India’s Public Stockholding of Agricultural Products: Will Exports of Procured Food Grains Cause Trade Distortion?

By Abhijit Das

Introduction

India’s concern for securing sufficient flexibility for maintaining public stockholding of agricultural products has received significant international attention in the last few months. In the context of public stockholding for food security purposes, some countries have raised an apprehension that exports of food grains from the Food Corporation of India (FCI) stocks distort global trade (See Raul Montemayor,  “Public Stockholding for Food Security Purposes – Scenarios and Options for a Permanent Solution”,  June 2014, ICTSD Programme on Agricultural Trade and Sustainable Development, Issue Paper No. 51).  Exports from a country can be said to distort global markets under two circumstances. First, when the exports benefit from specific subsidies; and second, when the export price is lower than the price at which the product is sold in the home market of the exporting country, i.e. the product is dumped. The mere fact that the export price is lower than the prevailing prices in international markets, including the prices in the importing country, cannot be the basis for concluding that low priced exports are distorting global markets. In order to conclude that low priced exports are distorting global markets, it is necessary to establish factually that the exports are either dumped or benefit from subsidies. It is essential to bear these two considerations in mind while examining whether exports of food stuff from FCI stocks are distorting global markets.

In the above context, this article will explore the question of whether the export of food grains from the FCI stocks could distort trade?

Analysis under the Subsidies Agreement

In any analysis of exports distorting global markets, it is relevant to keep two concepts in mind: (i) assessing benefit of a financial contribution; and(ii) pass through of subsidies. Under the WTO Agreement on Subsidies and Countervailing Measures (“Subsidies Agreement”), for a subsidy to exist there must be a financial contribution and benefit must be conferred. There has been considerable debate whether benefit arising from a subsidy (or more specifically the benefit arising from a financial contribution) is to be assessed from the perspective of “cost to the government” or from the perspective of “benefit to the recipient”. Out of these two approaches, Subsidies Agreement suggests that the “benefit to the recipient” approach is the preferred approach under Article 14 (d) of the Subsidies Agreement.”See also WTO Panel Report, Canada- Measures Affecting the export of Civilian Aircraft, WT/DS 70, adopted August 20, 1999, para. 9.2. Under the provisions of Article 14 (d), benefit to the recipient is determined keeping the following guideline in mind:

[T]he provision of goods or services or purchase of goods by a government shall not be considered as conferring a benefit unless the provision is made for less than adequate remuneration, or the purchase is made for more than adequate remuneration.   The adequacy of remuneration shall be determined in relation to prevailing market conditions for the good or service in question in the country of provision or purchase (including price, quality, availability, marketability, transportation and other conditions of purchase or sale).

Thus if food stocks are disposed for exports at prices higher than the prevailing market price, then no benefit will accrue to the eventual exporter from price support under Minimum Support Price (MSP).

It is quite possible that subsidies granted by the government to one entity pass through to another entity when the subsidised products are sold by the first entity to the second entity. The terms and conditions of the sale will generally determine whether the subsidy has passed through from the seller to the buyer. In case the sale is at arms-length between unrelated parties, unless there is evidence to the contrary, it can be presumed that there is no pass through of the subsidy from the seller to the buyer. In other words, the effects of subsidies seem to be extinguished in an arm’s length transaction.

Based on the reasons given below, it can be concluded that exports of food stuff originating in FCI stocks cannot distort global markets.

