Understanding the role of Subsidies and Investments

in Indian Agriculture

Ashok GulatiDirector in Asia, IFPRI

Mumbai Media Forum on Subsidies and India’s Agrarian Distress

YMCA, Mumbai, March 26, 2007

Page 2

Growth performance of Indian Agriculture: Growth Rates in Agriculture and Overall GDP

6.0

3.4

6.7

5.5

7.6

9.0

3.2

1.3

4.7

2.1 2.3

4.1

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

Seventh Plan(1985-90)

Annual Plan(1990-92)

Eighth Plan(1992-97)

Nine Plan(1997-2002)

Tenth Plan(2002-2007)

EleventhPlan* (2007-

2012)

An

nu

al A

vera

ge

(%)

Gro

wth

Rat

e (a

t co

nst

ant

pri

ces)

Overall Agriculture & Allied

Source: Economic Survey 2006-07, GOI. *Towards Faster and More Inclusive Growth: an Approach to the 11th FYP, December 2006, Planning Commission, GOI

Note: Growth rates prior to 2001 based on 1993-94 prices and from 2000-01 onwards based on new series at 1999-00 prices

Page 3

Why have the growth rates in agriculture slumped?

Various hypotheses, but no agreement

• Falling public investments in agl.??

• Or rising subsidies??

• Or falling global prices after the east Asian crisis???

• Or domestic supply bottlenecks ??

• Or domestic demand constraints??

• Or????

Page 4

Understanding subsidies in Agl.

Budgetary and economic subsidies

While budgetary subsidies are often explicit and easy to estimate, economic subsidies are generally hidden and difficult to capture accurately.

To know the real story, challenge is to go beyond budgetary subsidies (A government could be subsidizing through budget, but taxing through trade policy: one foot on the accelerator and another on the brake!)

• (For details one may see Subsidy Syndrome in Indian Agriculture: Gulati-Narayanan, 2003, OUP)

Page 5

Implicit Subsidization/taxation of AGRICULTURE VS MANUFACTURING: India 1965-2005

(Source: Pursell, Gulati, and Gupta, 2007 (forthcoming)

Fig 7India 1965 to 2005: Agriculture versus Manufacturing Protection

-60

-40

-20

0

20

40

60

80

100

120

Pro

tect

ion

Rat

e

Manufacturing NRA

Agriculture NRA 11 crops

Agriculture DRA 11 crops

Page 6

Estimating Input Subsidies

Fertilizers: difference between import parity and what the farmers pay

Power: difference between cost of providing power to all sectors and what is the revenue tariff from agl.

Irrigation: difference between the O&M exp. and revenue from irrigation

Credit: difference in the rates of interest between agl and other sectors and defaults in agl.

(No definition is perfect and we are open to alternative definitions!)

Page 7

Trends in Input Subsidies (Billion Rps in 1993 price)

Source: Fan, Gulati, Thorat, 2007 (forthcoming)

0

50

100

150

200

250

300

Power Fertilizer Irrigation Credit Total

Page 8

Input Subsides and GDPSource: Fan, Gulati and Thorat, 2007 (forthcoming)

Input Subsidies as Percent of GDP

0

2

4

6

8

10

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

% of AgGDP % of GDP

rr

Page 9

Input subsidies (power, fer., irrigation) and public investments in agl. (NAS)

Source: Gulati and Narayanan, (2003)

0

40

80

120

160

200

240

280

Public Investment Subsidies

Subsidies

Publ ic

Investment

Page 10

Understanding investments in/for agl.

National Accounts Statistics (NAS, CSO) defines GFCF in agl. as GCFA minus Changes in stocks

By the type of institution • Public (government comm. Undertakings,

90% is irrigation)• Private corporate (plantations)• Private households ( a variety of investments

largely dominated by agl. Machinery, wells, etc.)

