An economic appraisal of withdrawing fertilizer subsidies in India

3eport So. : .my 32 Yeviszd .iueus: 1??5 Jains E. Cuizon Research Cnir Xgriculcxre arid h r a l Development 3epattnent 9erational 301Lcy Staff Vorld B d ! The - ~ i ~ .?resentrd here are those of the author(s>, +n4 :hey should not - s b e in:er?retctd as reflctcting t5ose af che Yorid 3ank.  .- -ce a ~ : h ~ is a consulcant of t5.e Wcrld r 3ank. 2cuever, t h e Korld Sack i c e s n o t ac:ept r e i p o n s i b i l i c y f o r the v i e v s eu;;ressec h e r e i n wkich a r e t h o s e of t h e a u t h o r s and shculd not b e a t t r i 5 u t e d t o t h e Uorld Sank o r t o its a f f i l i a t e d o r g a n i z a t i o n s . ;Fie f i n d i z q s , i n t e r ? r e t a t i c n s , azd conc?usiocs a r e t h e resu1:s of r s s e a r c h su??orted i n > a r t by t h e 3ack; they do c c t n e c e s s a r i l y re7reser.t o f f i c i a l ? o i i c y GZ t h e Sack. 2.e desigsaticns e ? l o y e d and :he ? r z s e n t a c i c n cf = a t e r i a l i n t h i s 2 c c c e r . t a r e s o l e l y f z r t h e cozveziscce 3f t h e r e a d e r and do n o t h p l y t'le expression of any opinion .d-,acssever >n t h e ? a r t of t h e 'iorld Sank o r its a f f i l i a t e s concernicq :he l e g a l s:atr;s of any C ~ U C ~ T tTeJr, r i : o ~ , a r e a o r of i:s authori:ies, cr concern<-5 t h e ? e l h i t a t i o n of i:s bcczdaries, o r z a t i o n a l a f f i l i a t i c r . .  I. I n t r o d u c t i o n Because of t h e importance of f e r t i l i z e r s i n i n c r e a s i n g a g r i c u l t u r a l output, government i n t e r v e n t i o n i n t h e f e r t i l i z e r market t o encourage its mor? widespread production and use has been a common - -- --phenomenon i n many-developing economies. However, whenever government d e c i d e s t o i n t e r v e n e i n t h e f e r t i l i z e r market, o r i n any market f o r t h a t m a t t e r , what follows is not a simple t a s k . It r.ot only involves the d e l i c a t e choice from among a l t e r n a t i v e forms of i n t e r v e n t i o n , but i t a l s o demands t h a t , from t h e s o c i a l s t a n d p o i n t , comparisons of a l t e r n a t i v e uses of s c a r c e p u b l i c funds be made i n o r d e r t o j u s t i f y t h e c o s t of t h e i n t e r v e n t i o n i t s e l f . I n t h i s paper, we a r e not concerned with what t h e optimal form of i n t e r v e n t i o n i n t h e f e r t i l i z e r market ought t o be. The economic l i t e r a t u r e a l r e a d y d i s c u s s e s t h i s a t length, o f f e r i n g c l u e s a s t o t h e proper ranking of forms of i n t e r v e n t i o n based on t h e i r s o c i a l impact on given s o c i a l o b j e c t i v e s . I n s t e a d , t h i s paper c o n s i d e r s t h e economic c o s t s and r e t u r n s of a l t e r n a t i v e uses of p u b l i c funds a l r e a d y earmarked f o r a f e r t i l i z e r subsidy. In p a r t i c u l a r , i t looks a t t h e current f e r t i l i z e r subsidies i n 1 n d i a u It uses a g e n e r a l e q u i l i b r i u m model o f I n d i a ' s a g r i c u l t u r a l s e c t o r t o s i m u l a t e t h e l i k e l y consequences of its removal on a g r i c u l t u r a l performance and t h e o v e r a l l d i s t r i b u t i o n of income. The nodel is a l s o used -11 Throughout t h i s paper, we focus mainly on I n d i a ' s t o t a l f i n a n c i a l subsidy on f e r t i l i z e r s .     Many varied reasons have been given i n favor of zontinuing exist- ing f e r t i l i z e r subsidies i n India. A s summarized i n the Report of the Committee on Controls and Subsidies (19791, these arguments s t a t e that: "...(a) t h e national o b j e c t i v e of a rapid increase i n agricul- t u r a l output c a l l s f o r the subsidization of f e r t i l i z e r use; (b) t h a t the subsidization of inputs would be a f a r b e t t e r method of subsidization of a g r i c u l t u r e than the r a i s i n g of t h e p r i c e s of a g r i c u l t u r a i products. The reason i n t h a t a higher p r i c e f o r a g r i c u l t u r a l products would help only the r e l a t i v e l y l a r g e r farmer with marketable surplus; (c) t h a t even the more prosperous farmers cannot be s t a t e d t o have a standard of l i f e comparable with urban resi- dents who enjoying many s o c i a l amenities not a v i l a b l e i n r u r a l areas, and t h a t a s h i f t i n the terms of trade i n favor of the a g r i c u l t u r i s t is desirable, both i n order t o stimulate a g r i c u l t u r a l production and i n order t o increase the demand f o r manufactured products i n the r u r a l areas; ('1) t h a t the f e r t i l i z e r subsidy a s of today l a r g e l y n e u t r a l i z e s the burden of diverse taxes on f e r t i l i z e r , and t h a t the net subsidy on f e r t i l i z e r s is r a t h e r small, and f i n a l l y ; (e) t h a t a f e r t i l i z e r subsidy, t o the extent it is promo- t i o n a l , must be retained."  