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| Crisis in the fields and India´s agricultural policy
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How to phase out subsidies without committing political suicide? From Assam, Brian Orland
Once a catalyst for higher crop yields and a boost in agricultural production, today agricultural input subsidies in India are inefficient allocations of government agriculture expenditures. The consensus among the economic policy-making community, both within and outside India, is that agricultural input subsidies are now a major drain on the agricultural sector of the Indian economy. India’s subsidy-heavy agriculture and food policy contradicts the empirical evidence indicating that input subsidies on irrigation, fertilizer, and power are inefficient allocations to stimulate growth and poverty reduction compared to investments in capital. Even so, the continuing increase in subsidy expenditures and underinvestment in agriculture persists.
It is left up to India’s elected officials and politicos to find a way to phase-out subsidies without committing political suicide. For policymakers, it still needs to be determined which subsidies have the worst impacts on the agricultural community and which areas of agricultural investment have the most potential to raise agricultural productivity and reduce poverty.
Subsidies on chemical fertilizers have the most pernicious impact of the major input subsidies economically, as well as socially, and ecologically. Fertilizer subsidies provided the least return to rupees spent in the 1980s and were only ahead of irrigation subsidies in the 1990s. Also, empirical evidence indicates that additional investment in roads, education, and agricultural research has the most potential to increase agricultural productivity and reduce poverty. The opportunity cost of India’s large agricultural input subsidies has been underinvestment in these more productive expenditures.
India’s agricultural subsidies have been increasing, as a percentage of agriculture GDP and in absolute terms, while public investment in agriculture slightly decreased over time (Figure 1. Source: Fran, Gulati and Thorat, 2007 - see PICTURE GALLERY). Agricultural subsidies climbed from less than 50 billion rupees in 1980 to over 450 billion rupees in 2003 at 2000-01 prices (Figure 2. Agricultural Subsidies - Power, Fertilizer, and Irrigation and Public Investments in Agriculture 1980-2000 - see PICTURE GALLERY). The absolute value of subsidies has been on an upward trend since 1980 with the exception of 1985 to 1987 and for a brief period when economic reforms were undertaken in 1991. The sharpest increases in subsidies followed the brief downward periods (1987 to 1988 and 1993 to 1996). In contrast to the rise in subsidies, investment in agriculture as a percentage of total investment has been on a downward trend since the 1970s up until the present except for a brief period of increase between 1999 and 2003(1). By the 1980s the amount of agricultural input subsidies became larger than public investment in agriculture, and the distance between them has continually widened as subsidies have continued to increase and public investment has gone down.
Subsidies have had differing impacts on agricultural growth and poverty reduction across both decade and sector. Of the four input subsidies, the subsidies on credit have delivered the most consistent return in terms of agricultural growth and rural poverty reduction (Figure 3. Returns in Agricultural Growth and Poverty Reduction in Investments and Subsidies,
Source: Fan, Gulati, and Thorat, 2007 – see PICTURE GALLERY). In the 1960s, for instance, credit subsidies, per rupees spent, were more effective at producing agricultural growth than investment in irrigation. In the 1980s, credit subsidies had a greater impact on agricultural growth than investments in roads, irrigation, or education. It would seem logical that more money would flow to the subsidies achieving greater returns to agricultural growth and poverty reduction, yet from the late 1970s, expenditures on credit subsidies were much less than expenditures on fertilizer subsidies (Figure 4. Input Subsidies in Indian Agriculture in Rs. Billions - 1993 Prices.
Source: Fan, Gulati, and Thorat, 2007 – see PICTURE GALLERY). Since economic reforms in 1991, expenditures on fertilizer subsidies have been greater, at times more than double (1997-98), expenditures on credit subsidies, despite the fact that credit subsidies were more effective at creating agricultural growth and reducing poverty than fertilizer subsidies throughout the 1980s and 1990s(2).
Expenditures on power subsidies present an upward sloping curve over the last four decades, and in the 1980s surpassed expenditures on any other agricultural input subsidy. In 2002, it was more than three times as large as the next largest expenditure on an input subsidy (fertilizer). The increase in expenditures on power subsidies is justified by the increasing impact of these subsidies on agricultural growth and rural poverty reduction relative to the impact of the three other subsidies. In the 1960s and 1970s, power subsidies had the least impact on agricultural growth and poverty reduction out of any other type of subsidy or investment. But in the 1980s, it had a greater impact than fertilizer subsidies and in the 1990s more of an impact than both fertilizer and irrigation subsidies.
