Do Fertilizer and Electricity Subsidies Benefit Indian Farmers? A Hybrid Regional CGE Analysis with Back-of-the-Envelope Explanations

This chapter uses a national computable general equilibrium (CGE) model with regional industries (a hybrid model) to investigate the effects on India of removing or modifying agricultural subsidies which account for about 2.5% of Indian GDP. A third of the subsidies are applied to inputs of fertilizers and electricity to agriculture. The other two-thirds are on production and sales of agricultural products. The deadweight loss associated with the subsidies is 0.20% of GDP. We find that the fertilizer and electricity subsidies contribute most of the deadweight loss and do not contribute to the objective of supporting farm income. If these input subsidies were phased out and replaced with additional production and sales subsidies, then real farm income would be increased by about 4% with no deterioration in the public sector budget, almost no effect on food security, and small increases in GDP and overall welfare. Rather than requiring readers to understand the intricacies of the CGE model, we explain the principal results by back-of-the-envelope calculations invoking familiar mechanisms and identifying key data items and assumptions in our model.