Issues of Direct and Indirect Subsidy for farm sector and other social sectors. 


Issues of Direct and Indirect Subsidy for farm sector and other social sectors. 

  • Subsidy is one of the powerful fiscal instruments, besides taxes and others, by which the objective of growth and social justice may be achieved.


  • Subsidies alter relative prices and budget constraints and thereby affect decisions concerning production, consumption and allocation of resources. Like many other countries, subsidies in Indian economy are pervasive. These are explicit or hidden and include the areas such as education, health, environment and variety of economic activities including agriculture and transport. Nearly 66 per cent of the people in India are still dependent on agriculture. The subsidies to agricultural sector provided by the government have recorded phenomenal rise during the past two decades.


  • The agricultural subsidies act as an incentive to promote agricultural development. In order to attain the goal of self-sufficiency in food, government adopts short term policies such as support prices of products and input subsidy to stimulate the products to increase the food production. It is expected that subsidies contribute to better cropping pattern, employment and income of the beneficiaries. But in most development programmes, subsidies are one among the many developmental inputs being provided. Thus the observable changes in cropping pattern, employment level and overall incomes are because of the joint effect of all the efforts going on. Therefore, these changes cannot be attributed solely to subsidies.


  • The subsidies may be direct or indirect, cash or kind, general or particular, budgetary or non budgetary, etc. But their impact is practically visible on both the production and distribution. The economic rationale of subsidies lies in incentivising the producers to invest in productive activities and increase production leading to high growth in national income and obtaining desirable structure of production.


Subsidies in Indian agriculture are of four types :


 Explicit Input Subsidies


  • Explicit input subsidies are payments made to the farmers to meet a part of the cost of an input. These are in the nature of explicit payments made to the farmer. For example, subsidy on improved or high yielding variety seeds, plant protection chemicals and equipments, improved agricultural implements and supply of minikits containing seeds, fertilizers and plant protection chemicals for certain crops are the explicit subsidies.

Implicit Input Subsidies


  • While there is transparency in explicit input subsidies, implicit input subsidies are hidden in nature. The latter arise on account of the mechanics of pricing of inputs. If inputs whose prices are administratively determined are priced low as compared to their economic cost, it becomes a case of implicit subsidization. As far as the farmer is concerned, he does not receive any direct payment but somebody in the economy accounts for the difference.


Output Subsidies Subsidization of agricultural sector through output pricing means that by a restrictive trade policy, the product prices in the domestic market are maintained at levels higher than those that would have prevailed in the absence of restrictions on trade. On the other hand, if the trade policies have resulted in keeping the domestic prices lower than the corresponding border reference price, the policies have taxed the agricultural sector. The border reference price is the free on board prices in the case of exportables and cost, insurance and freight price in the case of importables.


Food Subsidies This apart, there is an important subsidy linked to the agricultural sector and that is the food subsidy. The twin policy of providing market support to the foodgrains producers and supplying atleast a part of the requirement to consumers at reasonable prices, along with the policy of maintaining a buffer- stock of required quantity for national food security, involved cost in the form of meeting the differences between the economic cost and issue prices of foodgrains.


There are several types of Federal Farm Subsidies:

  1. Direct payments. ‘‘Direct’’ payments are cash subsidies for producers of selected crops like wheat, corn, sorghum, barley, oats, cotton, rice, soybeans, minor oilseeds, and peanuts. Direct payments are based on a historical measure of a farm’s acreage used for production, but some payments go to owners of land that is no longer even used for farming.


  1. Marketing loans. The marketing loan program is a price support program that began in the New Deal era. The program encourages overproduction by setting a price floor for crops and by reducing the price variability that would otherwise face producers in the free market. The marketing loan program covers the same crops as the direct subsidy program.
  2. Insurance. When viewed internationally, the Risk Management Agency runs the USDA’s farm insurance programs, which are available to farmers to protect against adverse weather, pests, and low market prices.


  1. Disaster aid. In federal system, the government operates various crop insurance and disaster assistance programs for farmers. In addition, Congress frequently declare ‘‘disasters’’ whenever the slightest adverse event occurs, and often distributes special payments to farmers regardless of whether they sustained substantial damage.


