manasi mulye
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Agricultural Subsidies
The issue of agriculture subsidies is a highly politically sensitive issue and arouses strong passions both among the supporters of such subsidies and the opponents of these subsidies. The supporters have argued that food subsidy in India is essential to maintain & sustain the food security system & ensure a safety net for the poor. On the other hand, subsidies on agriculture inputs such as irrigation, power & fertilizers are necessary to enable the poor & marginal farmers to have access to them. If agriculture inputs are subsidised, the poor farmers will not be able to use them & this will lead to a decline in their income & productivity levels.
The benefits of subsidies on agricultural inputs are mostly concerned by large farmers & the industry while small & marginal farmers fail to derive much gain.
The issue of agricultural subsidies is not to be examined only from the point of view of ‘fiscal unsustainability’ but from a much wider perspective of ensuring food security & safety net for the poor & protecting the interests of the country in the new emerging international economic order that is taking shape under the aegis of the WTO.
Subsidies on agricultural inputs
Introduction of the high yielding varieties programme in the 1960s demanded to supplying irrigation, water & fertilizers to the farmers. Since these were ‘critical inputs’ for the new agricultural strategy, the Government tried to ensure that they were accessible & affordable. Subsidization of agricultural inputs thus becomes an important instrument of agricultural policy. Subsidy on fertilizers is provided by the Central Government while subsidy on water is provided by the State Governments. In this context, it is important to remember that subsidy on water is divided into two parts-power subsidy & irrigation subsidy.
Total subsidy on agricultural inputs was Rs.14069 crore which rose as much as Rs.36514 crore in 2002-03, i.e., in the span of a decade, subsidy on agricultural inputs increased by two & half times .
Power &irrigation subsidies
Power & irrigation subsidies are provided by the State Governments as water 7 electricity fall within their domain. The main reason for the high level of high subsidies is the pricing policy of the State Electricity Boards (SEBs).
The most important consequence of rapidly increasing power and irrigation subsidies is the heavy fiscal burden. Critics have been arguing that these subsidies have reached fiscally unsustainable levels & unless checked can pose serious problems for State finances. Moreover, the pricing policy on power has pushed the SEBs into heavy losses & this has, in turn, hampered their ability to undertake modernisation & upgradation of the power systems in the country. The marginal cost of power to the farmer is almost zero. This power pricing framework provides, what Gulati & Narayanan term, ‘perverse incentives’ to the farmers leading to excessive & inefficient use of power.
The rate at which exploitation of ground water has proceeded is likely to make ground water scarcer in coming years. This could adversely affect the very sustainability of agricultural development in future as water table is likely to drop drastically.
The whole method of calculating ‘power subsidy to agriculture’ is defective as the very base of calculating power consumption in agriculture is defective.
Because power is used for drawing water for irrigation, the water intensive crops (like rice & sugarcane) account for the significant portion of the subsidies
Larger farmers have benefited more from power subsidies as compared with small farmers.
As far as irrigation subsidies are concerned, low price of canal water induces inefficient use of surface water & its over-exploitation. It also leads to the problems of water-logging & salinity.
According to Gulati & Narayanan, rapidly increasing subsidies on canal irrigation also have adversely affected public sector investment in agriculture.
Fertilizer subsidy
Fertilizer subsidy is borne by the centre. This policy has been governed by the following two objectives: 1.making fertilizers available to the farmers at low & affordable prices to encourage intensive high yielding cultivation & 2.Ensuring fair returns on investment to attract more capital to the fertilizer industry. To fulfill the former objective, the Government has been statutorily keeping the selling prices of fertilizers at a largely static, uniformly low level through out the country. This has helped in increasing the demand for fertilizers considerably over the years. As far as the latter objective is concerned, the Government, under the Retention Price Scheme (introduced with effect from November 1, 1977) fixes a fair ex-factory retention price for various products of different manufacturers which allows for reimbursement of reasonable cost of production including a margin of profit, at 12 % on net worth if the factory utilizes 90% of installed capacity from the second year of the plant & achieves certain norms with regard to consumption of raw materials, utilities & other inputs.
Fertilizer subsidy becomes necessary due to the twin objectives of fertilizer pricing policy under which the farmer gets fertilizers at a low rate which is predetermined, called the maximum selling price. The manufacturer is paid an amount, called the retention price which is high enough to cover his costs & yet leave a 12% post tax return on the net worth. The difference between the retention price & the selling price is the subsidy paid by the Government. For imports, the subsidy is equal to the difference between the cost of imported material & the selling price.
