Agricultural Trade Can Change the Poverty Ridden Face of Indian Countryside

Liberty Institute Briefing Paper on Trade and Development "Agricultural Trade Can Change the Poverty Ridden Face of Indian Countryside" was published in November 1999

For fifty years India has followed the most restrictive policy regarding agriculture. The result has been that while in 1947, 85% of Indians depended on agriculture which contributed to over 70% of Indian GDP, today the corresponding figures are 70% and 35% respectively. Not surprisingly the face of Indian agriculture we are most familiar with is one of abject poverty.

Ironically, the much promoted India industry under the tutelage of the state while capturing a large chunk of the GDP has remained highly uncompetitive internationally, but Indian agriculture continues to enjoy competitive advantage in many crops despite years of neglect and denial of access to international markets. Opening up trade in agricultural products provides a tremendous opportunity to improve the lot of the farmers in developing countries and consumers around the world.

1. On Exports: Studies show India is export competitive in a number of agricultural products. These include cereals like rice, wheat, maize and sorghum; fruits like banana, grape, lichee and mango; vegetables and tubers like onions, potatoes and tomatoes. India is also competitive in processed foods like tomato paste and mushrooms.

2. On imports: India's domestic agricultural market has been largely protected by quantitative restrictions until now. Because of obligations under the Uruguay round of the GATT these quantitative restrictions are being removed. India's market will open to agricultural imports. Protection will have to come via tariffs. Most of India's tariffs on agricultural imports are very high, between 100 to 150 per cent. It agreed to zero tariffs in some dairy products and rice because at the time it was experiencing a scarcity in those products. Today, it is in surplus so there is a call for renegotiating these tariffs.

What these two issues mean. First, India has great potential as an agricultural exporter. Second, it has little to worry about agricultural imports because it has high tariffs and most market priced agricultural imports will not be able to compete against cheaper Indian products. In fact, Indian agricultural prices are almost all well below world prices. The question of being flooded by imports simply does not arise.

What is the real danger at Seattle? The real danger in Seattle is the problem of export subsidies. If a country subsidizes its agricultural exports it will be able to undercut Indian farm exports no matter how competitive they are. If a country subsidizes its agricultural exports it will be able to flood Indian markets, no matter how cheaply Indian agricultural products are at home.

The European Union is the main country guilty of using massive export subsidies to sell huge agricultural surpluses it generates, the surpluses themselves being the result of input subsidies and protectionism. The US, too, provides some export subsidies and provides quite high degree of protection to some domestic corps. A third agricultural bloc, the Cairns group of agricultural exporters does not use export subsidies at all. The fourth bloc consists of protectionist countries like Japan and China which do not import or export. India used to be in the fourth bloc, but is now moving into the economic position of the Cairns group.

India's key concern should then be export subsidies. If India is to open up on either the import or export front in farm goods, world agricultural trade must be free of export subsidies. Preferably it should be free of input subsidies as well. Because of India's artificially low domestic prices for agriculture, Indian farmers actually receive a net negative subsidy from the government. Consequently, Indian consumers are left with perpetual scarcities, lack of variety and poor quality of agricultural produce.

What about food security? India's present policy of forcing farmers to sell at artificially low prices provides a major negative incentive. It also ensures they never have enough capital to invest in their farms. One result can be seen in the terribly low productivity levels of Indian farmers.

It may be politically and socially necessary to maintain these artificially low prices, but these prices must be compensated with incentives for farmers to grow more and means for them to invest more. If not, productivity will eventually fall behind population growth. The answer to this is to let them export their surpluses. Farmers repeatedly have had harvests of crops greater than the country's domestic needs. These have often gone to waste.

The present policies designed to promote food security do little more than ruin Indian farming in the long term.

Other related agricultural issues India needs to take up at WTO:

• Ensuring phytosanitary measures are not used as hidden trade barriers to keep out Indian farm exports.

• Support use of biotechnology in agriculture. Bans on genetically modified food are based on romantic notions of nature, not science. They are affordable in countries with too much food, but not in developing countries with food scarcity

It has been calculated that if protectionist barriers were to be halved around the world in agricultural trade, the world would be richer by $ 400 billion. India is in an excellent position to get a portion of that money, enriching its farmers, and benefiting its consumers, if it pushes hard for free trade in this area. It need not fear imports. It should embrace exports. It should fight, more than anything else, export subsidies in this sector.