The Indian Economy Blog

August 31, 2007

The Full Monty

Let’s have unilateral trade liberalisation

Abi is right. Dweep didn’t go far enough. What India needs to do is to say “to hell with the WTO” and unilaterally, completely, dismantle trade barriers. For that matter, so does everyone else.

Here’s Sauvik Chakraverti on the topic on TCS Daily:

Unilateral free trade is a very good idea for a huge country such as India. If subsidized grain enters the market, poor marginal farmers, subsistence agriculturists and day laborers get cheap food. They will move away from subsistence farming as grain will be cheaper to buy in the market. They will move ‘from subsistence to exchange’, in Peter Bauer’s words, and integrate themselves with the urban exchange economy. Instead of grain, Indian farmers will produce fruits and vegetables or even flowers — solid cash crops. And this benefit will be paid for by US and EU taxpayers. [TCS Daily]

Moreover, dropping trade barriers for imports from Pakistan is the real peace process.

31 Comments »

  1. You go Mr Pai :-)

    Comment by Gaurav — August 31, 2007 @ 4:15 pm

  2. Nitin, I have to say I can’t agree with you on this completely. Protection has its place in certain contexts like manufacturing where huge capital investments are made by companies playing by the rules and laws of the land. This means paying excise duties and local taxes etc apart from huge capital investments.

    An example of this is Tata Motors and their “One Lakh Car” project in Singur, West Bengal which involves an investment of Rs 1,500 crores. Following Tata Motors are a huge chain of suppliers who are going to be investing a similar amount if not more. These companies are going through all the legal and political obstacles of doing business in West Bengal.

    It would be a slap in the face by the government if after all this, they let someone just buy a similar low cost car from China or South America. In a study by SIAM, ICRA Advisory Services report that car companies manufacturing in China enjoy a 23% cost advantage based on taxation alone.

    Comment by Nikhil Nayak — August 31, 2007 @ 5:12 pm

  3. Nitin…agree on both counts. Dropping import tariffs for Pakistan (and Bangladesh, Nepal, and Myanmar) is how we can “win the peace”. And yes, I did not go far enough :-)

    Of course, protectionists will argue that buying cheap is not the aim – it is to build “national champions” (like Sarko likes to do)

    Comment by Dweep — August 31, 2007 @ 5:49 pm

  4. Nikhil,
    You pithily summarize the argument in favour of, not protection, but lowering tax rates in India. A 10 – 15 % corporate tax rate would benefit everybody (except academic economists and bureacrats in the IT department)

    Comment by Corporate Serf — August 31, 2007 @ 5:54 pm

  5. ‘If subsidized grain enters the market, poor marginal farmers, subsistence agriculturists and day laborers get cheap food.’

    why would the (imported) grain be subsidised any longer if we lift all barriers on our own? a)if our farmers are affected the domestic production would go down and prices will rise. b) if the americans, say, have surpluses large enough to bridge the shortfall their govt wouldn’t have to incentivize exports, by way of subsidies, right? and even if they did, in the short term, wouldn’t the prices remaining low depend on the simple equation that their surpluses exceed our shortfall?

    Comment by kuffir — August 31, 2007 @ 6:00 pm

  6. oops clicked submit by mistake in my previous post …

    I wanted to conclude by saying that a lot of other issues need to be done before dismantling trade barriers one of which is streamlining the tax system and double taxation.

    I also happened to read Abi’s post on nanopolitan which ends as follows – “On the other hand, we have a BILLION consumers who have a gucking-fod-given right to enjoy their cheap toys and low-priced gadgets and dumped cars! Worse, keeping manufacturing alive will only result in perverse incentives for the workers to stay in manufacturing — just when they should be encouraged to move into our sunrise sector: BPO.

    Just for the record Abi is wrong or atleast has not thought this thing through. BPOs are limited to absorbing people with formal education. Manufacturing is able to absorb a far wider spectrum of the rural population who would have no chance of getting a BPO job.

    Comment by Nikhil Nayak — August 31, 2007 @ 6:01 pm

  7. Oh please, are we equating discussing dumping of subsidized products with that of import duties on fairly produced products? Free trade on non subsidized products is a good thing – it engenders benefits to consumers and increase in quality and productivity, importing subsidized produce (agro or other) is detrimental in the long term and has various issues as kuffir and others have aptly pointed out in Dweeps post. At best it’s a tunnel visioned short term approach to import subsidized products.

    I don’t see why Nitin/Abi is equating the two, plus Abi’s argument that we should forget about manufacturing is quite a hardsell IMHO.

