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Agriculture and The World Trade Organisation

Gurdarshan Singh Bhalla
Jean-Luc Racine
Frédéric Landy

II. Market and regulation: the national scenarios

5. WTO and Indian Agriculture: Beyond Trade Related Policies

Bhupat M. Desai

Texte intégral

1At a public function organized by the Gujarat Economic Association in February 1996, Professor M.L. Dantwala who was being felicitated for becoming a National Professor, observed that the new economic policies introduced in mid-1991 could be categorized into those that are right, those that are wrong, and those that are in grey-areas. He cited delicensing and doing away with the permit-raj as a right reform. His illustration of a wrong reform was intellectual property rights and for the grey-areas he observed that those who are more active professionally might try consensus building based on more and better informed analysis. It is this scholarly, creative, and prudent approach of Professor Dantwala that has provided the inspiration for this paper. It is my small contribution to the cause that he has championed in his esteemed career spanning over five to six decades.


2Three reasons justify the theme of this paper. One, the new economic policies since mid-1991 and much of the research that has followed have not recognised the positive features of GATT’s provisions for agriculture. Instead, they have pinned much emphasis and optimism on its trade related provisions that have much less promise for this sector (see, for example, Singh, 1994; Gulati and Sharma, 1994; Ahluwalia, 1996; two significant early exceptions are: Bhalla, 1992; and Nayyar and Sen, 1994; and more recently Debroy 1997). Two, most trade related reforms under GATT impinge on agricultural growth objective through improvement in its barter terms of trade (i.e. prices received to prices paid by farmers) which is a “misconceived” instrument for this objective since it has an ambiguous impact as will be shown later. Three, trade is not an imperative route for agricultural growth in India, since being a large developing country, India does not have demand as a binding constraint. Moreover, agricultural growth is consistent with import-substituting as well as export-led overall development strategies with their consequent contributions to foreign exchange earnings. And historical experience of agriculture world over suggests that both these can and do coexist.

3With this background, this paper critically but constructively discusses three types of public policies that are identified from the WTO provisions for agriculture in developing countries. These are termed as:

  1. Positive but “misconceived”

  2. Positive and “rightly” conceived

  3. Positive but “inappropriate and ill-conceived”

4These are all discussed with a view to turning the last two in more desirable directions to combine the role of the State and the market for agriculture’s contributions to economic growth and poverty alleviation. Such directions of public policies for agriculture are strongly advocated because this sector has an altogether different role at an early as against later stage of economic development. Agriculture, in the early stages of economic development, has to generate surplus commodities for relaxing wages goods constraint to accelerate employment-led economic growth and poverty alleviation, besides containing inflation. These contributions of agriculture in a developing country are relatively more important than its other contributions like providing market, labour and capital for non-agricultural sectors. It is this differential role of agriculture that requires correcting the misconceived uniformity of GATT’s approach towards developing and developed countries (Shukla 1992).

Positive but “misconceived” policies

5Reducing undue protection to trade and industry through such policies as lower export and import restrictions, freer and improved market access, delicensing, dereservation, etc., is a step in the right direction. It is claimed that this will reduce prices paid by agriculture and inefficiencies in institutions serving agriculture. This, in turn, would make the barter terms of trade for agriculture more favourable. Better barter terms of trade will encourage technical change, investment and growth in agriculture (Singh, 1994; Ahluwalia, 1996). But this relative price has an ambiguous impact on aggregate agricultural supply, technical change, and private and government expenditure on agriculture (Desai and D’Souza 1999, Desai 1997, Rao 1989, Desai and Namboodiri 1997a, 1998a, 1999a). This is because it has impacts that work in opposite directions.

6When the barter terms of trade improve, it has income, wealth, and substitution effects on aggregate agricultural supply (Desai and D’Souza, 1999; besides, some earlier literature like Mathur and Ezekeil, 1961; Krishnan, 1965; Narain, 1988; and Behrman, 1968, though the discussion in these studies is about the marketed surplus and relative price of subsistence crops). The income effect is that better barter terms of trade increases income and hence consumption increases with consequent decline in saving/investment and output (i.e. negative impact). Similarly, the wealth effect is that improved income encourages leisure and hence reduces labour supply which in turn reduces output (i.e. negative impact). Substitution effects are two-fold. One is that better barter terms of trade improve incentives to save/invest and hence consumption declines and saving/investment improves which results in increased output (i.e. positive impact). The other is that with the improved barter terms of trade incentives to increase labour supply improve with consequent rise in this supply that results in increased output (i.e. positive impact). Thus, the aggregate impact of a rise in barter terms of trade is two-fold – consumption/saving may rise or fall, and labour supply/leisure may rise or fall. A priori, therefore, we cannot say whether aggregate supply will increase or decrease with an improvement in the barter terms of trade for a decision-making unit and level at which consumption, investment, labour supply, and production are all intertwined.

7On the empirical evidence for whether aggregate agricultural supply response is positive or negative, past studies on India show that about 30 per cent of the cases reveals that the barter term of trade has a “net” impact that reduces aggregate output (i.e. a negative impact). This suggests that the negative income and wealth effects have more than offset the positive substitution effects. The corresponding number for aggregate effective supply (i.e. marketed surplus), which is what matters for trade is as high as 75 per cent. For high-income countries this number is 33 per cent for aggregate output. And from cross-country aggregate output studies it is found to be close to 36 per cent. Furthermore, a recent study by Desai and Namboodiri (1999a) on India which considers the post-Green Revolution period shows that both aggregate output and marketed surplus of foodgrains which still occupy two-thirds of the cultivated land are negatively associated with their barter terms of trade. All these findings are highly significant to question the positive price response of aggregate output that studies on agricultural trade liberalization assume (Martin and Waters, 1996; Anderson and Tyres, 1990; Binswanger, 1989; Gulati and Sharma, 1991; Chibber, 1988). Agricultural policy-making thus cannot rely on price as an instrument since it has a potentially powerful but uncertain impact.

