A large share of annual government expenditure in India goes towards subsidising fertilisers for agricultural use. These subsidies serve the dual purpose of increasing yield and total agricultural output, as well as providing economic support to the large agriculture-dependent population in India. However, critics of the subsidy programme argue they are inefficient, expensive, and poorly targeted, especially now that alternatives such as cash transfers can reach smaller and more remote farms more easily. In many settings, these subsidies introduce additional distortions and costs such as overusage of fertilisers, overproduction of food grains, and environmental damage including groundwater contamination and soil degradation. As such, for many decades now, many have called for ending the fertiliser subsidy programme in India. This project investigates the counterfactual effect of removing fertiliser subsidies on the welfare of farmers and consumers in India.
The project draws on data from the Cost of Cultivation Surveys that follow farmers in three-year waves, agricultural censuses that provide representative district-level farm size distributions, and data from the Fertiliser Association of India to construct district-level prices of various fertiliser products. Using these data and a natural experiment in which subsidies for certain kinds of fertilisers were slowly phased out, the research team first provides reduced-form evidence to show how these subsidies matter for agricultural output in India. The team then develop a structural model where, given input prices and expectations of output prices, farmers choose a set of crops to plant. The structural model also includes a downstream demand model that gives rise to equilibrium prices. With parameters of this model in hand, the team can evaluate counterfactual subsidy regimes and quantify the welfare loss (or gain) from phasing out fertiliser subsidies.
Subsidies are extremely expensive for governments and while they can be effective, if mistargeted or no longer needed, then programmes should be reviewed with the possibility that funds are diverted to more cost-effective policies. Simultaneously, erroneously phasing out a subsidy which is effective can have dire impacts, particularly in a sector as important as agriculture. Findings from this project relating to fertiliser subsidies in India can provide important lessons for organisations in India and beyond on optimal subsidy rates, eligibility for subsidies based on farm size, and quotas. For sub-Saharan Africa, these counterfactual simulations may be particularly relevant given the revival of agricultural subsidy programmes in recent years.