Issue Related Direct and Indirect Farm Subsidies & Minimum Support Price

March 6, 2022March 6, 2022 Simplified

GS III- Issue Related Direct and Indirect Farm Subsidies & Minimum Support Price

Agricultural subsidies are the positive intervention taken by the government for the farmers in the agrarian sector to help them produce more and get the desired remuneration. It helps in managing the supply of agricultural commodities, influencing the cost and supply.

It helps in promoting agricultural development, balances inter-regional disparities and stimulates agricultural production. It is also expected that subsidization improves mechanization of agriculture, promotes better cropping pattern, employment opportunities etc.

Need for farm subsidies:

Article 48 of the Indian Constitution, the responsibility of the state to organize agriculture on modern lines.
As per FAO, 70% of Indian rural households primarily dependent on agriculture for their livelihood.
Subsidies are one of the tools for income distribution and to reduce inequalities (Oxfam report 2020- top 10% holds 72% of wealth).
Poor income realization to farmers(farmers income is less than 1/3rd income of non-farmers)
Farm subsidies act as a complementary income to farmers, which can be invested back in agriculture.
Farm subsidies ➡ Access to quality inputs such as seeds, fertilizers ➡ Increase in productivity ➡ Better income to farmers.
Farm subsidies in a way motivate farmers to continue farming as an occupation.
Insulate farmers from the issues posed by the covid-19 pandemic.

Types of Agricultural Subsidies

Explicit Input Subsidies

These are specific cost subsidies made to farmers to help them manage the input costs needed before production. These are made through cash as in KALIA scheme of Odisha or Ryuthu Bandhu scheme of Telangana. These are generally made to small and marginal farmers who cannot purchase high-quality inputs by themselves. The objective is to optimize production using new technologies.

Implicit Input Subsidies

These are hidden subsidies, not directly in terms of payments. The input prices of the products are administered in this case for example: through low electricity charges etc.

Output subsidies

It is the restrictive trade policies through which prices at the domestic market are kept at a higher rate than those that would have prevailed in case of absence of such restrictions.

Similarly, On the basis of mode of payment, agricultural subsidies can also be Direct Subsidies and Indirect Subsidies.

Direct Subsidies

Direct farm subsidies are those subsidies that are directly provided to farmers and are generally paid in the form of a direct cash subsidy. That is in direct subsidies the beneficiary purchases the product at the same price and the beneficiary is separately compensated for the purchase.
Examples of direct farm subsidies: PM Kisan Scheme, PAHAL in LPG, Farm Loan Waivers.

Advantages of Direct Farm Subsidies:

Direct Subsidies help in increasing the purchasing capacity of farmers and to raise the standard of living of the people.
Direct cash transfers government empowering citizens and gives choice to beneficiaries to purchase as per needs.
It also helps to prevent the misuse of public funds as money is reached beneficiaries directly.
Direct subsidies also curb the inefficient use of resources. Ex: As farmers will purchase fertilizer at full rate will purchase what needed.
The cash farmers receive can be used as capital in agriculture.
Reduces government burden freeing transportation and storage costs.

Issues of Direct Farm Subsidies:

Lack of Financial Inclusion in rural areas, poor accessibility of ATM and banking service.
The chance that farmers can use the money for non-farm unproductive needs.
More money in the hands of the public may lead to inflation.
May have an impact on the food security of the country.
Main issues like market reforms and innovation in agriculture remained unaddressed.
Issues with the identification of beneficiaries.
Indirect Subsidies

These are indirect as they do not involve any direct transfers or payments. They can take the form of price reduction, welfare mechanisms, cheaper credits, insurance facilities, farm loan waivers etc. These subsidies mostly reach the farmers along with the use of inputs and hence are highly correlated with the amount of their use.

Merits:

These help in the development of priority areas which are not developed.
The purpose was to achieve food security in the 1960s when the country was facing an acute food shortage. The green revolution provided for good quality seeds and fertilizers to the farmers.
These are meant to provide training support and technical assistance to farmers to improve productivity.

Demerits:

These have led to cereal centric agriculture with distorted cropping patterns. Natural resources like groundwater are declining at a heavy rate. They do not see any incentive in saving the resources.
Regional disparities and biased toward large farm holders is another disadvantage. They are generally not successful in reaching the target beneficiaries because of loopholes like corruption, identification, lobbying by rich farmers etc.
It is generally misused to gain political mileage during elections, for example, farm loan waiver etc.
It does not lead to infrastructure creations.

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.