  1. Export subsidies. The USDA operates a range of programs to aid farmers and food companies with their foreign sales.


  1. Agricultural research and statistics. Most American industries fund their own research and development programs.



  • The agricultural sector in Madhya Pradesh enjoys both input and output subsidies. This chapter provides an overview of agricultural input subsidies in the state, based on secondary data. It is presented in four sections. The first section gives the kinds of subsidies admissible in the year 2000-2001 under different agricultural programmes of State Agricultural Department. The second section gives an account of direct subsidies made available by the Departments of Agriculture, Horticulture, Animal Husbandry and Fisheries. The third section gives details of estimation of the indirect subsidies viz. fertilisers, power and irrigation and in the fourth section the total agricultural subsidies both direct and indirect are analysed.


  • Subsidies do not reach the marginalized farmers


The marginalized farmers, the main target audience for the government to come up with subsidies in the first place are found wanting of the same. Effectively, the more well off farmers end up taking more than their fair share.


  • The fiscal burden on the government


The government fails to recover its costs because of taxation issues and is thus led to borrow from other sources. Ineffective taxation policies end up taking their toll on the government’s developmental plans.


  • The APMC Act


The APMC Act was set up by the government, as a means to improve the efficacy of the process of the farmers getting their rightful price due to them, through the establishment of middlemen acting as links to the chain. Sadly though, their main prerogative was rendered ineffective, due to their own middlemen.


The APMC act established mandis, where farmers auction their produce. The presence of middlemen, effectively multiplied prices at each level which thus led to higher prices and lower profits for the farmers.


Dealing with Harmful Subsidies


Excess subsidisation is not just an unwarranted fiscal cost. It can do significant damage. For example, oversubsidisation of fertilisers, leads to excessive use of fertilisers, pesticides and other agricultural inputs that have environmentally detrimental effects leading to erosion, compaction, and denitrification of top soil. Similarly, excess subsidisation of water causes drying up of rivers, declining water tables and soil erosion. Excess subsidisation of diesel compounds environmental pollution.


  • Solution Strategy


A proposed solution strategy to be effective would need to work on three basic levels.


  1. Customer Base Identification and Selective Targeting


  1. Effective channelization of subsidies



  1. Logistics Support.



  1. Customer Base Identification


  • Segmenting farmers into three broad categories based on their economic status, to ensure that the subsidies reach the ones most in need. A proposed model that takes in certain parameters, assigning them different weights through Principal Component Analysis (PCA) and comparing it through a seismic inspired model.


  • Logistics From a logistical standpoint the system needs to develop into a more transparent setup. This can be ensured by integrating the UID (Aadhar) system into the fold. This integration would ensure that leaks are prevented and a more transparent and effective system of monetary transfer is established. Cashless and quick transfer of funds could thus become possible, helping weed out the need for middlemen in the system as a whole.


  • This proposed model may not be fully effective and has its fallacies, this may not be the best way of coming out with this issue. But, the issue of ineffective agricultural subsidization is one of national importance. This is but a endeavor to think about the same and to come up with something that could help enliven the lives of our farmers.


 Current strategy of Government for social sector subsidies


  • In its three-year action plan for the economy the government think-tank mooted a reduction in food subsidies as a proportion of GDP by 2019-20 through better targeting and rationalisation measures.


  • Within revenue expenditures, subsidies have tended to crowd out the socially more productive expenditures such as those on education and health.


  • While in absolute terms, the allocation towards food subsidy, as per the Aayog, will increase marginally to ₹1.57 lakh crore from ₹1.24 lakh crore, as a proportion to GDP, the expenditure will come down to 0.73% from 0.90% in 2015-16.


  • The government’s allocations are based on reduction in food subsidy as a proportion to GDP from 0.90% in 2015-16 to 0.73% in 2019-20.


  • The efficiency of social expenditure must be improved to deliver better outcomes. This may be done for example through better targeting and the use of direct benefit transfers. Open ended schemes that can absorb rising expenditures and lack clearly identified beneficiaries must be avoided.


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