Why is substitution of agricultural subsidies inviable?

Guest blog by Vaibhav

• Indian economy is one of the fastest growing economies of the world, with major chunk of its population engaged in subsistence form of farming . Although agriculture sector accounts for maximum workforce but its contribution to GDP is comparatively very small.

Agriculture forms backbone of Indian economy and to cushion the farmer’s efforts who are poverty stricken, the government intervenes through tools like setting up MSP (Minimum Support Price), farm loan waiver and subsidies. The aim of these interventions is to provide advanced inputs which have scientific base to augment the productivity and farm income.

There are two major edifice put forward by savvy economists of contemporary time.

One, who bolster the current policy of indirect govt interventions through MSP subsidies etc.

Two, who put forward the proposal for universal income transfer or DBT(Direct Benefit Transfer) to farmers.

Why DBT or universal income transfer is inefficient to help the ryots?

• The amount spent on fertilizer subsidy is around Rs 62,000cr –  Rs 78,000 cr per annum . The money is allocated in different proportion on different nutrients as per the predicted demand in the sector. If you take stock over the number of farmers, the numbers are big and size of farms too varies a lot so consequently a blanket scheme for disbursement of money won’t work out and the disbursement will cause much more than the amount being spent on fertilizer subsidies. This will put extra pressure on government’s exchequer and will impact the infrastructure, R&D prospects in agricultural sector.

• There have been several research papers and reports which point towards the imperative role of human behaviour in consumption. As majority of the population lives below poverty line and does not have the means to attain autonomous consumption, the transferred money would be used for current consumption and that would downplay the proposed purpose of consumption in farm activities . This in long run will exacerbate farm distress with no subsidies on fertilizers and other inputs. The above situation may even lead to low production .

•The fundamental labor theory that studies the effects of increase in income point towards substitution and income effect. DBT and Universal basic income may lead to income effect on the farmers. MGNREGA  is an empirical case where the income effect has been observed . The guaranteed workdays and fixed income led the petty farmers to abandon farming which led to long stretches of land left barren, without cultivation. If that case emulates to entire farm sector, the production will drop and may even affect the food security.

• In order to to monetize the transfers, farmers have to visit banks and allied institutions at several instances which will lead to loss of working hour and the opportunity cost of availing such a diminutive sum will be high .

 Government’s flagship scheme PM Kisan Samman Nidhi Yojna which offers Rs 6000 per annum has proved to be good mechanism to boost the aggregate demand but has been of no benefit for the agriculture sector because the amount is too less to make any impact in income of individual farmer. The govt has fiscal constraint and it cannot afford to disburse substantial amount . This clearly points that DBT or universal basic income is just a mirage and can’t be implemented in real terms.

Way forward

• Schemes like DBT or universal basic income will be effective only when we move onto commercial farming. Shifting the excess or disguised workforce out of farm sector to other sectors along with other institutional measures will pave path for commercial farming. To transform the working class into employable workforce, government needs to work in a direction to build human capital that is only possible through public funded high quality education and health facilities.

• To fix the issue of black marketing, the government can come up with a new type of agriculture credit or coupon system wherein the credit or the coupons can be assigned to an individual, which could further be used to buy inputs of farming.

After contemplating the above arguments it is understandable that in current times we can’t replace subsidies with DBT or UBI . All sectors of economy are interdependent so we need to have a comprehensive policy to bring paradigm shift from the existing mechanism to a new which is more efficient and effective. We can’t go out with issue specific fixation. We need to have panacea for the economy as whole.

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