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World Trade Organised?

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It seems to be falling into place for global trade. After a US-China agreement to cut tariffs on technology products, the big hurdle to global trade has fallen with the US and India resolving their differences on food subsidy.

The food subsidy issue had held up the agreement on trade facilitation agreement (TFA) that aims to reduce red tape and improve process to speed trade across borders.

The China pact and the TFA approval could add more than $2 trillion to world economy according to various estimates.

Approval of TFA was the big worry really. Global growth continues to stagnate with IMF forecasting 3.2 per cent increase in 2015. The rising belligerence of developed countries had undermined the World Trade Organisation’s (WTO) efforts to create a cohesive global trade system. But the developing countries did not find it harmonious enough and were worried about absence of egalitarian principles.

The food row with India was a glaring example of this perception that had created a big crisis for the 20 year old WTO. US objected to India’s food subsidy programme as it seemed to breach the 10 per cent limit that WTO prescribes. India wanted more time to reduce the subsidies but sought protection from needless disputes on the issue. Now the two countries have agreed on a peace clause that will allow India almost unlimited time to reduce the subsidies.

In many ways this is a vindication of the stand taken by India. The Narendra Modi government has done well to stick to its stand while remaining flexible enough to arrive at a solution. More importantly, the Modi government realises the dangers of rising food subsidy bill. So while it fought for its right at WTO to keep the subsidy, the government is taking steps to curb the cost of food bill.

The central government has begun to dissuade state governments from adding to the subsidy burden. State governments keen to add to the subsidy by offering a purchase price to farmers higher than the centre would have to fund it themselves. So far the states would announce a higher procurement price, take political credit but send the additional bill to the centre. With the burden back on states, most will avoid populist rise in purchase price.

The government is also allowing a bulk of the produce of grains to be available in the markets. Mandatory levies meant that producers were forced to sell most of their produce to the government raising the cost to government. With less buying by government, the subsidy will be lower and market forces stronger. The central government is also curbing its own enthusiasm to keep hiking the price. The granaries of the government are at more than double the necessary buffer stock as a result of the previous policies of over procurement at non-sustainable prices.

Modi government has packaged the deal well and should rightfully take credit for the deal with US. Now India and the rest of the world can sign up for the TFA. India had refused to sign it until the subsidy issue was addressed.

TFA by itself could add momentum to global growth if the deal is signed quickly. Developing countries can benefit much from TFA since it has the potential to reduce the cost and delays in transaction.

Despite the renewed optimism, it will be important for European market leaders and the US to push forward the TFA agenda with actual change on the borders.

These countries have a habit of agreeing on paper but stalling decisions on the ground.

Emerging markets are growing faster powered by younger populations. If the western world does not walk the talk on TFA, it will suffer more than the emerging markets.