Importance of fertilizer subsidies | Daily News

Importance of fertilizer subsidies

Fertilizer is an essential input to the agricultural production process. Fertilizers are materials which contain one or more plant nutrients and applied to the growing media to support the plant growth and it is necessary to supply only the correct amount of nutrients to a soil that is expected to be consumed by the crop.

Therefore, it is important to consider the right source, right rate, right time and right place of fertilizing the soil. Fertilizers can be broadly divided into two groups based on the source, as inorganic and organic fertilizers. Inorganic fertilizer is any material of natural or synthetic origin mined from mineral deposits or manufactured from synthetic compounds that is applied to soils or to plant tissues to supply one or more plant nutrients essential to the growth of plants.

The main organic fertilizers are animal waste, peat, plant waste from agriculture and treated bio solids and liquids. Organic fertilizers usually contain fewer nutrients, but offer other advantages in agriculture; organic fertilizers supply micro-nutrients, increase fertilizer use efficiency, energy source for many different micro organisms, nourish many biological reactions vital to good soil structure, promote soil aggregation and stable aggregates greatly aid in soil porosity and better water holding capacity and suppress soil borne diseases.

As fertilizer is an essential input in agriculture, strong fertilizer related policies are crucial for any national effort aimed at improving agricultural productivity. Therefore, the aim of this article is to make the reader aware on impacts, limitations and best practices of fertilizer subsidy programmes and this article was written based on a literature review.

Fertilizer subsidy programmes

Large scale agricultural input subsidies were a common and major feature of agricultural development policies in poor rural economies from the 1960s to the 1980s. Many developing countries are facing the continual challenges in increasing their agricultural production and concerns over food security have pushed governments to intervene in the sector, particularly providing input subsidies to farmers to ensure a higher and uninterrupted supply of agricultural commodities. Further, input subsidies in developing countries have commonly been targeted towards small-holder rather than commercial farmers, with mechanisms directing subsidised inputs away from large scale commercial farms and regulations prohibiting sale of subsidised inputs by recipients. Among many input subsidy schemes implemented, subsidies for fertilizer have undoubtedly been a major agricultural intervention for many developing countries, despite the enormous financial burden on the budget of governments of such countries.

The input subsidy programmes have a wide range of different objectives and most of these objectives are mutually complementary. The objectives are as follows; agricultural productivity, wider (pro-poor) economic growth, producer welfare (emphasis on poorer producers), consumer benefits (lower output prices, access), national/household food self-sufficiency/security, input adoption, input use efficiency, input supply system development and efficiency, soil fertility replenishment and political benefits (personal, party, etc.). Further, regardless of their objectives, the design and implementation of input subsidies should be ‘smart’ as their benefits in terms of agricultural productivity and food security exceed what could be achieved by investing the resources in other areas. However, whether they are truly smart in design and practice is doubtful.

There are two main factors which determine the costs of fertilizer subsidies and they are the cost of acquiring the fertilizer and the full economic cost of implementing the fertilizer subsidy programme. In general, world fertilizer prices have more than doubled over the past years and ocean freight and transport costs have also increased, reducing the potential returns to fertilizer subsidy programmes. The costs of implementing the subsidy programme include not only the economic costs of distributing and applying the fertilizer but also the opportunity costs of the resources used in the programme.

Impacts of fertilizer subsidy programmes

Fertilizer subsidy programmes are attractive to many because they offer the potential to increase the food grain harvest and thus reduce hunger in the short run. Income gains transferred to farmers through the subsidy result in greater savings and investment in productive assets, contributing to longer-run growth. In addition, income transfers to farmers address the social and political objectives of poverty alleviation and improved equity. Further, subsidy programmes have greatest (but not exclusive) potential in contributing to wider growth when applied to the production of staple grains rather than to cash crops. It further highlights that a key contribution of input subsidies will commonly be their contribution to consumers’ welfare and real incomes through lowering food prices, while also benefitting producers. On the other hand, many agricultural scientists argue that increasing fertilizer use is the key to increasing productivity in agriculture and that subsidies may be necessary to do so as the use of improved seeds and fertilizer contributed to large productivity gains in many parts of the developing world over the last 50 years. Further, a reduction in fertilizer subsidy is likely to have an adverse impact on farm production and income of small and marginal farmers as they do not benefit from higher output prices but do benefit from lower input prices.

In contrast, due to the availability of subsidised fertilizer, farmers have been found to overuse it, resulting in numerous negative environmental externalities such as soil degradation, surface water pollution and groundwater pollution. As such, excess use of fertilizers in agriculture is found to have a significant impact on the economy, society and broader environment of a nation. Further, some scholars show that the costs of fertilizer subsidy programmes generally outweigh their benefits and indicate that at least a partial reallocation of expenditures from fertilizer subsidies to research and development and infrastructure would provide higher returns to agricultural growth and poverty reduction. However, because subsidy programmes enable governments to demonstrate tangible support to constituents, they are likely to remain with them for the foreseeable future. Hence, they suggest benefits can be enhanced through changes in implementation modalities and complementary investments within a holistic agricultural intensification strategy.