The f i r s t t h r e e of t h e s e arguments a r e not convincing a s they a r e not supported by s o l i d e m p i r i c a l evidence. The q u e s t i o n remains: does t h e e x i s t i n g f e r t i l i z e r s u b s i d y p o l i c y outrank a l l o t h e r i d e n t i f i a b l e a l t e r n a t i v e p o l i c i e s i n a c h i e v i n g h i g h e r a g r i c u l t u r a l o u t p u t s , a more e q u i t a b l e r u r a l incune d i s t r i b u - t i o n , and more f a v o r a b l e r u r a l a s a g a i n s t urban income outcome? This is t h e e m p i r i c a l q u e s t i o n we s e e k t o ,answer i n a l a t e r p a r t of t h i s paper. The f o u r t h of t h e above-mentioned arguments is presumptive a s t h i s has a l s o never been e m p i r i c a l l y shown. F i n a l l y , t h e last argument f o r conrlnuing e x i s t i n g . s u b s i d i e s , though perhaps t h e most t h e o r i t i c a l l y appealing, is l i k e w i s e ques- t i o n a b l e . F e r t i l i z e r s u b s i d i e s can be j u s t i f i e d , but only a s a temporary mea- s u r e , when used a s a means t o f a c i l i t a t e t h e adoption and l e a r n i n g of new tech- However, ~ i v e nt h a t f e r t i l i z e r s u b s i d i e s i n I n d i a have been i n e x i s t - ence f o r o v e r a decade, they a r e now a n enduring long run expense r a t h e r than a temporary i n c e n t i v e f o r technology d i f f u s i o n O v e r a l l , t h e r e a p p e a r s t o be no clear reason f o r continued f e r t i l i z e r s u b s i d i e s i n India. As t h e Committee on C o n t r o l s and Subsidies i n f s c t recom- mends, t h e c u r r e n t subsidy should be g r a d u a l l y phased o u t and f e r t i l i z e r should be marketed at a n economic p r i c e . 111. Withdrawing Fertilizer Subsidies i n India - A P a r t i a l Equilibrium Analysis . The c u r r e n t huge c o s t of t h e I n d i a n f e r t i l i z e r subsidy is brought about by t h e p o l i c y t o m e e t growing requirements For f e r t i l i z e r s v i a dsmestic production ( a t a guaranteed producer r e t e n t i o n p r i c e ) while at t h e same time f i x i n g f e r t i l i z e r p r i c e s t o farmers lower than t h e i r t r u e production costs. Because domestic s u p p l i e s still f a l l s h o r t of c u r r e n t demand, imports remain however, is not t h e c a s e i n India.       f e r t i l i z e r variables given any of three a l t e r n a t i v e ways government choose:; t o remove t h e n e t f e r t i l i z e r ~ u b s i d y . ~Of course, these a l t e r n a t i v e s do not exhaust a l l the possible ways of t o t a l l y eliminating the f e r t i l i z e r subsidy. ~ l t e r n a t i v e s2 and 3, f o r instance, can a c t u a l l y be used i n combination such t h a t t h e i r aggregate e f f e c t s still r e s u l t i n having a zero n e t f e r t i l i z e r subsidy. It is also possible t o decrease (or increase) both the r e t a i l p r i c e and the producer retention p r i c e a t the same time and still obtain a zero net f e r t i l L z e r subsidy. The a l t e r n a t i v e s l i s t e d i n Table 2 a r e only meant t o highlight the widely d i f f e r e n t a g r i c u l t u r a l output and incone d i s t r i b u t i o n consequences of eliminatinf. the f e r t i l i z e r subsidy according t o which of a l l passible a l t e r n a t i v e s is chosen. In general, an3 increase i n t h e f e r t i l i z e r r e t a i l p r i c e w i l l cause a g r i c u l t u r a l outputs t o decline s i n c e l e s s f e r t i l i z e r s w i l l then be used by farmers. Food p r i c e s w i l l r i s e and net buyers of food, the r u r a l poor and the urban c l a s s e s , w i l l suffer. On the other hand, any decrease i n r e t e n t i o n p r i c e s t o f e r t i l i z e r producers w i l l not a f f e c t f e r t i l i z e r use by farmers. Agricultural outputs w i l l therefore remain unchanged. Indigenous f e r t i l i z e r production w i l l decrease but t h i s is unlikely t o s i g n i f i c a n t l y a f f e c t employment i n the f e r t i l i z e r industry s i n c e the industry is not