Extent and Effectiveness of Subsidies

  • India’s agricultural input subsidy policies have fostered yield gains and even surpluses.
  • The Indian Government provides free electricity and water for farmers, as well as subsidised seed, chemical inputs and transport. It also guarantees purchase by the government of all wheat and rice produced. This agricultural regime has certainly resulted in increased agricultural production
  • Agricultural input subsidies and the Green Revolution prevented famine in many parts of India.
  • Given that a significant majority of commodity payments go to larger farms, these subsidies ultimately benefit large agricultural corporations more than the farmers who contract for them or sell to them. By mainly giving subsidies to industrial sized farms, the government is primarily supporting mono-crop farming operations that utilize intensive farming practices like chemical fertilizers, herbicides and pesticides, and minimal crop rotation.
  • India subsidizes agricultural inputs in an attempt to keep farm costs low and production high. GOI’s intended result is for farmers to benefit from lower costs, but also for them to pass some of the savings on to the consumers in the form of lower food prices.
  • The main policy instruments to support farmers in India include subsidised fertiliser, power, agri-credit and crop insurance on the input side, loan waivers and minimum support prices for major crops on the output front. But a recent study done jointly by OECD and ICRIER estimated that trade and marketing policies of India have inflicted a huge negative price support to Indian farmers.
  • According to the OECD study the producer support estimate (PSE) for India works out to be a negative 14% of gross farm receipts for the period 2000-01 to 2016-17, primarily because of restrictive policies (minimum export prices, export bans or export duties) and domestic marketing policies (due to Essential Commodities Act, APMC, etc).
  • Input subsidies have resulted in overutilization of inputs. This overutilization has in turn led to soil degradation, soil nutrient imbalance, environmental harm, and groundwater depletion, all of which have caused decreased effectiveness of inputs.
  • Additionally, input subsidies distort trade by increasing net exports of input intensive commodities while decreasing net exports of commodities which require relatively fewer inputs.
  • Marginal returns on subsidies are way below those from investments. The results show that expenditure incurred on agri-R&E (research and education), roads or education are 5 to 10 times more powerful in alleviating poverty or increasing agri-GDP than similar expenditure made on input subsidies.
  • Over time a rapid increase in input subsidies has squeezed public investments in agriculture. Excessive input subsidies have caused large scale inefficiencies in the agri-system.
    • For example, fertiliser subsidies, especially on urea, have led to an imbalanced use of soil nutrients.
  • Subsidies on irrigation water have resulted in the inefficient use of scarce water.
  • Highly subsidised power to agriculture has led to over-exploitation of ground water. Subsidies on interest rates on crop loans has diverted substantial amounts of agri-credit to non-agricultural usage.
  • Although the new crop insurance scheme, PMFBY, has dramatically reduced the burden of premiums that are paid by farmers, its effective implementation and quick settlement of claims into farmers accounts remains a challenge.