Effects of Fertilizer Subsidy

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5.4. Effects of Fertilizer Subsidy

Local politicians sometimes point out to the “right” of farmers to cheap fertilizer. In Indonesia it is often observed that the government gives smallholders fertilizer and other inputs at a subsidized price. The debate is often heated. The following however summarizes the main arguments against the position of a subsidy on fertilizer price. The value of tradable input transfer is negative for both rubber monoculture and rubber agroforestry Table 16 and the NPCI of these systems were less than one and ranged between 0.59 and 0.69 under both systems which is an indicator that producers in both systems are not taxed when they buy tradable inputs; hence producers are protected because of government’s subsidy on the tradable inputs like fertilizer i.e. Urea, TSP and KCI. The introduction of subsidies on fertilizers had come to the cost of other programs in the budget. The proponents of the subsidies should clarify which other programs in the budget have to be reduced and also indicate the socialeconomic reasons why this should be done. In spite of introducing subsidy on fertilizer, use of fertilizer by farmers has not changed. The main effect of having subsidies on fertilizer in Indonesia is to increase the supply coming from other countries with a net effect most likely equal to zero. As long as Indonesia is subsidizing fertilizer, it is worthwhile for her smallholder farmers to get fertiliser at a cheaper price which is often not the case. As fertilizer use does not increase and in fact might even go down, the effect of subsidies on productivity are zero or negative. The official distributors increase 78 their sales and profits which hardly produces any benefit to the smallholder farmers in Jambi. The re-introduction of subsidies creates difficulties in loan negotiation with major donors ADB, WB, and IMF. The total cost of the negotiation process on development programs implementation is much higher than any supposed benefit of subsidies.

VI. IMPACT OF POLICY DISTORTIONS ON RUBBER PRODUCTION

Different scenarios were designed to estimate how much change in each of the concerned factors would alter the efficiency of the production system by recalculating the values of the indicators when the factors of production change by a certain percentage. As for the market price of inputs, the government had already removed all forms of taxes on agro-inputs such as fertilizer and other chemicals during the time of study. It would be illogical therefore, to expect any significant reduction in input prices under the current policies of liberalization. For analysis purposes, only real interest rates at both private and social were estimated i.e. from 10.0, 5.0 respectively to 15, 10 and with 10 increase in price of rubber respectively. Considering the transmission process of price at f.o.b. level to farm gate level, it is assumed that the farm gate price changed proportionally with changes in the interest rates Table 17. It can be seen that with this new interest rate, rubber agroforestry remained less profitable both in terms of private and social prices. On the other hand, rubber monoculture offered higher social profits. Output transfer by farmers and net transfer in the economy were substantial. All of these suggest that the use of improved technology accompanied by removing of failures in output domestic market and distorting policies in both interest rate and exchange rates would bring about smallholder rubber agroforestry system production more competitive in the world market.