CHAPTER 2

COMPOSITION, MAGNITUDE AND TREND OF INPUT SUBSIDIES

CHAPTER 2

COMPOSITION, MAGNITUDE AND TREND OF INPUT SUBSIDIES

This chapter presents a comparative analysis of the composition, magnitude and trend of

input subsidies (fertiliser, electricity and canal irrigation) at all India level and in Haryana

during 1981-82 to 2004-05. It is divided into six broad sections. Section one is related to

the review of literature on different aspects of input subsidies. Section two, three and four

are related to estimation of fertiliser, electricity and canal subsidy respectively during the

last two and half decades. Section five presents the composition, magnitude and trend of

total input subsidy, whereas the last section concludes the main findings of this chapter.

2.1 REVIEW OF LITERATURE

The successive droughts in 1965-66 and 1966-67 accentuated the need for food

sufficiency in India. The government responded by introducing the seed-water-fertiliser

technology in the 1960s. This technology demanded a high priority for supplying

irrigation water, electricity and fertilisers to the farmers. The need was further reinforced

by the objective of foodgrains self-sufficiency that followed during this time. Owing to

the strategic importance of these critical inputs, the onus fell upon the government to

ensure that water, power and fertilisers were available, accessible and affordable.

Subsidies thus, became an important instrument of domestic economic policy.

The primary objectives of these input subsidies were to help diffusion of technological

inputs; to create productive assets for the poor farmers; and to protect poor consumers

from sustaining a loss in real incomes due to food price inflation. It required balancing of

the interests of consumers and farmers. The policy of the government has been of low

input and low output prices. A high input, high output prices policy would have penalised

the small and marginal farmers who produce largely for their own consumption.

Evidently, higher food prices would have been a serious constraint for the population

living in poverty. Therefore, both input subsidies and output prices support programmes

were used as complementary instruments of the twin policy of promoting productivity

9

and stabilising the agricultural prices (Acharya, 2000; Subbarao, 1985; Maene, 2000;

Acharya, 1995).

Subbarao (1985) maintains that subsidies are expected to be short run measures, and are

not meant to be the substitutes for long run improvement in social and physical

infrastructure. Even in the short run a sharp rise in the subsidies may cut into the

resources available for productive investment. Rao and Gulati (1994) indicate that input

subsidies in the initial stages of the green revolution did induce the farmers to readily

adopt new technology. Over a period of time, however, these subsidies began to mount,

even as the farmers became fully conscious of the profitability of new technology. The

general impression has been that Indian agriculture is highly subsidised through cheap

fertilisers, free power and irrigation water. Many studies on input subsidies have

suggested for their phased withdrawal over a period of time. The high amount of

subsidies on fertiliser, irrigation, and power has been questioned on the following

grounds (Acharya, 2000):

• The subsidies have placed an unsustained burden on the finances of the central

and state governments, which have severely limited the public sector capacity for

financing investment in agriculture and irrigation.

• Subsidies on irrigation through canal water and electricity have led to the

distortion of the cropping pattern in favour of water intensive crops.

• Theses subsidies have also led to adverse environmental effects. Over irrigation

by farmers has led to water logging and salinity in certain areas. Similarly, under

pricing of electricity has led to the depletion of ground water in some areas.

• The bulk of the benefits of these subsidies have gone to the irrigated areas and

large farmers with serious long term implications for inter-regional and inter-

personal disparities in development.

However, the questions must be carefully answered before deciding on the withdrawal of

these subsidies. For example, the question of whether these subsidies have a role to play

in the context of increasing production and providing food security must be addressed.

The question of whether the benefits of these subsidies have gone only to the rich farmers

10

of irrigated areas must be looked. The issue of the effect of the withdrawal of subsidies

on farm income, private investment, small and marginal farmers, standard ofliving of the

poor strata of the society, level of inflation and on the export performance also demands

attention.

The strongest case for a progressive removal of subsidies continues to be based on the

increasing fiscal burden on exchequer at a time when fiscal deficits need to be contained.

Given the magnitude of the subsidies, it is easy to imagine the impact it has on the

finances of the input supplying agencies. In the case of canal irrigation and power,

irrigation departments and State Electricity Boards (SEBs) form the channels through

which the subsidies are administered. By charging rates below the cost, the input

supplying agencies have not been able to sustain themselves financially. These agencies

are forced to turn to the state governments for budgetary support. In the case of fertilisers,

the subsidy is borne by the union government. Since the state and the union finances

itself are in doldrums, such situation cannot be sustained for long.

In this connection it is interesting to review two papers of the Ministry of Finance

(Government of India), which estimated the financial burden imposed by the major

subsidies. First paper (1997) gave a comprehensive estimate of budget based subsidies in

which both explicit and implicit subsidies were covered. This study made the

classification of subsidies into three categories i.e. public, merit and non-merit goods.

The estimation of budgetary subsidies is computed as excess of the cost of providing a

service over the recoveries from the service. There is a consensus on the provision and

continuance of subsidies on the merit goods since the overall benefit to the society in the

form of externalities is much larger. However, the provision of subsidies on non-merit

goods has come in for sharp criticism as in their case, the benefits accrue to the individual

while the costs are borne by the society. Moreover, in several cases, instead of intended

beneficiaries, the benefits are appropriated by better-off sections. This paper has shown

that non-merit subsidies were 10.71 percent of Gross Domestic Product (GOP) and merit

goods subsidies were 3.69 percent of GOP. The recovery rate in case of the centre was

1 1

12.1 percent for non-merit goods and that of the state governments was 9.3 percent. At

the aggregate level, the recovery rate was 10.3 percent.

However, proper classification of merit and non-merit goods was lacking in this paper.

For example, only primary education is a merit activity, but rest of the education is not.

The classification of subsidies has to be carried out with greater sensitivity inspite of the

complexities involved. Another major drawback of this paper is that it takes a purely

budgetary approach to determine the magnitude of the subsidies. Such an assessment

strengthens the lurking argument that any reduction in subsidies will harm the small and

marginal farmers and hence be politically incorrect. (Gandhi and Patel, 2006; Chopra,

2004; Datt and Sundharam, 2006)

The Ministry of Finance again presented a report on central government subsidies in

2004. This report has focused on the central government subsidies and leaves out state

government subsidies. The earlier discussion paper was thus, more comprehensive. While

it gives a total estimate of explicit and implicit subsidies, it concentrates on a detailed

analysis of only explicit subsidies which accounts for only 40 percent of the total

subsidies in 2003-04. Even in explicit subsidies, it makes a detailed analysis of three

major subsidies i.e. food, fertilisers and petroleum and give suggestions to rationalise

these subsidies.

Though, input subsidies on fertiliser, power and irrigation has placed unsustained burden

on the finances of the central and state governments, a pertinent question arises about the

impact of these subsidies on the capital formation in agriculture sector. The period since

1991, has seen a fall in public sector capital formation. There is a widespread decline

across board in all the states in public sector capital expenditure for agriculture. The

highest decline is observed in resources allocated by the union government for

agricultural infrastructure. The decline is not confined to investment in irrigation projects;

it is rather sharper in other heads related to agricultural development (Chand, 2006; Rao

and Gulati, 2005).

12

On the question of efficient instrument to attain high agricultural growth, Roy and Pal

(2006) used the 2SLS model to conclude that investment is a better instrument than

subsidisation. This does not necessarily mean that agricultural subsidies are wasteful

expenditure. What the result shows is that marginal benefit from one rupee investment in

agriculture is higher than spending it on subsidy. Since public investment in agriculture

has larger productivity enhancement effect than subsidy, the state governments should

restrain themselves from diverting resources to subsidise agriculture at the cost of more

productive investments. However, just reducing the subsidy will not serve the purpose.

The reduction in subsidy should be planned in a judicious manner in view of the various

sensitivities involved. The planners need to ensure that the additional savings from

reduction in the subsidy bill will be ploughed back as investment in agriculture. Without

this, it will have a regressive effect on agricultural productivity and rural poverty. At the

same time, whatever subsidies are provided, should be targeted to the poor and to the

backward regions, where productivity is very low and farmers are unable to invest more

in agriculture.

Another problem associated with input subsidies is that it distorts the choice of cropping

pattern. In the USA, for example, lobbying and political pressures have led to

complicated price and trade barriers for rice that prevent competition from imports.

Under such a system, one can find huge rice production, a high water consuming crop in

the middle of the San Joaquin Valley of California, where high evaporation rate wipe out

more than 50 percent of the applied water, contributing to water logging and downstream

salinisation. In Turkmenistan, the distorted price and production quota for wheat and

other staple crops grown in the middle of the Karacum Desert have led to over-extraction

of water from Amu Darya, resulting in further drying of the Aral Sea and creating

polluted return flows. Supporting the price paid for the sugar in Morocco has protected

powerful farmers and corporation on the one hand and depleting aquifers of their scarce

water on the other (Sur, Deininger and Dinar, 2002).

Thus, the serious impacts of input subsidy are environmental degradation and promoting

growth which is likely to be unsuitable and unsustainable in due course. Singh and Joshi

13

(1989), Rao and Gulati (1994), Gulati and Shanna (\995) reveal that subsidy on

irrigation through electricity and canal water causes distortion in cropping patterns such

as in favour of water intensive crops like paddy in Punjab and sugarcane in Maharashtra.

Input subsides, by encouraging the intensive use of inputs in limited pockets, have led to

lowering the productivity of inputs, reducing employment elasticity of output through the

substitution of capital for labour, and environmental degradation such as waterlogging

and salinity on the one hand, and lowering of water tables on the other. In a case study of

Gujarat, Shaheen and Shiyani (2005) conclude that flat tariff rate is the major factor of

groundwater over-exploitation in the region as subsidisation of electricity for pumping

ground water reduces the marginal cost of extraction to near zero and thereby encourages

the farmers to use the resource inefficiently. Alagh, (2003) has shown that the agriculture

sector in Punjab and Haryana is also facing serious problems like fast dwindling ground

water resources, increasing strain on marketing infrastructure because of minimum

support prices not keeping pace with rising costs of production.

On the equity issue, many studies conclude that most ofthe benefits of these subsidies are

appropriated by irrigated area and large fanners. Gregory, Roy and Bumb (2000) report

that input subsidies have a more pernicious impact on resource allocation, compared to

other forms of support. The choice of input mix and products produced is distorted and

the effectiveness of such intervention in raising fann incomes is not guaranteed. Farmers,

growing crops that require higher fertiliser rates )than other crops receive a

disproportionate quantity of subsidy. This in tum can distort farmers' economic decisions

by encouraging the planting of high fertiliser using crops that may not have comparative

advantage. Agricultural support policies in Turkey were having effect of widening

income disparities between various regions, especialIy as the poorest regions were

relatively non-intensive users of subsidised inputs.

Subbarao (1985) states that the benefits from a combination of incentive policies

comprising price supports and input subsidies have accrued disproportionately to the

prosperous regions and affluent farmers. The proliferation of input subsidies, which are

cornered by the high productivity regions, escalate the treasury cost and reduce the

\4

effective public resources available for investment in irrigation and infrastructure in the

backward regions. It has been found that most of the share of input subsides has been

appropriated by fewer better-watered and well-developed regions.

Similarly, Singh (2004) indicates the high degree of inequity in crop-wise and state wise

distribution of fertiliser subsidy. Paddy and wheat crops alone account for more than half

of fertiliser subsidy. Also it is the regions and states with better irrigation facilities such

as Punjab, Haryana, Uttar Pradesh and Andhra Pradesh, which specialize in cultivation of

water-intensive crops, are getting a large share in subsidies. Favourable agro-climatic

conditions, better infrastructure and bias of technological change in case of superior

cereals are responsible for the prevailing inter-crop and inter-regional inequity in

distribution of fertiliser subsidy.

Jain (2006) observes that the policy of electricity subsidy ignores equity considerations.

The study highlights the existence of disparities in the flow of electricity subsidy between

the advanced and backward regions of Punjab. While the medium and the large farmers

reap all the major benefits of the subsidy, the poor farmers, especially in the backward

areas remain excluded due to their non-possession of electricity connections.

Tuteja (2004) examines the utilisation of agricultural input subsidies in Haryana based on

micro level data. The results regarding net returns per hectare and per farm are indicative

of positive impact of subsidies on the net returns/income of the farmers. Withdrawal of

input subsidies would affect the income of farmers adversely. The benefits of input

subsidies accrue disproportionately to affluent farmers with large size of holding but the

small and marginal poor farmers also benefited by raising their meager income from

cultivation.

Sinha and Prasad (1980) made an attempt to assess the impact of subsidies on agricultural

productivity, income and employment of the selected beneficiary farmers' households in

Muzaffarpur district in Bihar. Marginal farmers have not benefited much from the

subsidies for irrigation and agricultural inputs because of their resourcelessness and small

15

size of I~nd holding. The agricultural subsidy requires the matching capital investment in

irrigation facilities ahd these farmers are hardly in a position to meet these expenditure.

In a case study of Punjab, Gupta (2002) substantiate the hypothesis that any scheme of

subsidy would benefit the big farmers more in view of their better resource position and

high risk bearing capacity. Subsidy on gypsum is one such example. Such subsidies are

likely to generate more inequalities in the distribution of income, unless, if such subsidies

are specifically designed for small peasantry. Since the study shows that agricultural

subsidies do effect production, cropping intensity and cropping pattern in the desired

direction, thus it should be continued and judiciously used to achieve the set targets.

Another important question related to input subsidies is the impact of its withdrawal on

the productivity and profitability of agricultural sector. Acharya (2000) indicates that

withdrawal of input subsidies would result in reduction of income of the farmers and

adversely affect not only their levels of living but also private investment in agriculture.

Singh (2004) and Acharya (2000) indicate that a reduction in fertiliser is likely to have

adverse impact on the welfare of the marginal and small farmers, who constitute a large

majority of farmers in the country. On the other hand, they will gain little from a rise in

output prices as they have little surplus to sell in the market.

The short-term effect of increase in input prices or user charges on the cost of production

can be assessed by looking at the share of these inputs in the total cost of production,

working on the assumption that the use of these inputs remains constant despite an

increase in their prices. For example, the cost of production of wheat would increase by

20 percent in Punjab. Moreover, another important aspect is the impact on paid out costs.

In such a situation, unless an increase in product prices is much higher than the increase

in th~ cost of production, even the surplus-producing farmers may not be fully

compensated (Acharya, 2000).

Chopra (2004) examines the subsidies given to irrigation (both surface and ground water

irrigation) with the explicit objective of determining whether their phased withdrawal

16

will impact the small and marginal farmers more than the large farmers. This exercise

investigates into the likely effects of a withdrawal of irrigation subsidies on small and

marginal farmers. Both single equation and simultaneous equation models are used to

analyse data for 1997-98. For surface water, adoption of better technology as exemplified

by improved seeds and location in canal command are the important factors determining

proportion of area irrigated by a holding. Irrigation water charges and size of the holding

are insignificant. This is uniformly true for all set of holdings. It is also found that a

withdrawal of subsidy and a consequent rise in the power tariff will have an adverse

effect on spread of ground water irrigation. However, the adverse effect will be felt more

or less uniformly by holdings of different size groups. Small and marginal farmers are not

adversely impacted due to the smallness of their holding per se.