Compared to subsidies on power, irrigation, and credit, subsidies on fertilizer have the worst overall impacts for Indian agriculture. Even though irrigation subsidies produce even less agricultural productivity and poverty reduction than fertilizer subsidies, the impacts of the fertilizer subsidies constrain the impacts of the other three subsidies. In the course of liberalization in the early 1990s, India was able to remove much of the tariffs from phosphate and potassium fertilizers, the majority of which are imported, but the large tariffs on nitrogen (urea) remained at the behest of the domestic producers. As a result, urea became a lot cheaper relative to the other two fertilizers leading farmers to adjust their fertilizer application to favor urea.
Indian farmers, responding to fertilizer price signals and ignorant about the consequences of unequal fertilizer application, have been over-feeding their fields cheap urea, causing crop yields to drop, land degradation, and higher water intensity(3). Nitrogen, unbalanced by phosphorous and potassium, causes the land to degrade at a faster pace (requiring heavier urea applications every year) and requires that more water be used in the cultivation cycle. Farmers, many of which are at the mercy of monsoon patterns no matter how much fertilizer they apply, generate debt from expenditures on urea and high yield variety seeds (which they must buy every year). With degraded land and seeds that demand chemical fertilizer, farmers continue to purchase increasing amounts of urea in a struggle against decreasing crop yields. It is well known in the agricultural community, that no matter how much a farmer is in debt, he will continue to purchase urea on loan.
The history and impact of the urea subsidies is one example of how subsidies can outlive their original aim (in this case, to induce technological change) and become a drag on the economy and counter-productive to improvement in crop yield and poverty reduction. In the case of urea, it has also caused devastating ecological and social impacts. In many parts of India, over-use of urea has leached the natural nutrients from the soil, leaving much less fertile land. As a result, crop yields have decreased or remained stagnant in many areas for primary crops like wheat, paddy, and pulses. The amount of inputs to support even stagnation in crop yields has increased. Fertilizer sales continue to rise and groundwater reservoirs are being depleted at rapid rates. Debt among farmers, largely a result of seed and fertilizer purchases, has become a national issue in India where hundreds of farmers commit suicide every year instead of face their insurmountable debts.
In addition to the divergence of subsidies by type, agricultural input subsidies as a whole have been unequally distributed across states. According to the Indian Constitution, agriculture is a concurrent subject with the individual states largely responsible for allocations and expenditures. As a result, agricultural subsidies have been as small as less than 5% of agricultural GDP in Assam, Kerala, and West Bengal, and as large as 15 to 20% of agricultural GDP in states like the Punjab and Gujarat, Tamil Nadu and Madhya Pradesh (Figure 5. Input
Subsidies as Percent of Agricultural GDP 1997-99 (1993 Prices).
Source: Fan, Gulati and Thorat, 2007 – see PICTURE GALLERY). In terms of amount of subsidies per agricultural worker, the states of Assam, Bihar, and Orissa were ten to twenty times less than Punjab, Gujarat and Haryana (Figure 6. Input Subsidies per Agricultural Person in Rs. 1997-99 (1993 Prices). Source: Fan, Gulati, and Thorat, 2007 – see PICTURE GALLERY). How has this impacted differences in poverty reduction across states? A rough correlation shows that states with higher agricultural subsidies, in general, reduced poverty more than states in which subsidies were much lower(4). Assam, for instance, was only able to improve its poverty head count ratio less than a percentage point between 1987 and 2000, while Punjab more than halved its head count ratio percentage.
As a whole, subsidies have had less of an impact on agricultural growth and rural poverty reductions than investments (road, education, irrigation, and agricultural research and development), with the exception of credit subsidies in the 1960s and 1980s and fertilizer subsidies in the 1970s (Figure 2. Agricultural Subsidies (Power, Fertilizer, and Irrigation) and Public Investments in Agriculture 1980-2000 - see PICTURE GALLERY). One of the major opportunity costs of rising subsidies in India has been investment in capital formation to improve rural infrastructure. China’s experience with agricultural development in comparison with India’s indicates that a dearth of capital formation to improve rural infrastructure prevented India from reaching the same productivity and overall production gains that China achieved particularly from the late 1970s to the mid 1980s. In 1999, India’s productivity of paddy per hectare was less than half that of China’s(5).
