Green Revolution in India Wilts as Subsidies Backfire

By Geeta Anand 

Akshay Mahajan for the Wall Street Journal

Pritam Singh, who farms 30 acres in Punjab, says the more desperate farmers become, the more urea they use. Overuse is stunting yields.

SOHIAN, India—India's Green Revolution is withering.

In the 1970s, India dramatically increased food production, finally allowing this giant country to feed itself. But government efforts to continue that miracle by encouraging farmers to use fertilizers have backfired, forcing the country to expand its reliance on imported food.

Popularized during the Green Revolution of the 1960s and 1970s, fertilizers helped boost crop yields and transformed India into a nation that could feed itself. But now their overuse is degrading the farmland. WSJ's Geeta Anand reports.

India has been providing farmers with heavily subsidized fertilizer for more than three decades. The overuse of one type—urea—is so degrading the soil that yields on some crops are falling and import levels are rising. So are food prices, which jumped 19% last year. The country now produces less rice per hectare than its far poorer neighbors: Pakistan, Sri Lanka and Bangladesh.

Agriculture's decline is emerging as one of the hottest political issues in the world's biggest democracy.

On Thursday, Prime Minister Manmohan Singh's cabinet announced that India would adopt a new subsidy program in April, hoping to replenish the soil by giving farmers incentives to use a better mix of nutrients. But in a major compromise, the government left in place the old subsidy on urea—meaning farmers will still have a big incentive to use too much of it.

The setback of the Green Revolution matters enormously to India's future. The country of 1.2 billion has positioned itself as a driver of global growth and as a significant commercial power in coming decades.

India likely will struggle to get there, and to return to the heady days of 9% economic growth, unless it figures out how to reinvigorate its agricultural sector, on which the majority of its citizens still rely for a living.

India's Food Crisis

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Akshay Mahajan for The Wall Street Journal

Bhupinder Singh's wheat yield on this 10-acre plot used to increase every year. But for the last five years it's been barely holding steady.

Agriculture has lagged behind other industries such as manufacturing and services, posting less than 2% growth in the latest reports on gross domestic product. And double-digit food inflation and declining yields spell less money in the pockets of rural Indians.

India spends almost twice as much on food imports today as it did in 2002, according to the Ministry of Agriculture. Wheat imports hit 1.7 million tons in 2008, up from about 1,300 tons in 2002. Food prices rose 19% last year.

To be sure, there are bright spots. Indian officials say the country may produce a record wheat harvest this year because of good weather conditions, unless rain or hail appear. The wheat harvest last year was better than expected, making some hopeful that the importing trend will be reversed.

Behind the worsening picture is the government's agricultural policy. In an effort to boost food production, win farmer votes and encourage the domestic fertilizer industry, the government has increased its subsidy of urea over the years, and now pays about half of the domestic industry's cost of production.

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European Pressphoto Agency

Indian commuters pass a rice shop as a shop keeper waits for customers in Calcutta, India, on Feb. 18.

Mr. Singh's government, recognizing the policy failure, announced a year ago that it intended to drop the existing subsidy system in favor of a new plan. But allowing urea's price to increase significantly would almost certainly trigger protests in rural India, which contains 70% of the electorate, political observers say.

The ministers of fertilizers and agriculture each declined requests for interviews.

"This is politically very difficult," says U.S. Awasti, managing director of the Indian Farmers Fertilizer Cooperative Ltd. and an informal adviser to government officials on the issue. The cooperative of 50 million farmers is the largest fertilizer producer in the country.

Farmers spread the rice-size urea granules by hand or from tractors. They pay so little for it that in some areas they use many times the amount recommended by scientists, throwing off the chemistry of the soil, according to multiple studies by Indian agricultural experts.

Like humans, plants need balanced diets to thrive. Too much urea oversaturates plants with nitrogen without replenishing other nutrients that are vitally important, including phosphorus, potassium, sulfur, magnesium and calcium.

The government has subsidized other fertilizers besides urea. In budget crunches, subsidies on those fertilizers have been reduced or cut, but urea's subsidy has survived. That's because urea manufacturers form a powerful lobby, and farmers are most heavily reliant on this fertilizer, making it a political hot potato to raise the price.

As the soil's fertility has declined, farmers under pressure to increase output have spread even more urea on their land.

Kamaljit Singh is a 55-year-old farmer in the town of Marauli Kalan in the state of Punjab, the breadbasket of India. He says farmers feel stuck. "The soil health is deteriorating, but we don't know how to make it better," he says. "As the fertility of the soil is declining, more fertilizer is required."

