Fertilizer Subsidy and Agricultural Production:A Study of India

Objectives: To identify effectiveness of Fertilizer Subsidy in the agriculture production considering agricultural credit statistics for India.

Methods: Annual time series data is collected for India from 1970-71 to 2016-17 from EPWRF database. Variables such as Agricultural GDP, Agricultural Credit and Fertilizer subsidy are collected for the analysis. Time series properties of the variables are checked using Augmented-Dickey-Fuller unit ischolar_main test and results were confirmed with Phillips & Perron Unit Root Test. Johansen co-integration test were used to check for any long-run co-integrating vector among the variables. Further vector error correction model and impulse response function was used to explain short-run dynamics among the variable.

Findings: Unit ischolar_main tests confirm presence of unit ischolar_main among the variables at level and all variables are stationary at first difference. Johansen co-integration test identified at most one co-integrating vector among the variables. After normalizing agricultural GDP, the co-integrating relationship suggests that agricultural credit is positively contributing to agricultural GDP and fertilizer subsidy is negatively contributing to agricultural GDP which means an increase in agricultural credit will increase agricultural GDP where an increase in fertilizer subsidy will decrease the agricultural GDP. The negative relationship between fertilizer subsidy and agricultural GDP is because of the high leakage in the delivery system of fertilizer subsidy. Speed of adjustment parameter suggests that agricultural credit corrects the short-run equilibrium more quickly than fertilizer subsidy. Impulse response function suggests that a standard deviation shock to fertilizer will not reflect in agricultural production for long (less than one year) but a standard deviation shock to agricultural credit may affect the agricultural production severely. Impulses of credit shock will reflect in production for four to five years.

Applications: Attempts by government to withdraw agricultural subsidy and establish cash transfers and more focus on agriculture credits will improve agricultural production in the long-run.