Types of Farm Subsidies in Indian Agriculture: Irrigation and Power Subsidies; Fertilizer Subsidy; Seed Subsidy; Credit Subsidy

Subsidies in Indian Agriculture

Major subsidies on Agricultural Inputs

Power and Irrigation Subsidies:

Subsidies on power and irrigation are provided by the state governments.

Power subsidy is granted on power that is used to draw on groundwater. Accordingly, it is a subsidy to privately drawing and privately-owned means of irrigation. Power subsidy is the difference between the price paid by the farmer for the usage of electricity and the actual cost of generating the electricity.

The sustainability of the power subsidies has come under a lot of stress in recent years mainly because of the bad health of State electricity boards finances. The states like Punjab and Tamil Nadu has provided electricity to the farmers free of cost which has led to its wastage and financial losses to the state electricity boards. Estimates further suggests that the average cost recovered by the SEB’s form the agriculture sector is only 10 percent of the cost of generating electricity.

Irrigation subsidy is the subsidy provided on the usage of government provided canal water. Irrigation subsidy is the difference between operating and maintenance cost of irrigation infrastructure in the state and irrigation charges recovered from farmers. This may work through provisions of public goods such as canals, dams which the government constructs and charges low prices or no prices at all for their use from the farmers. It may also be through cheap private irrigation equipment such as pump sets.

Irrigation subsidies has become unsustainable mainly because the states have failed to device a rational pricing model for the canal water. Estimates suggest that the pricing of the canal water did not cover more than 20 percent of the operational and maintenance expense of the canals.

Fertilizer Subsidies

The fertilizer subsidies are borne by the Central Government. The need for the fertilizer subsidy arises from the nature of fertilizer pricing policy of the government. The fertilizer price policy is being governed with the following two objectives:

  • Making fertilizer available to farmers at a low and affordable price to encourage their use and increase production.
  • Ensuring fair returns on the investment made by the fertilizer industry to attract more investment in the fertilizer industry.

To fulfil the first objective, the government has been keeping the selling prices of fertilizers static and uniformly low throughout the country.

As far as the second objective is concerned, the government had come up with the policy of “Retention Price Scheme” in the year 1977.

Retention Price Scheme: Under RPS, the government fixes a fair ex-factory retention price for various fertilizers of different manufacturers. The Government pays the manufacturers their cost of production along with a profit margin of 12 percent (post tax) if the factory utilises the 90 percent of the installed capacity.

Calculation of Fertilizer Subsidy

Under the fertilizer pricing policy, the farmer gets the fertilizer at a pre-determined low rate called maximum selling price. The manufacturer was paid an amount called Retention Price which is fixed at a high level so that manufacturer can cover his cost and yet leave a 12 percent profit.

Fertilizer subsidies in the Post Reform Period

  1. The mounting burden of subsidies compelled the policy planners to make a serious attempt to reform the fertiliser price policy to rationalise the fertiliser subsidy. As part of economic reforms initiated in the early 1990s, the government decontrolled the import of complex fertilisers such as di-ammonium phosphate (DAP) and muriate of potash (MOP) in 1992, and extended a flat-rate concession on these fertilisers. But, urea imports continue to be restricted and canalised.
  2. Based on the recommendations of various committees including the High-Powered Fertiliser Pricing Policy Review Committee (HPC) and the Expenditure Reforms Commission (ERC), a New Pricing Scheme (NPS) for urea units was implemented in a phased manner from April 2003 with an objective to bring transparency, uniformity, and efficiency, and reduce the cost of production. Similarly, based on the recommendations of the Expert Group on P and K fertilisers, a policy for phosphatic and potassic fertilisers has been implemented.

Nutrient Based Subsidy Scheme

The Government of India implemented a Nutrient Based Scheme with effect from 2010. Under the NBS scheme, a fixed subsidy is announced on per KG based on nutrients annually. An additional subsidy is also given for micronutrients.

With the objective of providing quality fertilizer to the farmers depending on the crops and soil requirements, the government has included new grade of complex fertilizers under the NBS scheme.

Under the NBS, manufacturers are allowed to fix the MRP. The farmers pay only 50 percent of the delivered cost of Phosphate (P) and Potash (K) fertilizer and the rest is borne by the government in the form of subsidy.

