Agricultural subsidies have always been and still are among the many contentious matters in international trade. Agricultural subsidies were central issues during the Uruguay Round and proved to be among the biggest stumbling blocks in the Doha Development Round. In recent years, the Minimum Support Price has become a very prickly issue, especially in India, where attempts to amend agricultural laws caused widespread controversy. This prompted massive protests by farmers across the country. The amendments concerned the farmers about how they would affect their often precarious livelihoods and agricultural practices. In addition, India has been subject to pressures by the WTO on the very issue of MSP. The farmers had begun to advocate for India to withdraw from the WTO and thus have added tensions to the current atmosphere where domestic quests for agricultural reform expose the tangled relationship between domestic agricultural policies, international trade regulations, and grassroots movements for agricultural reform.
MSPs and the arising WTO obligations
Agricultural subsidies are regulated by the WTO through two primary frameworks: the Agreement on Subsidies and Countervailing Measures (SCM) and the Agreement on Agriculture (AoA). These agreements collectively impose rules on how subsidies are to be provided and address the adverse effects of such subsidies on member interests, AoA being specifically focused on agricultural trade reform through market access, domestic support, and export subsidy regulations.
Minimum Price Support (MPS) programs, normally in developing nations, stimulate government procurement of agricultural products at set prices. These programs serve a dual purpose—not only do they balance the income risk of farmers, but they also ensure that food is affordable for society as a whole. The preamble to the AoA feels that there is a need to prevent distortion through progressive reductions in agricultural or farm support. However, administered prices operate differently in developed and developing countries, with developing country rates fairly above domestic rates to guarantee farm returns and developed countries maintaining those at lower rates with various forms of support such as decoupled income and crop insurance subsidies.
Instead of establishing the damage, evidence of having exceeded subsidy limits, whereby domestic support caps for MPS are determined in accordance with Annex 3 of the AoA with a de minimis limit of 10%—this WTO regulatory approach. This framework was interpreted in the case of Korea—Various Measures on Beef, whereby all producers under the market price support mechanisms enjoy the benefits of guaranteed minimum marketing prices. Food security considerations are deeply anchored within the WTO arrangement, as acknowledged in Paragraph 6 of the AoA’s Preamble. Reference to this regard is further reinforced by Footnote 5 of Annex 2, Paragraph 3, which directly addresses food security policies in developing countries, thus justifying the legitimate, transparent government stockholding policies at state-determined prices.
A landmark decision was the rejection of challenges to food security-related purchases made by developing countries at prices determined by the state in the Bali Decision, which put a definitive end to any discussions regarding maximum trade-distorting support limits. Indefinite protection under this provision was afforded by the 2014 WTO General Council Decision while the process undertaken took on a permanent form. For any of these provisions to come into play, a set of requirements is put into place whereby those countries have to notify before breaching potential AoA obligations, refrain from trade distortion or knowingly cause food security issues in any other country, provide for operational transparency, and conform to public criteria.
Herein lives a comprehensive framework in which the WTO sought to balance trade liberalization with food security needs for developing countries. While affording important protection through things like the Peace Clause, it ensures regulatory oversight through certain compliance requirements, encouraging a system where developing nations can pursue food security objectives and remain linked to the global trading system.
MSP regime of India
Farmers are back on the streets after a gap of over two years, reviving their protest against the three controversial farm laws introduced by the Central Government. Among their demands in this renewed agitation is a legal guarantee on the Minimum Support Price (MSP) as per the recommendations of the MS Swaminathan Commission. The issue is reminiscent of their previous demand during earlier protests. In retaliation, the Union Government had formed a committee headed by a former Union Agricultural Secretary to look into the intricacies of the MSP mechanism. MSP acts as a vital protective measure whereby farmers are assured a reasonable price for their produce, thereby providing them with protection from the fickle market. The fresh demand for a legally binding MSP enhances the farmers’ other agenda of economic security and justice.
