Reforming Agricultural Subsidies

• 03 Jun 2025

For Prelims: Agricultural Subsidies, PM-KISAN, Pradhan Mantri Krishi Sinchayee Yojana, Nutrient-Based Subsidy (NBS), Pradhan Mantri Fasal Bima Yojna, MSP,  Food Corporation of India, Agriculture Marketing Infrastructure Fund (AMIF), Pradhan Mantri Garib Kalyan Anna Yojana, Per Drop More Crop (PDMC), Shanta Kumar Committee (2015), World Trade Organization (WTO), Zero Budget Natural Farming (ZBNF).     

For Mains: Need and challenges related to agricultural subsidies, Types of agricultural subsidies, Ways to reform agricultural subsidies. 

Source: PIB 

Why in News? 

The Vice President stated that direct transfer of agricultural subsidies could significantly boost farmers' income, estimating each could receive at least Rs 35,000 annually if all aid reaches them directly (instead of indirect subsidies). 

What are the Various Types of Agricultural Subsidies in India ? 

• Direct Benefit Transfer (DBT): It provides direct income support in form of cash transfers to farmers. E.g., PM KISAN, Rythu Bandhu (Telangana), KALIA (Odisha). 
• Input Subsidies: 
  • Fertilizer Subsidy: It makes fertilizers like urea affordable by paying the difference between production cost and selling price. E.g., Di-Ammonium Phosphate (DAP) fertiliser, Nutrient-Based Subsidy (NBS) scheme for non-urea fertilizers. 
  • Seed Subsidy: It offers high-yielding, disease-resistant seeds at subsidized rates, e.g., Seed Village Program, Seed Bank, Mukhyamantri Beej Swavalamban Yojana in Rajasthan. 
  • Irrigation Subsidy: The irrigation subsidy, under PM Krishi Sinchai Yojana (PMKSY), offers up to 55% support for drip and sprinkler systems to promote water conservation. 
  • Power Subsidy: It provides free or subsidized electricity for agricultural pumps, with states like Punjab offering free electricity to tubewell irrigation, though this has raised concerns about groundwater depletion. 
• Credit & Insurance Subsidies: 
  • Pradhan Mantri Fasal Bima Yojna (PMFBY): PMFBY protects farmers from crop failure by requiring them to pay a 1.5-5% premium, with the government covering the remaining cost. 
  • Interest Subvention Scheme: Under the Modified Interest Subvention Scheme, farmers get short-term loans up to Rs 3 lakh via Kisan Credit Card at a 7% subsidised interest rate, with a 1.5% subvention to eligible lending institutions. 
• Output Subsidies (Price Support): 
  • Minimum Support Price (MSP): MSP guarantees minimum prices for 22 crops like wheat, rice, pulses, and oilseeds, and fair and remunerative price (FRP) for sugarcane, procured by agencies such as Food Corporation of India (FCI) and NAFED. 
    • Also, state level schemes like Bhavantar Bhugtan Yojana (Madhya Pradesh) compensate farmers if market prices fall below MSP. 
• Infrastructure & Post-Harvest Subsidies: 
  • Warehouse & Cold Storage Subsidy: The National Horticulture Board (NHB) offers a capital investment subsidy scheme providing a credit-linked back-ended subsidy of 35% in general areas and 50% in North East, hilly, and scheduled areas for building or modernizing cold storage facilities with capacities between 5,000 and 10,000 million tonnes.  

Agriculture Subsidies and WTO

What are the Consequences of Agricultural Subsidies in India? 

• Fiscal Burden on Government: The Union Budget 2025–26 has allocated Rs 3.71 lakh crore for food and fertiliser subsidies and as of January 2025, over Rs 3.46 lakh crore has been disbursed to more than 11 crore PM-KISAN beneficiary farmers. 
  • It strains public finances and worsen the debt crisis for fiscally stressed states like Punjab. 
• Soil Degradation: India’s consumption ratio of nitrogen, phosphorus and potassium (NPK) is 6.7:2.4:1 (ideal of 4:2:1), leading to soil toxicity & declining yields. 
  • Punjab & Haryana have the highest urea consumption, causing groundwater pollution & cancer clusters. 
• Groundwater Depletion: Free electricity encourages excessive tube-well use, depleting groundwater table. 
  • Agriculture consumes 87% of India’s groundwater, with extraction exceeding 100% in states like Punjab, Rajasthan, Haryana, and Delhi in 2024. 
• Market Distortions: The Shanta Kumar Committee (2015) reported that only 6% of farmers—mainly in Punjab, Haryana, and Andhra Pradesh—actually benefit from MSP. This skewed procurement has led to overproduction of rice and wheat while pulses and oilseeds remain underproduced.  
  • In 2024, the FCI had to dispose of 18 million tonnes of rotting grains, causing a waste of taxpayer money. 
• Hurt Export Competitiveness: World Trade Organization (WTO) rules limit India’s farm export subsidies, affecting trade.  
  • Developed countries, led by the US, accuse India of providing up to 93.9% subsidy to rice farmers in 2020–21, breaching the 10% limit set under WTO rules. 