8Yet another reason why price is a “misconceived” instrument is that the price response of aggregate supply is feeble even when it is positive (Bhalla, 1992; Desai and Namboodiri, 1997a and 1999a; Ghosh, 1997). This is because land supply is fixed, cropping patterns are governed by agro-climatic and other factors, and initial input intensities are low (Mellor, 1966 and 1976; Narain, 1988). The short run positive elasticity for India ranges from a low of 0.02 to 0.36, while the long run elasticity ranges from 0.02 to 0.83. But the modal range for the short run elasticity is 0.11 to 0.25; while for long run the range is 0.26 to 0.50. Even for a high income country like the United States of America the range was 0.05 to 0.17 in the short run and 0.07 to 0.23 in the long run during 1920-1957 (Grilichies, 1960). Cross-country studies for developed agriculture based on time-series data reveal an elasticity of 0.34 to 2.96 though a similar such study for developing agriculture shows the range to be 0.13 to 0.78 only (Chibber 1988). This suggests that for developing countries the supply response elasticities are no more than a little over one-third of what they are for the developed countries.

9Finally, several studies on aggregate and crop-specific supply responses in developing countries show that non-price factors like irrigation, technology, weather, etc. have a “relatively” much more powerful impact than the relative prices (Krishna, 1963 and 1982; Chibber, 1988; Palanivel, 1995; Rao, 1989; Mungekar, 1992 and 1997). Moreover, Desai and Namboodiri (1999a) show that in India non-price factors like technical change, capital stock, and conducive institutional structure are more potent in influencing the aggregate agricultural output, while the relative prices are least important. This is so even in the post-1965 era since when a positive agricultural price policy has been pursued.

  • 1 The improvement in the growth rate of real plan expenditure on agriculture is more of a statistical (...)

10Our contention of relative farm prices being a “misconceived” instrument for agricultural growth is also supported from what the earlier noted reforms of reducing protection to trade and industry in India have accomplished for agriculture. In the post-reform period till around mid-1990’s, barter terms of trade for agriculture have further become favourable and yet neither the growth of non-price factors like new technological inputs or government expenditure on agriculture has improved. Nor has agricultural growth or the (rural) poverty ratio improved. On the contrary, all of these have deteriorated (see Table 1)1. This is despite a further shift in favour of high-value crop-mix and output-mix and more favourable weather conditions in post-reform period (Desai, 1998). What has truly improved growth rates are HYV area, real plan expenditure on rural development and rural credit flow, output of a few commodities like wheat, condiments, spices, fruits and vegetables, inland fish, some agro-exports and some food processing industries like that of fruit and vegetables, beverages, fisheries, spices and to an extent rice which has already improved India’s share in world agro-exports (Desai, 1998). But, they have not wielded better growth rate of new technological inputs or that of agriculture and its mainstream products that have a large share in acreages, output, and value added.

11Why then are these reforms positive? They are positive in the sense that they will improve the market structure with consequent efficiency in the supply of farm inputs and marketing services. Price reforms for canal-irrigation, fertilizers, and farm electricity are also imminent for similar reasons, besides for improving farmers X-efficiency (i.e. use as distinct from allocative efficiency, a concept coined by Leibenstein, 1976 and 1980). Improving efficiency of institutions serving agriculture as well as that of farmers may be accomplished by more appropriate pricing of these inputs that is regularly changed and enforced, besides by improving the present extension worker to farmer ratio of 1: 800/1000, which is highly inadequate.

12To conclude, what GATT provisions suggest for trade and price reforms for agriculture have their rationale in making the market structure and institutions supplying various services and inputs more competitive, efficient, and effective. But for accomplishing the objective of rapid technology-led agricultural growth they are “misconceived”. It is in realizing such sectoral growth, however, that GATT has provisions, except for TRIPS, that are both positive and “rightly” conceived. Before we turn to discuss them, options available for accelerated agricultural growth may be briefly sketched so that what we discuss next is more clearly appreciated.

  • 2 Following Ricardo, trade literature argues that international trade like technical change can also (...)

13Extensive farming, intensive agriculture, and technical change are the three “strategic” options for growth in agriculture (Dantwala, 1986). Extensive farming in India is no longer feasible because most land frontiers have been exhausted. Intensive agriculture is agro-economically unsustainable for it increases production at diminishing rate and creates pressure on natural resources. Thus, the most preferred option is technical change, i.e. scientific-knowledge based farming (including product innovations) along with new inputs in which this change is embodied.2

14Such a “strategy” is imperative for it enables overcoming a trap into Ricardo’s Law of Diminishing Returns to which agriculture, unlike other sectors, is more prone. Besides being a necessary “strategy”, it is also sufficient for it increases production at reduced unit cost/price in real terms, thus benefiting the poor who spend a large part of their budget on agricultural commodities (Kahlon and Tyagi, 1983; Sidhu and Byerlee, 1992; Rao, 1994; Singh, Pal and Morris, 1995; Acharya, 1997; Desai and Namboodiri 1998b).

15Technical change in the post-1965 period accounted for as much as 43 per cent of agricultural growth in India though in the United States it claimed as much as 67 per cent (Desai, 1994; Ball, 1985). In the latter part of this period, total factor productivity has significantly decelerated despite significant increases in the use of new technological inputs. Even land productivity has decelerated in these years (Desai and Namboodiri, 1997c). This suggests that the distinction between intensive agriculture and scientific knowledge based farming that was much in evidence when the Green Revolution got initiated has become blurred.

16Restoring this distinction requires another round of the Green Revolution. But it has to have a technical change that is both seed and resource centred rather than only seed or only resource-centred to more fully harness its potential in a sustainable manner. This requires government expenditure on agricultural R&D, extension service, soil testing laboratories, irrigation and watersheds, electricity, seeds, selective input subsidies and marketing infrastructure like roads and communication. This is because most of these are merit/public and quasi-public goods in whose case the market fails as benefits to private investors including farmers are lower than to society at large (Rao, 1989; Desai and Namboodiri 1997a; Desai, 1998; Rao 1998). It is in this context that the WTO’s provisions for government budgetary support for agriculture being exempted are both positive and in the right direction. But the literature in India or elsewhere has not recognised it (Gulati and Sharma, 1994; Pursell and Gulati, 1993; Ahluwalia, 1996; Goldin and Knudson, 1990; two exceptions are: Bhalla and Singh, 1994; and Nayyar and Sen, 1994).