Increased demand and the soaring price of hydrocarbons, the main ingredient of many fertilizers, have taken India's annual subsidy bill to more than $20 billion last year, from about $640 million in 1976.

"The only way for agricultural yields to rise again is for the government to give farmers the incentives and the products to provide balanced nutrition to their crops," says Bimal Goculdas, chief executive officer of Dharamsi Morarji Chemical Co., one of the oldest fertilizer firms in India.

Agriculture experts say the country can't afford to wait. "There are big problems for the future of food production in India if these problems are not addressed now," says Reyes Tirado, an agricultural scientist and researcher for Greenpeace Research Laboratories, an arm of advocacy group Greenpeace International.

Under the new plan, the government will offer subsidies to fertilizer companies on the nutrients, such as sulphur, phosphorus and potassium, from which their products are made, rather than the fertilizer products themselves. The idea is to provide incentives for farmers to apply a better mix of nutrients.

Ultimately, the government plans to pay the subsidy directly to farmers, who will be able to buy products of their choice, including but not limited to urea.

Mr. Singh's government, however, said it would continue to subsidize urea, although it would set the price 10% higher.

Mr. Awasti, the fertilizer cooperative head, says the continuing urea subsidy means that farmers likely will still use too much of it. "The government is opting, as with any very difficult change, to adopt it in phases," he says. He says he believes that the urea subsidy will be dropped altogether in a year.

In the early years after India gained independence in 1947, the country couldn't even dream of feeding its population. Importing food wasn't possible because India lacked the cash to pay. India relied on food donated by the U.S. government.

In 1967, then-Prime Minister Indira Gandhi imported 18,000 tons of hybrid wheat seeds from Mexico. The effect was miraculous. The wheat harvest that year was so bountiful that grain overflowed storage facilities.

Those seeds required chemical fertilizers to maximize yield. The challenge was to make fertilizers affordable to farmers who lacked the cash to pay for even the basics—food, clothing and shelter.

Back then, giving cash or vouchers to millions of farmers living all over India seemed like an impossible task fraught with the potential for corruption. So the government paid subsidies to fertilizer companies, who agreed to sell for less than the cost of production, at prices set by the government.

The subsidies were designed to make up the difference between the production price and sale price—and to give the producers a 12% after-tax return on any equity investment.

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Akshay Mahajan for the Wall Street Journal

Bhupinder Singh's wheat yield has been barely holding steady lately.

Fertilizer manufacturing companies sprang up around the country. Nagarjuna Fertilizers & Chemicals Ltd. became one of the most profitable publicly listed companies in India.

In 1991, with the cost of the subsidy weighing heavily on India's finances, Manmohan Singh, then finance minister and now prime minister, pushed to eliminate it. Most fertilizer companies lobbied fiercely to retain the program. Many legislators also resisted ending the subsidy, fearing a backlash from farmers.

"The business interests lobbied and the business interests prevailed," says Ashok Gulati, the director in Asia of the International Food Policy Research Institute, a Washington-based think tank, who was involved in the policy discussions at the time. A last-minute compromise eliminated the subsidy on all fertilizers except for urea.

"That's when the imbalanced use of fertilizers began," says Pratap Narayan, ex-director general of the industry group, the Fertilizer Association of India.

With urea selling for a fraction of the price of other fertilizers, farmers began using substantially more of the nitrogen-rich material than more expensive potassium and phosphorus products.

In the state of Haryana, farmers used 32 times more nitrogen than potassium in the fiscal year ended March 2009, much more than the recommended 4-to-1 ratio, according to the Indian Journal of Fertilizers, a trade publication. In Punjab state, they used 24 times more nitrogen than potassium, the figures show.

"This type of ratio is a disaster," Mr. Gulati says. "It is keeping India from reaching the production levels that the hybrid seeds have the power to yield."

Producers of phosphorus-based fertilizers struggled. The government reintroduced a small subsidy on phosphorus fertilizers, but at times it didn't cover the difference between the government-set price and the actual cost of production. Dharamsi Morarji, one of the oldest fertilizer companies in India, closed some plants.

With scant domestic supply, India had to import seven million tons of phosphorus-based fertilizers last year, according to a senior official at the Ministry of Chemicals and Fertilizers.

Twenty-one percent of the urea, 67% of the phosphorus-based fertilizers and 100% of the potash-rich fertilizers sold in India in the fiscal year ended March 2009 were imported, according to a report this month from Fitch Ratings.

In the northern state of Punjab, Bhupinder Singh, a turbaned, gray-bearded 55-year-old farmer, stood barefoot in his wheat field in December and pointed to the corner where he had just spread a 110-pound bag of urea.

