Rising dole hits both investment and productivity
With around Rs 175,000-180,000 crore of annual expenditure on agriculture subsidies, the government probably feels it is doing a lot for the farmers and, come election time, will probably boast about it to get the rural vote. Yet, as an Icrier analysis at its ‘Supporting Indian farms the smart way’ workshop shows, not only is the rising subsidy not helping agriculture as much as one would have hoped, it is worsening matters in various pockets in the country, and not just for the farmers. There is, of course, the obvious problem of large leakages. In the case of fertiliser subsidies that account for over 40% of the total agriculture subsidy, at current global prices, a large chunk of subsidies actually go to inefficient local producers—at a time when global commodity prices are likely to remain low, it is important to keep this in mind. And when the fertiliser subsidy reaches the farmer, it is the larger farmers who get the bulk of it. That, of course, also applies to water and electricity subsidies that, together, add up to around 4.8% of the agriculture GDP, or around 55% of all farm subsidies. At a macro level, the problem is deeper since, at 9% of agriculture GDP, the money spent is around three times that spent on investment in the sector—so, if expenditure on subsidies was to be reduced, this would enable the government to spend more on investment.
If the expenditure on subsidies had the same impact as an increase in government investment, it wouldn’t really matter. But, as the study points out, the money is better spent on investment, and by a long margin. For every million rupees spent on agriculture R&D, for instance, it finds that the number of poor would fall by 251—contrast this with a mere 11 in the case of the fertiliser subsidy and a negligible number in the case of irrigation. Every rupee spent on agriculture R&D, similarly, helps increase agriculture growth by R7.68—higher yielding seeds or, for instance, GM seeds that can withstand a flood/drought will boost farm output significantly. That same rupee, when spent on fertilisers helps raise agriculture GDP by a mere 35 paise.
The picture gets even worse when you take into account the negative impact of the subsidies. The most evocative example of this, of course, is the recent controversy over holding IPL matches in Maharashtra due to severe drought—as FE pointed out at that time, the 6 million litres of water that the IPL matches would consume was something used up in producing just 3 tonnes of sugar in the state versus the 9-10 million tonnes that is produced annually. With water available free, however, Maharashtra’s farmers don’t think twice about growing a crop that is mainly responsible for aggravating the crisis. Nor is Maharashtra alone—Punjab, for instance, uses more than twice the water that West Bengal does for cultivating rice, but nonetheless continues to be the biggest producer in the country. According to the Icrier study, nearly 80% of groundwater reservoirs in Punjab and 60% in Haryana are over-exploited, a direct result of the irrigation and power subsidy. Excessive use of urea, thanks to the huge subsidy on the fertiliser has, similarly, meant a massive imbalance in usage and a consequent reduction in fertility of the soil. Amazingly, despite the huge body of evidence showing the waste, successive governments have continued to push subsidies over investment—sadly, farmers seem to have fallen for the ploy.