Positive and “rightly” conceived policies

17From the viewpoint of a developing country like India, positive and “rightly” conceived policies include the following of the GATT provisions on domestic support assistance that is exempted under the “Green Box” and non-exempted agricultural subsidies as part of AMS (Aggregate Measure of Support) allowed up to 10 per cent of agricultural production to encourage agriculture and rural development that are an integral part of development (Oza, the exempted measures are: 1995; Bhalla and Singh, 1994; Nayyar and Sen, 1994; Debroy, 1996).

  1. General government assistance for research, pests and disease control, training services, extension services, inspection services, infrastructure services, and direct payments to producers for environmental programmes

    • 3 While official definition of such farmers considers those with up to 2 hectares of land, some studi (...)

    Public support of farm input and credit subsidies for marginal and small farmers3 that are excluded/exempted from non-product specific assistance

  2. Public support of farm input and credit subsidies for farmers other than marginal and small farmers being allowed as a part of AMS to the extent of 10 per cent of agricultural production

    • 4 This holds only when GATT formula is considered to measure the product-specific support. But the al (...)

    Equivalent measure of support for agricultural products in whose case calculation of product-specific support is impracticable such as for non-tradables4

  3. Assistance for public stock holding for “food security” and domestic food aid such as food subsidy given under the Public Distribution System (PDS) as long as it is based on clearly defined criteria related to “nutritional” objectives.

18How has India used these opportunities both before and after macro-reforms? Excepting the equivalent measure of support (i.e. item 4), all others have been part of agricultural policy in India. What GATT provisions offer for public support for agriculture was better harnessed prior to their emergence. But in the wake of macro-reforms it was frittered away under the exclusive reliance on “markets” and “setting prices right”.

19Firstly most of the purposes and especially those related to agricultural research, training and extension, infrastructure (like irrigation, rural electricity, rural roads, cooperatives, etc.), and environmental protection (like that for drought-prone areas, hill areas, etc.) have been part of the government expenditure “on” and “for” agriculture as will be soon shown. Yet the new policies have not fully harnessed these opportunities; both the absolute and relative (i.e. per cent) shares of government’s planned expenditure “on” agriculture in real terms are lower in the post-reform period as was shown earlier. What gained most is the government’s planned expenditure on target-group specific rural development programmes (like the Integrated Rural Development Programme (IRDP) and Jawahar Rozgar Yojana) even though they have had limited success. In the post-reform period even government plan expenditure on infrastructure like power, ports, communication, etc. has declined (Ghosh, 1997).

20Table 2 shows that the central government’s planned expenditure “on” and “for” agriculture and rural development that was realized and budgeted respectively for 1996-97 and 1997-98 had increased inadequately compared to the inflation, besides being lowered/kept constant as a per cent of total plan expenditure. Moreover, the pattern of this expenditure also shifted from technological and economic resources to programmes like storage and warehousing, IRDP and rural employment (see Table 2). These trends are also likely to hold for the state government budgets for two reasons. One is that the central budget acts like a “budget leader”. Two, and more important, net transfer of resources from the central government to the state governments has significantly declined in the wake of macro-reforms with a consequent resource crunch (Ghosh, 1997).

21These have all largely resulted from the structural adjustment and liberalization that have emphasized the earlier discussed misconceived public policies for agricultural growth (Ghosh, 1997; Desai, 1997). Even the increased emphasis on target-group specific rural development programmes is short-sighted as such individual beneficiary-oriented programmes fructify little without being integrated with technology and infrastructure-led growth in agriculture where most poor are engaged.

22A recent redeeming feature is that the central government budget for 1998-99 has corrected most of the earlier discussed deficiencies of the previous budgets (compare Table 2 and Column 2 of Table 3). This may be because India has now a government and political coalition that have for the first time since Independence explicitly stated that economic growth is influenced by both industrialization and agricultural performance.

23But even this government failed to sustain this correction in its second budget of 1999-2000 (see Table 3). The only exception is the better allocation for economic programmes. Notwithstanding the importance of this exception the government’s failure in its agriculture related second budget is indicative of lack of sustained planning to translate its better appreciation of this sector’s contribution to economic growth in reality.

24While correcting for this failure, the government also needs to recognize that it needs to improve net resource transfer to the state governments, since agriculture is a state subject and since the states have limited powers to raise resources. Additionally, the government also must play a leadership role in inducing the states to provide equity-support to the credit cooperatives, besides undertaking land reforms that emphasize selective legitimisation of tenancy, consolidation of land fragments, and enforcement of existing ceilings on land ownership to fully realize the potential of technology and infrastructure-led rural growth induced by the new government expenditure policy. Indeed, such pro-active roles of the government will greatly facilitate in realizing the potential of long-run response of agricultural output/supply to the first set of rightly but “misconceived” policies discussed earlier. To put it differently, sustained shift from the “misconceived” policy of relying on relative prices to non-price factors for agricultural growth will, in the long run, make the aggregate supply response both positive and elastic (Rao and Gulati, 1994; Rao, 1989; Binswanger, 1989).

25The government policies on farm input subsidies are misconceived, ad-hoc, and suffer from some conceptual inconsistencies. This is disconcerting as such subsidies are estimated to be well below the 10 per cent permitted under GATT (Oza, 1995; Bhalla and Singh, 1994; Gulati and Sharma, 1994). Such policies seem to have resulted from an obsession with fiscal deficit rather than viewing it as a larger issue of public finance and trade policies. Three points need to be stressed.

