The truth about subsidies

http://www.infochangeindia.org/analysis186.jsp
InfoChange News & Features, April 2007

The truth about subsidies

By Darryl D'Monte

A Swiss cow gets a subsidy that will allow her to fly first-class around the world! And Queen Elizabeth gets farm subsidies of over $ I million annually. Subsidies don't always work as they are meant to in India either

Two humorous anecdotes about farm subsidies sum up their absurdity as well as their paradoxical nature. Vijay Jawandhia of the Shetkari Sanghatna in Wardha, who was in Mumbai recently to speak at a journalists' workshop on the role of subsidies in the agrarian crisis, recounts how he was once asked what he would like to be reborn as, in his next life. Without batting an eyelid, he replied: "A European cow!"Seeing the bewilderment on the face of the questioner, he amplified: "A European cow gets $ 2 a day by way of subsidy: that is more than half the world's population gets."

Ron Steenblik, an economist who heads research in an NGO called the Global Subsidies Initiative (GSI), headquartered in Geneva, made a very similar point. According to Oxfam, the annual subsidies given to a cow in Switzerland (obviously more than the average in the European Union) are the equivalent of a first-class airfare around the world.

Devinder Sharma, food policy analyst from Delhi, cited data from a European NGO, farmsubsidies.org, to demonstrate how Queen Elizabeth, as a huge landowner, is among the highest recipients of farm subsidies. In 2003-04, she received nearly $ 1.31 million. Prince Charles, who ironically enough is an ardent exponent of organic agriculture and is vehemently opposed to genetically modified crops, received more than $ 480,000 for his personal estate in Cornwall. Similarly, Prince Joakim of Denmark received $ 220,000, and Prince Albert of Monaco $ 300,000.

Eminent agricultural scientist, Professor M S Swaminathan, who heads the National Commission on Farmers, opened the workshop by detailing several dimensions of the crisis. He quoted the Approach Paper to the Eleventh Five-Year Plan in December last year: "Economic growth has failed to be sufficiently inclusive, particularly after the mid-1990s. Agriculture lost its growth momentum from that point on and subsequently entered a near-crisis situation, reflected in farmer suicides in some areas."

He pointed out how growth in agriculture is dropping below population growth. Between 1971-72 and 2003, the percentage of marginal landholders, with less than 1 hectare, has risen from 63% of rural households to 80%. India's Green Revolution, in which Swaminathan played a pioneering role, is stagnating, which is why he has been calling, in recent years, for an "Ever-Green Revolution". implying more ecologically sustainable farming.

The Green Revolution has been characterised by capital- and resource-intensive inputs, which have robbed the soil of its natural regenerative powers. While yields of most crops have been declining, Swaminathan cited how milk production, which was based on galvanising small dairy farmers through cooperatives, had catapulted the country into becoming the largest producer of milk in the world.

He called for comprehensive credit and insurance for farmers -- debt is one of the major reasons why cotton farmers in Vidarbha and elsewhere have been committing suicide. NABARD has to review its mandate, role and business model with its focus on farmers. Professor Swaminathan specified that the rate of interest for farmers should be 4%, and there ought to be a four- to five-year credit cycle in drought-prone areas. Farmers had to be made credit- and insurance-literate; barely 4% of farmers participate in insurance schemes. Farmers could be insured as a group, rather than individually, with a low transaction cost and the village treated as a unit. There could be a Rural Insurance Development Fund.

According to Steenblik, GSI's mandate is to uncover new subsidies and expose bad design and unintended consequences of subsidies. One of the classic examples is India's fertiliser subsidy, which accrues to manufacturers who are then supposed to pass it on to farmers. According to Dr Ashok Gulati, the Delhi-based Asian Director of the International Food Policy Research Institute, the returns were only 53 paise for every rupee spent on subsidising fertilisers through the 1990s. He claimed, somewhat controversially, that returns in the farm-related sector were highest on roads -- Rs 3.17 for every rupee spent, in the same decade. This was presumably because produce could be more speedily dispatched to markets and did not perish. (The next highest return, according to his research, was on farmersâ€™ education.)

Dr Amar Nath, Senior Economist with the National Institute of Public Finance and Policy, described how the government's intention was to make fertiliser affordable to farmers, and widely distributed. In reality, this was not the case. "Fertiliser subsidies are indirect and the benefits accrue more to the manufacturers and large farmers than small and marginal farmers," he pointed out. The share of fertiliser cost in the total cost of inputs in agriculture is so high that only large farmers benefit from this subsidy."What's more, the application of fertiliser is more or less uniform throughout the country, irrespective of weather, soil and topography.

