Farm subsidies: money down the drain

Nepal is now a remittance-driven economy and rural areas are emptying due to outmigration, yet 62% of Nepal’s population still relies on farming and it contributes to a fourth of the country’s GDP. 

Successive governments have spent Rs107 billion in the past five years on agricultural subsidies, and banks have extended flexible loans worth Rs367 billion to farmers and agro-businesses in the last decade. By 2024, loans from private financial institutions had grown eight-fold in ten years.  

All this was designed to increase farm productivity, stimulate the economy, create jobs in agriculture and reduce imports. Some of that has happened, but not commensurate with the money spent. 

Investment in the agricultural sector has increased by an average of 23.4% every year in the past ten years, but the average annual growth in farm production since 2015 is only 2.77%. In fact, agricultural productivity has actually dropped, and food imports (mainly from India) have soared. 

The question then is: where did all that money go? Evidence points to the budget being leaked along the way with little of it reaching the intended beneficiary farmers.  

Nepal Rastra Bank data shows that commercial loans to commercial farms, tea estates, livestock farms and fisheries accounted for 4.5% of all loans, which in 2014 alone totaled Rs50.99 billion. The government had made it mandatory for banks and financial institutions to provide 15% of its loans to farmers and agro-businesses by 2027.  

By 2024, agricultural loans accounted for 8% of the total loans provided by commercial banks – of this 22% went to farming, 37% to livestock and 39% to agro-businesses. In recent years, concessional loans are also provided to farmers in which the government provides a 5% interest subsidy. For instance, if a bank issues an agricultural loan at 9% interest, the government will pay 5% of it. By mid-November last year, Rs100 billion worth of such subsidised loans had been approved. 

The government has also provided outright grants to increase agricultural production. The Ministry of Agriculture and Livestock Development released data last week showing that grants worth Rs107 billion had been distributed in the last five years.  

Given such generous outlays, there should have been an improvement in food production by now. Yet Nepal produced a little over 9.5 million tons of cereal crops in the fiscal year 2014, and ten years later it had risen only slightly to 10.9 million tons. 

The improvements are restricted to pulses, fruits, and vegetables. In the last decade, the production of cash crops increased by 8.8%, other fruits by 4.6%, and vegetables by 2.5% annually.  

Meanwhile, Nepal’s agricultural imports doubled over the same period, from Rs130 billion in 2014 to almost Rs257 billion last year. The country imported about Rs46 billion worth of food, Rs28 billion worth of vegetables and Rs23 billion worth of fruits just last year.

Some of the support for the government’s agriculture programs has come from international donors, including the Project for Agriculture Commercialisation and Trade (PACT), Nepal Agriculture and Food Security Project (AFSP), Nepal Livestock Sector Innovation Project, High Mountain Agribusiness and Livelihood Improvement Project, and the Rural Enterprise and Economic Development (REED) Project. 

Despite this, agricultural production has not increased, and the quality of life of farmers has deteriorated to the point where many are abandoning agriculture altogether. Funds meant to uplift farmers are wasted on administrative work, consultant fees, training seminars and other purchases. 

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The Agricultural Commercialisation and Trade Project for Nepal was launched in 2018, for which the World Bank provided a Rs2.06 billion grant and Rs2.92 billion loan. The Bank's own investigation showed that of the grants, a large proportion was pocketed by middlemen along the way. Another Rs810 million went to consultants for teaching farmers about agro-businesses, Rs680million to pay the salary and allowances for staff, Rs460 million was spent on buying vehicles and equipment, and Rs110 million for training seminars. Project officials also spent Rs40.8 million on foreign junkets.  

An audit report showed that 40% of the total funding was spent on administrative work. The Bank even sent a letter in 2020 to Yubaraj Khatiwada, who was finance minister then, alleging corruption and requesting action. Nothing was done about it.

The Improved Seed for Farmers Program, a Rs3.28 billion project for six districts in western Nepal supported by the International Fund for Agricultural Development (IFAD) and other institutions, also had anomalies. An audit report records purchase of 178 motorcycles, 20 four-wheelers, more than 200 laptops and tablets, 49 desktop computers, as well as dozens of photocopy machines, printers, and cameras totalling more than Rs322.1 million. 

Another Rs203 million was spent on consulting services, Rs505.3 million on training seminars, and Rs597.1 million on salary and allowances for staff.  

“This is clear evidence of agro-washing, agriculture is simply a front for other business dealings,” alleges Biswash Gauchan of the Institute for Integrated Development Studies (IIDS). 

An Auditor General’s report a few months ago cited examples of misuse of agricultural loans, and recommended that the government recover the low-interest government-administered agricultural subsidy with penalties.

A similar study on agricultural loans by the Central Bank last year found that 14% of concessional loans given out by banks and financial institutions were being misused. In response, the Finance Ministry stopped administering Interest Subsidy Loans last year.

Studies by other government agencies concluded that investment in agriculture in Nepal has been ineffective. Even a Ministry of Agriculture task force concluded six years ago that government farmer grants had ‘poured money down the drain’.

The report found that the benefits went not to farmers and agro-businesses that needed help, but almost exclusively to those in collusion with higher-ups in charge of the grants. The funds, concluded the study, went towards the purchase of vehicles, luxury goods and other facilities rather than contributing to the agricultural sector. 

Former NRB executive director Nar Bahadur Thapa says the reason agricultural loans appear to be increasing while agricultural production has not risen is because the loans have been ostensibly taken for agriculture but poured into real estate speculation. 

“It is not enough just to pour money into the agriculture sector, government and financial schemes will only yield results when we create appropriate infrastructure and markets and facilitate trade,” says Hari Bahadur KC, chair of the committee set up by the Ministry of Agriculture to evaluate government subsidies.

It is clear that the problem lies in dysfunction in the government’s delivery mechanism and corruption right up the line. The investment will not lead to increased productivity until the grants, loans, and subsidies stop lining the pockets of the wealthy and connected. 

“It is an open secret that the grants are being misused, but no one wants to own up to this fact and take moral responsibility,” says Uddhav Adhikari, former president of the National Farmers Group Federation (NGNF). “We need to strengthen monitoring to ensure that subsidies are provided to small-scale agro-businesses and farmers, and that they are utilised properly.”  

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