26One, subsidy is justified when society benefits more than the private enterprise including farmers. Two, indiscriminate and unilateral cut in subsidies would adversely affect agriculture’s comparative advantage as it would then raise farm prices vis-à-vis world market prices (Nayyar and Sen, 1994). Three, controlling fiscal deficit requires a more integrated sectoral perspective on tax concessions, tariff reductions, etc. that are a part of liberalization to avoid causing loss of revenue which reduces public expenditure. One such policy measure of the budget for 1997-98 was the reduction in corporate and personal direct tax rates under the plea that it would improve the compliance of tax with consequent better revenue collection. But this has not been realized. Given that the present tax to GDP ratio is quite low, compared to many other developing countries, such tax concessions can have serious ramifications (Ghosh, 1997).

27The fertilizer subsidy policy has also been ad-hoc and characterized by uncertainty about this subsidy and also about inducing adverse parity in prices of NPK fertilizers. This has led to lack of a level playing field for the manufacturers of these fertilizers. It has also led to adverse NPK ratio in the use of fertilizers by farmers with consequent environmental stress. Again, this policy is an outcome of excessive faith in liberalization and “setting prices right” as a source of improving allocative efficiency, a concept that is restrictive compared to the concept of X-efficiency. We have more to say on this later when the third type of public policies implied by GATT is considered.

28Yet another problem is that the government proposes to consider agricultural research and education as merit goods but not agricultural extension services (GOI, 1997). The free-rider problem for such services is as true as it is for agricultural education. Similarly, such problems for irrigation and flood control are not recognized though for soil and water conservation and flood control is recognized (GOI, 1997). Since government expenditure on all these is part of public support that is exempted under the “Green Box”, these are unwarranted for the commitments under GATT.

29However, GATT’s implicit definition of credit subsidy has some serious problems. This subsidy is defined as the difference between the interest rate on agricultural credit and that on trade and industry credit considering the concept of opportunity foregone (Bhalla and Singh, 1994; Gulati and Sharma, 1991). Such a concept implies credit market is perfectly competitive with consequent inter-sectoral interest rates being same. But this market is inherently imperfect dealing as it does in future transactions (Stiglitz, 1994; Desai and Mellor, 1993). Further, the literature on financial liberalization defines this subsidy as nominal interest rate being lower than some measure of inflation (Shaw, 1973; McKinnon, 1973). Considering this definition, Indian agriculture was not subsidised for as many as 36 out of 46 years since 1950 (Desai and Namboodiri, 1999b). Subsidy in these ten years resulted not because nominal rates were reduced but because inflation shot up due to exogenous shocks like oil crisis and severe droughts. Thus, neither the deregulation of interest rates which is normally justified when there is subsidy nor the raising of interest rates in post-reform period was required. The latter was unwarranted also because institutional lenders have scale economies and/or constant returns to scale in their costs suggesting thereby that cost-based pricing does not require them to raise interest rates (Desai 1994b; Bhattacharjee, Desai and Naik, 1999).

30On the fifth type of public assistance for “food security”, GATT provisions would require PDS to be targeted since it at present serves the non-poor also. Policies are being fine tuned for this by identifying the poor based on income criterion and the poor backward areas. However, this could be further improved as identification based on income alone is not full proof. It could be improved by a process of elimination of say taxpayers. For the rural sector, it could be done by weeding out those owning a pukka house of certain size and type, tractor, TV, phone, etc. Making PDS a genuine entitlement would turn it into transparent public support of pride and could reduce the government expenditure on food subsidy.

31But GATT’s provision of buying (and selling) food (for PDS) at open market price is inappropriate for more than one reason. One, it would increase the food subsidy burden with consequent pressure on government’s resources. Two, when a large buyer like India enters the market to purchase for food security, sellers tend to take advantage by holding up the stocks until prices skyrocket. Such market sentiment not only enhances government’s costs but also hinders discharging its social responsibility that is implicit in food security related objectives of the developing countries (Dantwala, 1993). Three, government purchases are at the support/procurement price which is a full-cost-based pricing. Four, farmers are free to sell to government and other agencies. Only in the case of rice and sugar is there a levy on the millers/processors. Over time, this levy has been reduced. But its complete elimination at this stage may result in inadequate purchases by the government with consequent problem of insufficient supplies for PDS and bufferstocks.

32Nonetheless, there seems to be room to reduce the total quantity of foodgrains procured by the government. It is estimated that this could be in the range of 15-20 million tonnes considering the requirements for both PDS and bufferstocks needed to meet the short supplies in the event of droughts (Tyagi, 1990). This should be possible to achieve with a better targeted PDS on the lines suggested earlier, besides better planning and implementation by the Food Corporation of India and state governments. Before we conclude it must be stated that the present policies of selling food under PDS and buffer stocks assist the government in maintaining lower prices for wages goods with consequent restraint on wage increases that would hurt the profitability in various sectors. Such food price policy is accomplished without hurting much the surplus producing farmers as the pricing is full-cost-based. Indeed, such a price policy has been one of the important factors behind the successes that the East and South-East Asian countries have achieved for their growth and poverty reduction (Ghosh, 1997).

33To conclude, most provisions of the “Green Box” and non-product specific public support for agriculture under the WTO are sound and in the right direction for accelerating this sector’s growth as also its contribution to alleviating poverty. The only modifications required relate to redefining the credit subsidy as negative real interest rate and not requiring the government to make purchases for food security at open market prices. The government needs to change its mindset of viewing input subsidies as a fiscal deficit problem to that of public finance issue and opportunity. Moreover, it must treat public support for extension service, irrigation, and flood control, like that for agricultural research and education, soil and water conservation, and flood control as merit goods. The government also needs to formulate a better-targeted PDS and bufferstock operations.

Positive but “inappropriate and ill-conceived” policies

34Positive but “inappropriate and ill-conceived” policies relate to GATT’s provisions on product-specific market price support (MPS), defining non-product specific support of farm input subsidies, and TRIPS. All these three provisions are positive in more than one sense.

