Adverse Selection

This has been used from our blog.Brinks of economic thoughts.

 

Adverse Selection

 

Adverse selection is a problem which is created as of asymmetric information before the transaction occurs. Adverse selection in the market will occur when potential borrowers those who are very much sure to produce the undesired result, are the ones who will be seeking the loans, and are probably the ones who are likely to be selected.

 

Now adverse selection is the situation that it is more likely that loans might be given to bad credit risks, so lenders may decide to stop making any loans, even though good  credit risk are in the market place.

 

This is widely witnessed while we are lending loans, if our information is not asymmetric, we will not have a problem. We will be well aware about the credibility to whom we are lending ,,and we will avoid lending to some one who has weak credibility in terms of repaying back,,,just as of the problem of adverse selection,,,we will decide ,,or may be in apposition when we are forced to deicide to stop lending ,,,even if we know about the past record of the one to whom we are lending.

 

Eg,,,sub prime mortgage crisis.

 

Now this has been a phenomenon which has been witnessed even during sub prime mortgage  crisis. There were easily  available loans which were available during time when real state boom was prospering in USA,,,which when busted resulted in world world wide financial crisis of 2008.

Adverse selection was when there were plenty of loans which were distributed to the peoples with weak past record,,,

 

In india we time and again talk about the norms of KYC,,know your customer,,this is just to ensure that banks have proper idea of the person with whom they are dealing just to ensure that they face minimal chance of any kind of default. Thus also ensuring that our sum of money is actually repaid back to banks,,,and they are not in loss.

India’s absence from voting on issue of Srilanka

This has been used from our blog ” Brinks of economic thoughts”

 

India’s absence from voting on issue of Sri lanka.

 

{This was a very crucial issue given the fact that any act in north parts of Srilanka was bound to create emotional issues in Tamil Nadu.Still Indian diplomacy took this step given the broadness of conducting neighbour relationship and respecting the sovereignty of an independent nation}

 

 

 

Srilanka is an island located in Indian ocean holding place of strategic importance as of nearby presence of Diego Garcia,a US naval base. It is divided from India by Palk strait.

It has been religiously and historically close to India.64 % of population is Buddhist and 15 % are hindus.

Tamils were of 2 kinds,

Ceylonese and Indian[which were brought by Britishers as plantation farmers]

Jaffna in north and east part of Srilanka had heavy concentration of tamil population.

Problem became serious when Tamils started demanding separate ‘’EALAM’’.

India also participated in peace keeping mission in 1987,,which made sentiments hurt in Tamil NADU and costed us lives of 1200 soldiers.

LTTE ,,the main fighting body of freedom of tamils faced crunch since 2001 US attack,,,

Attacks on LTTE grew channelized since 2006..and finally LTTE was uprooted in 2009.

Blames were made on srilankan army that in last phases of the wars there were widespread human rights violations,,,which srilanka a denied.

This had been demand of USA,,and its allies to set up independent commission to enquire the cases of harsh conduct of national army,,

India had voted against Srilanka on previous occasions..this time India decided to do away from voting.

Only S Korea voted among prominent Asian nations. Pakistan and China also did not vote as of same internal conflicts.

Srilanka responded positively immediately after with release of Indian fisherman.

 

 

Harsh Vardhan Pathak

 

Regulation of natural Monopolies

This has been taken from our blog Brinks of economic Thoughts.

Attached is the Link

 

https://wordpress.com/post/harshmohit.wordpress.com/21

 

Natural monopolies are conducive to industries where the largest supplier derives cost advantages and must be regulated to minimize risks.’’

 

DEFINITIONS OF NATURAL MONOPOLY

Technological definitions

-Behavioral and market equilibrium considerations

-Sunk costs

-Empirical evidence on cost subadditivity

 

 

 

WHY REGULATE NATURAL MONOPOLIES?

Economic efficiency considerations

–Other considerations

–Regulatory goals

 

ALTERNATIVE REGULATORY INSTITUTIONS

-Franchise contracts and competition for the market

-Franchise contracts in practice 

-Independent “expert” regulatory commissions

 

 

KEY POINTS

  • A natural monopoly is defined by an incumbent in an industry where the largest supplier can theoretically create the lowest production prices, generally through economies of scale or economies of scope.
  • Natural monopolistic conditions are therefore at high risk of creating actualmonopolies, and society benefits from regulating these situations to even the playing field.
  • Regulating industries to minimize monopolization and maintain competitive equality can be pursued through average cost pricing, price ceilings, rate of return regulations, taxes and subsidies.
  • While the concept of a monopoly is generally perceived as a threat to free markets, there are specific circumstances where natural monopolies are either pragmatically useful (cost effective) or virtually unavoidable.

TERMS

The characteristics of a production process in which an increase in the scale of the firm causes a decrease in the long run average cost of each unit.

Government assistance to a business or economic sector.

 

 

A monopoly is a business or organization that maintains exclusivity of the supply of a particular product or service, and can evolve naturally or be designed specifically based on the nature of a particular market or industry. Monopolies on the whole are governed under antitrust laws, both on a national level in most countries and on an international level via institutions such as the World TradeOrganization (WTO).

The evolution of a monopoly is a critical component in recognizing which industries are at high risk of monopolization, and how these risks may be realized operationally. A natural monopoly is defined by an incumbent in an industry where the largest supplier can theoretically create the lowest production prices, generally through economies of scale or economies of scope . In this type of circumstance, the industry naturally lends itself to providing advantages for the single largest provider at the cost of allowing for competitive forces. Natural monopolistic conditions are therefore at high risk of creating actual monopolies, and society benefits from regulating these situations to even the playing field.

