A Whale of a Tale: Agricultural Subsidy in Nepal

On Feb 15, 2017:

In recent years, Nepal has witnessed a surge of subsidies as an increasingly popular instrument of economic policy to bring about desirable behavioral changes among different population sub-groups. One of the recent policy interventions aimed at improving agricultural outcomes in rural Nepal entails a fertilizer subsidy scheme exclusively for poorer farmers. However, there remains an emergent need to evaluate the direct impact of such a major policy breakthrough and its potential spillover implications.

In 2009, the Nepalese government introduced a subsidy on chemical fertilizers for a maximum of hundred thousand metric tons per year, aimed at improving economic well-being of subsistence farmers in the Hills and Terai region respectively. The policy mandates that a high level subsidy allocation management committee fixes the sales price at 20-25 percent higher than the price prevailing on the Indian side of the border. According to Food and Agricultural Organization (FAO), the Nepalese government allocates $20 million annually to account for the price differential. Retail price for the farmer, therefore, includes sales price at the import points and transportation cost up to the delivery point.

There exists compelling evidence on significant use of fertilizer subsidies employed by governments across the world, with fertilizer subsidy constituting 1.5 percent of gross domestic product (GDP) in India and 2 percent of the government’s budget in Zambia in recent years. This shows that large scale input subsidy program interventions have gained prominence in the agricultural sector.

Increasing use of modern inputs such as fertilizer has been successfully linked with agricultural productivity in the developing world. Moreover, previous research has shown that low agricultural productivity is associated with persistence of poverty in agriculture-based countries. This has further led to strong advocacy for fertilizer subsidy as a tool to promote fertilizer use and enhance agricultural yield among rural farmers.

Even though there is well-documented evidence of positive repercussions of the Green Revolution on increase fertilizer use in Asia, relatively little empirical evidence exists in the context of rural Nepal. Given that agriculture in Nepal contributes to almost 40% of the GDP and employs over 65% of the households, the government’s decision to subsidize fertilizers forges a promising avenue towards enhancing agricultural production, reducing poverty and improving food security. Still, there exists a dearth of rigorous evidence on the linkage between government-led subsidy intervention and agricultural outcomes of poor farmers.

Strikingly, recent estimates from Nepal’s government statistical database show that annual agricultural yield in the Hills region reported a massive growth rate of 15% from 2009 to 2011. Following the fertilizer subsidy decision in 2009, private sector businesses stopped supplying chemical fertilizers. This subsequently resulted in a massive ten-fold increase in the amount of fertilizers sold by Agriculture Input Company Limited (AICL), a government entity. Yet, policy makers have failed to explore the repercussions of the fertilizer subsidy intervention on annual agricultural yields of farmers in the Hills region.

Previously, the government implemented a fertilizer subsidy scheme in 1974 in response to a significant increase in global fertilizer prices. However, demand for fertilizers escalated further and continuous rise in fertilizer prices persisted, resulting in massive financial burden. Consequently, farmers started to queue up in the retail outlets, as the government failed to import fertilizers to meet an increasing demand.

To facilitate the supply of chemical fertilizers for sustainable agricultural growth, the government decided to eliminate the subsidy scheme in November 1999 and allowed private sector to import and distribute the fertilizers. However, traders suffered from price fluctuations in the overseas market, leading to a large decrease in overall supply of fertilizers in remote areas. Consequently, Ministry of Agriculture and Cooperatives launched a subsidy for chemical fertilizers in March 2009.

The emergent need to undertake an empirical study on the linkage between the fertilizer subsidy and agricultural productivity is relevant in the context of Nepal’s substantial shift in fertilizer management policy over the years. One recent econometric study, for example, shows that introduction of fertilizer subsidy is associated with a decrease in annual agricultural yields of 22.6 percentage points among subsidy-eligible farmers in the Hills region of Nepal. Strikingly, government’s absolute control of the supply and sales of subsidized fertilizers has potentially led to lower use of chemical fertilizers and poorer agricultural yields.

While policy makers laud the subsidy initiatives as pro-poor, opponents claim that fertilizer subsidies might turn out to be regressive, with wealthier families well-connected to the government officials benefiting more than subsistence farmers. Massive fertilizer subsidies may lead to overuse of fertilizers, resulting in adverse consequences on the environment. Worse, ongoing subsidy scheme in Nepal does not account for rising transportation costs in the hilly areas. Under such circumstances, how does the government ensure that farmers don’t resort to adulterated substandard fertilizers?

At present, the government appears to exhibit half-baked commitment towards seeking a better understanding of the constraints on technology adoption in agriculture. The adulteration of fertilizers is an issue in low-income countries with weak capacity for fertilizer quality regulation. Qualitative reports claim that district-level fertilizer inspectors lack logistical and manpower support to take any action in response to a reportedly large number of subs-standard samples previously found in Nepal. Worse, fertilizer mixtures formulated in-country as well as informal imports through the Indo-Nepal border areas suffer from quality control problems.

In conclusion, we need to undertake a thorough study on better understanding the direct and indirect impact of the fertilizer subsidy on agricultural outcomes. Unless the government expends a cursory effort in monitoring and evaluating the policy change, it is possible to delve into the unintended adverse consequences of the subsidy intervention. It is, however, equally important to take concrete steps towards assessing the change in welfare arising from such economic policy experiments among rural farmers.