35One, these provisions legitimise such policy support and thereby provide an “assured” policy environment which is critical for farmers who, unlike others, encounter more and varied risks and uncertainty. The East Asian countries have pursued such policy environment for agriculture even under liberalization (Ghosh, 1997). Two, these provisions also provide incentives for sustained technological transformation of agriculture. In the early stage of this process in a developing country like India, farm input subsidy may be a better option than product price support though it may be mildly regressive (Mellor, 1966 and 1976; Krishna, 1967; Barker and Hayami, 1976). This is perhaps because the prevailing market environment for farm commodities tends to fulfil its incentive function on its own, besides the fact that product price support benefits larger farmers much more than the smaller ones who are net purchasers of marketed surplus. And yet product price support is needed to ensure some price stability, which is not always inherent in agriculture. Three, TRIPS would provide incentives to discover and innovate new technologies. Moreover, it would induce better accountability of the agricultural R&D system.

36But there are certain features of all these three provisions which have “inappropriate and ill-conceived” implications for agricultural policy in a developing country. We discuss them for MPS first followed by a discussion on input subsidies and lastly TRIPS. In so doing we also consider how these are being practised in India.

Product-specific MPS

37GATT defines market price support as administered domestic price minus reference price of CIF/FOB depending on whether the product is net importable/exportable (Bhalla and Singh, 1994; Debroy, 1996). There are several serious problems with this definition.

  • 5 Desai & Namboodiri, (1999a), show that inflation is relatively more accounted for by the compositio (...)

38While reference price is market price, administered domestic price is “presumed” to be the price that represents market price rather than the market price itself. There is thus an inherent contradiction. Two, not all production is sold at this administered price even though it is eligible and hence to that extent MPS is understated if this price is lower than the domestic market price and the border price which often is the case. Three, a more serious inherent contradiction follows from this formula. That is, its negative value is inferred as disincentive/tax as is the case for most crops in India and yet in the same breadth it is also considered to have a comparative advantage in its agriculture (Gulati and Sharma, 1991). India’s lower prices (either procurement or market price) are an indication of its lower unit costs which in turn suggests its revealed comparative advantage in agriculture. This is because of agriculture’s different resource endowments and technology that is less capital-intensive compared to that in the high-income countries that determine the border prices. Four, GATT’s formula implies consideration of an additional criterion of parity principle in determining domestic support/procurement price which is based on full cost-pricing as was stated earlier. While this would improve (net) producers’incentives and gains, it would hurt net purchasers and consumers in general. The latter is estimated to be larger than the former (Rao, 1989; Anderson and Tyres, 1990; Sandoulet and de Janvry, 1990; Parikh, 1992; Nayyar and Sen, 1994). To top it all, it would imply additional inflationary5 tendencies which would hurt industrialization and growth in general (Mellor, 1966 and 1976; Rangarajan, 1982; Rao, 1989). Five, border prices of agricultural commodities are notoriously volatile with consequent MPS measured to swing quite widely (Singh and Brar, 1996). It has, therefore, builtin limitations to serve the earlier stated objective of stabilizing farm prices. Lastly, border prices are justified on the ground that they represent perfectly competitive international markets for agricultural commodities. But this market is more of an oligopoly dominated by a few large players (Gill and Brar, 1996).

39How may MPS be measured so that the valid idea of product-specific support could be ascertained for policy commitments? Our suggestion is as follows:

40MPS = [αDSP + α (1-α) DMP]-[DUTC]


42α = product-specific percentage of production eligible to receive domestic support price (DSP)

43DSP = product-specific domestic support price

44DMP = product-specific domestic market price

45DUTC = product-specific domestic unit total costs of production

46The rationale for this is three-fold. One, the administered support price of the government has an avowed objective of making the market price that is incentive-oriented. Hence, the market price support (MPS) should be the weighted average of the government support price and the open market price. Two, MPS so measured has its merits in that it enables finding the competitive advantage. Three, it is based on a method of full-cost based pricing principle rather than both this cost and parity principle which has highly complex implications for serving the interests of farmers, consumers, industries and economy as was stated above. Such a principle is also advocated on the ground of being simple (Krishna, 1967), and is commonly used in developed countries like the United States and South Korea (Johnson, 1967; Ghosh, 1997).

47One problem with this formula is that data requirements are quite large, complex, time consuming, and costly, especially for a large and diverse agriculture as in India and China. Moreover, it is likely to unduly politicise support price determination as variation in unit cost is very large (Krishna, 1967; Johnson 1967).

48It is for these among other reasons that we also prefer the product price support policy that should be highly selective. The selection could be guided by choosing products that have sustained and broad-based increases in per hectare yields and/or total factor productivity. This is because in such crops once the supply curve shifts, prices crash with the consequent need to guarantee price support by the government to sustain technological change for future. This also implies that product price support must “follow rather than precede” technical change, i.e. earlier discussed non-price factors related policies that are positive and “rightly” conceived under GATT. The goal of ensuring price stability may be served by determining a minimum support price rather than market price support (MPS)/procurement price. This may be determined on the basis of variable costs (or approximately cost A2 in the parlance of Commission on Agricultural Costs and Prices in India). This is because farmers would find it profitable to continue as long as their variable costs are covered.

49In India, the distinction between minimum support price and procurement price (i.e. MPS), which was in force at one time, needs to be restored on the lines suggested above. Moreover, government procurement price is based on full unit cost plus something to account for price parity. Various types of parities such as open market prices, output-input price parity, inter-sectoral price parity, etc., are considered. While the earlier discussion on undesirable implications of border-price parity need not be repeated, it is worth recalling the discussion on barter terms of trade that it has both an ambiguous and inelastic impact on (aggregate) output/supply. Even other parities may be ignored as they are implicitly considered in the option that is suggested earlier (Krishna, 1967).

