Despite several inadequacies, it appears that status quo will prevail for quite a while.

An interesting revelation in the just presented Union Budget is the provision of a staggering amount of subsidies extended by the Central government—Rs 6.5 trillion for the current year and Rs 3.70 trillion for the following. This represents approximately 20% and 10%, respectively, of the annual aggregate government expenditure, and explains the unprecedented rise in planned fiscal deficits to 9.5% and 6.8% of GDP in the two respective years.
A bulk of the $100 billion plus being spent in India annually on subsidies and on income-support are accounted for by the support to farmers by way of cheap fertilisers, electricity and water, and a cost linked minimum support price for most major crops. In addition, about two-thirds of the population is protected and required to pay a minute fraction of the actual price paid to farmers. In 2020-21, the food subsidy payment to Food Corporation of India (FCI) is Rs 4.22 trn, while Rs 1.34 trn is going to fertiliser-manufacturers for the supplies effected till the previous year. For 2021-22 the relevant provision stands Rs 2.42 trn for FCI including Rs 0.61 trn for past dues, and Rs 0.8 trn for next year’s subsidised fertilisers.
Surprisingly, at a time when its revenues—both tax based and those from other sources—are understandably low, the Union Government took on its books, arrears of Rs 3.39 trn of FCI, and Rs 0.54 trn owed to fertiliser-makers. No doubt desirable is onboarding the off budget items within the governmental fiscal deficit (and transparently showing the true levels of financial shortfalls and consequent borrowings), these elevated provisions would not necessarily serve either the economic-recovery objective of stimulating demand, or activating the supply-side.
Greater fiscal deficit and debt raisings unduly alert international rating agencies and the increase spend on subsidies makes it tougher to provide adequately for other priorities. Besides determining the appropriate time to honour past commitments, the entire regime of subsidies, in fact needs revisiting. At Rs 3 trn, the annual State support to the farm sector is the single largest outlay, with the Centre bearing the brunt of it.
To begin, the Central fertiliser subsidy scheme calls for recasting. First, there is the oft-stated necessity to effect changes in cropping-pattern and lowering the decades long priority to growing wheat and paddy. The consumer demand for these staples has declined and preference emerging for vitamin-rich foods pulses, legumes, vegetables and fruits, and high protein grains quinoa, rajgira and amaranth. There is need to encourage cultivation of commercial crops cotton, soyabeans and the now globally-in-demand scores of Indian spices.
Second, given the emerging water emergency, subsidising water intensive crops is no longer in order. This includes sugarcane and the usual culprits—paddy and wheat. Also support for fertilisers purchased by large farmers in particular needs reduction and recalibration with the reprioritisations.
Finally, the overuse of urea (a mixture of N-P-K) needs checking, particularly from soil health angle. Restricting subsidies to the appropriate fertilisers based on soil card of each farmland, must become the practice. Though a nutrient based subsidy change was announced, 90% subsidy still goes for urea. The price which farmers pay, has not been raised since 2002 and all cost escalations are absorbed by increasing the subsidy quantum. For phosphorus and potash fertilisers, subsidy is kept “uniform” per nutrient basis and their producers have the freedom to fix the selling price. Hence, the continued run on the exchequer by the urea-makers.
Back in 2016, the Economic Survey had put out unpalatable findings—24% of aggregate fertiliser subsidy was spent on inefficient fertiliser-producers, 41% diverted to non-agricultural uses including smuggling to neighbouring countries, and 24% consumed by larger, presumably richer farmers. That left a meagre 11% for small and marginal farmers who dominate Indian farming and warrant the maximum public support.
While clearing past commitments, the Finance Minister in her Budget speech had indicated that henceforth until 2026 chemical fertiliser-makers wouldn’t face delays receiving their entitled subsidies. Apart from assurance of loosening purse-strings, this reaffirmed the continuation of existing scheme without any major overhaul despite its several angularities. Such a move also bucks the notable global trend to move towards growing chemical free foods.
The food grains given to 850 mn people account for another large portion of the Central subsidy bill. As per National Food Security Act 2013, “ration card holders” and their families end up getting over 90% subsidy on wheat and rice lifted from fair price shops under the elaborate countrywide Public Distribution System (PDS). The two priority categories (household category and state household category) are monthly entitled to 5 kg of grains while extremely poor and vulnerable under the Antyodaya Anna Yojana get 25 kg wheat or 10 kg rice and 1 kg sugar. For eight months till November 2020, “free rations” of 5 kg wheat or rice, along with a kilogram of pulses were given to most cardholders under the PM Garib Kalyan Anna Yojana.
