In Indian agriculture, R&D needs attention, subsidy bias must be corrected

Date:02-17-2021

Finance Minister Nirmala Sitharaman needs to be complimented for bringing about transparency in the Union Budget, at least in the part on the agri-food sector. Year after year, a substantial part of the food subsidy was being put under the carpet by increasing the Food Corporation of India’s (FCI) borrowings — these had crossed Rs 3 lakh crore. 

No one believed that the budgeted figure of Rs 1,15,570 crore in the 2020-21 financial year reflected the true picture of this subsidy. The FM has revised this figure to Rs 4,22,618 crore, a whopping increase of Rs 3,07,048 crore. The revised estimate (RE) for FY 2020-21 is 3.66 times the budgeted figure, indicating that almost all borrowings of FCI have been cleared. This is indeed a historic step towards introducing transparency in the Union Budget. And for FY 2021-22, the budgeted estimate is Rs 2,42,836 crore.

The minister also needs to be complimented for clearing off the fertiliser industry’s arrears. Against the budgeted figure of Rs 71,309 crore for FY 2020-21, the revised estimate is Rs 1,33,947 crore, an increase of Rs 62,638 crore. For FY 2021-22, things are likely to smoothen with a budget provision of Rs 79,530 crore.

The third highest expenditure in the agri-food space is that of the Pradhan Mantri Kisan Samman Nidhi (PM-Kisan), which decreased from Rs 75,000 crore in FY 2020-21 to a RE of Rs 65,000 crore; the same amount is now budgeted for FY 2021-22.

The Pradhan Mantri Fasal Bima Yojana is budgeted at Rs 16,000 crore for FY 2021-22, not much different from the RE of FY 2020-21 (Rs 15,306 crore). The interest subsidy on short-term credit to farmers in FY 2021-22, Rs 19,468 crore, too will not be very different from the RE of FY 2020-21, Rs 19,832 crore.

From a policy perspective in the agri-food space, beyond the transparency in numbers, one must point to the huge bias towards subsidies — food and fertiliser, PM-Kisan, crop insurance and interest subvention — as compared to investments, especially research and development. The allocation for agri-R&D is a meagre Rs 8,514 crore in FY 2021-22 against a RE of Rs 7,762 crore in FY 2020-21. This is bewildering as the marginal returns in terms of agri-growth from expenditures on agri-R&D are almost five to 10 times higher than through subsidies. India spends not even half of what a private global company like Bayer spends on agri-R&D — almost Rs 20,000 crore every year. No wonder our growth momentum in agriculture remains subdued and India keeps spending on freebies with sub-optimal results.

Two major policy points need to be debated. One with respect to food subsidy, the FCI’s economic cost of rice is Rs 37/kg and of wheat about Rs 27/kg. This economic cost is roughly 40 per cent higher than the procurement price. Why not give the public distribution system’s beneficiaries the choice of direct cash transfers to the tune of procurement price plus 25 per cent? This could create a more diversified demand which, in turn, will support diversification in agriculture. Further, in food subsidy, it is time to revise the issue prices for beneficiaries. While the “antyodaya” (most marginal) category can keep receiving grains at Rs 2 or Rs 3/kg, all others should pay at least half of the procurement price if food subsidy has to be brought to manageable levels. Further, one should debate whether 60 or 67 per cent of the population should be covered by the food subsidy or this figure should be brought down to 40 per cent.

Two, in the case of the fertiliser subsidy again, massive subsidisation of urea, to the tune of almost 70 per cent of its cost, is leading to its sub-optimal usage. It is time to move towards direct cash transfers to farmers based on a per hectare basis and free up prices of fertilisers. This will help reduce leakages and imbalance in NPK (nitrogen, phosphorus, potassium) usage and lead to efficiency, equity and environmental sustainability.

Overall, the expenditure on agri-R&D needs to be doubled or even tripled in next three years, if growth in agriculture has to provide food security at a national level and subsidies on food and fertilisers need to be contained. Can our policymakers do it? Only time will tell.