Why in the News?
Issues have been raised by the World Trade Organization (WTO) concerning Agricultural Subsidies in India. Major subsidies in India are on fertilizer, power, credit, output, seed, and export products.
What is Subsidy?
- The term subsidy refers to financial assistance in the form of discounts or monetary grants by the Central government to public entities or private institutions.
- The objective is to make the products offered by these institutions affordable for public consumption.
- The subsidized products are necessary for the larger public good and are a means of supporting the community’s welfare.
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Historical Background
- Post-Independence Era (1947 onwards): The government introduced various subsidies to promote industrialization, agriculture, and social welfare, aiming to reduce poverty and achieve self-sufficiency in key sectors.
- Green Revolution (1960s): During the 1960s and 1970s, Subsidies on fertilizers, seeds, and credit were provided to farmers to encourage the adoption of new agricultural technologies and boost food production.
- Liberalization Reforms (1991): While liberalization led to a reduction in some subsidies and a shift towards market-oriented policies, the government continued to provide support to sectors deemed crucial for social welfare and economic development.
Types of Subsidies:
- Food subsidy: The food subsidy’s main objective is to provide essential eatables to a large section of the population living below the poverty line in India.
- The major food items supplied to the BPL families (by PDS system) vary as per the region, it includes – Wheat, Rice, Sugar, Milk, Cooking oil, and more.
- Education subsidy: The Central government extends the education subsidy to eligible students to pursue higher technical and professional education.
- Export subsidy: To make exports attractive and lend support to the companies, the government offers export subsidies.
- Fertilizer subsidy: The fertilizer is provided at a fixed MRP that is below the actual price; the government pays the difference between the actual coat and the MRP.
(Note: There are various types of subsidies but UPSC usually asks for Agriculture subsidies)
Subsidies in Agriculture:
Direct Subsidies:
- Credit Subsidies: Subsidized credit programs offer farmers loans at lower interest rates or with relaxed repayment terms to finance agricultural activities, such as purchasing inputs, machinery, or land.
- Ex-The Government of India provides interest subvention of 2% and Prompt Repayment Incentive of 3% to the farmers, thus making the credit available at a very subsidized rate of 4% per annum as per Kisan Credit Card.
- Direct Income Transfers: Governments provide direct cash transfers or income support schemes to farmers to supplement their incomes, improve their financial stability, and alleviate rural poverty. Ex-PM Kisan Samman Nidhi Scheme under which support of Rs.6000/- per year
Indirect Subsidies
- Fertilizer Subsidies: Governments often provide subsidies on fertilizers to reduce the cost burden on farmers and promote fertilizer use, which enhances crop productivity. Ex- the Union Budget for the fiscal year 2024-25 (FY25) allocated ₹1.64 trillion for fertilizer subsidy.
- Seed Subsidies: Subsidies on quality seeds help farmers access improved varieties that are disease-resistant, drought-tolerant or have higher yields. Ex- the government provides a subsidy of Rs. 1000/- per quintal or 50% of the cost.
- Water Subsidies: Subsidized irrigation infrastructure and water supply schemes aim to improve water availability for agricultural purposes, especially in regions facing water scarcity. Ex- Pradhan Mantri Krishi Sinchai Yojana.
- Minimum Support Prices (MSP): Governments guarantee a minimum price for certain crops to protect farmers from market price fluctuations and ensure stable income. Procurement agencies purchase crops from farmers at MSP, often for staples like wheat, rice, and pulses. Ex- the government of India sets the MSP twice a year for 24 commodities (23 crops + 1 sugarcane).
- Crop Insurance Subsidies: Subsidies are offered on crop insurance premiums to encourage farmers to enroll in crop insurance schemes, which protect them against yield or revenue losses due to adverse weather, pests, or other risks. Ex- Pradhan Mantri Fasal Bima Yojana (PMFBY)
- Subsidized Agricultural Machinery: Governments may subsidize the purchase of farm machinery, equipment, and tools to mechanize agricultural operations, increase efficiency, and reduce labor costs. Ex- Sub-mission On Agriculture Mechanization (SMAM scheme)
Present issues raised by the WTO:
- Market Distortion: The WTO contends that agricultural subsidies have the potential to disrupt global markets. For instance, subsidies like India’s Minimum Support Price (MSP) may result in the undervaluation of Indian agricultural goods on the international stage.
- Trade Barriers: Subsidies can create challenges for foreign producers without subsidies to compete effectively in markets where subsidized goods are sold.
- Overproduction of certain crops: Subsidies can lead to overproduction of certain crops, which can further distort the market and lead to wastage.
- Negative Environmental Impact: Overuse of fertilizers and water for irrigation, encouraged by subsidies, can lead to environmental degradation.
- Inequity: The benefits of subsidies often go to larger farmers rather than small-scale farmers who need them the most.
Limitations Faced by Indian Agriculture:
- Subsidies on few crops: Subsidies like MSP, which are applicable for only a few crops, have led to cereal-centric agriculture with distorted cropping patterns, as farmers tend to grow only those crops for which they are given subsidies.
- Benefiting only wealthy Farmers: As per the Economic Survey 2018, wealthy farmers benefited over small farmers from the farm subsidies. Thus the objective of giving subsidies is not fulfilled. This is the case frequently witnessed in Punjab and Haryana, where affluent farmers enjoy taxpayer money.
- Fiscal deficit: Also, the subsidies lead to a substantial financial deficit and burden on the financial exchequer.
- Cause of pollution: Subsidies for agriculture can foster the overloading of croplands, which leads to erosion and compaction of topsoil, pollution from synthetic fertilizers and pesticides, and release of greenhouse gases, among other adverse effects.
Way Forward:
- Diversification of Subsidies: Expand subsidy programs to cover a wider range of crops, including fruits, vegetables, pulses, and other diversified agricultural products, to promote crop diversification and mitigate the cereal-centric focus.
- Targeted Subsidy Programs: Implement targeted subsidy schemes that prioritize support for small and marginalized farmers, ensuring that subsidies reach those who need them most and reducing the disproportionate benefit to wealthy farmers.
- Price Stabilization Mechanisms: Develop price stabilization mechanisms beyond MSP, such as futures markets, crop insurance, and warehouse receipt systems, to mitigate price volatility and provide income security to farmers without distorting cropping patterns.
Prelims PYQ
In India, markets in agricultural products are regulated under the (UPSC IAS/2015)
a) Essential Commodities Act, 1955
b) Agricultural Produce Market Committee Act enacted by States
c) Agricultural Produce (Grading and Marking) Act, 1937
d) Food Products Order, 1956 and Meat and Food Products Order, 1973
Mains PYQ
Q How do subsidies affect the cropping pattern, crop diversity and economy of farmers? What is the significance of crop insurance, minimum support price and food processing for small and marginal farmers? (UPSC IAS/2017)
Q What are the different types of agriculture subsidies given to farmers at the national and at state levels? Critically analyse the agricultural subsidy regime with reference to the distortions created by it (UPSC IAS/2013)
