Agrarian crisis: Direct transfer more efficient, effective than input subsidies

Updated: February 12, 2019 6:52 AM

The government subsidises agriculture in a number of ways. It provides direct subsidy through fixation of minimum support price for essential crops and purchase of machinery, drip and sprinkler irrigation under various centrally-sponsored schemes. The indirect subsidy is extended through provision of inputs such as irrigation, fertiliser and power at prices much below their cost of production.

Agrarian crisis: DBT more efficient, effective than input subsidies

By Seema Bathla & Anjani Kumar

The issue of agricultural subsidies in India has been a hot potato for long. The government subsidises agriculture in a number of ways. It provides direct subsidy through fixation of minimum support price for essential crops and purchase of machinery, drip and sprinkler irrigation under various centrally-sponsored schemes. The indirect subsidy is extended through provision of inputs such as irrigation, fertiliser and power at prices much below their cost of production. Short-term institutional loans are also advanced to farmers at lower rates of interest compared to the prevailing market rate. As of today, even the waiving off of institutional loans is becoming a norm. Input subsidies—though these aim to incentivise farmers to accelerate investment and output—have mostly been provided to compensate them for the loss owing to a deliberate policy to keep output prices low for consumers.

It goes without saying that the price-based support has been a catalyst in increasing the acreage and output of foodgrains and making India self-sufficient and food secure. But it has become a central concern of every policy discourse in India that the misconceived policy framework has made farming non-remunerative and squeezed farmers’ income mainly due to manifold increase in the price of inputs vis-à-vis output. The efficacy of input subsidies is, therefore, questioned on grounds of enormous fiscal burden on the exchequer, lower marginal returns from the additional expenditure, price distortions in input and output markets, and excessive use of inputs and their adverse impact on natural resources. Small farmers hardly benefit from subsidies due to prevailing corruption, leakages, lack of ownership of pumpsets and land titles.

The flow of subsidy has increased manifold over time. The subsidy estimated for fertiliser, power, irrigation (canal) and credit (interest) across 20 major states has grown from Rs 127 billion in 1983-84 to Rs 1,050 billion in 2013-14 (at 2004-05 prices)—at an annual rate of 6.2%. During 2013-14, per-hectare subsidy was Rs 7,891, with a high percentage share of fertiliser (36), followed by power (31.9), credit (19.5) and irrigation (12.6), respectively (according to IFPRI, 2017). Its share is almost 19% in the average net income of farmer estimated at Rs 42,000 per hectare.

Pulling out subsidies, as has been argued in various fora, is feared to increase input prices, especially of fertilisers that may adversely affect their application and consequently productivity and income. It may also be not a sound proposition in view of high volatility in output prices due to vagaries of nature and large uncertainties that farmers face in the disposal of the produce. The process of price discovery of commodities in the regulated markets (mandis) is still opaque, with hardly any policy intervention to support farmers in a situation of plunge in prices.

One feasible policy change that merits attention for the larger benefit of farmers is to opt for direct benefit transfer (DBT). Telangana has taken the lead by providing an investment support at Rs 20,000 per hectare (`8,000 per acre) irrespective of the size of the landholding, crops grown and inputs used. Lately, Jharkhand and West Bengal have also announced cash assistance of `5,000 per acre to farmers. Without deliberating into the rationale of fixation of this amount and modus operandi, we deliberate on the amount of cash transfer to farmers in lieu of the current practice of providing subsidised inputs.

One simple way is to transfer the amount that the government incurs on subsidy. For 2013-14, our estimates for 20 major states indicate a total expenditure on input subsidy at `1,970 billion (at current prices). Taking the net sown area of 138 million hectares, the average expenditure of Rs 14,000 per hectare can be directly transferred to farmers’ bank accounts. This amount tantamount to Rs 2,044 billion if the government decides to transfer cash as per total 145.7 million operational holdings across the country. It would considerably be lower at Rs 1,760 billion and save money if support is restricted to marginal and small farmers representing 86% holdings (Agriculture Census 2015-16). The second approach is to estimate the percentage increase in expenditure on input equals per-hectare subsidy/actual expenditure*100. Multiplying this percentage change (increase) with elasticity of production with respect to input price (i.e. cross price elasticity) provides an estimate on the impact of subsidy withdrawal on percentage loss in the value of output per hectare.

The third approach, which we have used for quantifying DBT in fertiliser, is to multiply the percentage increase in input price in a situation of subsidy removal with estimated cross price elasticity. It indicates a percentage reduction in the value of output, which is taken to represent loss in net farm income due to consumption of inputs at market price. It provides a case that the same amount be directed towards cash transfers in the form of income support. Our calculation based on NSS-AIDIS 2012-13 shows that keeping changes in demand, price of output and other factors constant, a complete withdrawal of fertiliser subsidy would result in an increase in price and hence a 12% decline in output, which can be prevented through cash transfer of Rs 5,180 per hectare, very close to `5,100 per hectare estimated under the first approach. The DBT for fertiliser varies from Rs 1,300 per hectare in Chhattisgarh to almost Rs 10,000 per hectare in Haryana, contingent upon its consumption and response to own price and output in each state.

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A DBT to the end-users, i.e. farmers, seems to be more cost effective. In case of fertiliser subsidy, the government doles out nearly `730 billion each year. This year, an additional amount of `700 billion is allocated towards a pilot project initiated in 14 states on sale to farmers, duly verified through e-machines installed at input dealers. The fertiliser companies will get a subsidy amount on receipt of sale records submitted by each dealer. Owning to high digital infrastructure requirements, errors in operating Aadhaar card and transaction costs of DBT to companies, it would barely save money. In contrast, the benefit of DBT to farmers at `14,000 per hectare is a guaranteed delivery to their accounts, which has never been the case due to rampant leakages and forced share of middlemen. It will also enable farmers in taking independent decisions on use of inputs. The cash transfer can be revised based on the rate of inflation, use of inputs and their respective prices.

The prerequisites for implementation of DBT are proper land records, appropriate strategy to target farmers by issuing ‘cultivator cards’, along with a criterion to cap the size of landholdings for receiving subsidy. This move should essentially exclude large farmers and enable small, marginal, tenant and women cultivators, who are large in number, generally indebted and devoid of land titles to receive the monetary benefits and come out of the agrarian crisis.

(Authors are agricultural economists at Centre for the Study of Regional Development, JNU, and International Food Policy Research Institute, Delhi, respectively)

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