 

–History of regulation of monopolies

 

The societal and economic dangers of monopolies are clear. To combat the effects of these large corporations, the government has tried, through both legislation and court cases, to regulate monopolistic businesses. Though the strategies that the US has followed have varied, the aim of curbing market hegemony has been relatively constant. Though examples of attempts at government regulation are widespread, three stand out from the rest:railroads of the 19th CenturyMicrosoft, and IBM.

Most regulation in its early history revolved around the railroad industry. At first, the responsibility of control of public industries fell on the individual states. However, the ineffectual legislation that was passed and the inability to control railroad monopolies made the need for federal regulation painfully apparent. The passage of the Interstate Commerce Act in 1887 created the first interstate regulatory committee. Though this group was not extremely effective in curbing the practices of the railroad, the precedent for federal regulation had been set. Later legislation, such as the Sherman and Clayton Anti-Trust Acts had more of an effect on large businesses. The latter bill created the Federal Trade Commission, which is the major regulatory body of monopolies today.

The important question that arises from regulation is: Why does the government feel that it must control big businesses? Does this not violate the principles of freedom outlined in the Constitution? Indeed, the government never tried to stifle a corporation simply because it was strong. Instead, regulation exists to preserve competition and the freedom for smaller companies to enter the market. If one company controls the market share, smaller groups will never be able to flourish. For example, the dominance of Microsoft in recent years has raised the question of whether its practices are monopolistic. Because the corporation controls the majority of the market in nearly all of its markets, there is an overwhelming social pressure for regulation.

The earliest regulatory measures were not as focused on competition, however. The goal was to protect the consumer. For example, the Grangers (19th Century farmers) felt that they were being oppressed by unfair practices of the railroads. There was great social unrest in this population because of the practices of large corporations. To avoid revolt and turmoil, the state government passed the Granger Laws. This group of legislation was essentially an attempt to appease the troubled farmers. It was not until the end of the 19th Century and the beginning of the 20th that regulation made the turn toward preserving competition.

Another trend in regulation is the unfortunate tendency of legislation to have little effect. Most of the laws created to control railroads were simply ignored by the large corporations. Similarly, the action of the Federal Trade Commission against Microsoft is often viewed as a trifle. Judge Stanley Sporkin rejected the June 1995 decision regarding the Microsoft monopoly, saying that the ruling was a mockery and that stricter control must be taken. Most attempts at federal regulation have been mediated, modulated, or amended until they lose much of their original bite.

Clearly social and governmental history has shown an ever-present desire to curb the growth of corporations. The dangers of allowing one company to assume supremacy over a market have frightened the government into regulation. Though, in many instances, the legislation fails to achieve its original goal, governmental regulation has become a standard in interstate and international commerce. America was founded on the principle of free trade and freedom of competition. Therefore, the government has assumed the responsibility of preventing the formation of monopolies and curbing unfair practices of large corporations.

 

 

Why does the government regulate monopolies? 

 

The government doesn’t regulate monopolies. It effectively bans them. Or at least it used to before GWB allowed business to run wild.

This is done to protect the citizens and society at large. The thinking being that a monopoly has absolute power over its industry and, thus, control over the government and people it serves. While competition is better for society because it fosters lower prices and product innovation.

 

The government may wish to regulate monopolies to protect the interests of consumers. For example, monopolies have the market power to set prices higher than in competitive markets. The government can regulate monopolies through price capping, yardstick competition and preventing the growth of monopoly power.

 

Why the Government Regulates Monopolies

 

  1. Prevent Excess Price. Without government regulation, monopolies could put prices above. This would lead to allocative inefficiency and a decline in consumer welfare.
  2. Quality of service. If a firm has a monopoly over the provision of a particular service, it may have little incentive to offer a good quality service. Government regulation can ensure the firm meets minimum standards of service.
  3. Monopsony power. A firm with monopoly selling power may also be in a position to exploit monopsony buying power. For example, supermarkets may use their dominant market position to squeeze profit margins of farmers.
  4. Promote Competition. In some industries, it is possible to encourage competition, and therefore there will be less need for government regulation.
  5. Natural Monopolies. Some industries are natural monopolies – due to high economies of scale, the most efficient number of firms is one. Therefore, we cannot encourage competition and it is essential to regulate the firm to prevent the abuse of monopoly power.

 

 

How the Government Regulate Monopolies

 

  1. Price Capping by RegulatorsRPI-X

For many newly privatised industries, such as water, electricity and gas, the government created regulatory bodies such as:

  • OFGEM – gas and electricity markets
  • OFWAT – tap water.
  • ORR – Office of rail regulator.

Amongst their functions, they are able to limit price increases. They can do this with a formula RPI-X

  • X is the amount by which they have to cut prices by in real terms.
  • If inflation is 3% and X= 1%
  • Then firms can increase actual prices by 3-1 = 2%

If the regulator thinks a firm can make efficiency savings and is charging too much to consumers, it can set a high level of X. In the early years of telecom regulation, the level of X was quite high because efficiency savings enabled big price cuts.

RPI+/- K – for water industry

In water the price cap system is RPI -/+ K.

K is the amount of investment that the water firm needs to implement. Thus, if water companies need to invest in better water pipes, they will be able to increase prices to finance this investment.

Advantages of RPI-X Regulation

  1. The regulator can set price increases depending on the state of the industry and potential efficiency savings.
  2. If a firm cuts costs by more than X, they can increase their profits. Arguably there is an incentive to cut costs.
  3. Surrogate competition. In the absence of competition, RPI-X is a way to increase competition and prevent the abuse of monopoly power.

