India holds Bali deal hostage | Domestic politics are said to be driving the latest world trade talk posturing
India blocked a reform of global custom rules last week, saying it wants an agreement on food subsidies and grain stockholding to run parallel to the trade facilitation pact.
The long awaited trade pact was part of the deal reached at the World Trade Organization meeting in Bali last year.
Some estimates say the deal could add $1 trillion to the global economy and create 21 million jobs, prompting a U.S. warning that India’s demands could kill global trade reform efforts.
NEW DELHI, India (Reuters) — India’s delaying of a global trade deal in the name of food security appears puzzling.
Its grain silos are spilling over, exports are on the rise and the prime minister is an avowed market champion.
However, government officials say prime minister Narendra Modi is prepared to risk global outrage to seize a historic chance to build a rural power base with his defence of farm subsidies and banish memories of humiliating national food shortages.
Modi triumphed in a general election only two months ago, but polls are never far away in the world’s largest democracy, and his Bharatiya Janata Party already has its eyes on new campaigns in the bread bowl states of Haryana and Maharashtra.
More than two-thirds of India’s 1.26 billion people live in rural areas, and Modi’s party, traditionally stronger in cities, needs to secure more farmers’ votes to consolidate its power.
Party officials are confident New Delhi’s tough line at World Trade Organization talks in Geneva will accomplish that.
“A strong stance in Geneva sends a message to the farmers and poor people that unlike the (last government), Modi can take on the global powers to safeguard the interests of rural India,” said a party lawmaker.
Modi’s government demanded a halt to a globally agreed timetable on new customs rules, but said it would sign the agreement in September if there is a concurrent deal on food stockpiling and subsidies, well ahead of a 2017 target agreed last December in Bali.
Critic’s say the brinkmanship threatens a deal that could add $1 trillion to global wealth and create 21 million jobs.
Modi risks alienating allies, including the United States.
“We understand that a new government in office for fewer than 100 days is eager to evaluate any previous agreement and assure their electorate they are doing the right thing,” said Diane Farrell, acting president of the U.S.-India Business Council.
“At the same time, we have a high degree of hope that they will work with the WTO to find the appropriate accommodations in order to sign on an agreement to the treaty.”
Critics say India’s move could cripple WTO talks, hasten trade negotiations elsewhere, which India opposes, and swiftly trigger trade disputes challenging India’s stockpiling policy.
However, the gambit is paying off at home, where the opposition, industry groups and many economists have welcomed India asserting itself more on the international stage.
“Modi, like any good strong leader, is committed to ‘India first.’ That was his campaign,” said Samir Saran of the Observer Research Foundation think-tank.
India rejects international criticism by saying it is responsible for the well-being of a quarter of the world’s poor and that its subsidy burden is vastly overestimated.
Current WTO rules limit subsidies to farmers in developing countries to 10 percent of the total value of agricultural produce based on 1986-88 prices.
New Delhi trade officials say India wants the formula to be adjusted for inflation and fears that if the Bali trade facilitation deal was signed July 31 as planned, questions of stockpiling and subsidies would end up on the back burner.
However, India has not formally raised the inflation-adjustment idea since the Bali summit in December.
India provides subsidized fertilizer and seeds to farmers and buys wheat and rice from them at fixed prices to boost production, build stocks for welfare plans and meet emergencies.
The incentives, coupled with good rains in recent years, have sent production soaring and state warehouses are overflowing.
India had stockpiled 21.2 million tonnes of rice and 39.8 million tonnes of wheat as of July 1, more than double the respective buffer norms.
Yet India is determined to hold onto these vast reserves, partly because of painful memories of dependence on U.S. food aid in the 1960s. Also, as recently as 2006, India’s surpluses vanished after two years of drought and it was forced to import grain, boosting global food prices.
Monsoon rains are expected to be below average this year.
“India cannot afford to rely on imports of rice and wheat as no one produces (enough) to feed a county of India’s size,” said a senior farm ministry official.
“Two successive droughts in India will scare the world market, and prices will surge in an unimaginable way.”
Government experts say nearly half of the 60 million tonnes of grains set aside for distribution at subsidized prices is siphoned off by corrupt officials, raising the question why India would burn bridges to defend such an inefficient system.
Still, some experts say India’s best choice might be simply to try to improve it because a change to cash transfer subsidies recommended by many economists would take years in a country with few rural banks.
India’s states are working to fix the system of warehouses and ration shops, which dates back to the famines of the 1960s, emulating simple solutions adopted by states that have dramatically cut waste and improved delivery.
“The public distribution system (PDS) has been making slow but steady improvement,” said Peter Kenmore, the United Nations’ food and agriculture representative in India.
“It is slow, sure, too slow, but basically the PDS is straightening out.”
He said the Food and Agriculture Organization’s position is that India’s food subsidies do not distort global markets.