    Comment by ALurker — August 31, 2007 @ 7:05 pm

  8. okay, i dont know why all are getting worked up by ‘full monty’ and Abi(especially), i think its more on the sarcastic front..?

    Comment by Renjith — August 31, 2007 @ 7:21 pm

  9. ALurker, Nikhil,

    Re: manufacturing etc, Abi is either being sarcastic or using the device of stretching the argument to absurdity as a tactic. You will have to ask him which one. It is a red herring as far as import tariffs on agricultural products are concerned.

    Kuffir,

    why would the (imported) grain be subsidised any longer if we lift all barriers on our own?

    Because we are importing them from countries that subsidise their farmers. Agricultural subsidies (say in Europe or America) are different from import tariffs in India.

    a)if our farmers are affected the domestic production would go down and prices will rise.

    That assumes that our farmers have the ability to influence the world price. In any case the reason of having import tariffs in the first placeis that the world prices are lower than domestic prices.

    b) if the americans, say, have surpluses large enough to bridge the shortfall their govt wouldn’t have to incentivize exports, by way of subsidies, right?

    Not quite. The subsidies are not given to incent exports but to protect the farmers\’ income.

    and even if they did, in the short term, wouldn’t the prices remaining low depend on the simple equation that their surpluses exceed our shortfall?

    Not sure what you mean here. Prices are set by demand and supply in the international market. Actually, the simple equation does not hold when prices are kept artificially low through subsidies. The point is that if European and American taxpayers are subsiding Indian consumers then why not enjoy it? What will happen if the subsidies are lifted? Well, if prices rise as a result, some other countries will become more competitive; one of which may even be India.

    Comment by Nitin — August 31, 2007 @ 7:39 pm

  10. nitin,

    ‘Agricultural subsidies (say in Europe or America) are different from import tariffs in India.’

    exactly. souvik isn’t talking of merely india reducing subsidies but india lifting import duties too – isn’t that what unilateral free trade means? the removal of trade and tariff barriers? if india engages in unilateral lifting of these barriers and america doesn’t, why would they need to sell cheap (that’s what i meant by subsidised in this context)because wouldn’t the world prices go up if there is a significant shortfall in indian production because isn’t that what would happen in the initial years?

    ‘That assumes that our farmers have the ability to influence the world price.’

    yes they would if their production goes down significantly as it would in the initial years when indian farmers wouldn’t be able to invest more in increased input costs.

    ‘Not quite. The subsidies are not given to incent exports but to \’protect\’ the fsrmers income.’

    really? this is a point of much contention. my own view is that at least a third of all american subsidy bills go towards promoting exports. a large portion of america’s agricultural land would remain untilled if they produced only for domestic consumption. and to protect their tiny farmer population direct transfers would cost them much less than their overalll subsidy bill. in 2005, 40 billion dollars were spent on ‘protecting’ 7,00.000 american farmers. the indian subsidy bill, by way of input subsidies (it could be more perhaps, but it doesn’t really matter because subsidy per farmer in india works out to a tiny fraction of similar subsidies in america) the same year? probably around 25.000 crores (or 5 billion dollars) for over fifty million farmers and 250 million other workers who depend on agricultural income and their families. the american support to each farmer works out to more than 57,000 dollars farmer per year. per capita income in america in 2005 was 34,586 dollars. do farm subsidies in america actually protect, and only protect, farmers’ incomes? the subsidies are still there even when many farmers deserting agriculture in america because those subsidies are meant to support the agribusiness-industry establisment built up over the years to promote american agri-products worldwide.

    ‘Not sure what you mean here. Prices are set by demand and supply in the international market.’

    what i mean is the americans and the europeans and others in developed world have reached probasbly their best productive capabilities by now. application of more technology and better inputs would probably yield much less incremental returns. so they probably wouldn’t be able to meet all of india’s shortfall after a certain limit. indian farmers on the other hand haven’t been given even the barest minimum resources needed to reach their fullest productive potential. 70% of our farmers do not even have access to regular sources of irrigation. would america/eu (the rest of the world wouldn’t come into the picture at all because they wouldn’t be able to compete with america/eu’s ‘subsidised’ prices anyway, at least in the short, medium term) be able to fulfill most of india’s needs cheap?

    Comment by kuffir — August 31, 2007 @ 9:39 pm

  11. ‘would america/eu (the rest of the world wouldn’t come into the picture at all because they wouldn’t be able to compete with america/eu’s ’subsidised’ prices anyway, at least in the short, medium term) be able to fulfill most of india’s needs cheap?’

    i should also add that most indian farmers would be so crippled in the short/medium term (more than 70% of them are heavily indebted right now anyway) that they wouldn’t be able to muster the resources to rise up again.. and meet any shortfall in supply.

