Investment over subsidies
We are witnessing something akin to lobbying for a Universal Basic Income (UBI) in India whereby every citizen gets a funds transfer into her bank account. A very recent proposal is presented as being also a solution to the current agrarian ‘crisis’. It argues for the removal of almost all agricultural subsidies, which range from fertiliser subsidies to those on interest, water and power, and distributing it among most of the rural population. This scheme presents itself as addressing ‘rural’ and not just ‘farm’ income. To evaluate what is being proposed as a way out of the agrarian crisis it would be useful to first understand what the nature of that crisis is and what the originally intended role of the agricultural subsidies was in Indian public policy.
At its core the agrarian crisis is a case of agricultural activity not yielding enough returns for a section of the farming population. Though it manifests itself as inadequate or declining income, at its core it reflects a natural resource constraint. A section of the farm population is facing a declining farm-size due to partitioning across generations. As the farming population grows the process of fragmentation of the farm will continue, with succeeding generations facing a shrinking pie. There are two solutions to this. One is the obvious one of taking a section of each household out of farming. The other is to re-configure public expenditure on agriculture to raise the yield of land, also under threat due to climate change. Actually, a reconfiguration of expenditure would serve both objectives.
The reconfiguration imagined is the shifting of agricultural subsidies to capital formation or ‘investment’. It is not known widely among the public that for three and a half decades now subsidies have progressively replaced public investment for agriculture. Having once been less than half of investment it is now five times as large. Two strands of evidence point to the desirability of moving some distance back. These are that the impact of public investment on both agricultural yields and rural poverty, encompassing a cohort wider than just farmers, is far far greater than that of the fertiliser, electricity, irrigation and interest rate subsidies. This crucial finding is due to the Sino-Indian team of economists Fan, Gulati and Thorat, and needs to taken seriously. In their study, the investments found most valuable were “educational” and on rural roads.
The agricultural subsidies we have inherited are possibly wasteful but they were designed for a particular purpose. This was to place Indian agriculture on a sound production platform. It envisaged raising the yield of land, which also works to produce rising output at steady cost. The price of food has been high for Indians at the bottom of the income distribution. It has held back industrialisation and the desired shifting of population away from the farm that would follow.
The generally high cost of food means that agricultural spending must be reconfigured towards to greater public investment. Even a total elimination of subsidies to enable this may not be such a bad thing. However, eliminating them to implement a generalised welfare programme scheme, which is what the UBI scheme amounts to, would not be wise.