Subsidies : Issues & Solutions
- During partition India got 82% of population with 70% of land , thus creating pressure on land.
- Population outpaced agriculture growth rate which had traditionally remained slow in India.
- Green Revolution made India self sufficient in grains , however due to costly inputs and investment had only benefited big farmers.
- Jha Committe recommended subsidy on purchase of various agriculture input so as to incentivized farmers to adopt new technology.
- Government provided subsidy on fertilizer , electricity , irrigation and in form of price support and crop insurance.
Subsidies come in various forms including:
- Direct (cash grants, interest-free loans)
- Indirect (tax breaks, insurance, low-interest loans, depreciation write-offs, rent rebates)
- US subsidy on agriculture is more than India , however it has lesser proportion of population dependent on agriculture.
- Fertilizer subsidy is next largest food subsidy.
- Subsidy is tool for manupulation of growth rate and cropping pattern.
- Subsidy increased 8.32 times while productivity has increased 1.1 times when compared pre- liberalized period to post liberalized period.
- India is second largest producer and consumer of Potasium and phosphorous fertilizers.
The provision made during interim budget for major subsidies during 2014-15 are as under:
- Fertilizer Subsidy – Rs. 67970.30 Cr.
- Food Subsidy – Rs. 115000.00 Cr.
- Petroleum Subsidy – Rs. 63426.95 Cr.
- Interest Subsidies – Rs.8462.88 Cr.
- Other Subsidies – Rs. 847.49 Cr.
Economic survey rightly points out that despite spending as high as 3.77 lakh crore rupees annually on subsidies there is no ‘transformational impact’ on standard of living of masses.
While subsidies are target toward poor people, it is seen that mainly rich class is disproportionately get advantages.
- Economic Survey 2013-14 points out that subsidies burden leads to higher food prices, having “zero or negative” impact on agricultural output.
- Urea is highly subsidised.
- The correct proportions in which Nitrogen (N), Phosphorus (P), and Potassium (K) should be used are 4:2:1. However, the skewed subsidy regime, resulting in farmers paying lesser for urea compared to phosphorus and potassium, had led to urea overuse in the ratio 8.2:3.2:1
- The incremental output of the excessive units of N is zero or somewhat negative.
- The distorted policy has also led to stagnation of private investment in the sector, especially in urea, and increased reliance on imports.
- Centre had directed the fertilizer producers to switchover to natural gas or else subsidy will not be given. Under the modified New Pricing Scheme III (NPS) and to phase out old and inefficient units after adding new capacities.
Subsidies and its opportunity costs
In 2013, total expenditure by government was 13.8% of GDP. Out of this revenue expenditure (consumption) was 12.1% of GDP, leaving just 1.7% of GDP for Capital expenditure (investments). Out of this revenue expenditure, non-plan expenditure was 9.5% of GDP. Further, non-plan expenditure had following breakup –
- Interest payments – 36.9%
- Defense Services – 12.1%
- Subsidies – 24.2%
- Grants to states and U.T.s – 6.3%
- Pensions – 7.3%
- Others – 13.2%
- In all this, there is significant scope of reduction in subsidies as they are infested rampantly with problem of mis-targeting and leakage.
- This can be easily grasped from the fact that just shifting to cash transfers in distribution of subsidized LPG is expected to save annually Rs 15000 crore for the exchequer.
Significance of Subsidies
- Stable and Predictable Farming System: With the existence of Agricultural Subsidies, it will help most of the farmers to make use of latest farming system and effective equipments that are available in the agriculture industry. This way, their productivity will increase as well as their work would be easier and faster.
- Subsidized Farming: If most of the farmers will use the subsidized farming system, the consumers will not encounter price spikes like bad harvest and the price of basic needs will not increase.
- It is Great for Developing World: Agricultural subsidies can contribute in developing the impoverished world since the staples like sugar, wheat and milk are all in affordable price that most people can afford.
- Survival of farmers: Subsidies are essential for the survival of farmers. In the absence of subsidies the poverty and expenditure levels of farmers will deteriorate and affect their livelihood security as farmers will have to shell out money towards fertilizers which they are presently using for heath, education etc.
- Prevent distress migration by increasing the income of farmers.
