Contents

What is subsidy?.............................................................................................................. 2
Objective of subsidies.................................................................................................... 2
Forms of subsidies........................................................................................................ 2
Need of subsidy: (1)........................................................................................................ 2
Agriculture subsidy:......................................................................................................... 3
What is Agricultural Subsidy?.......................................................................................... 3
Types........................................................................................................................ 4
Problems with Agri Subsidy............................................................................................ 4
Agriculture in WTO.......................................................................................................... 5
Need of including agriculture in trade negotiation:.................................................................5
Agreement on Agriculture.................................................................................................. 7
The boxes................................................................................................................... 7
Salient Features of AoA.................................................................................................. 8
Very important terms related to this topic............................................................................. 10
Aggregate Measurement of Support (AMS).......................................................................10
PEACE CLAUSE....................................................................................................... 11
G-33....................................................................................................................... 12
Current scenario............................................................................................................ 12
Important links to refer:................................................................................................... 13
References:............................................................................................................... 13

What is subsidy?

Subsidy literally means assisting from behind.

Subsidy is the opposite of tax it is an instrument of fiscal policies

Objective of subsidies
By means of creating a wedge between consumer prices and producer costs, lead to changes in
demand/ supply decisions
Forms of subsidies

cash payment to producers/consumers --> visible form

reduced tax-liability
low interest government loans
government equity participation.
Invisible
forms

P.S: If the government procures goods, such as food grains, at higher than market prices or if it
sells as lower than market prices, subsidies are implied.

Need of subsidy: (1)

a) Inducing higher consumption/ production
b) Offsetting market imperfections ( it is a situation where free markets fail to allocate resources
efficiently)
c) Achievement of social policy objectives including redistribution of income, population
control, etc.
d) can help in controlling the prices to maintain stability.
e) Especially in case of agriculture where food is basic right of all, one cannot leave everything
to market, government intervention is needed.

Agriculture subsidy:
First some background-Indian Government role in agriculture sector development.

To create self-sufficiency
employment creation
support to small-scale producers for adopting modern technologies and inputs
reduction of price instability and improvement of the income of farm households.

This can be done in forms such as :

import-export policies
domestic policies like
- price support programs
- direct payments
- input subsidies to influence the cost and availability of farm inputs (like

Most common

credit, fertilizers, seeds, irrigation water, etc. )

Input subsidies benefit economically, environmentally and socially
Inputs like fertilizers, irrigation water and electricity have a significant share in agricultural
subsidies
What is Agricultural Subsidy?
"An agricultural subsidy is a governmental financial support paid to farmers and
agribusinesses to supplement their income, manage the supply of agricultural commodities, and
influence the cost and supply of such commodities.

Types

Two major types of subsidies

fertilizer subsidies
food subsidy

These two account for almost 90 percent of agricultural subsidy.

one more form which is intangible and uncountable is that, agricultural income is not
taxed in India.

The agriculture subsidies are distributed by every country but the amount varies. In India, the
subsidies provided are very low compared to other countries while number of dependents is very
large. Thus, agriculture subsidy for our poor farmers is one important tool to help our agriculture
sector grow
Problems with Agri Subsidy
a) Agri subsidies intended to raise farmer incomes by remedying low crop prices instead
they promote over production and therefore lower crop prices
b) Agri subsidies promote over production of one crop thus other crops are not/less
available in the market
c) Distinguishing between the needy and a non needy is difficult . For eg- In US 90% of
farm subsidy goes to largest 25 percent of farms. In European Union, Japan and Canada
this figure is 70 percent.
d) Many economists (including Joseph Stiglitz) have argued in long term the agri-subsidies
will affect raising global food prices therefore harming the poor, increasing malnutrition,
etc.
e) Also subsidies hamper terms of trade and so doesnt allows one country to take benefits
of comparative advantage.
f) Due to extensive government participation, subsidies may create inefficiencies
g) There are issues like the straining effects of agricultural subsidies on the sub-optimal use
of scarce inputs like water and power induced by subsidies, and whether subsidies lead to
systemic inefficiencies

Agriculture in WTO
Before the Uruguay Round, agriculture was not included as a substantial part
Need of including agriculture in trade negotiation:

Massive domestic subsidies given by industrialized countries

Lea
ds
to

excessive production and its dumping in international markets

+
import restrictions to keep out foreign agricultural products from their
domestic markets.