Jawaharlal Nehru, India’s Prime Minister for the first 17 years after Independence, was confounded by the inability of Indian agricultural development to keep pace with China’s(6). In the First and Second Five Year Plans, Nehru’s government tried to emulate China’s success in using underemployed rural labor for capital improvements in agriculture through the cooperative farming model. But most Indian states’ failure to implement rural land reform made Nehru’s effort to catalyze cooperative farming communities a non-starter. With the benefits of capital improvements largely accruing to large landowners, small-scale and subsistence farmers had little personal incentive to volunteer their surplus labor to dig canals, and construct roads and bunds.
Following Nehru’s death, his successor Prime Ministers Lal Bahadur Shastri and Indira Gandhi decided to pursue the technological fix of high yield variety seeds and chemical fertilizers, which Nehru had dismissed as unnecessary to bolster agricultural productivity(7). Subsidies were introduced to stimulate the adoption of the new technologies, and crop yields soared in farms using the new seeds and chemical fertilizers. India’s “Green Revolution” was an overwhelming success for the underperforming agricultural sector. Higher production was achieved without agrarian reform or a national effort to improve rural infrastructure. Government irrigation projects were only undertaken in the areas where technological upgrade was concentrated, but the development of irrigation and transport infrastructure was not pursued for the country as a whole.
Now, thirty years after the Green Revolution, the problem of capital investment in the Nehru era has come back again to confront India’s economic policymakers. Continued failure to make these capital investments, evidenced by the falling rate of public investment in agriculture, means that India is not laying the groundwork for long-term improvements in productivity and poverty reduction. As one retired economist who worked in the Punjab recently remarked to me, this time there will be no easy technological solution. India’s next Green Revolution will be a lot harder to achieve. The phasing out of ineffective subsidies is the first of many difficult steps.
Notes:
1. See Fan, Gulati, and Thorat, 2007. Also see Raghbendra Jha Investment and Subsidies in Indian Agriculture, 2007.
2. For the benefit of credit subsidies to agricultural growth, see S.S. Acharya, Agricultural Marketing and Rural Credit for Strengthening Indian Agriculture, INRM Policy Brief No. 3, Asian Development Bank, 2006.
3. Geeta Anand, Green Revolution in India Wilts As Subsidies Backfire, Wall Street Journal, 22 Feb 2010.
4. This rough correlation was done using data from poverty head count ratio data taken at three points in time between 1987 and 2000 from: Angus Deaton and Jean Dreze, Poverty and Inequality in India: A Re-Examination, Economic and Political Weekly, 7 Sep 2002. http://www.princeton.edu/rpds/papers/pdfs/deaton_dreze_poverty_india.pdf
5. Desh Gupta, India’s Lagging Sector: Indian Agriculture in a Globalising Economy, May 2008. http://rspas.anu.edu.au/papers/asarc/WP2008_05.pdf
6. In a 1956 letter to the Chief Ministers, Nehru wrote in exasperation: “How are we to increase agricultural production? We know for a fact that some other countries have rapidly increased their food production in the last few years without any tremendous use of fertilizers. How has China done it? China’s resources in this respect are not bigger than ours. China is at the same time laying far greater stress on industrial development and heavy industry than we are. Yet, they are succeeding in increasing their agricultural production at a faster pace than we are. Surely, it should not be beyond our powers to do something that China can do.” Francine Frankel, India’s Political Economy 1947-2004, New Delhi: Oxford University Press, 2005. p. 141.
7. Francine Frankel, India’s Political Economy 1947-2004, New Delhi: Oxford University Press, 2005. p. 141.
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MA Candidate in South Asia and International Economics at
The School of Advanced International Studies (SAIS), Johns Hopkins University. He did research internship at the Strategic Foresight Group in Mumbai and at the Institute of Peace and Conflict Studies in New Delhi. He also did public health research at a leprosy hospital in rural Tamil Nadu. Received BA in Political Science from Davidson College, North Carolina.
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