In the interim pay the food and fertiliser beneficiaries through DBT.
Doing away with subsidies and instead extending income support to the poor has often been suggested. A limited Universal Basic Income kind of assistance is surely a straight-forward way of taking care of the needy and holds a higher possibility of reaching the intended beneficiaries, besides letting them procure their essentials from the open market. This option has hitherto been excluded citing lack of resources though it has been more on grounds of political expediency and lack of will and courage to take on the vested interests yearning for status quo.
Subvention through grant of subsidies is no doubt a time-tested mechanism. Provision of essential goods and services, free of cost or at affordable prices, endeavours to keep the body and soul together of the poor, infirm, old and others in need. It promotes consumption of merit goods and practices known to have direct personal or external benefits. However, the numbers seeking state assistance continue to grow in most developing countries, while the capacity of the delivery systems to reach out often lags behind. Periodical revisiting to check out their efficacy and continued relevance is rarely done.
From such a prism should be undertaken a review of the two largest components of the Indian basket of subsidies, viz. food and fertiliser (for which Rs 2.43 trillion and Rs 0.8 trn respectively or 9.5% taken together of the aggregate expenditure of Rs 34.8 trn are provisioned for 2021-22). The food subsidy is intended to reach 813.5 mn or about two thirds of the population under the Public Distribution System (PDS) as per the National Food Security Act 2013 (NFSA), while the fertiliser subvention is to assist 13 crore farmers and their families or 42% citizens.
Economic Survey, 2016 had cited that only 11% the extant fertiliser -support expendture was used by small and marginal farmers accounting for 85 % of land holdings.There is significant inappropriateness (estimated at 24 % ) by way of it promoting excessive application of urea(NPK) instead of the complementary nutrient- fertilisers and causes widespread cultivation of water intensive crops viz sugar cane, paddy & wheat. With no meaningful restriction on how much subsidised- fertiliser can be procured by a farmer, it is the larger peasants who end up cornering almost a quarter of the subsidised input.
Economic Survey, 2016 had cited that only 11% of the extant fertiliser support expenditure was used by small and marginal farmers accounting for 85% of land holdings. There is significant inappropriateness (estimated at 24%) by way of it promoting excessive application of urea (NPK) instead of the complementary nutrient fertilisers and causes widespread cultivation of water intensive crops viz sugarcane, paddy and wheat. With no meaningful restriction on how much subsidised fertiliser can be procured by a farmer, it is the larger peasants who end up cornering almost a quarter of the subsidised input.
To effect the warranted optimisation, the fertiliser subsidy must be restricted to small farmers with holdings up to 2.5 hectares; given to the farmer and not the fertiliser manufacturers and linked to the nutrient value of fertilisers. Procuring a soil health card from an approved agency must be a prerequisite to availing of the fertiliser, as was done in Gujarat about a decade ago. Limited quantities of subsidised fertilisers may be permitted to the larger cultivators as long as they don’t raise “undesirable crops” and it is based on their soil health cards.
Also the subsidy needn’t remain as high as at present (urea retail prices haven’t been raised since 2002 and all cost escalations are absorbed by the continuous increases in subsidy). Such financial support for fertilisers needs to be gradually brought down from the prevailing 90% odd to 50% for small farmers and 25% for others, within five years. An added benefit of the near market pricing would be less diversion to non agricultural uses including being smuggled to neighbouring countries—estimated a 41% in the aforesaid survey.
The intended beneficiaries of fertiliser subvention should receive the money equivalent support directly in their bank accounts. Given the Indian IT software prowess, it is feasible for commercial banks to upload twice a year every farmer’s fertiliser account card with the value of his subsidy entitlements. With the bank card and his soil health card, he would effect the fertiliser purchase from a retailer equipped with a POS (point of sales) portable machine. With such built in checks, the subsidy would be more appropriate, better targeted and less amenable to misuse. Fertiliser manufacturers would have little incentive to overstock their dealers or show inflated sales.
About such changes, the large farmers should have no genuine grounds to be unhappy. They are already included in the PM Kisan programme, under which every farmer-family receives a uniform annual grant of Rs 6,000; 100% of their produce of wheat and paddy stands purchasable under the MSP scheme and the MSP determination is based on the actual average cost of production. With a lower fertiliser subsidy, their costs would increase but so would the linked MSP. It may also be recalled that no Indian farmer pays income tax on profits from cultivation.