    Comment by kuffir — August 31, 2007 @ 10:25 pm

  12. Dear Kuffir,

    There is no doubt at all that the call for unilateral trade liberalisation is a call for India to drop import tariffs. If world prices are lower for some reason, then Indian consumers enjoy cheaper food. If world prices are higher, then Indian producers can sell both at home and abroad at the world prices.

    Why would the America continue to subsidise their farmers if India lowers its tariffs? Well, because, as I mentioned, the subsidies are ostensibly to protect farmers income. Of course, money is fungible, so those subsidies end up making foodgrains cheaper in India, but the point is that the subsidies in general are not linked to world prices.

    Will world prices rise if Indian producers are out of the market? First, world prices are artificially low because of subsidies; so they won’t rise to the extent subsidised quantities are available. Subsidies as I just mentioned are not linked to price, but to Western farmers’ income. Second, not all Indian farmers will go out of the market. Only those whose costs of production are higher than the world price will do so. You’ll need to adjust this for crop cycle time (half-year) and weather etc. You yourself point out the extent to which they subsidise agriculture, so you know how deep they are prepared to dig to keep our lunch cheap.

    Comment by Nitin — September 1, 2007 @ 12:36 am

  13. The last sentence should read: You yourself point out the extent to which Western countries subsidise agriculture, so you know how deep they are prepared to dig to keep our lunch cheap.

    Comment by Nitin — September 1, 2007 @ 12:38 am

  14. Nitin,
    It seems to be that lowering agricultural tariffs unilaterally would be the equivalent of the British forcibly lowering Indian cotton tariffs during their colonial expansion. There are too many people who live off the land, and as pointed out above, 70% are in debt, for the “food will be cheaper argument” to wash especially since many of them probably already eat what they grow. Additionally, one has to worry not only about small and marginal farmers but also the currently landless who also live off the land by working for other farmers. If farming becomes more uneconomical due to outside competition, these people cannot get paid. I maybe wrong about these questions, but I am afraid this problem is too difficult for such a facile solution to be so easily acceptable. I also think that unless there are reasonable estimates of the relative savings in “cheaper food” to the increased unproductivity of many farms, it would be unreasonable to argue that unilateral tariff reduction is an unalloyed “good”.

    Comment by A former student — September 1, 2007 @ 5:08 am

  15. Dear former student,

    Isn’t your argument circular? It appears to me that what you are saying is that a policy that seeks to get many people off the land should not be implemented because too many people live off the land?

    The ‘grow what they eat’ argument is similarly fallacious. It assumes that (a) they grow everything they eat (b) they want to continue doing so and (c) savings are not fungible. Cotton farmers would benefit from cheap rice and sugar. So the net effect needs to consider loss of income due to lower tariffs vs gain in income due to cheaper prices. Why are they indebted today? Because the state has restrictive rules on who they can sell to, and at what price. So import tariff reduction isn’t likely to change much (at least, in general).

    Comment by Nitin — September 1, 2007 @ 5:42 am

  16. Poor farmers most likely dont have the economic resources to compete in a completely open agricultural market, and it is not clear to me that the gains from cheaper food will be sufficient to offset the costs incurred by such competition. They also dont have the resources and economic opportunity to change occupations easily and stop living off the land.

    My arguments did not propose any solutions, and I definitely dont think that the policy you suggest is the obvious or even the most viable one, so, no, there is no circularity in my argument, since by opposing your recommendations I am not opposing *all* options to get people off the land.

    “So the net effect needs to consider loss of income due to lower tariffs vs gain in income due to cheaper prices”.

    This was precisely my contention. It is not at all obvious to me that the loss in income will be offset by cheaper prices.

    Second:
    “Why are they indebted today? Because the state has restrictive rules on who they can sell to, and at what price. So import tariff reduction isn’t likely to change much (at least, in general).”

    This is a rather categorical statement, no? Are you sure that indebtedness is solely due to restrictive rules by the state? It may very likely be true, but again, this is not obvious (to me at least). As for the second half of your statement regarding import tariff reductions, it a) depends on the first argument and b) again this is a quantitative question, it maybe that the penalty due to import tariff reduction is insignificant compared to the penalty due to the state, but it is also possible that the opposite is true.

    Regarding the “they grow everything they eat”, I dont see how b) is an implied assumption. It could very well be that there is no choice in what they eat, simply because that is the cheapest option. Yes, for cotton farmers, they do have to buy their food, but this is not entirely central to my argument. I dont really get the point of your objection on this particular matter.

