India's subsidy model fiscally heavy, environmentally damaging: Gulati | AI With Sanket

The Federal spoke to Prof Ashok Gulati, Distinguished Professor at the Indian Council for Research on International Economic Relations (ICRIER), on why India’s biggest subsidies—food and fertiliser—need a redesign. He argues the current model is fiscally heavy, environmentally damaging, and politically hard to reform, and that savings should be redirected to skills and rural infrastructure.

Food and fertiliser subsidies take up a big part of the Budget. How do you see this burden?

Let me talk about subsidies in the Union Budget first, because subsidies also exist in state budgets—power subsidy in particular—but let’s focus on the Union Budget.

This year, the food subsidy is roughly around ₹2.25 lakh crore. Then, the fertiliser subsidy is anywhere from ₹1.95 lakh crore to ₹2 lakh crore. So together it is about ₹4.2 lakh crore to ₹4.25 lakh crore.

This is in a Budget of about ₹51 lakh crore, so it is roughly 8 to 8.5 percent of the total Union Budget.

China gives direct subsidy to farmers on a per-hectare basis; they don’t subsidise prices. They gave about $24–25 billion directly to farmers per hectare. That is the direction we should go.

Are you against food subsidy itself? Or only the way it is being given now?

Food subsidy is for the consumer. I have no problem when you are giving free food to those who are on the verge of extreme poverty, who cannot afford to earn for their living, and you have to save them.

The definition of extreme poverty — World Bank’s definition — uses $3 a day in purchasing power parity terms, per capita per day. As per that, only about 5.3 per cent of Indians are below extreme poverty. Even if you take a higher poverty definition—$2.20—then about 24 per cent of India’s population is poor.

When I worked with Atal Bihari Vajpayee, he had a formula: Antyodaya, those who are extremely poor, should get free food. Those under BPL—below poverty line—should pay at least half the minimum support price. And those above that should pay 90 per cent of the minimum support price.

I thought that was a very good way to proceed, because today you are giving free food to 56 per cent of the population. Either you are saying India is so poor that 56 per cent cannot afford food at all, and therefore you want to give free food.

I feel you need to gradually reduce this 56 per cent to 40 per cent, 25 per cent, and 15 per cent, and use the saved money to give people skills. The old saying is: teach a person how to fish rather than giving him a fish every day.

To me, anything beyond giving free food to the extreme poor becomes political—about votes—rather than doing justice to the people you want to serve. If you are really interested, you have to upgrade skills, provide education, and build better infrastructure so people can earn their living.

Even a small ant works hard for its food security. We are humans—God has given us mind and hands—and everybody has to work for that.

So food subsidy needs to be rationalised, and savings must be invested back into people and physical infrastructure.

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You also argue that free ration for 56 per cent is no longer justified. But politically, can any government reduce it?

The issue is more political than economic.

Economically, everybody would agree that 56 percent should not be given free food. But politically, any party trying to reduce it has to navigate a tough terrain. The opposition will immediately brand them “anti-poor” and say money is going to business people.

So you have to ensure money saved is going back into rural and underdeveloped areas.

Also, I know people with wonderful motorcycles and even four-wheelers who still get free food. If they can afford smartphones and motorcycles, why should they be getting free food?

If the concern is misuse, are you saying subsidies should be removed entirely? Or only targeted?

Poorest of the poor is Antyodaya—extreme poverty. If it is 5.3 per cent as per the World Bank for 2022, and even if you go by NITI Aayog’s multidimensional poverty estimates, it is around 11 per cent. So give free food to, say, 15 per cent. I have no problem.

But giving totally free food to 56 per cent—beyond the extreme poor—you should charge at least half the MSP or half the economic cost of FCI to bring rationality.

This is not anti-poor. This is rationalising the subsidy for those who deserve it most.

Or stop saying that you have reduced poverty. You cannot claim poverty has reduced sharply and still say half of India is so poor it cannot afford food without free ration. Either admit 56 percent is in the poorest-of-the-poor bracket, or rationalise the scheme. It cannot be both.

You also raised a cost and market-price argument. What is irrational in the current design?

Let me give you an example. The economic cost of rice for FCI is about ₹42 per kg—buying from farmers, stocking, distributing. But in rural markets you can get it at ₹30 per kg. Why do you have to first buy at a higher cost and then distribute?

What farmers are doing in Chhattisgarh and other places is: they give all their paddy to the government, and then expect the government to give it back to them. This is unnecessary round-tripping.

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A better approach is to give some cash, or give food coupons. And why only wheat and rice? You are giving rice to a rice producer. Nothing can be more irrational.

The challenge today is not food security, it is nutritional security. People need pulses, oilseeds, milk, eggs—more nutritious things. Either let them buy on their own through cash support, or give coupons for nutritious products.

So how should India define who qualifies for support?

You can use different indicators.

The World Bank follows an income-based approach—per capita income of $3 per day per person in PPP terms at the 2021 price level. It is difficult to measure exact income of each person, but they use assumptions and work it out.

NITI Aayog uses 12 indicators for multidimensional poverty and has said only about 11 percent are poor.

If you don’t want to go by the World Bank, go by NITI Aayog. Then ask state governments to identify who qualifies based on those indicators. It is difficult, but if you say only 15 percent will get free food and others must pay at least 50 percent of economic cost or MSP, the ball will start rolling and resources can be saved.

