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Agriculture: Subsidies, Seeds, Fertilizers and Related Issues

Agriculture: Subsidies, Seeds, Fertilizers and Related Issues


Table of Contents

  1. Inputs of Agriculture, related issues and Subsidies thereon
  2. Seeds
  3. Fertilizers
  4. Power, Water and Irrigation
  5. Credit and Insurance


Agriculture sector is undoubtedly most important sector of Indian economy as it provides employment to 54.6% of people and food security of India revolves around this sector. Its importance can be gauged by the fact that whenever there is fear of deficit monsoon, whole of the population ranging from farmers, workers, businessmen, policy makers and even foreign investors are caught into nervousness. Because of dependence of disproportionate population on this sector, Indian economy can be still said to be an agrarian economy. However, sector is largely state controlled which resulted in widespread inefficiencies and distortions.

Sector has been growing appreciably at least 4% from last few years (with some exceptions) and last year’s growth was record 4.7%. But this is no reason for rejoice as our farmers and agricultural sector are still quite vulnerable and growth is on back of interventions which has given us a skewed agricultural basket. Primary reason for this growth is said to be good monsoons and growing crop incentives under schemes like Minimum Selling Price (MSP). Share of agriculture in economy remains stagnant at 13.9%. This is an indicator that people dependent upon agriculture are still unable to make a decent earning. From very beginning agriculture has been at center of government policy, but sector was recognized as prime moving force only in 2002. It actually started at the time of World War 2, when food shortages were severe. Later Public distribution System was developed during time of great Bengal Famine which killed about 2 million people. Ultimately government control got strengthened by appointment ‘Commission for Agriculture’ and formation of ‘Food Corporation of India’ in 1960’s. Former’s role was to recommend prices for government procurement of different crops and latter’s function ranged from procurement, storage and issue of food grains.

During this time India was heavily dependent upon foreign food aid which compromised India’s sovereignty over crucial matters. It was at this time realized that, apart from building structure for storage and distribution, self-sufficiency in production of food grains is imperative. It resulted in huge investments in agriculture productivity, through the means of hybrid seeds, Chemical Fertilizers, Pesticides and irrigation infrastructure. This came to known as Green Revolution.

Green revolution, overtime, yielded impressive results and in coming decades India was self-sufficient in food grain production and achieved physical food security. However, it didn’t give Indian people economic food security and food security is still a big challenge. Costly inputs and MSP regimes regularly pushed up prices and rendered them unaffordable to the poor. It all culminated into a confusing situation where on one hand there were bumper productions and excessive food grains with FCI, on the other hand millions were living under starvation. This was mainly because laws, regulations, institutions which were brought into existence in face of scarcity, largely continued even at the time of abundance. End result is uncompetitive agriculture sector, reeling under debt which can’t survive without heavy government support. All this left us with vulnerable farmers and people and an underperforming economy.

As always, this issue is again a major one for current government and there are some suggestions towards reforms and few steps were also taken recently.

In this article we’ll discuss issues involved and various steps government have taken to remedy for Agriculture production, procurement and storage. In next article we’ll cover agriculture marketing and trade in India.

Inputs of agriculture and subsidies thereon

Subsidies on inputs have their root in Green revolution. That time extensive subsidies were given on Hybrid seeds, Fertilizers, pesticides etc. main aim of subsidies are two – one is to keep cost of the food grains at minimum and avoiding food inflation, second is to ensure income security of the farmer. While this policy has helped a lot to secure food sufficiency, yet it has many unintended negative impacts. It results in overuse of inputs as inputs costs doesn’t represent adequate market costs, farmers are unable to respond to market signals. They continue to use skewed mix of inputs as costs are borne by government.

  1. Seeds

    Many schemes such Rashtriya Krishi Vikas Yojna, Macro Management Agriculture, Integrated Scheme for oilseeds, pulses, oil palm and maize (ISOPOM); Technology missions for cotton, National food security Mission etc. provide for subsidized seeds. Some of them also provide incentives for investment in Seed manufacturing infrastructure and upgradations.

