Given how overall subsidies have risen from 1.4% of GDP in the NDA years to 2.4% in the UPA-2 period—they could rise to 3.4% if the Food Security Act is implemented in earnest—containing this has to be top priority for the new government. Though politicians like to pretend otherwise, the fact is very little of the subsidies go to the poor. The Kirit Parikh panel, for instance, has pointed out to how just 0.07% of the LPG subsidy in rural areas went to the poorest fifth of households. Another report, from the Commission for Agricultural Costs and Prices (CACP) on fertiliser subsidies which may be out by the time the new government takes over, is expected to make much the same point on fertiliser subsidies—while fertiliser subsidies in the interim budget for FY15 have been kept at FY14’s level of R67,970 crore, this will overshoot the target since FY14’s arrears alone add up to over R30,000 crore.
The report, based on an earlier study by the commission—Pricing, Costs, Returns and Productivity in Indian Crop Sector during 2000s—tries to quantify who gets the fertiliser subsidy and, more importantly, whether it at all makes a difference to farmers. After all, if the hike in costs resulting from a cut back in subsidies is taken care of by a hike in MSP, for instance, this leaves the farmer unaffected. According to the CACP study, fertiliser costs comprise just 5% of the total cost of production for the farmers. Which means that, were fertilisers prices to be raised by, say, 10% each year, this would raise the cost of production for farmers by less than 0.5%, something that is quite easily absorbed. CACP analysis also shows productivity—and profits—tends to be higher in irrigated areas which are also the ones where more fertiliser is used per hectare. Since this is the land owned by richer farmers, this means poor farmers get hit twice over. They don’t get as much fertiliser subsidy as their lands are not irrigated; and since a higher fertiliser subsidy generally means the government has less to spend on creating irrigation facilities, they get hit by their lands being less productive. From an equity angle, therefore, it would be beneficial to reduce spending on fertiliser subsidies and to channel this money into creating more irrigation facilities. That’s an easy enough lesson, but the surprising part is that the UPA has not paid much