Agriculture Subsidies in India

Introduction of the HYV program in the mid-1960s necessitated a high priority to supplying quality inputs like irrigation, water, fertilizers and electricity to the Indian farmers. These all were classified as essential inputs for the development of the agriculture.

To ensure that these inputs are accessible to all farmers at all the times the government decided to subsidised these inputs.

How Subsidy Works

There are two most common ways of subsidising agriculture;

1. Firstly, governments may pay much higher prices for the agricultural products than what the farmers can obtain under free market environment, and
2. Secondly, by supplying the inputs at a price that is below the cost of supplying these inputs or below at the price that would prevail in an open free trade environment.

• Higher prices for farm products can be provided mainly by insulating the domestic markets from the world economy through a restrictive trade policy.
• On the other hand, vital inputs like fertilisers, irrigation water, credit, electricity used in the agricultural sector can be supplied to the farmers at prices which are below the open market prices. The prices of these inputs, therefore, do not reflect their true value, i.e, the real cost of supplying these inputs.
• Of the above mentioned two alternatives, subsidies on inputs are normally preferred because it is believed that benefits of government expenditure can be derived by the farmers only in proportion to their use of inputs. Input subsidisation also avoids raising food and raw material prices, thus avoiding the plausible adverse effect on growing industrial sector or a large mass of poor living in the developing countries.
• However, most often, it is not just a single mechanism but a combination of both higher output prices and lower input prices which has been used to subsidise agriculture with objectives varying from the need to raise domestic production and protect incomes of the farming community.
• India also tinkered with both input and output prices, primarily to protect the poor and/or to stimulate the use of modern inputs.

Rationale for subsidising Agriculture

Negative Impacts of Agriculture Subsidies

However, the issue of agriculture subsidies is not to be examined only from the perspective of fiscal imbalances, but from a much wider perspective of ensuring food and nutritional security for Billions and ensuring that poor and marginal farmers do not get wiped out from the market.

Direct and Indirect Farm Subsidies