 

Disadvantages of RPI-X Regulation

  1. It is costly and difficult to decide what the level of X should be.
  2. There is danger of regulatory capture, where regulators become too soft on the firm and allow them to increase prices and make supernormal profits.
  3. However, firms may argue regulators are too strict and don’t allow them to make enough profit for investment.
  4. If a firm becomes very efficient, it may be penalised by having higher levels of X, so it can’t keep its efficiency saving.

 

 

2.Regulation of quality of service

 

Regulators can examine the quality of the service provided by the monopoly. For example, the rail regulator examines the safety record of rail firms to ensure that they don’t cut corners.

In gas and electricity markets, regulators will make sure that old people are treated with concern, e.g. not allow a monopoly to cut off gas supplies in winter.

3.Merger Policy

 

The government has a policy to investigate mergers which could create monopoly power. If a new merger creates a firm with more than 25% of market share, it is automatically referred to the Competition Commission. The Competition commission can decide to allow or block the merger.

4.Breaking up a monopoly.

 

In certain cases, government may decide a monopoly needs to be broken up because the firm has become too powerful. This rarely occurs. For example, the US looked into breaking up Microsoft, but in the end the action was dropped. This tends to be seen as an extreme step, and there is no guarantee the new firms won’t collude.

  1. Yardstick or ‘Rate of Return’ Regulation

 

This is a different way of regulating monopolies to the RPI-X price capping. Rate of return regulation looks at the size of the firm and evaluates what would make a reasonable level of profit from the capital base. If the firm is making too much profit compared to their relative size, the regulator may enforce price cuts or take one off tax.

A disadvantage of rate of return regulation is that it can encourage ‘cost padding’. This is when firms allow costs to increase so that profit levels are not deemed excessive. Rate of return regulation gives little incentive to be efficient and increase profits. Also, rate of return regulation may fail to evaluate how much profit is reasonable. If it is set too high, the firm can abuse its monopoly power.

  1. Investigation of Abuse of Monopoly Power.

In the UK, the office of fair trading can investigate the abuse of monopoly power. This may include unfair trading practises such as:

  • Collusion (firms agree to set higher prices)
  • Collusive tendering. This occurs when firms enter into agreements to fix the bid at which they will tender for projects. Firms will take it in turns to get the contract and enable a much higher price for the contract.
  • Predatory pricing (setting low prices to try and force rival firms out of business)
  • Vertical restraints – prevent retailers stock rival products
  • Selective distribution For example, in the UK car industry firms entered into selective and exclusive distribution networks to keep prices high. The competition commission report of 2000 found UK cars were at least 10% higher than European cars

 

 

 

 

Regulating Natural Monopolies

The consolidation of an industry into one sole supplier can represent a substantial threat to free markets and their consumers, as price can be easily manipulated through a thorough control of the supply. As a result, monopolies are generally viewed as illegal entities. Regulating industries to minimize monopolization and maintain competitive equality can be pursued in a number of ways:

  • Average cost pricing:
  • As the name implies, this regulatory approach is defined as enforcing a price point for a given product or service that matches the overall costs incurred by the company producing or providing. This reduces the pricing flexibility of a company and ensures that the monopoly cannot capture margins above and beyond what is reasonable.
  • Price ceiling:
  • Another way a natural monopoly may be regulated is through the enforcement of a maximum potential price being charged. A price ceiling is a regulatory strategy of stating a specific product or service cannot be sold for above a certain price.
  • Rate of return regulations:
  • This is quite similar to average cost pricing, but deviates via allowing a model that can create consistent returns for the company involved. The percentage net profit brought in a by company must be below a government specified percentage to insure compliance with this regulatory approach (i.e. 5%).
  • Tax or subsidy:
  •  
  • The last way a governmental body can alleviate a natural monopoly is through higher taxes on larger players or subsidies for smaller players. In short, the government can provide financial support via subsidies to new entrants to ensure the competitive environment is more equitable.

As with most regulatory approaches, none of these are perfect solutions and consolidation within industries conducive to a natural monopoly will continue to arise. Antitrust laws and the careful control of mergers, acquisitions, joint ventures, and other strategic alliances are critical in the regulation of natural monopolies. In extreme circumstances it is also a viable option for governments to break up monopolies through the legal processes.

 

Conclusions

 

 

For over 100 years economists and policymakers have refined alternative

definitions of natural monopoly, developed a variety of different regulatory mechanisms and procedures to mitigate the feared adverse economic consequences of natural monopoly absent regulation, and studied the effects of price and entry regulation in practice. The pendulum of policy toward real and imagined natural monopoly problems has swung from limited regulation, to a dramatic expansion of regulation, to a gradual return to a more limited scope for price and entry regulation. Natural monopoly considerations became a rationale for extending price and entry regulation to industries that clearly did not have natural monopoly characteristics while technological and other economic changes have erased or reduced the significance of natural monopoly characteristics that may once have been a legitimate concern.

After the most recent two decades of deregulation, restructuring, and regulatory reform, research on the regulation of the remaining natural monopoly sectors has three primary foci. First, to develop, apply and measure the effects of incentive regulation mechanisms that recognize that regulators have imperfect and asymmetric information about the firms that they regulate and utilize the information regulators can obtain in effective ways. Second, to develop and apply access and pricing rules for regulated monopoly networks that are required to support the efficient expansion of competition in previously regulated segments for which the regulated networks continue to be an essential platform to support this competition. Third, to gain a better understanding of the effects of regulation on dynamic efficiency, in terms of the effects of regulation on the development and diffusion of new services and new supply technologies. These targets of opportunity are being addressed in the scholarly literature but have been especially slow to permeate U.S. regulatory institutions. Successfully bringing this new learning to the regulatory policy arena is a continuing challenge.

