Agricultural-Input-Subsidy

To modernize the existing technology or to implement new technology subsidy play an important role.

By Ayesha Rauf

Background: Developmental subsidies particularly on fertilizers and tube wells were found to be very effective in a country like Pakistan. After 1950s subsidy on agricultural inputs were provided in Pakistan. Government of Pakistan provided subsidy on fertilizers to boost their use.  During the 1960 method of subsidizing agriculture inputs was continued and at the end of the 1960s utmost of the inputs including seed, insecticide, fertilizer, irrigation water, and installation of tube wells, tractors and their spare parts were subsidized. Subsidies Resulted into higher input prices throughout the 1970s hence started to be cut down. These higher expenses were followed by recession all over the world. This was the time when oil and credit crises rise and there was excessive devaluation of Pakistan currencies. In the 1970s Subsidies existed on most of agricultural inputs, but government removed them in the 1980s due to the pressure of the World Bank and the IMF. Subsidies were removed from pesticides, tractors, tube wells and seeds in 1985 and in 1990 subsidies were also stopped for nitrogenous, potash, and phosphoric fertilizers consecutively.

Impacts of subsidy programme

Lower the prices of agricultural input known as input subsidies. Subsidies reduce the cost to farmers and indirectly increase the income of poor farmers and consumers, whereas the policy provides financial support to very few poor farmers and taxpayers. Due to the transfer of income, farmers can increase their yields using input. Input subsidies when applied to staple crops they increase their level of production at both levels the household and the national and also replenish soil fertility. Subsidized companies should increase the level of output where there is a significant growth in supply and demand for the poor, mainly cereals. Increase in yields depend on following elements e.g., quality of the input, timing of delivery, complementary resources such as availability of seed, weather conditions, and the technical skills of beneficiaries in using the inputs. Due to high level of production, subsidies could significantly reduce the charges of staple food, particularly if the country is geographically isolated from the international market and domestic food prices rise because of higher transportation costs.

The subsidy affecting production pushes up demand for agricultural on-farm labor, rural real income will be an increase, which also provide an advantage to those who are not achieving the targeted subsidy program. Rising revenues could increase demand for inputs, and transfer to producers will return to suppliers. Private sector is ideally included in policy and policy has potential to contribute to the development of the input market in the country by facilitating investment in marketing systems and lowering transaction costs. New suppliers will enter in the enterprise as subsidized and unsubsidized business, it will also increase in volume when market starts to expand. So, competitiveness, efficiency, and ability to understand economies of scale will increase and market margins will decline.

Wages and real income of major producers and consumer’s increases, subsidies provide long-term development of rural market structure improves the demand for products such as livestock, horticultural crops, non-agricultural goods and services.  The land is released and supply capacity increases as productivity increases. Due to multiple effects, subsidies can facilitate long-term livelihood changes. There is more than one spoiler effect on markets as interlocking arrangements are made between input suppliers and agents. Subsidy programs also provide the social protection and food security at both household and national level by enhancing the production of staple crops and lowering prices of food, especially when country is not united with the international markets. Reducing food prices can have ambiguous consequences. On the one hand consumer welfare increasing, and the producer surplus decrease results in lower output prices, which is obtained from the transfer of producer. Second reason is that, a reduction in returns can lead to farmer losses due to lower prices.

Recommendations:

Farmers should utilize subsidized input rather than selling they should apply them on their crops, otherwise it will end up profiting better-off farmers. Large scale farms produce higher value cash crops often, staple crops may not encourage at the national level to the same scope, and there will be no discount in output prices that help poor food buyers. Food entitlement of poor households will not increase through subsidies. It is cleared that if farmers are selected through vouchers, the charges of exchanging vouchers for inputs increase significantly if there are no input suppliers located locally.

 

Each crop needs different types of fertilizer according to its conditions. Fertilizer should be compatible with the crop which is supported by the system and is targeted by subsidies. For developing input market, vouchers should be exchanged between private input suppliers. Instead of relying on the government, we should move to the private sector as fertilizer suppliers or choose some private companies, which will play a significant role in the development of private distribution sector. We have to established a voucher system, try to keep it functional in a steady way for at least five years. It will allow enough time to develop the further system, and it will enhance the development of private sector and also encourage the use of fertilizer by farmers. Long-term programs are often difficult to maintain with a short cycle of donor and government funding, but genuine efforts have been made to make the program sustainable, exclusively if it has achieved significant benefits.

The program classifies a strict criterion to mark recipients and should also introduce a mechanism to control and prove the effectiveness of targeting. For example, land size is one such feature that has been used in recent subsidy programme.  In some subsidy program it has been found that an effective way to enhance the proficiency of targeting is to bound the size of subsidized inputs to a level that is too small/minor to interest better-off farmers but appropriately enough to benefit poorer producers. Introducing a self-targeting component into the program. Keeping the subsidy programme apolitical, is challenging to achieve, particularly during elections despite of its importance.