Public Finance Aspects of Indian Agriculture

A much disturbing aspect of Indian agriculture relates to its relatively small contribution to the country’s public sector funds. Another equally, if not more, disturbing aspect of Indian agriculture relates to its rapidly growing demands on the country’s public finances. This paper first reviews both of these aspects and then addresses itself to the issue of what may happen if things on the two fronts in question keep on going the way they currently are. The paper reveals that just three items of public spending on agriculture – central fertilizer subsidy, electricity subsidy and irrigation subsidy – account for nearly one-fourth of the increase in India’s public sector deficit in recent years. The contribution of the agricultural sector to recent increases in India’s public sector deficit, if other such items (e.g., credit subsidy, crop insurance losses, state fertilizer subsidies) are taken into account, will turn out to be far more daunting. According to the paper, a vicious circle seems to have already set in. the policymakers have justified agricultural subsidies on the ground of the country’s poor’s inability to pay market prices for food. But subsidies, by promoting inefficiencies in the use of inputs, have had the effect of raising input intensity of farm output and thereby of raising the costs of food production. This, in turn, has led to demands for more fiscal favours. What is more, the regime of subsidies has also encouraged rent-seekers to get what they can from the system, with politicians seeking high-profile new projects, not proper maintenance of existing systems, and farmers employing political pressure to get what giveaways they can, rather than organizing for improved agricultural extension services. All this has contributed to rapidly-rising fiscal outgoes. The above vicious circle urgently needs to be broken; otherwise it will keep pushing India inexorably towards a situation of rising public sector deficits – a situation which may pose the following major risks, or a combination or them, for the Indian economy during the 1990s: substantially higher real interest rates, crowding out of some investment, lower growth rates, debt trap, substantially higher inflation rates, and excessive external debit service burden.