Subsidies in the Global Food System I: India’s Subsidised Farm Inputs

28 August 2013 FDI Team

India’s agricultural input subsidy policies have fostered yield gains and even surpluses, but now threaten the long term sustainability of the agricultural industry and the health of the country’s economy. Adaptation may prove to be difficult, however, as these policies are deeply entrenched in the agricultural production system.

Background

The agricultural subsidy programme in India originated during the Green Revolution of the 1960s. It aimed to aid food self-sufficiency, lower food prices and benefit farmers. Electricity, water and fertiliser were subsidised, while high-yielding crop varieties were introduced. Agricultural input costs have risen in recent decades, yet the Indian Government continues to provide these inputs at little or no cost to farmers. Consequently, costs of agricultural subsidies now account for almost 25 per cent of government spending. While productivity has increased and food prices have fallen as a result of the scheme, it seems that the costs now outweigh the benefits.

Comment

The Indian Government provides free electricity and water for farmers, as well as subsidised seed, chemical inputs and transport. It also guarantees purchase by the government of all wheat and rice produced. This agricultural regime has certainly resulted in increased agricultural production; however, the extent of government intervention has impeded the development of functioning markets. The result is that inefficiencies and degradation now threaten India’s long term economic sustainability and agricultural productivity. Liberalisation measures implemented across other sectors of India’s economy, have failed to extend to agriculture.

Agricultural input subsidies and the Green Revolution prevented famine in many parts of India. Due to poverty, inefficiencies and corruption in supply chains, however, India continues to experience a high rate of malnutrition. Growth in grain yields has not matched increases in demand, nor has it resulted in efficient input usage. Farmers do not have the incentive to improve input productivity and have thus become dependent on the subsidies to sustain their production and incomes. As India’s demand for food continues to grow, the subsidy bill will expand also. The current level of government spending on the system is unlikely to be maintained, as the net loss generated is leading to persistent deficits. If the funds are not creating a sustainable agricultural system, they are an inefficient allocation of public resources.Greaterefficiency could be attained by allowing a market-based input supply chain for agricultural inputs to operate, but the current policy mechanism inhibits the development of a functioning market and the cost to poor smallholders would be disastrous.

The subsidy system is also causing the misallocation of resources, which may reduce India’s ability to meet its future food demand. Current growth in food demand is predominantly for vegetable and meat products, associated with the changing consumption patterns of the growing middle class. Demand for grain products is declining. The current policy regime is not suited to this change and is incapable of adapting. Rice and wheat crops account for three quarters of agricultural land area and 85 per cent of the gross value of crop output.Although there is now a surplus of these crops, farmers haveno incentive to diversify so long as the purchase of these crops is guaranteed. To ensure India’s long term food security, current policies must be adapted to allow producers to respond to changing market demands.

Subsidies also result in detrimental environmental impacts due to resource overuse, as farmers have no incentive to use freely available resources efficiently. Notably, groundwater extraction is occurring at more than double the recharge rate. Furthermore, as water resources are depleted, farmers respond by installing deeper wells that use more electricity, compounding the existing electricity overuse problem. This over-extraction is a key factor driving India’s severe and worsening water security situation. Other adverse environmental impacts are associated with the overuse of chemical inputs, leading to soil degradation, nutrient imbalance, and losses in ecosystem services and biodiversity. While the subsidies have resulted in increased yields, policy change is needed to create incentives for farmers to adopt more efficient practices, to prevent further degradation and promote efficient input usage.

The strategic implications of this policy regime for India are significant. For example, there is some possibility of tension with neighbours such as Pakistan, primarily associated with the differential costs of production causing tension between farmers.There is also the potential for more serious, long-term conflict over shared water resources, should current usage practices cause them to become scarce.

The difficulty is that internal instability, in the form of social unrest, could be widespread if dramatic policy changes are attempted, as farmers make up half of India’s population and thus exert considerable political pressure. Policy changes would be extremely unpopular among farmers, who rely on the subsidies as a form of income support. It is therefore necessary that any policy change is carefully designed, so as to encourage innovation in a way that farmers perceive will benefit them. Removal of the subsidies without compensation would harm household food security. To achieve subsidy reform without provoking unrest, will require changes thatinvolve multiple policy mechanisms, including extension, education and incentives. While adaptationis likely to be a challenging and complicated process, it is crucial. Continuation of the current policies will be detrimental to India’s food security, welfare and, in the long-term, economic growth.

Charlotte Jones
Research Assistant
Global Food and Water Crises Programme

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