India’s Sensible Subsidies Reform – Just Pay The Farmers In Cash

Narendra Modi is suggesting that India should make itself richer at zero cost by making simple cash payments to farmers instead of the multiple and varied subsidies available. Of course, it would be better if there were no such payments, no such subsidies at all, so that India would get on with the job of having fewer farmers altogether, but this is still a step in the right direction and something that will make India richer as a whole.

It is also part and parcel of the same shift away from rations and other subsidies to the poor and the replacement with a simple cash payment.

We can argue about this on the grounds of simplicity if we like. It’s easier to get cash to someone than to make sure they get subsidised fertiliser, or cheap seed grain, or really are a farmer so get to pay a different amount for electricity. We might comment upon it in the political sense, there’s a general election coming up and a promise of cash handouts to the plurality, if not the majority, of Indians who are farmers will no doubt aid in gaining votes.

But the truth here is that this is economically sensible:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] India is considering a plan to transfer cash to farmers instead of offering subsidies on various agricultural inputs, people with knowledge of the matter said. The government is planning to club all farm subsidies including fertiliser costs and instead pay farmers cash, the people said asking not to be identified as the discussions aren’t public. The additional cost will be limited to ₹70,000 crore annually, the people said. Finance minister Arun Jaitley had budgeted ₹70,100 crore for farm subsidies in year ending March 31. Finance ministry spokesman D.S. Malik didn’t respond to two calls made to his mobile phone. [/perfectpullquote]

There’s some amount of the economy that is shifted off to those farmers in the form of those subsidies. Or, at least, it costs some amount of the economy, some percentage of GDP, to provide them. There is some amount of benefit that the farmers feel from getting them too. Quite obviously, whatever system we use we want the farmers to gain the maximum value – value to them, obviously – from that portion of ours that gets sent to them. Or, equally valid, we’d like to have the farmers as well off as they are now while reducing the amount of our money it costs us to achieve this.

The system that achieves this is simply to send the cash. For poor people value agency just as everyone else does. If they get a fertiliser subsidy then they get cheap fertiliser – well, they do if there’s any available at the subsidised price and they’ve not got to pay a bribe for access. Even if the system worked exactly as it should the farmers would still be better off with the cash. Because their choice – that agency – as to what they’d do with the cash is worth more than the fertiliser. Or the electricity, water, whatever it is that we’re subsidising for them.

This is true of every welfare system everywhere. The US one even admits it – people would value the cash it costs to provide Medicaid more than the Medicaid. People do value cash more than food stamps, that’s why the exchange rate is about 50 cents cash for $1 food stamps.

Cash provides choices, choice is something valued by us humans. Thus aiding people with cash aids them more, makes them richer, for the same cost to us than subsidising them with things or services. Or, equally, we can make them as well off as they are at less cost to ourselves.

Modi’s idea of simply sending the farmers the cash is an excellent one. It’ll either make us richer as less is spent to gain the same effect on the farmers or the farmers will be better off as they value the cash more than the goods. Collectively India is richer by changing the system – why wouldn’t we do something that makes all richer in this manner?