India simply cannot afford to keep supporting agriculture the dumb way

By: | Updated: September 24, 2018 2:01 AM

Subsidies cost 8% of agri-GDP vs public investment of just 2.2%; the MSP-plan that costs 1% of GDP will make it worse.

India simply cannot afford to keep supporting agriculture the dumb way

Though Icrier and Syngenta Foundation economists Ashok Gulati, Marco Ferroni and Yuan Zhou didn’t say as much, that their book—released by finance minister Arun Jaitley—is called Supporting Indian Farms, the smart way makes it clear they feel this is being done the dumb way right now.

Dumb in the sense that, while the costs of subsidies are very high, just a handful of farmers corner these benefits. And so, at a time when the government needs to do a lot to help farmers—agriculture grew just 2.4% p.a. in the last four years—it doesn’t have the money to do so. Its recently announced MSP-based deficiency payments plan to help farmers could cost as much as 1% of GDP —`1.75 lakh crore—if market prices fall, as they often do, to 20% below the government-mandated MSP. The government clearly doesn’t have this money and, just last week, in response to the rupee collapsing and bond yields soaring, Jaitley promised investors that he would stick to his 3.3% of GDP fiscal deficit target and wouldn’t cut capital expenditure either.

Even without this, as Gulati/Ferroni/Zhou point out, agriculture subsidies were around Rs 170,811 crore in FY15, or around 8% of agriculture GDP—most of these subsidies like those on electricity or irrigation go to just a small fraction of farmers. Indeed, this doesn’t include Rs 190,000 crore spent to procure wheat and rice—this is counted under food subsidy for the poor—from just 4-5% of the farmers in the country.

While subsidies rose from 2.8% of agri-GDP in 1980-81 to 8% in 2014-15, government investments fell from 3.9% to just 2.2%. While the government must invest more in agriculture, subsidies for a handful of farmers beat investments 4:1.

Thanks to increased taxes over the past few years, Jaitley said, the government has more money to spend on agriculture. While he spoke of the need to harmoniously blend investment and subsidies, the government’s increased expenditure is mostly of the dumb type; increased expenditure on rural roads, though, is smart.

The `1.75 lakh crore on MSP-based deficiency payments will not just dramatically add to subsidies, what is more important is the damage this will cause. In the case of rice, for instance, MSPs will rise by 13.5%, making local rice costlier than that globally; India exported $7.8bn of rice last year. And, in the case of cotton, where MSPs will rise by 28%, this can potentially hit $20bn of exports of cotton-based products as Indian cotton gets more expensive than that globally. The saving grace, for now, is the collapse in the ` and the US-China trade war that is creating fresh openings for Indian exports.

Indeed, high MSPs for water-guzzlers like rice and sugarcane is also hitting the country’s water table. In Maharashtra, sugarcane is grown on 4% of the land but uses two-thirds of the water. And while the government has raised ethanol prices dramatically to help sugar mills find an alternative source of demand to pay for the excessively priced sugarcane, once oil prices fall to reasonable levels, oil PSUs won’t be able to afford the ethanol.

If, instead of wasting money supporting agriculture the dumb way, the government were to be smart, it wouldn’t need to spend as much and farmers would be better off. In order to keep prices low for consumers, India has historically banned exports or put other restrictions—like not allowing it to be sold across state boundaries—on farm produce. In the case of wheat, where India is very competitive, an export ban was imposed from February 2007 to September 2011; after the ban was lifted, exports rose to over $5 bn in 2012-13.

Gulati/Ferroni/Zhou calculate the Producer Support Estimate after taking these restrictions into account. Since this was minus 14.4% of the value of farm produce between 2000-01 to 2016-17, it means Indian farmers were effectively taxed by this amount. This tax is much higher than the subsidy-spend each year. Indeed, even the farm loan waivers, typically criticised by pink-papers such as this one, pale into insignificance when compared to this annual tax; that the loan waivers are so small compared to the ones big industrialists have got underscores this even more.

Interestingly, another point made in the Icrier-Syngenta study relates to the benefits to farmers from spending on farm R&D, to get better seeds and other inputs. While the top agri-biz firms like Syngenta, Bayer, Monsanto and Dow spend $6-7 bn on R&D each year as compared to less than a billion by India’s ICAR, it is interesting to note how, since Modi came to power, the government hounded Monsanto, by putting a cap on seed prices, then trying to put a cap on its royalties and even telling the court that the patent it had been granted in India was illegal! It is not clear whether the authors have got their message across to the government, but one thing is clear, and it is that India simply cannot afford to keep supporting agriculture the dumb way—it is too expensive and it does not work.

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