Sanjay Negi's thoughts on Current Affairs and Information Technology Directions.

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Monday, July 03, 2006

Kamal Nath and the WTO Talks

Kamal Nath says that he had no option but to withdraw from the Talks as there was no negotiation space. The bone of contention is the huge subsidies that the US gives to its Farmers which lowers the prices of agricultural commodities and therefore gives an unfair advantage to the exporters of these goods from that country.

We have seen this genre of arguments before. The most common is the anti dumping scenario where the importing country imposes punitive duties to discourage below cost trade by predatory monopolistic transnational behemoths. Sometimes it could even be working at country level itself as in the case of China where the costing is not very transparent and it is difficult to clearly distinguish between cost saving components attributable to State subsidies and natural competitiveness of a developing economy.

What are the real issues here? As a customer is someone wants to sell to me at below cost, I would indeed be quite glad as it would represent transfer of wealth from the seller to the buyer. However the seller would soon go broke as this could not be sustained over a long period of time. The only reason that the seller with deep enough pockets would resort to below cost pricing would be to drive out other suppliers of those goods out of the market and then much more than recoup the earlier losses through the control gained through domination.

This is obviously not in the interests of fair play as it clearly amounts to resticting competition and therefore anti dumping duties are justifiable for trans-national trade. In case of supply demand equations within national boundaries, anti-trust and with anti-predatory pricing laws are supposed to take sufficient care of the matter so that fair competition is not impaired.

Coming to agriculture, most of India's farmers are subsistence farmers who have no surplus to sell and in fact are either net buyers or are badly under nourished. What comes to Mandis or is mopped up by government agencies is from medium to large and rich farmers who get subsidized farming inputs like fertilizers, water and electricity. Their surplus is then procured by FCI at higher than market prices giving them a double benefit for cost and price.

If India were to allow US to sell Agricultural produce to India at below cost, the marginal and subsistence farmers and other rural folks who are net buyers would get access to food at lower prices and would to that extent be less mal-nourished courtesy the US tax payer. Even the Government procurement agencies would find it cheaper to import from the US than buy from local medium and large farmers which they may still refrain from as they would continue to support the rich farming lobby.

Driven to its logical conclusion, the open market prices could possibly even settle lower than the PDS prices thus relieving pressure on Government procurement and forcing rich farmers to offload directly into the open market at the now much lower prices.

Those who get immediately hit would be the medium farmers with marginal surplus who would would see a proportionately large drop in their earnings and be forced to acclerate divesification of their sources of income. This may even lead to some badly needed consolidation in agricultural production activity to off set lower prices by greater economies of scale.

India needs to quickly move its working population from rural self sufficient agricultural communities to urban specialisation through division of labour. It is wrong to say that we do not have enough capital to follow that path. Capital is nothing but a representation of wealth in a country and wealth is tradeable human value add by another name. Value addition becomes tradeable through specialization as products or services and therefore urbanization is the fundamental secret to wealth creation. If for the moment we ignore the environmental impact of specialisation based civilizations, this is a proven model for economic success.

Kamal Nath can be given some benefit of doubt. He cannot even with uncle Sam's subsidies unleash the energies of a shackled nation all by himself, so he may be only softening the impact of transition for a few medium and rich farmers and in the process prolonging the agony for the masses. It is true that a lot of other events need to happen for this to work, but if people like Kamal Nath keep blocking all opportunites, they are only perpetuating the status quo. After all if the urban one third of the population is able to grow the GDP at 8%, the balance rural two thirds is becoming relatively marginalized.

The logic of wealth creation is remorseless and the only salvation lies in urbanising this remaining two thirds of India. If in the process we are able to use some unwitting help from the US tax payers, we should count our blessings.

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