labor-intensive. Except perhaps f o r a marginal decline i n t h e incomes of the f e r t i l i z e r producers o r the urban rich, the overall income d i s t r i b u t i o n w i l l remain unaltered. -6/ In Figure 1, the point K describes the equilibrium f e r t i l i z e r price and q u a n t i t y t h a t would p r e v a i l i n the absence of any imports o r f e r t i l i z e r subsidy. Indeed t h i s is an option open t o government. However, the opportunity cost of having high domestic p r i c e s r e l a t i v e t o world p r i c e s is extremely high. Only i f world p r i c e s were g r e a t e r than o r equal t o the equilibrium price, i.e., Pv )Pe, would this alternative be viable.  f e r t i l i z e r production and f e r t i l i z e r consumption cannot be a t t a i n e d without having higher f e r t i l i z e r s u b s i d i e s and/or more e f f i c i e n t f e r t i l i z e r p l a n t s t h a t causes a rightward s h i f t i n t h e domestic f e r t i l i z e r supply curve. Since t h e e a r l y 80s, I n d i a saw more of t h e former r a t h e r than the l a t t e r adjustments. Figure 2 i l l u s t r a t e s wiat w i l l happen i f t h e f e r t i l i z e r subsidy were vithdrawn given t h e same a p r i o r i c o n d i t i o n s assumed i n Figure 1 except t h a t t h e v o r l d f e r t i l l z e r p r i c e (P,) is now s e t higher than the government's guaranteed p r i c e t o domestic f e r t i l i z e r producers (PO). S Figure 2 is r e n i n i s c e n t of t h e Indian f e r t i l i z e r s i t u a t i o n immedfately a f t e r f i r s t o i l p r i c e h i k e of 1973-74. Our i n i t i a l c o n d i t i o n s i n Figure 2 show t h a t t h e amount OQO of d f e r t i l i z e r is domestically produrod (P.: producer p r i c e s ) 2nd t h e amount 0Qo is consumed Cat Po r e t a i l prices). T o t a l f e r t i l i z e r subsidy is given t C by t h e a r e a P0PoC.D + ABDE. Any decrease i n Ps w i l l decrease t h i s t o t a l C S Figure 2  only be eliminated if retail fertilizer prices rise to the world price level, i.e., PC - Pw. - But then, local fertilizer producers w i l l s u f f e r an opportunity loss (equal to the area PgPw4C) because retail prices are set higher thpii ~roducerprices. Only if Ps were also set equal t o P, would there then be no net losses t o producers and zero subsidies. I;r this instance, world prices rule. Domestic f e r t i l i z e r production w i l l increase but f e r t i l i z e r consumption will decline. In Figtire 2 , only i n the unlikely case where the world price Pw i s greater than the equilibrium domestic price Pe w i l l a setting o f both PC and Ps lower than Pw result i n no net losses t o domestic fertilizer producers and i n no net f e r t i l i z e r subsidy by government. both PC and Ps w i l l equal Pe and there will also be no imports. In 1973-74, what the government o f India d i d i n response t o higher world f e r t i l i z e r prices was t o increase i t s retail and Froducer retention prices (although a fertilizer equalization charge was askzd o f producers). This was a judicious response though it invariable led to lower fertilizer consumption but slightly higher domestic f e r t i l i z e r production. And because these domestic fertilizer price increases were not sufficient t o o f f s e t the higher cost o f fertilizer imports, a large subsidy on fertilizer imports f i r s t came into ulace i n 1974-75. The government could not have avoided this subsidy. Only if it had allowed for even higher fertilizer retail and producer retention prices, or the high world fertilizer prices, t o dominate the domestic narket could this subsidy have been avoided. Fortunately, this subsidy came down i n the following years primarily because o f lower fertilizer import price::.  -71Except for a few minor departures to be noted later, the model in this section is exactly the same as that described in Quizon and Binswanger (1984). The mathematical structure and all the econometrically estimated parameters of the model are given in this paper. - 5/ Bapna, Binsvanger and Quizon (1984) describes how these parameters were obtained for the semi-arid tropical regions of India.   