Subsidies have for long been a necessary evil, a vote-bank silver bullet. But its relevance stands challenged in today’s increasingly market-oriented economic order. The recent US declaration of giving differential treatment to developing countries, with regard to farm subsidies, brings up the long standing issue of slashing subsidies that have a distortionary impact.

The idea of farm subsidies being counterproductive finds a strong basis in the case of Punjab, where these have started posing a threat not only to the exchequer but also to the very sustainability of agriculture operations.

Over-exploitation of water Muted agriculture sector growth, exacerbated by agricultural non-sustainability, has made crop diversification imperative. As a restorative measure, the State government has already proposed area diversification from wheat and rice to alternate crops in a phased manner, through its New Agriculture Policy. But any proposed strategy must address the saturation of irrigation intensity, owing to the incessant irrigation subsidies, which began as a necessity but has reduced to a mere populist measure.

A survey by the Punjab agriculture department indicates that in the last eight years, more than 54 per cent of farmers have installed water guzzling submersibles, and more than 45 per cent have got their motors renewed to increase the power, or simply purchased higher capacity motors. There has been an increasing use of groundwater for irrigating paddy but the rate at which the electricity was priced remained flat.

According to the Central Ground Water Board, out of 137 blocks in Punjab, 110 come under the over-exploited category. Besides, the gross underpricing of electricity has encouraged the farmers to pump groundwater with minimal cost and effort. As the farmer’s electricity use shot up at an alarming rate; the quality, reliability and supply of electricity declined.

Ever increasing demand for electricity coupled with negligible tariff-cost ratio, has resulted in inflating the subsidy bill of the state exchequer; subsidised input prices do not even cover the cost incurred in supplying them. This implies huge losses to the state electricity board pushing the state government to the point where it is unable to pay for these subsidies.

Rational optimisation

To arrest the huge losses and make the proposed diversification strategy successful, there is a need for policy overhaul on subsidies.

To curb the unsustainable practice of giving free electricity, a system where power consumed at each point is accounted for needs to be put in place. If implemented properly, paddy cultivation automatically gets costlier ultimately leading to a reduction in its acreage, making the diversification plan successful. The key is to charge for electricity and ensure sustainable groundwater use. A farmer must be exposed to a break-even point beyond which growing paddy would be unprofitable, promoting greater adoption of the diversification strategy.

A possible strategy to achieve this rationalisation in the use of electricity is by charging for electricity for specific acreage. For instance, marginal and small landholders can be given free electricity while the medium and large landholders are made to pay the right price for using electricity. Another possible solution is quantity (electricity) rationing, wherein each farmer is given a designated quantity (units) of power on a monthly basis and excess quantity of power withdrawn by him is charged on a unit basis.

A reorientation in the grant of subsidies is clearly the need of the hour, so that its distorting effects are corrected.

Walia is an analyst at ISB and Sharma an associate consultant with EY. The views are personal

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