total value added at reference prices in each state as weights. This was done by first calculating the value added at observed market prices in the total production of the crop in each state. The value added measured at reference prices in the total production of the crop in each state was then estimated. The total value added at domestic ( observed ) prices in all the states covered was then divided by the total value added in these states measured at reference prices. This was then used as an estimate of the weighted average India -wide effective protection of the crop.

# **Effective Subsidy**

In India, farmers receive subsidies in various forms, and in addition are exempt from income taxes. The fertilizer subsidy is one of the largest, and that is treated in the estimation of the nominal protection coefficient of fertilizers and captured in the effective protections coefficient of the individual commodities. Apart from this, there are three other major subsidies, two on non tradable inputs, canal irrigation water and electricity principally used for pumpsets, and subsidized credit. A number of the original commodity studies include extensive discussions of the methods used to estimate these subsidies, and there is also a considerable body of empirical research on this subject that built on these original estimates. The original results have been incorporated into the incentive estimates included in the background papers for the period 1981-90. In some cases estimates for the last few years of the 1980s were not available, and we projected them using the all-commodities wholesale price index.

In the background papers these subsidies are in the first instance quantified by estimating effective subsidy coefficients ( ESCs). The ESC is simply the numerator of the effective protection coefficient plus the total subsidies per unit of the commodity, divided by value-added in reference prices i.e. by the effective protection denominator. That is: ESC = (VAD + NS) / VAR where, ESC = Effective subsidy coefficient VAD = Value added at domestic prices VAR = Value added at reference price NS = Net subsidies on non traded inputs The rationale for the ESC concept is that the subsidy per unit of the commodity is treated _as if_ it is equivalent to an increase in the price of the commodity. For example, if the combined value of the subsidies on irrigation water, electricity and credit is equivalent to 10 percent of the domestic selling price of the commodity, the ESC pretends that the same incentive effect to the farmer would result from a 10 percent increase in his selling price.<sup>13</sup> The largest non-traded subsidies are generally received by crops grown in irrigated areas. The average level of subsidies received by some crops which are predominantly not irrigated -in particular maize and sorghum- was very low. Partly for this reason, data on non-traded subsidies for these crops was also not available, and so in these cases ESCs were not calculated.

> 13 Insofar as changes in input prices would lead to substitution among them, the incentive effects are clearly not the same. But this qualification also applies more generally to effective protection indicators, which implicitly assume fixed input-output coefficients. There is a considerable literature which argues that empirical EPC estimates are useful indicators of incentives despite this qualification.

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