Food and Fertiliser subsidies — Major drag on farm sector growth
S. D. Naik
With a chunk of budgetary resources being diverted to foot the growing subsidy bill, there have been significant cut-backs in public sector outlays on agriculture. The Budget should mention that the entire amount saved on subsidies would be used to step up public investment in irrigation projects, agriculture research and rural infrastructure. That will blunt the prevailing opposition to reduce food and fertiliser subsidies, says S. D. Naik.
THE skyrocketing subsidies on food and fertilisers have not only become the major contributors to the Centre's burgeoning fiscal deficit, but have also emerged as a major drag on India's farm sector growth in the post-reform period. With a big chunk of budgetary resources being diverted to foot the growing subsidy bill year after year, there have been significant cut backs in public sector outlays on agriculture since the early 1990s. The real public investment in agriculture (mostly in major and medium irrigation projects) has declined by about 20 per cent between 1994-95 and 2000-01.
The food subsidy bill, after rising from a modest Rs 2,850 crore in 1991-92 to Rs 7,500 crore in 1997-98, zoomed to an alarming Rs 24,200 crore in 2002-03 as per revised estimate (RE). It is projected to swell further to Rs 27,800 crore in 2003-04 (BE), thus touching one per cent of GDP. The food subsidy bill has been soaring continuously because of the wrong policies being pursued in respect of procurement and distribution of food grains.
The system of routinely hiking the minimum support prices (MSPs) year after year, often without any economic rationale, has benefited only the rich farmers of Punjab, Haryana, Uttar Pradesh and Andhra Pradesh at the cost of consumers all over the country. Thanks to the rising MSPs owing to intense political pressure from the farm lobby, rich farmers prefer to offload their entire produce to the Government's procurement agencies leaving very little to private trade. Consequently, the FCI godowns have been overflowing over the past few years and its holding costs have been rising to unsustainable levels.
Thus, in the name of food security, the Government is holding more than three times the required foodgrain stocks and incurring additional costs of between Rs 5,500 and Rs 6,000 crore annually. What is worse, a major part of the so-called food subsidy goes to rich farmers and the Food Corporation of India. The really poor and the needy are left in the lurch as the reach of the public distribution system (PDS) is confined to hardly 10 per cent of the weaker sections in the country.
What is worse, apart from bleeding the national exchequer, the policy has prevented the much-needed diversification of cropping pattern in the country. Even as food habits have changed over the years, the farmers continue to concentrate on growing wheat and rice because of assured MSPs instead of shifting to oil seeds pulses and other cash crops, which are in short supply.
Similarly, farmers in certain regions have concentrated on producing high cost sugarcane, thanks to unsustainably high prices paid to cane growers. Production of sugar has been consistently more than what we need for domestic consumption during the last few years. This has resulted in mounting sugar stocks and spreading sickness in sugar industry. The sugar co-operatives in Maharashtra and UP and in dire straits today and the Government is preparing a package to bail them out.
Another adverse consequence of rising MSPs along with heavily subsidised irrigation water and electricity is that the rich farmers continue to grow water-guzzling crops. Excessive weightage is given to highly water-intensive crops such as sugarcane and paddy while those needing much less water are starved of even modest requirements. Due to under-pricing of water, the State governments have not been able to find resources for their ambitious watershed development programmes. As a result, the groundwater table in many parts of the country has been going down at an alarming rate. This has serious long-term implications for the water management and sustainable agriculture. Experts have warned that scarcity of water and its erratic supply are likely to become the biggest threat to food security in the coming years.
As for fertiliser subsidies, the issue has been politicised to such an extent by successive Governments that it has been completely divorced from economic pragmatism. The Retention Pricing Scheme (RPS) for fertilisers introduced 1977, based on the Marathe Committee recommendations, to ensure a reasonable return on investment to the industry and help in raising production and consumption of fertilisers has long outlived its utility.
As many experts have pointed out, the RPS should have been discontinued at least after the launch of economic reforms in 1991, if not earlier.
Instead of doing that, the Government further compounded the problem by announcing the decontrol of phosphatic (P) and potassic (K) fertilisers in 1992 without simultaneously decontrolling, or at least rationalising, the prices of nitrogenous fertilisers.
The flare up in the prices of P and K nutrients soon after their decontrol (fuelled by the sharp increase in the prices of their imported inputs) resulted in farmers switching over to nitrogenous fertilisers in a big way. Consequently, there was a sharp drop in the consumption of P and K, leading to a huge imbalance in the NPK ratio that threatened to damage soil quality. To contain the damage, the Government was forced to offer ad hoc price support (subsidy by another name) to decontrolled fertilisers.
Thus, instead of moving towards total decontrol, the Government brought back, via the back door, controls even on the so-called decontrolled fertilisers. Yet, the distortions in the NPK ratio persisted because of the continued resistance to raise the prices of nitrogenous fertilisers. Every Finance Minister, who tried to increase in urea price even marginally, was forced to withdraw the same under intense political pressure. A small increase of 5 per cent in urea price announced by the Finance Minister, Mr. Jaswant Singh, in the 2003-04 Budget also met with the same fate.
Because of the imprudent policies followed over the years, the fertiliser subsidy has gone up from a modest Rs 505 crore in 1980-81 and Rs 4,389 crore in 1990-91 to Rs 13,800 crore in 2000-01. It is budgeted at Rs 13,400 crore for 2003-04 but the actual figure may turn out to be much higher.
Despite this, the resource poor farmers and those in unirrigated dryland areas have not benefited at all from this burgeoning subsidy on the national exchequer just as the poorest of the poor in the country have not benefited from the ever-rising food subsidy. The C. H. Hanumantha Rao Committee on fertiliser prices, which submitted its report in April 1998, had recommended a gradual deregulation of the industry and scrapping of the long-outdated unit-wise RPS for urea. However, its recommendations still remain on paper. Now, the Government proposes to switch over to a group-based concession scheme (GCS) for pricing of urea with partial decontrol of distribution with effect from April1, 2003. This may not make much difference to the prevailing mess in fertiliser pricing policy.
Clearly, the time has come for the Government to expedite total decontrol of fertiliser pricing and distribution. True, this may render some of the existing capacity, particularly that based on naphtha feedstock economically unviable. But this is not the case with fertiliser industry alone. Post- liberalisation, a large number of industries, saddled with weak and unviable units, had to restructure or close down. That is better than allowing the national exchequer to bleed indefinitely.
What is needed is a massive campaign to be undertaken by the Government to educate the entire political class to drive home the damaging consequences of growing food and fertiliser subsidies for agriculture and the interests of farmers. The political parties should be made to understand that most of the subsidies do not reach the farmers and consumers.
Weaker sections of the population could be given direct support through food coupons and farmers could be supplied with much cheaper imported fertilisers by lowering import tariffs. Resource poor farmers could be helped to get fertilisers at a cheaper rate through an input voucher scheme.
The total subsidy on food and fertilisers is budgeted at Rs 41,200 crore for 2003-04. If this is reduced drastically to around Rs 12,000 crore by better targeting, it is possible to raise public sector outlay on agriculture by Rs 30,000 crore annually. In fact, the Budget should specially mention that the entire amount saved on subsidies would be used for stepping up public investment in irrigation projects, agriculture research and rural infrastructure. That will blunt the prevailing opposition to reduce food and fertiliser subsidies and provide a big push to farm sector growth.