  1. Exports of foodstuff are not undertaken directly by the government or the procuring agency. Whenever the Central government allows exports of rice / wheat from FCI stocks, it calls for tenders. FCI stocks are sold to the highest bidders, who are generally private players .(See Policy & FCI, “Procurement Policy”, Department of Food & Public Distribution, http://dfpd.nic.in/?q=node/9 (last visited Nov 24, 2014).  Successful bidders acquire possession of the appropriate quantity of FCI stocks, which are subsequently exported. The prices at which the successful bidders finally export are not determined by the government, but by the exporters themselves. Being rational economic operators, the exporters are likely to undertake profit maximising activities. They are, therefore, not likely to export at prices that are lower than the prices at which they acquired the stocks for export from FCI.
  2. FCI does not export the stocks of food stuff from public stockholdings. Instead, the stocks are sold to the eventual exporters through a process of competitive bidding. Consequently, such sales are at arms-length. Hence, it cannot be argued that the subsidies on account of government procurement of food stuff pass through to the eventual exporters. It is clear that food stuff exported from stocks originating in FCI stocks do not benefit from subsidies on account of the procurement at administered prices and therefore do not distort trade.
  3. Under provisions of Article 9.1 (b) of the Agreement on Agriculture (AoA) “the sale or disposal for export by governments or their agencies of non-commercial stocks of agricultural products at a price lower than the comparable price charged for the like product to buyers in the domestic market” is treated as an export subsidy subject to reduction commitments. Over the past 10 years very small quantities of rice and wheat have been exported from FCI stocks.  During the past decade, the year with highest exports of wheat from FCI stock was 2012-13. FCI stocks were disposed for exports through a process of international competitive bidding at an average price which was around 30% higher than the MSP for wheat during 2012-13. Taking MSP as a proxy for the comparable market price, it is clear that wheat exports from FCI stocks in recent years do not violate Article 9.1 (b) of the AoA.
  4. Another allegation that has been made by some countries is that due to procurement by the government of food stuff at high administered price, farmers garner windfall profits. It has further been argued by these countries that the windfall profits enable the farmers to export at low prices, resulting in dumping. This argument is incorrect. First, the assumption of windfall profits for farmers is without any basis. Second, the eventual exports from FCI stocks are generally not made by farmers from whom the government procures food stuff, but by grain traders through a process of competitive bidding. Thus, beneficiaries of government procurement at administered prices and the eventual exporters are entirely separate entities, with the latter not benefitting from the so-called windfall profits of the former. Hence, the possibility of so-called windfall profits enabling the exporters to dump in the international market at low prices is unfounded.
  5. There is another reason why the supposed windfall profits on account of administered prices for procurement of food stuff from farmers for public stockholding cannot lead to dumping. Manufacturers and exporters have an incentive and propensity to dump, if they are unable to sell their output at remunerative prices in the domestic market. However, the reality is different for farmers whose produce is eligible for procurement under administered prices. All the produce of eligible products of a farmer can be potentially procured by the government for public stockholding.
  6. In the alternative, a farmer can sell his produce to private traders, who in turn can export. But the price at which the farmer sells to the private trader/ exporter will generally be higher than the administered price (if the private trader offers a lower price, the farmer would prefer to sell for government stockholding programme). As the private trader is likely to maximise his profits, it is unlikely that he will export at a price that is below the administered price.
  7. An allegation made by some countries is that India distorts global markets as the price at which FCI stocks are sold to the eventual exporters is lower than the economic cost of the FCI in procuring and holding food stocks. However, the economic cost to the FCI is not the relevant consideration while examining whether exports of rice and wheat from FCI stocks are subsidised.  As stated earlier, cost to the government is not the correct approach for determining whether a financial contribution confers a benefit. Article 14 of the Subsidies Agreement follows the “benefit to the recipient” approach and not the “cost to the government” approach. Thus, economic cost of holding food stocks by FCI is not relevant for determining whether exports from FCI stocks are subsidised and hence distort trade.
  8. As MSP generally determines the market price prevailing in a particular year, this should be an appropriate benchmark for determining adequacy of remuneration. As stated earlier, the price at which FCI stocks are disposed for exports was substantially higher than the MSP. Thus, based on the “benefit to the recipient” approach, it is difficult to accept that exports of food stocks from FCI distort international trade.
  9. During the past decade, the year with highest exports of wheat from FCI stock was 2012-13. However, even during this year wheat exports from FCI stock constituted less than 0.1 % of global wheat exports. It is unlikely that such a small quantity can distort global markets.

Conclusion

It  can be seen from the data that the FCI stocks are sold for exports at substantially higher prices than the MSP. As discussed above, based on the test of “benefit to the recipient”, the exporters of grains do not receive any advantage of benefit because the stocks are disposed of at competitive prices. In light of the above fact, the exports of such food grains do not constitute market distortion in the importing countries. Further research is required to identify  the circumstances under which exports from FCI stocks could distort global trade.

 

Prof. Abhijit Das is the Head of the Centre for WTO Studies, New Delhi. He is a trade policy expert who combines extensive experience of direct participation in international trade negotiations with formulating, implementing and managing trade-related capacity building initiatives. His areas of research interest include agriculture, trade remedies, global value chains, geographical indications etc.

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