The protests are heating up across the country, while tensions between farmers and the government remain in place. This resurrection involves an unfinished aspect of agricultural reform and the need for real dialogue on the matter. The outcome of this standoff stands to be very significant for Indian agriculture, depending on millions that depend on it. Upcoming is a battle between the farmers and the government over agricultural policies complementing international trade rules. The WTO blames India for providing excessive MSP support, breaching the limit under its Agreement on Agriculture. While the government procures food grains at MSP and distributes them at subsidized rates under its welfare schemes, it claims that accruals distort trade.
Since there is little policy space available to them, developing countries like India relied on the Special and Differential Treatment (S&DT) provisions under the AoA. Article 6.2 permits investment subsidies, input support for poor farmers, and diversification incentives. Yet, this flexibility is under attack. The AoA sorts subsidies into three boxes: Green (non-trade distorting—aided by meant research and infrastructure), Blue (in connection with production-limiting programs), and Amber (considered trade distorting, like MSP). Amber Box subsidies must keep within de minimis levels (10% of production value for developing nations), but India has been accused of evading this limit.
The US charges India with providing wheat and rice MSP support that far exceeds the allowable 10% cap, equating it to about -93.4% in 2020-21. India rebuts that the method of calculation of support price in the AoA is flawed and that its Public Stockholding (PSH) program’s aim is rather to benefit small farmers and food security and does not change the nature of trade. The 2013 Bali Peace Clause granted provisional relief by allowing developing countries to overrun steering subsidy limits but is still a stopgap measure. India continues to press for a permanent solution, asserting that the AoA is skewed in favor of developed countries, which maintained high subsidies from 1986 to 1988, with little restriction. As such, the USA and the EU still provide 50-65% support for certain crops while the AoA compliance is cast against India’s 15% support provision. Other developed nations have higher export subsidies, which continue to drive down world prices of agriculture and disadvantage developing countries. The reason for
This ongoing debate highlights profound inequities in tying international trade rules, making MSP critical not just for Indian farmers but also for broader issues of international trade justice.
Swami Nathan Committee Report and the new formula proposed for MSP calculation
The Swaminathan Commission Report proposes a crucial formula for determining Minimum Support Price (MSP): C2+50%. This means the MSP should be at least 50% more than the weighted average cost of production, covering expenses like capital and land rent to ensure farmers receive fair returns.16 To address farmers’ concerns, the government formed an MSP Committee in 2022, comprising farmers’ representatives, government officials, economists, and scientists. The committee aims to enhance the effectiveness and transparency of the MSP system. MSP announcements are based on recommendations from the Commission for Agricultural Costs and Prices (CACP). The CACP considers various factors like demand-supply dynamics, production costs, domestic and global prices, and their impact on the economy when suggesting MSP. 17 The key difference is that the government sets MSP at 1.5 times the Cost of Production (CoP), where CoP is A2+FL. The Swaminathan Commission, however, suggests that CoP should be based on C2, proposing the ‘C2+50 percent’ formula for setting MSP. 18 This concerted effort reflects the government’s commitment to addressing farmers’ needs and ensuring a fair pricing mechanism that safeguards their interests amidst evolving agricultural landscapes, but MSP calculations still continue with the old formula and not the comprehensive cost.
Controversy Surrounding MSP Legislation: Analyzing the Divergent Perspectives
The MSP implementation debate revolves around various challenges: According to the opposition, this may take away ₹40 lakh crore, or 80% of the budget, and might distort market equilibrium when it comes to prices, thereby making exports less competitive; they warn against production manipulations by farmers and difficulties in determining fair pricing across different terrains. The supporters, however, argue that the actual cost is not going to be this high; it’s more likely to be about ₹21,000 crore for MY2023, as not every crop enters the market. They perceive it as a vital price regulator that could permit surpluses to be sold off to generate additional revenue and guarantee fair payment. Balancing the goals of farmer welfare and efficient market measures ultimately prescribes the policy’s fate.
Unsuccessful outcome of MC13 and the ongoing issues within the WTO
The conference held in Abu Dhabi under the auspices of the WTO 13th Ministerial Conference (MC13) ended without reaching a consensus on critical issues concerning food security and fishing subsidies after four days of intense negotiations among all 166 members. However, the so-called “peace clause” protection achieved in 2014 by Nirmala Sitharaman hangs on as a great victory for India, as long as there is no permanent solution in respect of the interest of Indian farmers.
