By, Anubhav Gupta

Edited by, Madhavi Roy, Senior Editor, The Indian Economist

In July of this year, India vetoed the Trade Facilitation Agreement (TFA) of the World Trade Organisation (WTO). The decision was widely reported to have ‘shocked the world’ with several trade diplomats described India’s position as ‘hostage-taking’ and ‘suicidal’. However the Indian government stood firmly behind its decision and demanded that the issue of India’s and other developing countries’ food security be addressed before the TFA’s ratification.

The Trade Facilitation Agreement (TFA) is a trade protocol aiming to give a boost to international trade by cutting down bureaucratic obligations between various countries. The deadline to sign the agreement was July 31 2014, and the deal has to come into force fully by 2015. The proponents of TFA argue that it will add $1 trillion to the global GDP and create an estimated 21 million jobs, with 18 million of those in developing countries, by reducing transaction costs, streamlining international customs procedures and facilitating easier movement of goods.

The problem lies with the outdated food subsidy rules of the WTO. The agricultural subsidy rules of the WTO allow subsidies at 10 per cent of the value of agricultural produce. Surprisingly, the base year for India has been fixed at 1986-88. India, understandably, is demanding that this date be changed to reflect the reality of food prices today.

The US, European Union (EU), Australia and other developed counties accused India of having violated the agricultural subsidy rules during the WTO meeting in Bali in December 2013. They said that by providing both subsidized inputs and a MSP to farmers, India was subsidizing agriculture ‘at both ends’. Also, India’s food stockpiling program, part of the Indian Food Security Act, was widely condemned as being in violation of the WTO rules. India countered by accusing the WTO of double standards- India’s subsidies of $12 billion to its 500 million farmers are considered ‘trade distorting’, while US subsidies of $120 billion to its 2 million farmers are not. India’s subsidies are $25 per farmer, while US subsidies amounts to $60,000 per farmer- 2,40,000 percent more than Indian subsidies.

Eventually a compromise was worked out. A ‘Peace Clause’ was added to the TFA deal. This clause allowed developing countries, including India, to continue their food security programs till 2017 without the threat of legal action or trade sanctions by the developed countries. A permanent solution to the problem was to be worked out within a 4-year time frame.

However the new government took everyone by surprise by vetoing the deal despite being under intense pressure by a bloc of developed countries including the US, EU, Canada and Australia to ratify the agreement before it lapsed at the July 31st deadline. Countries like China and Russia, who have traditionally supported India in the WTO, also expressed their disappointment with this decision.

The Indian government argued that as India contained 25 per cent of the world’s hungry (every fourth Indian is hungry and every second Indian child is malnourished), the government’s first responsibility was to ensure food grains to its people, with the food security program and agricultural subsidies being essential to that objective. Also, India believes that the U.S. is only paying lip service to the WTO food-stockpiling program, and India needs to push for a permanent solution to the issue at this stage or else it would fail to bring the developed countries to the negotiating table. Therefore, it wanted the issue of public food stockpiling and food subsidy to be addressed alongside the TFA.

India found support with the International Fund for Agriculture Development (IFAD), a United Nations body. IFAD president Kanayo F. Nwanze said, “Creating jobs for some other country, while people are still hungry, doesn’t make sense. If I was in the position of feeding my own family or creating jobs for someone else, what would I do? What would you do?”

India’s veto could signal the beginning of the end for the WTO. The failure of the Bali conference would mean that developed countries would hasten their efforts to execute free trade deals such as the Transatlantic Trade and Investment Partnership (TTIP) and Trans Pacific Partnership (TPP). That could lead to a fragmented world of separate trade blocs. Some countries, and in particular Australia, have considered excluding India from the agreement and pushing ahead with the deal. However there is a consensus that such a move would be ‘naïve’ considering India’s position as the world’s second most populous county and as one of the largest and fastest growing economies.

Last week, after the talks between Prime Minister Narendra Modi and President Barack Obama, India and the US directed their officials to ‘urgently’ start consultations with other WTO members to work out the next step. Although India’s position has isolated it internationally, within the country there is great support for the government’s position and a belief that by leveraging its new found position as an economic powerhouse, India can lead the developing countries in standing up to the WTO and ensuring food security for the majority of the world’s poor.


Anubhav Gupta is a first-year student of Economics at St. Stephen’s College, University of Delhi. As a future investment banker, he strives to explore and learn about every nook and cranny of the financial markets. He is an avid reader with a particular interest in philosophical and historical fiction. He devotes the rest of his time to running and globetrotting.

Posted by The Indian Economist | For the Curious Mind