Direct And Indirect Farm Subsidies And MSP

What is a Farm Subsidy?

An agricultural or farm subsidy is a financial aid provided by the government to the farmers, agribusiness owners, and agricultural raw material suppliers. Farm subsidies help Indian farmers to get the best rates for their crops and also simultaneously increase agricultural productivity. It effectively helps in managing the demand and supply of agricultural products. A survey shows that around 21% income of the farmers per hectare is facilitated by the government subsidy. The farm subsidies are provided to the farmers in two ways that can either be direct or indirect. Direct subsidy usually implies any monetary aid provided by the government to the farmers, while the indirect subsidy refers to the non-cash benefit provided by the government for example concession in fertilizer rates, relaxation in interest rates in crop loans, etc.

What is the need for Farm Subsidies?

India is an agricultural country and more than 70% of its population relies upon the agricultural sector. Also, this sector has a significant contribution to the Indian economy. Thus the growth of the agricultural sector is quite important for the Indian citizens as well as the Indian Economy. It is one main reason why Govt. of India (GOI) is trying to uplift the agricultural sector in India via direct and indirect subsidies. Farm subsidies do not provide a complimentary income to the farmers but also morally uplift them to increase agricultural production. Also, the indirect subsidies in the agricultural sectors create new employment opportunities. Subsidies for crops and fertilizer help farmers increase their crop quality and productivity.

Types of Agricultural Subsidies:

• Direct Subsidy

A direct subsidy is a kind of subsidy that is being provided to the farmer by the government in form of cash while the indirect subsidy is being provided via discounts on other agricultural purchases like crops and fertilizers. The most common example of direct subsidy is the Farm Loan Waiver Scheme, the PM Kisan Scheme, etc.

• Explicit Input Subsidy

This kind of subsidy is being paid to the farmer for purchasing agricultural products like crops and fertilizers. This kind of subsidy is being paid to small and marginal scale farmers who are not able to buy crops and fertilizers on their own.

• Implicit Input Subsidy

This kind of subsidy not directly helps farmers via money but it helps them by cutting their extra costs. Like providing subsidies on electricity bills, and relaxation in bank loan interests.

• Output subsidy

This kind of subsidy, allows the government’s restrictive trade policies to provide a good rate to the farmers for their crops and prevent traders from charging arbitrary rates. 

Subsidies Provided by the GOI to the Indian Farmers:

The government of India offers various subsidies to the Indian farmers for irrigation, fertilizer, equipment, seeds, and export. The total subsidy offered to the Indian farmers accounts for 2% of the total GDP of India. Described below are some of the subsidies offered to the Indian farmers by the GOI.

• Fertilizer Subsidy: Under the fertilizer subsidy government let traders buy fertilizers from the manufacturers and sell them at a discounted price to the farmers. The difference amount is paid by the government to the trader. Through the fertilizer subsidy government ensures the supply of good quality fertilizers to the farmers at affordable rates. While also takes care that the manufacturer and the trader also get a reasonable return. For the Financial year, 2022-23 GOI finance ministry of India allocated a fund of Rs. 63,222.32 crores for the urea subsidy.
• Seed Subsidy: The GOI provides a subsidy to the farmers in the purchase of seeds and this subsidy varies with the crops for the cottonseed government provides a subsidy of Rs 15 per Kg or 25% of the total order value. For certified seed distribution the available subsidy is Rs. 20/Kg. 
• Power Subsidy: Indian farmers are provided with a subsidy on the electricity and this subsidy varies in states like Gujarat where it costs Rs 8/unit of electricity consumed for residencies, it costs only 60 paise per unit for the farmers. While in the states like Andhra Pradesh, Karnataka, Punjab, and Telangana electricity is free for farmers. 
• Credit Subsidy: Government offers credit subsidies to the farmers in many ways like waving off the interest of loans, clearing bad debts, and offering low-interest loans via regional rural banks (RRBs).
• Irrigation subsidy: Irrigation requires a huge sum of money as farmers need a spread a network of drips on their agricultural land. The cost of laying drip pipe per acre costs approx. Rs 45,000-60,000. Thus, the GOI provides discounts to the farmers to buy irrigation equipment like pumps and drip pipes.
• Water subsidy: Under the water subsidy the government aims to ensure the delivery of clean pumped water to every farmer. Thus to achieve this aim GOI is constructing new dams and canals for easy water management. 

Merits and Demerits of Direct Farm Subsidies:

Merits:

• Farm subsidies increase the purchasing power of farmers and thus uplift their living standards.
• With the direct digital transfer, no amount is being taken by the middle-men.
• The farm subsidies enable farmers to save money to buy their next crop instead of taking a loan.
• The farm subsidies assure a surplus amount of food supply in the nation and reduce the chances of food shortage in the country.

Demerits:

• Due to direct transfers in bank accounts and the unavailability of ATMs in rural areas, it becomes difficult for farmers to withdraw money.
• Many times corruption is been observed with fake identification, certain people also claim the subsidy who actually don’t require it.
• It usually has a bad political impact as it helps politicians create a good impression on the farmers to gain votes.
• It doesn’t lead to any infrastructural development.

What is the Minimum Support Price (MSP)?

The MSP or Minimum Support Price is the price that is being decided by the government on which the government purchases the crops from farmers. The MSP was introduced in India in 1966-97, to provide farmers with a price guarantee and safeguard their profit.

In the union budget 2022-23 GOI has announced a MSP (Minimum Support Price) of Rs. 2.37 Lac Crores for the farmers cultivating wheat and paddy.

What is the need for MSP?

The Minimum Support Price is declared by the GOI before every sowing season based on the recommendation of the Commission for Agricultural Costs and Price (CACP). The minimum support price is quite important for farmers as it protects their profit. For example, if the cost of the crops is being decided less in the open market then the farmer holds an option to sell his crops to the government on MSP. The MSP of every crop varies with its type and also MSP doesn’t apply to all crops. 

The MSP mutually benefits both the government and farmers as the government gets an ample amount of grains. To ensure the food security in the nation as well as to export the extra ones, so that it helps in boosting the economy as well. 

Merits and Demerits of Minimum Support Price:

Merits:

• MSP helps the government in controlling the volatility in crop prices and keeping the prices as low as possible. 
• MSP acts as financial security for the farmers so that they can pay back the loans taken for the crops and get back the money spent on the cultivation of crops.
• MSP helps government buy the surplus amounts of good grains from farmers and thus ensures that there should not be any food shortage in the nation.
• MSP also helps financial institutions and banks and MSP allows farmers to pay back their loans. This helps in preventing waiving of loans such that creating no debts on the banks and ensuring the smooth functioning of the economy.

Demerits:

• MSP doesn’t seem to be much beneficial for the small-scale farmers as they sell their crops in the open market and usually borrow money from the private lenders and thus don’t get benefited from government schemes.
• Often it is observed that farmers get a better value for their crops by selling them directly to the FPI (Food Processing Industries) and through govt. announces MSP for 23 crops, it procures only one-third of those.
• The MSP eliminates the competition in the agricultural sector and limits the opportunities for the farmers. Besides these, it puts pressure on govt. finances.

The agricultural sector is the most flourishing sector of India and generates more than 40% of the total employment in the country. Thus this sector holds significant economic importance and thus GOI should adopt strong measures to ensure that these farm subsidies help each and every farmer of this nation.