The nominal income of each group is computed a s t h e sum of t h e i r re- s ~ e c t i v es u p p l i e s of f a c t o r s of production m u l t i p l i e d by the f a c t o r p r i c e s , p l u s an exogenously given component of n o n a g r i c u l t u r a l income. Real income is defined a s nominal income, d e f l a t e d Iby an endo- genous consumer p r i c e index. The p r i c e index r e f l e c t s a l l endogenous food p r i c e changes and is s p e c i f i c t o each income group. P r i c e s and q u a n t i t i e s a r e determined by equating aggregate demands w i t h a g g r e g a t e s u p p l i e s f o r each of t h e f o u r a g r i c u l t u r a l o u t p u t s and f o r each of t h e v a r i a b l e i n p u t s except fertilizer.'' For f e r t i l i z e r , iLs r e t a i l p r i c e ( i n t h e f e r t i l i z e r demand equation) and its producer p r i c e ( i n t h e f e r t i l i z e r supply equation) a r e assumed t o be exogenously given. F e r t i l i - z e r imports, purchased at a f i x e d p r i c e , a r e what equate domestic f e r t i l i - z e r demand and supply and a r e endogenous. The t o t a l f e r t i l i z e r subsidy is t h e sum of a domestic f e r t i l i z e r subsidy and a f e r t i l i z e r import subsidy. These components of t h e t o t a l subsidy a r e computed as r e s i d u a l l o s s e s ( o r g a i n s ) from s e l l i n g t h e a v a i l a b l e f e r t i l i z e r a t t h e given r e t a i l price. The q u a n t i t y of land is exogenous, but t h e "land r e n t " is determined endo- genously as t h e r e s i d u a l farm p r o f i t s a f t e r v a r i a b l e f a c t o r s have been paid o f f . Nonagricultural p r i c e s a r e given exogenously, and t h e q u a n t i t y con- 12 sumed a d j u s t s . The model s o l v e s f o r a l l endogenous p r i c e and q u a n t i t y changes and s i m - u l t a n e o u s l y d e t e r s i n e s f o r each income group the ch,.nges i n t h e i r nominal income, p r i c e d e f l a t o r , r e a l income, l a b o r and d r a f t power supply, and con- sumption l e v e l s . The e n t i r e node1 is w r i t t e n i n logarithmic-linear form. 1-l This is t h e f i r s t d e p a r t u r e from t h e g e n e r a l model described i n Quizon and Binswanger (1984)- Appendix I shows i n mathematical terms how t h e f e r t i l i z e r market an? f e r t i l i z e r s u b s i d i e s a r e modeled. I v i a trade.   and d o m e s ~ j cf e r t i l i z e r consumption remain unchanged. F e r t i l i z e r imports increase by 23.82, enough t o cover the decline i n domestic f e r t i l i z e r production by 15.5%. The main l o s e r s a r e l i k e l y t o be f e r t i l i z e r producers who presumably belong t o the r i c h e s t urban group (U4). Unfortunately, t h i s is not shown i n Table 3. Because the model does not t r e a t the nonagricultural s e c t o r endog~nously, the e f f e c t of reducing f e r t i l i z e r producer p r i c e s on nonagricul.~uralincomes is not taken i n t o account. Nonetheless, we can expect t h e decline i n the income of U4 t o have no s i g n i f i c a n t e f f e c t s on a g r i c u l t u r a l output demands and on a g r i c u l t u r a l prices. The r i c h e s t urban group not only consume a small proportion of t o t a l a g r i c u l t u r a l output but a l s o have r e l a t i v e l y smaller income e l a s t i c i t i e s of demand f o r a g r i c u l t u r a l cnmmodities. Alternative 1 assumes that self-sufficiency i n f e r t i l i z e r is not a paramount government goal. Alternative 2 allows the f e r t i l i z e r r e t a i l p r i c e t o increase but assumes t h a t the government's f e r t i l i z e r r e t e n t i o n price t o producers does not change (P' = 0). F e r t i l i z e r consumers bear the i n i t i a l burden of t h e s withdrawal of the f e r t i l i z e r subsidy by 50%. F e r t i l i z e r consumption declines (-6.6%), and s o does aggregate a g r i c u l t u r a l production (-0.4%). Food p r i c e s increase and a l l urban c l a s s e s lose. Real farm p r o f i t s decline (-1.7%) an& landowners lose mainly because higher f e r t i l i z e r r e t a i l p r i c e s increase farm production costs. F i n a l l y , the poorest r u r a l group who a r e n e t bu.yers of food l o s e from t h e food p r i c e increase. However, because l a b o r is a s u b s t i t u t e f o r i e r t i l i z e r    - 22 - ?aide 5 MU: Foal Subsidy d Irrigazim Lnescrenc -1m F a d Subsidy sorun's I.nlgaum henarlosal 5.1 4.2 A.3 4.4 b - ~ c i c L-e - - FYwmmau blueass Irrigarion af ?co&rah rrrlgatlon T k k m e d to *fi V/O PeCWary Falr WE 'a; af !hhrmmx 99a ?hrbc aopratinral v- (L*) m-= zbtai@arlolrdProductlcn * -0.M9 4.335 0.407 0.482 . Hoe Probftica E+eat Rabxicu 0.LU -2.249 0.761 ~ @ z e a L s ~ m 9.052 1.351 0.949 OtkrCropeFnxhaim 4.419 4.70' 0.341 0.368 CX reflacar Mae ?ria -- r+ner Rla? 2.193 -4.383 -3.W -5.620 CoarseCeraalsPria 0. m -2.712 - 2 . M -3.844 OctnCropeRicm 1.63 -1.639 -1.290 -2.835 M w F b 0.333 0.271 0.466 0.116 0. ~n 0.239 w'4Fm 0.4% 0 . U 0.706 Real Farm Profit Real Per cqlita Ilnxaz of: h a L ; 4.174 0.671 0.874 l h ~ a l 2 -0.m 4.181 0.349 m1ral3 0.019 -0.776 -0.008 muz~l5 0.290 -1.852 4.634 k b l l 1.010 2.035 1.506 Urbw2 0.