Repurposing agricultural subsidies for the benefit of farmers and nature

Excerpts from the presentation by Dr. Ashok Gulati at the 10^th BIOFIN East Asia Pacific Regional Dialogue

Transcribed and prepared by Abbie Trinidad, Senior Technical Advisor, UNDP BIOFIN Global and Ainur Shalakhanova, Environment Finance Analyst, UNDP BIOFIN Global 

_{^{Target 18 of the Global Biodiversity Framework recognizes the environmental and financial impacts of the continued use of subsidies and therefore aims to progressively reduce funding by at least US$ 500 billion per year by 2030. According to OECD estimates, this amount supports agricultural production in 54 countries, leading to habitat destruction, soil degradation and nutrient pollution. Repurposing this ineffective and unsustainable support could lead to significant fiscal savings and free up scarce resources to contribute to the other SDGs.}}

_{^{Currently, BIOFIN is working in 27 countries to analyse the harmful effects of subsidies on biodiversity and create action plans to rethink and redesign them. In India, BIOFIN is fortunate to benefit from the experience and wisdom of eminent scientist Dr Ashok Gulati. Dr Ashok attended the EAPAC Regional Dialogue in Sigiriya in November 2023 and shared his insights on the topic of repurposing harmful subsidies. This article is an excerpt from Dr Gulati’s presentation.}}

Agriculture subsidies in India and globally

All over the world, most countries -- even the G20 countries subsidize their agriculture. There are various policy instruments that are used to subsidise. In developed countries, prices are generally higher than they would be with free trade. So, there is protection in the form of output prices.

However, some developing countries subsidise inputs because they want to maintain low inputs and low output prices. There is a reason for this -- even for large countries like India, China or Indonesia, which have large populations to feed. The first and most important task of any government is to ensure the food security of its people. The Green Revolution introduced high-yielding varieties and prevented famines. However, it was also supported by subsidising primary inputs such as fertilisers.

These subsidies were introduced in India in the 1970s and have expanded to around US$ 24 billion to date. Then there is another food subsidy for consumers, especially for wheat and rice. India gives five kilogrammes of wheat and rice per person free of cost to more than 800 million people every month through the Prime Minister’s Garib Kalyan Yojana. This is perhaps the largest food security programme in the world. In total, these two subsidies, fertiliser and food subsidies in India, amount to nearly US$48-49 billion. However, output prices are controlled, and input prices are subsidized.

The bottom line is that the OECD has made an estimate of the so-called producer subsidies. According to this, India has a negative estimate of producer subsidies. Most developed countries, all OECD countries, have a subsidy of 14% to 15% on both the input and output side. But India subsidizes its inputs but also suppresses the output prices, which is called market price support, and that is negative, while the budget subsidy through inputs is positive. So the bottom line is that Indian farmers are implicitly taxed and not subsidised. However, this does not mean that inputs are not subsidised. Fertilisers are very heavily subsidised, which has an impact on biodiversity.

Observations from India on mapping harmful subsidies

Fertilizer subsidies promote and increase the production of staple crops: rice, wheat and sugarcane. This support has led to monocultures because farmers make high profits from crops such as rice, while competing crops such as oilseeds, pulses or millets require less fertiliser. These may be more nutritious, but since there are subsidies and rice is the staple crop in most Asian countries, at least in South and South East Asian countries, especially India, and people are committed to growing rice and wheat, this is the rotation. In some states like Punjab, the seat of the green revolution, a monoculture has developed where the success of one variety crowds out all others, which in turn has a negative impact on the biodiversity of the region.

SWAB: a smart approach to redesigning harmful subsidies

When the subsidy programme was designed and implemented, extreme poverty in India was over 60% and political philosophy dictated measures such as low input and output prices. Today, extreme poverty in India as defined by the World Bank at $2.15 PPP is around 11%. There is not much sign of extreme poverty anymore and it is time to let market forces work.

Part of this transition is to support farmers in a smart way: smart subsidies. Smart subsidies focus on agricultural practises that are in harmony with nature, i.e. protecting biodiversity, protecting soil, protecting water and minimising greenhouse gas emissions. You could call it SWAB: Soil, Water, Air and Biodiversity as a holistic package, and farmers who opt for such practises must be rewarded for doing so.

This is where the new policy innovation is needed, where farmers who adopt good practises and take all these things into account get additional credits -- green credits, biodiversity credits, carbon credits, greenhouse gas emissions and climate resilience. Financial products and policies are needed that can incentivise farmers to promote biodiversity.

Raising awareness as a first step towards redesigning harmful subsidies

Policy is embedded in a political economy framework. First, policy makers need to recognise that the context in which these policies were created has changed, that the background has changed and that this should also apply to the policy. Poverty has declined and there is no longer a shortage of staple foods in India as there was in the 1960s or 70s.

Since the supply of food is sufficient, market forces must prevail because there is no longer any reason for subsidies. For example, the prices of fertilisers such as urea are subsidized by 85% to 90%, which has led to abuse or oversupply. However, the plant only absorbs 35% to 40% of the nitrogen. The rest is released into the environment as nitrous oxide or leaches into the water and damages water bodies. This is a story where the success of one variety of wheat or rice causes it to spread over millions of hectares but harms the concept of biodiversity.

One way to solve this problem is to grow many other crops on the same platform. For example, millet, pulses or oilseeds that fix nitrogen. These crops are not as heavily subsidised with nitrogen, nor are they as heavily subsidised as the $24 billion. As such, they are better for nature and biodiversity and also more economical. Policies that give equal treatment or fair treatment, in fact, better treatment to those that promote biodiversity should be designed.

This is certainly a sensitive issue. It needs to be discussed with farmers and priorities need to be communicated to farmers in a timely manner. It is time to think about nature. It is time to think about biodiversity as part of the policy package and not just blindly increase productivity.

Making agricultural practices more conducive to biodiversity conservation

A calibrated “carrot and stick” formula is needed. People cannot be forced, so the “stick” needs to be minimised, while the “carrot” needs to be increased to incentivise farmers. Farmers will adopt the new practises through constant education. They also look at their profitability. They may want to protect biodiversity, but if their profit drops by 20%, they are unlikely to adopt any of the practises we are asking for.

So, the whole system needs to be changed to get smart subsidies that are consistent with the promotion of biodiversity. The profitability of the farmer and the farmer must take centre stage and he will be guided by the profits of the crops he grows. If these profits can be realigned in a way that promotes biodiversity, then we can hope for a success story. Otherwise, it is a losing battle.