The Impact of Policy Shift from In-kind Transfers to Direct Cash Transfers on Paddy Production: Evidence from Mahaweli H System in Sri Lanka

In 2016, the Sri Lankan government introduced a policy change related to fertilizer subsidy by converting the in-kind transfer into a direct cash transfer. This research article analyses the consequences of this policy change on the paddy production from economics perspective. The analysis uses national-level data from 1961 to 2013 and farm-level data collected in 2016. Macro-level findings manifest that the use of fertilizer significantly increases the paddy production in Sri Lanka. It was also identified that the cash amount granted under the direct cash transfer policy is not equivalent to the in-kind transfer programme. As a result, paddy production is expected to decline under the direct cash transfer programme when compared to the material subsidy scheme. However, this is against the preference of economists on direct cash transfers over in-kind transfers. The findings reveal that direct cash transfers increase the paddy production under two conditions: (a) when rational farmers effectively utilize the cash grants to optimize their production inputs; and (b) an equivalent amount of in-kind transfer is provided as direct cash transfer. Hence, direct cash transfers are not always better than in-kind transfers; it is better when in-kind transfer is compensated with an equivalent amount of cash transfer. JEL: A1, B1, B2, C1, C5, D6, N5