- 1.W 1.433 urbm3 0.011 1.7U 1.275 Urbsab -0.107 9.W) 0.821 Aggregacem-wa IncQwe (iiEXl0 0.113 4.W5 0.233 Q-- -3. L51 d.06) -3.w Fcrdlizer P l x & c h FertUker Zqmro, 1.L51 -7.036 -1.101 F- Retail Ria? 5.962 5.433 5.m - Ferrillter --SQeer's Ricm -5.962 - 5 . a -5.83 ~ ~ C u e a l ~ a f : lhaal1 4.109 0.738 0.793 - 2 4.110 0.5% 0.635 lhrral3 4.U6 0.424 0.533 lhPal5 0.069 daU 4.111 Vrber!l o m 2.855 2.101 - 2 0.423 2-30 1.925 lktm3 0.166 2.086 1.727 UrbeaG 0.775 4.162 0.I 3 A g g r e g a t e R Z r ~ c a ~ -m 0.~168 0.584 0 . m  We a l s o do not show 524 e x i s t i n g regional d i s p a r i t i e s i n the s i z e and conposition of a g r i c u l t u r a l o u t p u t s , a g r i c u l t u r a l i n p u t s and i n f r a s t r u c t u r e , r e a l p e r c a p i t a incoaes, and s o on a r e a l t e r e d by government policy. Scenario 4.1 shows what happens i f government uses t h i s R s 2.483 b i l l i o n f o r a food subsidy t o urban r e s i d e n t s which i t s d i s b u r s e s v i a urban Zood r a t i o n shops. Under t h i s scheme, each urban r e s i d e n t is provided with the same amount of subsidized food irrespective of the person's income l e v e l . This s u b s i d i z e d food is procured domestically. When r e l e a s e d i n t h e r a t i o n shops, \re f u r t h e r assume t h a t t h e per c a p i t a urban Pood r a t i o n s a r e e i t h e r i n f r a m a r g i n a l , o r i f n o t , t h e excess of one's own demand can be r e s o l d by the urban r e c i p i e n t i n t h e open market. This scheme then is tantamount t o a nominal income t r a n s f e r of R s 2.483 b i l l i o n t o a l l urban , r e s i d e n t s i n e o u a l amounts. Scenario 4.2 shows t h e e f f e c t s a second o p t i o n , t h a t is, of i n p o r t i n g R s 2.483 b i l l i o n worth of wheat o r 1.38 m i l l i o n m e t r i c tons of wheat a t 1980-dl world p r i c e s and subsequently releasi-tg t h e s e i n t h e open market. Scenario 4.1 and 4.2 a r e b a s i c a l l y a l t e r n a t i v e short-term poverty a l l e v i a t i o n programs. They show t h a t i f t h e paramount g o a l of gover-ment i s co improve the incomes of the poor i n the short-run, t a r g e t e d Food s u b s i d i e s o r income t r a n s f e r s t o then, and/or increased c e r e a l imports a r e b e t t e r ways of a t t a i n i n g t h i s o b j e c t i v e than f e r t i l i z e r subsidies. However, f e r t i i t z e r s u b s i d i e s a r e b e t t e r only i f t h e government's main o b j e c t i v e were t o encourage domestic a g r i c u l t u r a l production instead. Both  vithdrew f e r t i l i z e r subsidies i n favor of targeted food subsidies o r di3:ect food imports. Comparina scenarios 4.1 and 4.2, w e note t h a t with imports of wheat (scenar3.o 4..2), aggregate agricultural production declines by more than when urban fool subsidies a r e financed (scenirios 4.1). However, urban resident? gain more I n the import scheme chan i n the urban ration shop schene which already i n i t i a l l y f a - o r s them. Dunping wheat: imports also favors t h e r u r a l poor thocgh i t harms the r u r a l upper Income group. Overall, increasing the per capita c e r e a l consumption of both the urban and r u r a l poor is best attainel by importing foodgrains rather than by relying on other short-run remedies, sue:-a s a high food price policy o r a f e r t i l i z e r subsidy, that increase aomestic food production. The l a s t twa columns 3f Table 4 show t h e e f f e c t s of using Rs 2.483 b i l l i o n from the f e r t i l i z e r stibsidy f o r major/medium i r r i g a t i o n a t t ! ~ cost of Ra 3713 per hectare i n 1980-81.15 Both scenarios assume that the benefits from newly i l r i g a t e d land w i l i extend f o r 50 years, the l i f - s;an of the new i r r i g a t i o n iafrastructure. 