Lea
ds
to

distortion of international trade in agriculture

Therefore, for a fair agricultural trade regime following is necessary

reduction of domestic production subsidies given by developed countries (US and EU

particularly)
reduction in the volume of subsidized exports and
minimum market access opportunities for agricultural producers world-wide.

Following table shows important milestones for agricuture in WTO

Period

Round

Agreement

Important aspects

s
198694

Uruguay

(was

Round

Agreement on

Agriculture

distorted sector
-

supposed

aimed towards fairer competition and a less

WTO member governments agreed to

to be for 4

improve market access and reduce trade-

years)

distorting subsidies in agriculture

-

these commitments were phased in over a six

years from 1995 (10 years for developing
countries)

2001-till

Doha

present

Development

(was

Round

supposed

The Agriculture Committee oversees the

agreements implementation
was planned to finish in January 2005 but
prolonged

access issues esp. agriculture

to be for 3
years)

US wanted to restrict a new round to market

member governments committed themselves

to comprehensive negotiations aimed at:
o market access: substantial reductions
o exports subsidies: reductions of, with a
view to phasing out, all forms of these

o domestic support: substantial reductions

for supports that distort trade

We must know about the AoA (Agreement on Agriculture) as it is in news currently:

Agreement on Agriculture

Final Act of the Uruguay Round of Multilateral Trade Negotiations,

signed in April 1994 at Marrakesh, Morocco
came into force on 1st January, 1995
All WTO members, except least developed countries (LDCs), were required to make

commitments in all these areas in order to liberalize agricultural trade

Three pillars of AoA: market access, export subsidy and domestic support.

Before proceeding to the features of AoA- we need to know the boxes mentioned on WTO's site
as it is related to the agreement here
The boxes
In WTO, general subsidies are identified by boxes with different colours:

green (permitted subsidies)

amber (slow down i.e. subsidies to be reduced),
red (forbidden subsidies)

The Agriculture Agreement has no red box (although domestic support exceeding the reduction
commitment levels in the amber box is prohibited)
Thus, AoA has the following boxes:

Amber (de-minimis)
Green
Blue (for subsidies that are tied to programs that limit production)
S&D (exemptions for developing countries)

Salient Features of AoA

Tariffication of

Market Access

non-tariff barriers ( quantitative restrictions

all non-tariff

and export and import licensing etc) to be

barriers

replaced by tariffs to provide the same level

Setting up of a

of protection.
Developing countries given a limited element

of special and differential treatment (S&DT).

Minimum level will be as a share of domestic

consumption.
Countries required to maintain 1986-88

levels of access for each individual product.

The market access provision, however, does

minimum level
for imports of
agricultural
products

not apply when the commodity in question is

a traditional staple of a developing country.

Domestic
support

identifies acceptable measures that support farmers

denies unacceptable, trade distorting support to the farmers
this is done through AMS ( described later)
Commitment made required a 20% reduction in total AMS for
developed countries over 6 years. For developing countries, this

Export
subsidies:.

percentage is 13% and no reduction is required for the LDC

several types of subsidies to which reduction commitments apply
eg- direct export subsidies dependent on export performance; sales
of noncommercial stocks of agricultural products for export at
prices lower than comparable prices for such goods in the
domestic markets; producer-financed subsidies; 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 dependent on their incorporation in export products made

of wheat etc.
such subsidies are virtually non-existent in India as exporters of
agricultural commodities do not get direct subsidy (they might get
it indirectly as in the form of income tax rebate etc)

Very important terms related to this topic

Aggregate Measurement of Support (AMS).