- Subsidies are often criticized for their financial burden. Some researchers assert to the extent that these should be withdrawn in a phased manner.
- Critics say government expenditure must be shifted from these large and often unproductive subsidies to transforming rural infrastructure like roads, water supply, research, electrification and market support.
- Agricultural subsidies cause trade distortion in market prices.
- Major beneficiaries are large farmers.A survey commissioned by Nabard and undertaken by Punjab Agriculture University has confirmed that 94% of the government subsidies are being availed by big and medium farmers, leaving the smaller farmers for whom subsidies are actually meant sidelined.
- A study of the Indian Institute of Management, Ahmedabad published in international journal “climate change” in 2011 warns that Nitrous Oxide (N2O) emissions from excessive use of fertilizers by farmers in the country is significantly adding to global warming. The study suggests that better planning could increase the national food grain production without further increasing the emission.Also the nutrient imbalance in fertilizer use is destroying soils, causing pest infestations and lowering yields.
- Use of fertilizers in agricultural farms beyond a limit does not increase the amount of yield. From 2005 to 2009, the total use of fertilizers in Punjab has increased by 10 percent while food grain production grew only by around 3 percent.
- The magnitude and incidence of subsidies, explicit and implicit, have spun out of control; their burden on government finances being unbearable, and their cost being felt in terms of a decline of real public investment in agriculture.
- Agricultural subsidies distort the cropping pattern and lead to inter-regional disparities in development
- General subsidies on scarce inputs like water and power have distorted their optimal allocation
- Cover only inefficiencies in the provision of governmental services
- Subsidies like (food subsidies) have a predominant urban bias
- Deleterious effect on general economic growth of sectors not covered by the subsidies
- Agricultural subsidies are biased against small and marginal farmers
- impact of subsidies on the quality of environment and ecology
Recent WTO Issue: Doha round of negotiation
Trade Facilitation Agreement
- Objective : To facilitate flow of goods across international borders, removing red tape from customs procedures, reducing paper work, reducing delay at port, making system more transparent and accountable. Establishing a system of appealing customs decisions. Financial assistance will be provided.
- The current WTO norms limit the value of food subsidies at 10% of the value of food grains production, however support is calculated at the prices that are over two decades old.
- GOI guarantees farmers a min. support Price which is higher than the market price and sells foodgrain to consumers at a price much lower than market price through PDS.
- India has refused to ratify Trade Facilitation Agreement, it is the only country in the entire WTO membership to stop the deal from getting implemented.
- India wants permanent protection of the Govt’s Minimum Support Price against the WTO’s subsidy caps.
- TF agreement may have adverse effect on Public stock holding for security purpose.
- developing countries are been called upon for ore and more without little being offered in return.
- It was agreed in Doha that the WTO will correct the faulty subsidy rules of Agreement on Agriculture, as these rules suits subsidy system of developed countries and not ours.Developing countries have been granted protection till a permanent solution, the deadline is upto 2017
- At the Bali meeting of WHO in 2013, India along with other developing countries were able to negotiate a “peace clause” that would allow subsidy beyond 10% for next 4 years, within that time period permanent solution would be devised.
- Subsidies that developed countries give are much larger and far more trade distorting than our.
- South Africa is said to be backing India, further some African countries have raised concern over the aid they were promised would be able to revamp customs procedure.
- India is not ready for implementation of TFA.
- Indian consumers are shifting away from staples
- There are issues of food inflation and supply side constrains which should be given priority.
- There are evidences that subsidies in India have failed to reach intended beneficiaries.
- The current WTO negotiations create incentives to push for reform such as moving towards per acre agricultural subsidies in lieu of MSP and DBT.
- Liberalization in agriculture shall bring efficiency , competitiveness and more choices for consumers.
Need of Reforms
- Instituting systems for periodic review of subsidies
- Setting clear limits on duration of any new subsidy schemes
- Balanced use of fertilizers (NPK) and shift to greener manures.
- Making subsidies as transparent as possible
- Reducing the overall scale of subsidies.
- Subsidy distribution could be rendered more equitable by making it inversely proportional to the size of the holding.