The more important subsidy-based welfare measure yawning for restructuring is food grain distribution in vogue since the early 1950s. NFSA, 2013 had expanded coverage to 75% of rural and 50% of urban population; given a legal right to the “eligible households”, i.e. priority households (who get 5 kg per person per month) and families covered by the Antyodaya Anna Yojana (who get a monthly 35 kg) at heavily subsidised prices—rice at Rs 3/kg, wheat Rs 2/kg and coarse grains Rs 1/kg. The selling price (central issue price or CIP) had been statutorily fixed for three years till July 2016 but was open thereafter for being raised up to the prevailing MSP. Purely for political expediency and the fact that the Central government has been procuring far more than the buffer stock norms, the CIP has never been revised. Meanwhile, the economic cost of wheat to FCI (hence the government) has swelled up to Rs 26.84/kg and rice to Rs 37.24/ kg. Niti Aayog has estimated the eligible beneficiaries increasing by 10% to 895.2 mn under the Census 2020 and the annual subsidy thereby going up by Rs 15,000 cr.
Raising the CIP, post Covid between 2022 and 2024, gradually to Rs 4/kg for wheat, Rs 5 rice and Rs 2 other grains and amending the NFSA to reduce the coverage from 75% to 60% in rural and from 50% to 33.34% in urban areas, of the 2020 population is imperative. About Rs 45,000 cr reduction in subsidies would be the consequence. No doubt introduction of electronic points of sale devices to authenticate beneficiaries at the time of distribution of food grains and electronically capturing the quantum distributed to families has streamlined the functioning of PDS. But the resultant financial gains might get diluted by better lifting of stocks facilitated by the interoperable One Nation One Ration card (ONOR) scheme, now adopted by most states.
Going forward, both MSP and the inter-linked PDS deserve recasting to significantly improve their efficacy and economics. While farm support is a global norm, in India where it is more a livelihood issue and not so much commercial, it needs fundamental changes. For one, MSP should be used as an instrument of state policy to keep the open market prices remunerative rather than merely for procurement of grains for PDS.
A better, though somewhat underbaked variant of it was the Bhavantar (price differential) scheme implemented in Madhya Pradesh by both BJP and the recently ousted Congress governments. Under it, the farmers received in their bank-accounts the money equivalent of the losses incurred by them for effecting sales at rates below the MSP. No doubt the scheme had lacunae, both conceptual and operational, but the principle was sound.
Bhavantar is direct money transfer to the farmer and eliminates the running of a humungously large and virtually unmanageable food procurement, its transportation cum storage and effecting its retail sales through lakhs of ration shops. With the cash received in their bank accounts, the farmer and his family would take the call on where to spend, and not the Big Brother. They might still go to a state-run shop for grains or expend it entirely in the open market on better protein and vitamin content foods like vegetables, eggs, fish and fruits or misgivingly on non food items.
To overcome the last possibility, most European governments, during the Second World War, ran a food stamp mechanism, which compelled the households to spend on food. But that was a time marred by acute food scarcity and equitable distribution of scarce food had to be ensured. In normal situations of growing agri production, granting greater choice in spending might give the individuals as much satisfaction as the actual value of their purchases.
In a developing country like ours, where 200 mn citizens admittedly still live in poverty, there is certainly a case for direct support by the state. Our past experience points towards opting for direct income transfers to the needy in preference to subsidising goods and services. That would entail smaller bureaucracy to administer, fewer leakages and less likelihood of vested interests emerging. Income transfers by themselves might not translate into better availability of essentials and might call for supplementing them with imposing of temporary restrictions on prices of selected foods, drugs, health services etc.
Where, however, neither option is feasible and financial subvention has to be retained, a sunset clause for each subsidy must be put in the scheme itself. Also, mandating prior parliamentary approval for starting each new subsidy scheme, its details and funding arrangements along with determining the end date should be made the practice. No mid course, suo moto, alterations in extent of coverage, level of support and the delivery mode be permissible. After all, spending public money on a select few at the cost of others does warrant utmost carefulness and extraordinary checks being in position.
Dr Ajay Dua, a development economist by training, is a former Union Secretary