Defining farm input subsidies

50GATT provisions on this are much less specific which makes our task incomplete and perhaps unwarranted. But in the case of an input like fertilizers (i.e. a traded input) it appears that a similar definition as for product-specific market price support is perhaps implied. In other words, fertilizer subsidy is measured as reference price minus domestic price, where the former is cif/fob depending on whether it is net importable/exportable adjusted for delivery at farm gate and the latter is the price paid by farmers (Bhalla and Singh, 1994; Gulati and Sharma, 1991 and 1994). But the government treats entire budgetary expenditure for fertilizers as this subsidy. And it broadly represents this input being sold to farmers at prices below the cost of its manufacturing/import and marketing. In a sense this suggests the same principle of cost-based product-specific market price support proposed earlier. Many of the reasons that guided this proposal may be applicable in this case also. The only modification required is to consider the weighted averages of both costs and the farmer’s price where the weights are the shares of domestic and imported supplies. But this is the case only for nitrogenous and phosphatic fertilizers as potash is totally imported into India.

51Considering subsidy/tax as the difference between what it costs to produce/supply and farmer’s price seems quite convincing. Such principle is even implied in the government’s approach paper on subsidies which covers other such farm inputs as canal irrigation water and farm electricity (GOI, 1997). Adoption of this cost-based principle would approximate the real nature of subsidy unlike the formula of GATT that portrays it to be a notional number. Perhaps the former measurement is more transparent and overcomes answering a counter-factual question implicit in the latter. Incidentally, most available estimates of farm input subsidies referred to earlier are well within what GATT permits, and use this more transparent measure.

Trade related intellectual property rights

52Provisions required under trade related intellectual property rights (TRIPS) for agriculture tantamount to “negative and wrong” policies, if not unfair, for India and developing countries in general. This is because under a sui generis system, those countries like India which have process patenting for agriculture will have to switch over to product patenting. This together with other provisions on TRIPS would severely constrain three aspects of the process of technological transformation of agriculture. These are:

  • Supply of inventions and discoveries

  • Access to this supply to those who want to produce patented products like seeds (including hybrids), pesticides and fertilizers (including bio-material based)

  • Farmers’ cost of adopting the patented new technologies (Nayyar and Sen, 1994; Oza, 1995).

53The first two will be constrained by the requirements of royalty and licensing and the fee to be paid for any patent without any ceiling. They are also constrained by the monopoly rights of patentees being fully protected even from the objective of development of indigenous technological capability in a manner that would subserve the wider public interest by requiring not only commercial producers but also scientists and labs to pay for the royalty for the protected (patented) varieties of seeds, bio-technology and genetic engineering based inventions (Oza, 1995). Furthermore, they would be constrained from the patent being considered “working” even when the patented product is only imported but not locally produced, as well as from the barriers to entry that will result from enhancing the patent expiry period from 5-7 years until 1998, to 20 years from 1999 (Oza, 1995).

54All this will constrain the supply with consequent increase in prices of patented products, which in any case will go up due to royalty and licence fees. Both of these in turn would make farmers’adoption of new technology costlier with consequent slower diffusion and rate of growth in productivity (Nayyar and Sen, 1994; Oza, 1995). What all this implies for agriculture in India and developing countries in general, is a dynamic comparative disadvantage which counts far more than the static comparative advantage (Nayyar and Sen, 1994).

55How can this be contained, if not eliminated? Two of the three desirable public policies required for this can, however, be considered as part of GATT’s provisions. One of these is that at least the royalty and licence fees to be paid for the patented new technologies could be an integral and explicit part of the earlier discussed exempted public support under the “Green Box” for agriculture. This is because “knowledge” is more of a “public good”. Second, the permissible limit of AMS, and non-product specific public support of input subsidies in particular, may be raised for developing countries from 10 per cent of agricultural production proposed under the GATT. Three, plant breeders’rights to supply of and/or access to patented new technology must be explicitly exempted from the requirements of patenting and from patentees’monopoly over the new technologies as was conceived under UPOV conventions of 1991 but not under the Uruguay Round of agreement (Nayyar and Sen, 1994; Debroy, 1996).

56Our plea is that the government may play a pro-active role on all these policies with WTO to make them a part of GATT. We also plea that both central and state governments must adopt the first and third type of changes as part of public support for agriculture and allied agricultural activities irrespective of how the WTO may respond, since these are legitimate under the GATT provisions in general.

Concluding observations

57WTO provisions for agriculture are a means to an end. Those provisions that have “misconceived” policy implications for agricultural growth seem to have been prioritised in India. They largely relate to reducing protection to trade and industry that may improve relative farm prices. Moreover, they seem to visualize more optimistic export-led agricultural growth which has an underlying assumption of domestic demand being a binding constraint rather than supply-side bottlenecks to this very end. This may be an outcome of conditionalities of structural adjustment and liberalization that has emphasized “markets” and “setting prices right”, which has underneath neoclassical economics framework and small country assumptions. But the provisions that are both “positive and right” and those that are “positive but ill-conceived” have remained at the bottom.

58What this has accomplished for agriculture is lower growth rate that is not even broad-based, besides higher (rural) poverty. Overcoming these would, however, require making a clear distinction between policy “strategy” and “instruments” which has been lost in the wake of macro-reforms. This, in turn, requires prioritising those provisions of GATT that are both right and in the desirable directions. They include in particular the public support for agriculture that is exempted as part of the “Green Box”. They moreover include the public support of farm input subsidies and price support that is non-exempted but allowed up to 10 per cent of agricultural production.

59Harnessing both of these must imply that agricultural growth is led more by “technology and infrastructure” rather than (relative) prices. Indeed, the long-run response of prices itself is influenced by the choice of this “strategy” and by changing the sequence of policy “instruments” from relative prices to government expenditure “on” and “for” agricultural development, and such other non-price policies as agricultural research and extension, irrigation, farm power, seed and fertilizers, credit and land reforms like selectively legitimising tenancy and consolidation of land fragments.

60It is this sequence, as well as the “sustained priority for and commitment to” these non-price policies besides input subsidies, which have led to what the East Asian countries have achieved in their agriculture and for the economy at large (Ghosh, 1997).

61While this must be emulated by India, it also requires solving the problems of TRIPS by financing higher prices of new technology evolution and transfer under the public domain of the “Green Box”, besides enhancing the 10 per cent of AMS including non-product specific support of farm input subsidies, and protecting the plant breeders’rights. Equally important is to appropriately price canal-irrigation water, farm electricity, and fertilizers. Improving farmers’X-efficiency also requires enhancing the present extension worker to farmer ratio to promote “knowledge” as an input.

