Fertilizer subsidy: Does it help increase output?

We were at an airport lounge waiting for our flight announcement. Among us were a politician, scientist, diplomat and an agriculturist. The discussion invariably shifted to paddy production and how it could be raised to make the country self-sufficient in rice. “Food security is an important requirement of the day,” the politician said. “Without sufficient food, no nation today is stable. All this time, we were preached the wrong sermon that our farmers need not produce paddy, but high income earning cash crops. The wisdom behind that was that we could import rice at a cheaper price if the need arises and give farmers a higher income by getting them to produce cash crops. The recent shortage of staple foods in the world market has made that so-called wise counsel a mockery.”

Both the scientist and the agriculturist nodded their heads in agreement, but the diplomat looked sceptic. “But, if the farmers don’t earn enough income to sustain themselves, how could they continue with paddy farming, even though paddy farming is a national priority?” he asked.

“That is why paddy farming should be subsidised,” the politician responded quickly. “All the countries in the world subsidise their farmers. Americans who ask us to do away with subsidies have been subsidising their wheat farmers all throughout. So does the European Union and Japan. If you need food, you have to bear that cost.”

The diplomat didn’t give up easily. He counter-argued. “Those countries are rich and can afford to pay subsidies. But, we are a poor nation. Our budgets are without resources even to undertake priority work. So, how do we find money to continue with subsidising paddy farming?”

Finding resources for subsidising paddy farming appeared to be a question not thought of by the proponents of the subsidy.
There was a silence for sometime and the agriculturist decided to break the silence with a solution. “Subsidy should not be viewed as a wasteful expenditure.

If it covers important costs like fertiliser, then it could be viewed as an investment. Then, the subsidy – the fertiliser subsidy – can be recorded as a capital expenditure in the budget. It is therefore only a matter of re-designing budgetary presentation,” he said.

Working Capital
At this stage, they looked at me to get my view on the proposal. “All the inputs which a producer uses for production constitutes working capital. So a farmer’s own labour, his hiring tractors, buying seeds, using fertiliser and pesticide, all these could be called his working capital.

But, when it comes to budgeting, classifying fertiliser subsidy as an investment by the government and presenting in the capital account does not make any sense. If you go for that treatment, then even the salaries paid to government officers can be categorised as investment. In that case, the whole budget becomes one big capital expenditure item,” I said.

“What about finding money for the fertiliser subsidy?” the diplomat raised the question again. “When the budget has a limited resource base, as in our case today…,” I said, “…to subsidise fertiliser, we need to cut expenditure elsewhere. So, the fertiliser subsidy is borne by someone else in the economy. It then becomes a question of giving priority. Whether we should give priority to fertiliser or to roads. If we decide on fertiliser, we have to give up roads.”

“Subsidising fertiliser should definitely be a priority item,” the politician interjected. “It helps paddy farmers to cut costs and produce more.”

“Isn’t fertiliser only a minor component of a farmer’s costs?” the diplomat asked and the agriculturist answered. “Yes, fertiliser is a minor segment of a farmer’s costs. The main segments are labour, tractors, harvesting and threshing. Fertiliser is even less than five percent of the costs,” he said.

“So, the fertiliser subsidy has only an insignificant role in reducing farmer’s costs. Even if you cut the fertiliser price by half, it reduces his costs only by about two and a half percent. If you want to help farmers, then you should subsidise his major cost components such as labour or tractor charges,” the diplomat clarified.

This opened the eyes of the scientist. “All this time we believed that fertiliser is the main cost component of a farmer. So, we even decided to launch a special research project on fertiliser application. Now it appears that it is not so important,” he said.
“The trouble with fertiliser subsidy is that its cost could balloon when the fertiliser prices rise in the market,” I said intervening.

“At that stage, it becomes totally unaffordable. This is exactly what has happened to us today. We started with Rs 4 billion. Sometime later, it went up to Rs 12 billion. Today it is more than double that amount at around Rs 25 billion. So, the best course is to give a good price to farmers and allow him to bear the costs. In that case, they will also learn to apply fertiliser economically,” I said.