Farm subsidies can be divided into direct and indirect subsidies depending on the type of subsidy given. How is direct farm subsides different from indirect farm subsidies? What are their merits and demerits? How can we tackle issues relating to them? Read the article to learn more about issues related to direct and indirect farm subsidies.
What are farm subsidies?
The government’s proactive measure to help farmers in the agricultural industry produce more and receive the necessary compensation is called farm subsidies. It influences the pricing and supply of agricultural goods and aids in managing their supply.
Let’s first examine the need for such subsidies before examining what direct and indirect subsidies are and the problems they raise.
It balances inter-regional imbalances, encourages agricultural production, and aids in the promotion of agricultural development. Additionally, it is anticipated that subsidies will advance agricultural mechanisation, encourage better crop patterns, provide employment prospects, etc.
Agricultural subsidies in India
The main agricultural subsidies in India are for food, fertiliser, irrigation, power, and loans. While the Center pays for food and fertiliser subsidies, the corresponding state government is responsible for electricity and irrigation subsidies.
Credit stipends are distributed via the banking system.
The price at which the Food Corporation of India (FCI) purchases from farmers and sells through the Public Distribution System is what is referred to as a food subsidy (PDS).
Need for farm subsidies
- According to Article 48 of the Indian Constitution, it is the state’s duty to modernise agricultural organisations.
- According to FAO, 70% of rural Indian households depend mostly on agriculture for their subsistence.
- One technique for distributing income and reducing inequality is subsidies
- Farmers only receive a little portion of their income (less than one-third of non-farmers income).
- Farm subsidies provide farmers with supplemental money that can be reinvested back into the industry.
- Farm subsidies Increase in production Access to high-quality inputs like seeds and fertiliser better revenue for farmers.
- Farm subsidies in specific ways encourage farmers to keep farming as a profession.
- Protect farmers from the problems that are caused by covid 19.
Types of Agriculture Subsidies
Different types of farm subsidies include:
Explicit Input Subsidies
Farmers receive these specialised cost subsidies to assist them in controlling the costs of the inputs required before production. Typically, these are given to small and marginal farmers who are unable to buy high-quality inputs on their own. Utilizing modern technologies, the goal is to maximise productivity. Utilizing modern technologies, the goal is to maximise productivity.
Implicit Input Subsidies
These are covert subsidies, not payments in the traditional sense. In this situation, the input prices of the products are controlled, for instance, by low electricity costs.
Prices on the domestic market are kept higher than they would have been as a result of the restrictive trade rules.
Similar to this, agricultural subsidies can also be classified as Direct Subsidies and Indirect Subsidies based on the method of payment.
Direct farm subsidies are those that are paid in the form of a direct cash subsidy and are given to farmers directly. In direct subsidies, the beneficiary pays the same price for the product but receives a separate payment for the purchase.
The PM Kisan Scheme, PAHAL in LPG, and agricultural loan waivers are a few examples of direct farm subsidies.
Direct farm subsidies have some benefits.
Benefits of Direct farm subsidies
- Direct subsidies aid in boosting farmers’ purchasing power and enhancing the general level of living.
- Government empowerment through direct cash transfers allows recipients to choose their purchases based on their requirements.
- Since money is given to beneficiaries directly, it also aids in preventing the misuse of public funds.
- Direct payments also reduce wasteful resource use. Ex: Farmers will buy fertiliser at full price and only what is required.
- Farmers can invest the money they get in their businesses as capital.
- Reduces the expense of the government, releasing funds for storage and transportation.
Issues of Direct farm subsidies
- Rural communities have inadequate ATM and banking service accessibility and a lack of financial inclusion.
- The potential for farmers to use the funds for non-farm, wasteful uses.
- Inflation may result from increased public access to money.
- May affect the nation’s food security.
- Important problems like agricultural innovation and market reform went neglected.
- Problems with beneficiary identification.
It is indirect as there are no direct transfers or payments involved. They can be in the form of lower prices, welfare mechanisms, more affordable credit, insurance options, waivers of agricultural loan payments, etc. These payments are mostly made to farmers in conjunction with the use of inputs, and as a result, they are closely tied to the volume of those payments.
The cost of the product is set at a lower price than the market price in cases of indirect subsidies. Indirect subsidies account for about 2% of India’s GDP. An indirect subsidy is any non-cash advantage that a recipient receives to support its operations or competitiveness. Modifications to the tax code are a common form of indirect subsidy.
Examples include MSP (Minimum Support Price), fertiliser, credit, and irrigation subsidies.
Positive aspects of Indirect subsidies
- These are crucial in fostering agricultural technology and infrastructure development. Ex: Subsidies for infrastructure.
- Farmers are guaranteed high-quality inputs through subsidies for seeds and fertiliser, which helps to raise farm output.
- Encourages farmers to adopt sustainable practises like crop diversification by helping to alter their behaviour.
