Agricultural subsidies: Why they need improving

Simply replicating the agricultural subsidy programme from another country does more harm than good. The future programme design should ensure that subsidies increase productivity, competitiveness and efficiency

Agricultural subsidies have drawn widespread attention of late with the unmasking of several cases of misappropriation in different parts of the country. Existing subsidies in agriculture production are actually intended to uplift marginal farmers as well as motivate people towards commercial farming. However, the real needy farmers seem to be facing difficulties in obtaining the funds to boost production. Instead, subsidies are spilling mostly in the urban areas, and the affluent sections of both farming and non-farming communities are skimming the state funds. Subsidies are neither promoting self-sustaining production nor food security at present. It is rather sending wrong signals and literally demotivating the actual farmers.

Due to the misemployment of the budget on subsidies, the proponents of subsidies are demanding for a revisitation of the programme to ensure that the right segment of the people is deriving benefit from the fund entitled to change our subsistence agricultural system. This necessitates extensive reform of subsidy policy in terms of both distribution and institutional framework.

The agriculture subsidy programme originated during the 1970s by providing direct inputs to the farmers, but since the 2000s, it is implemented in a cash payment model. Agricultural subsidies now constitute 0.84 per cent of the GDP, with yearly spending of around Rs 10 billion. Quite surprisingly, the annual agricultural growth rate remains below 3 per cent, and agri-import is surging by 11 per cent every year despite the huge governmental investment to boost production. The government is pouring money haphazardly to create big farms with the aspiration of making a significant leap in agriculture at a stroke. This has made the relevancy of subsidies questionable.

Subsidy policy shows mixed effects, research says, depending on the size and type of economy. In the developed countries, subsidised agriculture is often criticised for resulting in welfare losses and noncompetitive market prices. Substantial subsidies in the agricultural sector in the big economies compete unfairly with small-scale agriculture of developing countries like ours. Large economies distort the market price to the level in which we cannot compete. Given this confrontation, a subsidy policy is indispensable in a country like Nepal to retain the farmers in farming and attract the youths on the farm to make headway from the existing subpar agricultural production and productivity.

The Ministry of Agricultural and Livestock Development is aware that subsidy is instrumental to solve our specific agricultural problems. Nevertheless, the subsidy programme rests on a weak base and is not supporting mass production and innovation as expected. Given the unique landscapes and small farms–only slightly greater than half a hectare on average – simply replicating the programme from another country does more harm than good. The future programme design should ensure that subsidies increase productivity, competitiveness and efficiency. A good subsidy programme demands rigorous homework regarding subsidy span, associated cost and its long-term feasibility.

The incoordination between the two line agencies – the agriculture ministry and Nepal Agricultural Research Council (NARC) – is well evident. This incoherence has further led to the implementation of the programmes rampantly and without research. Hence, issues as moral hazards – undesirable behaviour like input overuse, inefficient crop choice – or adverse selection – an inability to select actual farmers – have become so dominant that the programme’s goals actually remain unmet. Although these behavioural issues cannot be fully resolved, subsidy directives should attempt to limit these issues at the minimum. Besides, prompting for empirical research beyond descriptive statistics is anticipated to measure gains or losses from the subsidy policy and discover cost-effective alternatives. The role of the Agriculture and Forestry University and NARC is noteworthy, and they must be at the forefront of subsidy-related research.  Agriculture is placed at the centre of strategic planning to fulfill food and other necessities. However, agriculture bears inherent risks emanating from weather, inputs and market-related phenomenon. Furthermore, the demand for agricultural products is pretty stable, but the supply is highly volatile. In light of these complications, subsidies act as a useful cushion to provide incentives for farming. This also prevents rising food and raw materials prices for agro-based industries.

Government service reaches less than one-fifth of the farmers at present. The uneducated farmers are uncomfortable with the way government advertises and demands paper works before enrollment. Redesigning programme enrollment to accommodate the needy farmers should be the topmost priority before we embark on long-cherished agricultural development. Advancing the programme with a ‘pay-for- performance’ model and keeping agricultural cooperatives as priority could be even more promising.

Subsidies are funded by taxpayer’s budgets while most people are still struggling to meet the basic amenities. We need to make sure that this fund with high opportunity costs is not misappropriated in any way.

Pathak is a graduate student of Agricultural Economics at Louisiana State University, USA