    New Policy on Seed Development (NPSD) includes permitting 100 per cent foreign direct investment (FDI) under the automatic route. The thrust is also on creating a seed bank.

    There are three stages in seed production cycle. At first stage Breeder seeds are developed by ‘Indian Council of Agricultural Research’ (ICAR), National Seeds Corporation or state farms corporations. In second stage Foundation Seeds are developed by NSC, SFCs or State seeds corporations and then finally Certified Seeds are produced and distributed to all farmers.

    Certification is done by state agricultural universities or private organizations authorized by ‘Indian Council of Agricultural Research’

    Hybrid Seeds

    Hybrid seeds are obtained by cross pollination of different varieties of related plants. These seeds were instrumental in green revolution. These seeds combine desirable properties of two related plants. Using a method of controlled crossing devised by Charles Darwin and Gregor Mendel in the mid-19th century, plant breeders can now produce seed that combines the desired traits of two pure parent lines in the first generation itself.

    One drawback was that these seeds don’t regenerate seeds of same quality. So every time farmers have to buy new seeds. In case of conventional seeds, farmers could use reproduced seeds by current crop. In that sense hybrid seeds pushed up Input costs for the farmers and multinational companies like Cargill Inc. established their monopoly over the market.

    Now there is growing clamour both for and against genetically modified variety of seeds. Its supporters believe that it can get world rid of starvation, whereas opponents fear negative effects on environment, biodiversity and health.

    Genetically Modified Varieties

    These varieties of seeds are developed in laboratories by genetic engineering technologies. In these technologies genes of different species of organisms (like bacteria genes with plants) are integrated to modify DNA to get desired characteristic. Bacteria named bacillus Thuringiensis gives a gene that is incorporated into plant’s DNA and we get Genetically Modified Organisms like BT- corn, BT- cotton, Bt- Brinjal etc. This plant will be protected from pests and will give increased yields. In USA GM crops are allowed and contribute about 85% of the consumption, whereas in Europe it is largely banned as of now. In India, it is allowed for commercial production of cotton and for food crops field trials are going on.

    In 2013 Supreme Court in response to a PIL appointed a Technical Expert Committee for considering whether trials should be allowed or not. TEC recommended that there should be moratorium on trials until proper regulatory and safety mechanisms are put in place, and BT crops are approved for their long term safety. Notwithstanding this government allowed trials for some crops, as SC didn’t pass any order in this relation.

    Main concern of the farmer community is that, Companies like Monsanto will exploit their monopolies as seeds are expensive and are not regenerative. Recently GMO cotton seeds supplied by Mahyco, (a GM seed company which has joint venture with Monsanto), resulted in a crop failure which brought suffering to farmers.

    National Seeds Corporation

    It is Miniratna Company under Ministry of agriculture formed in 1963 to produce foundation seeds and undertake certification activities. It has central role in development of seed industry in India. Various schemes such as ISOPOM, NFSM and National Horticulture Mission are implemented (partly or fully) under NSC. It is also involved in export of seeds, especially to SAARC nations and African countries.

    It maintains a SAARC seed bank in which large quantities of various seeds are kept as inventory so that shortage due to any natural calamity or otherwise could be tackled.

  2. Fertilizers and Manures

    Fertilizers are any organic/inorganic, natural/synthetic material used in soil to supplement it with plant nutrients which are essential for plant’s growth.

    Fertilizers were another most important part of green revolution. Some points to be noted are –

    1) In India per hectare Consumption around (around 146 Kg) is far lower than developed countries.

    2) Indian Soils are deficient in Nitrogen and Phosphorus

    3) Fertilizer can most effectively be used with ample water. So rainfed areas (deprived of irrigation) constitute 70 % of agricultural land and still they use only 20% of national Fertilizers consumption. On other hand Rabi crops are dominantly produced in Irrigated areas, so they consume about 66% of fertilizers while their share of total agri output is 33%

    4) Due to rising prices of fertilizers government is promoting organic farming and organic manure.

