The Sunday Times Economic Analysis

The Sunday Times Economic Analysis By the Economist

The case for and against fertiliser subsidies
In a recent television programme, Rupees and Sense, former Finance Minister and current Senior Adviser of the Ministry of Finance was posed a question that appeared to be an uncomfortable one. In the event, it turned out to be an excellent opportunity for Mr. Ronnie de Mel to give his views on the pros and cons of subsidies, without compromising on either his past role or his current position.

Many viewers may have missed the subtleties of his answer.
The question was direct and apparently simple. "Do you think the fertiliser subsidy is an investment?"The answer was knowledgeable, subtle and skillful. He went back to his period as Finance Minister when he gave across the board subsidies on fertiliser in the face of opposition by the World Bank and IMF.

He tamed these institutions, he told us, by inviting their heads here and showing them the dire conditions of our farmers. So Mr. de Mel implied he was for fertiliser subsidies in the public interest. There were two subtle points he made almost en passé. These were vital ones in the current situation. He said, almost casually, that the cost of the subsidy then was much less than today and that he gave the fertiliser subsidy for all cultivations. These in fact are the two important points that have to be considered. Is the cost of the subsidy too high to bear? Is it practical to give only a limited number of farmers this subsidy?

The cost of fertiliser has risen in the market and is likely to continue rising as it is a petroleum based product. The total cost of the fertilizer subsidy is huge. It is expected to be around Rs. 8.5 billion for paddy and in total the paddy subsidy is estimated at Rs. 10 billion. In fact it could rise if oil prices rise further. Since the fertiliser subsidy is not the only large subsidy and transfer payment, the total cost of these expenditures have an important bearing on the fiscal deficit. Therefore inflationary pressures are significant even though the fertiliser subsidy would have a beneficial impact on production. It is owing to this problem that the crafters of the budget restricted the subsidy to genuine paddy farmers. Therein lies another tricky problem that we will discuss later.

There are no doubt benefits from the fertilizer subsidy. Fertiliser cost would be more affordable to farmers and thereby it should make a contribution to paddy production and productivity. Consumers would also be benefited indirectly owing to the resultant reduction in the cost of paddy production. Therefore market prices for paddy are likely to be lower than if fertilizer was not subsidised. Consequently, the subsidy has a deflationary impact as well as an inflationary push. Mr. de Mel made the point that he introduced an across the board subsidy for all crop fertiliser.

This no doubt would be difficult to achieve in the current context of high import prices of fertiliser. But restricting the subsidy to genuine farmers is wrought with serious problems that could defeat the objectives of the subsidy. The fertiliser subsidy currently being implemented is meant to be given to genuine farmers, who can prove their credentials and they would be given a quota depending on the extent cultivated. That is a modus operandi that will result in intended beneficiaries not getting fertiliser.

The inherent deficiency is that when the market price is higher than the subsidised price, corruption to get hold of fertiliser at the lower subsidised price is inevitable. The recipients of the fertiliser at the much-subsidised price would in many cases be not the intended beneficiaries but others with influence and those who can bribe the distributors of the fertiliser. The seeds of corruption are within the policy proposal itself. Those with a capacity to influence the decision makers, such as officers implementing and distributing the subsidised fertiliser, powerful politicians and traders would get hold of the fertiliser and re-sell it at higher prices. This is inevitable. Only some farmers would obtain the requisite quantity of fertiliser at the subsidised price. The intended beneficiaries would be limited, the unintended beneficiaries quite large.

A fertiliser subsidy could make an important contribution towards increasing agricultural production and reducing the costs of production. Yet when such a subsidy is large and combined with other subsidy measures and welfare payments, the fiscal impact is detrimental to price stability. Further when the subsidy is large and given to selected individuals, it is likely to reach many unintended beneficiaries. These are the reasons for arguing that the present fertiliser policy could be costly and yet not achieve its stated objectives.

The objectives of subsidising fertiliser to farmers and reducing the cost of production would have been much better served had all fertiliser been subsidised at source and distributed unreservedly. This would have meant that there was no need for persons other than farmers to get hold of fertiliser. Farmers would then have had access to fertiliser at the subsidised price. Under such a scheme farmers would have obtained their fertiliser in time and in the quantities required. The objectives of increased productivity and production and improvement in farmer incomes would have been achieved. Unfortunately such a policy is too costly. The fertiliser subsidy that is being implemented is less costly but will not reach many farmers and therefore its objectives hardly served.

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