You suggested marking houses of beneficiaries. Isn’t that socially risky?

My point is, it is my tax money—who asked me to distribute it free to people who are capable and can earn their living? You are making a nation of lazy people. That is a big danger.

Let’s move to fertiliser subsidy. What are the two big problems you see—environment and fiscal cost?

Fertiliser subsidy sits with the Department of Chemicals and Fertilisers, and that subsidy is bigger than the entire Budget of the Ministry of Agriculture and Farmers Welfare. And the Ministry of Chemicals and Fertilisers does not deal directly with farmers. If the subsidy is for farmers, it should be given directly to farmers.

Today we hugely subsidise urea. Plants do not consume more than 35 to 40 percent of that urea. The rest goes into the atmosphere as nitrous oxide, which is 273 times carbon dioxide. So you are poisoning the atmosphere.

Or it leaches into groundwater, nitrate content becomes high, groundwater becomes non-potable, and it causes diseases—thyroid, diabetes—and in Punjab they say even cancer due to excessive use.

We need to rationalise. We need to decontrol fertiliser prices, because NPK ratios are totally out of gear. But it has to be front-loaded with direct cash transfer of subsidy to farmers so they are not impacted.

Another point: 20 to 25 percent of fertilisers produced do not reach agriculture. They are used by other industries—plywood, glass—and even go outside to neighbouring countries due to arbitrage. Urea is so cheap because there is 85 to 90 percent subsidy.

Overuse of urea leads to greenery, but underuse of P and K reduces grain output. Productivity does not increase—you only see greenery.

So we need to rationalise this. Savings will be enormous. I can bet ₹50,000 crore to ₹70,000 crore every year can be saved, and that can go into skill development and better rural infrastructure.

Why does urea distort the whole system?

Look at pricing of macronutrients—nitrogen (N), phosphate (P), potash (K). P and K are under nutrient-based subsidy with limited subsidy. But urea has huge subsidy—80 to 85 per cent. So farmers use far more urea than P and K. NPK balance gets totally distorted.

Optimally, the national ratio should be around 4:2:1. Today, it is something like 10:2. In states like Punjab, Haryana, Telangana, compared to what state universities recommend, they are 200 per cent away.

Overuse of urea leads to greenery, but underuse of P and K reduces grain output. Productivity does not increase—you only see greenery.

Crop response ratio has fallen. In the 1970s, 1 kg of NPK gave 13 kg of grain. Today it gives less than 3 kg of grain. One key reason is imbalance in NPK.

Then micronutrients—zinc. Our soils are deficient in zinc, so wheat and rice are deficient in zinc. And one reason for high stunting—35 percent of children under 5—relates to zinc deficiency.

All of this is linked to wrong policy on fertiliser pricing.

What is your fix—direct benefit transfer for fertiliser? How would it work?

If fertiliser subsidy is for farmers, give it up front on a per-hectare basis.

If a farmer has irrigation, gross cropped area will be double, so give double. Give it once before rabi, once before kharif. Then decontrol prices. NPK price ratios will correct automatically and farmers will get the signal to use fertiliser more rationally. Productivity will rise and excess use—which causes environmental damage—will reduce.

Relative prices getting corrected will also create product innovation—customised fertilisers for different crops and regions. Right now we have blunted innovation.

In China, more than 60 percent of fertilisers are used in customised NPK ratios for different crops and regions. In India that is only 17 percent. China, from a smaller crop area than us, produces more than double the agricultural output. Their average holding size is smaller than ours.

China gives direct subsidy to farmers on a per-hectare basis; they don’t subsidise prices. They gave about $24–25 billion directly to farmers per hectare. That is the direction we should go.

Why doesn’t this happen in India, despite repeated recommendations?

We have been suggesting it for a long time. There are operational issues.

One is tenants. How do we identify a tenant? The government says it doesn’t know who farmers are because it goes only by land records. The land record owner may be sitting in Canada or Australia. The person tilling the land may not have ownership.

Even PM-Kisan of ₹63,000 crore goes only to landowners with title.

We need to move away from the mindset that “farmer” means the title-holder. We need to identify each plot. GPS can identify a moving car. These are stationary plots—space technology can identify each plot. Number them like we have Aadhaar numbers.

You can identify what crops are grown, what fertiliser recommendation should be, and even control quantity so leakages reduce.

About 35 percent of the country is being tilled by tenants. Government figures are lower, but on the ground it is at least one-third. Tenants don’t get credit. They don’t get PM-Kisan. If you think subsidies are reaching the real farmer without fixing this, you are living in a fool’s paradise.

Space technology is there. Fertiliser sales data is there. PM-Kisan data is there. These need to be triangulated, linked with Aadhaar and bank accounts—JAM trinity.

If the Prime Minister takes it up as high priority, it is a six-month job. We work so hard on FTAs and other things—why don’t we identify our farmers first? If we do that, we can unleash a revolution.

You also made a larger political point at the end about “freebies”. What is that concern?

Everything is being given free—under different names, distributing everything free. You can never make a nation strong through freebies. Freebies need to be limited, and investment in education, human resources, skills, and infrastructure has to increase if you want to become a strong, self-reliant nation.

Otherwise this freebie culture will kill the country. You cannot rise with freebies.

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