62There is also an urgent need for better governance and accountability of institutions related to agricultural R&D, extension service, irrigation, power, credit, etc., besides making them farmer-friendly and collaborative.

63The place that may be assigned to the product price policy in this package of policy “instruments” is to let the market work except for the selective price supports together with the Public Distribution System and bufferstocks that are better targeted.

64To conclude, there is no short cut to agricultural growth and poverty alleviation. But what the non-price policies for “technology and infrastructure” can achieve for agriculture is to serve better the complex interests of farmers, consumers, industries and economy than what the product price and agro-trade related policies can achieve in the early stage of economic development.


Table 1Agricultural Performance in Pre and Post Reform period in India


Pre-Reform 1985-86 to 1990-91

Post-Reform 1991-92 to 1996-97

Barter Terms of Trade (BTOT-lndex of wholesale prices of agriculture to index of wholesale prices of

manufacturing-Base 1981-82)

1. Average Index



2. Annual Compound Growth Rate in BTOT (%)



Percentage of GOl’s Plan Expenditure on Agriculture

to Total Plan Expenditure



Annual Compound Growth Rates in Non-Price Factors (%)


HYV Area (Mn.ha)




Fertilisers Use (Mn.tons of NPK)




Gross Irrigated Area (Mn.ha)*




Electricity Use in Agriculture (Bn.kwh)*




Real Plan Expenditure on Agriculture and Rural Development in 1980-81



Prices (Rs.Bn)




Real Plan Expenditure on Agriculture alone in 1980-81



Prices (Rs.Bn)




Real Total Institutional Rural Credit issued during the year in 1980-81



Prices (Rs.Bn)


Real Total Institutional Rural Credit Outstanding in 1980-81Prices (Rs.Bn)



Agricultural Growth: Annual Compound Growth Rates (%)


Foodgrains Production Index (T.E. 1981-82 =100)




Non-foodgrains Production Index (T.E. 1981-82 =100)




Agricultural Production Index (T.E. 1981-82 =100)




Paddy/Rice Output in 1980-81 Prices (Rs.Bn)**




Wheat Output in 1980-81 Prices (Rs.Bn)**




Oilseeds Output in 1980-81 Prices (Rs.Bn)**




Sugarcane Output in 1980-81 Prices (Rs.Bn)**




Cotton Output in 1980-81 Prices (Rs.Bn)**




Fruits and Vegetables Output in 1980-81 Prices (Rs.Bn)**




Pre-Reform 1985-86 to 1990-91

Post-Reform 1991-92 to 1996-97


Condiments and Spices Output in 1980-81 Prices (Rs.Bn)**




Milk and Milk Products Output in 1980-81 Prices (Rs.Bn)**




Eggs Output in 1980-81 Prices (Rs.Bn)**




Marine Fish Output in 1980-81 Prices (Rs.Bn)**




Coarse Cereals Output in 1980-81 Prices (Rs.Bn)**




Pulses Output in 1980-81 Prices (Rs.Bn)**




Inland Fish Output in 1980-81 Prices (Rs.Bn)**




Gross Real Value Added (GDP) from Agriculture in 1980-81 Prices (Rs.Bn)*




Net Real Value Added (NDP) from Agriculture in 1980-81 Prices (Rs.Bn)*




NDP from Agriculture in Current Prices (Rs.Bn)*



Poverty Ratios (%)***









Agro-processing Industries Growth: Annual Compound Growth Rates (%)


Agro-processing Industries Output in 1981-82 Prices (Rs.Bn)***




Agro-processing Industries Value Added in 1981-82 Prices (Rs.Bn)***




All Food-processing Industries Output in 1981-82 Prices (Rs.Bn)***




All Food-processing Industries Value Added in 1981-82 Prices (Rs.Bn)***



Growth in Agro-Trade: Annual Compound Growth Rates (%)


Food Exports( ($ Mn. in 1980-81 Unit Values)****




Beverages and Tobacco Exports ($ Mn. in 1980-81 Unit Values)




Oilseeds and Oilcakes Exports ($ Mn. in 1980-81 Unit Values)




Cotton, Cotton Apparel, Jute, etc. Exports ($ Mn. in 1980-81 Unit Values)




All Agro-Exports ($ Mn. in 1980-81 Unit Values)




Trade Balance on Agricultural A/c ($ Mn. in 1980-81 Unit Values)



India’s Agro-Exports as a Percentage of World Agro-Exports



* For Pre-Reform 1986-87 to 1990-91, and Post-Reform 1991-92 to 1995-96 as data for other post-reform years are not available.
** For Pre-Reform 1987-88 to 1990-91, and Post-Reform 1991-92 to 1994-95 as data for other post-reform years are not available. Paddy/rice, wheat, oilseeds, sugarcane, cotton, coarse cereals, and pulses account for as much as 92 per cent of total cropped area, and 56 per cent of agricultural production. These crops, plus milk and milk products, eggs and fisheries account for over 75 per cent of agricultural output. In all these major crops yields per hectare in post-reform years have lower growth rates, despite more favourable weather conditions (Desai 1998).
*** These are for 3 years each as data for other years are not available. But these poverty ratios must have worsened after 1993 as average consumer price index for food for agricultural labourers and industrial workers has increased respectively by 6.41 and 23.88 per cent, while the average wholesale price index for foodgrains has increased by 11.84 per cent in post-reform period of 1991-92 to 1996-97 when agricultural growth worsened with consequent lower employment growth opportunities.
**** Includes spices, sugar, rice, fish, meat, fruits, and other processed foods.
@ For five years each of pre and post-reform periods of 1986-87 to 1990-91 and 1991-92 to 1995-96, respectively.
(1) “Agriculture and Agro-business Issues under Economic Liberalisation”, Bhupat M. Desai, in Contemporary India in Transition, Peter de Souza (ed), Sage Publications, New Delhi, 1999.
(2) Economic Survey, Various Issues, Government of India.
(3) Monthly Abstracts of Statistics, Various Issues, Central Statistical Organisation, Ministry of Planning, Government of India.