At this stage, it is worth to examine some of the issues related to individual component of

input subsidies (fertiliser, power and canal irrigation). Over the past two decades input

subsidies have shown upward trend, though magnitude of these subsidies has fluctuated

considerably. In case of fertiliser subsidy, the oil crisis of 1973174, when India was still

dependent on grain imports, motivated the government to develop the Retention Price

Scheme (RPS), fixing a fair price for fertiliser based on prescribed efficiency norms and a

controlled price affordable to farmers, while at the same time giving a reasonable level of

return to the industry. After implementing the RPS for nitrogen producers in 1977, RPS

was implemented for phosphate fertilisers during the next few years. This scheme not

only attracted considerable investment in fertiliser production but also led to manifold

increase in fertiliser subsidy due to various reasons. Firstly, subsidies are paid on more

tonnage each year due to demand growth. Secondly, the reluctance of the government to

raise retail prices to match increases in domestic production costs and international prices

widens the per unit subsidy cost.

Gulati and Sharma, (1995) and Gregory, Roy and Bumb (2000) are of the view that

fertiliser policies grossly distort the relative prices of the three major plant nutrients.

Indian policies have kept the maximum sale price of nitrogen (N) low relative to

phosphate (P) and potash (K), particularly since the deregulation of P and K markets in

17

inefficiency of SEBs to the rest of economy. Another dimension worthy of attention is

that the farmers may actually be paying much more than what is being reflected in the

government records of revenue tariff. There is a pressing need to correctly estimate the

consumption of different categories and set right this wide variation in estimates by

actually measuring power consumption through metered supplies. This study suggests

that in rationalisation of the pricing policy, serious thought must also be given to quality

of service. Currently, power supplies are so unreliable, inadequate and of such poor

quality that the farmers are highly dissatisfied. Thus, there is an urgent need to increase

efficiency in generation, transmission and distribution, and link power supply and tariffs

to quality and putting in place rational pricing policy free of political interference.

Another important point related to power subsidy is the practice of the flat rate system in

agriculture sector. This system implies that the marginal cost of additional unit of

electricity used is negligible. This provides an incentive to the farmer to go for water

intensive crops. As a result, in the low rainfall area or where groundwater reserves are

inadequate, the availability of water gets depleted beyond the recharge level. While some

increase in electricity charges would help in solving the problem of fast depleting

groundwater levels in certain areas, it may not bailout state electricity boards of their

financial losses. The approach to cost recovery in this sector should be based on a

package consisting of improving the efficiency of functioning of electricity boards

particularly reducing power theft and default in payments, replacement of flat rate system

by a system of metered supply and recovering the cost of installing meters and

administrations charges from the users (Acharya, 2000).

In case of canal irrigation, Raju and Gulati (2005) indicate that the irrigation sector in

India suffers from at least two interrelated problems. The first is a severe pressure on the

resources for normal operation and maintenance as the cost recovery from canal irrigation

is extremely low and the state budgets are unable to allocate more funds because of the

overall fiscal crunch. Secondly, the reduction in construction funding for new or ongoing

canal networks, leading to undue delays in the completion of projects, which in tum leads

to rise in costs and reduction of benefits. The quality of service provided by irrigation

19

agencies is not satisfactory. Fanners have the capacity to pay for higher irrigation

charges, and many are also willing to pay, but they need to be assured for better irrigation

service and plugging of leakage in irrigation funds.

On the issue of rationalisation of canal subsidy, Acharya (2000) indicates that the overuse

of water arises largely due to low water charges and that too at flat rates. Further, in many

irrigation command areas, the number of outlets is much larger than the authorised

number and the size of many of these outlets is also bigger than the prescribed one. Quite

often, obstructions are also placed in the minors and distributaries. As a result, the

problem of wastage of water gets compounded. Low water rates often do not give the

water user a correct idea about the scarce nature of this input. However, raising the

irrigation charges should not be considered as panacea to solve all these problems. In

fact, improvement in the efficiency of the management system should receive prime

attention. Once the system is improved and fanners are assured of the timely supply of

water, there may not be any resistance to the increase in water rates.

India is not required to cut the input subsidy under WTO provisions, however, the input

subsidy given to agriculture in India, not only financially unsustainable, but also under

pricing of inputs is a major cause of indiscriminate and injudicious use of these inputs,

raising the cost of production and contributing to degradation of land, pollution of water

resources and over exploitation of ground water. It is politically unwise to link reduction

of input subsidies with trade liberalisation and therefore, the importance of input subsidy

refonns cannot be undennined (Rao, 2001; Gulati and Narayan, 2003; Gulati and

Shanna, 1995).

It is pertinent to mention that technological progress and technical efficiency

improvement are the two key sources of long-tenn agricultural growth and more attention

should be given to promote them through investing in Research & Development (R&D)

and extension services. To date it has been argued that input subsidies are necessary

because agriculture could not afford to pay for inputs and also output prices were lower

than the international prices. However, increasing output prices without enabling fanners

20

to increase output through technological change and higher technical efficiency cannot

sustain higher growth in agriculture. To attain high agricultural growth, there is need for

large-scale price and institutional refonns to relieve the pressure of subsidies on the

exchequer and also to release resources for higher investments in agriculture sector.

There is an urgent need to target the subsidies more effectively to benefit small and

marginal fanners for whom these were originally intended and also to improve the

efficacy of public investments in agriculture so that they serve the desired purpose

(Guleria and Singh, 2001; Gulati and Shanna, 1995; Kalirajan and Shand, 2006; Chand,

2006).

2.2 FERTILISER SUBSIDY

This section is divided into two sub-sections. Methodology is discussed in sub-section

one, whereas sub-section two deals with the estimated fertiliser subsidy.

2.2.1 Methodology

Fertiliser subsidy extended to the agriculture sector consists of support provided on

imported and indigenously produced fertilisers. However, there is a debate on whether

fertiliser subsidy is really going to the fanners, or to the fertiliser industry. To estimate

the share of fanners, fertiliser subsidy is calculated on the import parity basis. The

fertiliser subsidy is measured as the difference between the import price and the domestic

price of the fertilisers. However, it is important to note that the consumption figures of

different fertilisers are available in nutrient tenns i.e. Nitrogen (N), Phosphorous (P) and

Potash (K), whereas the import prices are available in terms of their respective

compounds e.g. Urea, D-ammonium Phosphate and Muriate of Potash. Therefore,

Fertiliser subsidy is estimated in two steps:

l. Per ton fertiliser subsidy for compounds is calculated as the difference between

the import price of these compounds and domestic price of fertilizers, plus dealer

margins, pool handling and freight charges.

TH-16739

2. Estimated per ton subsidy on compounds Urea (46% N), O-ammonium Phosphate

(18-46-0) and Muriate of Potash (60% K) is converted! into their respective

nutrient i.e. Nitrogen (N), Phosphorous (P) and Potash (K). The resultant subsidy

on nutrients is multiplied by their respective consumption figure to obtain the total

fertiliser subsidy to agriculture sector at all India level and in Haryana.

2.2.2 Estimated Fertiliser Subsidy

Table 2.1 shows, per ton fertiliser subsidy on Urea, D-ammonium Phosphate and Muriate

of Potash. It was negative in 1986-87, due to the lower import price as comparison to the

domestic price of Urea. Though, the fertiliser subsidy on Urea has shown upward trend

during 1981-82 to 2006-07, but it varied year to year as a result of fluctuations in the

import price of Urea. The exponential growth rate of the import price of Urea was 6.06

percent during 1981-82 to 1990-91 and 5.77 percent during 1991-92 to 2006-07.

Whereas, the exponential growth rate of the domestic price of Urea was 0.46 percent

during 1981-82 to 1990-91 and 4.27 percent during 1991-92 to 2006-07. It means the

domestic price of Urea has grown at a lower rate than the import price, which led to the

rise in per ton subsidy on Urea during 1981-82 to 2006-07.

In case ofO-ammonium Phosphate (OAP, 18-46-0), per ton subsidy was negative during

1981-82 to 1983-84, 1986-87, 1992-93 to 1993-94 and 1995-96. It occurred due to the

fact that the domestic price of DAP was higher than the sum of the import price, pool

handling expenses and dealer margin. As the case of Urea, fertiliser subsidy on OAP has

shown upward trend during 1981-82 to 2006-07, but it has shown huge variations

because of the fluctuations in the import price during 1981-82 to 2006-07. The

exponential growth rate of the import price of DAP was 7.58 percent during 1981-82 to

1990-91, and 7.45 percent during 1991-92 to 2006-07, whereas the exponential growth

rate of the domestic price of DAP was 0.37 percent during 1981-82 to 1990-91, 2.36

percent during 1991-92 to 2006-07. Therefore, the domestic price of DAP increased at a

I Subsidy on N is (110.46) of subsidy on Urea. Subsidy on P is 11.46 (subsidy on DAP - 0.18 of Nitrogen subsidy); whereas subsidy on K is derived as (11.06) of subsidy on MOP (60% K20)

II

Table 2.1 PER TON SUBSIDY ON FERTILIZER COMPOUNDS

Rs./Ton YEAR 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90

UREA (N) (46% NITROGEN) c.i.fprice 1744 1380 1396 2000 2157 1350 1590 1941 2363 Pool handling expenses 791 1064 878 883 957 783 927 952 976 Dealer margin 120 120 130 130 130 130 130 133 137 Domestic price 2350 2350 2150 2150 2250 2350 2350 2350 2350 Subsidy 305 214 254 863 994 -87 297 676 1126

DIAMMONIUM PHOSPHAT P (DAP, 18-46-0) c.i.fprice 2240 2010 2045 2550 2487 2500 2651 3533 3787 Pool handling expenses 791 1064 878 1041 1163 840 996 1061 995 Dealer margin 145 145 190 190 190 190 190 190 190 Domestic price 3600 3600 3350 3350 3475 3600 3600 3600 3600 Subsidy -423 -381 -236 431 365 -70 237 1184 1372

MURIATE OF POTASH: K '60%) (K20) c.i.fprice 1716 933 999 1200 1347 1185 1201 1832 2149 Pool handling expenses 388 401 402 402 416 451 515 515 515 Dealer margin 90 90 95 95 95 95 95 95 95 Domestic price 1300 1300 1200 1200 1250 1300 1300 1300 1300 Subsidy 894 124 296 497 608 431 511 1142 1459 .. Source: 1. FertIlizer statIstIcs m IndIa (vanous Issues), Fertl\tzer AssocIatIOn of IndIa, New DeIhl.

2. Report of High Powered Review Committee (1998), "Fertilizer Pricing Policy", Department of Fertilizer, New Delhi. 3. Government ofIndia: Monthly Statistics of Foreign Trade. DGCIS. Calcutta, (Various Issues). 4. Gulati, Ashok and Sudha Narayanan (2003), "The Subsidy Syndrome in Indian Agriculture", Oxford Publication.

23

Table 2.1 (continue) PER TON SUBSIDY ON FERTILIZER COMPOUNDS

RS./Ton YEAR 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99

UREA (N) (46% NITROGEN) c.i.fprice 3194 3665 3809 3791 6105 6977 6522 4980 4338 Pool handling expenses 1001 1025 1050 1000 1010 1090 1190 1209 1229 Dealer margin 140 144 147 140 141 153 167 169 172 Domestic price 2350 3060 2760 2760 3320 3320 3490 3660 3660 Subsidy_ 1985 1774 2246 2171 3937 4900 4388 2699 2079

DIAMMONIUM PHOSPHAT P (DAP, 18-46-0) c.i.fprice 3804 4087 4430 4270 6631 7777 7088 8730 10030 Pool handling expenses 1001 1025 1050 1000 1010 1090 1190 1209 1229 Dealer margin 190 195 200 190 192 207 226 230 235 Domestic price 3600 5040 6650 6600 7753 9694 8394 8300 8300 Subsidy 1396 267 -970 -1140 80 -619 110 1870 3193

MURIATE OF POTASH: K (60%)(K20) c.i.fprice 2391 3004 3817 3784 3970 4543 4788 5816 6601 Pool handling exp_enses 531 543 557 530 535 578 631 650 670 Dealer margin 95 98 100 95 96 104 114 115 116 Domestic price 1300 1700 4500 3800 3787 4291 4122 3700 3700 Subsidy 1717 1946 -26 609 815 935 1410 2881 3686 Source: As Table 2.1 Note: Data for pool handling and dealer margin is extrapolated from 1997-98 onwards

24

Table 2.1 (continue) PER TON SUBSIDY ON FERTILIZER COMPOUNDS

Rs ITon YEAR 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

UREA (N) (46% NITROGEN) c.i.fprice 3741 5511 5688 5808 7558 10647 8972 10323 Pool handling expenses 1249 1269 1290 1311 1332 1354 1376 1398 Dealer margin 175 178 181 184 186 190 193 196 Domestic price 4000 4600 4600 4830 4830 4830 4830 4830 Subsid), 1165 2358 2559 2472 4247 7361 5711 7087

DIAMMONIUM PHOSPHAT P (DAP, 18-46-0) c.i.fprice 9214 8610 8039 8835 9574 12338 12972 14026 Pool handling expenses 1249 1269 1290 1311 1332 1354 1376 1398 Dealer margin 239 243 248 253 257 262 267 272 Domestic price 8300 8900 8900 9350 9350 9350 9350 9350 Subsidy 2402 1223 677 1049 1814 4604 5265 6346

MURIATE OF POTASH: K (60%) (K20) c.i.fprice 6997 7395 6017 5981 5761 8396 9668 10137 Pool handling expenses 690 711 733 755 778 801 826 851 Dealer margin 117 118 119 120 121 122 123 124 Domestic price 3700 4255 4255 4455 4455 4455 4455 4455 Subsidy 4104 3969 2614 2401 2205 4865 6162 6657 Source: As Table 2.1

25

lower rate than the import price, which has led to increase in subsidy on DAP during the

period 1981-82 to 2006-07.

Per ton subsidy on Muriate of Potash was a negative sum only in 1992-93, when the

domestic price ofDAP was higher than the import price. As, in the case of urea and DAP,

fluctuations in the import price of Muriate of Potash led to the wide variations in per ton

subsidy on potash during 1981-82 to 2006-07. The exponential growth rate of import

price of potash was 7.37 percent in 1981-82 to 1990-91 and 7.04 percent in 1991-92 to

2006-07, whereas the exponential growth rate of the domestic price was 0.41 percent in

1981-82 to 1990-91 and 2.74 percent in 1991-92 to 2006-07.

Table: 2.2 EXPONENTIAL GROWTH RATE OF IMPORT AND DOMESTIC PRICE OF

DIFFERENT COMPOUNDS (%1

Urea DAP Muriate of Potash Import Domestic Import Domestic Import Domestic

Year price price price price price price 1980-81 to 1990-91 6.06 0.46 7.58 0.37 7.37 0.41 1991-92 to 2006-07 5.77 4.27 7.45 2.36 7.04 2.74

Source: As Table 2.1

During 2002-03 to 2006-07, the domestic price of Urea, DAP and Muriate of Potash has

remained stagnant, but the import price of these compounds increased almost by 100

percent, which led to rapid increase in subsidy on these compounds in recent years. For

example, per ton subsidy increased from Rs.2472 to Rs.7087 on Urea, Rs.l 049 to Rs.

6346 on DAP and Rs. 2401 to Rs. 6657 on Muriate of Potash during 2002-03 to 2006-07.

