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The so-called 'heavy farm subsidisation' is a case of 'heavy reverse subsidisation' of consumers by farmers. The cost of growing food, however high, has to be borne by the state for basic survival of people
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| All input subsidies are actually consumer subsidies and not farmer subsidies as they are commonly called. Any other support to the farmers can at best be called an incentive to keep growing food for billions of people, not a subsidy or a freebie. |
In an article in this newspaper (‘Revisiting a dream‘, IE, March 6), Ashok Gulati argued that the Narendra Modi government gives a lot of subsidies to the farmers. He claimed that the farm subsidies given by the states and the Centre add up to more than Rs 4 lakh crore per annum. Many people in the country seem to believe that the farmers are the most pampered lot. Gulati says that the policy of heavy subsidisation of input subsidies, especially fertilisers and power, must be rationalised.
Let’s critically examine the issue. Gulati says that the fertiliser subsidy crosses Rs 2 lakh crore annually. The revised estimates (RE) for 2022-23 show that the fertiliser subsidy is indeed Rs 2.25 lakh crore. But this sharp spike was due to the geopolitical situation resulting from the Russia-Ukraine war; it was less than Rs 1 lakh crore a few years ago. The prices of fertilisers have now fallen substantially and this is reflected in the budget estimates of Rs 1.75 lakh crore for 2023-24.
The government fixes the minimum support price (MSP) for various crops on the basis of the recommendations of the Commission for Agricultural Costs and Prices (CACP). The Commission calculates the cost of production for various crops on the basis of the subsidised cost of fertilisers or other inputs and not at the actual cost of these inputs. Thus it reduces the cost of production by the value of the “input subsidy” given for that crop. The government then fixes a lower MSP for the crop based on the lower cost calculated by the CACP. So subsidised inputs ultimately reduce crop prices that the farmers get and thus, benefit the consumers. If, for instance, the cost of production (C) is Rs 1,000/quintal and there is no subsidy, an MSP of Rs 1,500/quintal as MSP would mean a 50 per cent profit. The CACP fixes the MSP at I.5 times the C. But if the input subsidy (S) is Rs 200/quintal, the CACP factors this in. It, therefore, takes Rs 800/quintal (C-S) for the purpose of fixing the MSP. At 1.5 times (C-S), the MSP is fixed at Rs 1200/quintal. This calculation has the effect of reducing the MSP by Rs 300/quintal or 1.5 times the amount of subsidy S. So, the subsidy is passed on to the consumer without any benefit to the farmers. In fact, the farmer loses 0.5 times of S or Rs 100/quintal. Thus, the fertiliser subsidy of Rs 2 lakh crore actually becomes a Rs 3-lakh crore subsidy for the consumers – in other words, Rs 1 lakh crore that should have gone to the farmer is reaped by the consumer.
