Dr Bharat Jhunjhunwala
The Government has cut subsidies on diesel and LPG in order to rein in the burgeoning fiscal deficit. Next on the firing line are fertilizer and food subsidies. But mere cut in subsidies is not the direction to go. More creative solutions are required which can lead both to better targeting and also reduction in financial burden. Take the case of fertilizer subsidies. The Government is providing huge subsidies to the manufacturers of fertilizers, especially urea. Many of these companies are inefficient. According to a document of the Finance Ministry only 46% of the amount was reaching the farmers in 1999-2000. The balance 54% was subsidizing inefficient producers. Second problem is that the farmer must have access to other complementary inputs, particularly irrigation, in order to buy the subsidized fertilizers. These inputs are available mostly with rich farmers. Thus the benefit of this subsidy accrues to rich farmers.
The Government had constituted a Committee under the Chair of Dr Y K Alagh few years ago to study this issue. Among the suggestions made by Alagh, one was to give fertilizer subsidy to the farmers directly in three districts on experimental basis. The same suggestion has been made by some economists. Standing Committee on Chemicals & Fertilizers in its Ninth Report for 2005-06 had also suggested giving “direct payment of subsidy to the farmers.” The fertilizer companies are opposing this move which is understandable. They stand to lose the subsidies being got by inefficient producers. But it is surprising that the Government has also dismissed this proposal on the grounds of administrative impracticability.
Main objection of the Government is that it will be near impossible to identify the actual purchasers of fertilizers so that they could be given compensation in cash. The objection is well taken. But there are other simpler ways that can be explored.
One way of distributing these subsidies would be to give the average entitlement of subsidy to every farmer irrespective of his use of fertilizers. The total consumption of fertilizers in a district divided by the cultivated land area gives the average use of fertilizer per acre. Say this comes to 50 kg per acre. Further assume the government is presently giving a subsidy of Rs 2 per kg. The entitlement of subsidy then is Rs 100 per acre. This amount can be sent to all farmers by registered post by cheque or tradable coupons. The farmer can purchase fertilizer against the coupon from open market at commercial rates and use coupons to pay for the same. The seller can claim the value of the coupon from the government. This scheme is administratively practicable.
The main objection to the giving of subsidy in cash directly to the farmer is identification of the farmer and establishing that he has actually purchased the fertilizers. These problems do not arise in the alternative scheme. All farmers may be given the coupons irrespective of whether they use fertilizers or not. It is likely that some farmers will sell the coupons to other farmers or to traders. Instead of decrying this, let us consider this as a payment to the farmers for maintaining our food security. Such across-the-board distribution will not reduce the use of fertilizers. Another person will purchase the coupon and buy and use the fertilizer. The net result will be that the subsidy will be shared between the farmer who does not use the fertilizer and the one who does. The farmers’ community as a whole will be benefitted in either case. The farmer should be given the freedom to either buy fertilizers with the coupons to encash them for meeting his other pressing needs because the total consumption of fertilizers remains unchanged. The gain is that the Government is freed from giving subsidies to manufacturers. Secondly, fertilizer will be sold in the market at the commercial rate. This will cause the farmers to use Nitrogen, Phosphates and Potash in tune with their market prices. Presently farmers are using excess Nitrogen because that is heavily subsidized.
Another objection is that the farmer can divert the subsidy for purposes such as marriages etc. This will lead to less use of fertilizers and lower food grain production. There is only part merit to the argument. This much is true that the subsidy may be used for marriages etc. But diversion of subsidy by one farmer will not make any difference to the total use of fertilizers. The farmer who purchases the coupon will use the fertilizer. The total consumption of fertilizer will remain as previously. Only it may be applied by farmer ‘B’ instead of farmer ‘A’.
The main benefits of this scheme are (1) The use of fertilizer will be in relation to its real commercial price and lead to efficient allocation of the nation’s resources; (2) Subsidy will reach the farmer rather than be appropriated by inefficient manufacturers; (3) Farmers will not be agitated by the high market prices of fertilizers because they are getting coupons; and (4) Government will make 54% savings instantly. It will be necessary for the government to distribute coupons of 46% of the present level of subsidy since that is what the farmers are receiving.
It may be pointed out that the United States runs a system of giving direct subsidies to its farmers for many decades. Indian leaders are ever willing to emulate that country in matters such as patents laws, free trade and human rights. Then why not follow that same country where direct distribution of subsidies is concerned? The real obstruction to implementing direct transfers is the bureaucratic self-interest. Government officials are loath to implement any scheme that will actually reach benefits to the people and not enable the bureaucracy tom take away a good slice of it.
A more important issue is whether we must give subsidy on chemical fertilizers or on straw and green manures. The government could provide subsidy on imports of straw so that the production of farmyard manure increases. Likewise subsidy can be provided on cultivation of green manures. Many reports are available which indicate that the use of chemical fertilizers in the advanced regions of the country has exceeded the optimal levels. Farmers are using higher levels of fertilizers but the production is stagnant because the ability of the soil to absorb the fertilizers and provide it to the plants is being eroded in absence of organic matter. Substituting fertilizer subsidy with subsidies on straw and green manures will lead to higher organic matter in the soil and help the country attain long term food security. Subsidy on imported pulp will lead to the same result. Paper factories will purchase less straw from the farmers and that will lead to more production of farmyard manure.
The Government must not hide behind the façade of administrative impracticability in order to provide benefits to the inefficient fertilizer industry and rich farmers.
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