The estimated per ton subsidy on different compounds (Urea, D-ammonium Phosphate

and Muriate of Potash) has been converted into their respective nutrients i.e. Nitrogen

(N), Phosphorous (P) and Potash (K) (Table 2.3). Per ton fertiliser subsidy on N was Rs.

560 in 1983-842, Rs. 2744 in 1990-91, Rs.4306 in 1999-00 and Rs. 12549 in 2005-06.

Subsidy on per ton Phosphorous (P) has shown huge fluctuations during 1983-84 to

2005-06 and was negative during 1983-84 to 1985-86, 1992-93 to 1997-98 and in 2003-

04. In case of Potash (K), per ton subsidy remained positive during 1983-84 to 2005-06.

2 Triennium ending

26

Table: 2.3 PER TON SUBSIDY ON FERTILISER NUTRIENTS

Rs ITon Triennium Ending N P K

1983-84 560 -973 730 1984-85 964 -512 509 1985-86 1529 -193 778 1986-87 1282 25 853 1987-88 872 44 861 1988-89 642 728 Il58 1989-90 1521 1428 1729 1990-91 2744 1789 2399 1991-92 3540 814 2846 1992-93 4352 -1201 2020 1993-94 4487 -3092 1405 1994-95 6054 -3841 777 1995-96 7976 -4338 13 II 1996-97 9583 -4061 1756 1997-98 8686 -2413 2903 1998-99 6642 1I50 4432 1999-00 4306 3725 5928 2000-01 4059 3353 6533 2001-02 4407 1393 5937 2002-03 5354 42 4991 2003-04 6723 -66 40 II 2004-05 10202 1418 5261 2005-06 12549 3555 7351

Source: As Table 2.1

2.2.2.1 Fertiliser Subsidy in India

Fertiliser subsidy3 is estimated by multiplying the per ton subsidy on N, P, and K with

their respective consumption figures at all India level. At current prices, the fertiliser

subsidy on N increased from Rs. 2511 million in 1983-84 to Rs. 21080 million in 1990-

91, Rs. 48207 million in 1999-00 and Rs. 149217 million in 2005-06. Fertiliser subsidy

on P was negative during 1983-84 to 1985-86, 1992-93 to 1997-98 imd in 2003-04. In the

case of, subsidy which was Rs. 512 million in 1983-84 increased to Rs. 2892 million in

1990-91, Rs.8751 million in 1999-00 and Rs. 15788 million in 2005-06 (Table 2.4).

3 All figures are for Triennium ending.

27

Table: 2.4 FERTILISER SUBSIDY IN INDIA

Total Total Subsidy

Triennium N P K Subsidy (8ase= 1980-81)

Ending

Current Prices Constant Prices 1983-84 2511 -1424 512 1598 1390 1984-85 5041 -777 409 4674 3588 1985-86 8464 -328 632 8769 6450 1986-87 7144 39 708 7892 5777 1987-88 4946 103 726 5775 3888 1988-89 4420 1950 1131 7501 4141' 1989-90 10808 4038 1874 16721 8782 1990-91 21080 5291 2892 29263 14133 1991-92 27872 2451 3684 34008 14810 1992-93 35564 -3394 2724 34894 13802 1993-94 37889 -8687 1765 30966 10713 1994-95 54667 -10763 804 44707 13762 1995-96 75824 -12277 1417 64964 18131 1996-97 94754 -11896 1916 84775 22063 1997-98 88953 -6485 3604 86071 20709 1998-99 71179 5932 5730 82841 18331 1999-00 48207 16167 8751 73124 15178 2000-01 45548 14777 10010 70335 14020 2001-02 49416 6656 9704 65776 12852 2002-03 58391 125 8012 66529 12733 2003-04 73818 -338 6513 79993 14786 2004-05 115328 6467 9662 131456 23269 2005-06 149217 17657 15788 182661 31346

Growth rate during TE 1983-84 to TE 1990-91 36.19 25.36 Growth rate during TE 1991-92 to TE 2005-06 9.56 2.69 Growth rate during TE 1983-84 to TE 2005-06 18.26 9.16 Source: As Tabl~ 2.1

Rs Million Asa

Govt. %of Estimate Govt.

Estimate

Current Price 6740 29 11914 30 16310 48 19160 41 19949 29 24206 26 33023 46 40439 71 45769 74 51081 71 52839 59 56070 80 58068 108 66940 127 80770 ltO 96277 89 115164 65 128104 56 132840 49 125408 53 118898 67 128732 97 148027 121

25.18 9.41 13.26

Total fertiliser subsidy, which is the sum of subsidy on N, P and K, has shown upward

trend during 1983-84 to 2005-06. The exponential growth rate of the fertiliser subsidy in

India was 36.19 percent during 1983-84 to 1990-91, 9.56 percent during 1991-92 to

2005-06 and 18.26 percent during 1983-84 to 2005-06. Though, the fertiliser subsidy

increased. during 1981-82 to 2006-07, the growth rate after 1991-92 was lower in

comparison to growth rate during 1981-82 to 1990-91. One of the reasons for low growth

of fertiliser subsidy in India was the sluggish trend in consumption of fertilisers during

28

1991-92 to 2005-06. For example, the exponential growth rate of Nitrogen (N)

consumption in India was 6.88 percent during 1983-84 to 1990-91 and 2.82 percent

during 1991-92 to 2005-06. In the case of P, it was 9.71 percent during 1983-84 to 1990-

91 and 3.74 percent during 1991-92 to 2005-06. The growth rate for K was 6.56 percent

during 1983-84 to 1990-91 and 4.32 percent during 1991-92 to 2005-06.

At constant prices, the fertiliser subsidy increased from Rs. 1390 millions in 1983-84 to

Rs. 14133 million in 1990-91, Rs. 15178 million in 1999-00 and Rs. 31346 million in

2005-06. The exponential growth rate was 25.36 percent during 1983-84 to 1990-91,2.69

percent during 1991-92 to 2005-06 and 9.16 percent during 1983-84 to 2005-06.

Table 2.4 also provides the government's estimates of the fertiliser subsidy during 1983-

84 to 2005-06. The Government estimates of subsidy are based on the retention price

scheme for fertilisers and concessions given to phosphatic and potassic fertilisers after

1992. The exponential growth rate of fertiliser subsidy (Government estimate) at current

prices in India was 25.18 percent during 1983-84 to 1990-91 and 9.41 percent during

1991-92 to 2005-06. Therefore, even the government estimate has shown lower growth of

subsidy during 1991-92 to 2005-06 in comparison to growth rate during 1980s.

The share of farmers and industry in fertiliser subsidy has been derived by comparing the

estimates on the basis of the import parity with the government estimates. The farmers'

share in the total budgetary subsidy was 29 percent in 1983-84, which increased to 71

percent in 1990-91, 127 percent in 1996-97, and then declined to 65 percent in 1999-00.

However, it again reflected upward trend after 1999-00, when farmers' share reached to

121 percent of budgetary support in 2005-06. There was a brief period, when share of the

farmers in total budgetary support was more than 100 percent i.e. 1995-96 to 1997-98 and

in 2005-06. An estimate of more than 100 percent shows that not only the total budgetary

subsidy was going to farmers, but also that the fertiliser industry was being implicitly

taxed. It occurred due to the fact that, the import parity prices during the above

mentioned years were so high that equating these prices with domestic prices would have

meant large profit to fertiliser industry. But, the implicit taxation of fertiliser industry was

29

only for a short period during 1983-84 to 2005-06. The fanners' share in budgetary

subsidy was 44.6 percent during 1981-82 to 1990-91 which increased to 85.06 percent

during 1991-92 to 2005-06. As a whole, the fanners' share was 68.88 percent during

1981-82 to 2005-06 and the industry share was 31.22 percent in the total budgetary

fertiliser subsidy. Fanners' share increased in the recent years due to the rapid rise in the

import price of different fertilisers on the one hand and stagnant domestic prices of these

fertilisers on the other hand. Due to this, fanners' share was 121 percent in total

budgetary support to fertiliser and thus, the fertiliser industry was implicitly net taxed in

2005-06.

Table: 2.5 COMPOSITION OF FERTILISER SUBSIDY IN INDIA

(%) Triennium Ending N P K TOTAL

1983-84 188.67 -118.33 29.67 100.00 1984-85· 177.00 -93.00 16.00 100.00 1985-86 109.67 -20.33 10.33 100.00 1986-87 118.33 9.00 -28.00 100.00 1987-88 112.67 11.67 -25.00 100.00 1988-89 101.00 22.00 -23.33 100.00 1989-90 66.67 21.33 12.33 100.00 1990-91 69.00 21.00 10.33 100.00 1991-92 81.33 7.67 11.33 100.00 1992-93 105.33 -13.00 7.67 100.00 1993-94 123.00 -28.67 5.67 100.00 1994-95 128.00 -29.67 1.67 100.00 1995-96 120.33 -22.67 2.33 100.00 1996-97 112.00 -14.33 2.33 100.00 1997-98 102.67 -7.00 4.67 100.00 1998-99 85.33 7.67 7.33 100.00 1999-00 65.00 22.67 12.67 100.00 2000-01 64.33 21.00 14.67 100.00 2001-02 74.33 10.67 15.00 100.00 2002-03 88.00 0.00 12.00 100.00 2003-04 92.00 -1.00 8.67 100.00 2004-05 89.00 3.33 7.67 100.00 2005-06 83.67 8.33 8.00 100.00

Source: As Table 2,1

Table 2.5 gives infonnation about the composition of the fertiliser subsidy in tenns of

their nutrients i.e. Nitrogen (N), Phosphorous (P) and Potash (K)' during the 1983-84 to

2005 .. 06. The share of any nutrient depends on the consumption level and per ton subsidy

30

on that nutrient. The share of N in total fertiliser subsidy was more than 100 percent

during 1983-84 to 1988-89 and 1992-93 to 1997-98. It happened due to the fact that the

share of either P or K was negative during that period. The major share of fertiliser

subsidy was in the form of Nitrogen (N) subsidy followed by Phosphorous (P) and Potash

(K).

Here, it is worth mentioning that the recommended consumption ratio ofN : P : K is 4 : 2

: 1. However, it was 6.20: 2.06 : 1 in 1983-84,6.35 : 2.51 : 1 in 1990-91,8.81 : 2.66 : 1

in 1995-96, 7.72 : 2.92 : 1 in 1999-00 and 5.84 : 2.29 : 1 in 2005-06. Therefore, the

consumption ratio at all India level was distorted during 1983-84 to 2005-06. This

distorted consumption ratio has resulted in many problems such as stagnation in

productivity, soil sickness, widespread deficiency of secondary and micro nutrients,

spread in salinity and alkalinity of the soil, etc. It is noteworthy that the Government of

India constituted a 'Task Force on Balanced Use of Fertilisers', under the Chairmanship

of A.K.Singh to review the policy on use of fertilisers. The committee recommended the

restoration of NPK use ratio at the macro level by increasing the use of P and K instead

of reducing the intake of nitrogen. However, at the micro level, the application of nutrient

has to be soils, crops, and climate specific.

2.2.2.2. Fertiliser Subsidy in Haryana

Fertiliser subsidy is estimated by multiplying the per ton subsidy on N, P, and K with

their respective consumption figures in Haryana (Table 2.6). At current prices, total

fertiliser subsidy in Haryana increased from Rs. 99 million in 1983-84 to Rs. 1395

million in 1990-91, Rs. 3585 million in 1999-00 and Rs. 11433 million in 2005-06. The

exponential growth rate of the fertiliser subsidy in Haryana was 31.85 percent during

1983-84 to 1990-91, 10.62 percent during 1991-92 to 2005-06 and 19.48 percent during

1983-84 to 2005-06. Though, the fertiliser subsidy in Haryana increased during 1981-82

to 2006-07, the growth rate after 1991-92 was lower than the growth during 1981-82 to

1990-91. One of the reasons for low growth of the fertiliser subsidy in Haryana was the

growth rate pattern in consumption of Nand P during 1983-84 to 2005-06. The

exponential growth rate of Nitrogen (N) consumption in Haryana was 8.10 percent during

31

1983-84 to 1990-91 and 4.41 percent during 1991-92 to 2005-06. In the case of P, it was

18.48 percent during 1983-84 to 1990-91, 4.56 percent during 1991-92 to 2005-06.

Table: 2.6 FERTILISER SUBSIDY IN HARY ANA

Rs Million TOTAL

N P K TOTAL (Base=1980-81) Triennium Ending

Current Prices Constant Prices 1983-84 128 -37 8 99 86 1984-85 253 -20 5 237 190 1985-86 432 -11 6 428 333 1986-87 363 0 6 369 287 1987-88 257 4 5 267 193 1988-89 232 86 6 325 199 1989-90 581 175 8 765 438 1990-91 1154 229 12 1395 724 1991-92 1570 99 13 1683 772 1992-93 1999 -177 \0 1832 755 1993-94 2184 -452 5 1737 617 1994-95 3175 -561 1 2615 824 1995-96 4502 -618 3 3886 1128 1996-97 5647 -567 5 5085 1387 1997-98 5323 -301 \0 5033 1282 1998-99 4238 242 17 4497 1048 1999-00 2836 723 26 3585 782 2000-01 2785 661 42 3487 719 2001-02 3162 316 47 3525 706 2002-03 3887 10 48 3946 767 2003-04 5011 -9 48 5049 944 2004-05 8145 367 80 8591 1561 2005-06 10361 - 908 165 11433 2033

Exponential growth rate during TE 1983-84 to TE 1990-91 31.85 22.67 Exponential growth rate during TE 1991-92 to TE 2005-06 10.62 3.54 Exponential growth rate during TE 1983-84 to TE 2005-06 19.48 10.12

Source: 1. As Table! 2. Statistical Abstract of Haryana (Various Issues)

At constant prices, the fertiliser subsidy was Rs. 86 million in 1983-84 to Rs. 724 million

in 1990-91, Rs.782 million in 1999-00 and Rs. 2033 million in 2005-06. The exponential

growth rate of the fertiliser subsidy at constant prices in Haryana was 22.67 percent

during 1983-84 to 1990-91, 3.54 percent during 1991-92 to 2005-06 and 10.12 percent

during TE 1983-84 to TE 2005-06.

32

Table 2.7 provides infonnation about the composition of the fertiliser subsidy in Haryana

in tenns of their nutrients i.e. Nitrogen (N), Phosphorous (P) and Potash (K) during the

1983-84 to 2005-06. The share of N in the total fertiliser subsidy was more than 100

percent during 1983-84 to 1985-86 and 1992-93 to 1997-98. It occurred due to the fact

that the share of either P or K was negative in the total fertiliser subsidy of Haryana

during that period. As in the case at all India level, the highest share of total fertiliser

subsidy was in the fonn of Nitrogen (N).