    5) India meets its 80 % requirement of Urea (N), while it is heavily dependent on Imports for its potassium (K) and phosphorus (P) fertilizer requirements.

    Fertilizers Vs Manure

    Fertilizers are made through industrial processes in which composition of nutrients is precise and deliberately fixed. In contrast Manure is derived animal waste such as cattle dung and urine. It enriches the soil generally. Further, presence of manure makes fertilizers even more effective.

    Macronutrients and Micronutrients

    Plants or crops needs about 17 essential elements to survive and grow. If any of these elements is deficient, then growth will be stalled or plant will die. Among these elements, N, P, Calcium, Magnesium and Sulfur are required in comparative large quantities and termed as macro nutrients. Other elements such as Boron, Chlorine, Copper, Iron, Manganese, Molybdenum, Zinc and Nickel are needed in smaller quantities hence termed as micronutrients. Macronutrient based fertilizers are dominant and its use enhances capability of plants to extract more micronutrients from soil.

    Nitrogen – is responsible for green leafy growth and overall plant health. Its Necessary for Photosynthesis to take place. Deficiency will result in yellow leaves and weak plant.

    Phosphorous – Is necessary for root, flower and fruit development.

    Potassium – Plant health and vigour. It helps plant to fight diseases and pests. It also gives strong cell walls 

    Nutrient Based Subsidy

    This was introduced in 2010 with objective to promote balanced use of fertilizers and to limit fertilizer subsidy of the government. Idea was to fix subsidy as per nutrients (in per Kg ) in the fertilizer and leave the determination of price to suppliers. Presently Urea is not covered under the scheme due to political compulsions. Consequently subsidized price of Urea remained stagnant even when real costs of production have risen significantly. On the other hand Potassium and Phosphorous are covered under the scheme and a fixed subsidy as per content of nutrients is given to suppliers and they change Maximum Retail Price as per market signals. Secondary and Micronutrients are also covered under the scheme.

    (In short urea is still controlled and P,K, are decontrolled)

    As a result, actual use of NPK is in ratio of around 8:3:1 while recommended use is 4:2:1

    This additional use of urea doesn’t give any additional benefit to the farmer. Instead this can degrade soil and harm crop. Productivity and quality of a crop depends upon use of diversified mix of macro and micronutrients, which vary from soil to soil.

    Latest Economic survey notes that while urea consumption has increased from 59 per cent to 66 per cent of total consumption in 2012-13 over 2010-11, per hectare consumption of fertilizer has declined from 140 kg to 128 kg over the same period.

    Fertilizer subsidy was `67,971 crore in 2013-14, an increase of 11 per cent over 2009-10. Large part of this went to production and consumption of urea that was not needed at all.

    Also, due to excessive use of fertilizers groundwater is also getting polluted and chemical bio accumulation problem is impacting health of people. In Punjab and Haryana, problem is rampant and ground water is found to be polluted with arsenic, uranium, fluoride etc.

    Indian Fertilizer Industry

    Indian fertilizer industry has made good progress in case of Nitrogen based fertilizers. India is 3rd largest producer of urea after China and USA. Productions largely state controlled. Popular PSUs are The Fertilizer Corporation of India ltd, National fertilizers Limited, Hindustan Fertilizer Corporation Ltd. etc.

    Main raw material used by industry is Naphtha (by product of petroleum), Rock phosphate, Sulfur gypsum and natural/smelter gasses. In absence of natural gas, coking coal or coke can be used. Hence most of the plants are near petroleum refineries, coal mines or sea coasts.

    Cooperative sector is also strong in this industry and two big cooperatives are IFFCO and KRIBHCO.

