Upon general reflection, the state subsidy programs of Nepal Government to expand the affordability of certain fundamental goods & services such as basic education and health, or to improve competitiveness in agriculture sector, etc. haven’t been quite successful. In fact, the inability of the state to efficiently administer its costly subsidy programs, and the consequent compromise of value-adding investments to other sectors of the wider economy seem to be doing more harm than good. The programs have not only hindered the access and growth of targeted sectors, but also have widely distributed the massive cost of operating such programs among wider participants such as taxpayers and other economic sectors that have very little stake on administered programs. In this write-up, we will scrutinize the state subsidy in fertilizer trading to validate our claims.
Fertilizer sector observed a deregulation of the state monopoly in fertilizer import and distribution from 1997/98 to 2007/08. While the deregulation did allow free competition against the state-owned Agriculture Inputs Company Limited (AICL), the persistence of state-subsidy in fertilizers unfairly challenged the profitability for private players. After all, the prices of the state-subsidized fertilizers were still below the cost they were procured at, thus leaving no profit potential and room for competition. So, the opportunity for enhancing competitiveness & innovation in the fertilizer trading business through free competition was refused by the state-subsidy system even though deregulation took hold. Besides, given the fact that this subsidy program cost a whooping NRs 23.19 billion in last 7 years (FY2065/66 to FY2071/72), the intensity of this burden among the taxpayers and the overall economy also appears to be phenomenal.
In general, state subsidy in agriculture or fertilizer is basically motivated with the convention that economic prosperity in Nepal can only initiate through Agriculture development. Thus, the idea of competing & substituting cheap foods imports from India and third countries through domestic produces supported via state-subsidy programs is well subscribed to by the state. But given the assertion by Nepali Times in an article published in Jan 2016, agriculture productivity has only increased by 3.36% on an average in the last five years (from 2010 to 2015) even though the subsidies to farmers have risen by almost 500% within the same period. And this statistical figure resonates acute failure of agriculture subsidy program of the state to assist agriculture development.
Furthermore, the purpose to externally preserve an incompetent sector by spilling other people’s hard-earned fruits of labour (via taxing) is self-defeating. After all, submitting to cheap food imports will instead generate more wealth saving that will eventually enable greater investment in areas where the market would find more economic value and comparative advantage. So, prosperity seems to be more promising in letting wealth channel in areas of actual economic potentialities with comparative advantage than attempting to rescue a sector dogmatically while denying the opportunity of cost saving.
In countering the argument that enough food should be produced domestically to maintain food security or buffer, encouraging higher consistency in cross-border trade to assure continuous supply would be more efficient than simply employing more wealth unproductively. Given that our neighbouring food exporting countries are producing more food than their internal demands at the brink of continuous technological improvement, they will definitely carry on with the incentive to export them for economic value after all.
However, it would be highly unrealistic to expect the state to scrap the entire agriculture subsidy program – mostly due to populist reasons. So, why not reimagine it as a voucher system that can replace direct subsidy programs as it is designed to minimize certain unwanted implications while sustaining the original purpose? Given the fact that voucher systems work on the principle of allowing grants to the ultimate consumers to purchase certain goods/services, it at least assures free competition, grants efficiency, and maintains true reflection of the market by minimizing price manipulation. After all, the vouchers distributed on a need based assessment will let demand-supply mechanism of the market determine the prices, and the private players can gain equal footing to compete with the state. (Potential for voucher systems to achieve such mentioned benefits in area of education in Nepal is well discussed in here and here.)
The potentiality to trigger a similar mechanism also exists in sectors including agriculture & fertilizers. In fact, the Agriculture Development Strategy (2015-2034) has even envisaged the implementation of the voucher system for similar purposes. However, unless a strategical framework and working procedure is devised for its implementation, it will only be another empty promise of the Nepal government.
Nevertheless, the voucher system and subsidies are an act of forced wealth redistribution to fund state-support programs, and therefore costs taxpayers despite their lack of direct willingness. In fact, prosperity without state support is possible and New Zealand’s case has been a great evidence for it. While the country experienced overnight scrapping off of its farm subsidies in mid 80s only to witness more farm prosperity, New Zealand has proven that economic sectors can prosper on its own if the sector is adding value to the end consumers. Therefore, state-support system as subsidy to plan development is just a half-baked logic that needs to be reconsidered from a broader perspective.