Farm subsidies

Published on 09 Mar 2025

Farm subsidies are financial assistance provided by governments to farmers or agricultural businesses to support agricultural production and ensure food security.

Rationale for giving subsidies

• Economic Rationale

• Income Support: Farmers often face income instability due to weather fluctuations, market price volatility, and other external factors. Subsidies can provide a safety net, helping to stabilize their income.

• Encouraging Adoption of Technology: Subsidies can incentivize farmers to adopt modern agricultural techniques, high-yielding varieties, and better inputs, leading to increased productivity.

• Risk Mitigation: Farming is a risky profession. Subsidies can help farmers manage risks associated with crop failures, natural disasters, and price fluctuations.

• Food Security: By supporting farmers, subsidies can help ensure a stable food supply, preventing shortages and price spikes.

• Social Rationale

• Rural Development: Agriculture is a major source of employment in rural areas. Subsidies can help maintain rural livelihoods and prevent migration to urban areas.

• Equity: Subsidies can help address inequalities between small and large farmers, providing a level playing field.

• Environmental Protection: Subsidies can be used to promote sustainable farming practices, such as organic farming or conservation tillage.

• Political Rationale

• Vote Bank: In many countries, farmers constitute a significant voting bloc. Subsidies can be a way to garner political support.

• Nationalism: Governments may view agriculture as a strategic sector and use subsidies to promote self-sufficiency in food production.

Types of Subsidies

• Direct Payments

• Pradhan Mantri Kisan Samman Nidhi (PM-KISAN): A direct income support scheme providing ₹6,000 per year to eligible farmer families in three equal instalments.

• Input Subsidies

• Fertilizer Subsidies: The government subsidizes the cost of fertilizers like urea, Di- Ammonium Phosphate (DAP), and (Muriate of Potash) MOP, making them affordable for farmers.

• Power Subsidies: Many states provide subsidized electricity for agricultural purposes.

• Credit Subsidies: Interest subvention schemes are offered through banks to reduce the interest burden on farmers.

• Seed Subsidies: Subsidies are provided on high-quality seeds to encourage their adoption.

• Insurance and Risk Management

• Pradhan Mantri Fasal Bima Yojana (PMFBY): A crop insurance scheme providing financial support to farmers in case of crop loss due to natural calamities.

Extent and Effectiveness of subsidies in India over the years

• Early Years (1960s-1980s): The Green Revolution Era

• Focus on Input Subsidies: The Green Revolution, initiated in the 1960s, heavily relied on input subsidies such as fertilizers, high-yielding seeds, and irrigation to boost agricultural production.

• Effectiveness: These subsidies were instrumental in increasing India's food grain production, leading to a significant reduction in poverty and hunger. For instance, wheat production increased from 11 million tonnes in 1960-61 to 55 million tonnes in 1980-81.

• Challenges: While successful in increasing production, the benefits were disproportionately enjoyed by larger farmers with access to resources. Smaller farmers often struggled to avail these subsidies due to lack of awareness and resources.

• 1990s - Liberalization Era: Shift Towards MSP

• Emphasis on MSP: With economic liberalization, the focus shifted towards price support mechanisms, primarily the Minimum Support Price (MSP). This guaranteed a minimum price for certain crops, aiming to protect farmers from price fluctuations.

• Effectiveness: MSP provided a safety net to farmers, especially during price downturns. However, it led to overproduction of certain crops, particularly wheat and rice, leading to surplus stocks and a fiscal burden on the government.

• Challenges: MSP became a political tool rather than a market-based mechanism, leading to distortions in the agricultural economy. Additionally, the benefits were concentrated in certain regions, such as Punjab and Haryana, exacerbating regional disparities.

• 2000s Onwards: Diversification and Direct Income Support

• Direct Income Support: Schemes like the Pradhan Mantri Kisan Samman Nidhi (PM-KISAN) were introduced to provide direct cash transfers to small and marginal farmers.

• Crop Insurance: To mitigate risks, crop insurance schemes were expanded.

• Credit Facilities: Easier access to credit was provided to farmers through various initiatives.

• Effectiveness: These measures provided some relief to small and marginal farmers, but challenges persisted.

• Challenges: Overlapping schemes led to inefficiencies, and leakage of benefits to ineligible farmers remained a concern. Moreover, the environmental impact of continued input subsidies became more apparent, with issues like groundwater depletion and soil health degradation emerging.

Challenges and issues associated with Farm Subsidies

• Inefficient Targeting

• Benefitting Larger Farmers: Subsidies often disproportionately benefit larger and more affluent farmers, while small and marginal farmers struggle to access them.

