Agricultural Overhaul

Agriculture in Nepal remains the mainstay of the national economy, accounting for 28.1 percent of the country’s total GDP. While agriculture’s share in Nepal has progressively declined over the recent years, the importance of this sector to the country’s economic and social fabric goes well beyond this indicator. The sector provides livelihood for 68 percent of the Nepalese population and is pivotal to alleviate poverty whilst uplifting the standard of living of the people.

While agriculture development can considerably contribute to the economic growth of Nepal, numerous challenges still persists in the sector. Informality, subsistence farming, land fragmentation, lack of access to credit and traditional farming, among many other problems has created an unfavorable environment for the commercial production of agricultural goods, hindering the overall growth of the sector. For the purpose of mitigating these barriers and fostering agriculture commercialization and development, the Government of Nepal has initiated various plans and programs. However, evidence regarding the effectiveness of these programs are minimal.

Currently, the plans in the agro-sector are highly focused on providing input, credit and interest subsidies or grants. However, the benefits provided have often failed to reach the poor and needy farmers. Numerous media portals are frequently occupied with news regarding how the funds are being misused or are instead benefitting the farmers outside the target group.

This poses a serious question – Are grants and subsidies making the already poor farmers worse off?

Large part of the agriculture sector in Nepal is informal and is limited to mere subsistence. The informal sector constitutes of majority farmers who are in need for constant price supports to sustain and expand. However, the sector is not likely to receive any subsidies or grants as it is often difficult to trace the farmers operating in the shadow economy. This implies that the officially registered large firms and corporations who are eligible for government support and credit facilities actually receive the benefits.

Tax exemptions and subsidies thus end up harming the poor and subsistence farmers as it distorts the market price of agricultural products. The price is based on subsidized goods produced by large farmers with greater economies of scale. On one hand it reduces price for general citizens, while on the other, it further reduces the income of small-scale farmers, making them worse off. The benefits in the form of tax breaks, subsidies and grants designed to benefit the poor instead become boons for the already better off.

Additionally, there exists within-sector discrepancy on the subsidies provided – some seeds are highly subsidized, whereas others are not. This signifies investment in the agriculture sector based on subsidy schemes rather than economic rationale. Besides, there is no consistency on the subsidized goods, as a result the farmers change crop cultivation as per the change in subsidized goods which has created adverse effects on their economic welfare.

Given that, such programs have made it more difficult for the small-scale farmers to transform their farmland into an economically viable commercial agriculture.  The outcomes have instead deemed to be contradictory to the goal of poverty reduction.

For the taxpayers, this gives the impression that their hard-earned money is not being utilized in the most productive way. With an approximate allocation of Rs. 18 billion every year, the agro-sector of Nepal has been a principal recipient of government budget. However, the support granted by the government does not seem to converge very well with the productivity accrued by the ago-sector, prompting a debate regarding the effectiveness and efficiency of the current modal.

It is apparent that in order to realize growth from the agriculture sector and to enhance the wellbeing of poor farmers, Nepal should focus on bringing major reforms in the current modality it has adopted. In order to raise agricultural productivity, policies and programs must not just entail subsidies but also include better infrastructure, roads, irrigation, storage, research & knowledge dissemination, capacity building and market support provision, among a host of other requirements. Hence, there is an ever-widening need to develop instruments to solve the many and varied problems underlying low agricultural productivity in Nepal.  To achieve the result, it is equally important to bring farmers in the formal economy through which their access to various facilities like insurance, credit and other benefits can be expanded.

The sector requires a major leap towards commercialization. However, mitigating the effects caused by these distortions is not something that can be achieved instantaneously. This shift from subsistence to commercial agriculture will require a substantial amount of time as well as financial resources.

– This article was originally published by Ayushma Maharjan in The Himalayan Times on March 1, 2020.