Project Research Theme 3: Agricultural Productivity and Sectoral Gaps, Research Theme 5: Political Economy and Public Investment, Cross-Cutting Issue 2: Climate Change and the Environment

Phasing Out Fertiliser Subsidies in India

This project has been retired

Years active

  • to

Funding category

  • PhD Research Grants

In this study, we investigate the impact of several major agricultural programs in India that affect hundreds of millions of farmers and consumers. Specifically, we jointly study fertilizer subsidies, government procurement at minimum support prices (MSP), and the distribution of subsidized foodgrains through the public distribution system (PDS). These programs are large-scale, expensive, and make up about 10% of the total annual expenditures of the Indian government. They are also the subject of much debate in public and policy circles. Given their size and importance, it is crucial to understand their equilibrium impact on farmers and consumers to make informed policy decisions. We aim to make progress on that front by answering the following question: how do these programs impact the welfare of farmers and consumers, and how does this impact differ along the income distribution?

To address this research question, we introduce a structural model of supply and demand in the agriculture sector. On the supply side, farmers make production decisions based on government policies and, upon harvest, sell their output to either government buyers or private traders. On the demand side, consumers receive foodgrains from the government through the PDS and make consumption decisions in the private market to satisfy their residual demand. We estimate the structural parameters of this model using several publicly-available administrative datasets. Our primary source of farmer-level micro-data is the Department of Agriculture's Cost of Cultivation Surveys (CCS) from 2008-09 to 2016-17, which provide detailed information on planting decisions, including crop and input choices. We determine the identity of buyers for each farmer using data from the 77th round of the National Sample Survey (NSS) conducted in 2019, which surveys a nationally representative sample of agricultural households in India. Finally, to understand household purchases of rice and wheat from PDS shops, we use a nationally-representative consumer expenditure survey from the 68th round of the NSS conducted from July 2011 to June 2012.

With structural parameters in hand, we run counterfactuals to understand the aggregate and distributional effects of these programs. On the demand-side, we find these programs to be progressive. In their absence, consumption and expenditures of lower-income households would be affected more adversely. On the supply-side, we find these programs to be (weakly) regressive. Higher fertilizer prices, in the absence of subsidies, would be compensated by higher output prices so impact on farmer welfare would be minimal. Under no government-procurement at MSP, richer farmers would experience a greater welfare loss, while some of the poorest farmers would gain -- a result driven partly by the inequitable implementation of the procurement program. The study contributes to the growing literature on agricultural interventions in developing countries, providing a simulation-based approach that integrates microdata on farmer- and household-level decisions. It also offers timely empirical evidence on the impact of India's largest agricultural programs, which are currently the subject of public and political debates.

PhD Research Grants

Closed • Deadline • PhD Research Grants

Research Team

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