- The indirect subsidies that provide farmers knowledge also include farmer training.
- Ensures the nation’s food security.
- Contribute to limiting the outflow from the agricultural industry to other sectors
- These aid in the development of underdeveloped priority areas.
- In the 1960s, when the nation was experiencing severe food scarcity, the goal was to attain food security. The green revolution gave farmers access to high-quality crops and fertilisers.
- These are designed to offer farmers technical and training support to increase productivity.
Issues of Indirect farm subsidies
- Agriculture has become dominated by cereals and has altered production patterns as a result of subsidies like MSP.
- Desertification is a result of the overuse of natural resources caused by subsidies for power, irrigation, and fertiliser.
- Due to intermediaries, indirect subsidies are tainted by corruption and leaks. Ex: PDS where leakages and the presence of ghost beneficiaries are noted.
- The WTO’s Amber box refers to market-distorting subsidies that are under pressure from the international community to be reduced.
- The current administration can offer incentives for minimal political gain in “vote bank politics.”
- These have resulted in agriculture centred on cereal and skewed crop patterns. Groundwater supplies, for example, are being depleted rapidly. They don’t see any benefit to conserving resources.
- Another drawback is the prejudice towards large farm owners and regional differences. Due to flaws like corruption, identification, lobbying by wealthy farmers, etc., they frequently fail to reach the intended beneficiaries.
- Typically, it is utilised improperly during elections to advance political goals, such as the remission of farm loans.
- It doesn’t result in the development
Issues related to farm subsidies in general
- According to the Economic Survey 2018, wealthy farmers gain more from farm subsidies than small farmers.
- Only roughly Rs. 3000-4000 crore of the Rs. 1.70 lakh crore allocated for food subsidies in the budget for 2018–19 was invested in agriculture, demonstrating wasteful spending rather than the assistance of agriculture.
- The financial exchequer is burdened by subsidies, which result in a significant financial deficit.
- Subsidy culture may encourage inefficiency and reliance on the government while weakening incentives for improvement.
- Subsidy policies may encourage other nations to pursue similar goals, which could result in trade conflicts and protectionist measures.
International issues caused by subsidies
- The de minimus levels of AMS (Aggregate Measures of Support), where wealthy nations like the USA pay subsidies >50% in some items like cotton and sugar, are not in reach for developing nations like India and China.
- Subsidies in affluent nations also serve as a barrier to the importation of goods from developing nations.
- The amount of subsidies given to wealthy nations is significantly more than that of developing nations like India.
- Due to the omission of equality, the WTO-signed Agreement on Agriculture contains loopholes. Spending on input subsidies and price support measures combined cannot exceed 10% of the entire value of agricultural production in developing nations and only 5% of the value of agricultural production in industrialised countries.
Measures and suggestions to tackle the issues
- The Kelker Committee suggested converting subsidies into capital investments and gradually eliminating them.
- Stopping subsidies that aren’t producing the desired results will help to rationalise subsidies.
- Long-term policies on export commerce are required to preserve continuity and maintain farmers’ alignment with exports.
- Encouraging financial inclusion activities in rural areas.
- Building warehouses and cold storage facilities close to the farm gate.
- The agri-sector is being developed holistically by fortifying backwards and forward connections.
- There should be a time limit on subsidies.
- encouraging programmes like cooperative and contract farming to make agriculture profitable.
- The agricultural laws should be properly executed since they are a good step toward giving farmers more authority and diminishing APMC markets‘ monopoly.
- The security of both food and nutrition should be a government priority.
- Constructing a system for market information to include price and demand projections that assist farmers in improved price realisation and assist farmers in selecting the crop.
- Under the Nairobi WTO package, developed and developing nations have pledged to gradually eliminate export subsidies.
- To minimise the large agricultural subsidies to wealthy nations, India and China together filed a proposal to the WTO.
- Subsidies should be limited based on a specific commodity, such as cotton, wool, etc., rather than the total agricultural value production.
- According to the requests of developing countries, the base year used to compute the de-minimus level should be adjusted.
Minimum Support Price
MSP is the minimum price that the government pays for the farmers’ produce at the time of procurement. It is aimed at saving the crops from price fluctuations in the market.
The MSP fixed by the government is considered as being remunerative for farmers.
However, MSPs do not have legal backing.
MSPs were first introduced in 1966-67 when the country adopted Green Revolution technologies. To boost domestic production and encourage farmers to plant high-yielding varieties, the government resorted to MSP. A minimum support price was guaranteed to them.
To read more about MSPs, click here
The fact that the agriculture industry, which accounts for greater than 40% of employment, only contributes 16–17% of GDP highlights the difficulties and issues that farmers must deal with. The government’s goal of doubling farmer income by 2022 is therefore achieved with the aid of farm subsidies, which also aid India in achieving double-digit growth by assuring food security.
Article Written By: Atheena Fathima Riyas