Modi scuttling WTO deal was right, but he has to fix many things back home quickly

The Narendra Modi government did the right thing in scuttling the trade facilitation agreement (TFA) using food security as the moral argument against it. US Secretary of State John Kerry told the Prime Minister yesterday (1 August) that not signing the TFA sent a wrong signal and also was against the latter’s efforts to make India more business-friendly, but the latter reminded him that India’s first duty was to its poor. Till trade rules specifically allow for higher levels of food stockpiling and subsidies to the poor, India will not be happy.

Both Kerry and Modi were effectively throwing red herrings to sidestep the real issues: those pushing TFA hardest are likely to be its main beneficiaries. India isn’t one of them. But our food security policy does not face any immediate threat. Under the “peace clause” agreed earlier under the World Trade Organization (WTO), no one is likely to make a big issue of food stocks or subsidies till 2017 - which anyway gives us sufficient time to get our act together.

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The truth is a TFA at this stage is not in India’s interests at all. What is TFA, really? 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.”

As a country with a huge and persistent trade deficit - our imports are billions of dollars higher than exports - any move to facilitate trade will worsen out trade deficit and damage the rupee in the short run. 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, till P Chidambaram clamped down on gold imports and domestic stagflation reduced demand for imports.

Against China, the trade balance is worse. 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.

Signing a TFA right now would damage us in the short run as India’s imports start running riot as domestic growth revives. 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.

So it is a bit thick if the world accuses us of being spoilers, when in reality the field is tilted against us. India may be the “spoiler” right now, since we are among a tiny minority of those seeking to delay TFA (we have actually not opposed it, but want to link it to a food security deal under WTO). But the truth is no country - and especially the big economic powers of the world, including the EU and the US - has failed to block a deal that is not in its national interest.

Hear Sanjaya Baru, former media advisor to Manmohan Singh, on this in The Indian Express: “In the current stand-off on India’s stance on its food security policy, Western powers are pretending as if they are the upholders of fair play and India the spoiler. The fact is that major trading powers have never shied away from being spoilers in multilateral trade talks whenever it has suited their national interest. It should be recalled that the US and EU have readily deployed non-economic weapons to threaten their trade partners whenever their economic interests have been threatened. When Japan emerged as a competitive global exporter, building a huge trade surplus vis–vis the transatlantic economies, the US deployed domestic laws, Special and Super 301, to get Japan to adopt ‘voluntary export restraints’. The EU single market was created in the early 1990s as a conscious response to Japan’s rise.”

To be sure, there are some ideological free traders. Surjit Bhalla, chairman of Oxus Investments, is one of them. He has been bitterly critical of Modi’s decision to scuttle the TFA for now.

But free trade has costs and benefits in the short-term. So while economists may claim that the TFA alone will add $1 trillion to the world economy and 21 million new jobs, the fact is no one can really measure this till the damage is done. Those 21 million jobs may get created mostly in China and the exporting nations, not in India. India’s manufacturing is already hollowing out as most Indian companies reduce domestic production in favour of imports from China. They are choosing to re-label Chinese products as their own. This is the kind of trade we will be facilitating with TFA.

So Modi is right to have delayed agreement on TFA, but his real challenge is to use the breathing space now available to fix things back home. It is one thing to use food security to block TFA, quite another to believe that that is the end of the matter. Ultimately, TFA and WTO should be used to benefit us as well, but this needs major reforms back home.

TFA will benefit us only when be become a major manufacturing and exporting nation - and this calls for boosting India’s competitive advantage by easing rules for business, investing in infrastructure, simplifying land and labour laws, and giving a boost to manufacturing. Modi is surely committed to this, but this needs quicker action on both the legislative and regulatory fronts. If we have six months to sign up for another TFA deal by December this year (after fresh negotiations), we have to get most of these reforms moving by that time. Even then, it will take the changes two more years to start boosting manufactured exports.

On food security, the problem is not the WTO’s rules on food stocks and subsidies. The problem is we don’t have a gameplan to deal with the fallout of the rules which say that food stocks should not exceed 10 percent of output, etc). We have time till 2017, when the peace clause runs out, but by that time we need to make food security compatible with WTO rules - and in our own interest.

Consider what needs to be done.

One, food subsidies are opposed in the WTO because it distorts trade and pricing. This is fact - but this is a problem even in internal trade. What we need to do is first create a domestic free market for food by ending all barriers to food movement across India and reforming APMC rules that force farmers to sell only at designated markets.

Two, we have wrongly construed food security to mean two things: holding huge stocks of rice and wheat, and offering food procured at ever-increasing minimum support prices (MSPs) at highly subsidised prices to the alleged poor. Actually, the poor have moved on. What they need is income security, and the means to buy what they want in terms of food and nourishment. They no longer eat only rice and wheat, but have moved on to protein foods, and since one can’t not try building pulses, vegetables or egg mountains to add to our rice and wheat mountains, the best thing to do is to shift food subsidies to direct cash transfers. If the Aadhaar system is used only to identify the poor and funnel cash to those clearly in need of income transfers (say, around 30 percent of the population, as against the current Food Security Act’s ambit of 66 percent of the population), we can start dismantling the elaborate system of high MSPs, high food stocking at high costs, and huge food and fertiliser subsidies. A shift to cash transfers would not violate any WTO rule, as it can be shown as income support to the poor, not a food subsidy.

Surjit Bhalla, writing in Mint, says that if one were to use the Suresh Tendulkar poverty line (which is now being updated), “there were approximately 250 million poor Indians in the 2011-12 fiscal year. At a cost of Rs 1,668 per person per year (the gap between what the 250 million currently consume and what it will take to lift them above the poverty line), realising zero poverty would require an annual expenditure of less than Rs 42,000 crore, which is less than 0.5 percent of GDP. The cost of recent subsidies has averaged about 3 percent of GDP.”

Even if we take Bhalla’s calculations as a gross underestimates, doubling or even tripling the income support needed for the poor, it would still cost only 1.5 percent of GDP. Three times Bhalla’s estimates for income support would add up to around Rs 1,26,000 crore - which is the currently food subsidy bill alone.

The message to the Modi government is simple: stalling the TFA is fine only if you fast-forward plans to make India a manufacturing and export hub in the meanwhile. Signing the TFA by 31 December in return for vague assurances on food security would be okay if laws and regulations that make us uncompetitive are reduced or eliminated. But food security has to be fixed any way. And you have time till 2017 to do that.

Time to get cracking.