"Without the urea, my crop looks sick," he said, picking up a few stalks of the young wheat crop and twirling them in his fingers. "The soil is getting weaker and weaker over the last 10 to 15 years. We need more and more urea to get the same yield."

Mr. Singh farms 10 acres in Sohian, a town about 25 miles from the industrial city of Ludhiana. He said his yields of rice have fallen to three tons per acre, from 3.3 tons five years ago. By using twice as much urea, he's been able to squeeze a little higher yield of wheat from the soil—two tons per acre, versus 1.7 tons five years ago.

He said both the wheat and rice harvests should be bigger, considering that he's using so much more urea today than he did five years ago. Adding urea doesn't have the effect it did in the past, he said, but it's so cheap that it's better than adding nothing at all.

Land needs to be watered more when fertilizer is used, and Mr. Singh worries about the water table under his land. When his parents dug the first well here in 1960, the water table lay 5 feet below the ground, he says. He recently had the same well dug to 55 feet to get enough water.

"The future is not good here," he said, shaking his head.

Balvir Singh, an agriculture development officer for Punjab state, says it is as if farmers have become addicted to urea.

"One farmer sees another's field looking greener, so he adds more urea," he says. "A farmer will become bankrupt, but he will not stop using urea."

The fertilizer industry, which had lobbied to retain subsidies back in 1991, now sees them as a problem. That's because the government, trying to rein in spending, has been squeezing the reimbursement promised to fertilizer companies.

The subsidy theoretically gives companies a 12% profit margin. Today, in part because of the way the government calculates the subsidy, it offers the average company a 3% margin, according to K. Rahul Raju, joint managing director of Nagarjuna Fertilizers & Chemicals, and Mr. Awasti, the fertilizer cooperative head.

Farmers in Punjab are increasingly glum. "Farming is in shambles," said Kamaljit Singh, standing with fellow farmers in the courtyard of the village agriculture cooperative. "If we have to support our growing families and our increasing population on this land, we must get higher yields. Otherwise our families and our nation will suffer."

Highway robbery : Gaurav Sabnis

“Don’t steal, the government hates competition”

The first time I read this one-liner, I nodded heartily in agreement and approval. Of course, the first time I read it, I was 17, and the one-liner was on a sticker pasted on the bike belonging to a girl I used to have a crush on. So her bike sticker could have summarised Hitler’s Final Solution, and I would still have agreed and approved. But that doesn’t take away from the pithiness of the one-liner.

Readers might think I am referring to the cases of Natwar Singh’s oil kickbacks, or the Sub-inspector caught accepting bribes on camera. Those cases are foul, and represent how deep corruption has penetrated in the Indian system. But I am talking about an example where the government, officially and legally, is stealing from the people. And in what is a real tragic irony, the victims of this theft are the same farmers whose suicides are used by several parties and “thinkers” to oppose free market policies. Read the following article and you realise that this theft would have been extremely unlikely and difficult under a free market regime. But under this socialist regime, it is literally as easy as signing a piece of paper.

Govt adds to farmer woes in Vidarbha

Here’s the story in a nutshell. Farmers in Vidarbha, are being forced to sell their land to the government at a price way below its market value. The Indians laws, which show scant respect for property rights of an individual, permit the government to appropriate privately owned land, and also permit the government itself to set the price. The sellers victims can’t negotiate. They can’t even refuse to sell the land. The government will grab it anyway. Legally. In Vidarbha, the government is grabbing farm land and paying farmers only 1.2 lakh rupees an acre. The current market price, even within 100 km of the area, is around 70 lakhs. If an airport is being built nearby, I am sure the price would grow many times more.

Now, the very existence of such a tyrranical law is justified by its supporters saying that since the government will use the land for public good(roads, etc), it should be empowered to grab land from recalcitrant land owners. Well-being-of-many-is-more-important-than-well-being-of-few and all that jazz. Personally I find even this justification tenuous. But even if we do accept it for the sake of the argument, note what the Vidarbha land will be used for. It will be sold to private developers and companies. Buildings, industries, and an airport will come up on that land. Who will be doing this selling? The government of course. Already, it has auctioned off several chunks of the grabbed land at over 60 times the price they paid the farmers for it. The land is adjoining a highway, and has a great deal of commercial potential. Ideally, the farmers should benefit from the economic windfall. But the government is playing the part of a very canny middleman, and pocketing the profit.

If this isn’t highway robbery, I don’t know what is.

