Farm Subsidies and Food Subsidies in India

Around 600 million people are dependent on agriculture, with nearly 98% of Indian farmers being on low income or resource poor and mostly engaged in subsistence farming, under such circumstances Farm Subsidies in form of financial support to farmers are an integral part of the government budget. Subsidies play a crucial role in a welfare state, but an absolutely free supply of consumer goods and inputs leads to considerable wastage, and misuse as well as pilferage in the supply channels, as Food and other subsidies in India suffer from an inefficient distributive system, and not more than 42% of subsidized food reaches the targeted beneficiaries.

Types of Farm Subsidies in India

Farm Subsidies in India can be categorised under 2 heads:

1.Direct Farm Subsidy

2.Indirect farm subsidy

Direct Farm Subsidies

  • In this subsidy is directly provided to the farmers, generally paid in the form of direct cash subsidy.
  • Thus, direct-subsidies play vital role in increasing the purchasing capacity of farmers and raising the standard of living of rural underprivileged section.
  • Direct farm subsidies are very common in most of the developed countries like US and Europe, but India provides direct subsidies in a very limited form like Food Subsidy, MSP-based Procurement etc.

Food Subsidy

  • In fulfilling its obligation towards distributive justice, the Government incurs food subsidies and provision of minimum nutritional support to the poor through subsidized foodgrains and ensuring price stability in different states are the twin objectives of the food security system.
  • Food subsidy is provided to distribute wheat and rice to the poor and also maintain a buffer stock; the difference between economic cost of foodgrains and the issue price is reimbursed to FCI.

Indirect Farm Subsidies

These are not in form of cash but provided in the form of-

  • Irrigation Subsidy
  • Power Subsidy
  • Fertilizer Subsidy
  • Seed Subsidy
  • Credit Subsidy
  • Farm loan waivers,
  • Investments in agricultural research, environmental assistance,
  • Farmer training, etc.

India spends roughly 2% of the GDP in Indirect Subsidies.

Power Subsidy

  • Electricity is required to draw the groundwater thus Government provides a subsidy which is equal to the difference between the price paid by the farmer for the usage of electricity and the actual cost of generating the electricity.

Fertilizer Subsidy

  • For sustained agricultural growth and to promote balanced nutrient application, it is imperative that fertilizers are made available to farmers at affordable prices (subsidy is provided to the industry) and with this objective, urea being the only controlled fertilizer, is sold at statutory notified uniform sale price, and decontrolled Phosphatic and Potassic fertilizes are sold at indicative maximum retail prices (MRPs).
  • In fiscal year 2018-19 the Fertilizer subsidies has been hiked to about 70,000 crore (Approx. 45,000 crore for Urea) from 65,000 crore in 2017-18.

Credit Subsidy

  • Availability of credit is a major problem for poor farmers as they are cash strapped and cannot approach the credit market because they do not have the collateral needed for loans and thus to carry out production activities they approach the local money lenders, which leads to their exploitation.
  • Credit subsidy is the difference between interest charged from the farmer and actual cost of providing credit, some example include-govt providing interest subsidy on short term crop loans, cost on writing off bad loans etc.
  • Government has increased the agriculture credit target for fiscal 2019 to 11 Lakh Crore, but 30-40% rural credit is leaking out of the system, as farmers avail of credit at an interest rate of 3-4 per cent and then make fixed deposits of the sum.

Infrastructure Subsidy

  • Transportation facilities, storage facilities, power, information about the market, etc are important for carrying out production and sale operations, individual efforts to construct such basic infrastructure are not viable due to long gestation period of infrastructure projects, thus cost of such Public goods is taken care of by Government.

Advantages of Farm Subsidies

  • Subsidies help in maintaining sustained flow of inputs like fertilizer, irrigation, electricity, hybrid seeds at reasonable prices to the small and marginal farmers and at the same time helps in generating employment in the farm sector.
  • Subsidies help farmers from any unusual price shocks.

Issues with Farm Subsidies in India

  • In Budget 2018-19, food subsidies in the range of Rs 1.70 lakh crore have been provided but investment in agriculture is only about Rs 3,000-Rs 4,000 crore, thus food subsidies has been termed as wasteful expenditure rather than supporting agriculture.
  • Overutilization of fertilizers in the Green Revolution area (Punjab, Haryana) due to subsidised agriculture has led to unbalanced NPK Ratio, increased salinity and reduced fertility of the soil.
  • Farmers in India are incentivized to dedicate more land and water to subsidized crops (wheat, rice, sugar, etc) desired by the government and this leads to less production and higher prices for other items (fruits, vegetables, etc) that consumers also want to purchase.
  • Unsustainable fiscal deficit- Subsidies are paid at the cost of development expenditure.
  • Subsidies distort cropping pattern as well.
  • Fertiliser subsidy primarily benefits the fertiliser producers and big farmers.
  • Subsidies reduce the incentive to improve, thus encourage inefficiency.
  • Subsidies can sometimes be regressive and suffer from leakages, e.g. electricity subsidies only help electrified households and also in the case of kerosene, 41 percent of PDS kerosene is lost as leakage and only 46 percent of the remaining 59 percent is consumed by households that are poor.

What should be the Way Forward?

  • There should be fewer freebies and higher investment in agriculture research, irrigation, better infrastructure and there should be better targeting of subsidies by linking them to specific crops, size of farms, area, regions etc.
  • Subsidies should not distort resource allocation and overuse of resources.
  • Impact of subsidy should be assessed periodically.
  • Subsidies should be time bound rather than permanent and focus should be on enhancing capabilities.
  • Direct Benefit Transfer (DBT) to transfer subsidy to the beneficiary.

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