The burden of subsidy on the Government has increased enormously. Fertilizer subsidy was Rs.505 crore in 1980. It rose to Rs. 4562 crore in 1993-94 &, to 13800 crore in 2000-01 and further to Rs. 16127 crore in 2004-05.
Presently urea is the only fertilizer which is under Statutory Price Control. To ensure adequate availability of fertilizers to the farmers at reasonable rates, subsidy is provided by the Government of India. Urea, the most consumed fertilizer, is subsidised under the New Urea Pricing Scheme, whereas phosphatic & potassic fertilizers, which are de-controlled, are covered, are covered under the Concession Scheme.
This had led to distorted & lopsided pattern of application of urea, phosphate & potash. The ideal average Nitrogen (N), Phosphate (P), & Potash (K) ratio use in India is 4:2:1. As against this, the ratio in India in 1991-92 was 5.9:2.4:1-not very much away the ideal ratio. However, due to the distortion in fertilizer pricing policy which made nitrogen (urea) much cheaper vis-à-vis phosphate & potash, the ratio becomes 9.7:2.9:1in 1993-94 & stood at 10:2.9:1 in 1996-97. This imbalance in NPK consumption implying excessive use of urea had adverse environmental effects & aggravated soil fertility problems. However, imbalance has been considerably rectified in recent years. The NPK ratio in 2006-07 was 5.9:2.4:1.
As stated in the beginning, fertilizer subsidy was initiated originally to encourage increased use of fertilizers by all farmers in a bid to boost up foodgrains production so that increasing requirements of the population could be met at affordable prices. Many economists have argued in recent times that RPS has outlived its utility & must be abandoned.
It is now being suggested that investment in irrigation is a better option. Studies conducted by James B. Quizon, Kirit S. Parikh & M.H. Suryanarayana & Ashok Gulati & Pradeep K. Elasticity of foodgrains output to irrigation is much higher than that to fertilizers, & also that investment in irrigation is superior to fertilizers, & also that investment in irrigation is superior to subsidizing fertilizers from the point of view of raising foodgrains production, & equity in its distribution.
The issue of agriculture subsidies is a highly politically sensitive issue and arouses strong passions both among the supporters of such subsidies and the opponents of these subsidies. The supporters have argued that food subsidy in India is essential to maintain & sustain the food security system & ensure a safety net for the poor. On the other hand, subsidies on agriculture inputs such as irrigation, power & fertilizers are necessary to enable the poor & marginal farmers to have access to them. If agriculture inputs are subsidised, the poor farmers will not be able to use them & this will lead to a decline in their income & productivity levels.
The benefits of subsidies on agricultural inputs are mostly concerned by large farmers & the industry while small & marginal farmers fail to derive much gain.
The issue of agricultural subsidies is not to be examined only from the point of view of ‘fiscal unsustainability’ but from a much wider perspective of ensuring food security & safety net for the poor & protecting the interests of the country in the new emerging international economic order that is taking shape under the aegis of the WTO.
Subsidies on agricultural inputs
Introduction of the high yielding varieties programme in the 1960s demanded to supplying irrigation, water & fertilizers to the farmers. Since these were ‘critical inputs’ for the new agricultural strategy, the Government tried to ensure that they were accessible & affordable. Subsidization of agricultural inputs thus becomes an important instrument of agricultural policy. Subsidy on fertilizers is provided by the Central Government while subsidy on water is provided by the State Governments. In this context, it is important to remember that subsidy on water is divided into two parts-power subsidy & irrigation subsidy.
Total subsidy on agricultural inputs was Rs.14069 crore which rose as much as Rs.36514 crore in 2002-03, i.e., in the span of a decade, subsidy on agricultural inputs increased by two & half times .
Power &irrigation subsidies
Power & irrigation subsidies are provided by the State Governments as water 7 electricity fall within their domain. The main reason for the high level of high subsidies is the pricing policy of the State Electricity Boards (SEBs).
The most important consequence of rapidly increasing power and irrigation subsidies is the heavy fiscal burden. Critics have been arguing that these subsidies have reached fiscally unsustainable levels & unless checked can pose serious problems for State finances. Moreover, the pricing policy on power has pushed the SEBs into heavy losses & this has, in turn, hampered their ability to undertake modernisation & upgradation of the power systems in the country. The marginal cost of power to the farmer is almost zero. This power pricing framework provides, what Gulati & Narayanan term, ‘perverse incentives’ to the farmers leading to excessive & inefficient use of power.