    Finally, it is easy to make proposals of this sort on issues like this, but I am personally uncomfortable about a few things:
    a) None of the arguments in this matter appear to me to be obvious, especially in the absence of any quantitative corroboration.

    b) They are a bit too facile, especially in matters regarding agriculture which still employs a majority of Indians. It is convenient to think up policy suggestions of this sort which may appear to be wonderful on paper, but this leaves many unanswered questions, eg:
    i. Where will all these people go?
    ii. What will they do? These transitions are tremendously painful.
    iii. What are the social consequences? Eg. is there sufficient capacity in other economic sectors to employ so many people, especially when many of them are primarily aware only of agriculture.
    iv. Will this result in increased urbanization, and is it possible to handle such transitions in a manageable fashion.

    I should point out that there is already tremendous internal migration and urbanization happening in India, and it is not clear that we are managing this transition very well, both in terms of infrastructure and otherwise.

    Finally, this is something relevant regarding the agricultural crisis in South Korea brought on by policies similar to those proposed in the post:
    http://yaleglobal.yale.edu/display.article?id=6196

    Comment by A former student — September 1, 2007 @ 9:13 am

  17. Afs, thats an excellent article at Yale Global. More people need to read it.

    Comment by Nikhil Nayak — September 1, 2007 @ 3:02 pm

  18. Nitin,

    I wrote about the basic flaw in the argument that most of Agriculture in India or Africa is unviable in Dweep’s post comments section here. Since we are yet to see a research data on this blog to predict what the final result of agricultural produce prices competition would be if the playing field were leveled, I think it’s early on your part to jump the gun on WTO.

    Also, I suspect Dweep is suggesting that Importing subsidized American and European agricultural produce would induce the subsistence farmers to get out of Agriculture, which is utterly flawed. It is similar to saying that to reduce the size of bureaucracy in India, we should reduce the salaries and perks of Bureaucrats. Everybody knows that young aspirants don’t aim for Civil Services and Police Force jobs because they aspire to get those formal government pay cheques or perks, Instead, the real remuneration lies in black money to be made from these posts. Similarly, most of subsistence farmers aren’t in farming because they are earning a lot of money, but because they don’t have other choices as the whole Government system is designed to keep them poor and helpless only. The solution would lie in correcting inherent systematic flaws.

    Also, Writing off WTO just because of agricultural subsidies issue is too vague a point for final conclusion. The collective clout of Indian, African and Brazilian groups do give us an advantage in negotiating over deals with the Western nations. However, Yes.. If Indian national interest demands bilateral treaties, we should be willing to sign them outside the purview of WTO also. But on this issue of supporting Agricultural subsidies, I’m still not convinced in its favour.

    Comment by Himanshu — September 1, 2007 @ 11:02 pm

  19. dear nitin,

    ‘Why would the America continue to subsidise their farmers if India lowers its tariffs? Well, because, as I mentioned, the subsidies are ostensibly to protect farmers income.’

    as you seem to insist on carrying on dweep’s weakly premised argument- how long is as long? 5 years? 10 years? because if america does wish to continue subsidising food exports it’ll have to keep prices less than competition from other countries. and if american prices are lower than the rest of the world why would consumers in any developing country want higher priced domestic products? would america/eu wish to become the world’s outsourcing hub for agriculture? or footing a large portion of the world’s food bill? as i said earlier, these cheap prices can’t be subsidised beyond a short period.

    ‘Second, not all Indian farmers will go out of the market. Only those whose costs of production are higher than the world price will do so.’

    to continue with my argument in the earlier para, most indian farmers, 80% of them, already bear a heavy burden of debt. cheap exports would starve them of any available credit. and the rest- how many of them would be able to compete? one of the weaknesses of dweep’s argument was that he seemed to look at india’s farmer community as an undifferentiated mass. another flaw was that he seems to think most subsistence farmers are inefficient and they’d be the first to move out because of cheap exports. but the reality is that india’s subsistence or marginal/sub-marginal farmers are actually more productive per acre (it’s another matter that their holdings are always much lesser than an acre each) than those with larger holdings. you might not be able to believe this but the fao has been saying this for a long time. so, who’d actually survive? the subsistence farmer or the larger farmer?

    if we follow your argument, it’d mostly likey be the subsistence farmer, because he is the more efficient producer, than the larger farmer. in effect, cheaper exports would effectively eliminate all competition in india. especially those larger farmers who would probably be able to muster the resources required to compete with western farmers in a more fair/free world environment. and this could happen in less than five years. so what’s the point in resolving, as dweep says, ‘internal issues’? there wouldn’t be any internal issues left in indian agriculture if we go the whole way as you suggest, we should.