All domestic support is quantified through the mechanism of total Aggregate Measurement

of Support (AMS)
It is a means of quantifying the aggregate value of domestic support or subsidy given to each

category of agricultural product.

consists of two parts
o Product-specific subsidy refers to the total level of support provided for each
individual agricultural commodity, essentially signified by procurement price in
India.
o 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.
1. Measures which have a minimum impact on trade i.e. Green Box criteria
Ex: Government assistance on general services like
(i)
research, pest and disease control, training, extension, and advisory
(ii)
(iii)
(iv)

services;
public stock holding for food security purposes;
domestic food aid; and
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 i.e. S&D Box criteria
Examples

(i)

investment subsidies which are generally available to agriculture in

(ii)

developing countries; and

agricultural input services generally available to low income and resource

poor producers in developing countries.

3. Direct payments under production limiting programme i.e. Blue Box criteria
These are relevant from the developed countries point of view only.
Also, under Amber box i.e. de-minimis provision - it is not required to reduce support in this
category if a product's value in any year remains below 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
PEACE CLAUSE

Article 13 (due restraint) of the Agriculture Agreement

protects countries using subsidies which comply with the agreement from being challenged

under other WTO agreements

Without this, countries would have greater freedom to take action against each others

subsidies, under the Subsidies and Countervailing Measures Agreement

The peace clause expired at the end of 2003 but Some countries (read US/EU) are pushing
for extending it to 2014 so that they can enjoy some degree of legal security, ensuring that
they will not be challenged so long as they comply with their commitments on export

subsidies and domestic support under the Agriculture Agreement

Some others want it to lapse as part of their overall objective to see agriculture brought under

general WTO disciplines that deal with governments ability to take action against subsidies
Some countries have proposed variants. Eg: Canada would like to see green box domestic
supports freed from the possibility of countervailing action under the Subsidies Agreement.
India proposes something like the peace clause should be retained but only for developing
countries, so that some subsidies are free from the possibility of countervailing duty

G-33

Coalition of 47 developing countries focused on defending their interests in subsistence

agriculture, food security and rural livelihood

India - has had over 500% inflation since 1988 Thus, India has made out a case for full

inflation allowance which will help the government procure grain from farmers (The Hindu)
The proposal of the G-33 countries is in line with Indias position but the West will resist this

change
Clause 18.4 of the AoA does mention that developing economies shall receive due

allowance for inflation in determining procurement prices

US and EU say that the AoA does not commit full allowance for inflation and thus, peace
clause must be accepted for the next 3 years

Current scenario

India is willing to accept Peace clause since it has started the food security program. If India
doesn't do this then it will be on back foot as due to NFS Act the procurement price of many

grains will shoot up very soon

For example- in India, procurement price of rice has shot up 24% from 1986-88- but only
10% was allowed (remember de-minimis level) thus, if India doesn't allow peace clause it

would not be able to procure wheat and other grains for food security act.
But this move by US/EU is a Hippocratic one as US itself provides a large amount of "trade

distorting subsidies" but blames India for doing it by launching the food security bill
In reality, food security bill is not under the radar but India's PDS system will be. Thus, India

needs to be careful while putting up any of its point at the upcoming Bali meet in December
It is still unclear that all G-33 members will support peace clause or not

Important links to refer:

What?

Link

List of G-33 members

http://www.wto.org/english/tratop_e/dda_e/negotiating_group

Link to various boxes

Newsletter "India and WTO"

s_maps_e.htm?group_selected=GRP017
http://www.wto.org/english/tratop_e/agric_e/agboxes_e.htm
http://commerce.nic.in/trade/international_trade.asp?

published regularly by

id=1&trade=i

Ministry of Commerce, a good

read for international trade

References:

http://agricoop.nic.in/statistics/stock2.htm
http://www.theguardian.com/sustainable-business/agricultural-subsidies-reformgovernment-support
http://www.heritage.org/research/reports/2007/06/how-farm-subsidies-harm-taxpayersconsumers-and-farmers-too
http://www.indianexpress.com/news/subsidies-in-fact/1093243/
http://www.wto.org/english/docs_e/legal_e/14-ag_02_e.htm
http://www.ijssbt.org/volume1/pdf/11.pdf
http://www.wto.org/english/tratop_e/agric_e/negs_bkgrnd13_boxes_e.htm
WTO AGREEMENT ON AGRICULTURE - report by ACTION AID
www.irinnews.org/printreport.aspx?reportid=98972
The Use of Input Subsidies in Developing Countries report by OECD

Personal details:
Akanksha Tiwari