Business Model:
IFFCO is a cooperative federation having over 40000 member cooperatives. KRIBHCO is a cooperative company. Money
is pooled within cooperatives thus company is owned by cooperatives only. Board members and president/MD are elected from within. Fertilizers from major plants are marketed by cooperatives only and sold to members/farmers. Thus there exists complete vertical integration in these societies. Dividends are distributes among shareholders (cooperative/members). IFFCO and KRIBHCO now have started aggressively diversifying product base and Joint-ventures to ensure sustained dividends. IFFCO has diversified to insurance (ITGI), telecommunication (IKSL) and other businesses.
As farmers are the consumer, marketer and owner of fertilizer production, various benefits have arrived as:
1) Affordable and just cost.
2) Increased access via cooperatives. Door to door service.
3) Large dividend benefits (IFFCO always procured profits since inception).
4) Control over market: As these are major stakeholders now.( IFFCO produces 35 % N and 27% potash fertilizers nationally).
5) CSR benefits like farm education, cooperative welfare fund, CORDET etc.

Today IFFCO is one of the largest fertilizer producers in the world and largest in Asia. It has profitable turnover of about $3 billion per year. It is ranked 37 in Indian’s top companies. Its 5 plants produce 7 metric tons of fertilizers serving 6 lakhs villages and millions of farmers. In addition to producing fertilizers, it also has ventured into providing technical support to farmers in India, providing insurance etc. Thus farm cooperatives are largely successful in supporting Indian Financial and Social inclusion.

The Fertilizer Cooperatives adopted villages under “village adoption program” for developing them as Model Agricultural villages. Storages cum community centers were developed in such villages, and infrastructural development was done. Also, training was imparted to villagers.
Such a model adopted helped getting rich dividends. It helped in strengthening the cooperative channels and their dissemination throughout the Country.

IFFCO has established charitable funds in villages to help them cope with natural disasters. IFFCO has made joint ventures in Senegal, Oman, Jordan and Egypt. Further, it has also made strategic investments in National Commodity and Derivative Exchange (NCDEX) and National Collateral Management Services (NCMSL).
Also, recently it has gone for product diversification and introduction of innovative products to improve soil health and NPK balance by fertilizers used by farmers

National Investment policy 2012 encourages Investment in manufacturing of urea and other fertilizers and also acquisition of fertilizer plants abroad.

3. Power and water for agriculture

Farmers get highly subsidized or free electricity for agricultural purposes. Electricity is mainly consumed in pumping out underground water. As 70 % of countries agricultural land is Rainfed electricity becomes main input in agricultural produce.

However subsidized and ample electricity has resulted in indiscriminate use of electricity by the farmers, which results in massive wastage of electricity and water. In fact this is main reason behind depleting ground water. It also provides avenues for pilferage and theft of electricity.

Separation of feeders

Feeder is an electrical cable or group of electrical conductors that runs power from a ‘larger central source’ to one or more secondary or branch-circuit distribution centers(to end user). We have yet common feeder lines for agricultural and other sectors in all states except Gujrat.

In Gujrat Jyotigram Yojna was initiated in 2006, which separated agricultural feeders from main feeder. Agricultural feeder supply was regulated and power is given only for 8-10 hours per day. Timings of powers are pre declared to the farmers. On the main feeder power is supplied full time. This development has two fold benefits; one is surplus electricity for industry and civilians and second is it arrested rapid depletion of ground water. Result is Gujrat has surplus power of 2000 MW (out of total capacity of 14000 MW) which is sold to other states.

Success of this scheme was recognized by planning commission and it was made central to power reforms under 12th five year plan.

New scheme Pandit Deendayal Upadhyaya Gram Jyoti Yojna, aims for separation of feeders at national level. It is first to be rolled out in Rajasthan and Andhra Pradesh. Scheme would be merged with ‘Integrated Power Development Scheme’, which aims at improving India’s sub-transmission and distribution network.


Although India is the second largest irrigated country of the world after China, only one-third of the cropped area is under irrigation. Irrigation is the most important agricultural input in a tropical monsoon country like India where rainfall is uncertain, unreliable and erratic India cannot achieve sustained progress in agriculture unless and until more than half of the cropped area is brought under assured irrigation.