Table: 2.7 COMPOSITION OF FERTILISER SUBSIDY IN HARY ANA

(%)

Triennium N P K TOTAL Ending 1983-84 130.33 -38.00 7.67 100.00 1984-85 123.33 -26.67 3.33 100.00 1985-86 108.67 -11.33 2.67 100.00 1986-87 98.00 3.67 -1.67 100.00 1987-88 95.00 6.33 -1.33 100.00 1988-89 84.67 16.33 -1.33 100.00 1989-90 78.33 20.00 1.33 100.00 1990-91 79.33 19.67 1.00 100.00 1991-92 92.33 7.00 1.00 100.00 1992-93 110.67 -11.00 0.67 100.00 1993-94 125.33 -25.67 0.33 100.00 1994-95 126.33 -26.33 0.00 100.00 1995-96 119.67 -19.67 0.00 100.00 1996-97 111.00 -11.00 0.00 100.00 1997-98 104.67 -4.67 0.00 100.00 1998-99 92.67 7.33 0.33 100.00 1999-00 77.33 22.33 0.67 100.00 2000-01 78.33 20.67 1.33 100.00 2001-02 87.00 11.67 1.33 100.00 2002-03 98.67 0.00 1.33 100.00 2003-04 99.67 -0.67 1.00 100.00 2004-05 96.00 3.00 1.00 100.00 2005-06 91.33 7.00 1.33 100.00

Source: As Table 2.6

It is important to note that consumption ratio (N : P : K) is very much distorted in

Haryana agriculture sector. It was 20.23 : 3.47 : 1 in 1983-84, and 39.18 : 11.89 : 1 to

33

2005-06. In the case of consumption ratio between Nand P, it was 5.83 : 1 in 1983-84,

3.17 : 1 and 3.21: 1 in 2005-06. Therefore, farmers in Haryana are more intensively using

Nitrogen (N) than the other nutrients offertilisers.

2.2.2.3 Comparison of Fertiliser Subsidy at all India Level and in Haryana

At current prices, per acre fertiliser subsidy at all India level was Rs. 3.61 in 1983-84,

which increased to Rs. 63.64 in 1990-91, and Rs. 279.48 in 2004-05 (Table 2.8).

However, in the case of Haryana, per acre fertiliser subsidy was Rs. 7.06 in 1983-84, Rs.

95.32 in 1990-91, and Rs. 541.00 in 2004-05. Thus, per acre fertiliser subsidy in Haryana

agriculture sector is almost double of what agriculture sector at all India level received.

Even at constant prices, per acre subsidy in Haryana agriculture sector was approximately

twice the subsidy in agriculture sector at all India level.

As a percentage of agricultural GOP, fertiliser subsidy at all India level and in Haryana

has shown upward trend during 1983-84 to 2005-06. At all India level, it was 0.30

percent in 1983-84, which increased to 2.36 percent in 1990-91. However, it declined to

1.96 percent in 1999-00 and again increased to 3.63 percent in 2005-06. In Haryana, it

was 0.47 percent in 1983-84, which increased to 2.73 percent in 1990-91. Though, it

marginally declined to 2.49 percent in 1999-00, it increased very steeply to 5.43 percent

in 2005-06.

The share of gross cropping area (GCA) of Haryana in total GCA at all India level lied

between 3.03 and 3.39 percent during 1983-84 to 2005-06. However, the share of

Haryana agriculture in the total fertiliser subsidy at all India level ranged from 7.23

percent to 4.52 percent during 1983-84 to 2005-06. Thus, agriculture sector in Haryana

enjoys more than proportionate share (about 1.5 to 2 times) of total fertiliser subsidy at all

India level when compared to its proportionate share in GCA oflndia.

34

Table: 2.8 COMP ARSION OF FERTILISER SUBSDIY: INDIA AND HARY ANA

Asa% Subsidy of Agriculture Haryana in Haryana

Per Acre Subsidy (Rs.) GDP GCAas asa% Triennium India Haryana India Haryana India Haryana a%of of India Ending IndiaGCA

Current Prices Constant Prices Current Prices Current Prices 1983-84 3.61 7.06 3.14 6.12 0.30 0.47 3.18 7.23 1984-85 10.59 17.20 8.13 13.83 0.71 0.98 3.12 6.96 1985-86 19.75 30.71 14.53 23.89 1.26 1.61 3.15 5.07 1986-87 17.79 26.59 13.02 20.67 1.13 1.37 3.16 6.56 1987-88 13.11 20.08 8.81 14.41 0.76 0.91 3.03 6.48 1988-89 16.69 22.88 9.22 14.05 0.73 0.83 3.08 6.33 1989-90 36.94 54.06 19.42 30.93 1.52 1.79 3.05 4.52 1990-91 63.64 95.32 30.76 49.47 2.36 2.73 3.20 4.70 1991-92 74.05 117.41 32.24 53.79 2.46 2.85 3.12 4.93 1992-93 75.60 126.56 29.89 52.12 2.24 2.69 3.13 5.29 1993-94 67.04 120.93 23.20 43.00 1.70 2.16 3.11 5.62 1994-95 95.53 176.73 29.42 55.73 2.05 2.73 3.15 5.84 1995-96 138.55 261.08 38.67 75.79 2.79 3.71 3.16 5.96 1996-97 180.00 339.69 46.86 92.64 3.25 4.41 3.18 5.99 1997-98 182.03 335.55 43.82 85.51 3.01 4.11 3.17 5.82 1998-99 173.49 298.44 38.41 69.57 2.41 3.29 3.16 5.40 1999-00 153.02 236.83 31.76 51.66 1.96 2.49 3.17 4.87 2000-01 148.43 229.17 29.58 47.28 1.76 2.19 3.21 4.94 2001-02 139.67 228.04 27.29 45.68 1.56 2.09 3.27 5.33 2002-03 144.74 256.41 27.68 49.82 1.56 2.26 3.35 5.94 2003-04 171.81 321.92 31.76 60.22 1.75 2.71 3.37 6.26 2004-05 279.48 541.00 49.50 98.35 2.77 4.24 3.39 6.46 2005-06 **** **** **** **** 3.63 5.43 3.37 6.30 Source: As Table! and 2.6 Note: **** Due to non availability ofGCA data

2.3 ELECTRICITY SUBSIDY

The power sector is in concurrent list of Indian constitution. The central and the state

governments are jointly responsible for the overall development of the power sector. The

state governments have constituted the State Electricity Boards (SEBs), which are

autonomous bodies and responsible for power generation and distribution. The

performance of the power sector mainly depends on the functioning of the SEBs.

Power sector in India has been witnessing major changes. Growth of power sector in

India since Independence has been noteworthy. However, the demand for power has

35

been outstripping the growth of availability. Very high level of technical and

commercial losses and lack of commercial approach in management of utilities have led

to unsustainable financial operations. Cross-subsidies have risen to unsustainable levels.

Such conditions led to the enactment of Electricity Act (2003), which provides an

enabling framework for accelerated and more efficient development of the power sector.

The broad objectives of the Electricity Act, 2003 as incorporated in its preamble are to

consolidate the laws relating to generation, transmission, distribution, trading and use of

electricity and generally for taking measures conducive for development of electricity

industry, promoting competition therein, protecting interest of consumers, supply of

electricity to all areas, rationalisation of electricity tariff, ensuring transparent policies

regarding subsidies, promotion of efficient and environmentally benign policies,

constitution of Central Electricity Authority, Regulatory Commissions and

establishment of Appellate Tribunal and for matters connected therewith or incidental

thereto.

In compliance with section 3 of the Electricity Act 2003 the Central Government

notifies the National Electricity Policy, which aims at achieving the following

objectives:

• Access to electricity - available for all households in next five years

• Availability of power - demand to be fully met by 2012. Energy and peaking

shortages to be overcome and adequate spinning reserve to be available.

• Supply of reliable and quality power of specified standards in an efficient manner

and at reasonable rates.

• Per capita availability of electricity to be increased to over 1000 units by 2012.

• Financial turnaround and commercial viability of electricity sector.

• Protection of consumers' interests.

However, the financial and commercial viability of electricity sector to a great extent

depends on the trend and magnitude of the electricity subsidy given to the agriculture

sector. The following sections show the trend and magnitude of electricity subsidy to the

agriculture sector during TE 1983-84 to TE 2004-05.

36

2.3.1 Methodology

The electricity subsidy is calculated in two steps:

1. Per unit subsidy to agriculture sector is estimated as the difference· between

average expenditure on per unit sold and recovery of electricity sold per unit to

the agriculture sector.

2. Multiplication of per unit subsiqy and the total unit consumed in agriculture sector

provides total electricity subsidy to the agriculture sector

2.3.2 Estimated Electricity Subsidy 2.3.2.1 Electricity Subsidy to Agriculture Sector in India

The electricity consumption in Indian agriculture sector has increased from 17505 million

kWh in 1983-844 to 44418 million kWh in 1990-91,90953 million kWh in 1999-00 and

86710 million in ~004-05 (Table 2.9). The exponential growth rate of electricity

consumption at all India level was 14.24 percent during 1981-82 to 1990-91, 2.43 percent

during 1991-92 to 2004-05 and 8.39 percent during 1981-82 to 2004-05.

The average cost of per unit electricity in India has increased from 55 paisa in 1983-84 to

101 paisa in 1990-91, 268 paisa in 1999-00 and 428 paisa in 2004-05. The exponential

growth rate in average cost of per unit electricity was 9.27 percent during 1981-82 to

1990-91, 11.47 percent during 1991-92 to 2004-05 and 10.41 percent during 1981-82 to

2004-05.

In India, agriculture tariffs are either metered or fixed tariff. A metered tariff is a rate

based on per unit of energy consumed, whereas, a fixed tariff is a rate based on the

capacity of a pumpset i.e. horse power (HP). The average per unit tariff of electricity

declined from 20 paisa in 1983-84 to 15 paisa in 1990-91, but increased to 21 paisa in

1999-00 and 44 paisa in 2004-05. The exponential growth rate of average per unit tariff

was -4.06 percent during 1981-82 to 1990-91, 10.35 percent during 1991-92 to 2004-05

and 3.87 percent during 1981-82 to 2004-05.

4 Onwards all figures (except exponential growth rate) are for Triennium ending.

37

Table: 2.9 ELECTRICITY SUBISDY TO AGRICULTURE SECTOR IN INDIA

Electricity Consumpti Average Average Subsidy Total Subsidy Recovery

on Cost Tariff (Paisa! Unit) (Rs. Million) (%)

Triennium Ending Million Paisa! Paisa! Current Constant Current Constant

KWH Unit Unit Prices Prices Prices Prices 4/3*100 I 2 3 4 5 6 7 8 9

1983-84 17505 55 20 34 29 6048 5185 38 1984-85 19004 61 20 41 33 7826 6262 33 1985-86 20872 67 19 48 36 10197 7607 28 1986-87 24609 73 18 55 39 13810 9637 25 1987-88 29378 81 17 64 41 19234 12233 21 1988-89 34530 87 16 71 42 24731 14533 18 1989-90 39400 94 15 79 43 31270 16822 16 1990-91 44418 101 15 85 42 38249 18727 15 1991-92 50978 109 14 95 41 48752 20841 13 1992-93 57402 118 14 103 40 59750 22869 12 1993-94 64195 131 15 116 40 74992 25620 12 1994-95 71109 147 18 129 41 92641 28995 12 1995-96 78577 164 19 145 41 114883 32611 12 1996-97 83017 186 20 166 43 138404 35849 11 1997-98 87009 210 20 190 45 165597 39284 10 1998-99 90830 238 21 217 48 198134 43295 9 1999-00 93135 268 21 246 51 229316 47200 8 2000-01 90953 298 26 272 54 246450 49018 9 2001-02 85779 327 33 294 57 251966 49245 10

2002-03* 83629 354 40 315 60 263163 50227 11 2003-04 84416 388 43 345 64 291964 54082 11 2004-05 86710 428 44 384 69 333883 59699 10

Exponential Growth Rate 1981-82 to

1990-91 14.24 9.27 -4.06 14.37 5.51 30.58 20.46 1991-92 to 2004-05 2.43 11.47 10.35 11.61 5.20 14.33 7.78

1981-82 to 2004-05 8.39 10.41 3.87 12.10 3.38 21.48 12.02

.. . . .. Source: (I) Annual Report on the Workmg of State Electnclty Board and Electricity Departments, Planmng CommissIOn (Various issues).

Note: Data on average cost and tariff per unit is extrapolated from 2002-03 onwards because planning commission stop publication of Annual Report on the Working of State Electricity Board and Electricity Departments.

At current prices, the subsidy per unit increased from 34 paisa in 1983-84 to 85 paisa in

1990-91,246 paisa in 1999-00 and 384 paisa in 2004-05. The exponential growth rate of

subsidy on per unit electricity was 14.37 percent during 1981-82 to 1990-91, 11.61

percent during 1991-92 to 2004-05 and 12.10 percent during 1981-82 to 2004-05.

However, at constant prices, the exponential growth rate of subsidy on per unit electricity

38

was 5.51 percent during 1981-82 to 1990-91,5.20 percent during 1991-92 to 2004-05 and

3.38 percent during 1981-82 to 2004-05.

Total subsidy, at current prices, increased from RS.6048 million in 1983-84 to Rs. 38429

million in 1990-91, Rs. 246450 million in 1999-00 and Rs. 333883 million in 2004-05.

The exponential growth rate of the electricity subsidy was 30.58 percent during 1981-82

to 1990-91, 14.33 percent during 1991-92 to 2004-05 and 21.48 percent during 1981-82

to 2004-05. The exponential growth rate of electricity subsidy (at constant price) was

20.46 percent during 1981-82 to 1990-91, 7.78 percent during 1991-92 to 2004-05 and

12.02 percent during 1981-82 to 2004-05.

The cost recovery from the agriculture sector has steeply declined during 1983-84 to

2004-05. It was 38 percent in 1983-84, which declined to 15 percent in 1990-91 and 10

percent in 2004-05. Overall, the electricity subsidy in India has shown upward trend

during 1981-82 to 2004-05, but the growth rate was lower during 1991-92 to 2004-05 in

comparison the growth during 1981-82 to 1990-91. This happened mainly due to the low

growth rate of electricity consumption in agriculture sector during 1991-92 to 2004-05

than the growth in 1980s.

2.3.2.2 Electricity Subsidy to Agriculture Sector in Haryana

Haryana Electricity Regulatory Commission (HERC) was established on I i h August

1998 as an independent statutory body corporate as per the provisions of the Haryana

Electricity Reform Act, 1997. Haryana was the second state in India to initiate the

process of reform and restructuring of the Power sector in India.

The Haryana Electricity Reform Act 1997 (Act No. 10 of 1998) was passed by the

Haryana State Legislative Assembly on 22nd of July 1997. After receiving the

Presidential assent on 20th February 1998, this Act came into force on 14th August 1998.

The erstwhile Haryana State Electricity Board was unbundled into two corporate bodies

namely Haryana Power Generation Company Limited (HPGCL) for the Generation of

Power and Haryana Vidyut Prasaran Nigam Limited (HVPNL) for the transmission &

39

distribution of power within the state of Haryana. Subsequently, the activity of

distribution and retail supply of power was entrusted w.e.f. 1 st July 1999, to Uttar

Haryana Bijli Vitran Nigam Limited (UHBVNL) for northern circles and Dakshin

Haryana BijJi Vitran Nigam Limited (DHBVNL) for southern circles of Haryana.

The Government of India notified 'Electricity Act, 2003' with effect from 10th June

2003. However, in Haryana the provisions of the Electricity Act 2003 were deferred by

six months from loth June 2003 vide notification No. 1/4/2003-IP dated 8.9.2003.

Therefore, the provisions of the Electricity Act, 2003 as well as the provisions of the

Haryana Electricity Reform Act, 1997, which are not inconsistent with the Electricity

Act, 2003, are applicable in Haryana.

