Agri Reform: Replacing Subsidies with Direct Benefit Transfer

As part of rationalising the subsidies time and again it has been suggested that replacing subsidies with the direct benefit transfer (DBT) through the trinity of JAM (Jan-Dhan, Aadhaar and Mobile) would not only empower the poor and farmers but also usher in a policy shift that can save the exchequer least Rs 50,000 crore every year.

Quantum of Subsidies

Food Subsidy

The market cost of rice hovers around Rs 35 per kg and that of wheat is about Rs 25 per kg, whereas rice is being sold via the PDS at Rs 3 per kg and wheat at Rs 2 per kg. This subsidy on rice and wheat covers around 90 per of the total subsidy.

The budget 2019-20 has made food subsidy allocation of Rs 1,84, 220 crores. Together with this there been pending dues of around Rs 1.86 lakh crore from Food Corporation of India (FCI). The FCIs loan from Banks now stands at Rs 2.48 lakh crore.

Inefficiency of Subsidies

The government procures paddy and wheat from rural areas. Then after adding almost 50 per cent cost for procurement, stocking and distribution on top of the MSP price, sells the back most of this grain to people in rural areas.

Can DBT address this inefficiency?

It is said that the government can better achieve its objective of empowering the poor in a much more cost-effective way if it transfers an equivalent amount of food subsidy in the form of cash to the beneficiary’s accounts.

The DBT will empower the people to buy anything rice, wheat, coarse cereals, pulses or even milk and eggs, which are more nutritious. This diversification of the diet will also aid in crop diversification.

Fertilizer Subsidy

The budget has allocated Rs 80,000 crore for fertilisers in the budget. Further, the government is yet to clear Rs 38,000 crore of its dues towards the fertilizer industry.

The urea price in India which is at roughly $80 per tonne is the lowest in the world whereas the average cost of production of the industry is around $250 per tonne. This large difference between the market price and cost price is leading to large leakages and inefficient use, besides polluting the groundwater table — in fact, the environment at large.

Moreover, studies show that crops do not absorb more than 25 per cent of the urea being applied in India. Hence India is basically subsidising the pollution of the environment.

The studies also suggest that by rationalising these subsidies and by converting them into direct cash transfers on a per hectare basis the government can save about Rs 50,000 crore every year. This money can be invested in agri-R&D and water management.