'Maintaining and operating a major/ The Sixth Five Year Plan of the Government of India assumes an average s e t v p cost of R s 6969 per hectare i n 1970-71 prices f o r new major/medi~utjrrigarion. Assuming an i n f l a t i o n r a t e equal t o that f o r non-agricultural coamodities, t h i s cost is equivalent t o R s 18713 psr hectare i n 1980-81, This figure is unadubtedly an upper limit. Independent simulations on the e f f e c t s of i r r i g a t i o n investments i n India currently being done by A. Parikh, T.N. Srinivasan and N.SUS. Narayana a t IIASA assume 6 cost of R s 1988.6 per hectare and R s 6736.84 per hectare f o r minor and major i r r i g a t i o n respectively a t 1970-71 prices. Moreover, a t l e a s t two World Bank project studies on major i r r i g a t i o n ic India assume a cost between R s 12300 and Rs i4400 per hectare i n 1982 prices,  medium i r r i g a t i o n sys:sm w i l l a l s o cost R s 216 per hectare per 'fiereas scenario 4.3 assumes t h a t the governdent w i l l bear the f u l l cost of m i n t a i n i n g and operattug the new i r r i g a t i o n system, scenario 4.4 assumes t h a t t h i s expense vill i n s t e d be f u l l y shouldered by d i r e c t beneficiaries (users) cf the new system. Scenario 4.1 then assumes a higher cost per - i r r i g a t e d hectare s i n c e the government has t o i n i t i a l l y s e t aside a certain > amount t o cover the d n t e n a n c e and operating costs f o r the nexL 53 years. Scenario 4.4 assumes t h a t a l a r g e r land area is actually i r r i g a t e d (because of lower cost t o government), However, landowners have s l i g h t l y higher t o t a l production c o s t s because they now bear the f u l l expense of I I maintaining and operatang the new i r r i g a t i o n system. Both scenarios assumes t h a t the e x t r a a g r i c u l t u r a l output made possible by the new i r r i g a t i o n w i l l be absorbed domestically, I < The figures f o r scenarios 4.3 and 4.4 show the 50 year net e f f e c t s of investing 5glX of the f e r t i l i z e r subsidy i n new i r r i g a t i o n i n 1980-81, Inese were obtained by f i r s t computing the year t o year benefits from the new irrigatiom and subsequently discounting these benefits a t 12% t o 1980-81. The scenarios report the sum of these discounted benefits, As i n the previous scenarfos, these numbers a r e percentage differences i n the esdogenous variables (from t h e i r actual 1980-81 levels) caused by the policy intervention. "=hey a r e tl-erefare comparable t o scenarios 4.1 and From a g r d v i t h equity perspective, i r r i g a t i o n investment appears t o be better &an e i t h e r the imports cum market dumping of foodgrain o r the domestic procurement cum urban ration shops schemes, With   measure t o help i n the d i f f u s i o n of new technology. F e r t i l i z e r subsidies a r e not supposed t o be s u b s t i t u t e s t o investncat i n a g r i c u l t u r a l research and extension o r i n s o c i a l and physical i n t r a s t r u c t u r e which alone guarantee she viability of new technology i t s e l f . F i n a l l y , we n o t e t h a t the scenarios l i s t e d i n Table 4 assume a s t a t e crading economy xhere decisions t o i n p o r t o r export any amount of food grains r e s t s o l e l y on t h e government. The importance of t r a d e decisions i n e f f e c t i n g the d i s t r i b u t i c n of income is i m p l i c i t i n scenario 4.2. Another paper (Binswanger and Quiton (1984)? e x p l i c i t l y shows these c r u c i a l e f f e c t s . A government decision t o export the e x t r a food grain made a v a i l a b l e from increased i r r i g a t i o n , f o r example, would reverse the progressive income d i s t r i b u t i o n e f f e c t s shovn i n scenarios 4.3 and 4.4. With exports, food grain outputs w i l l increase b u t s o v i l l food g r a i n p r i c e s . Net producers of food, o r the r u r a l upper incoze Eroup, w i l l pain while netcon'suners of food, o r t h e r u r a l poor and the urban c l a s s , v i l l lose. Trade policy is a najor determinant of t h e f i n a l d i s t r i b u t i o n a l outcoce of any governnert program i n a g r i c u l t u r e .  ?!ODELING FEKTILIZEK SUBSIDIES I!J A GENERAL EQUILIBRIlibI ?!ODEL OF THE IBDIAN AGRICULTURAL SECTOR T h i s n o t e shows how F e r t i l i z e r s u b s i d i e s i n I n d i a c a n be modeled o i t h i q t h e Quizon and Binswanger (Q-B) (1984) g e n e r a l e q u i l i b r i u m model OF t h s I n d i a n a g r i c u l t u r a l s e c t o r . The n a t u r e o f t h e e x i s t i n g F e r t i l i z e r s u b s i d y i n I n d i a is e x p l a i n e d i n S e c t i o n I1 o f t h i s p a p e r . L e t Ps be t h e r e t e n t i o n p r i c e o f f e r t i l i z e r t o f e r t i l i z e r p r o d u c e r s , PC t h e F e r t i l i z e r r e t a i l p r i c e and Pw t h e world p r i c e o f f e r t i l i z e r . Both Ps and PC a r e s e t by government and P, is fixed, i.e., t h e government