Table 2.10 show the trend and magnitude of electricity subsidy during 1983-84 to 2005-

06. In Haryana agriculture, the electricity consumption was 1262 million kWh in 1983-

84, 2726 million kWh in 1990-91, 4147 million kWh in 1999-00 and 5835 million in

2005-06 in the agriculture sector (Table 2.10). The exponential growth rate of electricity

consumption was 11.69 percent during 1981-82 to 1990-91,3.19 percent during 1991-92

to 2005-06 and 7.08 percent during 1981-82 to 2005-06.

The average cost of per unit electricity in Haryana has increased from 52 paisa in 1983-

84 to 97 paisa in 1990-91, 314 paisa in 1999-00 and 369 paisa in 2005-06. The

exponential growth rate in average cost of per unit electricity was 9.58 percent during

1981-82 to 1990-91, 8.97 percent during 1991-92 to 2005-06 and 10.21 percent during

1981-82 to 2005-06. Per unit tariff of electricity increased from 20 paisa in 1983-84 to 27

paisa in 1990-91, 50 paisa in 1999-00, but declined to 28 paisa in 2005-06. The

exponential growth rate of average per unit tariff was -3.25 percent during 1981-82 to

1990-91,0.03 percent during 1991-92 to 2005-06 and 3.47 percent during 1981-82 to

2005-06.

40

Table: 2.10 ELECTRICITY SUBISDY TO AGRICULTURE SECTOR IN HARY ANA 5

Recover Electricity Average Average Subsidy Total Subsidy y

Trienniu Consumption Cost Tariff (Paisa! Unit) (Rs. Million) (%) m Curren Constan Curren Constan

Ending Million Paisa! Paisa! t t Prices t t KWH Unit Unit Prices Prices Prices 4/3* 100

I 2 3 4 5 6 7 8 9 1983-84 1262 52 20 32 28 414 355 38 1984-85 1334 59 20 40 33 533 437 34 1985-86 1347 66 20 46 36 621 489 30 1986-87 1462 73 19 54 41 793 594 26 1987-88 1744 86 18 68 46 1234 827 22 1988-89 2123 90 21 69 45 1471 942 24 1989-90 2535 98 25 73 43 1819 1068 26 1990-91 2726 97 27 70 37 1906 1011 28 199\-92 3104 107 24 83 38 2599 1169 23 1992-93 3537 118 23 95 38 3436 1358 19 1993-94 3974 138 25 114 40 4550 1597 18 1994-95 4129 160 34 126 41 5216 1685 21 1995-96 4118 185 42 142 42 5867 1735 23 1996-97 4113 210 50 160 43 6566 1784 24 1997-98 4027 248 55 192 48 771l 1930 23 1998-99 3991 278 56 222 51 8848 2029 20 1999-00 4147 314 50 264 57 11053 2379 16 2000-01 4451 351 42 309 64 13890 2851 12 2001-02 4645 389 40 348 70 16194 3250 10 2002-03* 4803 385 40 345 67 16545 3220 10 2003-04 5074 374 39 335 63 16958 3192 10 2004-05 5427 362 32 330 60 17967 3285 9 2005-06 5835 369 28 341 61 19898 3542 8

Exponential Growth Rate 1981-82

to 1990-91 11.69 9.58 -3.25 12.47 4.89 25.45 17.00 1991-92

to 2004-05 3.19 8.97 0.03 10.43 4.27 13.94 7.59 1981-82

to 2004-05 7.08 10.21 3.47 11.90 3.38 19.81 10.68 .. . . .. Source: (I) Annual Report on the Workmg of State Electnctty Board and Electnclty Departments, Plannmg CommIssIOn

(Various issues) (2) Statistical Abstract of Haryana (Various Issues)

(3) http://herc.nic.in/

5 Note: Up to 2001-02 data has been taken from Annual Report on the Working of State Electricity Board and Electricity Departments, Planning Commission (Various issues) but after that planning commission stop publishing this report. Therefore 2002-03 onwards data is estimated from Haryana Electricity regulatory commission website.

41

At current prices, per unit subsidy increased from 32 paisa in 1983-84 to 70 paisa in

1990-91,264 paisa in 1999-00 and 341 paisa in 2005-06. The exponential growth rate of

subsidy on per unit electricity was 12.47 percent during 1981-82 to 1990-91, 10.43

percent during 1991-92 to 2005-06 and 11.90 percent during 1981-82 to 2005-06.

However, at constant prices, the exponential growth rate of subsidy on per unit electricity

was 4.89 percent during 1981-82 to 1990-91,4.27 percent during 1991-92 to 2005-06 and

3.38 percent during 1981-82 to 2005-06.

Total subsidy, at current prices, was Rs. 414 million in 1983-84, Rs. 1906 million in

1990-91, Rs. 11053 million in 1999-00 and Rs. 19898 million in 2005-06. The

exponential growth rate of electricity subsidy was 25.45 percent during 1981-82 to 1990-

91, 13.94 percent during 1991-92 to 2005-06 and 19.81 percent during 1981-82 to 2005-

06. At constant prices, total subsidy increased from Rs. 355 million in 1983-84 to Rs.

1011 million in 1990-91, Rs. 2379 million in 1999-00 and Rs. 3542 million in 2005-06.

The exponential growth rate of electricity subsidy was 17.00 percent during 1981-82 to

1990-91, 7.59 percent during 1991-92 to 2005-06 and 10.68 percent during 1981-82 to

2005-06.

The cost recovery from the agriculture sector has shown downward trend during 1983-84

to 2005-06. It was 38 percent in 1983-84, which declined to 28 percent in 1990-91 and 8

percent in 2005-06. Thus, the electricity subsidy in Haryana has shown upward trend

during 1981-82 to 2005-06, though, the growth rate was lower during 1991-92 to 2005-

06 than the growth during 1981-82 to 1990-91.

2.3.2.3 Comparison of Electricity Subsidy at all India Level and Haryana

Per acre electricity subsidy (at current and constant prices) to agriculture sector in

Haryana is more than that of all India level (Table 2.11). As a percentage of agricultural

GOP, electricity subsidy at all India level as well as in Haryana has shown upward trend

during 1983-84 to 2004-05. At all India level, it was 1.09 percent in 1983-84, which

increased to 3.14 percent in 1990-91, 6.07 percent in 1999-00 and 7.17 percent in 2004-

05. In the case of agriculture sector of Haryana, it was 1.91 percent in 1983-84, which

42

increased to 3.85 percent in 1990-91,7.47 percent in 1999-00 and 9.11 percent in 2004-

05. The share of GCA of Haryana in total GCA at all India level lied between 3.03 and

3.39 percent during 1983-84 to 2004-05. Whereas, the share of Haryana agriculture in

total electricity subsidy of agriculture sector at all India level was 6.89 percent in 1983-

84, which declined to 4.98 percent in 1990-91 and 4.78 percent in 1999-00. However, the

share of the agriculture sector of Haryana improved to 5.38 percent 2005-06.

Table: 2.11 COMP ARSION OF ELECTRICITY SUBSDIY: INDIA AND HARY ANA

Asa% of Agriculture Haryana

Per Acre Subsidy (Rs.) GDP GCAas Triennium India Haryana India Haryana India Haryana a%of Ending IndiaGCA

Current Prices Constant Prices Current Prices % 1983-84 13.71 29.67 11.76 25.45 1.09 1.91 3.18 1984-85 17.75 38.71 14.21 31.73 1.27 2.28 3.12 1985-86 22.91 44.46 17.09 34.97 1.49 2.40 3.15 1986-87 31.20 56.64 21.77 42.43 1.88 2.84 3.16 1987-88 44.15 97.13 28.04 64.65 2.41 4.16 3.03 1988-89 56.01 111.73 32.94 71.41 2.73 4.50 3.08 1989-90 69.91 136.42 37.67 80.32 3.01 4.81 3.05 1990-91 83.29 130.47 40.81 69.17 3.14 3.85 3.20 1991-92 106.35 182.78 45.45 82.07 3.47 4.33 3.12 1992-93 129.53 238.27 49.56 94.12 3.69 4.83 3.13 1993-94 162.05 315.84 55.39 110.95 4.03 5.57 3.11 1994-95 198.21 354.50 62.06 114.62 4.34 5.67 3.15 1995-96 245.19 395.96 69.61 117.16 5.01 5.74 3.16 1996-97 293.76 438.55 76.11 119.15 5.25 5.66 3.18 1997-98 349.76 513.61 83.01 128.57 5.63 6.19 3.17 1998-99 414.37 586.68 90.59 134.55 5.69 6.40 3.16 1999-00 480.30 729.18 98.85 157.00 6.07 7.47 3.17 2000-01 520.79 912.03 103.56 187.25 6.13 8.62 3.21 2001-02 534.78 1048.97 104.52 210.61 6.00 9.63 3.27 2002-03 574.38 1074.91 109.54 209.16 6.18 9.49 3.35 2003-04 630.55 1084.52 116.79 204.18 6.47 9.21 3.37 2004-05 717.76 1141.44 128.44 208.81 7.17 9.11 3.39

. . .. Source: (I) Annual Report on the Workmg of State ElectrICIty Board and ElectrICIty Departments, Planning Commission (Various issues).

(2) Statistical Abstract of Haryana (Various Issues). (3) http://herc.nic.inJ

Subsidy in Haryana

asa% of India

Current Prices 6.89 6.83 6.21 5.87 6.14 5.95 5.93 4.98 5.30 5.64 6.06 5.76 5.19 4.75 4.67 4.50 4.78 5.62 6.44 6.34 5.86 5.38

In short, the electricity subsidy at all India level and in Haryana has shown upward trend

during 1981-82 to 2004-05 and Haryana enjoys more than proportionate share in total

43

electricity subsidy to agriculture sector at the all India level than its proportionate share in

GCA at the all India level.

2.4 CANAL IRRIGATION SUBSIDY

Water has been an essential input for agricultural development. The Constitution of India

lays down the legislative and functional jurisdiction of the union, state and local

governments regarding 'Water'. Under the scheme of the Constitution, 'Water' is basically

a state subject and the union comes in only in the case of inter-state river water. List II of

the seventh schedule, dealing with subjects regarding which states have jurisdiction, has

the following as Entry 17 :"Water, that is to say, water supplies, irrigation and canals,

drainage and embankments, water storage and water power subject to the provisions of

Entry 56 of List I Entry 56 of List I (Union list), reads as follows: "Regulation and

development of inter- state rivers and river valleys to the extent to which such regulation

and development under the control of the union, is declared by Parliament by law to be

expedient in the public interest". The Constitution has a specific article (Article 262),

dealing with adjudication of disputes relating to matters of inter-state rivers or river

valleys. The two laws enacted by the Union under Article 262 and Entry 56 of List I are

the Inter-State Water Disputes Act, 1956 (as amended up to 1980) and the River Boards

Act, 1956. Under these provisions, the central and the state governments have made huge

investments to develop the irrigation infrastructure to attain high agricultural growth.

There has been a massive development of canal irrigation in India since independence.

However, there is a widespread concern about the growing magnitude of recurring losses

on irrigation projects due to subsidised water rates. Irrigation water rates being levied by

the state governments vary from state to state as well as for crops and seasons. These

have not been revised in many states since a long time. The revenues from public

irrigation works do not cover even the costs of operation and maintenance. There has

been a general complaint that the standards of maintenance are poor and progressively

getting poorer resulting in deterioration in the quality of service. In this context, it is

interesting to estimate the trend and magnitude of subsidy on canal irrigation because it

44

has implications for the overall fiscal situation of the central and the state governments,

efficiency of domestic resources, etc.

2.4.1 Methodology

Irrigation subsidy can be estimated in more than one way. First, the irrigation subsidy can

be obtained on the basis of national account statistics. Under this method irrigation

subsidy is equal to the difference between the 'imputed charges on irrigation' and

depreciation of the government departmental enterprise in agriculture. The imputed

irrigation charges are equal to the losses incurred on the irrigation and are treated as

subsidy in the Income and Outlay Account of the Administrative Departments (including

Departmental Commercial Undertaking other than Railways and Communications). The

'imputed irrigation charges' also include grants made by the governments to the

departmental commercial undertakings or public corporations in the form of

compensation for operating losses.

However, the chief drawback of this method is the lack of clarity on what constitutes

'imputed irrigation charges' and this prompts several questions.6

• This method does not reflect the true cost of delivering irrigation water. Apart

from the operations and maintenance cost, huge capital expenditures are incurred

on the provision of irrigation. These lumpy expenditures are not incurred

regularly or continuously. If this component is excluded it would grossly

understate the cost incurred by the input-supplying agency. On the contrary, if it

does factor in capital expenditures as well, the question as to what portion of it is

included and what is the method by which it is done will have to be answered.

• Most state governments are beneficiaries of loan and grants forwarded to them by

the central government. Even if the interest is accounted for these estimates, the

actual rate of interest charged by the central government is minimal and diverges

significantly from the opportunity cost of such funds. Also, about the issue of

grants that flow from the centre to state - it is essential to include imputed interest

6 Gulati, Ashok and Sudha Narayanan (2003), ;'The Subsidy Syndrome in Indian Agriculture", Oxford University Press, New Delhi.

45

on the grant as well, if true interest burden is to be arrived at. If it is also included,

then the method adopted needs to be known.

Due to these conceptual complexities with regard to these estimates, the alternative

method to compute irrigation subsidy is adopted. It is based on the difference in the cost

of supplying irrigation water and what the farmers pay for irrigation water as its direct

price. The cost of irrigation includes the interest on capital, the working cost of operation

and maintenance (O&M) and depreciation. It is important to note that Vaidyanathan

Committee report (GOI, 1992) suggested that the pricing of canal water must cover the

entire O&M expenses and one percent of cumulative capital expenditures incurred in the

past at historical prices. Gulati and Narayanan (2003) viewed this as cost of canal

irrigation that needs to be recovered from the farmers and deducted from it the payments

made by the farmers for canal irrigation water to compute canal irrigation subsidy.

However, this method underestimates the actual canal subsidy to some extent because it

takes only one percent interest of cumulative capital rather than total interest on

cumulative capital. Therefore, in the present study, canal irrigation subsidy is computed

as the difference between the gross revenue and the working expenses (O&M expenses,

depreciation and total interest on capital employed) on major, medium and minor

irrigation projects.

2.4.2 Estimated Irrigation Subsidy 2.4.2.1 Canal Irrigation Subsidy in India

The estimates of canal subsidy, on the basis of 'imputed irrigation charges', is given in

Table 2.12. At current prices, irrigation subsidy increased from Rs. 7240 million in 1983-

84 to Rs. 23790 million in 1990-91, Rs. 76360 million in 1999-00 and Rs. 103680

million in 2002-03. The exponential growth rate of irrigation subsidy was 17.93 percent

during 1981-82 to 1990-91, 12.53 percent during 1991-92 to 2002-03 and 15.00 percent

during 1981-82 to 2002-03. At constant prices, the exponential growth rate of irrigation

subsidy was 8,79 percent during 1981-82 to 1990-91, 5.27 percent during 1991-92 to

2002-03 and 5.53 percent during 1981-82 to 2002-03.

