Even subsidies go wrong

Subsidy policies brought by government authorities in the name of public welfare often contradict with their own spirits. While no government policy is implemented with a bad intention, there are, most often than not, some unintended consequences associated with these policies. There are plenty of examples around to augment this.

We know very well that ‘there is no such thing as a free lunch’ and subsidies are no exceptions to this.

Government of Nepal comes up with a number of subsidy programs annually and agriculture is one sector is never left out. Some observations on the agriculture subsides that are worth noting have been discussed in the following paragraphs.

Although agriculture is perceived as the backbone of Nepalese economy, the two-third of the total population engaged in this sector contribute to only about one-third of the GDP. This figure tells a lot about the agricultural productivity of Nepal and makes one wonder if agriculture should really be held as the national means of livelihood.

Government of Nepal spends a great deal of money in the name of protecting local farmers through subsidy programs. According to Ministry of Agriculture cash subsidy scheme accounts more than sixty percentage of total agriculture budget. However, the bitter truth is that agriculture productivity has declined sharply despite these protectionist mechanisms. One of the main purposes of these programs is to substitute the imports from India with the ultimate aim of achieving food security. Agriculture and farms in India are highly subsidized which result in lower prices of Indian agriculture products in the Nepalese market. Nepalese agro-commodities can in not ways compete with such low-priced Indian products. Given this fact, these is room for being critical to subsidies in agriculture with regard to their aim and substitution of imports of agricultural products from India.

Moreover, these subsidies have not been able to reach targeted groups. A primary reason for this is poor management of designated public institutions (Agricultural Inputs Company Limited and National Trading Company) and ineffective service-delivery mechanism. There is more to this disregard for the optimal utilization of scarce resources i.e. market distortion. With the supply of fertilizers at subsidized rates by government, entrepreneurs hardly dare to enter the fertilizer market as the price level of fertilizers supplied by the government reaches far below the market price level. Now, as a consequence of subsidy in the market, private sectors are compelled to exit the fertilizer industry. Along with the competition barriers, there are other things leading to short supply of fertilizers; one of them is the cumbersome process of getting a new firm registered for trading fertilizers.

One line of thinkers defend subsidy in some sectors, highlighting the benefits it brings to a specific target group. However, the alternative use of that financing should not be overlooked. One thing that policy makers ought not to ignore is that if the creators of the wealth were allowed to dispose of the wealth they create according to their own discretion, they could lead to greater value-creation for the society than they actually do when channeled to a specific target group via subsidy mechanisms.

Subsidy programs are often touted as being a populist move designed by the government agencies under the influence of the political leader so as to secure a place in the heart of a voter. One of the examples is the special priority given to agriculture in the annual financial plan right before second Constituent Assembly election. Hence, government authorities before announcing subsidy programs should rethink about the potential consequences and they better not ignore the concept of economics which asks for proper allocation of scarce resources.