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)

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5.0

10.0

15.0

20.0

25.0 1960s-1970s 1980s 1990s

Rs.

of

GD

P p

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Rs.

spent

in e

ach

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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!