 

HARSH VARDHAN PATHAK

SSE-I-09

MSC ECONOMICS INTEGRATED

BATCH 2011

ASSIGNMENT ON REGULATION OF NATURAL MONOPOLIES

SUBJECT’’ECO OF INDUSTRIAL ORGANISATION AND STRATEGY.

 

World trade organisation;Agriculture and India

{Amidst various contentious issues of dispute between India and WTO,this was written as an assignment and various references were were used which have been mentioned at the end of the work}

 

Indian is no exception to these general trends, with a few special features. During last two decades India’s agricultural exports as a part of total merchandise exports have continued to decline from the preponderant position they occupied in the pre-independence. But with the achievement of self-sufficiency in food grains and some other major agricultural commodities, which used to account for large portion of import bill, overall imports of agricultural commodities have sharply declined. The outlay on agricultural imports as a proportion of earnings from agricultural exports has progressively declined, and all the balance has become progressively more favourable. Discussion on these issues has, naturally, to take into account the new trade regime as the stated objective of firstly to study the performance of India’s agricultural exports under WTO regime. Secondly, to analyze the competitiveness of top agri-exports of India under WTO regime. Finally, to suggest policy measures in the identified India’s agricultural. In the first part of discuss briefly introduce, the developments in agricultural trade specially the agricultural exports at the world level in the recent years and discuss the performance of Indian agriculture in this respect finally shaped the shifts in this policy. Final part, I will try to spell out the ingredients of a strategy to augment agricultural exports in the changing, and more demanding, global economy.

 

 

According to the Indian Census 2001, the share of cultivators and agriculture labourers in the total labour force of India declined from 64.8 per cent in 1991 to 58.2 per cent in 2001, while the share of agriculture value added in total value added of the country dropped from 31.3 per cent to 24.5 per cent. Thus, a 6.8 per cent shift in the output from agriculture to non-agriculture resulted in a shift of just about 6.6 per cent labour from farming to non-farming sector. If this were the case, then even if the share of agriculture is completely overtaken by the other sectors, the problem of huge income inequality between rural and urban will remain daunting. The ratio of income defining the poverty line in urban and rural India has increased from 1.29 in 1983-84 to 1.4 in 1999-00. Nevertheless, the urban-rural income differential in India is much smaller than that of developed countries (Table 1). In order to bridge these inequalities, the developed countries generally tend to resort to heavy subsidies to their agricultural sector. The rural-urban divide in India is increasing steadily and it would have to face the same problem as other developed countries are facing at present (Table 1). However, India could not afford to employ the same balancing strategy as practiced by the developed countries of providing subsidy to the agricultural sector, because its rural population is very large.

Therefore, the solution to reduce the rural-urban divide in India lies in employment-generating large-scale industrialization and expansion of agriculture processing and exports, so that each percentage point shift in the share of agriculture value added to other sectors leads to at least two percentages points shift in the labour force from farm sector to non-farm sector. Maintaining this target itself will inherently lead to a comparable growth in per capita income of the farm sector.

Agreement on Agriculture (A-o-A) and India

 

The success of the Agreement on Textiles and Clothing has given legitimate boosts and seriousness to multilateral trading system. Agreement on Textiles and Clothing, which promised to put an end to the country-by-country quotas on imports of textiles and clothing imposed by the major developed countries including the United States and European Union became a reality from January 1, 2005. On the other hand, the success of the Agreement on Agriculture in liberalizing agriculture was less than expected but it has opened the door to future liberalization and concrete results are expected in near future.

Agreement on Agriculture (A-o-A) or URAA:

The core objective of A-o-A is to establish a fair and market-oriented agricultural trading system. Its implementation period was six years for developed countries and nine for developing countries, starting with the date the agreement came into effect – January 1, 1995. These dates are now extended under a built-in provision of A-o-A of own review and renewal. That renegotiation is now underway, under the terms set at the fourth WTO ministerial conference in Doha and the Framework Decision agreed at the WTO General Council on August 1, 2004. The AoA comprises three sections referred to as three pillars of the agreement:

1. Market access,

2. Domestic support and

3. Export subsidies.

 

However at the outset, the agreement notes that the reform program should be made in an equitable way among all Members, having regard to non-trade concerns, including food security and the need to protect the environment; having regard to the agreement that special and differential treatment (SDT) for developing countries is an integral element of the negotiations, and taking into account the possible negative effects of the implementation of the reform program on least-developed and net food-importing developing countries. In addition, there are provisions of Special Products and Sensitive Products, which are to be exempted from stringent discipline of the above provisions of the A-o- A

 

 

Provision of Special Products designates a certain number of products of the developing countries that would be exempt from tariff reduction requirements and other disciplines in order to protect and promote food production, livelihood security and rural development. The key issues here are associated with the mechanism to decide on country-w ise crops. In the case of developed countries also, certain products, based on political, social and cultural considerations are designated as Sensitive Products, which will be treated less stringently. Here the main dispute lies between the United States, which has proposed 1 per cent of the tariff lines for such products while the EU is asking for 8 per cent of the tariff line.