Page 11

Trends in public and private sector investments in agl. (Rs billion at 1993 prices)

(NAS)Trends and GCFA at 1993-94 prices

0

40

80

120

160

200

Year

Total Public Private

Page 12

Relative share of public and private investments in Agl. (NAS definition)

Share of Public and private sector in GCFA (at 1993-94 prices)

0

10

20

30

40

50

60

70

80

Year

Per

cen

tag

e

Public Private

Page 13

Agl. growth depends not only on investments in agl. but also for agl?

Dantwala had spoken in the past on this issue and many tried to capture this

But recently, few attempts to estimate public investment for agl:• Fan, Hazell and Haque (2000)• Ramesh Chand (2000)• Gulati and Bathla (2002)• GOI (2003) (DES, MOA Committee)

(Each one differs in scope and coverage)

Page 14

Trends in public investment for agl. (alternate concepts: Gulati-Bathla, 2002)

Public GCFA under Alternate Concepts at 1993-94 Prices

0

20

40

60

80

100

120

140

1980

-81

1981

-82

1982

-83

1983

-84

1984

-85

1985

-86

1986

-87

1987

-88

1988

-89

1989

-90

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

Year

Rs.

bill

ion

Concept 1 Concept II Concept III

Page 15

Diversity in levels and trends of investments for agl.

Except Fan et.al. (2000), all others show declining trend in public investments for agl., although their levels differ;

In Fan et.al. (2000), if you include rural education, the trend is pulled somewhat upwards(open to suggestions!)

Page 16

Input Subsidies and public investments for agl. (as per Fan, et.al. 2000) Rs. Billion at 1993 prices

0.0050.00

100.00150.00200.00250.00300.00

Subsidies Investment

Page 17

Measuring the impact of public investment for agricutlure? IFPRI Study (Fan, Hazell and Thorat, 1999)

Page 18

Returns in Ag GDPSource: Fan, Gulati, and Thorat, 2007 (forthcoming)

1960s 1970s 1980s 1990s

Returns in Agricultural GDP (Rps per Rps Spending)

Roads 8.79 3.80 3.03 3.17Education 5.97 7.88 3.88 1.53Irrigation Investment 2.65 2.10 3.61 1.41Irrigation Subsidies 2.24 1.22 2.28 n.s.Fertilizer Subsidies 2.41 3.03 0.88 0.53Power Subsidies 1.18 0.95 1.66 0.58Credit Subsidies 3.86 1.68 5.2 0.89Agricultural R&D 3.12 5.90 6.95 6.93

Page 19

Returns in Poverty ReductionSource: Fan, Gulati, and Thorat, 2007 (forthcoming)

1960s 1970s 1980s 1990s

Number of Poor reduced per Million Rps Spending

Roads 1272.29 1345.68 295.43 334.98Education 411.03 468.65 447.21 108.75Irrigation Investment 182.73 125.49 197.27 66.91Irrigation Subsidies 149.11 67.51 113.50 n.s.Fertilizer Subsidies 180.88 180.88 48.14 23.67Power Subsidies 78.68 52.31 82.52 26.9Credit Subsidies 256.6 92.54 258.51 41.73Agricultural R&D 207.30 325.57 345.24 323.30

Page 20

What does all this research imply?

Raise investments and contain subsidies;

Rationalizing each subsidy is a challenge: price reforms alone will not succeed.

Institutional reforms are more critical and must go hand in hand with price reforms

Page 21

What sort of institutional reforms?

Power: Towards creating competition?• “Unbundling” as in power generation, transmission and

distribution?• Two part tariff system with pre-paid electricity cards for the poor

• Irrigation: Involving WUAs as in canal irrigation and having Canal Regulatory Commission to bring transparency in investments

• Fertilizers: Abolishing RPS and opening up imports of urea

• Credit: Introducing NBFIs to reach small and marginal farmers

Page 22

But the future of agriculture will depend upon a New Vision of Agri-systemSource: Gulati, 2007

Input Suppliers

Farmers

Logistic Suppliers

Agro Processors

RetailersA Vision of dynamic complete Agri-System, where farms are fragmenting while all other segments are scaling up fast