US CANADA WRONG ON WHEAT EXPORT SUBSIDY

US CANADA WRONG ON WHEAT EXPORT SUBSIDY

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USA / CANADA WRONG ON WHEAT EXPORT SUBSIDY

India should set policies right during WTO interim peace clause

Tejinder Narang

As widely reported in media, USA and Canada have raised questions on the subsidised export of 2 million tons of Indian wheat.

Canada is contemplating approaching WTO on India’s criteria of lowering minimum export price from $300 to $260 fob /mt while this is "lower than the price of the same quality wheat from Canada (and other countries) sold in the range of $270-275 per tonne".  How does India determine the floor price for wheat exports?" Canada asked.

US Wheat Associates, which promotes US grain sales has commented—“India, which offers its farmers a minimum of 13,500 rupees ($218) per tonne, has "consistently ignored" promises made to the World Trade Organization over subsidising exports. Given transport costs of some $80 a tonne for getting wheat from India's interior to port, sales prices of $279.52-283.60 a tonne at a tender which closed on January 14 imply shipments are indeed being financially supported”.

From an analyst perspective exports efforts by India from FCI inventory and made through international tendering by Indian PSUs appear to be fully compliant with WTO.

CANADA

Canadian contention merits following response.

First there is no mention in the tender documents of Government agencies of any floor price, though Government internal guidelines do define the lowest price dollar value at which shipments can be made. The cost of acquisition of grain and the estimated handling expenses can be the accepted norms for such a minimum export value.

Secondly, lowering minimum export price from $300 to $260 was done owing to depreciation of rupee from Rs54- 55 to Rs 61-62 (about 13%) and it has nothing to do with depressing intrinsic rupee value of export  that remains around Rs 16500/mt. In 2012-13 average price realization through global tendering was $310fob/mt (Rs 16730) and this year it has averaged around $280(Rs 17360) in 2013-14 which is above Rs. 16000/mt.

USA

On USA’s point of view, the logical explanation is-- The “pooled cost” of grains as per FCI website is Rs 12200($197) of 12-13 vs MSP of 12850($207) and Rs 12820 ($206) for 13-14 against current MSP of Rs 13500/m($218). It will be reasonable to assume that pooled cost of grain of FCI will take into account total wheat inventory—opening stocks-- lying with it of previous years as well (of 2011-12, 2012-13). MSP of 2011-12 was Rs 11700($188). Thus the current MSP is not assumed as the sole element for the costing of wheat.

The transport cost of $80 a ton presumed by US wheat associates is erroneous. Pooled rail freight cost from interior both from “Punjab/Haryana to West coast” and “Madhya Pradesh to East Coast”  does not exceed Rs 1500/mt or  $24/mt, while port handling costs etc. could be additional Rs 1000-1200/mt or about $20/mt.  Indian export even at $250 appears to be compliant with WTO, based upon pooled cost and logistical charges.

Even if pooled costing is deemed debatable, the current MSP of Rs 13500 ($218) plus$44 handling charges also amount $262/mt fob which closer to $260. The principle is to take the cost sans local taxes—as taxes cannot be considered for determination of export price. And “basis”—logistical expenses are added to the cost for arriving at FOB value at the port.

FCI’s wheat also competes with open market for exports. If local market falls below $260, takers from FCI/PSUs tenders will automatically vanish. Indian wheat export has thus market based self- balancing mechanism.

 However Indian side too needs to be cautious. Pursuant to envisaged implementation of Food Security Act in 2014-15, possibilities of greater diversions of 90% subsidised grains in the open market cannot be ruled out. This is bound to cause distortion in the open market and also in the exports.

WTO has granted India, and some other developing countries, an interim reprieve against legal action for four years (till 11^th WTO meeting in 2017) of breaching farm subsidy limits, as part of a deal struck at a 9^th Inter ministerial meeting of WTO in Bali on 7^th December 2013 subject to compliance for furnishing pertinent data.

If MSP continues to remain untamed, open ended procurement with lavish bonuses continue and reforms in FSA remain in abeyance, WTO is sure to bite with penalties or trade sanctions. The policy maker must take advantage of this interim relief by WTO in setting the system right before it is too late.