IFPRI Policy Seminar "Input Subsidy Programs in Developing Countries What Works, What Doesn’t, and Why?" presentation by Simeon Ehui, The World Bank. Presented on 18 April 2013.

1. The South Asian Experience

2.  Introduced --- primarily by donors --- in the early
1970s to speed adoption of new technology and
innovations
 Original goal was to incentivize small farmers to
adopt improved practices
 Minimum packages including seeds, fertilizers,
and other inputs worked as long as donor’s
money was available

3.  Significant input subsidies -- seeds, fertilizers, and water -- behind the spread of
Green Revolution technology in South Asia
 India, for instance, shifted from food aid dependency to food exporting, despite high
population growth
 The argument that subsidies do not promote production or increase productivity
is not credible, at least in the short run.
 Bardhan and Mookerheeji’s rigorous impact study inWest Bengal shows seed/fertilizer
mini-kits raised the value added per acre, generated employment, and promoted
growth.
Seed Water Fertilizer
More
Crops

4.  In many cases the rate of adoption among farmers was smaller
than expected
 Energy subsidies went to irrigated farmers while dry land farmers
who needed more rural infrastructure investment – roads,
markets, science and technology received less.
 Fertilizer subsidies often led to a distortion in the application of
fertilizers
 In India, farmers applied only subsidized fertilizers, sometimes
excessively, which created a major ground water pollution problem.
 Behaviors didn’t change: few farmers were willing to adopt inputs
without subsidies

5. 0.00
50.00
100.00
150.00
200.00
250.00
300.00
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
Crop Sector TFP
Input index Output Index TFP Expon. (Input index)

6.  The burden on public expenditure
 Governments spending more on short-term
agricultural activities than on long-term investment
programs
 Poor targeting and corruption favor allow elite
farmers and operators to take the lion's share of
these subsidies
 Long-term impacts on the environment and
productivity

7. 4.1
7.2
0
3.1
0
2.6
2.2
0
5.7
0
0.3
2.8
0
5
10
15
20
25
Subsidies Ag Budget Public GCF
Food Fertilizer Other Electricity Irrigation Other Ag Exp. Res&Ext. Pub Inv
Allocation of Public Expenditures: Share of Agriculture and Allied Sectors, 2008-09
Public Investment

8. -
5.0
10.0
15.0
20.0
25.0
Roads Education Irrigation
investment
Irrigation
subsidies
Fertilizer
subsidies
Power
subsidies
Credit
subsidies
Agricultural
R&D
1960s-1970s 1980s 1990s
Rs.ofGDPperRs.spentineacharea

9.  In India, larger farmers get most of the
subsidy, better-off states get most of the
subsidy.
 Not so much by corruption, but by design
 Fertilizer, water, and power subsidies are usually
proportional to the amount of land cultivated
 A farmer with 5 ha automatically gets more than the
farmer with 0.5 ha
 Most fertilizer subsidies went to the fertilizer
industry

10.  In India, overusing urea (more subsidized than P
and K) is providing decreasing marginal returns
in terms of productivity gains
 In parts of Punjab and Haryana chemicals have
leached into the soil and started polluting the
groundwater  affecting water quality 
creating health and other problems

11.  Electricity subsides have a huge
impact on agriculture
 Currently agriculture uses 30%
of electricity supply at virtually
no cost
 But they are highly effective and
efficient – 88% of electricity
subsidies reach the farmers, but
 It promotes rice production in
already over-exploited areas of the
NW
 Extraction exceeds recharge
 A 10% reduction in electricity
subsidy will reduce groundwater
extraction by 6.4%!

12.  Misuse of free or nearly free resources is human
nature.
 It is common to see farmers in head-end reaches of
surface irrigation systems overusing water while tail-
enders get nothing.
 Power subsidies contribute to falling water tables in large
parts of India.
 Subsidizing credit brings the short-term fiscal cost, but the
long-term impact on borrower behavior is more worrying.

13.  “Do as we say, not as we do” policy dialogue gets no traction
 Subsidies are essentially the “third rail” of policy in our countries
 Many of our clients have resigned themselves to the cost if it gets them
the political support
 In India,2012-13 food subsidies alone amount Rs 117,547 crores
(US$21.7 billion) which is 23% of the budgeted fiscal deficit
 This is a BIG DEAL for the Ministry of Finance and the Government –
especially when it is not taming food inflation or promoting growth!
 Still, the subsidies remain.

14.  Quantify all of the detrimental impacts
 Analyze the environmental consequences of falling
water tables, waterlogging, water contamination, etc.
 Are productivity gains being held up by
indiscriminately subsidizing inputs?
 Agricultural scientists sometimes look at input-output at a
farm level
 Economists should take note, team up with scientists, and
figure out what this means at the macro level of
district, state and country.