 

Market Access: 

 The market access requires that tariffs fixed by individual countries be cut progressively to allow free trade. Since different countries fixed their tariffs at different levels confronting the interest of each other, several harmonizing formula such as Uruguay Round formula , Swiss formula, Girard formula, and Canadian “income tax” formula were suggested to cut tariffs in which steeper cuts are suggested on higher tariffs, so as to bring all the international tariffs closer to almost the same level. All these formula have unique coefficients with different effects. The developed countries preferred Swiss mathematical Formula in which the coefficients also determine the maximum tariff where the starting tariffs will end up. For example, if the coefficient is 20, then a very high starting tariff will end up with a national tariff of exactly 20 percent and lower starting tariffs will end up proportionately lower, close to 20 percent as well. The developing countries do not like this formula because it quickly brings them closure to the competition, a situation they are not prepared. The key arguments is that the developed countries want to deprive developing countries a facility that has been extensively used by them to achieve current state of their economy.

Other formulae are more flexible. For example the formula used in the Uruguay Round for agricultural tariff reductions required that tariffs be cut by a percentage average over a number of years; in that the developed countries agreed to cut tariffs by an average of 36 percent over six years with a minimum of 15 percent on each product; some cuts could be greater than others and thus the combination of average and minimum reductions allows countries the flexibility to vary their actual tariff reductions on individual products.

Domestic support and the little boxes

The A-o-A broadly subdivides domestic support programs into three boxes with colours, green, blue and amber and two other categories namely Development measures and de minimis. Under current WTO rules, countries are free to employ subsidies under the “green” and “blue” boxes, certain development measures, and the de minimis subsidies. In addition there are some Non-trade concerns (NTCs) listed in the preamble to the A-o-A, which can be used to legitimize government programs that run contrary to the market-oriented agricultural trading system. They include food security, rural development and environmental protection. The European Union wants to include animal welfare and eco-labeling as NTCs. 

Development measures cover direct or indirect permitted (A-o-A article 6.2) assistance aimed at encouraging agricultural and rural development in developing countries and is allowed. They include investment subsidies generally available to agriculture such as research and development, extension programs, and soil and water conservation; and agricultural input subsidies available to low-income or resource-poor farmers such as fertilizer, water, and electricity. Under the de minimis provision, developed countries are allowed to use other subsidies with an aggregate value of up to 5 percent of the total value of domestic agricultural production in the case of developed countries and 10 per cent in the case of developing countries.

The Amber Box (A-o-A Article 6) contains category of domestic support that is scheduled for reduction based on a formula called the “Aggregate Measure of Support” (AMS). The AMS calculates the amount of money spent by governments on agricultural production, except for those contained in the Blue Box, Green Box and de minimis. It required member countries to report their total AMS for the period between 1986 and 1988, bind it, and reduce it according to an agreed-upon schedule. Developed countries agreed to reduce these figures by 20% over six years starting in 1995. Developing countries  agreed to make 13% cuts over 10 years. Least-developed countries do not need to make any cuts.

Export support

 Export support include trade distorting programs such as Export Subsidy, State Trading Enterprises 2 Export Credits, Special and Differential Treatment, Special Products, and Sensitive Products aimed at benefiting the domestic producers against the international competition. A-o-A tends to eliminate or minimize such supports. Export subsidies are government payments to the exporting firms directed to encourage use of inputs from the domestic resources. Accordingly, an export subsidy program will pay the difference between a more expensive domestic input and a cheaper imported alternative in order to encourage exporters to buy inputs from domestic market. Dairy products and sugar in EU continue to receive considerable export subsidies. The U.S. Step 2 program subsidizes its cotton production through U.S. exporting firms. Export credits given by a government to underwrite the cost of doing business on commercial terms also amounts to export subsidy. Often, the United States is criticized for such policies where the United States Government gives credit to its domestic companies to deliver goods in another country but the payments are recovered from the importing countries government in long instalments and cheaper interest rate making it more lucrative for the poor countries to import from the United States. This is also one of the major points of dispute between the United States and the EU and it is now agreed that such credit line will not exceed 180 days.

 Doha Round:

Brief of the package encompassing A-o-A .The Fourth WTO Ministerial Conference was held in Doha , Qatar from 9 to 14 November 2001. In fact, the Doha Ministerial was a starting of a new round with unique feature foc used on implementation of A-o-A and “Development” of the developing countries so that they could meaningfully become part of the agreement.

 Article XVII of the GATT 1994 deals with state trading enterprises and their operations multilateral global trading system. The following Fifth WTO Ministerial Conference held in Cancun, Mexico from 10 to 14 September 2003 was dedicated to stock taking of progress in negotiations and other work under the Doha Development Agenda (DDA). However, the DDA required correcting the imbalances that penalize developing countries and improve the commitment of WTO members. The modalities3 for the Doha Round are to be completed by the end of April 2006, the draft schedule based on these modalities by 31 July 2006 and the Round is expected to conclude by the end of 2006, a date chosen carefully for the Ministerial Meeting when the term of ‘Trade Promotion Authority of the United States’ ends. In this round the latest Ministerial was held in Hong Kong Ministerial (Dec 13-18, 2005), which has given some hope for success as for the first time developing countries have managed to get a mention from developed countries of reduction in their subsidies otherwise most of the previous commitments have been falsified. The issues related to implementation of A-o-A dominate the Doha Round and they include:

1. High agriculture trade distorting subsidies granted by rich countries.

2. Agriculture export subsidies .

3. High tariffs on exports of agricultural and industrial products of interest to developing countries .

However, at various Ministerial negotiations new items from other agenda have been added to make it a comprehensive round. For example, the modalities of the A-o-A are being coupled with GATS, and investment issues. Therefore, the proposals for negotiation have transformed to include among others the following (list of all items is provided in following sub-section):

1. On agriculture, 2013 as the end date for the elimination of export subsidies with an important part frontloaded by 2010 .

