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Farming is dead; long live subsidies

Farming is dead; long live subsidies
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First Published: Wed, Feb 17 2010. 01 15 AM IST

In a fix: Avtar Singh, who owns 8 acres, is caught in a cycle of rising costs and near-stagnant farm income. Ramesh Pathania / Mint
In a fix: Avtar Singh, who owns 8 acres, is caught in a cycle of rising costs and near-stagnant farm income. Ramesh Pathania / Mint
Updated: Fri, Feb 26 2010. 08 34 PM IST
Faridkot (Punjab): Avtar Singh is a child of Independence. When, as a six-month-old toddler he came to India in early 1948, his family was almost penniless. By dint of hard work, the way most Punjabis of the era built their fortunes, the Singhs managed to acquire 23 acres of land. That was in 1965 when the going was good. Today, that landholding has fragmented as it has passed down generations.
In a fix: Avtar Singh, who owns 8 acres, is caught in a cycle of rising costs and near-stagnant farm income. Ramesh Pathania / Mint
Singh himself owns 8 acres of land. His brothers and their children own the rest. Singh’s farm is irrigated, a big benefit in a country where most agriculture is rain-fed, but he is caught in a vicious cycle of rising costs and near-stagnant farm income. His is a story of millions of farmers in Punjab, Haryana and other areas touched by India’s Green Revolution—the 1970s movement that stressed on irrigation and the use of fertilizers to increase farm produce.
“I don’t understand what went wrong. Today, I get almost 20 times higher yield than when I began farming in 1965. Yet, I barely manage to save anything at all,” the former headman of Kameana village in Punjab’s Faridkot district says.
A look at the costs incurred by him and the monetary returns from farming shows why. On average, Singh ends up spending Rs7,700 per acre on inputs such as fertilizers, pesticides and labour while cultivating rice of the non-basmati variety. His yield per acre is around 27-28 quintals (1 quintal equals 100kg). In nominal terms, his returns look impressive: With the prevailing minimum support price for rice of Rs1,050 per quintal, his gross revenue adds up to Rs28,350. If his input costs are accounted for, his return is a tidy Rs20,650 per acre. Does he, and most farmers like him, protest too much?
Life is more complicated than that. Singh has a huge loan to repay. He purchased a tractor some years ago. He also has to borrow money for operational costs (or working capital in industry lingo) every season from the local grain commission agent. This usually happens at the start of every sowing season. The interest alone eats up much of his returns. In Punjab, the interest rate on loans from moneylenders is in the range of 24% to 30%. Public sector bank are rather reluctant to lend money for these purposes. Even if they are willing, their paperwork and formal requirements often defeat farmers.
As a result, Singh tries to farm his land more intensively. His use of urea (a popular fertilizer) per acre has almost doubled: from roughly one-and-a-half bags per acre 15 years ago to close to four bags now (one bag equals 50kg). His use of DAP (diammonium phosphate, another fertilizer, but a more expensive one) has remained almost constant at one bag per acre. He rarely uses potassic fertilizers. The result is a greatly skewed NPK (so called after the chemical symbols for nitrogen, phosphorous, and potassium) ratio. The ideal NPK ratio is 4:2:1. In Singh’s case, it is close to 4:1:0. The average in Punjab, was close to 3.71:1:0 in 2006-07.
Singh is an experienced farmer and should know the harmful effects of excessive use of chemical fertilizers, but his behaviour indicates otherwise. “It works. If I use more urea, the yield improves. If I won’t do so, it will fall drastically,” he argues. And he is reluctant to use biofertilizers or, even better, leave part of his holdings fallow to allow them time to recover. “I cannot afford that. Any fall in yield or leaving a part of my field fallow will sink me.”
That’s the case all over Punjab, India’s granary.
After almost 40 years of relentless use, Punjab’s soil is addicted to chemical fertilizers. If their use is curtailed, foodgrain output will fall drastically. The consequences for the country’s food security and Punjab’s prosperity cannot be underestimated.
A chain of irrationality
There is an entire chain, from Singh upward to the state government to the Centre that draws benefits from the current state of affairs. Most subsidies—food, fertilizer and oil—can be explained by perverse incentives at each link in this chain.
In Singh’s case, for example, one bag of urea costs him Rs246 and one of DAP, Rs470. The subsidy per bag on urea is at least Rs530 and that on DAP, Rs1,030. This price differential is one big factor in the nutrient imbalance in Punjab.
There is broad agreement about this. In Chandigarh, the state capital, Punjab’s finance minister Manpreet Badal agrees that “”price differentials are leading to a skewed nutrient ratio”.
The Union government, as part of a larger objective to reduce the bill for fertilizer subsidy, which is estimated at Rs49,980 crore this year, is considering a nutrient-based subsidy scheme for fertilizers, even a direct cash transfer of the fertilizer subsidy to farmers.
Neither may work, says Badal. “Logistics would be my worry. Who is going to evaluate what every farmer uses and how much fertilizer is required in every field,” he adds.
“I am worried how could you physically transfer the subsidy to a farmer. In a country where land records are poor, doing this will be difficult.”
There are other options, such as transferring money directly to farmers through their bank accounts. But there are complications. Many farmers lease land and farm it. If land records are as incomplete as Badal says, it will be a challenge to identify farmers who pay for fertilizers and use them.
Physical, door-to-door handing out of money by state government officials (either those of the revenue department or the development bureaucracy) could turn out to be self-defeating in the face of corruption and inefficiency.
The issue is not that of farmers alone. There is a symbiotic relationship between the Union and state (Punjab and Haryana) governments when it comes to food purchases. At this level, farmers are only incidental to the story. These state governments levy taxes on the grains purchased by the Food Corporation of India. At one point of time, some years ago, these taxes and levies on the Union government’s purchase of foodgrains amounted to nearly 12.5% of the total value of purchases in Punjab. These were a source of perennial friction between the state government and the Centre. They also funded expenditure by the state government. The higher the amount of grain bought, the greater was the amount garnered by the state governments.
So, from the perspective of the states, it makes sense to push for constant increases in output, even if their ecological and other costs increase with every passing year.
At the Central level, a wholly different set of concerns takes over. Keeping inflation in check requires that the Union government have a ready reserve of foodgrains to douse the fire when prices rise. It is easy to do so if grains can be purchased easily from surplus states. The political costs of not doing so can be high: inflation is politically expensive. It also makes great sense to keep powerful farm lobbies, represented by regional parties in Punjab and Haryana happy: They get to keep their constituents happy, while the Union government has enough ammunition to fight inflation. There are few incentives to change the existing system.
The costs, of course, are staggering. Food and fertilizers subsidies alone accounted for Rs1.02 trillion. As for the ecological costs, they simply cannot be calculated.
“Our land had 24 elements/micronutrients when intensive cultivation (had) begun in 1962-63. There was shortage of only one or two such elements. Today, excessive subsidization of chemical fertilizers has ensured that very few farmers use natural fertilizers. The result is that in many parts of Punjab, soil is deficient in as many as 16 micronutrients. You can see the ecological costs for yourself,” says Sucha Singh Gill, an agricultural economist and former professor of economics at Punjabi University in Patiala.
Badal, too, is aware of the problem and argues for realistic policy choices. “ Ultimately you have to decide the cost of food,” he says and adds that “we have to look towards eastern India for food. Punjab and Haryana will not be able to meet the food requirements of the country.”
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First Published: Wed, Feb 17 2010. 01 15 AM IST