Indo-US WTO deal buys us time; but we need to reform manufacturing and food subsidies

The details of the I ndo-US deal to end the World Trade Organisation (WTO) standoff over a trade facilitation agreement (which will ease customs procedures) are still hazy, but there seems to be some gain for India from it.

The main gain seems to be indirect US support for India’s food procurement programme and the stockpiling of mountains of grain for food security. What we may have given in return is an assurance that we will not block the Trade Facilitation Agreement (TFA), a deal on which was worked out last December in Bali. We had initially agreed to sign on the dotted line, but Narendra Modi had blocked it in July by linking the food stocks issue to it.

Under WTO rules, complete unanimity is required for any deal on TFA. This is why India was seen as a spoiler. The Indo-US deal allows us to escape the villain tag.

More from Economy

Inflation likely to be a big focus area for budget 2024, say sources Explained: Will the Bank of Japan break tradition and raise interest rates?

What is TFA? And why is the world so gung-ho about it? According to the WTO, it is about ensuring “faster and more efficient customs procedures through effective cooperation between customs and other appropriate authorities on trade facilitation and customs compliance issues.”

What is the food security issue, and why did Nirmala Sitharaman, the Minister of State for Commerce and Industry, block it on Modi’s instructions last July? Under WTO rules, no country can stock more than 10 percent of its overall food production as a buffer. There is, however, a “peace clause” that allows us to exceed this limit till 2017, but after that we will have to comply. The Indo-US agreement announced by Sitharaman yesterday (13 November) is probably about extending this “peace clause” indefinitely, but it is not explicitly spelt out as yet.

As I had noted in July, India is a net merchandise importer, and TFA benefits exporters more than importers. The WTO estimates that TFA alone will add $1 trillion to the world economy and create 21 million new jobs. However, no one can really measure where this growth in output and jobs will accrue. Those 21 million jobs may well get created in China and other major exporting nations, and very little in India, despite our new Make in India thrust. India’s manufacturing has been hollowing out for some decades now, as most companies reduce domestic production in favour of imports from China. They are choosing to re-label Chinese products as their own. Nokia, one of the big manufacturers in India, recently wound up shop and moved to Vietnam. We will now probably be importing Nokia mobiles from Vietnam. This is the kind of trade we will be facilitating y signing the TFA. (Read more about the Nokia exit here ).

However, the gain is that we do get more time to sort out our food subsidy and stocking issues. The Modi government has already taken three important decisions on this front: one is to keep minimum procurement prices (MSPs) below inflation. The last kharif price increase was Rs 50 a quintal for paddy, a moderate hike of 3.8 percent. The second decision is about getting states to reduce barriers to inter-state movements of farm produce. This is a work-in-progress. The third is to shift to direct cash transfers for payment of subsidies. While the initial decision is to move LPG subsidies to cash transfers, over time this could happen in food subsidies too. This will automatically reduce the need for excessive stocking of grain in FCI godowns, as the poor will buy the grain they want from the market with the subsidies paid into their bank accounts.

The issue of MSPs could then be relabelled as income support to farmers. These issues could be sorted out by 2017, but the Modi government may have bought even more time, in case the issues become politically sticky back home.

More pressing will be the impact of signing the TFA, which calls for easing customs procedures in India to facilitate easier imports. Here, the Make in India policy and the government’s efforts to reduce red tape will improve the competitiveness of Indian goods, but it is highly unlikely that significant manufacturing investment will take place in India in the near future, enough to impact exports. TFA benefits largely merchandise exports.

As a country with a huge and persistent trade deficit, any move to facilitate trade will worsen out trade deficit in the short run unless we can make gains in services exports. In 2013-14, India imported $450 billion worth of merchandise, and exported $312 billion worth - a gap of $138 billion. In the year before, it was worse - at $190 billion. Against China, in a bilateral trade turnover of $65.47 billion, the deficit is $31.42 billion. Which means China exports nearly thrice as much to us as we export to them.

The biggest short-term beneficiaries will be the export powerhouses of China, Asean, Germany and some other countries in Asia, Latin America and Europe whose economies are heavily export-oriented.

On the other hand, there is no trade facilitation protocol in the things we are good at: Indian software services, for example, continue to face huge American and European roadblocks in the form of visa rules and other non-tariff barriers.

Clearly, we have to push the US and Europe to ease rules for software exports, and maybe sponsor a TFA in manpower services.

But that will take some doing. Meanwhile, we have bought breathing space. Modi should use it to reform both manufacturing and subsidies.

(Note: The latter parts of this article have been reproduced from an earlier article on TFA in Firstbiz. Read the full article here ).