2. Agreement that the EU, US and Japan will undertake the biggest reductions on agricultural subsidies that distort trade and that these will be effective cuts, which is a serious improvement as compared to the previous round.

3. On cotton, which is of key importance to many African countries, export subsidies on cotton to be eliminated by 2006 and cuts to domestic subsidies will be greater and faster than for the rest of products.

4. Special agriculture products and a safeguard to protect those agricultural products of developing countries with concerns about livelihood security, food security and rural development .

5. On industrial products, a Swiss formula to cut tariffs, with high tariffs subject to bigger cuts, thus addressing tariffs peaks and tariff escalation in particular on products of interest for developing countries. Developing countries will for a start cut tariffs only in proportion to the cuts by developed countries.

6. A step forward towards a completely duty-free and quota -free access for the world poorest country Members of the WTO .

7. On Services, the door has been opened to plurilateral negotiations .

8. Countries have started tabling collective requests in the services of sectors that are of particular interest to them.

9. Aid for Trade package, to help developing countries address their supply-side constraints.

 

India’s Ministerial Positions at Doha rounds and on A-o-A 

Pascal Lamy, WTO General Secretary visited India on April 5 2006 for the second time in last six months, which is an indicator of the gravity of problems being faced by Indians in meeting the demands of developed countries. The Indian position is that the development agenda and the farmers’ interest cannot be diluted and that the industrial and agriculture issues should not be mixed, while at the same time the Indian negotiators feel that no change is made in subsidy position of the developed countries, yet new elements are being introduced. Nevertheless the Indian leadership has come up to the age of globalization and is slowly shedding its defensive posture and it has been demonstrating dynamism in the WTO negotiations. India rejected the idea of introducing new issues such as Investment, Competition, Trade Facilitation or Transparency in Government Procurement, and did not consider the basic trade principles like non-discrimination or market  access appropriate for dealing with issues like Investment and Competition. The Minister for Commerce and Industry raised the concerns that sensitive industries in developing countries including small-scale industries, which sustain a large labour force, could be destroyed. India was firmly opposed to any linkage between trade and labour standards and recalled that the Singapore Declaration had once and for all dealt with this issue and there was no need to refer to it again. Similarly, on environment, India was strongly opposed to the use of environmental measures for protectionist purposes and to imposition of unilateral trade restrictive measures and considered that the existing WTO rules were adequate to deal with all legitimate environmental concerns. In fact the Minister termed them as Trojan horses of protectionism.Doha Ministerial was saved from failure to continue the work program. The African countries, deserted Indian hopes because they were promised the continuation of their trade preferences into the EU marke t for some more years. However, to the windfall pleasure of India, the round was launched with services brought into the fold of international rules through the General Agreement on Trade in Services (GATS).

At the Cancun Ministerial (10-14 September 2003), India felt that the draft Cancún Ministerial Text was grossly inadequate on implementation issues, precision, operational and effectiveness and fixing responsibility and would severely affect the interests of developing countries in agriculture, industrial tariffs and Singapore issues. There was no progress in removing barriers to export from developing countries to the developed countries. India argued that all the time-lines set at Doha for their resolution have been breached. On certain issues even the mandate itself has been questioned. To make matters worse, the draft Ministerial text accords low priority to these issues. It does not envisage any time-frame for taking decisions for resolving outstanding issues. This is in sharp contrast to the issues of interest to developed countries for which time-lines have been provided for taking decisions. On agriculture subsidies, India argued that the prevailing subsidies in the developed countries were not targeted to keeping small struggling family farms  in business but to provide hefty rents to large farmers or corporates. On the other hand, against equity, justice and fair play, developing countries are being asked to liberalize their agriculture. India felt there was an urgent need to bring down the high tariffs and non-tariff barriers on products of export interest to developing countries while ensuring that special and differential treatment for developing countries and policy space to deal with sensitive products remain an integral part of all elements of negotiations. India reiterates that under no circumstances can it accept any form or harmonization of tariffs in agriculture or obligations to create and expand tariff rate quotas.

On market access negotiations on non-agricultural products (NAMA), India favored the formula mandated by the Doha Declaration, without any amendment in any aspect of the formula.

 

Contentious issues and on-going Debate

The main complaint about policies supporting domestic prices, subsidized production and subsidised exports is that they encourage over-production. This works as deterrent to imports and promotes low-priced dumping on world markets. However, there are also arguments in favour of subsidies, particularly in the case of net importers of agriculture products. Such countries do benefit from imports at suppressed prices, (see for example (Panagariya, 2005). Nevertheless, depending on prolonged food aid program could render a country net importer of food due to the dependency created by circumstances and could discourage domestic production. Once such a vicious circle is created it becomes difficult to come out of it.

Agriculture subsidies

About 84 percent of farmer households in India survive with less than 2.0 hectare of land with average size of their holding being 0.63 hectare, while average size of all holdings in India is just about 1.4 hectare. Survival of such farmers is at stake if they do not get alternative means of livelihood. Where will these farmers get employment if Indian markets are flooded with foreign agricultural products under the market access program?  In India the product-specific support is negative, while the non-product specific support i.e., subsidies on agricultural inputs, such as, power, irrigation, fertilisers etc., is well below the permissible level of 10 per cent of the value of agricultural output. Therefore, India is under no obligation to reduce domestic support currently extended to the agricultural sector. Yet, subsidies are wisely considered burden in India and they are being rationalized. On the other hand, domestic subsidies in OECD countries during 2002 accounted for about US$ 226.5 billion (Table 6), which has increased to US$279.5 billion in 2004. United States spent US$4 billion as subsidy to support its 25,000 cotton producers (US$160, 000 per producer) in 2003. 4