Direct Benefit Transfers as a Solution
Given above are only few examples of subsidy support gone wrong. In such scenario, direct benefit transfers comes to rescue government from this problem. It is likely to have multiple benefits –
- Fiscal savings – Assuming explicit subsidies being extended by state in current form to remain between 3 to 4 lakh crores, DBT will curb this expenditure by around 15%, which is a conservative estimate of current leakages.
- It hits at roots of corruption – It is common knowledge that subsidized fertilizer is diverted to industrial use from agricultural sector, kerosene is mixed in diesel and PDS food is leaked in black markets.
- Direct transfers will eliminate intermediaries which will end system of rent seeking from beneficiaries.
- It is likely to control inflation – Distortions created by subsidy regimes discourage investment in relevant sectors. This creates supply side constraints in economy. It is expected that recent deregulation of diesel will increase production and private firms will reopen their retail outlets. This will create competition which often results in cheaper prices.
- Trading and purchase at market prices keeps demand in check. For e.g. subsidy on urea encourages farmers to use it more even when there is no due benefit. This created huge demand of urea and in turn high prices of unsubsidized urea. This scenario has increased government’s subsidy on urea manifold, which is not only waste but a disaster in itself. Similar case is with the food grains. DBT will leave more food grain in market and hence lower prices.
- Better nutrition – When there is cash transfer poor will be able to diversify their diet by including more items like pulses, eggs etc. This will increase their protein intake.
However, there is risk that some households will misuse this cash in social evils like alcohol, tobacco or gambling. For this government has made eldest women in a household target beneficiary for cash transfers. This step is likely to empower women.
Government launched PAHAL scheme – pan India initiative for transfer of direct benefits for Liquefied Petroleum gas. Its huge success and about 3 crore fake beneficiaries have been eliminated, which will contribute to annual saving of Rs. 15000 crore.
Direct Cash Transfer is also being implemented for transfer of wages in MGNREGS scheme. It has resulted in reduction in delayed and fake payments in relevant areas.
Further, Direct Benefit Transfer for fertilizers and kerosene is on the cards. In case of fertilizers government is facing problems in determination of beneficiaries because there is lack of clear land titles.
JAM Trinity – Jan Dhan Yojna, Adhaar and Mobile base
Direct benefits transfers intend to transfer subsidies directly to account of beneficiaries. For this to happen efficiently there are two separate but related issues which need to resolve as prerequisite.
- One is medium of transfer
- second is identification of beneficiaries
- For first, government is banking upon Pradhan Mantri Jan Dhan Yojna, under which more than 20 crore accounts have been opened. This is perhaps most significant step toward financial inclusion till date as unbanked population has been halved to 233 million.
- India has more than 900 million subscribers and out of these about 370 million users are based in rural areas. Currently internet penetration in India is about 40% and is expected to grow spectacularly once national optic fiber network is in place. This all will be developed into digital mobile or internet based cash transfer mechanism.
- Further, RBI has opted for differentiated banking by rolling out licences for Payment and Small banks. RBI last year issues 11 licences for payment banks to various corporate giants, telecoms and most importantly, India Post. India post is having about 155000 branches mostly in rural areas.
- Apart from this, in-principle licences for Small Finance Banks have been granted to 10 entities which will further enhance penetration of banking services.
- Apart from these initiatives, behavioral and technical remedies may be of immense use to control and target subsidies better. Under ‘Give it up’ campaigning, about 50 lakh LPG users have voluntarily given up there subsidy entitlements. On technological side, Urea is being neem coated, which while enhancing agricultural productivity, makes it unfit for industrial use.
Subsidies are essential for the survival of farmers. Farming, India’s largest private sector activity, is unprofitable for most. First change that reality, fulfil past promises, create alternative jobs and help develop skills. Only then can farm subsidies be lowered. Farm subsidies help increase productivity, generate employment on the farms, ensure low food prices and stanch the flow of rural population into towns and cities.
Subsidies are meant for poor people and they shall ensure equitable redistribution of resource. Subsidies extended to rich are regressive. Rationalization of subsidy regime will improve markets in India which will then attract more investment. This in short, can turn the wheel of a virtuous economy which creates more employment and attacks poverty at its roots.