Revamp of subsidy regime likely to be in focus in FM Sitharaman's Budget

As of now, the proposal on the table is to consider direct benefit transfer to farmers for food and fertilizer subsidies, sources said

The Ministry of Finance is considering a revamp of the subsidy regime, with the focus being on food and fertiliser subsidies.

The proposal on the table, according to sources, is direct benefit transfer to farmers for both types of subsidies. However, there are administrative issues. 

A proposal to launch a pilot project for transferring urea subsidies to farmers’ accounts, instead of the current mechanism of crediting it to companies’ accounts, is being examined.

For food subsidies, however, the delay in payment to farmers under the PM Kisan Yojana has made farmers anxious, and hence direct benefit transfer has become a contentious issue.

The second tranche of payment under the PM Kisan, due in October, could be completed only in the first week of this month.

Hetal Gandhi, director, CRISIL Research, said, “The government would focus on more output efficiency rather than input subsidies. Creating processing infrastructure, logistics and export opportunities for agri products would hence be a structural area of focus. In the interim, input subsidies/regulations will continue. For this, a movement to direct subsidy regime is intended, but has challenges.”

Even the fertiliser ministry is studying global practices on how these subsidies are paid. The Union fertiliser secretary recently said in a TV interview that many countries gave e-voucher and paper vouchers. According to him, other practices included calculating subsidies in terms of the crop cultivated. 

“India will have to adopt an approach conducive to Indian farmers,” he had stated.

In the case of urea, to pay directly to farmers, it is ideal to shift to nutrient-based subsidies like other fertilisers and decontrol the prices of urea. 

That has its implications, and alternatives for making direct payment into farmers’ accounts are being looked into. 

So far as agriculture is concerned, weaknesses in the procurement mechanism were exposed after the Union government started sharply raising the minimum support prices of pulses and oilseeds, along with other crops.

Food Corporation of India (FCI) handles procuring wheat and rice when their prices fall below their minimum support prices (MSPs). But for pulses and oilseeds, several loopholes in the mechanism were found when prices were quoting much below MSPs for a long period of time and the government was not able to procure either due to infrastructure issues or other reasons. 

However, FCI’s its debt is high and it has no storage space for fresh wheat, which will have to be procured from April.

Cotton Corporation of India has one million bales (one bale is 170 kg) of last year’s procured stock and plans to procure more 5 million by the end of this season because prices have been ruling below the MSP.

All procurements have huge costs with the quality of the commodities deteriorating.

In this regard, the NITI Ayog had prepared a version of the Bhavantar scheme, first introduced in Madhya Pradesh and later adopted by the Centre. It was submitted to the government immediately after it took over office in May. 

In the Union Budget this issue is expected to make a beginning. 

Bhavantar had its own weaknesses in implementation and the benchmark price for calculating price differences with reference to MSPs were not available transparently.

Gandhi says: “Also, in the case of moving to a compensation scheme for MSPs minus mandi prices, the government needs to be cautious. While it may be the best way to address lower mandi prices and hence farmer losses/lower profits, it needs impeccable execution frameworks.”