It is also argued that in countries such as United States, subsidies are enjoyed by a selected few, mostly producing corn, wheat, cotton, soybean, and rice, while growers of 400 other crops hardly get any such subsidy. Because of income and price support programs, the farmers in OECD countries are reported to use high levels of pesticides, fertilizers and herbicides in order to increase productivity of the land and maximize profits. But, these acts also lead to pollution of rivers and lakes. Therefore, in overall assessment, it is argued that the social benefits of subsidies may be much less and deserve to be curtailed (Cooper 2004) and also see information uploaded at http://www.ewg.org/farm/). Table (6) compares 2002 values of subsidy for India and selected OECD countries. Subsidy constitutes almost 54 percent of the agriculture value added in OECD as compared to seven per cent in India. This figure will further go down when taken as percentage of value of agriculture output. Opposition to subsidy is also from within than outside. In the case of United States six reasons are promoted to kill farm subsidy: (1) Lower Food Prices for American Families, (2) Lower Costs and increased Exports for American Companies, (3) Budget Savings and Equity for the U.S. Tax Payers, (4) More Environment friendly Land Use, (5) Lager Market for U.S. Farmers

 

Oxfam, “Agriculture Dumping in Africa.” July 8, 2003.

Economic Diversification for Rural America, and (6) A more Hospitable World (Griswold, Slivinsy and Preble 2006).It is not that, the farmers in OECD countries will become jobless if subsidies are removed. The population dependency on farm is extremely thin in these countries. It is not like India, where more than 60 per cent of the population depends on farm. In OECD countries the farmers can easily switch to better options quickly as demonstrated in New Zealand, which was heavily subsidizing its sheep farmers until 1984. The sheep farm subsidy was completely removed within a span of one year after 1984 and today New Zealand is one of the least subsidized countries among OECD countries, with a subsidy incidence of just about 0.3 billion (3 per cent of total farm receipt as compared to 30 per cent in OECD)5 in 2004.

India’s Readiness: Agriculture Policy Regime

As a general policy of trade reforms in India, some 1,400 quantitative restrictions including those on agriculture products were replaced by the custom tariffs. While tariff rates have been declining and aimed to achieve the level of ASEAN countries, the average MFN tariff7 is still over 20 per cent. However, almost all the tariff lines in the case of agriculture are bound 8

The MFN tariff is based on “standard” rates of duty, which are statutory tariffs and may only be changed through legislation. Binding plays an important role in signalling to the business community an upper limit for possible tariff increases. As a result of the Uruguay Round negotiations, India had bound about 67 per cent of its tariff lines, while applied tariff were kept below bound rates. Subsequently, India submitted rectification and modifications of its schedule under Article XXVIII: 1 of the GATT, 1994 and increased the number of bound tariffs from 67%, to 72.4% in 2001. Bindings have been undertaken for previously unbound products, such as textiles and clothing, while India renegotiated some commitments on previously bound . applied tariff on agriculture products in 2004 was about 49 per cent while the average bound rate was 125 per cent. In addition, anti-dumping measures have become an important element in India’s trade policy.With the removal of QRs on India’s imports, apprehensions have been expressed that such removal may impact the domestic producers adversely and result in a surge and dumping of imports into the country. However, necessary mechanisms have been put in place to provide adequate protection and a level playing field to domestic players vis-à-vis imports. Appropriate tariffication, at peak customs duty, have been effected for these QRs. A number of agricultural and horticultural products placed on the free list of imports in earlier years have also been brought to the peak rate to ensure adequate protection to Indian farmers. Tariff binding for such products have also been renegotiated at substantially higher levels. For sensitive agricultural products, suitable enabling provision has been made to fix the statutory tariff rates at appropriate high levels. It has also been decided to amend the 1992 Foreign Trade (Development & Regulation) Act for vesting the Government with necessary powers to impose QRs as a temporary safeguard measure. EXIM Policy announced on 31.3.2001 further provides for the following measures to protect the domestic producers:  Import of agricultural products like wheat, rice, maize, other coarse cereals, copra and coconut oil has been placed in the category of State Trading. The nominated State Trading Enterprise will conduct the imports of these commodities solely as per commercial considerations. Similarly, import of petroleum products including petrol, diesel and ATF has also been placed in the category of State Trading. Import of urea will also be done through the mechanism of State Trading.Imports have also been made subject to various existing domestic regulations like Food Adulteration Act and Rules there under, Meat Food Product Order, Tea Waste (Control Order) and import of textile material using the prohibited dyes has been banned. To ensure that import of agricultural products do not lead to unwanted Infiltration of exotic diseases and pests in the country, it has been decided to subject imports of all primary products of plant and animal origin to ëBio .Security & Sanitary and Phyto-Sanitary Permití. Import of foreign liquor, processed food products and tea wastes have been subjected to already existing domestic regulations concerning health and hygiene.

. What are the main features of the WTO Agreement on Agriculture which are of concern to India?

. The main features of the WTO Agreement in Agriculture which are of concern to India are:

i)                   India has been maintaining Quantitative Restrictions (QRs) on import of 825 agricultural products as on 1.4.1997. Under the provisions of the Agreement, such Quantitative Restrictions will have to be eliminated. India has sought to remove them in three phases within an overall time frame of six years upto 31.3.2003. These Quantitative Restrictions will have to be replaced with appropriate tariffs.

ii)                ii) The Agreement also imposes constraints on the level of domestic support provided to the agricultural sector. In India’s case, it may have in future some implications on minimum support prices given to farmers and on the subsidies given on agricultural inputs. However, the Agreement allows us to provide domestic supportto the extent of 10% of the total value of agricultural produce.

iii)               Disciplines on export subsidy do not affect us as India is not providing any export subsidy on agricultural products.

iv) The Agreement allows unlimited support to activities such as (i) research, pest diseases control, training, extension, and advisoryservices; (ii) public stock holding for food security purposes; (iii) domestic food aid; and (iv) Income insurance and food needs, relief from natural disasters and payments under the environmental assistance programmes. Moreover, investment subsidies given for development of agricultural infrastructure or any kind of support given to low income and resource poor farmers are exempt from any commitments. Most of our major rural and agricultural development programmes are covered under these provisions. Therefore, the Agreement does not constrain our policies of investments in these areas.

