Farm Subsidies in India, Types, Importance, Issues

Farm subsidies have become one of the most important pillars of India’s agricultural policy. In a country where agriculture supports nearly half of the population, farm subsidies act as a safety net for millions of small and marginal farmers. At present, farm subsidies account for roughly 2% of India’s GDP and contribute about 21% of farmers’ income, showing how deeply the system depends on farm subsidies for income stability and production support.

Over time, India has developed a wide network of farm subsidies to reduce input costs, provide income support, and protect farmers from price and climate risks. These farm subsidies can broadly be classified into direct subsidies and indirect subsidies.

Types of Farm Subsidies in India

Farm Subsidies in India are classified into direct and indirect subsidies. Direct subsidies include benefits like income support schemes and cash transfers to farmers, while indirect subsidies cover support through reduced input costs such as fertilizers, electricity, irrigation, credit, and Minimum Support Price (MSP) mechanisms.

Direct Farm Subsidies

Direct farm subsidies are those where the benefit reaches farmers in the form of cash support, price assurance, insurance, or investment incentives.

• PM-KISAN provides ₹6,000 per year to land-owning farmers as direct income support. This is one of the largest direct farm subsidies in the world in terms of coverage.
• Minimum Support Price (MSP) ensures remunerative prices for 22 crops. Through procurement, MSP functions as a major form of price-based farm subsidies.
• Pradhan Mantri Kisan Urja Suraksha evam Utthaan Mahabhiyaan (PM-KUSUM) offers farm subsidies for solar pump installation, helping farmers reduce electricity and diesel expenses.
• Pradhan Mantri Krishi Sinchayee Yojana (PMKSY) provides farm subsidies for drip and sprinkler systems to improve water efficiency.
• Pradhan Mantri Fasal Bima Yojana (PMFBY) offers heavily subsidised crop insurance to protect farmers from climate-related losses.
• Kisan Credit Card (KCC) provides interest subvention, making farm loans cheaper and acting as a credit-linked farm subsidy.
• Agriculture Infrastructure Fund offers subsidised financing for cold chains, warehouses, and post-harvest facilities.
• Farm loan waivers are periodic farm subsidies aimed at relieving farmers from severe indebtedness.

Indirect Farm Subsidies

Indirect farm subsidies lower the cost of agricultural inputs and services.

• Fertiliser subsidies, including urea subsidy and Nutrient-Based Subsidy for P&K fertilisers.
• Electricity subsidies through free or low-cost power for irrigation.
• Water subsidies via low irrigation charges.
• Seed subsidies to promote high-quality seed production.
• Export subsidies such as transport assistance for certain crops.
  

These indirect farm subsidies play a crucial role in lowering the cost of cultivation, especially for small farmers.

Why Farm Subsidies Are Necessary?

• Support for Small and Marginal Farmers: More than 85% of farmers in India operate small or marginal holdings. Farm subsidies help them survive in a sector marked by price volatility and uncertain rainfall.
• Reduction in Input Costs: Farm subsidies on fertilisers, seeds, electricity, and irrigation significantly reduce the cost of cultivation, making farming viable for low-income households.
• Food Security and Productivity: Farm subsidies such as MSP, irrigation support, and crop insurance encourage production and help maintain stable food supplies.
• Prevention of Distress Sales: Through MSP and procurement, farm subsidies protect farmers from sudden price crashes during bumper harvests.
• Encouragement of Long-Term Investment: Investment-linked farm subsidies like the Agriculture Infrastructure Fund and PM-KUSUM promote capital formation in agriculture.
• Climate Risk Protection: Insurance-based farm subsidies under PMFBY help farmers cope with losses caused by floods, droughts, or pests.

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Issues with the Current Farm Subsidy System

• High Fiscal Burden: Farm subsidies together account for around 2% of GDP, placing pressure on public finances and limiting spending on long-term agricultural investments.
• Exclusionary Nature: Despite large spending on farm subsidies, benefits are uneven, Only about 6% of farmers benefit from MSP procurement, according to the Shanta Kumar Committee, PM-KISAN excludes tenant farmers and sharecroppers, Loan waiver-based farm subsidies often miss farmers who rely on informal credit.
• Market Distortions: Certain farm subsidies distort incentives.
  • Loan waivers weaken credit discipline and increase NPAs.
  • MSP-led procurement encourages overproduction of certain crops.
  • Electricity-based farm subsidies create financial stress for DISCOMs.
• Environmental Damage: Some farm subsidies unintentionally promote unsustainable practices.
  • Urea-heavy fertiliser subsidies lead to nutrient imbalance.
  • Free electricity encourages excessive groundwater extraction.
  • Water-intensive crops are grown in unsuitable regions due to distorted incentives.
• Neglect of Structural Issues: Large farm subsidies often address short-term income concerns but fail to solve deeper structural problems such as poor irrigation, weak markets, and low agricultural research.

Need for Rationalisation of Farm Subsidies

Currently, government spending on farm subsidies is higher than spending on gross capital formation in agriculture. This indicates that the system focuses more on consumption support rather than productivity enhancement. A strategic shift is needed:

• Gradual rationalisation of inefficient farm subsidies.
• Reallocation of savings toward irrigation, storage, mechanisation, and research.
• Greater focus on income support and investment-based farm subsidies.

WTO Concerns Over Farm Subsidies

India’s farm subsidies have also faced scrutiny at the World Trade Organization. Key Issues include: 

• MSP and public stockholding programmes are considered trade-distorting if they exceed 10% of production value based on outdated price benchmarks.
• Sugarcane pricing and export-related farm subsidies were challenged for exceeding limits.
• Fisheries farm subsidies have been linked to overcapacity and overfishing.
• India has also faced criticism for delays in notifying subsidy data.

Some of these concerns are temporarily addressed through the Peace Clause, which protects food security programmes from legal challenges. India argues that farm subsidies are essential for feeding a large population and supporting vulnerable farmers, and therefore seeks a permanent solution at the WTO.

Way Forward 

• Shift from input-heavy farm subsidies to direct income support.
• Extend benefits to tenant farmers and sharecroppers.
• Promote water-efficient and nutrient-balanced practices.
• Increase investment in irrigation, R&D, and rural infrastructure.
• Strengthen digital land records for better targeting of farm subsidies.
• Continue negotiations at the WTO for policy flexibility.

Farm subsidies remain essential for sustaining farmer incomes and ensuring national food security. However, the current structure of farm subsidies is fiscally expensive, uneven in coverage, and sometimes environmentally harmful. A gradual transition toward smarter, targeted, and investment-oriented farm subsidies can create a more productive, equitable, and sustainable agricultural sector in the long run.