Farm Subsidies in India: Overview

Farm subsidies refer to the governmental financial support paid to the farmers and agribusinesses to reduce their input expenditures and supplement their income. Farm subsidies are worldwide phenomenon and India is of no exception.

Brief Background

In the initial years of independence, agriculture was totally primitive with small and fragmented land holdings. The situation was such that India was facing acute shortage of food grains to cater to the ever rising population of the country. To meet the crisis of deficiency of food grains required a shift from the traditional agriculture practices to modern farm practices. However, expensive cost of inputs like high yielding varieties of seeds, farm mechanization and modern technology etc. deterred farmers to move towards adaptation to new technology. On the recommendations of food grain price committee 1964, the Government of India started the scheme of subsidies on purchase of various agriculture inputs to facilitate the farmers.

The scheme not only helped farmers to gradually adapt to new practices of farming but also aided in implementing green revolution by supporting farmers to invest in newly introduced seed-cum-fertilizer technology.

Types of Farm Subsidies

A subsidy is a converse of tax and is an instrument of fiscal policy. In broadest terms, subsidies can be of two type viz. export subsidy and domestic support. Apart from this, Income from agriculture is tax free in India so that is also a kind of intangible / invisible subsidy.

Direct and Indirect Farm subsidies

Agriculture subsidies can also be categorized into direct and indirect farm subsidies taking account the policy instruments used in providing them. Direct Farm subsidies involve rendering cash to the recipient farmers. India provides direct subsidies in very limited form like food subsidy, MSP-based procurement, etc. However, direct farm subsidies are very common in most of the developed countries like US and Europe.

Indirect farm subsidies are not provided in the form of cash but supporting farmers in an indirect manner. For example- Providing cash directly to the farmers to buy fertilizers is an example of direct subsidy whereas subsidizing fertilizer companies to provide cheap urea to farmers amounts to indirect subsidies. Other example may include-Cheap credit facilities, farm loan waivers, reduction in irrigation and electricity bills, investments in agricultural research, environmental assistance, farmer training, etc.

Comparison of direct and indirect subsidies

Direct subsidies are very important as they provide direct purchasing capacity of the farmers, thereby, having multiplier effect in enabling farmers to invest in agriculture and eventually increasing their standard of living. They also help in checking the misuse of public funds as they help in the proper identification of the beneficiaries. Most importantly it gives choice to the consumer to invest where he wants.

As far as indirect farm subsidies are concerned, India spends around 2% of GDP on indirect subsidies. Among all products, fertilizers accounts for two thirds of total indirect subsidies. It is found that indirect subsidies are mostly beneficial to the big farmers as small farmers are more dependent on cash to meet their needs. Moreover, indirect subsidies do not provide incentive to farmers to invest in improving production processes. Sometimes they also tend to distort the trade at national as well as global level.

Policy Instruments of Farm Subsidy

There are five main policy instruments of delivering direct and indirect farm subsidies as follows:

1. Price and Income Support Policy
2. R&D support
3. Input subsidies
4. Import measures
5. Export measures

Price and Income Support Policy

Government of India has several instruments to safeguard the interest of farmers under its price and income support policy. The main price and income support instruments are

• Minimum Support Price (MSP)
• Minimum Export Price (MEP)
• Market Intervention Price (MIP)
• Buffer Stocks Operations
• Public Distribution System

Minimum Support Price

Under Minimum Support Price Scheme, CACP recommends the MSP currently for around 26 commodities. When calculating the cost of production the commission considers the cost of paid-out inputs, imputed value of family labour, and land rental. MSP are normally announced before the commencement of sowing operations of the particular crop. MSP are usually remunerative and higher than the production cost of crop. Farmers are free to sell their product either at MSP or in market whatever is advantageous for them. We have discussed this scheme later in this document and also here.

Minimum Export Price (MEP)

Using MEP, the government disallows the exports of particular commodities below specific price. The objective of this policy is primarily to check domestic price rise and augment the supply within domestic market. It is generally used as a temporary measure and helps the farmers and exporters to realize better and remunerative prices. Government generally applies MEP on price sensitive commodities such as onion, pulses, rice, edible oils etc. MEP decisions (imposition / removal) are taken by union cabinet on request of ministries. Kindly note that legal backing for MEP comes from Foreign Trade (Development And Regulation) Act, 1992.

Market Intervention Price Scheme

Market Intervention Price Scheme (MIP) is a price support mechanism implemented by central government on request of State Governments for procurement of perishable and horticultural commodities in the event of a fall in market prices. The Scheme is implemented when there is at least 10% increase in production or 10% decrease in the ruling rates over the previous normal year.

Buffer Stocks Operations

The government maintains buffer stocks of Foodgrains (rice/ wheat) and other commodities (pulses) procured by its agencies via MSP or other procurement schemes to check sudden price rise of commodities and any such other contingencies.

Public Distribution System

Distribution of subsidized food to poor Indian is at the core of India’s food security system. It is operated through the TPDS and managed by the FCI, which is also responsible for procurement and buffer stocks of grains. Rice is also distributed through TPDS to benefit the poor.

Research and Development Support

The government implements the policy and schemes to augment the public investment in R&D with focus on increasing production and productivity of farm commodities.

Input Subsidies

Both central and state governments provide input subsidies for farmers via subsidized fertilizers, electricity, irrigated water and seeds. In addition commercial banks, co-operative societies and regional rural banks are required to provide credit to agricultural producers below the market interest rates.

Import Measures

Government imposes tariffs, quota, state trading and monitoring agencies as import measures to provide indirect subsidies. Many a time, government imposes import duties on farm products to protect farmers by preventing flooding of cheap agricultural commodities.

Export Measures

This includes measures to increase farm exports. The key instruments under this include Agri-export zones, incentives and price support on farm exports, and establishment of various promotional councils.

Criticism of Farm Subsidies: Argument and Counter-argument

The most critical argument against farm subsidies is that farm subsidies are wasteful expenditure leading to more wastage of resources rather than supporting agriculture. For example-overutilization of fertilizers in Punjab and Haryana due to subsidized agriculture led to unbalanced NPK ratio. Proponents of this argument say that instead the government should invest in improving the agriculture efficiency and providing the necessary infrastructure like marketing facilities, ensuring proper price of their produce etc. which would be eliminating the root cause of the problems of the agriculture.

The counter-argument is as follows. Half of India’s workforce is engaged in agriculture and most of them are either marginal or small farmers. Subsidy support is needed to incentivize them as the land-to-man ratio has been falling (from 0.34 in 1951 to 0.15 in 2009). To keep substantial agriculture growth rate (around 4%), fertilizer consumption needs to be increased by 3 percent every year. In such a scenario, subsidies help maintain the sustained flow of inputs like fertilizer, irrigation, electricity, hybrid seeds at reasonable prices which is necessary to increase productivity, generate employment in the farms, ensure low food prices and contain the flow of rural population into towns and cities. Nowhere in the world is farming economically viable without subsidies, and India is no exception. Farm subsidies come in various forms. Further, looking at global norms, India provides meager subsidies to its farmers. For example, in 2009, the per capita subsidies worked out to be $239 in the EU and $102 in the US. In India, they were a meager $21. The gains from 20 years of liberalization are yet to be fully realized as old inequalities remain. There is no denying the fact that reforms are the key to effective agriculture but along with these subsidies provided by the government is the most important tool to keep the agriculture going. According to some estimates, reduction in farm subsidies will lead to a fall in consumption and complete removal will cause an 18 percent drop in farm production.