Cost of the fertilizer subsidy for paddy farmers: an empirical investigation in Sri Lanka

Abstract

Introduction

The Government of Sri Lanka has introduced a number of policies and programs to increase paddy production since independence (Athukorala, 2016). Paddy cultivation provides livelihood opportunities for more than 1.8 million farmers in the country. Successive governments have provided support to stimulate paddy production by way of large scale irrigation schemes, land development and settlement schemes, free provision of irrigation water, fertilizer subsidies and guaranteed prices. The Government of Sri Lanka has been subsidizing fertilizer for more than five decades. The main objectives of the subsidy scheme is to make fertilizer available as cheaply as possible in order to encourage its wider use; and thereby increase agriculture productivity, achieve national self-sufficiency in rice and support the livelihoods of paddy farmers. A subsidy scheme for the fertilizers nitrogen (N), phosphorus (P), and potassium (K) was intiated since 1962–89 for paddy cultivation. The new political regime which came into the power in 2015 has introduced a major change to the fertilizer subsidy programme, by shifting from the material fertilizer subsidy programme to a cash transfer programme.

In developed countries, it is generally agreed that fertilizer demand is cost inelastic. This may be due to the lack of an economic substitute for chemical fertilizer. Generally, in less developed countries the demand for fertilizer is thought to be more elastic under the assumption of readily available substitutes such as manure and other organic materials.

Ekanayake (2006) investigated the impact of the fertilizer subsidy on paddy cultivation in Sri Lanka and concluded that fertilizer subsidy is not a key determinant of the use of fertilizer in paddy cultivation. Ramli et. al. (2012) investigated the impact of fertilizer subsidy on Malaysia Paddy/Rice Industry using a System Dynamics Approach. Result indicates that fertilizer subsidy does significantly impact the paddy and rice industry. Rodrigo et al. (2015) found that mechanization prevents overuse of fertilizer and a seed paddy subsidy will ensure self-sufficiency in rice production. However, the subsidy scheme has become a politically sensitive issue in Sri Lanka because the majority voters are rural farmers (Thenuwara, 2003; Weerahewa et al., 2010, Jayne & Rashid, 2013). In this context, a clear understanding about the factors that determine the demand for fertilizer is necessary in evaluating the effectiveness of the fertilizer subsidy scheme implemented by the government of Sri Lanka. However to estimate the cost recovering level of output for paddy, an analysis of government expenditure on fertilizer subsidy on paddy production in Sri Lanka has not been investigated and this study focuses on this issue.