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BW Businessworld

An Opportunity That India Let Go

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Foreign pressure often provides governments with a handy lever with which to overcome domestic vested interests and push through long-overdue reforms. The rules on agricultural subsidies set by the World Trade Organisation (WTO) are one such tool that a reform-minded India should have grabbed. It could have begun dismantling the populist and financially ruinous policy of free water and electricity that have set the country on course for environmental disaster. By standing alone against all, including its partners in BRICS, the G-20 and G-33, and threatening to scuttle the Trade Facilitation Agreement (TFA), India has not only earned the world’s opprobrium, but also blighted its own efforts to modernise trade.

India threatened to block the signing of TFA if it did not receive WTO assurance on its policy of stockpiling subsidised grain. India is ready to hold all members hostage unless such a pledge is delivered before the signing. The Narendra Modi government might relent in the end hoping that its tough stance would win it brownie points with farmers in key states. But this brinkmanship marks a big setback for its reform agenda, if the BJP is serious about ending the subsidy raj.

The challenges India is facing is not new. In the 1990s, while it was negotiating to enter the WTO, China used the requirements of global free trade as a powerful lever to end many of the archaic practices of state capitalism. In doing so, it successfully launched the country on the path of phenomenal growth, a lesson India’s leaders would do well to consider. It is high time the lawmakers at all levels start taking measures to wean India’s mostly rich farmers off the mother’s milk of subsidies — free electricity and water — and make agriculture responsive to the free market. For so long, India, with the help of farmers, has provided subsidised grains through minimum support prices — often at higher than market price — and then distributed cheaply to the poor. The result has been desultory and often corrupt distribution of food, but intensive utilisation and waste of groundwater and a growing mountain of food grain. On 1 July, India had a wheat stock of 40 million tonnes, twice as much as it requires.

While one can question the wisdom of the gigantic feeding programme set up by the Food Security Act, nobody questions the importance of providing cheap food to people living below the poverty line. It is the focus on producing and distributing grain that distorts the economy. This incentivises farmers to produce wheat and rice in abundance, causing substantial wastage (by the government’s own admission, two million tonnes of grains go waste every year) and spiking budget deficits. Now that the government has accepted the Aadhaar unique identification card to distribute benefit, this can also be linked to a bank account to implement direct cash transfers to the needy. Already 640 million people have the Aadhaar card. Leveraging this platform would not only allow people to buy whatever items they need, it would also be fully WTO compliant, falling into the so-called ‘green box’ of allowable subsidies.

Ending water and power subsidies will be critical to avoiding massive water shortages and a resultant food crisis. India is already the largest user of groundwater in the world, accounting for a quarter of the global total. Since 60 per cent of India’s irrigated agriculture and 85 per cent of drinking water depends on groundwater, the rapid depletion of its aquifers is pushing India into dangerous territory. A recent World Bank report noted that India only has 20 years before its aquifers reach “critical condition”, when demand for water will likely outstrip supply. Since groundwater is a critical buffer against the unpredictability of the monsoon rain, India’s millions will be exposed to hunger, if the rain should ever fail.

It will be a great irony if in its supposed fight with the WTO for food security, India hastens the ruin of its agriculture. 

(This story was published in BW | Businessworld Issue Dated 25-08-2014)