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Farm Subsidies: A Need for Remodeling – IMPRI Impact and Policy Research Institute

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Farm Subsidies: A Need for Remodeling - IMPRI Impact and Policy Research Institute

A Amarender Reddy

India is spending huge sums of money on incentivizing and subsidizing farmers to adopt new technology and also increase incomes.

The support given by governments to the agricultural sector can be categorized as market-distorting and non-market distorting. Market distortion means any interference that significantly affects the prices of inputs like fertilizer and water or output like procurement of paddy and wheat at the Minimum Support Price (MSP) from farmers.

Income support initiatives are like direct money transfer schemes such as PM-KISAN, under which ₹6,000 is transferred to each farmer-household, and crop insurance premium subsidies under PMFBY (Pradhan Mantri Fasal Bhima Yojana), wherein farmers’ production risks are covered. Public investments in irrigation and market infrastructure development and expenditure on agricultural research and development are also considered non-market distorting, which are meant for the enhancement of the productive capacity of farmers.

Over the years, all governments should try to gradually shift to non-market-distorting support as it helps boost farmers’ incomes without affecting market prices.

However, in India, the general trend is the reverse. Year after year, the budget allocated to market-distorting fertilizer subsidies and free power for agriculture has been increasing, while investment support for R&D in agriculture and market infrastructure is dwindling.

Rising burden

For example, this year’s fertilizer subsidy is likely to cross ₹2.76-lakh crore. Similarly, food subsidy is expected to exceed ₹2.37-lakh crore, to procure mainly paddy and wheat at MSP from farmers. Likewise, huge subsidies are given to provide free power for pumping water into farmlands and on loan waiver schemes.

The support to non-market distorting schemes like PM-KISAN (₹70,000 crores), PMFBY (₹15,500 crores), and agricultural research and development budget (₹8,513 crore) is much lower.

This disproportionately higher share of market-distorting subsidies is leading to the over-use of fertilizers and enhanced focus on water-intensive crops like paddy and wheat rather than on diversified and more nutritive crops like pulses and oilseeds.

The price-distorting schemes were introduced during the Green Revolution period to directly incentivize farmers with cheaper fertilizers and water, and higher prices for paddy and wheat to encourage them to produce more. With these policies, India became a surplus producer of paddy and wheat, and many other agricultural commodities by the mid-1980s.

But an adverse fallout of this is year after year the Budget allocation for these subsidies has been growing, consequently, relatively less amount is allocated to public investments. For example, currently, the government is giving a subsidy of ₹2,183 for each 45-kg bag of urea to keep its retail price at ₹267; the government imports urea at ₹2,450/bag from international markets. This is leading to the over-use of urea and underutilization of various micro-nutrients.

Similarly, procurement at MSP is confined to only paddy and wheat with the neglect of other crops like pulses, oilseeds, and millets, which is leading to mono-cropping of paddy and wheat, with less area allocated to other crops. This is resulting in the surplus production of a few crops like paddy, wheat, and sugarcane, while there’s a huge shortage of pulses and oilseeds.

There’s an urgent need to put an end to higher Budget allocations for market-distorting fertilizer and power subsidies, and enhance allocation to non-market-distorting subsidies/support like direct money transfer to farmers/income support. This will help in increasing farmers’ income, make them purchase farm inputs based on requirements, and enhance their productive capacity.

The article was first published by The Hindu Bussiness Line as Recast farm subsidies on January 5, 2023.

Read more by the author: National Education Policy and Indian Agricultural Universities.

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