c a n n o t i n f l u e n c e t h e world p r i c e of f e r t i l i z e r . A l s o , l e t Qd be t h e t o t a l demand For f e r t i l i z e r , Qs t h e t o t a l s u p p l y o f f e r t i l i z e r , Qsd t h e t o t a l d o m e s t i c p r o d u c t i o n o f f e r t i l i z e r and Qsw t h e t o t a l f e r t i l i z e r i m p o r t s . We t h e n h a v e t h e f o l l o w i n g e q u a t i o n s : ( 1 ) Q; = aP' +Qd ( o t h e r s ) C ( 2 ) Q l d = EP' + Qsd ( o t h e r s ) S (3) Q; = WIQid + W2Qiw ( 4 ) Q; = Q ; T h e s e e q u a t i o n s a r e e x a c t l y l i k e what are used i n t h e Q-B (1984) inodel e x c e p t t h a t PA f P i . The p r i m e s (') i n d i c a t e t h e endogenous v a r i a b l e s as e x p r e s s e d i n r a t e s o f g r o w t h , a is t h e own p r i c e e l a s t i c i t y o f f e r t i l i z e r demand, E is the own p r i c e e l a s t i c i t y of f e r t i l i z e r supply,  and the l a s t two terms of equation ( 1 ) and ( 2 ) r e f e r t o a l l o t h e r terms t h a t e n t e r t h e f e r t i l i z e r demand and domestic f e r t i l i z e r s u p l y equation r e s p e c t i v e l y . We d e f i n e t h e t o t a l f e r t i l i z e r subsidy (V) as: t h e subsidy is t h e sum of a domestic subsidy t o f e r t i l i z e r producers and a subsidy on f e r t i l i z e r imports. Expressing t h i s equation i n t e r n s of r a t e s of growth, we o b t a i n : ,.%!hi PwQsw LUs where s d = V , s, = V , sc = V and a r e base y e a r values. The e q u a t i o n s y s t e n described by e q u a t i o n s (1) t o (5) has 7 unknowns, Q;, QlP , Q:, Q , P:, P6, and V ' . l The l a s t t h r e e unknowns a r e p o l i c y v e r i a b l e s . The government c a t s e t t h e r a t e of change i n the t o t a l amount of t h e subsidy (V'). 90w any adjustment i n t h e t o t a l subsidy is t o be a t t a i n e d can l i k e w i s e be s e t by government, e.g., P; = 0 o r P: =O o r P' C = -p' e t c . The equation system given by (1) t o (5) is s o l v a b l e i f any two s J of t h e s e t h r e e p o l i c y v a r i a b l e s a r e defined a p r i o r i . I n t h e s c e n a r i o s d e s c r i b e d i n Table 3, f o r i n s t a n c e , we s e t V ' = -50 and e i t h e r Pi = 0, Pb = 0 o r P: =-PI. s -1/ Note t h a t e q u a t i o n (1) is econometrically estimated. See @uizon and Binswanger (1354) and B a ~ n a ,Binswanger and Quizon (19SL), f o r d e t a i l s . For e q u a t i o n (2), t h e orm p r i c e e l a s t i c i t y of f e r t i l i z e r supply is assumed t o be 1.  Sapna, S.L., Hans Binsvanger and Jaime Quizon ( 1 9 8 6 ) . "Systens of Output Supply and Factor Demand Equations For Semi-Arid Tropical India", Indian Journal of A g r i c u l t u r a l Economics, v o l . XYXIX, So. 2. Binswanger, - a n s , Jaime Quizon and Gurushri Swarny (1982). "The Demand f o r Food and Foodgrain Q u a l i t y i n India", World Bank, ARU Discussion Paper SO. 6. Binsvanger, Sans and 'aim Quizon (1986). " ~ i s t r i b u t i o n a lConsequ'ences of Xlternative Food P o l i c i e s i n India", World Bank, U U Discussion Paper No. 20. Desai, Gunvant M. (1979). " F e r t i l i z e r i n I n d i a ' s Agricultural Developement," i n Agricultural Development c f - J n d i a -Polic] and Problems, C.H. Shah (ed.), Bombay: Orient Langman Ltd. (19841, "Growth i n F e r t i l i z e r Consumption: Pric: and Non-Price Policies," i n Papers and Summary of Proceedings of I n t e r n a t i o n a l F e r t i l i z e r Pricing Seminar, March 27-30, 1984, World Bank, Industry Department (mimeo). India (1979). Report of t h e Committee on Controls and Subsidies, New Delhi, May 1979. (1983). Economic Survey 1982-83, New Delhi, 1983. India Planning Commission (1980). Sixth Five Year Plan 1980-85, New Delhi, 1980. Quizon, Jaime and Hans Binsvanger (1984). "Income Distribution i n India: The Impact of P o l i c i e s and Grovth i n t h e Agricultural Sector," World Bank, ARU Discussion Paper No. 21. S h a l i t , H a i m and Hans Binsvanger (1984). " F e r t i l i z e r Subsidies: A Review of Policy I s s u e s with Special Empahsis on Western Africa," World Bank, ARU Discussion Paper No. 27.  o r So. : S t C 2 3 e Acqsisicioa o f 1 3 f o ~ ~ t i oand cha XCopcisa of !:ev Tec?.~oLogy n j y C l r s i r c ~Fader and logo: SlaCa, Sa?cetzhar L382. Xegor: SO.: &XU 3 Sclecciag Coatacc P a r z r s f o r bqricu1:ural 5xcension: Tha TraiAr.3 ar.d tILsic Systeri In Saryana, k d l a by Car3hon ZeCer acd Xaiager Slada, Xugwc 1992. %?or: Yo.: .LXU O 3.e i t g a c t of Accic.-dcs 7:vard X s k on b p t i c u l c c r a l 2 e c i s F o n ~i z 3uzal IaCia. 