KRI: Output-based subsidy will sustain agricultural production


A SHIFT in subsidy and incentive system within the local agriculture industry is necessary to ensure the sustainability of the national rice productivity, said Khazanah Research Institute (KRI).

The research outfit noted if there was a sudden removal of subsidies and incentives, farmers’ earnings will be negatively affected, particularly in the short-term period.

“According to a study, increasing subsidies and guaranteed minimum price of paddy since 2005 has done little to significantly increase farmers’ income.

“Even though farmers are responsive to output and input subsidies such as cash price transfer and subsidised fertiliser and seeds respectively, both instruments are inadequate to increase yields and revenue to farmers as they are constrained by ineffective institutional supports particularly in research, development and extension (RDE), as well as lack of local input,” KRI stated in a study titled “Implications of the Dominant Shift to Industrial Crops in Malaysian Agriculture, Phase 1: System Dynamics Model of the Paddy and Rice Sector”.

KRI recommends a shift from the input-based subsidy to an output-based, which relies on the farm performance, coupled with the implementation of effective RDE and local input production to improve yields and reduce production cost respectively.

It added that the future of the paddy and rice production industry relies not on subsidies, but impactful RDE programmes. A fully functioning RDE is effective to energise the whole system towards higher yields, self-sufficiency level and farmers’ income.

“Done gradually, the 40-year old input subsidy is not indispensable,” said the lead author of the study Prof Datin Paduka Fatimah Mohamed Arshad.

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

Between 2011 and 2015, more than RM2 billion was utilised on paddy subsidies and incentives annually, which translated to 40% to 50% of the Agriculture and Agro-Based Industry Ministry’s (MoA) expenditure.

“Although the amount has dropped below RM2 billion from 2016 to 2019, the paddy and rice industry still receive more budgetary assistance than any other crops,” the KRI study stated.

According to the findings, the proposed ecosystem of a new virtuous circle comprises an optimum complementarity of RDE strategies, productive subsidies and incentives and local input development.

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

“The objective of the study is to identify structural transformations needed to induce inclusive growth and sustainability of the paddy and rice sector using a system dynamics approach,” KRI said.

The study also simulates a number of future policy scenarios consisting of various combinations of subsidy mix and RDE strategies as well as local input production.