Relevance: GS Paper III (Agriculture)
Why has this issue cropped up?
Recently Union Finance Minister Arun Jaitley remarked that India needs a good blend of investments and subsidies in its agriculture policy.
Policy followed by India to support farmers
The main policy instruments to support farmers in India include
- subsidised fertilisers,
- power,
- agri-credit,
- crop insurance, and
- minimum support prices for major crops
Negative price burden
- A recent study, conducted jointly by the OECD and ICRIER, estimated that India’s trade and marketing policies have inflicted a huge negative price burden upon the country’s farmers.
- The Producer Support Estimate (PSE) for India works out to be minus (-) 14 per cent of the gross farm receipts for the period 2000-01 to 2016-17. This is primarily because of restrictive export policies (minimum export prices, export bans or export duties) and domestic marketing policies (due to the Essential Commodities Act, APMC, etc).
The wrong way to support agriculture
Public capital formation in agriculture has been declining from 3.9 per cent of agri-GDP in 1980-81 to 2.2 per cent in 2014-15 — it recovered to 2.6 per cent in 2016-17 — while input subsidies on fertilisers, water, power, crop insurance and agri-credit have risen from 2.8 per cent to 8 per cent of the agricultural GDP during the same period. This is the “dumb” way of supporting agriculture, as the marginal returns on subsidies are far below those from investments.
Impacts of excessive subsidies in agriculture
- Excessive input subsidies have caused large-scale inefficiencies in the agriculture system. For example, fertiliser subsidies, especially on urea, have led to the imbalanced use of soil nutrients.
- The subsidy on irrigation water has resulted in an inefficient use of scarce water.
- Highly subsidised power has led to over-exploitation of groundwater.
- Subsidy on the interest rates on crop loans has diverted substantial amounts of agri-credit to non-agricultural use.
The right way to support agriculture
- The results show that expenditure incurred on Agri-R&E (Research and Education), roads or education are five to 10 times more powerful in alleviating poverty or increasing agri-GDP than a similar expenditure made on input subsidies.
- The rapid increase in input subsidies has squeezed public investments in agriculture. The results of the analysis, therefore, point out that India has not got the biggest bang for its buck being spent in the agriculture space. The smarter way to support agriculture and alleviate rural poverty would have been to increase investment in agriculture at a rate much faster than subsidies.
Way forward
- Although the new crop insurance scheme, PMFBY, has dramatically reduced the burden of premium paid by farmers, its effective implementation and the quick settlement of claims into farmers’ accounts remains a challenge.
- The best blend of subsidies and investments must now give more weightage to the latter, as the finance minister indicated.
- Investment in public irrigation is very expensive, as it involves long lags, and the gap between the potential created and potential utilised has increased over time. To give higher returns, this leaky system must be fixed, it should be made more transparent and the gap between potential created and utilised bridged.
- The present system of delivering subsidies through the pricing policy needs to be shifted to an income policy, which could be well-targeted, and leakages minimised— on the lines of JAM trinity. Many OECD countries, as well as emerging countries such as China, are moving in that direction. Indian farms can also benefit from this move where input subsidies at least are given as DBT on a per hectare (ha) basis.
- Investments need to be prioritised towards agricultural research and development, roads and education. If India needs to access that technology, it needs to develop a proper IPR regime, which is in the interest of farmers as well as investors.
Conclusion
Can India make bold moves to give its farmers access to the best technologies in the world, which in turn can augment their productivity and incomes and give the nation long-term food security? Only time will tell whether India follows smart or dumb policies in its agri-space.
