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Exploring subsidies and tariffs in India

saiko3p/iStock/GettyImagesPlus Tea plantation in Munnar, India
Commentary: As long as countries like India continue to oppose free markets, U.S. farmers will need a safety net.

By Farm Policy Facts

Most of agriculture cheered when President Trump and his trade team announced a modernized trade pact with Mexico and Canada. But it was a comment about another country during the White House press conference that really caught our attention. 

India is “the tariff king,” Trump said.  “India charges tariffs of 100% … that’s not free trade.”

India is a growing country with 1.34 billion people – 18% of the world’s population – and tons of trade potential for American businesses, including farmers and ranchers.  But right now, trade isn’t a two-way street. 

India boosts subsidies in 2018

In addition to its massive tariffs, India is spending tens of billions of dollars on new agricultural subsidies in an apparent bid to bolster farmer support for Prime Minister Narendra Modi. 

The new subsidies come even as India has little money to spend and little space to store all of the crops. 

Modi, who ran in 2014 on a platform that included doing more for farmers, has promised to double their income by 2022, according to Reuters.

Unrest in the countryside in the wake of falling commodity prices spawned bloody protests last year, with farmers in the capital carrying the heads of neighbors they say committed suicide and placing rats in their mouths.

Modi hiked minimum price supports for crops to 25% in July, compared to the historical 3% or 4% during his first 4-year term. But the move may backfire. In addition to storage issues, the government’s deficit target is already under pressure from high oil prices, Reuters reported. 

Subsidies for rice, corn, lentils, peanuts and sunflower will all be above the current market price, according to Reuters.

Dairy exports to surge

Dairy is one commodity that the Indian government has taken big steps to prop up with subsidies, according to Reuters. India’s exports of skimmed milk powder are expected to increase to 100,000 tons in fiscal 2018-19.

India’s move could impact world prices that have already dropped by half in the last 4 years due to surpluses.

India’s move on dairy comes in the wake of widespread protests by farmers who have struggled with oversupply in the domestic market. Two western Indian states are paying $727.86 a ton in subsidies for exports while the national government approved a 10% subsidy on top of that in July. The state subsidies alone would mean $72.78 million in government support if India exports 100,000 tons, as expected.

The increase is significant to the world market. USDA recently forecast India’s export of non-fat dry milk at 15,000 tons, which would mean a nearly nine-fold increase. 

And that’s just the exports. India has engaged in a long-term effort to block U.S. dairy shipments, which sparked complaints from American dairy producers who say the trade barriers are costing them more than $30 million in lost sales. Those complaints resulted in an April announcement by the U.S. Trade Representative’s office to examine India’s actions.

Rice and wheat draw U.S. complaint

India’s subsidies for rice and wheat are far higher than what’s allowed by the World Trade Organization (WTO), the United States said in a statement in May. 

Support for wheat has been more than 60% higher than the value of production during the last four years, according to the statement. Rice support has been more than 70% the value of production.

The U.S. said anything over 10% violates WTO rules. It estimated the true payment for rice subsidies to be $26.43 billion and it put wheat payments at $14 billion. 

The U.S. pointed out that India was at least the third largest agriculture producer in the world and has moved from the 10th largest exporter to the 7th as exports increased 22% in recent years.

It is the world’s largest rice exporter, commanding a third of the world market with 20% of its crop.

Sugar exports spark concern 

India is also set to become the world’s largest sugar producer, and Brazil and Australia are teaming to file a formal complaint with the WTO, according to Reuters.

The nations say any move by India to subsidize exports of its growing sugar stockpile is a threat to world price recovery. 

India has used domestic subsidies to encourage farmers to grow more acres of sugarcane. It recorded a record crop during the last harvest and observers expect another record crop this year. 

India this year planned to spend $231 million to subsidize payments from mills to sugarcane farmers, according to Bloomberg.

Mills in India have been struggling with a slump in local prices following the record crop. The government has mandated that mills meet export quotas even if prices are lower than the cost of production. 

India’s output is expected to climb to a record 31.5 million tons this year, Bloomberg reported.

India’s expansion in sugar comes as world market sugar prices are at their lowest level in a decade, hovering around 10-11 cents, noted Jack Roney, Director of Economics and Policy Analysis at the American Sugar Alliance. 

That price is barely half the world average cost of producing sugar. 

“India shields its sugar producers from the vagaries of the volatile and often depressed world market,” he said. “Indian sugar producers are not responding to world market signals. They are responding to government decisions on domestic sugar pricing and credit programs.” 

Roney noted that export subsidies are illegal under WTO rules, though India doesn’t seem to care. 

“We are pleased to hear that two other big sugar exporters, Brazil and Australia, are contemplating a formal WTO complaint against India,” he said. 

India’s subsidy spending on sugar makes it hard for nations like the United States to compete. American farmers, he said, are among the most efficient in the world, but can’t go up against foreign governments with nearly-unlimited funds to subsidize production. 

The Sugar Alliance, which represents the U.S. sugar growing industry, supports the “zero-for-zero” resolution that was introduced in Congress.

It would eliminate U.S. sugar policy, which historically cost taxpayers nothing, if other nations drop their subsidies.

“Until then, we need the U.S. sugar policy as a buffer to foreign-government dumping on the world market,” he said.

Sugar is not alone in its need for a strong domestic farm policy. And as long as countries like India continue to game the system and oppose free markets, U.S. farmers will need a safety net to help weather the storm.

Source: Farm Policy Facts, a 501(c)(4) non-profit organization, is a coalition of farmers and commodity groups created to educate members of Congress and Americans about the importance of agriculture and its contribution to a strong and vibrant United States. 


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