This is testified by the success story of agricultural progress in Punjab Haryana and western part of Uttar Pradesh where over half of the cropped area is under irrigation! Large tracts still await irrigation to boost the agricultural output.

However, care must be taken to safeguard against ill effects of over irrigation especially in areas irrigated by canals. Large tracts in Punjab and Haryana have been rendered useless (areas affected by salinity, alkalinity and water-logging), due to faulty irrigation. In the Indira Gandhi Canal command area also intensive irrigation has led to sharp rise in sub-soil water level, leading to water-logging, soil salinity and alkalinity.

Read more on irrigation here

Inter Basin Water Transfers

One of the most effective ways to increase the irrigation potential for increasing the food grain production, mitigate floods and droughts and reduce regional imbalance in the availability of water is the Inter Basin Water Transfer (IBWT) from the surplus rivers to deficit areas.  Brahmaputra and Ganga particularly their northern tributaries, Mahanadi, Godavari and West Flowing Rivers originating from the Western Ghats are found to be surplus in water resources.  If we can build storage reservoirs on these rivers and connect them to other parts of the country, regional imbalances could be reduced significantly and lot of benefits by way of additional irrigation, domestic and industrial water supply, hydropower generation, navigational facilities etc. would accrue.

For this purpose Ganga- Cauvery link canal was proposed in 1970’s, but as we know Deccan Platue and other higher areas lie in between Ganga and Cauvery, water has to be lifted with use of pumps. Electricity required in this pumping is as high as 6000-7000 MW which makes this project unviable. Also there are many other apprehensions regarding ecology of rivers and impact on downstream and upstream regions.

Another proposal (also in 70’s) suggested construction of two canals – the first 4200 km. Himalayan Canal at the foot of Himalayan slopes running from the Ravi in the West to the Brahmaputra and beyond in the east; and the second 9300 km Garland Canal covering the central and southern parts, with both the canals integrated with numerous lakes and interconnected with pipelines at two points, Delhi and Patna.

The proposal was examined by two committees of experts comprising Senior Engineers from CWC, State Governments, Professors from the IIT s and Scientists from Geological Survey of India and Indian Meteorological Department who opined that the proposal was technically infeasible.  The cost estimated by the experts in 1979 was about Rs. 12 million crores. The realistic cost at 2002 price level comes to about Rs. 70 million crores.

Notwithstanding this, there are some success stories at regional basis under which water is transferred from one basin to another. For eg. –

a) Indira Gandhi canal – Transfer of water from Indus basin to deserts of Rajasthan

b) Periyar project – Transfer of water from Periyar basin to Vaigai basin

c) Kurnool Cudappah Canal –  Transfer of water from Krishna basin to Pennar basin

4. Credit and Insurance

To procure all other inputs such as seeds, fertilizers, agricultural labor for tilling/weeding/sowing, every farmer needs money. This money requirement is more at the beginning of sowing season, but post-harvest loans are also crucial. Further, as we have seen, agriculture in India is fraught with exigencies of nature and macroeconomics, insurance is must for the farmer.

Traditionally, Indian farmer has been dependent upon informal sources of finance, such as from money lenders or subscribing to small chit funds. After the independence, by persistent efforts of government share of institutional credit has increased substantially. Informal or non-institutional credit was largely unregulated and Interest rates were a tool to extract maximum out of farmer. In contrast, under institutional credit there are various Interest Subvention schemes, under which farmer gets subsidized credit. There has been also large scale, but controversial Farm Loan waivers. Further, agricultural credit is largest component of Priority Sector lending targets.


Institutions like NABARAD, Regional Rural Banks, and Rural Cooperative Banks will be discussed separately under series of articles on banking.