Neem Coated Urea Policy, 2015:

The government has made it mandatory for domestic fertilizer firms to “Neem coat” at least 75 per cent of their urea production (It can even go upto 100%).Earlier, there was a cap of 35% on this. The government has also allowed manufacturers to charge a small 5 per cent premium on Neem-coated urea

Aim:

Checking the excessive use of urea which is deteriorating the soil health and adversely impacting overall crop yield

Benefits:

  • Reduce the subsidy outgo
  • Prevent diversion of urea for industrial use

Limitations:

The subsidy savings arising out of this pales beside the enormity (financially and politically) of the fertilizer subsidy that is paid on the three major fertilizers, N, P and K

New Urea Policy, 2015:

To incentivize domestic manufacturers and free transportation of P (phosphorus) and K (potassium) fertilizers. It will be in force from 2015 to 2019 (4 Financial years)

Need for the Policy:

  • India is world’s third-largest consumer of fertilizers
  • India is highly import-dependent in the case of urea. Presently, India is importing about 80 lakh metric tonnes of urea out of total demand of 310 lakh metric tonnes

Objectives:

  • Maximize indigenous Urea Production to reduce import dependency and reduce subsidy burden on the government
  • Promote energy efficiency to reduce Carbon-footprint (via energy efficiency) to make Urea production environment-friendly. [This will be done via revised specific energy consumption norms]
  • Make Urea production plant to adopt the best technology available and become globally competitive
  • Rationalization of Subsidy burden
  • Timely supply of Urea to farmers at the same MRP

Salient Feature:

  • The government will cover the entire cost of natural gas, which is the main feedstock of urea.
  • Movement plan for P&K fertilizers has also been freed to reduce monopoly of few companies in a particular area so that any company can sell any P&K fertilizer in any part of the country. Rail freight subsidy has been decided to be given on a lump sum basis so that the companies economize on transport. This will help farmers and reduce pressure on the railway network

Proposed Outcome:

  • Will cut the yearly subsidy bill
  • Increase annual production by 2 million tonnes

 

Imbalance in Fertilizer Use Consumption

The government interventions in the fertilizer policy over the years has resulted in uneven pricing structure and nutrient usage. The result of this is distorted pattern and application of the fertilizer usage in India. The application of N-Nitrogen, P-Phosphate and K-Potash in the farms is distorted. The ideal ration of N: P: K usage IN India is 4:2:1.

However, due to inaccurate price structure, the N: P: K ratio in India has become 10:3:1 in the year 1997-98. The ratio had further deteriorated in the succeeding years. The current situation is, however, improved a little with N: P: K ratio at 8.2:3.2:1 in the year 2013-14.

The reason for such a gross mismatch is the relative cheap price of the urea (Nitrogen) as compared to the other two nutrients Phosphate and Potash. The imbalance and excessive use of urea had also resulted in the degradation of the environment and soil fertility.

Seed Subsidy: Seed subsidy is granted through the distribution of quality seeds at a price that is less than the market price of the seeds.

Credit Subsidy: It is the difference between interest charged from farmers, and actual cost of providing credit, plus other costs such as write-offs bad loans. Availability of credit is a major problem for poor farmers. They are cash strapped and cannot approach the credit market because they do not have the collateral needed for loans. To carry out production activities, they approach the local money lenders.

Taking advantage of the helplessness of the poor farmers the lenders charge exorbitantly high rates of interest. Many times, even the farmers who have some collateral cannot avail loans because banking institutions are largely urban based and many times they do not indulge in agricultural credit operations, which is considered to be risky. (such as collateral requirements) can be relaxed for the poor.

Infrastructural Subsidy: Private efforts to construct basic infrastructure in many areas do not prove to be sufficient to improve agricultural production. Good roads, storage facilities, power, information about the market, transportation to the ports, etc. are vital for carrying out production and sale operations. These facilities are in the domain of public goods, the costs of which are huge and whose benefits accrue to all the cultivators in an area.

No individual farmer will come forward to provide these facilities because of their long gestation period and inherent problems related to revenue collections (no one can be excluded from its benefit on the ground of non-payment). Therefore, the government takes the responsibility of providing these and given the condition of Indian farmers a lower price can be charged from the poorer farmers.

 

By
Himanshu Arora
Doctoral Scholar in Economics & Senior Research Fellow, CDS, Jawaharlal Nehru University
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