Withdrawal of Fertiliser Subsidy Some Issues and Concerns forFarm Sector Growth in India
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Abstract:
While fertiliser subsidy has probably been one of the most hotly debated issues in the
country over the past two decades, the debate reached a new height following a
recommendation by the Prime Minister's Economic Advisory Council (PMEAC) in its
latest Economic Outlook 2012113 that are progressively losing their relevance
and are becoming unbearable fiscal burden so a beginning can be made in dismantling
fertiliser subsidy. In view of this, the present paper analyses the fertiliser subsidy
from two different aspects, both important for policy planners in the country. First, who
is benefiting from the current system of fertiliser subsidies and secondly what is the
impact of recent policy changes on fertiliser consumption and prices and proposed removal
of fertiliser subsidies on farm income. Fertiliser subsidies account for a significant share
of the total support to agriculture and have increased by about 560 per cent between
triennium ending (TE) 2003-04 and TE 2010-11 mainly due to steep increase in
international prices of fertilisers and feedstocks/raw materials, increased consumption
and unchanged farm gate prices. The findings suggest that all farmers benefit from
subsidies, however, small and marginal farmers receive about 53 per cent of the subsidy,
higher than their share in total cropped area (44.3%), The partial decontrol of fertiliser
sector which has led to unprecedented increase in prices of phosphatic (P) and potassic
(K) fertilisers (about 160% in DAP and 280% in MOP) and relatively cheaper nitrogenous
(N) fertilisers, led to sharp fall in consumption of P and K fertilisers, thereby imbalance
in use of N, P and K nutrients. Moreover, dependence on expensive imports has
significantly increased during the last 6-7 years. The results show that removal of fertiliser
subsidy will make farming unprofitable in many states and therefore removal of fertiliser
subsidies will not be in the interest of farming community, particularly, small and marginal
farmers and less developed states/regions. The paper argues for containing subsidy but
without hurting interest of millions of small and marginal farmers including tenant
cultivators. As radical reforms like dismantling of subsidy and deregulation of fertiliser
industry in one go are neither economically desirable nor politically feasible, a case can
be made for continuation of fertiliser subsidy with better targeting and rationing to
achieve socio-economic objectives of national food security, poverty alleviation and
farmers' welfare as well as subsidy reduction.Keywords:
Consumption
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Abstract Fertiliser intended for government subsidy programmes is sometimes diverted and sold to farmers at or near market prices. Failure to account for such ‘leakage’ can upwardly bias econometric estimates of the effect of government fertiliser subsidy programmes on total fertiliser use. This paper extends the framework used in earlier studies on the crowding in/crowding out effects of subsidised fertiliser on commercial fertiliser purchases to account for leakage, and then applies it to the case of Zambia. Results suggest that each additional kg of subsidised fertiliser injected into the system increases total fertiliser use by 0.54 kg. Without controlling for leakage, the estimate would have been 0.87, an overestimate of 61%.
Leakage (economics)
Crowding out
Crowding
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In recent years, Communist China has been advocating chemical fertiliser application as a means of raising land yield for grains and cotton in order to feed her growing population and to provide sufficient raw materials for light industry. Domestic production of chemical fertiliser increased fivefold during the First Five Year Plan period of 1953–57 and again expanded threefold during the Second Five Year Plan period of 1958–62. More than one half of the total consumption of chemical fertiliser has been imported mainly from Western European countries and Japan. The average rate of consumption per hectare is still low in comparison with other agriculturally advanced countries but the rate of increase has been impressive. On the other hand, such a drastic increase must be exerting great pressure on agricultural practice in China. What incentive, if any, does the government provide to encourage the application of chemical fertiliser? How high is the fertiliser price? How much can fanners expect to gain from an increase in fertiliser application? Does the government gain tax revenue from promoting fertiliser application?
Hectare
Consumption
Agrochemical
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The genesis of input subsidies in Indian agriculture can be traced to the philosophy and objectives of agricultural development strategy launched during the mid-1960s. Input subsidies helped in balancing the conflicting interests of farmers and consumers and in achieving macro and micro food-security. Subsidies on fertilizers, electricity and canal water, which account for bulk of subsidies, have been analyzed. In 1999–00, the electricity subsidy accounted for 53 per cent; fertilizer subsidy, 28 per cent; and canal irrigation subsidy, 19 per cent. During the last twenty years, 81 per cent of the incremental subsidy has been contributed by increase in the rate of per unit subsidy. Contrary to general perception, Punjab has accounted for only 7.4 per cent of the total subsidies in Indian agriculture. Across farm size groups distribution of subsidies has been found to follow the pattern of share of operated areas. Cropwise analysis has revealed that the input subsidies are mainly going to the food crops. The paper has suggested a caution in handling the issue of subsidies in Indian agriculture because the economic conditions of farmers have not improved to a desirable level. Subsidies on farm inputs cannot be seen in isolation of the subsidies in other sectors of the economy, which are many a times more, and consequences of their withdrawal are less painful.
