An Economic Analysis Based on Equivalent Variance of the Fertilizer Subsidy: A Case of Mahaweli System H in Sri Lanka

Abstract

The theory of equivalent variance postulates that, cash transfers are preferred over material subsidies as overall production is expected to increase if the government grants a cash transfer equivalent to the value of the material subsidy. In line with this theoretical argument, the government of Sri Lanka recently undertook a major change in the agriculture subsidy policy by converting the material fertilizer subsidy in to a cash transfer. However this policy reform has received many criticisms from several parties, including the farmers and farmer representatives. The study aims at analysing the economic impact of this policy change on the paddy output by employing macro and micro perspectives. The analysis is based on time series data from 1961 to 2013 at national level and survey data on the Yala seasons of 2015 and 2016 at micro level. The survey was conducted using cluster sampling method and Meegalewa Grama Niladhari division in Mahaweli System H was selected for this purpose. The findings of this study indicate that fertilizer is a significant determinant of the paddy output in Sri Lanka. Further, it was revealed that the government has not allocated a cash transfer equivalent to the material fertilizer subsidy provided under the former subsidy scheme. Thus, a significant reduction can be expected in the paddy output in the Yala 2016. The study recommends that the government should grant equivalent cash transfer or encourage organic fertilizer usage in order to reap the benefits of this policy change.