Input Subsidies
Simeon Ehui
The World Bank
The South Asian Experience
Input subsidies have a long history
Introduced --- primarily by donors --- in the early 1970s to speed adoption of new technology and innovations
Original goal was to incentivize small farmers to adopt improved practices
Minimum packages including seeds, fertilizers, and other inputs worked as long as donor’s money was available
It wasn’t all bad Significant input subsidies -- seeds, fertilizers, and water -- behind
the spread of Green Revolution technology in South Asia India, for instance, shifted from food aid dependency to food exporting,
despite high population growth The argument that subsidies do not promote production or
increase productivity is not credible, at least in the short run. Bardhan and Mookerheeji’s rigorous impact study in West Bengal shows
seed/fertilizer mini-kits raised the value added per acre, generated employment, and promoted growth.
Seed Water Fertilizer
More Crops
But it wasn’t all good, either In many cases the rate of adoption among farmers was
smaller than expected Energy subsidies went to irrigated farmers while dry land
farmers who needed more rural infrastructure investment – roads, markets, science and technology received less.
Fertilizer subsidies often led to a distortion in the application of fertilizers In India, farmers applied only subsidized fertilizers, sometimes
excessively, which created a major ground water pollution problem. Behaviors didn’t change: few farmers were willing to adopt
inputs without subsidies
India: Crop Sector TFP 1981-2008
0.00
50.00
100.00
150.00
200.00
250.00
300.00
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
Crop Sector TFP
Input index Output Index TFP Expon. (Input index)
Three major challenges face subsidized inputs
The burden on public expenditure Governments spending more on short-term
agricultural activities than on long-term investment programs
Poor targeting and corruption favor allow elite farmers and operators to take the lion's share of these subsidies
Long-term impacts on the environment and productivity
Subsidies dominate public expenditure in agriculture
Subsidies Ag Budget Public GCF0
5
10
15
20
25
4.1
7.2
0
3.1
0
2.6
2.20
5.7
0
0.3
2.8
Food Fertilizer Other Electricity Irrigation Other Ag Exp. Res&Ext. Pub Inv
Allocation of Public Expenditures: Share of Agriculture and Allied Sectors, 2008-09
Public Investment
Impacts of Different Public Expenditures (Fan, Gulati and Thorat 2008)
-
5.0
10.0
15.0
20.0
25.0 1960s-1970s 1980s 1990s
Rs.
of
GD
P p
er
Rs.
spent
in e
ach
are
a
Missing the target!
In India, larger farmers get most of the subsidy, better-off states get most of the subsidy. Not so much by corruption, but by design Fertilizer, water, and power subsidies are usually
proportional to the amount of land cultivated A farmer with 5 ha automatically gets more than the
farmer with 0.5 ha Most fertilizer subsidies went to the fertilizer
industry
Beyond Fiscal Impacts
In India, overusing urea (more subsidized than P and K) is providing decreasing marginal returns in terms of productivity gains
In parts of Punjab and Haryana chemicals have leached into the soil and started polluting the groundwater affecting water quality creating health and other problems
Electricity and Water Don’t Mix
Electricity subsides have a huge impact on agriculture
Currently agriculture uses 30% of electricity supply at virtually no cost
But they are highly effective and efficient – 88% of electricity subsidies reach the farmers, but It promotes rice production in
already over-exploited areas of the NW
Extraction exceeds recharge A 10% reduction in electricity
subsidy will reduce groundwater extraction by 6.4%!
Take human nature into account Misuse of free or nearly free resources is human
nature. It is common to see farmers in head-end reaches of
surface irrigation systems overusing water while tail-enders get nothing.
Power subsidies contribute to falling water tables in large parts of India.
Subsidizing credit brings the short-term fiscal cost, but the long-term impact on borrower behavior is more worrying.
Subsidies are highly political “Do as we say, not as we do” policy dialogue gets no
traction Subsidies are essentially the “third rail” of policy in our
countries Many of our clients have resigned themselves to the cost if
it gets them the political support In India,2012-13 food subsidies alone amount Rs 117,547
crores (US$21.7 billion) which is 23% of the budgeted fiscal deficit
This is a BIG DEAL for the Ministry of Finance and the Government – especially when it is not taming food inflation or promoting growth!
Still, the subsidies remain.
Need to change the conversation
Quantify all of the detrimental impacts Analyze the environmental consequences of falling
water tables, waterlogging, water contamination, etc. Are productivity gains being held up by
indiscriminately subsidizing inputs? Agricultural scientists sometimes look at input-output at a
farm level Economists should take note, team up with scientists, and
figure out what this means at the macro level of district, state and country.
Thank you!