Imagine how things would be in a free-market scenario. Such a land-grabbing law would not exist. Neither would there exist laws which forbid farmers from selling their farms for non-farming purposes. Instead, a farmer would be free to negotiate the price of his land. Developers and private industries would come, negotiate a price, and buy the land from the farmers. Would robbery be possible even then? Yes, maybe. But only in the worst case scenario, and only if extreme force or threats were used. If the mafia decided to be the middlemen, and threatened the farmers to sell the land at below-par prices, and then sold it to the private developers, pocketing the profit. Even this would be possible only if the police/state were incapable of responding to the farmers’ complaints about the mafia. Without threats of physical harm, the farmers are not stupid enough to sell the land below its real value.

Here, however, we have a situation much worse. If the mafia or even the private developers intimidate them, the farmers can go to the government, i.e. police and ask for protection. Maybe even hire private security agencies. Here, the government itself is intimidating and forcing the farmers to sell their land dirt cheap. Where do the farmers go?

A lot of people think that the biggest cause of the failures in our system is “corruption”. I hope this example shows them, corruption is a symptom and not the cause. The biggest cause is the flawed system itself. In the Vidarbha case, let us assume no kickbacks have been paid to the government officials by private developers. Let us assume the deal is completely “clean” and free of coruption. Even then, with a process allowed, sanctioned, and enforced by the constitution of socialist India, hundreds of farmers are being fleeced out of a lot of money. Money that could improve their lot, enable them to start a new life in a profession much more productive, efficient, and profitable than monsoon-dependent farming. Money that could potentially stop a lot of suicides. Money which should rightly be in the bank accounts of farmers. But the money instead, is lying, not in the Swiss bank accounts of a few corrupt people.

It is lying in the coffers of the Government.

India's water shortage: northern Punjab region

India's water shortage

Farmers are having a hard time finding ground water to grow their crops.

By Daniel Pepper, contributor

Punjab: Naresh Kumar, 22, crouches under a drill that will shortly bore 375 feet down to extract ground water to cultivate the local rice crop.

(Fortune) -- Just before dusk, on the plains of India's northern Punjab region, 22-year-old Naresh Kumar sprinkles mustard oil, turmeric, and raw sugar inside a ten-inch circle traced in the rich soil. Hands clasped, head bowed, he prays for a bountiful supply of ground water. Then he cranks a wheezing diesel engine, lines up a drill over the offerings, and releases a lever that brings an iron cylinder crashing into the earth. "Business is growing," says Kumar. "But we've placed about as many tube wells as we can in this area."

Indeed, the ground here in India's fertile breadbasket is beginning to look like Swiss cheese. On either side of Kumar's drill the calm beauty of emerald rice paddies belies a catastrophe brewing hundreds of feet beneath the surface. As the water table drops dangerously low, farmers are investing heavily - and often going into debt - to bore deeper wells and install more powerful pumps. A prayer might just be the best chance for survival.

Punjab has only 1.5 percent of India's land, but its output of rice and wheat accounts for 50 percent of the grain the government purchases to feed more than 400 million poor Indians. Experts say the 375-foot-deep tube well and 7.5-horsepower pump Kumar is installing for a farmer are at the eye of a storm that threatens India's food security, environmental health, and economic progress. "We have depleted the ground water to such an extent that it is devastating the country," says Gurdev Hira, an expert on soil and water at Punjab Agriculture University in Ludhiana. Hira estimates that the energy used to subsidize rice production in the region costs $381 million a year. He and other experts warn that, if left unchecked, future drilling will bleed state budgets, parch aquifers, and run farmers out of business.

The problem is not only that farmers are mining aquifers faster than they can be replenished. As water levels drop, pumps are also sapping an already fragile and overtaxed electricity grid. And because farmers in Punjab pay nothing for electricity, they run their pumps with abandon, which further depletes the water table. "All these issues are interconnected," says Saurabh Kumar, who heads the government's Bureau of Energy Efficiency in New Delhi. "But agreeing on a simple thing is asking for the moon."

Environmental reforms

That's exactly what Kumar hopes to do: get politicians, farmers, and bureaucrats to sign on to reforms that will save billions of dollars and reduce the amount of water pumped out of the ground. A pilot program for his nationwide scheme is expected to launch early this year. Farmers will receive new, efficient pumps with meters and prepaid electricity credits allowing them to draw roughly the same amount of water they use now and either pocket the savings if they pump less or pay to pump more. Utilities will be required to upgrade transmission lines to cut losses and improve service.

The program comes at considerable cost (about $7.5 billion) but promises great savings ($2.2 billion a year). Unlike many experts who say the answer to India's water and energy problems is to charge farmers the real cost of electricity, Kumar argues that "for political reasons, for the next fifty years you cannot charge for energy in the agriculture sector. There would be riots."