The rate at which exploitation of ground water has proceeded is likely to make ground water scarcer in coming years. This could adversely affect the very sustainability of agricultural development in future as water table is likely to drop drastically.
The whole method of calculating ‘power subsidy to agriculture’ is defective as the very base of calculating power consumption in agriculture is defective.
Because power is used for drawing water for irrigation, the water intensive crops (like rice & sugarcane) account for the significant portion of the subsidies
Larger farmers have benefited more from power subsidies as compared with small farmers.
As far as irrigation subsidies are concerned, low price of canal water induces inefficient use of surface water & its over-exploitation. It also leads to the problems of water-logging & salinity.
According to Gulati & Narayanan, rapidly increasing subsidies on canal irrigation also have adversely affected public sector investment in agriculture.
Fertilizer subsidy
Fertilizer subsidy is borne by the centre. This policy has been governed by the following two objectives: 1.making fertilizers available to the farmers at low & affordable prices to encourage intensive high yielding cultivation & 2.Ensuring fair returns on investment to attract more capital to the fertilizer industry. To fulfill the former objective, the Government has been statutorily keeping the selling prices of fertilizers at a largely static, uniformly low level through out the country. This has helped in increasing the demand for fertilizers considerably over the years. As far as the latter objective is concerned, the Government, under the Retention Price Scheme (introduced with effect from November 1, 1977) fixes a fair ex-factory retention price for various products of different manufacturers which allows for reimbursement of reasonable cost of production including a margin of profit, at 12 % on net worth if the factory utilizes 90% of installed capacity from the second year of the plant & achieves certain norms with regard to consumption of raw materials, utilities & other inputs.
Fertilizer subsidy becomes necessary due to the twin objectives of fertilizer pricing policy under which the farmer gets fertilizers at a low rate which is predetermined, called the maximum selling price. The manufacturer is paid an amount, called the retention price which is high enough to cover his costs & yet leave a 12% post tax return on the net worth. The difference between the retention price & the selling price is the subsidy paid by the Government. For imports, the subsidy is equal to the difference between the cost of imported material & the selling price.
The burden of subsidy on the Government has increased enormously. Fertilizer subsidy was Rs.505 crore in 1980. It rose to Rs. 4562 crore in 1993-94 &, to 13800 crore in 2000-01 and further to Rs. 16127 crore in 2004-05.
Presently urea is the only fertilizer which is under Statutory Price Control. To ensure adequate availability of fertilizers to the farmers at reasonable rates, subsidy is provided by the Government of India. Urea, the most consumed fertilizer, is subsidised under the New Urea Pricing Scheme, whereas phosphatic & potassic fertilizers, which are de-controlled, are covered, are covered under the Concession Scheme.
This had led to distorted & lopsided pattern of application of urea, phosphate & potash. The ideal average Nitrogen (N), Phosphate (P), & Potash (K) ratio use in India is 4:2:1. As against this, the ratio in India in 1991-92 was 5.9:2.4:1-not very much away the ideal ratio. However, due to the distortion in fertilizer pricing policy which made nitrogen (urea) much cheaper vis-à-vis phosphate & potash, the ratio becomes 9.7:2.9:1in 1993-94 & stood at 10:2.9:1 in 1996-97. This imbalance in NPK consumption implying excessive use of urea had adverse environmental effects & aggravated soil fertility problems. However, imbalance has been considerably rectified in recent years. The NPK ratio in 2006-07 was 5.9:2.4:1.
As stated in the beginning, fertilizer subsidy was initiated originally to encourage increased use of fertilizers by all farmers in a bid to boost up foodgrains production so that increasing requirements of the population could be met at affordable prices. Many economists have argued in recent times that RPS has outlived its utility & must be abandoned.
It is now being suggested that investment in irrigation is a better option. Studies conducted by James B. Quizon, Kirit S. Parikh & M.H. Suryanarayana & Ashok Gulati & Pradeep K. Elasticity of foodgrains output to irrigation is much higher than that to fertilizers, & also that investment in irrigation is superior to fertilizers, & also that investment in irrigation is superior to subsidizing fertilizers from the point of view of raising foodgrains production, & equity in its distribution.