46

Table: 2.12 IRRIGATION SUBSIDIES- MAJOR, MEDIUM AND MINOR IRRIGATION

INDIA (NAS BASIS) Rs 10 Mi Ilion

Departmental Irrigation Irrigation Enterprise Subsidy Subsidy

Triennium Imputed Irrigation (Agriculture) Depreciation (2-5) Ending Charges (3-4) Current Constant

GDP NDP Prices Prices 1 2 3 4 5 6 7

1983-84 1160 1091 655 436 724 625 1984-85 1378 1278 772 506 872 699 1985-86 1601 1515 920 595 1006 754 1986-87 1944 1816 1120 696 1248 876 1987-88 2237 2101 1295 807 1431 920 1988-89 2712 2518 1599 919 1793 1057 1989-90 3152 2923 1870 1053 2099 1129 1990-91 3568 3282 2093 1189 2379 1179 1991-92 4041 3668 2312 1356 2685 1160 1992-93 4573 4150 2612 1539 3035 1164 1993-94 5267 4804 3065 1739 3528 1212 1994-95 5960 5454 3500 1954 4006 1262 1995-96 6858 6311 4098 2213 4645 1322 1996-97 7975 7356 4827 2529 5446 1412 1997-98 9157 8477 5598 2879 6278 1493 1998-99 10455 9746 6509 3237 7219 1582 1999-00 11211 10517 6943 3575 7636 1577 2000-01 12357 11292 7468 3824 8532 1697 2001-02 13282 11990 7953 4037 9245 1805 2002-03 14586 13024 8805 4219 10368 1980

Exponential growth rate during 1981-82 to 1990-91 17.93 8.79 Exponential growth rate during 1991-92 to 2002-03 12.53 5.27 Exponential growth rate during 1981-82 to 2002-03 15.00 5.53 .. Source: (I) NatIOnal Account Statistics (Various Issues).

Table 2. I 3 provides the estimates of the irrigation subsidy on the basis of alternative

methodology i.e. difference between working expenses (O&M expenses, depreciation

and total interest on capital employed) and gross revenue from major, medium and minor

projects. The cost recovery on major and medium projects has declined during 1983-84 to

2004-05. It was 16 percent in 1983-84, which declined to 9 percent in 1990-91 and to 7

percent in 2004-05. In the case of minor irrigation projects, the recovery of cost on minor

projects was lower than the recovery from major and medium projects. It was 7 percent in

1983-84, which declined to 4 percent in 1990-91 and to 4 percent in 2004-05.

47

Table: 2.13 IRRIGATION SUBSIDIES- MAJOR, MEDIUM AND MINOR IRRIGATION IN INDIA

Total Subsidy

Major & Medium Project Minor Project Total As a %of Triennium GR W.E W.E-GR Recovery GR W.E W.E-GR. Recovery Current Constant Recovery NAS

Ending (3-2) (2/3" 100) (7-6) (617"100) Prices Prices (2+6)/(3+ 7)*100 Estimate (10 Million) % (10 Million) % (10 Million) % %

I 2 3 4 5 6 7 8 9 10 II 12 13 1983-84 134 876 742 16 22 335 313 7 1054 910 13 145 1984-85 137 972 835 15 18 381 363 5 1198 971 12 141 1985-86 173 992 819 17 19 428 409 4 1227 921 14 123 1986-87 174 1165 992 15 17 515 498 3 1490 1045 12 119 1987-88 177 1309 1132 14 19 717 699 3 1831 1172 10 127 1988-89 157 1628 1471 10 21 866 845 2 2316 1363 7 129 1989-90 171 1917 1747 9 29 949 920 3 2667 1440 7 128 1990-91 199 2268 2069 9 36 936 901 4 2970 1472 7 125 1991-92 220 2489 2269 9 44 965 921 4 3190 1384 8 120 1992-93 257 2801 2544 9 51 976 925 5 3469 1341 8 116 1993-94 342 3194 2852 10 60 1138 1077 5 3930 1348 9 111 1994-95 414 3715 3301 11 75 1342 1267 6 4568 1435 10 114 1995-96 472 4267 3795 II 93 1611 1518 6 5313 1514 10 115 1996-97 466 4872 4407 9 105 1762 1658 6 6064 1577 9 112 1997-98 439 5508 5069 8 111 1859 1748 6 6817 1622 8 109 1998-99 421 6306 5885 7 107 2161 2054 5 7940 1737 6 110 1999-00 421 7151 6730 6 104 2102 1998 5 8729 1799 6 114 2000-0J 551 7986 7435 7 92 2135 2043 4 9478 1886 6 112 2001-02 621 8331 7710 8 87 1947 1860 4 9570 1870 7 105 2002-03" 707 8806 8100 8 87 2144 2057 4 10157 1940 7 98 2003-04" 716 9461 8745 8 95 2336 2241 4 10986 2036 7 2004-05" 783 10788 10005 7 106 2591 2486 4 12490 2233 7 .. Source: (I) Water and Related StatistIcs, Central Water COIllllllSSlOn (Vanous Issues).

(2) Financial Aspects ofirrigation Projects in India, Central Water Commission (Various Issues). Note: ·Data from 2002-03 onwards is extrapolated.

48

At current prices, the total irrigation subsidy has increased from Rs. 10540 million in

1983-84 to Rs. 29700 million in 1990-91, Rs. 87290 miIlion in 1999-00 and Rs. 124900

miIlion in 2004-05. The exponential growth rate of the irrigation subsidy was 16.35

percent during 1981-82 to 1990-91, 10.84 percent during 1991-92 to 2004-05 and 12.85

percent during 1981-82 to 2004-05. At constant prices, the exponential growth rate of

irrigation subsidy was 7.34 percent during 1981-82 to 1990-91, 4.48 percent during 1991-

92 to 2004-05 and 4.07 percent during 1981-82 to 2004-05. The cost recovery from

irrigation projects has declined during 1983-84 to 2004-05. It was 13 percent in 1983-84,

which declined to 7 percent in 2004-05.

Table: 2.14 EXPONENTIAL GROWTH RATE OF IRRIGATION SUBSIDY IN INDIA (%)

Year Current Price Constant Price 1981-82 to 1990-91 16.35 7.34 1991-92 to 2004-05 10.84 4.48 1981-82 to 2004-05 12.85 4.07

The comparison of results on the basis of 'imputed irrigation charges' and alternative

methodology shows that the estimates of subsidy by later methodology was higher than

'imputed irrigation charges' methodology. As a percentage of 'imputed irrigation

charges' based estimates, the alternative estimated subsidy was 145 percent in 1983-84,

125 percent in 1990-91 and 114 percent in 1999-00. But in 2002-03, the estimate of

subsidy on alternative methodology was lower than 'imputed irrigation charges'

methodology

2.4.2.2 Canal Irrigation Subsidy in Haryana

Table 2.15 provides the estimated subsidy on major, medium and mmor irrigation

projects in Haryana during 1983-84 to 2004-05. At current prices, the total irrigation

subsidy increased from Rs. 340 million in 1983-84 to Rs. 1110 million in 1990-91, Rs.

2290 million in 1999-00 and Rs. 3710 million in 2004-05. The exponential growth rate of

the irrigation subsidy was 18.35 percent during 1981-82 to 1990-91, 5.51 percent during

1991-92 to 2004-05 and 11.49 percent during 1981-82 to 2004-05. At constant prices, the

exponential growth rate of the irrigation subsidy was 10.37 percent during 1981-82 to

1990-91, -0.66 percent during 1991-92 to 2004-05 and 2.77 percent during 1981-82 to

49

2004-05. The cost recovery from irrigation projects has shown downward trend during

1980s. It declined from 38 percent in 1983-84, to 13 percent in 1990-91. However, it

increased to 15 percent in 1999-00 and 17 percent in 2004-05.

Table: 2.15 IRRIGATION SUBSIDIES- MAJOR, MEDIUM AND MINOR IRRIGATION IN

HARYANA Rs 10 Million

Recovery Triennium Gross Revenue Working Expenses Subsidy (3-2) Subsidy (2/3*100) Ending Current Price Constant Price (%)

I 2 3 4 5 1983-84 21 55 34 29 38 1984-85 25 63 38 31 39 1985-86 22 70 48 37 32 1986-87 20 77 57 43 26 1987-88 II 81 70 48 14 1988-89 13 92 79 51 14 1989-90 13 III 98 57 II 1990-91 16 127 III 59 13 1991-92 16 147 132 60 II 1992-93 17 166 149 60 10 1993-94 18 187 168 60 9 1994-95 19 293 274 86 8 1995-96 20 308 287 85 8 1996-97 22 319 296 83 8 1997-98 25 244 219 55 10 1998-99 38 254 215 50 15 1999-00 42 271 229 50 15 2000-01 51 279 228 47 18 2001-02 54 313 259 52 17 2002-03* 65 352 287 56 19 2003-04 73 405 332 62 18 2004-05 77 448 371 68 17

Exponential growth rate during 1981-82 to 1990-91 18.35 10.37 Exponential growth rate during 1991-92 to 2004-05 5.51 -0.66 Exponential growth rate during 1981-82 to 2004-05 11.49 2.77

.. Source: (I) Water and related statIstICS, Central Water CommIssIOn (varIous Issues). (2) Financial aspects of irrigation projects in India, Central Water Commission (various issues).

, Note: *Data from 2002-03 on wards is extrapolated.

2.4.2.3 Comparison of Canal Irrigation Subsidy at all India Level and In Haryana:

Per acre electricity subsidy at (current and constant prices) to agriculture sector in

Haryana is less than that of all India level (Table 2.16). As a percentage of agricultural

GOP, canal subsidy at all India level was 1.94 percent in 1983-84, 2.47 percent in 1990-

91, 2.32 percent in 1999-00 and 2.68 percent in 2004-05. In the case of Haryana, it was

50

1.59 percent in 1983-84, 2.27 percent In 1990-91, 1.57 percent in 1999-00 and 1.89

percent in 2004-05.

Table: 2.16 COMP ARSION OF INDIA AND HARY ANA: IRRIGATION SUBSDIY

Asa% Haryana Subsidy of Agriculture GCAas in Haryana

Per Acre Subsidy (Rs.) GDP a%of asa% Triennium India Haryana India Haryana India Haryana India of India Ending GCA

Current Prices Constant Prices Current Prices % Current Prices 1983-84 23.96 24.38 20.69 20.99 1.94 1.59 3.18 3.32 1984-85 27.23 27.75 22.09 22.81 2.00 1.64 3.12 3.22 1985-86 27.57 34.15 20.69 26.79 1.81 1.83 3.15 3.85 1986-87 33.66 40.89 23.60 30.64 2.04 2.04 3.16 3.85 1987.88 41.95 53.65 26.83 36.76 2.31 2.37 3.03 3.90 1988-89 52.39 58.61 30.86 37.77 2.55 2.38 3.08 3.45 1989-90 59.63 71.98 32.26 42.08 2.58 2.50 3.05 3.66 1990-91 64.73 75.93 32.10 40.57 2.47 2.27 3.20 3.73 1991-92 69.58 92.34 30.17 42.24 2.30 2.24 3.12 4.12 1992-93 75.20 103.13 29.05 41.28 2.17 2.12 3.13 4.26 1993-94 84.97 117.09 29.17 41.56 2.12 2.09 3.11 4.31 1994-95 97.75 184.97 30.71 58.20 2.15 2.85 3.15 5.75 1995-96 113.38 193.21 32.31 57.05 2.32 2.77 3.16 5.39 1996-97 128.72 197.88 33.49 55.45 2.31 2.64 3.18 5.09 1997-98 144.02 145.75 34.28 36.75 2.33 1.77 3.17 3.23 1998-99 166.06 142.65 36.35 32.94 2.28 1.57 3.16 2.76 1999-00 182.76 151.35 37.67 32.83 2.32 1.57 3.17 2.65 2000-01 200.31 150.00 39.84 30.94 2.36 1.43 3.21 2.41 2001-02 203.18 167.57 39.71 33.66 2.28 1.54 3.27 2.71 2002-03 221.59 186.46 42.29 36.12 2.39 1.64 3.35 2.82 2003-04 237.27 212.92 43.96 40.02 2.43 1.80 3.37 3.03 2004-05 268.55 236.20 48.06 43.23 2.68 1.89 3.39 2.98 .. Source: (I) Water and related statlsttcs, Central Water CommissIOn (vanous Issues).

(2) Financial aspects of irrigation projects in India, Central Water Commission (various issues).

The share of agriculture sector of Haryana in total irrigation subsidy at all India level

was 3.32 percent in 1983-84, which increased to 3.73 percent in 1990-91 but declined to

2.76 percent in 1999-00. However, the share of Haryana marginally increased to 2.98

percent 2004-05. The share of gross cropping area (GCA) of Haryana in total GCA of

India lied between 3.03 to 3.39 percent during 1983-84 to 2004-05. Thus in recent years,

the agriculture sector in Haryana enjoys less than proportionate share in the total

irrigation subsidy at all India level when compared to its proportionate share in GCA at

all India level.

51 , '

2.5 Estimated Total Subsidy 2.5.1 Total Input Subsidy to Agriculture Sector in India

Table 2.17 gives infonnation about the estimated total input subsidy to agriculture sector

in India. The exponential growth rate of the total input subsidy was 25.82 percent during

1981-82 to 1990-91, 12.56 percent during 1991-92 to 2004-05 and 18.00 percent during

1981-82 to 2004-05.

Table: 2.17 TOTAL INPUT SUBSIDY IN INDIA

Rs Million Triennium Canal Canal

Ending Fertilizer Electricity Irrigation Total Fertilizer Electricity Irrigation Total Current Prices Constant Prices

1983-84 1598 6048 10543 18190 1390 5185 9099 15675 1984-85 4674 7826 11976 24477 3588 6262 9709 19559 1985-86 8769 10197 12271 31238 6450 7607 9210 23268 1986-87 7892 13810 14897 36598 5777 9637 10444 25859 1987-88 5775 19234 18306 43315 3888 12233 11724 27845 1988-89 7501 24731 23160 55392 4141 14533 13633 32307 1989-90 16721 31270 26667 74657 8782 16822 14403 40007 1990-91 29263 38249 29695 97207 14133 18727 14714 47574 1991-92 34008 48752 31899 114659 14810 20841 13836 49487 1992-93 34894 59750 34692 129336 13802 22869 13408 50079 1993-94 30966 74992 39299 145257 10713 25620 13483 49816 1994-95 44707 92641 45678 183026 13762 28995 14345 57102 1995-96 64964 114883 53124 232972 18131 32611 15138 65879 1996-97 84775 138404 60640 283819 22063 35849 15770 73683 1997-98 86071 165597 68169 319836 20709 39284 16217 76209 1998-99 82841 198134 79395 360370 18331 43295 17369 78995 1999-00 73124 229316 87286 389727 15178 47200 17992 80370 2000-01 70335 246450 94778 411563 14020 49018 18856 81894 2001-02 65776 251966 95696 413438 12852 49245 18701 80799 2002-03 66529 263163 101568 431260 12733 50227 19398 82358 2003-04 79993 291964 109865 481822 14786 54082 20357 89224 2004-05 131456 333883 124906 590246 23269 59699 22334 105302

Exponential growth rate during 1981-82 to 1990-91 25.82 16.07 Exponential growth rate during 1991-92 to 2004-05 12.56 6.10 Exponential growth rate during 1981-82 to 2004-05 18.00 8.81

Source: As Table 2.1-2.16

At constant prices, the exponential growth rate of total subsidy at constant prices was

16.07 percent during 1981-82 to 1990-91, 6.10 percent during 1991-92 to 2004-05 and

8.81 percent during 1981-82 to 2004-05. Thus, the total input subsidy to agriculture

52

scctor has shown upward trend during 1981-82 to 2004-05, but thc growth ratc in input

subs idy during 1991-92 to 2004-05 was lower than the growth in thcl980s.

