Subject: SubsidiesXAgriculture

MSP is the government-declared assured floor price at which the government procures specific agricultural crops from farmers, through agencies like FCI, NAFED and state procurement bodies.

Announced before the sowing season based on recommendations of the Commission for Agricultural Costs and Prices (CACP)

Intended to cover the cost of production + reasonable margin (50% over A2+FL cost)

Notified for 23 crops (22 mandated crops andFRP for sugarcane)

Role of MSP in rescuing farmers from the Low-Income Trap

Predictability – Assured pricing helps farmers plan crop investments, buy better inputs and adopt new technologies.

Crop diversification through higher MSPs for nutri-cereals and oilseeds. Eg- higher MSP hikes for millets in recent years

Improved creditworthiness of farmers due to MSP-backed income – Reduce dependence on moneylenders.

Enhances Food Security through the Public Distribution System (PDS)

Strengthens Rural Economy – higher rural demandmultiplier effect on rural economy

Benchmark for private buyers: If traders offer prices below MSP, farmers can opt to sell to government agencies instead.

Limitations of MSP

Effective mainly for wheat and rice in states like Punjab, Haryana, MP, UP

MSP growth has not kept pace with rising production costs. (CRISIL Report)

Limited Reach – only 6% farmers benefitted (Shanta Kumar committee)

94% of the total agri and allied sector output is outside MSP support.

Limited storage capacity has resulted in huge piling of stocks in FCI warehouses.

Way Forward

Shift towards Regenerative Agriculture Incentives – Eg- DBT for farmers adopting soil-friendly inputs, micro-irrigation, and low-carbon practices

Price Deficiency Payment (MP’s Bhavantar Bhugtan Yojana)

MSP 2.0 based on 3 D’s – Decentralisation, Diversification and Digital Procurement.

MSP can act as a meaningful income stabiliser only when it is complemented by efficient procurement, strong market linkages, and inclusive access

The total government subsidy for food and fertilizers for the fiscal year 2025-26 is budgeted at It constitutes around 2% of India’s GDP and 21% of farmer’s income.

Direct subsidies –

These involve direct budgetary support or cash transfers to farmers and agricultural institutions.

Income support schemes –

PM-KISAN

Raythu bandhu Scheme of Telangana

MSP For 23 crops to ensure Income Security

Interest subvention through Kisan Credit Cards – KCC)

Crop insurance premium subsidy under PMFBY (Pradhan Mantri Fasal Bima Yojana)

Indirect subsidies to the farm sector

These reduce production costs or guarantee revenue without direct cash payment:

Fertiliser subsidy – Subsidised urea, DAP and other fertilisers under the Nutrient Based Subsidy

Subsidy on agricultural infrastructure

PM-KUSUM – Subsidy for Solar Pumps

PMFBY – Subsidy for Micro Irrigation

Agriculture Infrastructure Fund (AIF) – Credit-linked subsidy for cold storage

Gramin Bhandaran Yojana – Support for rural godowns and storage

Power & irrigation subsidy

Free or highly subsidised electricity for irrigation pumps

Subsidised canal and micro-irrigation schemes (Eg- PMKSY)

Seed and mechanisation subsidy – Eg- Sub Mission on Agriculture Mechanisation

Research & Extension services – Funding to ICAR, Krishi Vigyan Kendras (KVKs)

Issues raised by WTO regarding India’s agricultural subsidies

Subsidy Classification by WTO

Green Box – Allowed (non-trade distorting). Eg- extension, infrastructure

Blue Box – Production-limiting subsidies

Amber Box – Trade-distorting subsidies. (10% of output) Eg- MSP, input subsidies

Trade-distorting support – MSP, fertiliser, power & irrigation subsidies classified as Amber Box. May exceed 10% de-minimis limit for developing countries

WTO decision (Nairobi, 2015) prohibits export subsidies. India’s sugar export incentives were challenged & ruled WTO-inconsistent

Transparency issues – Allegations of under-reporting or delayed reporting of subsidies

Environmental concerns – overuse of fertilisers and groundwater, causing Soil degradation, Groundwater depletion and Ecological stress

The sustainable path for ensuring farmer welfare remains protected includes gradual shift towards Green-Box-compliant support such as direct income transfers, infrastructure creation, R&D, crop insurance and climate-resilient agriculture.