India was the center of attention at the recent WTO Ministerial Meeting in Bali, Indonesia as it sought a food security ‘peace clause’ for public stockholding programs under WTO agricultural subsidy commitments.  At the heart of the need for the policy change is India’s economic transformation over the last 20 years which has created the opportunity for government programs to improve the diets of many low-income Indians.  How this will work out remains open to debate, but there is no doubt that India has entered a new era in economic and trade policies.

The Indian government in 1991-93 introduced major reforms to industrial, trade, and exchange-rate policies that led to India becoming one of the world’s fastest growing economies, with real GDP growth increasing from 5.7 percent annually in the 1990s to 7.8 percent annually during the 2000s, and slowing to 3.6 percent in 2013 with recovery to 5.2 percent in 2014.  Two-way international trade increased from just $46 billion in 1991 to $1.05 trillion in 2012.  Inflow from international investors grew from almost nothing in the early 1990s to $37.2 billion in 2010.

Despite that impressive economic revolution, about 20 percent of the nation’s 1.2 billion people are poor using India’s national poverty line, and about 40 percent are poor using the international income standard of $1.25 per day.  Sixty percent of the people rely primarily on agriculture for income and employment, and rural areas account for 70 percent of India’s population.  The urban population is growing at over 2.0 percent per year with middle-class households accounting for about 160 million consumers having an increasing impact on the changing demand for food.

The slower economic growth in recent years has not prevented the Indian government from pursuing government programs to increase food consumption by low-income Indians.  This has always been good politics, but the government did not previously have the means to pursue that goal.  In September the President signed a National Food Security Bill approved by both houses of Parliament.

According to the U.S. Agricultural Attaché in India, the bill created an entitlement for 820 million people (50 percent of the urban population and 75 percent of the rural) to receive 11 pounds per person per month of subsidized rice, wheat or millet for at least the next three years.  Pregnant women and lactating mothers are entitled to free meals during pregnancy and for six months after giving birth, and children six months to 14 years old receive one free meal per day.  The current entitlement for the poorest of the poor will remain at 77 pounds per household per month.  About 55 million metric tons (MMT) of food grains will be distributed annually via the Public Distribution System (PDS).  The current PDS will be reformed, with the government specifically authorized to introduce cash transfers, food coupons, or other programs in lieu of delivery of physical grain.

India has a diverse agriculture that generates 17 percent of GDP and 10 percent of export earnings.  The introduction of high-yielding wheat and rice varieties and supportive government policies in the 1970s and1980s led to strong growth of output for those crops.  Major farm policies – including price supports, input subsidies, and public sector research – have been slow to adjust to the needs of India’s increasingly diverse consumer market.  Farm output growth has slowed from 2.8 percent annually in the 1990s to just 2.2 percent in 2009-10, and yields for most major crops remain low by world standards.  Cotton is a major exception to that as hybrid and biotech seeds have led to yields rising by 8 percent per year in the 2000s and production growing by 10 percent per year.

Indian agriculture production continues to adjust despite the policy shortfalls.  According to estimates by the Foreign Agricultural Service of USDA, India’s cow’s milk production is 60 MMT per year, exceeded only by the 140 MMT by the 28 countries of the EU and 93 MMT by the U.S., and it is the largest fluid consumer of milk.  Production and consumption of chicken broiler meat is expected to be 3.6 MMT in 2014, the world’s fifth largest producer and almost a 40 percent increase in the last five years.  India is the third largest producer of wheat, after the EU and China, at 93 MMT and exports are expected to be 6 MMT this year.  It is the second largest producer of rice, after China, at 103 MMT in 2013/14 and is expected to have exports of 10 MMT, the world’s largest.  India is also the world’s second largest sugar producer, after Brazil, at 25 MMT and largest in human consumption.

The government of India has programs to purchase 25 commodities at minimum support prices (MSP), but wheat and rice are the crops most purchased and influence planting decisions by farmers.  These programs have been under scrutiny by other exporters for possibly being in violation of India’s WTO commitments for domestic food programs and exports of excess supplies.  In November of last year the government lowered the minimum export price for government-owned wheat to near the MSP to clear warehouse space for this year’s crop. With declining world market prices and increasing food commitments at home, India’s government needed some assurances they would not become entangled in WTO disputes.

The debate is not over with passage of the food bill.  The new food program is built on the PDS which is inefficient and subject to abuse.  Focusing on rice and wheat is a continuation of the policies of the 1960s and 1970s even though demand is rapidly changing to more livestock and poultry products and fruits and vegetables.  Expanding subsidies for food in rural areas is no substitute for farmers’ access to new technology and production financing to expand output.  Incomes for farmers would increase and the supply of food would increase for the urban middleclass.

The new program also ignores the impact more open domestic markets can have on supply and demand.  The government is still trying to centrally manage production, storage, domestic use and exports that lead to economic inefficiencies and trade policy conflicts. The Food Bill allows the central government to experiment with programs other than just distributing subsidized food grains and directs the government to increase food security by increasing productivity in agriculture and decentralizing storage.

India’s agricultural production and food consumption policies are out of step with the rest of the Indian economy.  There are some indications the central government recognizes the need to recommit to the macroeconomic policy changes begun 20 years ago to again spur faster overall economic growth.  Similar changes are needed in agriculture that could improve food production and address trade policies concerns.

Ross Korves is a Trade and Economic Policy Analyst with Truth About Trade & Technology (www.truthabouttrade.org). Follow us: @TruthAboutTrade on Twitter | Truth About Trade & Technology on Facebook.