In the face of high inflation, the Economic Survey asked the government on Tuesday to use subsidies as a policy for correcting market failures that had led to unabated rise in prices of food articles.

The Survey also blamed dismal agricultural performance on low investment, imbalance in fertiliser use, distored incentive system and low post-harvest value addition, saying poor farm output could complicate maintenance of price stability.

Major subsidies, mainly on food, fertiliser and petroleum, grew from Rs 40,716 crore (Rs 407.16 billion) in 2002-03 to Rs 44,220 crore (Rs 442.20 billion) in 2005-06, and were budgeted at Rs 44,792 crore (Rs 447.92 billion) in 2006-07.

Putting a question mark on the efficacy of the current subsidy system, the Economic Survey tabled in Parliament propounded alternative mechanisms for cost-effective income transfers to the 'truly needy' people.

"Subsidies are an important fiscal policy tool for correcting market failures, particularly under-consumption of basic essentials such as food," it said, adding the system will confront new challenges in the face of the need to feed an estimated additional 150 million people.

On the challenges on the foodgrain front, the Survey said the production of crops, particularly wheat and pulses, had plateaued for some time now.

There is a need for developing area-specific wheat varieties, particularly to suit the water-abundant eastern region, it said.

"Poor agricultural performance, as the current year has demonstrated, can complicate maintenance of price stability with supply-side problems in essential commodities of day-to-day consumption," the Survey said.

Observing that the low agriculture growth was a cause for concern, it said, "low investment, imbalance in fertiliser use, low seeds replacement rate, a distorted incentive system and low post-harvest value addition continued to be a drag on the sector's performance".

With a shortfall in domestic production vis-vis domestic demand and hardening of international prices, prices of primary commodities, mainly food, have been on the rise in 2006-07 so far, it said.

Wheat, pulses, edible oils, fruits and vegetables and condiments and spices have been the major contributors to the higher inflation rate in primary articles.

The Survey said the recent spurt of activity in food processing and integration of the supply chain from the farmgate to the consumer's plate has the potential of redressing some of the root causes such as low investment, poor quality seeds and little post-harvest processing.

The government initiated measures to enhance domestic availability of wheat, pulses, sugar and edible oils by a combination of enhanced imports, export restrictions and fiscal concessions.

The Survey said the decision to permit 55 lakh tonnes of wheat for PDS and social welfare measures and import by private wheat traders helped in augmenting supply.

The Survey made it clear that the National Common Minimum Programme's mandate of targeting all subsidies sharply at the poor and the truely needy like small and marginal farmers, farm labour and urban poor remains to be implemented.

"The inconclusive debate on subsidies needs to be resumed and tangible progress made for cost-effective income transfers to the truly needy," it said.

Alternative mechanisms for the delivery of subsidy are available, it observed, adding that "they must be tried at least on a pilot basis and the experience should lead to the invention of alternative and more effective mechanisms".

The challenges of meeting the needs of the growing number of people will include changing dietary patterns with increasing income and changes in lifestyle.

Economic Survey 2006-07: Complete Coverage