Conclusion

Though India has demonstrated that there exists broad political support to its economic reform programme, as has been proved by the transition of several Governments in the last decade through the political space, agricultural trade policy reforms need to be accelerated much more than what has been done so far. The challenge is to mitigate the inefficiency that exists in the Indian agriculture to close the gap between its potential and actual performances through a proper policy framework. India being a net exporter in agriculture products, it has more to gain from the trade reforms. It has sufficiently high bound rates on most of the products and therefore, flexibility can be ensured against unfair competition. India does not have to worry about its subsidy, as it is already below the required line and it also does not have any domestic support to recon with. All these place India in an advantageous position. Moreover, the ongoing negotiations are likely to yield enough flexibility in product choice and tariff selection. A multilateral trading system is in the interest of India, given the fact that it is placed in such a situation where no clear group fits well. Therefore, India should work towardthe success of the Doha round and in the mean time make use of the opportunity to reform its domestic market to bring in more efficiency. The interests of India are certainly at variance from the common interest of least developed countries, which became amply clear during the Tokyo and Doha Ministerials, when the least developed countries left India alone. Many of these countries are net importers of food and the subsidy in the exporting countries makes them better off. Moreover, under the Everything But Arms (EBA) initiative of the European Union, the LDCs have quota- and duty-free access to the EU market9, a facility that was never available to India. The services sector for India is critical to its growth and increasing the pace of industrial growth is its necessity. With favourable bound rates for agriculture onboard, the Negotiating framework of India must be different from that of other developing

countries. The situation is highly tenacious for India, particularly in view of the fact that the developed countries have managed to link agriculture subsidy with the market access in services and industry. If the European Union needs to do more on agricultural tariffs, and the US needs to do more on reducing agricultural subsidies, then the G-20 group of countries, where India is a key member, are also needed to do more on industrial tariffs. This is a hard ball game. Moreover, all these issues are dynamically linked to the future agenda of the WTO inter-alia in terms of substantial opening up trade in services; rules governing transparency in bilateral trade agreements, anti-dumping and Traditionally, India has fallen prey to the group dynamics because its interests do not fully confirm to the least developed countries, whose cause it used to champion nor does it radically differ from those of developed countries, who it confronts. Therefore, the time has come for India to come out of ambiguity and take a rational step in the negotiation process to harness best of its own interests. Some sacrifices are worth taking in order to gain a wider market.

 

References

Anderson, Kym and Martin, Will (eds) 2005 Agricultural Trade Reform and the

Doha Development Agenda, New York: The World Bank and Palgrave

Macmillan.

Bathla, Seema 2006 ‘Trade Policy Reforms and Openness of Indian Agriculture:

Analysis at the Comodity Level’, South Asia Economic Journal 7(1): 19-53.

Bhagwati, Jagdish 2005 ‘From Seattle to Hong Kong’, Foreign Affairs December

2005 — WTO Special Edition.

Birthal, P.S., Joshi, P.K. and Gulati, A. 2005 ‘High Value Food Commodities

and Vertical Coordination in India: Implications for Smallholders.”‘ Toward

High-Value Agriculture and Vertical Coordination: Implications for

Agribusiness and Smallholders, National Agricultural Science Centre, Pusa,

New Delhi, 7 March 2005.

Cooper, Sarah Fitzgerald 2004 ‘A Tough Row to Hoe’, Research Reports:

American Institute for Economic Research LXXI(18): 101-10

 

ASSIGNMENT OF DEVELOPMENT ECO AND INDIAN ECONOMY.

HARSH VARDHAN PATHAK.

SSE-I-09.

MSC INTEGRATED ECO.

 

BATCH 2011.

 

 

 

Used from our blog Brinks of economics Thoughts.

 

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World trade organ.isation;Agriculture and India

Eve before the result of General Election of 2014

{This was before run up to the declaration of the General election results 2014.}

 

 

So just last day before the results …

Strangely youth this time are more concerned about 16th may than,14th February..

A good sign for a nation full of youth population,that atleast youth are concerned about the election result,even there were times when youth discarded politics as game of people outly involved in corrupt practices…

We saw emergence of few leaders on the hopes of making efforts of removal of corruption,they made their mockery,,but still they initiated some positive energy,,which is very much needed in log run,,

What we might see tomorrow is a mandate,,we all hope that it is more stable government at centre..we are in a way very much affected by compulsions of coalition politics,,,so this is very much hoped that NDA must have strong majority,,,we can then look forward to stable government at centre which can speeden up vital steps for economic speedening,,strong efforts to strengthen our security establishment..

We are hopeful to enter into era of strong centre,,as more dependence on coalition partners deters speed and normal functioning,,

Record turnout this time indicates that people voted for change,,betterment,,,

Rest is to be seen tomorrow,,what has been the outcome of 9 phases long electoral exercise,,

But we voted,,,in hope of betterment,,stability

 

 

Harsh Vardhan Pathak

Doon University

 

 

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