Closely related to PDS is the five-decade-old Minimum Support Price (MSP) for farmers, currently applicable to 23 crops. In recent years, a whopping Rs 2 trillion is spent on open ended, viz., 100% MSP based procurement of wheat and rice, and up to 25% of the produce of other crops. This particular nature of the support measure for wheat and rice leads FCI procuring far beyond the buffer stock norm based on actual off-liftings; and has resulted in it currently stockpiling 79.6 mt grains against the needed 21.4 mt, and blocking Rs 1.8 trn.
Though theoretically a pan India facility for all farmers, MSP has been largely availed by larger farmers having sizeable marketable surpluses, compared to small farmers who dominate the Indian farm space (85% holdings are under 2 hectares) and barely grow enough for their family requirements. Their insignificant sellable produce gets typically sold at the farmgate to middlemen, or in nearby village market usually at below market rates. Predominantly only larger farmers, who have access to trucks and tractors, take their loads to APMCs or other approved mandis where procurement at MSP is undertaken by FCI or other designated agencies.
Despite MSP being applicable to several crops, FCI prefers purchasing wheat and rice for which there is demand under PDS. Thereby the usefulness of the price support mechanism is unevenly spread. The perennially irrigated Punjab, Haryana, Western Uttar Pradesh, parts of Madhya Pradesh, and coastal pockets of Andhra Pradesh and Tamil Nadu, are the main beneficiaries. In fact, 26% of FCI’s cereal procurement is from Punjab alone, though it produces 14% of the country’s wheat and paddy.
Given this reality, the way forward should include not physically buying all wheat and rice brought to markets at MSP, and changing to use MSP as a support-price to be invoked only in event of price falls (as opposed to a blunt instrument for procuring grains for the PDS). A must is broadening it to cover all major crops, particularly pulses and millets and thereby meaningfully incentivise crop-diversification and benefit more regions (including major pulse-producers Karnataka, Andhra Pradesh, Gujarat). Also warranted is extending MSP to dairying and horticulture—at 22.5% and 21% respectively in aggregate farm produce value compared to 16.4% for all cereals and pulses put together, these two segments are growing quicker than the staples.
In backdrop of the ongoing farmers’ protests, Prime Minister Narendra Modi provided an assurance in Lok Sabha of not cutting the food subsidy and stated that “MSP was there, is there and will remain”. For all practical purposes, this has put to end any immediate tapering off the huge spends on MSP programme and the more direct food subsidies under PDS. It is unclear whether either would get restructured soon despite their known aberrations and inadequacies.
Besides food and agriculture subsidies, support is extended to the Ujjwala scheme (PMUY) giving free cooking gas stoves and cylinders to 80 mn BPL families. The implementation of the desirable move to use LPG, a clean fuel, was hastened during the lockdown at the peak of the health crisis. Its beneficial effects on the health of women (and in relieving the drudgery of daily collection of wood or coal to fire “chullahs” for cooking) far outweigh the amount of subsidy.
A host of interest subsidy measures are at play though each is with varying impact. The two more recent ones for promoting affordable housing, PMAY-Urban and PMAY-Rural offer interest subsidy between 3% and 6% on institutional housing loans for tenures of 20 years. With multiplier effects of construction, especially in the economic recovery process, this facility is proving its worth and 16.7 mn houses supported by it stand completed.
Since 2006, interest subvention for agricultural credit has been operational. Its outlay for 2021-22 is reduced by Rs 364 cr, though loan-target stands enhanced to Rs 16.5 trillion. Under this arrangement, crop-loans are made at 7% per annum interest, and at 4% to those paying back their loans regularly. Useful as this might appear, the ground reality is mixed. Low short term interest rates have caused diversion of agri-loans to non-agricultural purposes. Share of short-term credit in the total direct credit-outstanding by public sector banks consequently leapt from 44% in 1982 to 74.3% by 2016, with the share of long-term credit correspondigly falling. This does not augur well for long term investments in farming.
Over time, it has become increasingly evident that the entire set of subsidies warrants a thorough overhaul. Several schemes have lost their focus, while others are being misdirected to the non-needy, while also becoming overly burdensome on the exchequer. It may now be time for the powers-that-be to demonstrate the requisite political will, and while applying the tenets of zero budgeting, restart the entire process by questioning the very need for each scheme of subvention.
Ajay Dua, a developmental economist by training, is a former Union Secretary.
The second part of the article focusing on what the essential subsidies are and how these should be delivered to the intended beneficiaries will appear next Sunday.