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As part of a national policy to ensure a certain level of food self-sufficiency in strategic crops, the government of Egypt subsidizes nitrogen fertilizer directly by distributing quotas of subsidized fertilizers to farmers and indirectly by subsidizing natural gas used by local fertilizer factories. The implication of this subsidy on farmers’ fertilizer demand and productivity remains unknown. Using a detailed agricultural survey collected from smallholder farmers in Upper Egypt, we show that nitrogen fertilizer application rates are substantially in excess of crop-specific agronomic recommendations. We exploit eligibility criteria and other sources of variation to show that farm plots with easier access to the subsidy tend to use more subsidized nitrogen fertilizer and less phosphate fertilizer. Easier access to the subsidy increases use of total nitrogen fertilizer per unit of land, mainly because of the increase in subsidized nitrogen fertilizer. In particular, the fertilizer subsidy program in Egypt is associated with significant overapplication of nitrogen fertilizer. Such overapplication of fertilizer is expected to adversely affect soil, water, and environmental health. Our findings have important policy implications for Egypt and other African countries known for input subsidy programs. As Egypt is currently moving on from the successful implementation of a comprehensive macroeconomic reform program towards sector-level reforms, our results suggest that eliminating fertilizer subsidies is a good place to start.
Lead (geology)
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Using the Agricultural Census 2003 and the Rice Household Survey 2008 for Indonesia, this paper analyzes the distribution of benefits from fertilizer subsidies and their impact on rice production. The findings suggest that most farmers benefit from fertilizer subsidies; however, the 40 percent largest farmers capture up to 60 percent of the subsidy. The regressive nature of the fertilizer subsidies is in line with research carried out in other countries, the result of larger farms using a larger volume of fertilizer. This paper confirms that fertilizer used in adequate quantities has a positive and significant impact on rice yields, but it also provides evidence that over-using fertilizer has an adverse impact on yields (an inverted U-curve relationship).
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Consumption
Staple food
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European farmers are currently affected by an increase in the price of fertilisers (from an index of 100 in 2005 to 150 in 2012 after it peaked at almost 200 at the end of 2008) that calls into question the future availability of these kinds of inputs. Since 2007, the strong demand from emerging countries, geopolitical tensions over natural resources, and the rise in the price of energy have been exerting upward pressure on the prices of mineral fertilisers that affect farmers’ production costs especially in the European Union, which is not self-sufficient in sources of NPK. Analysis of data from the Farm Accountancy Data Network shows that the cost of fertilisers increased from €80/ha in 2004 to €114/ha in 2011. This rise had the highest impact in 2009 because it was not offset by higher agricultural prices (the cost of fertilisers accounted for 5.4% of agricultural production in 2009 and only 4.4% in 2011). The cost of fertilisers and its increase is particularly high for farms specialised in cereal, oilseed and protein crops, and accounted for 13.9% of agricultural production in 2009.
Common Agricultural Policy
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<p>This paper assesses the origins of and changes to fertilizer policy in Nepal over a period of time. It assesses farmers’ awareness of the recent changes to the subsidy policy and examines their perceptions of the extension services. This paper looks at the environmental implications of the concentrated application of chemical fertilizer, particularly as far as food security is concerned. Questionnaire surveys, group discussions, a workshop, soil analyses and archival materials were used to collect data for this study. Changes in fertilizer policy have occurred in four different phases: (i) without subsidy; (ii) with subsidy; (iii) with deregulation of fertilizer trade; and (iv) the current phase of subsidies for fertilizer. However, timely and effective fertilizer distribution by the government has always been a problem. Only few farmers (12 %) know about recent changes in the fertilizer policy; most of them (44 %) were satisfied with the new subsidy scheme. Valid proof of land ownership is a requirement for qualifying for subsidized fertilizer, and this makes it difficult for some small farmers who are tenant. The soil analysis indicated a significant decrease in the soil pH as a result of intensified agriculture. One reason is due to the intensive use of chemical fertilizers and the declining use of farmyard manure. The ineffectiveness of the extension services also influences farmers’ use of fertilizer as they are not aware of which fertilizer and how much to use. The use of fertilizer may increase yields in the short term, but in the longer term, it may worsen the food insecurity in the country.</p>
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This paper analyses the change in fertilizer subsidy policy in Sri Lanka with a view to understand its impact on national rice production, demand/supply of inputs, farm profit and government budget. In addition, cost effectiveness of the fertilizer subsidy is evaluated in terms of transfer inefficiency. Demand supply equilibrium model along with input markets is employed to obtain the results. The results indicate, complete fertilizer subsidy reduction would reduce rice production by around 4%, while a 36% decline in the fertilizer demand for paddy cultivation. Although, the subsidy cut reduces the enormous government burden, farmers are unfavorably affected by 40% reduction of farm profit. Moreover, fertilizer subsidy would cause government to spend Sri Lankan Rupees (SLRs.) 1.38-1.91 to increase farm profit by one rupee. Meanwhile, a 3% decline of paddy production and a 14.5% increase in the rice price is expected with the proposed cash transfer policy.JEL classification numbers: Q11, Q13Keywords: fertilizer subsidy, transfer inefficiency, two-stage technology.
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Abstract Kenya is one of the few countries in Sub‐Saharan Africa to experience an impressive rise in fertiliser use following a series of input market reforms in the early 1990s. Two major consequences of these reforms were declining fertiliser marketing margins and distances between farmers and fertiliser dealers. We quantify the effects of these changes on commercial fertiliser use and maize production in Kenya by estimating fertiliser demand and maize supply response functions using nationwide household survey data. Our results indicate that between 1997 and 2010, the estimated 27% reduction in real fertiliser prices that can be attributed to falling marketing margins associated with market reforms led to a 36% increase in nitrogen use on maize fields and a 9% increase in maize production resulting from both yield and acreage effects. On the other hand, decreasing distances to fertiliser retailers from the perspective of a given household did not appear to raise fertiliser use or maize supply, although a comparison across households using average distances over the panel indicate that those closer to retailers do apply more fertiliser on their maize fields.
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