More Investments the Way Forward for Agriculture?

By Sivakami Prasanna,

(Image source: Business World)

At the time of India’s independence subsidies were necessary as they were important for the small and marginal farmers to access inputs and to encourage them to adopt new technology. But now subsidies are slowly outliving their utility. Subsidies given to the agricultural sector of India have increased from `50,440 crores in 2000 to `1,08,682 crores in 2010. Total subsidies that were given to the agricultural sector in the year 2018 was `57,600 crores.

The Ministry of Agriculture and Farmers’ Welfare is divided into three departments and in 2018 the grants were divided as following:

1. Agriculture, Cooperation and Farmers Welfare: 81 per cent

2. Agricultural Research and Education: 14 per cent

3. Animal Husbandry, Dairying and Fisheries: 5 per cent

While 81 per cent of the grants go for providing agricultural subsidies, only 14 per cent are allocated for investments in agricultural research. Subsidies have progressively increased from 2.8 per cent in 1980–81 to 8 per cent in 2014–15. But many times they have not served their purpose; often mistargeted or not implemented properly and biased towards certain crops and regions. They also

distort trade and damage fiscal budget by pushing up revenue and fiscal deficit.

Investment in agriculture can come as private investment, public investment and foreign direct investment. While private investment can be done by rich farmers, poor farmers lose out on the benefit of investment which increases the already existing gap between the rich and poor farmers.

Investments in agriculture have reduced to 2.2 per cent in 2014–15 from 3.9 per cent in 1980–81. The major areas in agriculture where we can increase investment are irrigation, fertilizers, research and development, post-harvest management, rural infrastructure and communication.

India’s Sugarcane Industry

India produced 32 million tonnes of sugar in the year 2017–18, which was more than the quantity the domestic industry and the foreign market demanded. The industry is provided with transport, export and input subsidies. The minimum support price ensured for sugarcane by India is also higher than the international prices. The transport, freight and handling charges would also be reimbursed.

The sugarcane industry is a good example of the negative impact of subsidies in the market and government’s inclination to take decisions that are affected by populism rather than the sustainability of these decisions. Our subsidy policies have led to a ‘glut’ in production. While the steps taken by the government might guarantee temporary respite to the sugarcane farmers, it may have

disastrous consequences in the future.

Comparative Analysis of Investments and Subsidies

Analysing the following,

1. The money being progressively spend on investments and subsidies

2. The impact of these subsidies and investments

3. A comparison of the returns given by investments and subsidies

we come to the conclusion that investments are much more effective than subsidies and this is because of the following reasons.

1. Investments are made directly; this ensures the elimination of any intermediaries. There is a better targeting of the beneficiaries.

2. Small and marginal farmers who do not have the capital for investment solely depend on government investment. Large scale expenditures on dams and multi-purpose projects are a good example.

3. Investing in communication, transportation and post-harvest management will ensure a higher profit and lower cost of production.

4. Investments are a sustainable solution. They are long-term solutions unlike subsidies, which are short term and only a part of the solution.

Green revolution’s success reflects a period when the government focused on the importance of both subsidies and investments. Green revolution practised selective investment. At the time of green revolution, public expenditure in agricultural research in 1964 was 1.64 billion. There was an average annual growth rate of 5.8 per cent in 1995 prices to 7.1 billion in 1990.

As a percentage of total agricultural expenditure, agricultural research and development was about 0.21 per cent in 1964 which was increased to 0.50 per cent in 1987.

The construction of dams, multi-purpose projects and expenditure in rural health, education and infrastructure during the initial years of independence helped India in achieving self-reliance in the production of crops. This was accompanied by high yielding variety seeds, fertilizers and other inputs at a lower price. Minimum support price further increased the farmers’ confidence to cultivate.

Thus, it can be concluded that the returns from investment in agriculture are much more than the subsidies. Subsidies are necessary in the initial phase of a country’s development and once the targeted growth is achieved, these needs have to be phased out. However, in a country like India subsidy becomes an increasingly politically sensitive issue. The government finds it impossible to

phase them out. Also, subsidies need to be rationalised and the excess money has to be allocated by the government to investment expenditure within the agricultural sector.

The government has to start phasing out input subsidies slowly and there should be a blending of both investments and subsidies. They need to balance and complement each other for the best possible returns. Also, the criteria for granting subsidies have to be tightened based on the income group, social group and region.

The subsidies that remain will have to be targeted properly and the leakages that exist should also be minimised. There is a need to draw a line that separates economic decisions from political decisions. Only then can we focus on policies of investment that are sustainable and effective in the long run.

(Sivakami Prasanna is Research Intern at Centre for Public Policy Research. Views expressed by the author is personal and need not reflect or represent the views of Centre for Public Policy Research)