Ironically, while the government is spending as much as Rs500 billion of taxpayer money on fertilizer subsidies annually, more than what it spends on education and health care combined, this has done little for the country’s farm economy. The blame goes to an inefficient subsidy system, in serious need of reform.
One positive move would be a shift to direct subsidies for the genuinely needy farmer’s use of fertilizers. But as his recent statement shows, fertilizers minister Ram Vilas Paswan doesn’t think it’s worth making the effort to ensure that the billions of rupees are used to better effect. Even though it is known that the prevalent system of subsidizing fertilizers through manufacturers has not delivered, whichever way we look at it—farmers or the industry.
The most glaring evidence, of course, lies in stagnant farm productivity, and in the poor soil quality thanks to skewed fertilizer use. Couple this with the findings of a study by NIPFP that showed that over the past 20 years, nearly 38% of fertilizer subsidies have gone to the industry and only 62% trickled down to farmers—where, naturally, the large farmers have benefited at the cost of the small, marginal farmers, and the import of the wastage comes through.
To top it all, we have an inequitable geographical pattern of fertilizer use because the way the subsidy is administered provides little incentive for the input to be easily accessible in the hinterland. As for the industry, the system has only encouraged inefficiency. The subsidy is determined based on the industry’s production cost plus its profit margin and the government controlled retail price. Those incurring higher costs for reasons including inefficiency get more subsidy! Not only this, the uncertainty in the regime has discouraged fresh private investment.
The situation is somewhat set to change, if things go well. Plans for decontrolling the industry are in the pipeline. As is a proposal for basing the subsidy on nutrients, rather than products. So far, policy has limited the use to specific products, ignoring crucial soil nutrients, and adversely affected the quality of soil. This should incentivize industry to offer a range of combinations suitable for different regions and crops.
However, for the best use of innovative fertilizer combines, farmers need to be free to choose—no doubt, they will have to be duly supported by awareness training and better farm extension programmes. A direct subsidy plan offers the flexibility to achieve this, while at the same time allowing the state to spend only on the small, marginal farmer.
Iffco, the country’s top supplier of soil nutrients, has come up with a technology-driven proposal using RFID —radio frequency identification device—akin to a smart card and is confident this can help deliver the subsidy directly into the farmer’s account. It suggests a pilot project in Haryana and Punjab where most farmers have bank accounts. Indeed, in regions where farmers can’t access banks, post offices or other outreach institutions of the government can well be used.
The finance minister in his Budget speech for 2007-08 had announced a pilot programme for at least one district in each state. But now Paswan is arguing that direct subsidies would lead to corruption and misuse and would be administratively expensive. This attitude is regressive. The minister insists that the practical approach on this front is a ‘scary’ one in the long term. That view comes as no surprise—after all, it means putting to an end the electoral benefits associated with status quo whenever the word subsidy crops up, just as we see in the case of water and power user charges for irrigation.
However, the time has come to address the chronic failures in our delivery systems (a la the veritable PDS!), not reject innovative, reformist proposals on the grounds that failures are bound to happen.
(Can direct subsidy for fertilizers work? Write to us at firstname.lastname@example.org)