Further, some scholars argue that subsidies as a failure due to subsidies create market distortions and displace public infrastructure investment, subsidies risk crowding out the private sector and targeting extremely difficult to achieve. They show that use of agricultural input subsidies has been controversial in developed and developing countries for several decades as such subsidies have been associated with inefficient resource use, pollution, government budgetary deficits and distorted prices and terms of trade. In addition, since the 1980s, the World Bank and the International Monetary Fund have provided loans to indebted developing countries conditional on their removal of agricultural input subsidies, although many African countries have resisted against this conditionality. However, when markets do not work well or when the farmers are physically and monetarily unable to have access to fertilizer, fertilizer subsidy programmes can be economically justified.

Limitations in Fertilizer Subsidy Programmes

Scholars show that the implementation of the programme without any regulatory system in place would have led to a situation in which major beneficiaries of the programme would have been the big farmers and informal traders who do not necessarily require such kind of support. The unclear targeting criteria and exclusion of some households for unclear reasons appeared to frustrate a lot of people. Poor planning, shortage of fertilizer and poor timing could result in not achieving the objectives of the programme. Late delivery of subsidised fertilizers or vouchers could lead to regular shortages and queues. Further, lack of transparency and lack of accountability in the administrative distribution appears to breed conflicts. The administrative targeting system could be frustrated because of the corruption and conflicts associated with the administrative distribution. Another weakness observed across programmes is the lack or limited focus on replenishing soil fertility.

In addition, implementation of the universal fertilizer subsidy could lead to economic disaster since government would be forced to spend beyond its limits. Further, it would lead government to borrow on the domestic market which in turn would put pressure on inflation and interest rates. Another problem could arise if the governments are implementing the programme without thinking is the marketing issue in case of produce surplus. If there is also a lack of emphasis on improving programme effectiveness and efficiency and inadequate attention to integration with complementary policies and programmes, the input subsidy programmes would not be resulted expected both direct and indirect benefits. Some programmes appear to be unfortunate due to limited monitoring, evaluation and audit systems, limited cost benefit and fiscal efficiency analysis and limited attention to possible problems of displacement and leakage. Therefore, it is important that governments improve the efficiency and effectiveness of input subsidy programmes in both raising productivity and promoting wider pro-poor growth within and beyond agriculture.

Best practices for fertilizer subsidy programmes

Scholars show that to a very great extent that policies often fail because their design is not well grounded in the country’s reality. There are unique circumstances of each country that have to be taken into account in policy formulation. There is thus need to fully grasp the messy hidden politics of policy and implementation in order to generate realistic policy responses and outcomes. In that context, a number of key lessons have been highlighted by scholars to have efficient and effective subsidy policies and they are presented below.

i. Focus: subsidies should be focused on inputs for important staple crops with a high potential response to input use constrained by market, profitability and affordability conditions and with emphasis on both consumer and producer gains.

ii. Scale: sufficient local or national scale is needed for the subsidy to affect staple crop prices and/or labour markets, but the scale also has to be limited to control costs so that the programme is affordable and efficient and does not crowd out critical complementary investments.

iii. Targeting: Effective targetingmust control costs, reduce displacement and improve subsidy impacts on incremental production and land and labour productivity. Universal provision, with rationing, may also be practicable, effective and efficient.

iv. Entitlement systems: Entitlement systems should be robust for effective targeting and rationing and system could be a state supply of fertilizer, cash payment, voucher/coupon system, reduced market price or transport subsidy etc.

v. Logistical systems: This face major challenges in coordinating targeting, entitlement, input distribution and purchases on timely. Major investments are needed to build human and physical capacity for development and operation of these systems.

vi. Input supply system development: This requires close attention to the complementary and changing roles of different public sector and commercial stakeholders and to institutions and for that fostering the development of trust and of transparent and stable policies encouraging private sector investments and activities.

vii. Performance monitoring, information and audit systems: These are essential for developing trust, controlling costs and fraud and establishing incentives for engagement by public sector, commercial, civil society and political stakeholders.

viii. Complementary policies and investments: The impacts of a large-scale subsidy programme depend on a range of complementary investments and policies promoting infrastructure development, staple market development and stability, agricultural research and extension and economic diversification in rural areas.

ix. Macro-economic management: Proper macro-economic management promotes a good investment climate, favourable conditions for growth and budgetary resources to support the programme.

x. Political commitment: This is essential for the mobilization of the substantial resources required for large-scale subsidy programmes in poor countries where such programmes have the most potential.

xi. Stability and flexibility: Stability to provide stakeholders with confidence and security and flexibility to adjust to changing conditions (in international and national markets, in weather and climate, in politics and in the national economy) with some changes in the direct or indirect and anticipated or unanticipated result of the programme are also needed to be considered.

xii. Fertilizer use efficiency: Farmers should be made aware on use of improved crop management practices, improved soil organic matter, early planting, timely weeding, applying fertilizer in response to rainfall, water harvesting and other conservation farming methods to increase fertilizer use efficiency. Further, fertilizer should be identified as a tool to improve soil health and fertility management. Farmers should be made aware of the benefits of organic and inorganic fertilizers, site-specific nutrient management, balanced fertilization, soil properties, crop diversification that enhances soil fertility etc.

To be continued….

(The implementation strategies of fertilizer subsidy programmes in other countries and in Sri Lanka are discussed in the next two articles).

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