Agricultural Subsidies

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 subsidized, 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.

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 subsidized under the New Urea Pricing Scheme, whereas phosphatic & potassic fertilizers, which are de-controlled, are covered, are covered under the Concession Scheme. Q1. Role of subsidy in Indian Farming Industry? Q2. Is there any impact of subsidy on the overall production given by a farmer? What if the subsidy is withdrawn? Q3. Do you feel that it is the right time to withdraw direct subsidy from the farmers? Justify