Explained: The cost of giving India's farmers cash instead of subsidies

The Narendra Modi administration appears to be making India's farmers a key plank in the upcoming budget, just ahead of the country’s general elections. According to reports, it plans to give the country’s farmers cash handouts in the form of direct transfers as opposed to subsidies.

It's a bold move that follows months of farmer protests and an agrarian crisis in the country. It is expected to benefit an estimated 146 million farmers, according to a report from State Bank of India (SBI).

The estimate follows media reports that the government has also decided against another series of loan waivers in its upcoming interim budget. Instead, the government may opt to provide income support and interest-free loans to the farmers.

Why cash transfer?

On surface, the cash transfer scheme makes fiscal sense as it would help plug leakages in the transmission of subsidies.
But there are a number of questions, not least of which is how feasible the scheme will be.

How much does the government currently spend on subsidies and support for farmers?

The government currently subsidised crop insurance, interest on farm loans and fertilisers.

As per a report published by the State Bank of India, the central government’s most recent budgetary allocation to subsidy and farmer support schemes totalled around ₹981 billion - which is roughly 2.9% of India’s GDP.

With an estimated 146 million farmers who benefit from these subsidies, the cost per farmer comes to anywhere between ₹5,335 and ₹10,162 annually. The lower figure going to someone who avails of one scheme and the higher figure going to someone who benefits from all three - crop insurance, interest subsidies and fertiliser subsidy.

That figure assumes that out of a total of 146 million farmers (as per Agriculture Census 2015-16), only 35% avail of crop insurance, 45% have bank accounts to avail of interest subsidies and 90% of all farmers receive fertiliser subsidies in some form or the other.

Will all farmers get cash transfers?

No. Landless farmers, who till someone else’s land, will be left out of the scheme. And that’s a high number in India. 56% of India’s rural households do not own any land, according to the last socio-economic caste census.

Many states like Jharkhand, Bihar, Gujarat, Kerala & Tamil Nadu are yet to fully digitise land records. This will make it tougher to ensure that cash transfers reach all intended beneficiaries.

SBI’s report estimates that the government may be able to reach up to 100 million farmers.

How much farmers get via direct cash transfer, if approved?

If the cash transfers reach 100 million farmers, the budgetary allocation will have to be around ₹1- ₹1.2 trillion. That works out to an average individual payment ₹10,000- ₹12,000 per farmer.

At this cost, there will be no additional financial burden on the government.

What is the flip side?

Even assuming that the cash transfers reach a 100 million farmers, as per the SBI estimate, it leaves out at least one third of the beneficiaries who were availing one kind of subsidy or the other. This is likely to backfire unless the government is able to fine tune the system and make it efficient and more inclusive sooner than later.