The flip side of cash subsidies

The flip side of cash subsidies

With the formation of the Nandan Nilekani committee on cash transfers for fuel and fertilizer subsidies, the government has moved towards a system of direct cash subsidies from the product-linked subsidies prevalent now. The objective is to have a system of cash transfers for food as well, but this is being held back by the government’s commitment to enact a food security Bill, which will deliver foodgrains to the poor at cheap rates.

While there has been enough hullabaloo over the intended benefits that cash transfers will bring to the government by reducing the subsidy bill, their likely impact on the farming community has been glossed over. This is important, because most of these fuel and fertilizer commodities (except LPG) affect the way in which agricultural production is structured. Diesel and fertilizers are essential components of input subsidies that farmers get (constituting two-thirds of their paid-out cost) and Minimum Support Prices (MSPs) act as the price stabilizing mechanism on the output side.

Nowhere in the world—and this includes developed countries— does agriculture survive without subsidies. But in a country like India, where agriculture is the main source of livelihood (and sometimes the only source) for more than 50% of the population, subsidies are essential. Even then, subsidies in India are a fraction of those in the developed world, particularly the US and European nations.

A move towards cash transfers in diesel, fertilizer and food would effectively mean that agricultural subsidy would become cash based. In most such cases, the subsidy is given on the basis of land owned and crop grown. While this may seem easy, it comes with its own problems. How much cash per unit of land should you give? Should it vary with soil quality, availability of water and weather conditions? Should it vary with the kind of crop grown, since costs vary accordingly? But more importantly, do we have detailed, actionable information on all these indicators?

Even if some data on these can be made available, it would be difficult to get accurate land records in many states, given that vast tracts are under dispute in various courts. But even if that is taken care of, it will still leave out a significant proportion of farmers who are share croppers and tenants. On the other hand, absentee landlords and those who lease out land would be the beneficiaries of the subsidy transfer.

What do cash transfers then mean for Indian agriculture? If the objective is to reduce subsidies, then they will mean less leakage and, therefore, better utilization of subsidies. But this will be achieved only if the problems mentioned above are solved.

However, if the subsidies are meant to encourage productivity and better farming practices, and ensure food security and price stabilization, there is no guarantee that any one of these will be achieved. At the same time, they may end up discouraging small and marginal farmers—who are the backbone of our food production—and actually endanger the very foundation of food security.

The MSP system is a major part of the incentive structure in agriculture. But it works only when the announcements of MSP are backed by the government’s intervention in the foodgrain market. Support prices don’t mean much if the government just announces them and does not procure a substantial part of the agricultural output. This is what has happened over the years—MSPs are announced for many crops, including coarse cereals and pulses. However, unlike rice and wheat, where MSP announcements are backed up by procurement, there is negligible procurement of other crops. As a result, there has been a steady increase in the production of rice and wheat, but not of coarse cereals, pulses and oilseeds. Yields of pulses have remained stagnant for almost two decades now. This is despite the fact that India is a net importer of both pulses and oilseeds.

Compared with other sectors of the economy, agriculture is far more vulnerable to fluctuating prices driven by the market. But in the absence of any price protection, the worst impact of direct cash transfers could be a reduction in the area devoted to basic foodgrain cultivation. That will mean a double blow to farmers. Not only will they be vulnerable to fluctuating market prices, but in the absence of proper land records, poor quality of data and property disputes a significant part of them would also be out of the ambit of the input subsidies. The net impact could be a reduction in the growth rate of foodgrain production.

It is high time we looked at the debate on cash transfers not just through the narrow lens of subsidy reduction, but also from the wider perspective of stimulating agricultural growth. At a time when more than half of the population depends on agriculture, any hasty decision without creating adequate protection for them would jeopardize the basis of inclusive growth.

Himanshu is assistant professor at Jawaharlal Nehru University and visiting fellow at Centre de Sciences Humaines, New Delhi

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