PMEAC for dismantling farm subsidies without causing disarray

Stating agriculture subsidies are losing their relevance and becoming unbearable fiscal burden, Prime Minister's Economic Advisory Council (PMEAC) today suggested the government make a determined move to dismantle the system without causing disarray.

"A determined move needs to be made to dismantle the subsidy regime in agriculture. It should be recognised, however, that the system has become addicted to subsidies and therefore, actions in this regard should be a retreat without disarray," said 'The Economic Outlook for 2012-13' brought out by the PMAEC, headed by C Rangarajan.

"These subsidies are progressively losing their relevance and are becoming an unbearable fiscal burden. Their role in contribution to productivity enhancement is fast disappearing." the report said.

As a vehicle for increasing income of the producers, subsidies have proved to be an inefficient and inequitable instrument, it said.

As a result, the PMEAC stressed that "a beginning can be made in dismantling fertiliser subsidy".

The panel observed that the issue has been complicated and that fertiliser production in the country was not based on the comparative advantages.

Among various suggestions for reforming fertiliser sector, those offered by the Expenditure Reforms Commission and reiterated by the PMEAC need to be examined for implementation, it added.

Of Rs 65,592 crore budget estimates for fertiliser subsidies during the current fiscal, about Rs 35,000 crore have already been disbursed.

On removal of power subsidy for the agri sector, the PMEAC report said there is a growing consensus among experts on removing it after reforming the power sector.

A number of states have started implementing reforms in a phased manner. "But so far no perceptible results have been obtained. The Achilles heel in these reforms is inefficiency in power generation and huge transmission losses," it said, adding unless these are remedied it would be difficult to remove subsidies on power for agricultural purposes.

"However, free power to agriculture is not going to solve these problems, it will only make a bad situation worse," the report noted.

The PMEAC further observed that "while there is some thought, though not much action, on removing subsidies on fertilisers and electric power, removal of subsidies on canal water has not attracted serious attention of policy makers".

Pointing out that pace of reforms in agriculture sector has been slow, the panel suggested the government re-examine the two theories -- state governments being responsible for reforms and limited capacity of small/marginal farmers to absorb shocks -- attributed to sluggish farm growth.

Apart from reducing subsidies, the PMEAC suggested the government pay greater attention to liberalising tenancy arrangements and reforming domestic markets for agricultural produce.