3y 2ans ?. 3L?~wanger,Zayanatha .'ha. T. j a l a r a a a i a h aad Donald .-I. S i l l a r s YAY at. ?&30r=So.: .L?U5 3ehaviaral anc Y ~ t a r i a lh c ' , e r i z a n c s of ?rsduc:i3n ? , ~ l i ~ t iF::o ~Azzi:zl::re ~ by Eats 7 . 3i:ssar,3e: a-d Y ~ r k3. 3 o s e n r ~ e i 3 ,Jcze 1982, %?vised J u l y 22, 1985 3egorr YO.: M U 6 3 e :eland f o r Food and Foodgrain CcalLcy i n i 3 d i a by Xacs ?. 3Fasuaz3erD l a i = e 3. Cuizon aad Gurzshri Svaay, S o v e d e r L382. ?.efere3cs :o :?e 2ebace 2 5 ;:e : ? e r g XCequac:.- a i Sxissizg Jiecs La 3eveloc=enc Csuzt-ies jy j h l o w ?.eurliaser, Yay '3d3. ?.e2orZ To. : M C 3 - - - :-!ure z::ecti*~e .Ud :a ..,zi:ed :he ZorL-1'~?=or and XU.%?~: A Zras:? Lock 3= Scatzs ? A l i = La2 A30, Zi:ls I: :DOG .4Lt jy 5 k k = o la-~cl',=-,e:. :ce 1333. ?.z=or= !:o.: -23-V 9 Fa::sr Gains &?= Lasses L? zke h:',Lkq j e d - A r i i TrosLcs: A 3!dac=i: bsjroacii :a Ysdclizg Cke Agricclcural 5 e c ~ 3 r 'Jjr ,'ah! 3. C-izoj 2t.d Yarj ?. 3F=sw=~lqer, jd3:2==2r :?33. ?.t'I:i2= ?a:= 1334. o r : - 0 : .:-X 13 .:a 2Lscriaucioa ~i k c o = e iz f=.aials Sar:kera hheac lagism by 3. Q u ~ z o Jazs ?. 3ilsvaaper and Cevar.=ra Suata, A-z,JSZ ~ , L993. 3svrscC I x s e i3dk. ?.e?or: !To.: M C l.1 ?opulat2oa Sansicy. Far&-3 Zxc+nsLty, ? a c t e r a s of La5or-l.'se a n i Xe~3.aizaCicn by ?rabhu L. ? i = g a l i azc ?azs I . 3i.svaaqer, Se~rce5erL333.   XeporC SO. : M U 27 r ' a r r i l l t a t Subsidfar: A Raviav sf Poiicy Zpauer vich Spacial %?harts on f e r c a m U r i c a , by tirim Shalfc a d :ions P. Sizsvamger. Xoveobar L384. Revised August 1985. Xaport SO. : 6- Froo Lad-Abundance cr, Land-Scarci:~: Tka Ef!fectr of Oopulation Crovth on Productian h l a t i s n s i n .kqrariHn Scanod.as. by ~ ~ ra.k a. s t n z - ~ e i g , -PUS 3101vangar, and John vcfncira, Sovrmbar 1980,. ?. Xeport So.: AXW 29 ihe I w a c c of Xural E1ectrification and Infrastructure, on ~ g r i c u l t u r a l 3e?ort So.: hRU 30 Public Tractor S i r e and Equipcent Hire Schezes i n Developing Coocczies (with Special Ezphasis on Africa). X study prepared by t h e Overseas i)ivision, Yatfonal I n s t i t u t e of Agricultutal Engineering (OD/NW), try P.J. Seager and 3.S. Fieldson, Xoveaber 1986. b p o r t Yo. : k9L' 31 E v a l u a t b g Research Svsten l e r f o r ~ n c eand Tarse:ins Xesearch i n Land Abundan; Areas of s b j - ~ a n a r a nAfrica, by ~ a a ;?. Sinsoanger, January 1985. 3e?orc So.: ARE 32 On the Provision of Exzension Services i n Third L'orld X ~ r i c u l t u r.e .bv - . Xlastair 3. Fischer (Cansultant), January 1985. l e ? o r t S o . : AXE33 An Ecoaonic a p p r a i s a l o f Sithdrabing Fer:ilizer SubsiCLes i n IzCia, 5y J a k e 3. Ouizoa, X j r i l 1985. Revised August 1985. -- lr:oort Yo. : . ;LIT! 3h m e I=pact of h g r i c u l t ~ r a lExtension: X Case Study of the T r a i n i ~ gand V i s i t Vethod (ThV) i n Raryaza. India, Gerlhon Feder, Lawence i. Lau and Xoger 9. Slade, ?!arch 1985. Bepore Y o . : Z-QL? 35 Xanaging Uater Yanagers: Deterring Exprcpriarion, o r , Equity a s a Control X e c h i s n , by Xoberr 'r;aCe, April 1085. X e ~ o r tYo.: ARU 36 , Cornon Property Resource Ya~agerenrin South Indian Villages, by l o s e r t Xade, April 1985. Report So.: ARU 37 On the Sociology of I r r i g a t i o n : How de we Know the Trulth about Canal P e r f o m by Robert Wade, Yay 1985.. Report No.: .2AUIJ8 Some OrganizacLzns concerned with Animal Traction Research and .Development i n Saharan Africa, by Paul Starkey, April 1985.  by J a i m Quizon and Janes S a r b i e r i , June 1985. Teport So. : ARU LO Agricultural Xechaaiiation and the Evolution of Farmizg S y s t e ~ si n Sub-Saharan Africa, bv Prabhu L. P i n a a l i . Yves Sizot and Hans P. S i n s w a n ~ ~ r - - of ' R i g i d i t y ' , with p a r t i c u l a r reference t o Taiwan, by Kobert Wade, 0--- June 1985. Report No.: ARU 42 Education, Experience and Inperfect Processing of Infornation i n the A d ~ p t i o n of Innovations. 3v A l a s t a i r J. Fischer. June 1985. 1 1 A G~.viewof t h e L i t e r a t u r e on Land Tenure Systems i n Sub-Saharan Africa, by Raymond Noronha. .July 14. 1985. ' ---- ,---. - - by Ham Binswanger, Balaranaiah, V. Bashkar Rao, M.J. Bhende and K.V. Kashirsagar, J u l y 1985. 1 The Inpact of Agricultural Extension: The Training and V i s i t System i n India, by Gershon Feder and Roger Slade, June 1985. Report No. : ARU 47 Methodological Issiles i n the Evaluation of Extension Impact, by Gershon Feder and Roner H. Slade, J u l y 1985. -- - - - -- --------- Yair Xundlak, Yaw-Cheng Yang and Alan B