Input Subsidies -- The South Asian Experience by Simeon Ehui
The South Asian Experience
Introduced --- primarily by donors --- in the early1970s to speed adoption of new technology andinnovations Original goal was to incentivize small farmers toadopt improved practices Minimum packages including seeds, fertilizers,and other inputs worked as long as donor’smoney was available
Significant input subsidies -- seeds, fertilizers, and water -- behind the spread ofGreen Revolution technology in South Asia India, for instance, shifted from food aid dependency to food exporting, despite highpopulation growth The argument that subsidies do not promote production or increase productivityis not credible, at least in the short run. Bardhan and Mookerheeji’s rigorous impact study inWest Bengal shows seed/fertilizermini-kits raised the value added per acre, generated employment, and promotedgrowth.Seed Water FertilizerMoreCrops
In many cases the rate of adoption among farmers was smallerthan expected Energy subsidies went to irrigated farmers while dry land farmerswho needed more rural infrastructure investment – roads,markets, science and technology received less. Fertilizer subsidies often led to a distortion in the application offertilizers In India, farmers applied only subsidized fertilizers, sometimesexcessively, which created a major ground water pollution problem. Behaviors didn’t change: few farmers were willing to adopt inputswithout subsidies
The burden on public expenditure Governments spending more on short-termagricultural activities than on long-term investmentprograms Poor targeting and corruption favor allow elitefarmers and operators to take the lions share ofthese subsidies Long-term impacts on the environment andproductivity
220.127.116.11.62.205.700.32.80510152025Subsidies Ag Budget Public GCFFood Fertilizer Other Electricity Irrigation Other Ag Exp. Res&Ext. Pub InvAllocation of Public Expenditures: Share of Agriculture and Allied Sectors, 2008-09Public Investment
In India, larger farmers get most of thesubsidy, better-off states get most of thesubsidy. Not so much by corruption, but by design Fertilizer, water, and power subsidies are usuallyproportional to the amount of land cultivated A farmer with 5 ha automatically gets more than thefarmer with 0.5 ha Most fertilizer subsidies went to the fertilizerindustry
In India, overusing urea (more subsidized than Pand K) is providing decreasing marginal returnsin terms of productivity gains In parts of Punjab and Haryana chemicals haveleached into the soil and started polluting thegroundwater affecting water quality creating health and other problems
Electricity subsides have a hugeimpact on agriculture Currently agriculture uses 30%of electricity supply at virtuallyno cost But they are highly effective andefficient – 88% of electricitysubsidies reach the farmers, but It promotes rice production inalready over-exploited areas of theNW Extraction exceeds recharge A 10% reduction in electricitysubsidy will reduce groundwaterextraction by 6.4%!
Misuse of free or nearly free resources is humannature. It is common to see farmers in head-end reaches ofsurface irrigation systems overusing water while tail-enders get nothing. Power subsidies contribute to falling water tables in largeparts of India. Subsidizing credit brings the short-term fiscal cost, but thelong-term impact on borrower behavior is more worrying.
“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 themthe 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.
Quantify all of the detrimental impacts Analyze the environmental consequences of fallingwater tables, waterlogging, water contamination, etc. Are productivity gains being held up byindiscriminately subsidizing inputs? Agricultural scientists sometimes look at input-output at afarm level Economists should take note, team up with scientists, andfigure out what this means at the macro level ofdistrict, state and country.