Kisan Credit Card Scheme (KCC)

Currently short term loan is disbursed to farmers through KCC. This method is used by all banks viz. Commercial or cooperative or regional rural banks. All types of farmers – Marginal farmers, Sharecroppers, Tenant farmers are eligible. Limit of credit disbursal depends upon land availability for cultivation and credit history of farmer. Through this card farmers also get Accidental death/permanent disability Insurance. Some banks have enlarged scope of KCC s by including Long term loans under it. Gov. advised banks to turn these cards in Smart cum Debit Card.

Interest subvention as per scheme of the government is available on the loans disbursed through card. There are other benefits in place such as no processing fees up to loan of 3 lakhs, Farmers can overdraw and maintain debit/negative balance upto certain extent.

Rate of Interest

Rate of Interest charged for loan upto Rs 3 lakh is 7% and further interest subvention of 3% is available on prompt payment, thus making effective interest rate @ 4 %. In other sectors, interest rate generally from 9 % and is a bit less for home loans. It depends upon monetary policy of RBI. We can see agricultural loans remain always subsidized.

Loan at subsidized rates is also available to small and marginal farmers for 6 moths post-harvest. Rationale behind this is to avoid distress saleOnce crop is harvested, farmer might not be able to sell crops immediately at good prices. If no such monetary support is there he might be forced to sell at low prices.

Also, collateral free ‘term loan’ upto Rs 1 lakh is allowed

Agriculture Debt Waiver and debt relief scheme

In 2008 debt was waived for and relief package was given to farmers to address their indebtedness. After waiver fresh loans were given. Its cost to government was about Rs. 60000 crores. Recently CAG has found many irregularities in implementation.

1) There have been large scale errors of inclusion and exclusion. Big farmers who were not cover under scheme also got waiver in some states.

2) There was lack of documentation and ineffective monitoring of the scheme.

Agricultural Insurance

Currently 3 major insurance schemes are –

1) National Agriculture Insurance Scheme – Launched for providing financial support to the farmers in the event of failure of crops as a result of natural calamities, pests and diseases.

2) Modified National Agriculture Insurance Scheme – It provides for subsidized premiums and 25% upfront/immediate payment of claim. It is compulsory for farmer who has taken loan. Private sector is allowed to operate under the scheme and NIAS stands withdrawn where MNIAS is implemented.

3) Pilot Weather Based Crop Insurance Scheme – It insures farmers from anticipated exigencies of weather such as frost, rainfall, flood and humidity, which may result in damage to crop.

It is largely believed that various schemes have badly failed in delivering what they intended. There is lethargic implementation; Companies take more than a year to settle the claims. When there is crop failure or damage, farmers need immediate relief, atleast before starting of next sowing season. In absence of this relief they have to forego crop for a season or depend upon expensive finance through informal sources.

Further, pricing of premium is arbitrary and profitability of farmers is not considered in this. In some crops premium is more than expected return on the crop. This keeps away small and marginal farmers from insurance. Yet they are the ones who need insurance the most.

As of now there is no scheme for Income insurance. If due to draught or natural calamity, farmers are not able to sow crops and will lose their income of that season, then they have no support of insurance. ‘Farm Income Insurance Scheme’ was launched in 2003, but it was soon discontinued after change of government.


1) Discuss various efforts of government towards financial inclusion of farming community. (200 words)

2) ‘In interest of energy and water security it is important to break energy-groundwater nexus.’ What is this nexus and what steps government has taken? (200 words)

3) Comment of Nutrient Based Subsidy scheme, its objectives and problems related to it? (200 words)

  1. What is role of Cooperatives in rural economy? (200 words)

Next Two Articles in the Series:


Article 2

Pricing policy and WTO

A) Minimum Support Price


C) Additional Bonus by states

D) Levy System

E) MSP for oil seeds, pulses and forest produce

F) Issues related to WTO

Article 3

Procurement, Storage and PDS

  1. FCI
  2. Centralized and decentralized procurement
  3. Storage

    FCI, CWC, SWC, entrepreneur guarantee scheme

  4. Economic Cost, Central Issue price etc.