WTO Subsidies catregorisation:

Export subsidies Ex. export credit is given to farmers by countries like China
Subsidies contingent upon the use of domestic over imported goods Ex. Countries like the USA where in order to ensure guaranteed return procure from farmers which indirectly benefits consumers with lower prices.
Industrial promotion subsidies Ex: New UK farming bill guarantees subsidies for 2020 to promote agri-industry in the event of Brexit.
Structural adjustment subsidies Ex: Schemes like PM Krishi Sanchai Yojana to promote irrigation in the agriculture
Regional development subsidies.
Research and development subsidies.

WTO Agreement On Agriculture(AOA): AOA is aimed to remove trade barriers and to promote transparent market access and integration of global markets. Three main pillars of the agreement.

Domestic Support: Calls for a reduction in domestic subsidies that distort free trade and fair price. As per this Aggregate Measurement of Support(AMS) is to be reduced by 20% over a period of 6yrs for developed countries and 13% over a period of 10yrs for developing countries.
Subsidies are put in Green, Amber, and Blue box subsidies.
- Green box subsidies are those which do not distort trade and shouldn’t involve price support. These are allowed without limits. Ex: PM Kisan for the farmers by the government.
- Amber box subsidies are all government measures that are considered to distort trade and production. Subsidies that are directly related to production quantities. Ex: MSP.
- Blue box subsidies are “amber box subsidies with conditions”, designed to reduce distortion.
Market access: It ensures that tariffs are fixed by individual countries to allow free trade and also to remove non-tariff barriers and converting them into tariff duties.
Export Subsidy: To phase out export subsidies by all the countries as agreed under the Nairobi package of WTO

What is MSP?

The Minimum Support Price (MSP) is the price fixed by government of the crops produced by farmers. It is the price which government pays to procure the crops from farmers. The MSP is a guarantee price that safeguards farmers with a minimum profit for their harvest, in case the open market keeps lesser price for their crops.

Why Support Price?

On the recommendation of the CACP-Commission for Agricultural Costs and Prices, the central government announces the minimum support price before the sowing season for some crops. This ensures the farmers that the government will give them a fixed price even if the price of their crops fall in the market. Through this, the government tries to reduce their loss.

However, not all governments give benefits to farmers. The worst is presently in Bihar and Madhya Pradesh, where farmers are not getting MSP. Anyway, the Shanta Kumar committee had said in its report that only 6 percent of farmers get the benefit of MSP. That is, 94 percent of farmers are dependent on the market.

Ø Fixation of MSP

The MSP is fixed on the recommendations of the Commission for Agricultural Costs and Prices (CACP).
- Factors taken into consideration for fixing MSP include:
  - Demand and supply;
  - Cost of production (A2 + FL method)
  - Price trends in the market, both domestic and international;
  - Inter-crop price parity;
  - Terms of trade between agriculture and non-agriculture;
  - A minimum of 50% as the margin over cost of production; and
  - Likely implications of MSP on consumers of that product.

Challenges and Problems Associated with MSP

Distorted Production – Recent trends by NSSO indicates shift in pattern of food consumption from cereals to protein rich foods, but no such remarkable shift is seen in sowing or production patterns. For e.g. India is largest producer and consumer of pulses in the world, but still 25 % of the pulses consumed are imported.
Huge Stocks– This resulted in ‘Open ended procurement’ which means government can’t decide quantity it wants to buy. How much ever grains are offered by farmers to gov. has to purchase. So now government has huge stocks which are almost double the requirements for Buffer stock, PDS and Other government schemes such as Midday Meal Scheme.
Out of control Inflation– As we have seen initially MSP and procurement prices were kept lower in relation to Market Prices. So lower the market prices, even lower were MSP and procurement prices. Situation now is that Market prices are dictated by MSP which remains most of the time higher. This brings market prices at least on par with MSP. Facts by surveys and analysts suggests an obvious directly proportional link between hike in MSPs and food Inflation.
Middlemen: The other major problem with the MSP-based procurement system is the working dependence on middlemen, commission agents and red-tapism of the APMC (Agriculture Produce Marketing Committee) officials. An average farmer finds it difficult to get access to these mandis, and depends on the market to sell farm produce.
Backwardness in Agriculture – Any industry grows when it adapts to a competitive environment. If farmers get market signals from the market about upcoming trends of demands of consumers, total supply in economy, new technologies, export opportunities or import vulnerabilities, they will find out more profitable crops, technologies and will keenly adapt. Present system creates glut in market of particular crops. It leads to intensive farming year after year, which degrades soil. Farmers rely on political pressure to remedy their problems, instead of adapting to market. This all keeps private investment away for the sector and thus contributes to backwardness in agriculture.
Environmental harm – It degrades the soil because of irrespective of the soil condition, some crops are preferred which have MSP over them which results in exploitation of group water resources, alkanity, decrease in the production of the crops in long run and much harm to environment.