Figure 2.1: Composition of Input Subsidies in India

1983-84 1990-91 1995-96 1999-00 2000-01 2004-05

o FERTILISER o B-ECTRICITY IRRIGATION

As shown in figure 2.1, thc composition of thc input subsidy has totally changed during

the last two decades. In 1983-84, the canal subsidy (57 .69 percent) was highest followed

by electricity (33.02 percent) and fertiliser subsidy (9.30 percent). However, since 1987-

88, the electricity subsidy accounted for a major share in the total subsidy. Its share in the

total input subsidy was 39.38 percent in 1990-91, 58.70 percent in 1999-00 and 57.51

percent in 2004-05. The share of irrigation subsidy has declined during 1983-84 to 2004-

05. The share of fertiliser has not shown any unique trend due to wide fluctuations in the

international prices of fertilisers during 1983-84 to 2004-05. However, its share in total

subsidy has increased from 9.30 percent in 1983-84 to 20.97 percent in 2004-05.

Table 2.18 provides the information about the composition of the input subsidy in terms

of per acre subsidy at current and constant prices. Per acre subsidy on all the three inputs

has increased at current and constant prices during 1983-84 to 2004-05. It is noteworthy

53

that per acre subsidy on electricity, since 1987-88, has been higher than subsidy provided

on fertiliser and irrigation.

Table: 2.18 COMPOSITION OF INPUT SUBSIDY IN INDIA

Rs. Per Acre Subsidy Triennium Fertilizer Electricity Irrigation Total Fertilizer Electricity Irrigation Total

Ending Current Prices Constant Prices 1983-84 3.61 13.71 23.96 41.28 3.14 11.76 20.69 35.59 1984-85 10.59 17.75 27.23 55.57 8.13 14.21 22.09 44.43 1985-86 19.75 22.91 27.57 70.23 14.53 17.09 20.69 52.31 1986-87 17.79 31.20 33.66 82.65 13.02 21.77 23.60 58.39 1987-88 13.11 44.15 41.95 99.21 8.81 28.04 26.83 63.68 1988-89 16.69 56.01 52.39 125.09 9.22 32.94 30.86 73.02 1989-90 36.94 69.91 59.63 166.48 19.42 37.67 32.26 89.35 1990-91 63.64 83.29 64.73 211.66 30.76 40.81 32.10 103.67 1991-92 74.05 106.35 69.58 249.98 32.24 45.45 30.17 107.86 1992-93 75.60 129.53 75.20 280.33 29.89 49.56 29.05 108.50 1993-94 67.04 162.05 84.97 314.06 23.20 55.39 29.17 107.76 1994-95 95.53 198.21 97.75 391.49 29.42 62.06 30.71 122.19 1995-96 138.55 245.19 113.38 497.12 38.67 69.61 32.31 140.59 1996-97 180.00 293.76 128.72 602.48 46.86 76.11 33.49 156.46 1997-98 182.03 349.76 144.02 675.81 43.82 83.01 34.28 161.11 1998-99 173.49 414.37 166.06 753.92 38.41 90.59 36.35 165.35 1999-00 153.02 480.30 182.76 816.08 31.76 98.85 37.67 168.28 2000-01 148.43 520.79 200.31 869.53 29.58 103.56 39.84 172.98 2001-02 139.67 534.78 203.18 877.63 27.29 104.52 39.71 171.52 2002-03 144.74 574.38 221.59 940.71 27.68 109.54 42.29 179.51 2003-04 171.81 630.55 237.27 1039.63 31.76 116.79 43.96 192.51 2004-05 279.48 717.76 268.55 1265.79 49.50 128.44 48.06 226.00

Source: As Table 2.1-2.16

Figure 2.2 shows the trend of total input subsidy as a percentage of agriculture GOP

during 1983-84 to 2004-05. Total input subsidy as a percentage of agriculture GOP has

shown upward trend during 1983-84 to 2004-05. It increased from 3.33 percent in 1983-

84 to 7.97 percent in 1990-91, 10.35 percent in 1999-00 and 12.61 percent in 2004-05.

54

Figure 2.2: Trends of Input Subsidies in India as % of Agricultural GDP

14

12

10

8

6 ---

4

2

-+- FERTILISER _ B-ECTRICITY -.-IRRIGA TION _ TOTAL

2.5.2 Total Input Subsidy to Agriculture Sector in Haryana

At current prices, total input subsidy to agriculture sector in Haryana has increased from

Rs. 854 million in 1983-84 to Rs. 4409 million in 1990-91, Rs. 16930 million in 1999-00

and Rs. 35481 million in 2005-06 (Table 2.19). The exponential growth rate of the total

input subsidy was 25.44 percent from 1981-82 to 1990-91, 12.07 percent from 1991-92 to

2005-06 and 18.01 percent from 1981-82 to 2005-06. At constant prices, the exponential

growth rate of total input subsidy at constant prices was 16.99 percent from 1981-82 to

1990-91,5.83 percent from 1991-92 to 2005-06 and 9.01 percent from 1981-82 to 2005-

06. The total input subsidy to agriculture sector has shown upward trend during the

period 1981-82 to 2005-06. However, the growth rate in the input subsidy during the

period 1991-92 to 2005-06 was lower than the growth in the 1980s.

Figure 2.3 shows the composition of input subsidy in Haryana for the period 1983-84 to

2005-06. The electricity subsidy accounted for the major share in the total input subsidy

between 1983-84 and 2005-06. The share of the irrigation subsidy has declined from

40.00 percent in 1983-84 to 11.76 percent in 2004-05. In case of fertiliser subsidy, its

55

Table: 2.19 TOTAL INPUT SUBSIDY IN HARYANA

Rs. Million Triennium Canal Canal Ending Fertilizer Electricity Irrigation Total Fertilizer Electricity Irrigation Total

Current Prices Constant Prices 1983-84 99 414 341 854 86 355 293 735 1984-85 237 533 382 II 52 190 437 314 941 1985-86 428 621 478 1527 333 489 375 1196 1986-87 369 793 573 1735 287 594 429 1310 1987-88 267 1234 701 2201 193 827 484 1504 1988-89 325 1471 791 2586 199 942 5Il 1652 1989-90 765 1819 979 3563 438 1068 571 2076 1990-91 1395 1906 1109 4409 724 lOll 593 2328 1991-92 1683 2599 1315 5597 772 1169 602 2543 1992-93 1832 3436 1487 6755 755 1358 596 2710 1993-94 1737 4550 1683 7971 617 1597 597 28Il 1994-95 2615 5216 2738 10569 824 1685 861 3370 1995-96 3886 5867 2873 12626 Il28 1735 848 3710 1996-97 5085 6566 2963 14614 1387 1784 830 4001 1997-98 5033 77Il 2187 14931 1282 1930 551 3763 1998-99 4497 8848 2151 15496 1048 2029 497 3573 1999-00 3585 11053 2293 16930 782 2379 497 3659 2000-01 3487 13890 2283 19660 719 2851 471 4042 2001-02 3525 16194 2590 22309 706 3250 520 4476 2002-03 3946 16545 2868 23358 767 3220 556 4543 2003-04 5049 16958 3325 25332 944 3192 625 4761 2004-05 8591 17967 3716 30274 1561 3285 680 5526 2005-06 Il433 19898 4150 35481 2033 3542 738 6313

Exponential growth rate during 1981-82 to 1990-91 25.44 16.99 Exponential growth rate during 1991-92 to 2005-06 12.07 5.83 Exponential growth rate during 1981-82 to 2005-06 18.01 9.01 Source: As Table 2.1-2.16

share in total input subsidy has increased from 11.88 percent in 1983-84 to 31.60 percent

in 2004-05. Therefore, the share of the fertiliser and the electricity subsidy in the total

input subsidy has increased, but the share of canal subsidy has declined between 1983-84

and 2005-06.

56

Figure 2.3: Composition ofInput Subsidies in Haryana

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0% 1983-84 1990-91 1995-96 1999-00 2000-01 2005-06

~ FERTILlSffi [] ELECTRICITY IRRIGATION

Table 2.20 presents the composition and trend of input subsidy in terms of per acre

subsidy at current and constant prices. Per acre subsidy on all three inputs has increased

at current and constant prices between 1983-84 and 2004-05. Per acre subsidy on

electricity has been higher than subsidy provided on other inputs during the same period.

Per acre total input subsidy at current prices has increased from Rs. 61.11 in 1983-84 to

Rs.301.72 in 1990-91 and Rs. 1918.64 in 2004-05.

57

Table: 2.20 COMPOSITION OF INPUT SUBSIDY IN HARY ANA

iRs. Per Acre Subsidy) Triennium Fertilizer Electricity Irrigation Total Fertilizer Electricity Irrigation Total

EndinK Current Prices Constant Prices 1983-84 7.06 29.67 24.38 61.11 6.12 25.45 20.99 52.56 1984-85 17.20 38.71 27.75 83.66 13.83 31.73 22.81 68.37 1985-86 30.71 44.46 34.15 109.32 23.89 34.97 26.79 85.65 1986-87 26.59 56.64 40.89 124.12 20.67 42.43 30.64 93.74 1987-88 20.08 97.13 53.65 170.86 14.41 64.65 36.76 115.82 1988-89 22.88 111.73 58.61 193.22 14.05 71.41 37.77 123.23 1989-90 54.06 136.42 71.98 262.46 30.93 80.32 42.08 153.33 1990-91 95.32 130.47 75.93 301.72 49.47 69.17 40.57 159.21 1991-92 117.41 182.78 92.34 392.53 53.79 82.07 42.24 178.10 1992-93 126.56 238.27 103.13 467.96 52.12 94.12 41.28 187.52 1993-94 120.93 315.84 117.09 553.86 43.00 110.95 41.56 195.51 1994-95 176.73 354.50 184.97 716.20 55.73 114.62 58.20 228.55 1995-96 261.08 395.96 193.21 850.25 75.79 117.16 57.05 250.00 1996-97 339.69 438.55 197.88 976.12 92.64 119.15 55.45 267.24 1997-98 335.55 513.61 145.75 994.91 85.51 128.57 36.75 250.83 1998-99 298.44 586.68 142.65 1027.77 69.57 134.55 32.94 237.06 1999-00 236.83 729.18 151.35 1117.36 51.66 157.00 32.83 241.49 2000-01 229.17 912.03 150.00 1291.20 47.28 187.25 30.94 265.47 2001-02 228.04 1048.97 167.57 1444.58 45.68 210.61 33.66 289.95 2002-03 256.41 1074.91 186.46 1517.78 49.82 209.16 36.12 295.10 2003-04 321.92 1084.52 212.92 1619.36 60.22 204.18 40.02 304.42 2004-05 541.00 1141.44 236.20 1918.64 98.35 208.81 43.23 350.39

Source: As Table 2.1-2.16

Total input subsidy as a percentage of agriculture GOP in Haryana has shown upward

trend during 1983-84 to 2004-05 (Figure 2.4). It increased from 3.97 percent in 1983-84

to 8.85 percent in 1990-91, 11.52 percent in 1999-00 and 15.24 percent in 2004-05. The

electricity subsidy has the highest share (9.11 percent) in total subsidy followed by

fertiliser (4.24 percent) and irrigation (1.89 percent) in 2004-05.

58

Figure 2.4: Trends of Input Subsidies in Haryana as % of Agricultural GDP

18,-------------------------------------------------------------. 16~----------------------------------------------------------~

14t---------------------------------------------~~~~_I

12+-----------------------------~~~~~--__ ~~--------~

10r-------------~~=_~~~--------------~~~~::1

8+-----------~~~----------------------------~~----------~

6t---~.-4L--------------~~~~~~~~------------~

o~~--._,__,--.__.--._~_,--.__.--._~_.--,__.--.__._.._~_,~

~-~~~~~~~~~~~~~~~~~~~~~ "OJ'O "OJ'<5 "OJ'O "OJ'13 "OJ'O "OJ'?) "OJ'O "OJOJ<0' "OJOJ'" "OJOJ "OJOJ "OJ~' "OJOJ'0' "OJOJ'O' "OJQ;.' "OJOJ'O' "OJOJOJ <f><0<0 <f><0" <f><0'l; <f><0":> f),,<0<:}<

~ FERTILISER _ B...ECTRICIlY ......-IRRIGA TON

2.5.3 Comparison of Total Input Subsidy to Agriculture Sector at all India Level

and in Haryana

At current and constant prices, per acre subsidy provided to the agriculture sector in

Haryana was higher than the subsidy given at all India level between 1983-84 and 2004-

05 (Table 2.21). It indicates that agriculture sector in Haryana is more subsidised when

compared to agriculture sector in India as a whole. Even as a percentage of agricultural

GDP, the agriculture sector in Haryana is more subsidised than the agriculture sector at

all India level. The share of agriculture sector in Haryana in total input subsidy at all

India level has increased from 4.69 percent in 1983-84 to 5.13 percent in 2004-05. It is

noteworthy that the share of GCA of Haryana in total GCA of India was between 3.03

and 3.39 percent during 1983-84 to 2004-05. Thus, agricultural sector in Haryana enjoys

more than proportionate share in the total input subsidy to the agriculture sector at all

India level in comparison to its proportionate share in GCA of India.

59

Table: 2.21 COMP ARSION OF INDIA AND HARY ANA: TOTAL SUBSDIY

Asa% Haryana Subsidy of Agriculture GCAas in Haryana

Per Acre Subsidy (Rs.) GDP a%of asa% Triennium India Haryana India Haryana India Haryana India of India Ending GCA

Current Prices Constant Prices Current Prices % Current Prices 1983·84 41.28 61.11 35.59 52.56 3.33 3.97 3.18 4.69 1984-85 55.57 83.66 44.43 68.37 3.98 4.90 3.12 4.71 1985-86 70.23 109.32 52.31 85.65 4.56 5.84 3.\5 4.89 1986-87 82.65 124.12 58.39 93.74 5.05 6.24 3.16 4.74 1987-88 99.21 170.86 63.68 115.82 5.48 7.44 3.03 5.08 1988-89 125.09 193.22 73.02 123.23 6.01 7.71 3.08 4.67 1989-90 166.48 262.46 89.35 153.33 7.11 9.\0 3.05 4.77 1990-91 211.66 301.72 103.67 159.21 7.97 8.85 3.20 4.54 1991-92 249.98 392.53 107.86 178.10 8.23 9.43 3.12 4.88 1992-93 280.33 467.96 108.50 187.52 8.10 9.64 3.13 5.22 1993-94 314.06 553.86 107.76 195.51 7.85 9.83 3.11 5.49 1994-95 391.49 716.20 122.19 228.55 8.54 11.25 3.15 5.77 1995-96 497.12 850.25 140.59 250.00 10.12 12.21 3.\6 5.42 1996-97 602.48 976.12 156.46 267.24 10.81 12.71 3.18 5.15 1997-98 675.81 994.91 161.11 250.83 10.96 12.07 3.17 4.67 1998-99 753.92 1027.77 165.35 237.06 10.38 11.25 3.16 4.30 1999-00 816.08 1117.36 168.28 241.49 10.35 11.52 3.17 4.34 2000-01 869.53 1291.20 172.98 265.47 10.25 12.24 3.21 4.78 2001-02 877.63 1444.58 171.52 289.95 9.84 13.26 3.27 5.40 2002-03 940.71 1517.78 179.51 295.10 10.13 13.39 3.35 5.42 2003-04 1039.63 1619.36 192.51 304.42 10.65 13.72 3.37 5.26 2004-05 1265.79 1918.64 226.00 350.39 12.61 15.24 3.39 5.13 Source: As Table 2.1-2.20

2.6 SUMMARY

Fertiliser, electricity and canal subsidy at all India level and in Haryana has shown

upward trend. But, the exponential growth rate of the fertiliser subsidy during 1991-92 to

2005-06 was lower than the growth in the 1980s. Per acre fertiliser and electricity subsidy

to agricultural sector in Haryana is more than the subsidy given to agricultural sector at

all India level. The agriculture sector in Haryana receives more than proportionate share

of total fertiliser and electricity subsidy at all India level in comparison to its

proportionate share in the GCA at all India level. However, in recent years, per acre canal

irrigation subsidy to agricultural sector in Haryana is lower than the subsidy given to

60

agricultural sector at all India level receive and Haryana enjoys less than proportionate

share of total canal irrigation subsidy at all India level when compared to its

proportionate share in the GCA of India. The composition of input subsidy has changed

at all India level and in Haryana during the past two and half decades. Per acre total input

subsidy to the agricultural sector in Haryana is more than the subsidy given to

agricultural sector at all India level. In brief, the agricultural sector in Haryana is highly

subsidised than the agricultural sector at all India level.