Table 2Growth in Government Expenditure in Current Prices “on” and “for” Agricultural and Rural Development, its Percentage Share in Total Government Expenditure and its Pattern under the Central/Union Budgets for 1996-97 and 1997-98

Budget Periods


1996-97 (BE)


1997-98 (BE)


(RE) over


1995-96 (RE)




% Change in Government Expenditure


“On” Agriculture and Rural Development (a)





“For” Agriculture and Rural Development (b)




% Share of Govt. Expenditure





“On” Agriculture and Rural Development (a)





“For” Agriculture and Rural Development (b)




Pattern (% to total) of this Expenditure

1“On” Agriculture and Rural Development through:

Technological Programmes (c)




Economic Programmes (d)




Institutional Programmes (e)





“For” Agriculture and Rural Development through:

Technological Programmes (f)




(b) Economic Programmes (g)




(c) Institutional Programmes (h)




(a). This includes plan expenditure on agriculture and allied activities, rural development, irrigation and flood control plus non-plan expenditure on fertiliser and food subsidies.
(b). This includes plan expenditure on fertiliser industry, power, petroleum, roads and bridges, foreign trade and export promotion, and export market development, besides what is stated in the above note.
(c).This comprises plan expenditure on agricultural research and education and on crops.
(d). This includes fertiliser subsidy, plan expenditure on major and medium irrigation, minor irrigation, command area development, soil and water conservation, animal husbandry, dairy development, fisheries, forestry, plantations, other agricultural programmes, and flood control and drainage.
(e).This includes food subsidy and plan expenditure on food, storage and warehousing, agricultural finance institutions, co-operatives, special programmes for rural development, rural employment, land reforms, other rural development programmes, and other special area programmes.
(f). Same as in Note 3.
(g). Same as in Note 4, plus fertiliser industry, power, petroleum, roads and bridges, and foreign trade and export.
(h). Same as in Note 5, plus export promotion and market development.
Source: Adapted from Desai, 1997.
Abbreviations in Tables 1 and 2: Mn = millions,
Bn = billions, T.E = triennum ending,
R.E. = revised estimates, B.E = budget estimates.

Table 3Growth in Government Expenditure in Current Prices “on” and “for” Agricultural and Rural Development, its Percentage Share in Total Government Expenditure and its Pattern under the Central/Union Budget for 1998-99 and 1999-2000

Budget Periods


1998-99 (BE)

1999-2000 (BE)



1997-98 (BE)

1998-99 (BE)

% Change in Government Expenditure


“On” Agriculture and Rural Development (a)




“For” Agriculture and Rural Development (b)



% Share of Govt. Expenditure




“On” Agriculture and Rural Development (a)




“For” Agriculture and Rural Development (b)



PaUern (% to total) of this Expenditure


“On” Agriculture and Rural Development through:

Technological Programmes (c)



Economic Programmes (d)



Institutional Programmes (e)




“For” Agriculture and Rural Development through:

Technological Programmes (c)



Economic Programmes (d)



Institutional Programmes (e)



(a). This includes plan expenditure on agriculture and allied activities, rural development, irrigation and flood control plus non-plan expenditure on fertiliser and food subsidies).
(b). This includes plan expenditure on fertiliser industry, power, petroleum, roads and bridges, foreign trade and export promotion, and export market development, besides what is stated in the above note.
(c). This comprises plan expenditure on agricultural research and education and on crop husbandry.
(d). This includes fertiliser subsidy, plan expenditure on major and medium irrigation, minor irrigation, command area development, soil and water conservation, animal husbandry, dairy development, fisheries, forestry, plantations, other agricultural programmes, and flood control and drainage. Plus fertiliser industry, power, petroleum, roads and bridges, and foreign trade and export.
(e). This includes food subsidy and plan expenditure on food, storage and warehousing, agricultural finance institutions, co-operatives, special programmes for rural development, rural employment, land reforms, other rural development programmes, and other special area programmes. Plus export promotion and mar ket development.
Source: Expenditure Budget 1998-99, and 1999-2000, Vol.11, Government of India, New Delhi.


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1 The improvement in the growth rate of real plan expenditure on agriculture is more of a statistical illusion, the base being smaller.

2 Following Ricardo, trade literature argues that international trade like technical change can also shift the production possibility frontier. But one of the two commodities considered for trade being agricultural it is also subject to Ricardo’s Law of Diminishing Returns. This is in direct conflict with the perfectly competitive framework (under which there is always constant returns to scale) that the trade theory assumes. Moreover, international trade relaxes the constraint of comparative cost through an exchange relationship which follows rather than precedes production process. Hence it cannot be relied upon to overcome the inherent Law of Diminishing Returns that the production process has in agriculture. It is thus not a substitute for technical change in agriculture which directly overcomes a trap into this Law. And such a change must precede trade to enable the latter to become a source of mutual gains to the trading partners.

3 While official definition of such farmers considers those with up to 2 hectares of land, some studies consider them to be those with up to 10 hectares of land presumably because in semi-arid and arid areas and some agro-climatically difficult areas farmers with even more than 2 hectares may have very low income and productivity. In 1992, at an all-India level, farmers owning up to 2 hectares of land constituted 82 per cent with about 36 per cent of land, while those owning 2.01 to 10 hectares constituted about 17 per cent with 51 per cent of land.(Desai, 1998).

4 This holds only when GATT formula is considered to measure the product-specific support. But the alternative method suggested later in the paper does not create this problem, besides being consistent with the concept of competitive advantage.

5 Desai & Namboodiri, (1999a), show that inflation is relatively more accounted for by the composition of real output that emphasises agricultural growth rather than overall output. It is also compared to the monetary, fiscal & trade variables. Both of these findings hold even after considering the post-reform period.

© Éditions de la Maison des sciences de l’homme, 2002

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