Farm Subsidies in India

Farm Subsidies are Government incentives paid to farmers/agri-businesses /agricultural organizations to supplement their income to influence the cost and supply of such commodities.

Farm subsidies constitute about 2% of India’s GDP. Total subsidy to farmers amount to 21% percent of their farm income, according to Ministry of Agriculture and Farmer Welfare.

Farm Subsidies: Rationale

• To support farmers as majority of farmers have small/marginal landholdings and are dependent upon agriculture for subsistence.
• To generate employment by making agricultural activities profitable
• To promote export by providing price competitiveness and improve brand value of Indian agricultural exports.
• To ensure food security

Farm Subsidies: Types

• Direct Subsidy: A direct subsidy is provided to the farmer in the form of cash.
• Indirect Subsidy: Indirect subsidy is provided by discounts on agricultural purchases like seeds and fertilizers.
• Explicit Input Subsidy: Explicit subsidy is paid to farmer for purchasing agricultural products like fertilizers. This is generally paid to small and marginal scale farmers not able to buy inputs on their own e.g., KALIA scheme of Odisha or Ryuthu Bandhu Scheme of Telangana.
• Implicit Input Subsidy: Implicit Input Subsidy does not directly provide money but helps the farmers by cutting the extra costs e.g., providing subsidies on electricity bills and interest subvention scheme (relaxation in bank loan interests).
• Output Subsidy: This subsidy provides support to farmers on their outputs like Minimum Support Price (MSP) on crops like wheat, paddy.

Farm Subsidies: Benefits

• Support Farm Income: Farm subsidies provide assured income and increase the purchasing power of farmers.
• Food Security: The farm subsidies assure adequate food supply and reduce the chances of food shortage and food inflation.
• Improvement in HDI: Improved farm incomes and food security aids in addressing issues like malnutrition, improving overall living standard.
• Crop diversification: Incentivising “less focussed” crops where subsidies on the crops having nutritional and environmental benefits are promoted. For example, boost to millet production.
• Bridge the Income Divide: According to FAO, 70% of Indian rural households rely mostly on agriculture for a living. Income support for small and marginal farmers bridges the income gap.
• Technology: Increased usage of technology and better infrastructure in agricultural activities lead to increased efficiency, increased profitability and reduce distress migration.
• Achieve National Goals: Farm subsidies are crucial levers in the achievement of goals such as achieving the US$ 5 trillion economy status, Sustainable Development Goals (SDG). For example, KUSUM programme (subsidy for solar pumps)

Farm Subsidies: Concerns

• Fiscal Burden: Farm subsidies form about 2% of India’s GDP. High amount of farm subsidies, farm loan waivers put excessive burden on Government finances reducing space for capital expenditure.
• Resource Wastage: It results in overuse and wastage of resources e.g., subsidized electricity for farms can be misused for personal use.
• Environmental Degradation: Fertilizer subsidies have resulted in overuse of Urea and DAP. Overuse of fertlizers leads to eutrophication, water pollution and soil erosion.
• Increase Inequalities: Indirect subsidies more beneficial for already rich farmers due to poor targeting.
• Distorted Cropping Pattern: Farm subsidies especially the MSP has led to distortion in crop pattern e.g., pre-dominance of wheat and paddy in Punjab/Haryana at the cost of pulses, maize, vegetables etc.
• Corruption and Leakages: Farm subsidies are susceptible to corruption and leakages. This leads to welfare loss and additional fiscal burden. Urea meant for farms is diverted to industrial usage or smuggled to neighbouring countries.
• WTO Concerns: India’s farm subsidies are questioned by the developed nations at the WTO. MSP is considered trade distortionary and breaches the Aggregate Measures of Support (AMS) level limited by the WTO norms.

Farm Subsidies: A Way Ahead

• Rationalisation: Farm subsidies should be rationalised according to the demand of programmes based on marketability, affordability and input cost and according to different income groups.
• Investments: There is a need to invest more in agriculture R&D, build better infrastructure to create efficient value chains bringing farmer producer organisations (FPO).
• Incentivise Long-term Capital Formation: Kelkar Committee recommended the phased elimination of subsidies and convert them to capital investments.
• Credit Eligibility Certificates: These certificates would enable landless tenant cultivators to obtain agricultural credit.
• Technology: Technological improvement like Aadhaar, direct benefit transfer can be used to eliminate inclusion and exclusion errors. The third party verifications of beneficiary will help in eliminating the free riders and leakages.
• Legislative Measures: Contract Farming Act, APMC reforms to reduce dependence on the government.
• International Measures: Under the WTO’s Nairobi package, developed and developing nations have committed to phase-off export subsidies. Rather than limiting the total agricultural value production, subsidies should be limited depending on individual products such as cotton, wool.

Farm subsidies have proven to be vital in supporting agriculture and providing income security to farmers. The Government should take steps to rationalize farm subsidies and invest more on capital formation, R&D in agriculture. This will improve agriculture productivity and make agriculture more remunerative.