Overall Issues related to Agricultural subsidies and their solution:

The heavy fiscal burden with only fertilizer subsidy going up to 70000 Crore in FY 2018-19. These can be resolved using better targeting and technological interventions like soil health card scheme and Krishi Vigyan Kendra scheme.
Subsidy in the form of free electricity has led to overuse of groundwater. The decline is to such an extent that more than 50% of districts in the country are under the dark zone. Water extracted shows contamination of arsenic and other heavy materials. Separate agricultural feeder network can be used which will supply electricity only for a few hours in a day. Precision irrigation or micro-irrigation facilities can be incentivized.
The recommended use of NPK fertilizer is in the ration 4:2:1, while the actual usage stands at 6.10:2.46:1 in 2017-18. This has harmful effects on soil fertility, biodiversity, leads to bioaccumulation and biomagnification. Promoting organic farming through Paramparagat Krishi Vikash Yojana, zero budget natural farming, innovations like neem coated urea can be used.
The subsidies many a time have great exclusion error and it missed out on the farmers who are at the utmost need of this. Technological interventions like Aadhar based identification, JAM trinity can help in solving this issue.
Price subsidies like MSP have effected Indian agriculture very badly. It has destroyed the cropping patterns and farmers are no longer producing the traditional crops. The agriculture has been cereal centric and nutrient-based crops are not grown. Even the remuneration is poor for those. Focus can be shifted now to value addition, promotion of horticulture and district-level interventions. It should be seen that farmers realize their proper amounts of the produce. eNAM can be used for marketing purposes.

Other Issues of Farm Subsidies

As per Economic Survey-2018, rich farmers are benefitted over small farmers from the farm subsidies.
Out of Rs. 1.70 lakh crore in budget 2018-19 as food subsidy only about Rs 3000-4000 crore was the investment in agriculture shows the wasteful expenditure rather than supporting agriculture.
Subsidies lead to a huge financial deficit and burden on the financial exchequer.
A culture of subsidies may promote inefficiency and dependence on the government and also reduce the incentive to improve.
Policies of subsidies may also promote other countries to follow the same pursuit which may then lead to trade wars and protectionist policies.

Issues at the international level due to subsidies

Developing countries like India and China are not in an affordable position to breach the de minimus levels of AMS(Aggregate Measures of Support) where developed countries like the USA provides subsidies >50% in some products like cotton, sugar.
Subsidies in developed countries also act as barrier entries to the goods of developing countries.
Subsidies granted to developed countries are way higher than those provided in developing countries like India.
Loopholes in Agreement of Agriculture signed under WTO as it doesn’t talk about equity. For developing countries, spending on price support measures and input subsidies taken together cannot exceed 10% of the total value of agricultural production and for developed countries, it is only 5% of their value of agricultural production. This provision is misused by the USA to provide 200% of subsidy to wool compared to other products.

Measures

Kelker committee recommended the phased elimination of subsidies and convert them to capital investments.
Rationalizing subsidies by stopping those subsidies which are not giving the desired results.
Exports need for long term policies on export trade to ensure continuity and keep farmers aligned to exports
Actively promoting financial inclusion in rural areas.
Constructing cold chain facilities, warehouses near the farm gate.
Holistically developing the agri-sector by strengthening backwards and forward linkages.
Subsidies should come with a sunset clause.
Promoting initiatives like contract farming and cooperative farming to make agriculture remunerative.
The farm bills a right move to empower the farmers and reducing the monopoly of APMC markets should be implemented strictly.
The government should equally focus on both food and nutritional security.
Building a market intelligence system to put price and demand forecasts which help farmers in better price realization and also helps farmers in deciding the crop.
International measures:
- Developed and developing countries have agreed to phase out export subsidies under the Nairobi package of WTO.
- India and China jointly submitted a proposal to WTO to reduce high agricultural subsidies to rich countries.
- Rather than the limit on entire agricultural value production the subsidies should be limit based on an individual product like cotton, wool, etc.
- The base year to calculate the de-minimus level should be changed as per the request of developing countries.

Conclusion:

The agriculture sector which provides >40% of employment, contributes only 16-17% of GDP which shows the problems and issues the farmers are facing. Hence farm subsidies with an intention to improve the agriculture sector help to achieve the government’s aim of doubling the farmer’s income by 2022 and also helps India to achieve double-digit growth by ensuring food security.

Source: Vikaspedia

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