• Example: A study by the National Council for Applied Economic Research (NCAER) found that around 40% of fertilizer subsidies benefit large farmers, while small and marginal farmers receive a disproportionately smaller share

• Leakages and Corruption: A significant portion of subsidies is lost due to leakages and corruption, reducing the actual benefit to farmers.

• Market Distortions

• Overproduction: Subsidies can encourage overproduction of certain crops, leading to surplus, price fluctuations, and potential wastage.

• Example: India's wheat production increased from 51.15 million tonnes in 2000-01 to 109.59 million tonnes in 2021-22, largely due to the MSP regime. This overproduction has led to a build-up of wheat stocks with the Food Corporation of India (FCI).

• Dependency: Excessive reliance on subsidies can discourage farmers from adopting efficient practices, reducing their resilience to market fluctuations.

• Environmental Concerns

• Resource Depletion: Overuse of subsidized inputs like fertilizers and pesticides can lead to soil degradation, water pollution, and environmental damage.

• Example: The Central Ground Water Board reported a decline in groundwater levels in many parts of India, particularly in Punjab and Haryana.

• Fiscal Burden

• High Cost: Farm subsidies constitute a significant portion of government expenditure, limiting resources for other development sectors.

• Example: According to the Economic Survey of India, food subsidies constituted a significant portion of the total subsidy burden and it has been increasing steadily.

• Sustainability: The long-term sustainability of these subsidies is questionable due to the increasing financial burden.

• Administrative Challenges

• Complex Implementation: Multiple subsidy schemes often overlap, leading to inefficiencies and confusion among farmers.

• Lack of Transparency: Lack of transparency in the implementation of subsidies can lead to corruption and reduced trust.

Recent Developments associated with Subsidies in India

• Direct Benefit Transfer (DBT)

• Aadhaar Seeding: Linking farmer's Aadhaar numbers with bank accounts for accurate identification and transfer.

• Geo-tagging of Farms: Using GPS technology to verify the location of farms and prevent fake beneficiaries.

• Payouts through Payment Banks: Collaborating with payment banks to expand financial inclusion and facilitate faster transfers.

• Conditional Cash Transfers: Linking subsidies to specific actions, such as adopting improved agricultural practices, to increase efficiency.

• Digitalization

• Blockchain Technology: Exploring the use of blockchain for secure and transparent record-keeping of land ownership, crop production, and subsidy distribution.

• Artificial Intelligence: Utilizing AI for image analysis to assess crop health, yield prediction, and disaster assessment.

• Internet of Things (IoT): Employing IoT devices for real-time monitoring of soil moisture, weather conditions, and crop growth.

• Crop Insurance

• Weather-Based Insurance: Developing insurance products based on meteorological data to provide coverage against specific weather events.

• Index-Based Insurance: Using agricultural indices, such as rainfall or satellite imagery, to determine insurance payouts.

• Public-Private Partnerships (PPPs): Collaborating with private insurance companies to expand reach and product innovation.

• Climate-Resilient Agriculture

• Soil Health Cards: Providing farmers with soil health reports to enable site-specific nutrient management.

• Paramparagat Krishi Vikas Yojana (PKVY): Promoting organic farming through cluster-based development and certification.

• Micro-Irrigation: Subsidizing installation of drip and sprinkler irrigation systems to improve water use efficiency.

• Addressing Regional Disparities

• Northeast Region Farm Income Scheme: Focus on horticulture, livestock, and fisheries development to diversify income sources.

• Himachal Pradesh Horticulture Development Project: Promoting high-density apple orchards, cold storage facilities, and value-added product.

Other measures to improve targeting of susidies

• Land Records Digitization: Accurate and up-to-date land records are crucial for identifying eligible beneficiaries.

• Farmer Classification: Categorizing farmers based on factors like income, landholding size, and adoption of technology to tailor subsidies.

• Risk Profiling: Identifying farmers with higher risk profiles, such as those in drought-prone areas, for targeted support.

• Last-Mile Delivery: Strengthening the network of cooperative societies and self-help groups for effective subsidy distribution.

• Benefit-Cost Analysis: Conducting rigorous cost-benefit analyses to assess the efficiency of different subsidy programs.

• Phasing Out Ineffective Subsidies: Gradually phasing out subsidies with low impact or high leakage rates.

Tags:
Economy

Keywords:
Agriculture Subsidies PM-KISAN Minimum support price MSP

Syllabus:
General Studies Paper 3

Topics:
Agriculture and Food Security