US Farm Subsidies "Good" for India?

♠ Posted by Emmanuel in ,, at 8/06/2007 11:01:00 AM
Because of India's ongoing economic boom, the Indian Minister of Agriculture Sharad Pawar is said to have predicted that India will become the world's biggest import destination for food grains like rice and wheat by 2011. Currently, the developing world negotiating bloc in the WTO Doha Round led by Brazil and India has been demanding concessions on US and EU farm subsidies in order to move fthe Round forward. However, TCA Srinivasan-Rhagavan argues in this op-ed from that India is going about things the wrong way. Given its expected future demand for grains, India should instead welcome these developed-world subsidies for they would enable it to feed its population at lower cost in the future. In effect, Americans subsidize Indian consumers. It's a novel idea that I remember reading about elsewhere; perhaps this idea is gaining traction:

In the 1970s, thanks to the Green Revolution, India stopped being food-deficient. But now, thanks to rapid economic growth, that is about to change.

The agriculture minister, Sharad Pawar, is reported to have told the Cabinet in May that by 2011 India will become the world's biggest importer of food grains. This was momentous news but it was buried in a small corner in this newspaper. No one else reported it.

There is every reason for India to become a major, if not the largest, importer of food. So India needs to give a good, long, hard think as to how it should handle this change: pragmatically or defensively.

But whichever way it chooses to approach the problem, it should certainly not do so foolishly, something our politicians may well force it to do. In order not to make the wrong policy choices, however, it is necessary to get the perspective right.

There are at least three aspects that need to be kept in view. There could be more.

First, historically, no country in the world that has experienced sustained and high rates of economic growth has managed to be self-sufficient in food at the start and in the middle of the growth period. This is because higher incomes result in an increase in the overall demand for food.

But agriculture is slow to adjust to the new demand conditions because of what are generally termed structural reasons. So until it adjusts - and that can take a generation - imports become necessary, usually at the margin but sometimes not as when crops fail.

This means that the issue should be viewed not from the point of view of food security alone, which is important, but price stabilisation and, equally importantly, the efficiency of the food-processing industry, which is a necessary companion to urbanisation as well. If the experience of other countries is anything to go by, the largest imports will be made directly by the food-processing industry to achieve higher value addition for sale in the urban markets.

This means the Indian farmer will not suffer on account of imports. It would be a complete mistake to think so and base policy on it. His market is different, as indeed are his problems, which stem more from flaws in domestic policy - which have been enumerated about a trillion times, at last count - than "competition" from abroad. If domestic policy is suitably repaired, imports will not be a problem in such a huge and growing market.

Second, it is important to resist the temptation to say that India has "regressed" to the 1950s, when it had to import food. This is emotive nonsense, designed to garner votes or to make Communists appear patriotic [they are ruling coalition partners].

The central point is this: in the 1950s imports were a consequence of low GDP growth in which agriculture had a 70 per cent share. In the future they will be a consequence of high GDP growth, in which agriculture has a 20 per cent share.

The result is that a variant of Engel's law will come into play. It has been known to happen before in other countries.

This point is very simple and not rocket science. People simply start to eat more as their incomes rise. Thus, although they may spend a smaller proportion of their incomes on food, on aggregate more food will be consumed. The same thing happens with fuel-efficient cars. Each car consumes less, so as incomes rise, more people buy cars - and oil consumption goes up.

It is not out of place here to make a comparison with savings. In the 1950s, India needed foreign savings in the form of aid because its own savings rate was low because the GDP growth rate was low. But now, even with a much higher growth rate and a savings rate of more than 30 per cent, it still needs foreign savings in the form of FDI. The key thing, therefore, is to focus on the reasons for such imports, and not on the fact of imports alone.

Third, crucially in my view, where India's negotiating stance at the WTO is concerned, it should alter its position. Basically, if it is going to import large amounts of food (grains and other things) it will gain if the others subsidise their agriculture. The same point was made (albeit in respect of Africa) by Joseph Stiglitz at a talk he gave at ICRIER. So I am in good company.

In effect, just as foreign savers with their countries' huge dollar reserves are subsidising the US consumer, the US taxpayer will subsidise Indian consumers. It is from this perspective that India should alter the analytical framework that determines its food trade policy.

India has been trying to learn a lot of things from China. This is one more area in which it can copy Chinese practice fruitfully.