Farmers like Darshan Singh, 55, who grows rice and wheat on 25 acres of Punjab land that has been in his family for generations, say they would be happy to pay for electricity if it was constant and didn't burn out their pumps. "Managing water is the biggest problem we have," says Singh, who has 91D 2 fingers on his thick hands. "This problem doesn't just have to do with farmers - it affects everyone."

The profusion of pumps and tube wells is also a result of a lack of infrastructure investment in rural areas. "No new irrigation potential has been created for about 20 years," says Mohan Guruswamy, who runs the Centre for Policy Alternatives in New Delhi. "The state prefers to dole out subsidies rather than make capital investments."

India's power sector loses as much as $9 billion a year subsidizing farmers' use of electric pumps. That's half of what the country spends on health and twice what it spends on education. Says Shreekant Gupta, a professor of economics at Delhi University: "It's a classic example of bad economic policies having serious environmental consequences."

Farmers opted to buy cars and SUVs : Mohali airport

‘Poor’ Punjab village becomes hot destination 

Jeorheri (Punjab): Jeorheri, on the outskirts of Punjab capital Chandigarh, does not have the best of roads. But that has not stopped bankers, investment planners and car dealers from heading for it.

In a village that is suddenly flush with funds, they all want a slice of the pie.

The acquisition of 306 acres by the Punjab government for the expansion of the Chandigarh airport to make it an international facility has turned out to be a windfall for residents of this "poor" village who have become millionaires overnight by selling their land.

The villagers, many of whom had not entered a bank earlier, now hold accounts in 20-25 banks. Swanky sports utility vehicles (SUVs), from a Mitsubishi Pajero to Tata Safaris and Scorpios, Jeorheri flaunts it all.

"On an average, more than 150 dealers engaged in buying and selling of land are visiting our village with one or the other new plan," said Vijay Sharma, 25, whose six and a half acres of land fetched him a compensation of nearly Rs 100 million.

"Middlemen from companies like Reliance, HDFC, ICICI Prudential, Bajaj Alliance and others are coming to our homes with endless investment schemes and trying to woo us to buy motorbikes, cars, SUVs, tractors and other things."

Even though the old guard in the village is not exactly happy about moving out of the land they have owned for generations, the younger lot is excited given the moolah raked in by their land - acquired by the Punjab government at the rate of Rs 15 million per acre.

Over 150 families, owning anything from a few hundred square yards to up to 10 acres, have benefited from the government land acquisition. Within a fortnight, everything in the small village has undergone a radical makeover with nearly Rs 5 billion coming the way of villagers.

Jeorheri has now become a hot destination for banks - both private and nationalised - investment agencies, car dealers and even share brokers.

While most families have opted to buy cars and SUVs - they mostly owned noisy motorcycles and jeeps earlier - the biggest beneficiary of the acquisition, Prem Lambardar, who gave eight acres of land, has bought a Rs 2 million Mitsubishi Pajero.

Nowadays it is not difficult to find youngsters with gelled hair, branded sunglasses, gold chains and expensive mobiles.

"Big companies like Ford, Mahindra & Mahindra, Tata Motors and Swaraj Tractors are coming with their vehicles and giving free test drives to villagers to lure them. We are fed up with these people and are now not even taking their calls," says village youngster Darshan Singh.

"In the initial days, many banks came to the village to open accounts with zero balance schemes. Now many people in the village have bank accounts in roughly 20-25 banks. But one can put his money in only one or two banks, so now other banks are calling us every day to put some money in our accounts there," added Vijay Sharma who just bought a Ford Fiesta car.

One representative of ICICI Prudential, requesting anonymity, said, "Poor villagers' bank accounts have suddenly been flooded with big amounts, so this is the best time for the company to hit bull's eye. Many people here are illiterate and we are actually saving them from unscrupulous middlemen. And in return villagers are also getting many lucrative investment schemes."

Nirmal Sharma, whose two acres were also acquired, said: "On the face of it, it's true that the so called 'poor' landholders have got fat cheques. They are buying swanky cars and constructing concrete houses; foreign trips are also being planned. But in reality this fascination for money is just superficial or just for the young people."

Sharma says the bigger reality is that farmers from the village will have nothing to do now.

"They are buying land in other places like Fatehgarh Sahib, Sirhind and Patiala district but people there have more than doubled the rates from Rs 1.2 million per acre to Rs 3 million per acre," Sharma said.

Many villagers also point out that the government has given them a raw deal. "In adjoining Mohali town, the government sells the same land for billions of rupees after acquiring it at much lower rates," villager Gurnam Singh said.