members are required to reduce the value of direct export subsidies to a level of 36% below the 1986-90 base period level over a six year implementation period. The quantity of subsidised export is to be reduced by 21% over the same period. In the case of developing countries, the reductions are two-thirds those of the developed countries over a ten-year period and there are no reductions for least developed countries. Under the Agreement, export subsidies are defined as "subsidies contingent on export performance" and the list covers export subsidy practices such as direct export subsidies contingent on export performance; sales of non-commercial stocks of agricultural products for export at prices lower than comparable prices for such goods in the domestic markets; producer-financed subsidies such as government programmes which require a levy on production which is then used to subsidise the export of the product; cost-reduction measurse such as subsidies to reduce marketing costs for exports including handling costs and costs of international freight; internal transport subsidies applying only to exports; subsidies on incorporated products i.e., subsidies on agricultural products such as wheat contingent on their incorporation in export products made of wheat etc. All such export subsidies are subject to reduction commitments in terms of both the volume of subsidised export and budgetary outlays for such subsidies. As indicated earlier, such measures are virtually non-existent in India and, hence, the issue of reduction of export subsidy on agricultural products is not of particular relevance for India.

Product coverage

The Agreement defines agricultural products by reference to the harmonised system of product classification. The definition covers not only basic agricultural products such as wheat, milk and live animals, but the products derived from them such as bread, butter, other dairy products and meat, as well as all processed agricultural products such as chocolates and sausages. The coverage includes wines, spirits and tobacco products, fibres such as cotton, wool and silk, and raw animal skins destined for leather production. Fish and fish products are not included nor are forestry products.

Implementation period

The implementation period for the country-specific commitments is the six-year period commencing in 1995. However, developing countries have the flexibility to implement their reduction and other specific commitments over a period of upto 10 years. Members had the choice of implementing their concessions and commitments on the basis of calendar, marketing (crop) or fiscal years. A WTO Member’s implementation year for tariff reduction may thus differ from the one applied to export subsidy reductions. For the purpose of the ‘peace clause’ the implementation period is the nine-year period commencing in 1995.

Peace Clause

The Agreement on Agriculture contains a "due restraint" or "peace clause" (Article 13) which regulates the application of other WTO agreements on subsidies in respect of agricultural products. The Article provides that Green Box domestic support measures cannot be the subject of countervailing duty action or other subsidy action under the WTO Agreement on Subsidies and Countervailing Measures, nor can they be subject to actions based on nullification or impairment of tariff concessions under the GATT. Other domestic support measures which are in conformity with the provisions of the Agreement on Agriculture may be the subject of countervailing duty actions, but due restraint is to be exercised by Members in initiating such investigations. Further, in so far as the support provided to individual products does not exceed that decided in the 1992 marketing year, these measures are exempt from other subsidy action or nullification or impairment action. Export subsidies conforming to the Agreement on Agriculture are subject to countervailing duty actions, but here also due restraint is to be exercised by Members in initiating such investigations. The peace clause remains in effect for a period of nine years from 1995, i.e., the entry into force of the WTO Agreement.

Committee on Agriculture

The Agreement on Agriculture is overseen by the Committee on Agriculture which reviews progress in the implementation of commitments mentioned above. The Agreement also calls for further negotiations to be initiated before the end of the fifth year of implementation. The Agreement is thus coming up for review at the end of 1999.

India has not undertaken any commitments under the Uruguay Round Agreement on Agriculture (AoA) which constrain us from following our developmental policy with regard to agriculture or which entail any action on our side immediately. We would, however, need to study the implications of removal of quantitative restrictions on market access, subsidy to farmers and tariffs on imports. The structure of the Agreement on Agriculture as it exists today seems to be slightly imbalanced, since it enables countries subsidising the agriculture sector heavily to retain a substantial portion of their subsidies upto the end of the implementation period while those countries which were not using these measures earlier are prohibited to use these measures in future beyond the de-minimis limit. We have to find ways to bring about more equity into the structure of the Agreement.

Implications of the Agreement

Implications of the Agreement would differ from country to country and would depend largely on the overall agricultural scenario in the country. Indian agriculture is characterised by a preponderant majority of small and marginal farmers holding less than two hectares of land, less than 35.7% of the land, is under any assured irrigation system and for the large majority of farmers, the gains from the application of the science & technology in agriculture are yet to be realised. Farmers, therefore, require support in terms of development of infrastructure as well as extension of improved technologies and provisions of requisite inputs at reasonable cost. India’s share of world’s agricultural trade is of the order of 1%. There is no doubt that during the last 30 years, Indian agriculture has grown at a reasonable pace, but with stagnant and declining net cropped area it is indeed going to be a formidable task to maintain the growth in agricultural production. The implications of the Agreement would thus have to be examined in the light of the food demand and supply situation. The size of the country, the level of overall development, balance of payments position, realistic future outlook for agricultural development, structure of land holdings etc. are the other relevant factors that would have a bearing on India’s trade policy in agriculture.