After fertiliser, the biggest subsidy in this country is for irrigation. Vidarbha, it is well known, suffers because it is in the rain shadow area of the state and lacks irrigation, which is partly why there is so much distress in the region. Some 70% of irrigation in the country is from canals, which is wasteful and poorly targeted, as distinct from tank irrigation. In Karnataka, 40 lakh hectares are irrigated by canals, and only 7 lakh hectares through tanks, although this was one of the states of peninsular India that was very well served by tanks and reservoirs in the past. Tanks are maintained by local village communities, so there is better management through de-silting, etc.

Canals, by contrast, require huge capital expenditure, have a long gestation, and require major maintenance, which is why, throughout the country, the cost-benefit ratios of major dams are going awry because reservoirs fill up with silt and their lives become shorter. According to Dr Amar Nath, although the original project reports envisage what cropping patterns there will be in the command area, in the final analysis there is a free-for-all where big farmers corner the gains of the scheme. This was the fear voiced about the Narmada dam which, it was alleged, would benefit cash-crop rich farmers in certain districts like Mehsana and Bharuch in Gujarat and not reach the parched districts further away. Recent reports allege that the power generated by the dam benefits industries in the state rather than those without electricity. (Only last month, an NGO in Gujarat called Pravah brought out a report that monitors delivery in â€œthe world's largest drinking water pipeline project,â€� an offshoot of the Narmada dam.)

Profligate flooding of fields through subsidised irrigation -- accounting for something like 80% of the country's total water use -- can change the face of the countryside for the worse. Farmers along the Rajasthan canal are growing wheat in the desert. In Punjab and Haryana, excessive irrigation has resulted in waterlogging. This has been amply documented by Shripad Dharmadhikari in his study on the illusory benefits of the Bhakra dam and Nangal canal in that region, which is potentially one of the most productive wheat-growing areas in the world. Even so, as Professor Swaminathan observes, India is able to produce only 2.71 tonnes of wheat per hectare, as against a whopping 7.58 tonnes in France and 4.25 tonnes in China.

In the developed world, there are countless examples of bad subsidies that artificially depress the prices of agricultural commodities to make them competitive. In a case studied at length at the Mumbai workshop, several speakers referred to how the US provides a subsidy of $ 4.7 billion for the cotton produced by its 20,000 farmers (and another $ 180 million to its textile industry). This means that under World Trade Organisation (WTO) rules prying open free trade in farm produce, Indian cotton farmers can no longer compete in the world market.

Devinder Sharma pointed to the contrast between the two countries: India has 320 million farmers, with an average holding of 4 hectares. The US has a minuscule number, with an average holding of 50 hectares. In the EU, a farmer quits his occupation every minute. As the controversy over SEZs depicts graphically in this country, farmers are by no means reconciled to switching to any other occupation.

The US can produce 7 tonnes of rice per hectare, as against 3 tonnes in India, on average. However, while the output of American rice is worth $ 1.2 billion, there is a $ 1.4 billion subsidy! In any case, as Sharma proved, productivity is not the only criterion for profitable exports. Thailand has now emerged as the biggest exporter of rice, but it produces only 2.8 tonnes per hectare. While economists like Dr Gulati advocated importing foodgrain if it was cheaper than the domestic price, Jawandhia and Sharma warned that importing food was equivalent to importing unemployment in this country. If there is one warning that both the virtual epidemic of farmer suicides and the agitation against SEZs underline, there will be widespread social unrest if the agricultural sector continues to decline and perish, with consequences for the ruling coalition that will be nothing short of disastrous.

According to Steenblik, subsidies given by the EU to dairy producers have resulted in major abnormalities: in Latin America, in the 1990s, when the EU donated its surplus milk powder, it was so plentiful that people used it to outline football pitches! Subsidies given to Denmark's wind energy producers (like Micon, which NEPC in India collaborated with for some years) enabled that tiny country to corner three-quarters of the world trade.

An emerging cause for concern is the subsidy given by the US to biofuels -- mainly corn -- to produce ethanol, supposedly a "green" fuel for cars. Not only does this divert corn from human consumption to fuel SUVs and the like, it also distorts cropping patterns in the US. Steenblik observed that a SUV, if run on ethanol, receives a subsidy of $ 520 per year, which is about the per capita income of a poor country like Burkina Faso. This policy also does not take into account the ecological impact: every kilolitre of ethanol produced depletes 10 kg of topsoil.

Sharma made a strong case for getting exporting countries to abolish subsidies or stop trading with them. When the WTO dispensation on free movement of agricultural produce was introduced, the World Bank estimated that the gains to the world would be $ 90 billion, of which $ 16 billion would accrue to developing countries. According to a study conducted by the Carnegie Endowment for International Peace in the US, however, the actual gains have been only $ 37 billion, out of which 110 developing countries benefited by only $ 6.76 billion. This is equivalent, asserted Sharma, to only half this country's rural development annual budget.