Study: Subsidies do not raise income

Shift to performance-based incentives may help rice farmers more, says research

The increase in subsidies and guaranteed minimum price of rice since 2005 has not done much to increase farmers’ income, says a study by Khazanah Research Institute (KRI).

In the latest publication, it was reported that even though farmers are responsive to output and input subsidies such as cash transfer, subsidised fertilisers and seeds, they are still unable to increase yield and revenue for the farmers.

This is because farmers are constrained by “ineffective institutional supports, particularly in research, development and extension (RDE) as well as lack of local input”.

“Over the years, the expenditure on rice subsidies and incentives have been on an increasing trend, with a gradual decline only in the last few years.

“Between 2011 and 2015, more than RM2bil was spent on rice subsidies and incentives yearly, which translated to between 40% and 50% of the Agriculture and AgroBased Industry Ministry’s expenditure.

“Although the amount has dropped below RM2bil in 2016 to 2019, the paddy and rice industry still receives more budgetary assistance than any other crop,” KRI noted in the study titled “Implications of the Dominant Shift to Industrial Crops in Malaysian Agriculture, Phase 1: System Dynamics Model of the Paddy and Rice Sector”.

The study’s lead author is Prof Datin Paduka Fatimah Mohamed Arshad, who is a visiting senior fellow of KRI.

The study was done in collaboration with Kusairi Mohd Noh, Nguyen Luong Bach, Illisriyani Ismail, Abdullah Ibragimov, Gregory Ho Wai Son, Siti Aiysyah Tumin and Ahmad Ashraf Ahmad Shaharudin.

However, the study noted that a sudden removal of subsidies and incentives, should there be any, may negatively affect the national rice productivity and the farmers’ net profit, especially in the short term.

The study instead recommended a shift from input to output-based subsidy, which is based on rewarding farm performance, implementation of effective RDE and local input production to improve yield and reduce production cost respectively which will improve farmers’ income.

Prof Fatimah said the future of the rice farming industry relied not on subsidies, but on impactful RDE programmes.

“A fully functioning RDE is effective enough to energise the whole system towards higher yield, self-sufficiency level and farmers’ income.

“Done gradually, the 40-year-old input subsidy is not indispensable,” said Prof Fatimah.

Moreover, the findings showed that the proposed eco-system of the new virtuous circle comprised an optimum complementarity of RDE strategies, productive subsidies and incentives and local input development.

This entails energising the RDE sub-system to enhance yield, cropping intensity and extension effectiveness, provision of productive incentives for efficient use of input (land, labour and non-labour input and capital) as well as local input production, said the study.