India’s Lagging Sector: Indian Agriculture in a Globalising Economy

By the time the Uruguay Round was commenced in 1986, agricultural protection in major economies, such as European Economic Commission, subsequently European Union, Japan and the USA had become common. In the case of Japan, given the very high opportunity cost of such protection, food security was the major concern; though politically it became connected to protecting the farmers, who had disproportionate influence over the outcomes of the elections. Price paid to the farmers was set on the basis of cost of production plus. Similarly EU’s Common Agricultural Policy (CAP) was aimed at protecting the incomes of its farmers. It combined a price-support scheme, direct subsidies and rebates to farmers for storing or exporting their output rather than selling within the community. The export subsidies came into being, because without these, the EU was tending to accumulate mountains of beef and butter. The USA has subsidized exports through the Export Enhancement Scheme and through Public Law 480, under which food sales, among other things, can be made to low income and food deficit countries in local currencies. The subsidies by both the EU and USA were causing friction between them, as well as with countries such as Australia, Argentina and Canada. Therefore there were pressures to bring agriculture on to the table at the Uruguay Round and resolve it. EU had special preferential arrangements, under a series of Lome Conventions, with its 69 associates from the African, Carribean and Pacific developing group of countries. Under the Lome Convention, these associates received duty free entry for most of their products and even in the case of products, subject to quotas, such as sugar, rum and bananas, they received above market prices. In addition, under the price insurance scheme, called Stabex, they were compensated for losses due to world price fluctuations. There were also internal pressures within the EU to reform CAP, led by Britain, which had suffered massive increases in food prices, after it joined EU in 1973 and jettisoned the cheap supply of food imports from countries, such as Australia and New Zealand, and substituted them for the more expensive ones from the EU. In addition CAP was taking up two-thirds of EU’s budget and Germany and the other more urbanized countries were providing on a net basis the major components of it. Thus, it was in the interests of Germany to wind back CAP. Nevertheless, given the large number of small farmers who benefited from EU subsidies, there was enormous resistance to any change in CAP and to the reduction of agriculture protection. Certainly effective farm lobbies grew up in all EU member countries, including the highly urbanized and high income France, where resistance to change remains strong. Still the Blair House Accord between the USA and EU on agricultural reforms, which subsequently became part of the Uruguay Round and Marrakesh Agreement of 1994 and which put in place a process of reduction in price support and in export subsidies over the six year period starting in 1995, was a in the right direction of greater liberalization in agricultural trade.