Implications of the Agreement on Agriculture for India should thus be gauged from the impact it will have on the following:

i) Whether the Agreement has opened up markets and facilitated exports of our products; and

ii) Whether we would be able to continue with our domestic policy aimed at improving infrastructure and provision of inputs at subsidised prices for achieving increased agricultural production.

Implications - Short Term

As far as opening of markets and impact on trade in agriculture is concerned, it may be noted that the share of developing countries in world exports of food remained at 44% and of agricultural raw materials increased insignificantly from 32% in 1994 to 34% in 1996, that is the post-Agreement period. The average growth of developed countries imports of agricultural products increased by just 1% during 1994-96. Nearer home, agricultural exports of ten Asian developing countries increased from US $ 49252 million in 1994 to US $ 55902 million in 1996. India’s share in total agricultural exports from developing Asia is 8%, behind China’s 19%, Thailand’s 17%, Malaysia’s 14% and Indonesia’s 10%. India’s exports of agricultural products have increased from US $ 4151 million in 1993-94 to US $ 7054 million in 1997-98. No tangible opening up of the markets has thus been noticed in the post-Agreement period so far. However, it may be premature on this basis to assess the long-term impact of the Agreement on opening up of markets.

Regarding freedom to pursue our domestic policies, it is quite evident that in the short term India will not be affected by the WTO Agreement on Agriculture. The safeguards provided for developing countries give enough manoeuvre to insulate ourselves from any major impact of trade liberalisation in agricultural commodities.

India has been maintaining quantitative restrictions (QRs) on import of 825 agricultural products as on 1.4.97. QRs are proposed to be eliminated within the overall time frame of six years in three phases – 1.4.97 to 31.3.2003. (All our trading partners barring the US have agreed to this phase-out plan and dispute with the US is pending with Dispute Settlement Body of WTO for adjudication). Within the provisions of the GATT Agreement India has bound tariffs at high levels of 100%, 150% and 300% for primary products, processed products and edible oils respectively. Therefore, the QRs can be replaced with high import tariff in case we want to restrict imports of these commodities.

In India, for the present, the minimum support price provided to commodities is less than the fixed external reference price determined under the Agreement. Therefore, the AMS is negative. Theoretically, therefore, we could increase the product-specific support upto 10%, the only restraint being the fiscal sustainability in the country’s context.

Implications - Long Term

As mentioned earlier, for a large majority of farmers in different parts of the country, the gains from the application of science and technology in agriculture are yet to be realised which would require infrastructural support, improved technologies and provision of inputs at reasonable cost. The Agreement on Agriculture thus recognised this and developing countries have been given the freedom to implement such policies under Article 6 relating to differential treatment, but any attempt in future to dilute provisions relating to differential treatment for developing countries could affect us adversely.

Regarding the impact of liberalisation of trade in agriculture in the long term, Indian agriculture enjoys the advantage of cheap labour. Therefore, despite the lower productivity, a comparison with world prices of agricultural commodities would reveal that domestic prices in India are considerably less with the exceptions of a few commodities (notably oilseeds). Hence, imports to India would not be attractive in the case of rice, tea, sunflower oil and cotton. On the whole, large scale import of agricultural commodities as a result of trade liberalisation is ruled out. Even the exports of those foodgrains which are cheaper in the domestic market, but are sensitive from the point of view of consumption by the economically weaker sections are not likely to rise to unacceptable levels because of high inland transportation cost and inadequate export infrastructure in India. Through proper tariffication, however, we will have to strike a balance between the competing interest of 10% farmers who generate marketable surpluses and consumers belonging to the economically poor sections of the society.

It is also argued that because of increasing price of domestic agricultural commodities following improved export prospects, farmers would get benefits which in turn would encourage investment in the resource scarce agricultural sector. With the decrease in production subsidies as well as export subsidies, the international prices of agricultural commodities will rise and this will help in making our exports more competitive in world market. Given our agro diversity, we have the potential to increase our agro exports in a substantial way. In the words of Shri A.V. Ganesan, "There will be growing pressure from the farmers to realise higher prices for their produce and to narrow the gap between the domestic and external prices. Our industrialists are pressing for a ‘level playing field’ vis-a-vis foreign enterprises; our farmers will press for a ‘level playing field’ for the prices of their products vis-a-vis international prices. Both the pattern of production and price expectations will increasingly be influenced by the demands and trends in world markets. On the one hand, the price incentive could be the best incentive and could give a strong boost to investment in agriculture as well as adoption of modern technologies and thereby to the raising of agricultural production and productivity. On the other hand, the rise in domestic prices would put pressure on the public distribution system and accentuate the problem of food subsidy. Furthermore, freedom to export agricultural products without restrictions will also need shedding the long-nurtured inhibition against their imports. The nature and character of State intervention and State support will have to undergo qualitative changes in order not only to realise the opportunities for exports, but also to cope with the implications of our agriculture coming into increasing alignment with the international market place".