    Comment by kuffir — September 2, 2007 @ 6:39 am

  20. Nitin, I think it’s but selfish for urban India to have a sense of entitlement to the cheapest and lowest at the cost of others in rural India. Free market rules bring about powerful changes that are painful to those adversely affected and the Indian government is doing the right thing at the moment in protecting our farmers.

    The example of South Korea given by A former student at Yale Global (link given above) tells us a story that we should learn from. We should enjoy our success but in my opinion not at the cost of our less fortunate countrymen.

    When corporate India is averaging 30% salary increases WTF are we asking cheaper prices for our food? Pay our farmers more for their hard work.

    Comment by Nikhil Nayak — September 2, 2007 @ 11:59 am

  21. ha ha.
    thx for a good laugh, nitin.

    Comment by andiron — September 3, 2007 @ 1:11 am

  22. Kuffir,
    another flaw was that he seems to think most subsistence farmers are inefficient and they’d be the first to move out because of cheap exports. but the reality is that india’s subsistence or marginal/sub-marginal farmers are actually more productive per acre (it’s another matter that their holdings are always much lesser than an acre each) than those with larger holdings. you might not be able to believe this but the fao has been saying this for a long time. so, who’d actually survive? the subsistence farmer or the larger farmer?

    if we follow your argument, it’d mostly likey be the subsistence farmer, because he is the more efficient producer, than the larger farmer.

    Wrong. Try again.

    Comment by Ravikiran — September 5, 2007 @ 5:02 pm

  23. Oops.. I didn’t realise that the blockquote tag wouldn’t work what I meant was:
    “another flaw was that he seems to think most subsistence farmers are inefficient and they’d be the first to move out because of cheap exports. but the reality is that india’s subsistence or marginal/sub-marginal farmers are actually more productive per acre (it’s another matter that their holdings are always much lesser than an acre each) than those with larger holdings. you might not be able to believe this but the fao has been saying this for a long time. so, who’d actually survive? the subsistence farmer or the larger farmer?

    if we follow your argument, it’d mostly likey be the subsistence farmer, because he is the more efficient producer, than the larger farmer.

    Wrong. try again.

    Comment by Ravikiran — September 5, 2007 @ 5:04 pm

  24. ravikiran,

    i’d forgotten, almost, about this post. could you please elaborate on your comment?

    Comment by kuffir — September 9, 2007 @ 12:32 pm

  25. Because when they are called “subsistence” farmers, it is not a joke. A farmer who farms 20 acres using his tractor may have a lower productivity *per acre* than the subsistence farmer, but his total income will still be higher, because he has a larger number of acres. The large farmer will be in a better position to absorb shocks to his income than the subsistence farmer.

    Comment by Ravikiran — September 10, 2007 @ 10:03 am

  26. ravi kiran,

    ‘A farmer who farms 20 acres using his tractor may have a lower productivity *per acre* than the subsistence farmer, but his total income will still be higher, because he has a larger number of acres.’

    my point exactly. but, please check nitin’s response earlier:
    ‘not all Indian farmers will go out of the market. Only those whose costs of production are higher than the world price will do so.’

    now, whose cost of production is likely to be lower than the world price?

    Comment by kuffir — September 10, 2007 @ 8:17 pm

  27. You are confusing productivity with cost of production.

    Comment by Ravikiran — September 10, 2007 @ 8:19 pm

  28. and you seem convinced higher productivity doesnt mean lower costs in this instance.. for subsistence farmers, labour costs, the most important component of agricultural inputs, are usually at negligible levels.

    Comment by kuffir — September 15, 2007 @ 3:04 pm

  29. That is kind of true if you ignore the cost of feeding the farmer himself and his family. This cost does the reduce in proportion to his landholding, and if he is a subsistence farmer, it means by definition that any cut in the price will eat into this cost.

    Comment by Ravikiran — September 16, 2007 @ 7:38 pm

  30. You work for dollars you buy your food with dollars!
    =====================================================

    Ratan Tata, Narayan Murthy and Azim Premji are leading India to serfdom……

    Comment by General — September 21, 2007 @ 7:52 am

  31. In wartime the enemy seeks to stop your trade. Why would ANY nation erect barriers to trade? Trade barriers are insane, and India should unilaterally drop all barriers. You could sell the idea by saying “We want to import all that cheap subsidized American food.” Maybe THAT would wake up Americans to the fact that our agriculture subsidies are a give-away to foreigners (oh, and also a destroyer of native agriculture).

    Comment by Russell Nelson — October 22, 2007 @ 12:09 am

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