Over thirty years, the benefits of the WTO have flowed mostly to developed countries, blocking initiatives that could have been beneficial to developing countries. Recent examples include developed nations blocking the TRIPS waiver proposal during COVID-19, which would have allowed vaccines to be produced by manufacturing them locally, and the refusal by the US government to appoint judges to the Appellate Body, halting the dispute settlement system since 2020.
While developed nations often categorize India as obstructionist in negotiations, the reality often depicts a multi-faceted power interplay in which wealthy nations dictate global trade rules in favor of their interests. One poignant issue opposing poverty alleviation via caps on food security subsidies based on outdated 1986-87 prices for public stockholding continues to face opposition from wealthy countries. That puts further strain on the ability to strike a balance among competing interests within the WTO along with the notion of effective and inclusive multilateralism.
Suggestions
The US, Australia, and other allied nations lodged accusations against India at the WTO for repressing the international market through heavy agricultural subsidies. However, they began to run in jeopardy of all credibility on two counts-they supposedly did not consider inflation in the elucidation of their support estimates in Indian rupees, and, in their estimation, they equated total production-not procurement levels.
The accusation sounds hypocritical since the US and others still afford a hefty amount of farmer support by means of Price Loss Coverage and Agriculture Risk Coverage, making a per-farmer support larger in 2020 (₹79 lakhs) compared to that of India. The US can give support up to 576% of the rice production value, while developing countries can only provide up to 10%.
Another problem is that the reference prices are fixed external reference prices based on 1986-88 and were manipulated by US and EC subsidies and market dominance. More than 80 developing countries proposed the use of dynamic reference prices as a way of describing present reality. By owning an MSP-backed system, which is required to nurture 800 million people, India claimed to have exceeded the 10% limit for rice in 2020-21.
While the Agreement on Agriculture recognizes the impact of inflation, it does not provide specific rules for the adjustment that would reflect how current global food security challenges have changed. The issue concerning agricultural subsidies in the WTO focuses on the US-INR conversion series from the period 1986-88, registering a figure of 13.5, climbing to 83 now. While India calculates the subsidies in dollars, leading to an increase in subsidies on account of INR depreciation, the US wants the calculation done in INR. The AoA makes no requirement for currency. Thus the disparity in estimates of price support for rice: based on US calculations, it’s 94 contrasted with the Indian figure of 15.2.
To arrive at a fair trading system, developing countries must push, through a fine coalition of developed countries, for AoA reforms concerning AMS entitlements. The current setup is cumbersome and suited for developed countries through its Amber box provisions, which distort the market in favor of developed countries and against the interests of developing countries’ agricultural sectors. Creating domestic mechanisms, such as regular inter-ministerial meetings between farmers, civil society organizations, and state governments, should be given priority. This collaborative process, involving the ministries concerned, such as those for agriculture, environment, external affairs, and commerce, must ensure compliance with WTO commitments while simultaneously safeguarding domestic interests.
Protection of S&DT provisions will be a sine qua non; a strong stand has to be taken against any proposals for capping support under the Development Box or reducing de minimis limits. Incorporating the elements of the SDGs concerning Zero Hunger and No Poverty into WTO negotiations will also strengthen the negotiating position for developing countries. Market intelligence units will be formed in Indian embassies to enhance global policy tracking for informing strategic decisions. This broad approach helps make up for domestic policy coordination, international advocacy, and intelligence sharing, which is crucial for protecting agricultural interests and ensuring fair trade on a global scale.
Conclusion
India faces an uphill task in formulating a minimum support price policy in compliance with WTO demands. In contrast to the WTO’s wish to curb trade-distorting measures, MSP is viewed as a tool to stabilize farmers’ income. Suggestions to exempt MSP from legal restraints may hoist up the impediments against WTO rules for designation of farmers. There is an immediate need for restructuring MSP or introducing some alternative supportive measures. Equally important is the demand for more flexibility for developing nations. A balanced and simultaneous approach must now connect together policy reforms and international engagement in a way that serves both the cause of farmers and trade commitments through contributing towards agricultural sustainability along with global obligations.