61

APPENDIX: 2.A

FERTILISER POLICy7

During mid-70's, the prices of fertilisers escalated steeply in the international market as a

result of oil crisis. To resolve the dilemma of how to keep farm gate prices offertilisers at

an affordable level in the face of rising production! import costs, the ministry of

chemicals & fertilisers constituted, "Fertiliser Prices Committee", in 1976, under the

Chairmanship of S.S. Marathe. The committee was set up to study the basis of existing

pricing of fertilisers and recommend a pricing policy which would ensure a fair return on

investment on a sustained manner. The objective was to ensure that both producers and

consumers of fertilisers found it worthwhile to produce and use fertilisers. Based on the

recommendations of Marathe Committee, the Retention Price Scheme (RPS) was

introduced for various fertilisers.

In 1983, a "High Powered Committee of Secretaries", headed by B.B.Singh was

constituted to conduct an in depth study of the Retention Prices Scheme, covering the

cost of production, the capital cost of fertiliser plants, the cost of inputs, and seeking an

analysis of the factors contributing to the increase in the cost of production and subsidy in

order to suggest remedial measures to contain the subsidies. The committee evolved a

group retention price for each of the different feedstocks for existing units and

. recommended a shift to uniform price later so as to allow plants time to adjust. The

committee favoured a tariff adjusted import parity price for new gas based units. None of

the major recommendations of the committee were accepted.

In 1987, a "High Powered Committee on Fertiliser Consumer Prices," under the

Chairmanship of G.V.K. Rao, submitted its report with several recommendations. The

committee felt that the prices of fertilisers could be increased by 5 to 7 percent, provided

the country has achieved a cumulative increase of 30 percent in the consumption of

fertilisers during the preceding three years. In 1991, the retail prices of fertilisers were

raised by 30 percent. The Government of India tried to experiment with dual pricing of

7 Fertiliser Statistics of India, FAI, New Delhi (various issues).

62

fertilisers on a limited scale by exempting small & marginal farmers from the hike of 30 • percent on the retail prices of fertilisers. The government earmarked funds on the basis

of the area held by small and marginal farmers upto a limit of 2 hectares and the average

per hectare consumption of fertilisers during 1990-91 in each state. But the scheme did

not succeed and discontinued in 1992.

A joint (parliamentary) committee on fertiliser pricing was formed in 1991 to review the

method of computation of retention prices for different manufactures of fertilisers and to

suggest whether there was any scope for reducing fertilisers within the existing scheme or

whether a new methodology for fertiliser pricing could be evolved without causing undue

strain to the exchequer, and at the same time assuring fair prices to the farmers and a fair

return to the manufacturers. The main conclusion and recommendations of the committee

were that the rise in subsidy had been mainly due to rise in the process of inputs which

were not reflected in the farm gate prices, increase in the cost of im"ported fertilisers,

devaluation of the rupee in July 1991 and the stagnant farm gate prices from 1980-1991.

The committee did not favour total decontrol of all fertilisers but recommended to

decontrol price and distribution of the phosphatic and potassium fertilisers along with a

marginal 10 percent reduction in consumer price of urea. The committee noted the lack of

incentives in RPS for fertiliser units to optimize capital costs of plants. Based on the

recommendation, the prices, movement and distribution of all phosphatic and potassic

fertilisers were decontrolled in 1992. As a result of the decontrol of phosphatic and

potassic fertilisers, the retail prices of these fertilisers increased significantly. With a view

to partially compensate the increased cost of decontrolled fertilisers, an ad hoc concession

(later termed as concession) was announced in 1992. The rates of concession were

revised from time to time in the later years.

In 1998, a High Powered Fertiliser Pricing Policy Review Committee under the

Chairmanship of Prof. C.H.Hanumantha Rao was set up to review the existing system of

subsidization of urea, and recommend measures for greater cohesiveness in the policies

applicable to different segments of the industry. It recommended that unit-wise

(Ret~ntion Price System) RPS for urea may be discontinued and instead of unit-wise

63

RPS, a uniform Normative Referral Price (NRP) be fixed for existing gas based urea

units and also for DAP.

The Expenditure Reforms Commission (ERC) headed by Shri K.P. Geethakrishnan had

gone into the question of rationalizing fertiliser subsidies. The commission submitted its

report in September, 2000. It recommended the dismantling of the control system in a

phased manner, leading to a decontrolled fertiliser industry at the commencement of

fourth stage, which can compete with imports albeit with a small level of protection and a

feedstock cost differential compensation to naphtha / LNG based units to ensure self-

sufficiency. It also recommended that the farm-gate prices of nitrogenous, phosphatic and

potassic fertilisers should be fixed so as to promote balances fertiliser use. It was

suggested that once the price of urea is re-determined every six months, the prices of

potassic and phosphatic fertilisers should be suitably adjusted to ensure the desired NPK

balance.

Based on the recommendations of various committees, a new pricing policy for urea units

was approved by the Government in December, 2002. The new pricing scheme came into

force w.e.f. 1.4.2003. The new policy aimed at greater transparency, uniformity, and

efficiency in disbursements of subsidy payments to urea units and inducing them to take

cost reduction measures on their own and be competitive. The scheme was implemented

in three stages.

• Stage-I for one year duration from 1.4.2003 to 31.3.2004

• Stage-II for two years duration from 1.4.200 to 31.3.2006

• Stage-III from l.4.2006 onwards. The modalities were to be decided by the

Department of Fertilisers (DOF) after review of the implementation of Stage-I

and Stage-II.

The scheme introduced a group based concession, which replaced RPS. The NPS

envisaged phased decontrol of movement, distribution and sale of urea which was

hitherto entirely under the purview of ECA (Essential Commodities Act) allocations. For

the Kharif 2003 season, 75% of the dispatches of each manufacture was covered under

64

ECA allocation and the balance 25% could be sold freely anywhere in India. For the Rabi

2003-04 seasons, this ratio was changes to 50:50 .. The scheme is still continuing. Under

stage II ofNPS, the capital related charges and consumption norms were tightened.

The government of India set up a 'Working Group on Review of Stage I & II of New

Pricing Scheme (NPS) and Formulation of Policy for Stage III for Urea Units' under the

chairmanship of Dr. Y.K.Alagh in December, 2004. The working group submitted its

report in December 2005. It could not recommend a workable mechanism to reduce the

prices of hydrocarbons, reduce the burden of subsidy while ensuring adequate supply of

urea and achieve balancing fertilization through pricing of urea. Therefore, the efforts

were made by the government for evolving a lore widely acceptable policy after the

submission of the report. The notification for NPS Stage III is still awaited.

The government of India constituted an "expert group on phosphatic fertiliser policy"

under the chairmanship of Prof. Abhijit Sen to review the current phosphatic fertiliser

environment, examine international and India phosphatic fertiliser scenario and examine

alternatives to the existing methodology of phosphatic fertiliser pricing and costing. The

expert group submitted its report during October 2005. The committee made a number of

recommendations and suggested the subsidy on DAP to form the basis for subsidy on

other phosphatic and complex fertilisers. The subsidy on DAP would have 3 components,

viz. (l) difference in the landed price of imported DAP (including customs duty) and the

MRP, (2) cost of marketing including the selling and distribution expenses and dealers'

margin (Rs. 350 per ton) and (3) to offset disadvantage to the domestic manufacturers of

vis-a-vis abroad. The government may review the competitiveness achieved by the

industry in future and accordingly consider downward revision of the two limits. The cost

of domestic production would be arrived at taking into account the normated cost of

phosphoric acid, international ammonia prices, cost of conversion, and capital cost based

on norms given by the tariff commission. The adjustment in subsidy of the first two

components would be made quarterly after taking into account the prevalent international

prices and foreign exchange rates. The expert group did not recommend any immediate

change in the MRP. However, changes in MRP may be considered in case the MRP goes

below 65% of the landed price of imported dap. The government may however consider

65

the revision in the MRP of DAP in case any revision is brought in the MRPs of other

nutrients. The final recommendations of the report are under active consideration of the

government of India.

The imbalance use of chemical fertilisers and neglect of organic manure caused many

problems, like stagnation in productivity, soil sickness, widespread deficiency of

secondary and micro nutrients, spread in salinity and alkalinity, etc. the fertiliser use is

also skewed in the country. In this context, a 'task force on balanced use of fertilisers',

under the Chairmansh~p of A.K.Singh was constituted to relook at the policy on use of

fertilisers. The committee recommended the restoration of NPK use ratio at the macro

level by increasing the use of P and K instead of reducing the intake of nitrogen.

However at the micro level, the application of nutrient has to be soils, crops, and climate

specific. Among other major recommendations, the committee suggested strengthening

of soil testing laboratories, fertiliser quality control laboratories, efforts for promotion of

green manures, vermin compost, enrich organic manures etc. the existing pricing

mechanism need to be made conducive for balanced fertilization by properly adjusting

the pricing and subsidy on nutrient basis. The recommendations of the report have been

accepted in principle.

Thus, the government of India has taken many steps during the planning period to protect

the interest of farmers, rationalise fertiliser subsidies, balance use of fertilisers, and make

Indian fertiliser industry competitive and viable.

66

APPENDIX TABLES

Table: 2.A COMPOSITION OF INPUT SUBSIDY IN INDIA

I P n ercentage Triennium

Ending FERTILISER ELECTRICITY IRRIGATION TOTAL

1983-84 9.30 33.02 57.69 100.00 1984-85 15.73 32.55 51.71 100.00 1985-86 25.37 33.26 41.37 100.00 1986-87 21.47 37.70 40.82 100.00 1987-88 \3.28 44.14 42.58 100.00 1988-89 10.44 46.12 43.44 100.00 1989-90 20.61 42.67 36.72 100.00 1990-91 29.22 39.38 31.41 100.00 1991-92 29.69 42.26 28.06 100.00 1992-93 27.27 45.93 26.80 100.00 1993-94 21.63 51.29 27.07 100.00 1994-95 23.39 51.16 25.45 100.00 1995-96 26.69 49.97 23.34 100.00 1996-97 29.97 48.60 21.43 100.00 1997-98 27.21 51.52 21.28 100.00 1998-99 23.31 54.73 21.96 100.00 1999-00 18.93 58.70 22.37 100.00 2000-01 17.09 59.88 23.02 100.00 2001-02 15.90 60.95 23.14 100.00 2002-03 15.49 60.96 23.55 100.00 2003-04 16.38 60.73 22.88 100.00 2004-05 20.97 57.51 21.52 100.00

67

Triennium Ending 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05

Table: 2.B TREND OF INPUT SUBSIDY IN INDIA

(AS A % OF AGRICULTURE GDP)

Fertilizer Electricity Irrigation 0.30 1.09 1.94 0.71 1.27 2.00 1.26 1.49 1.81 1.13 1.88 2.04 0.76 2.41 2.31 0.73 2.73 2.55 1.52 3.01 2.58 2.36 3.14 2.47 2.46 3.47 2.30 2.24 3.69 2.17 1.70 4.03 2.12 2.05 4.34 2.15 2.79 5.01 2.32 3.25 5.25 2.31 3.01 5.63 2.33 2.41 5.69 2.28 1.96 6.07 2.32 1.76 6.\3 2.36 1.56 6.00 2.28 1.56 6.18 2.39 1.75 6.47 2.43 2.77 7.17 2.68

68

Total 3.33 3.98 4.56 5.05 5.48 6.01 7.11 7.97 8.23 8.10 7.85 8.54 10.12 10.81 10.96 10.38 10.35 10.25 9.84 10.13 10.65 12.61

Table: 2.C COMPOSITION OF INPUT SUBSIDY IN HARY ANA

I P n ercentage Triennium

Ending FERTILISER ELECTRICITY IRRIGATION TOTAL 1983-84 11.88 48.12 40.00 100.00 1984-85 17.42 47.55 35.03 100.00 1985-86 25.48 42.27 32.25 100.00 1986-87 20.35 46.53 33.13 100.00 1987-88 11.93 54.71 33.36 100.00 1988-89 9.79 57.90 32.31 100.00 1989-90 20.37 52.09 27.54 100.00 1990-91 30.58 43.63 25.80 100.00 1991-92 30.25 45.97 23.78 100.00 1992-93 28.10 49.89 22.01 100.00 1993-94 22.07 56.63 21.30 100.00 1994-95 23.63 51.87 24.50 100.00 1995-96 29.51 48.20 22.29 100.00 1996-97 34.81 44.85 20.34 100.00 1997-98 33.86 51.48 14.66 100.00 1998-99 29.10 57.02 13.88 100.00 1999-00 21.78 64.60 13.62 100.00 2000-01 18.26 69.92 11.81 100.00 2001-02 15.68 72.65 11.67 100.00 2002-03 16.90 70.79 12.31 100.00 2003-04 19.54 67.26 13.20 100.00 2004-05 26.55 60.83 12.62 100.00 2005-06 31.60 56.64 11.76 100.00

69

Triennium Ending 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05

Table: 2.D TREND OF INPUT SUBSIDY IN HARY ANA

(AS A % OF AGRICULTURE GDP)

Fertilizer Electricity Irrigation 0.47 1.91 1.59 0.98 2.28 1.64 1.61 2.40 1.83 1.37 2.84 2.04 0.91 4.16 2.37 0.83 4.50 2.38 1.79 4.81 2.50 2.73 3.85 2.27 2.85 4.33 2.24 2.69 4.83 2.12 2.16 5.57 2.09 2.73 5.67 2.85 3.71 5.74 2.77 4.41 5.66 2.64 4.11 6.19 1.77 3.29 6.40 1.57 2.49 7.47 1.57 2.19 8.62 1.43 2.09 9.63 1.54 2.26 9.49 1.64 2.71 9.21 1.80 4.24 9.11 1.89

70

Total 3.97 4.90 5.84 6.24 7.44 7.71 9.10 8.85 9.43 9.64 9.83 11.25 12.21 12.71 12.07 11.25 11.52 12.24 13.26 13.39 13.72 15.24

CHAPTER 3

FARM WISE INPUT SUBSIDY