Concise notes on Rising Agricultural Subsidies

Concise notes on Rising Agricultural Subsidies (Reference: India’s Agricultural Development under the New Economic Regime: Policy Perspective and Strategy for the 12th Five Year Plan Vijay Paul Sharma, W.P. No. 2011-11-01, IIM(A), November 2011.)

by Munish Alagh

The mounting burden of subsidies compelled the policy planners to make a serious

attempt to reform fertilizer price policy to rationalize the fertilizer subsidy.As part of economic reforms initiated in early-90s, the government decontrolled the import of complex fertilizers in 1992, and extended a flat-rate concession on these fertilizers. But, urea imports continued to be restricted and

canalized.

The estimates of fertilizer subsidy as per Central government budgets over the years in the post-reforms era show that fertilizer subsidy has increased significantly. The fertilizer subsidy has increased from Rs. 4389 crore in 1990-91to2010-11 (Rs. 54876.68 crore). As a percentage of GDP from agriculture and allied sectors, this represents an increase from 4.5 percent in 1990-91 to 8.3 percent in 2010-11. The total food subsidy has jumped to about Rs. 60600 crore in 2008-09 from 2450 crores in 1990-91, about 24.7 fold increase in less than two decades in absolute terms. But if one looks at the percentage of GDP, then the burden of food subsidies in India is much less than that of many other developing countries. The food subsidy in India as percentage of the GDP has varied from 1.6 percent in 1990-91 to 5.4 in 2009-10, and on an average remained at about 3 percent over the last 19 years.

The above analysis shows that the volume of subsidies increased substantially during the post reforms period. The rate of increase, however, was higher for food subsidy (compound annual growth rate of 17.1% per year) than for fertilizer (13.8%).

During the 2000s, fertilizer subsidy growth has increased significantly (25.2%) as against 13.6 percent during the 1990s, because international prices of fertilizers and raw materials, feedstocks and intermediates increased substantially and yet fertilizer farm gate prices remained constant in the country between 1991 and 2001 and 2002 and 2009. Growth rate in food subsidies was higher (16.6%) during the 1990s compared with 2000s (13.4%).

The main reasons for ever increasing food subsidies are (i) significant increase in

procurement prices of foodgrains, (ii) increased government procurement and storage costs, and (iii) no increase in issue price of foodgrains provided through public distribution system during the last decade. Therefore, in order to contain rising input subsidies, moderate and gradual increase in prices of inputs is necessary to reduce the burden on fiscal and more importantly, for inducing farmers to use these inputs more efficiently. Full decontrol of fertilizer prices may lead to very high increase in prices and adversely affect farm incomes and agricultural production. Sharma and Thaker (2010) have reported that fertilizer subsidy is more equitably distributed among farm sizes and small and marginal farmers have a larger share in fertilizer subsidy in comparison to their share in cultivated area. The benefits of fertilizer subsidy have spread to unirrigated areas as the share of area treated with fertilizers has increased and the share of unirrigated areas in total fertilizer use has also increased. A reduction in fertilizer subsidy is, therefore, likely to have adverse impact on farm production and income of small and marginal farmers and unirrigated areas as they do not benefit from higher output prices but do benefit from lower input prices. Therefore, there is a need to contain fertilizer subsidies but it should not affect production and productivity of small and marginal farmers, who might cut down use of fertilizers if prices increase significantly.