What are the Advantages and Limitations of Replacing Agricultural Subsidies with Direct Benefit Transfers? 

Advantages	Limitations
Improved Targeting: Ensures subsidies reach only eligible farmers, reducing leakage and inefficiency.	Exclusion Risks: Small or marginal farmers without proper documentation may be left out.
Increased Transparency: Direct payments reduce intermediaries, lowering corruption and misallocation.	Digital Divide: Reliance on banking and digital infrastructure may disadvantage remote or unbanked farmers.
Promotes Farmer Autonomy: Farmers have freedom to decide how to use funds, encouraging diversified investment.	Misuse of Funds: Transfers may be spent on non-agricultural needs, diluting the intended impact on productivity.
Reduces Market Distortion: Avoids overuse or misuse of inputs like fertilizers and power by unlinking subsidies from physical inputs.	Price Volatility Exposure: Without input subsidies, farmers may face higher costs during price spikes, increasing vulnerability.
Administrative Efficiency: Lowers cost and complexity of managing large input subsidy programs.	Implementation Challenges: Requires robust beneficiary identification, grievance redressal, and monitoring systems.

How can India Reform its Agricultural Subsidies? 

• Targeted Direct Benefit Transfers (DBT) with Geo-Tagging: Subsidy allocation should balance input subsidies with precision-targeted DBT using geo-tagging and farmer identification technologies in project mode and scale in phased-wise manner. 
  • It will reduce leakage, aiding smallholders, promoting financial inclusion, and encouraging efficient resources and build upon Shanta Kumar Committee’s (2014) recommendation to shift from grain-based distribution to cash transfers. 
• Market-Responsive MSP Reform: Reform MSP into a dynamic, market-responsive system using real-time data on input costs, demand-supply, and regional prices. Ensure transparency by publishing the pricing method and involving farmers and experts to prevent issues like the 2020 farm protests. 
• Green Subsidy Transformation: To promote sustainable agriculture, restructure power and fertilizer subsidies by directly linking them to adoption of water-efficient technologies like drip and micro-irrigation systems under programs like the Per Drop More Crop (PDMC) initiative.    
  • Phase out subsidies for water-intensive crops and incentivize diversification with tailored support to boost agro-biodiversity, conserve groundwater, and match regional agro-climates. 
• Post-Harvest Infrastructure: Increase Agriculture Mechanization and Infrastructure Fund (AMIF) subsidies to curb post-harvest losses and incentivize agro-processing units near farms to boost value addition and farmer incomes. 
  • Localized infrastructure boosts farmer incomes by capturing higher market value, reducing reliance on distant markets, and strengthening agricultural supply chains. 
• WTO-Compliant Subsidy Reforms: Shift subsidies to non-trade-distorting areas like agricultural R&D, extension services, rural infrastructure, and capacity building, aligning with WTO rules, while advocating higher subsidy ceilings for developing countries to protect smallholders and boost exports. 
  • Additionally, adopting the Kelkar Committee’s (2012) suggestion to reduce subsidies on fuel, food, and fertilizers is essential to curb excessive public spending.

Conclusion 

India’s agricultural subsidies though beneficial need urgent reforms to balance farmer welfare with fiscal and environmental sustainability. Shifting to direct cash transfers, rationalizing MSP, promoting sustainable farming, and investing in post-harvest infrastructure can enhance efficiency while reducing distortions. WTO-compliant policies and crop diversification will ensure long-term food security, farmer prosperity, and ecological balance. 

Drishti Mains Question:

Q.Examine the role of agricultural subsidies in ensuring food security in India. Should subsidies be continued in their current form?

UPSC Civil Services Examination, Previous Year Questions (PYQs) 

Prelims

Q. With reference to chemical fertilizers in India, consider the following statements: (2020) 

1. At present, the retail price of chemical fertilizers is market-driven and not administered by the Government. 
2. Ammonia, which is an input of urea, is produced from natural gas. 
3. Sulphur, which is a raw material for phosphoric acid fertilizer, is a by-product of oil refineries. 

Which of the statements given above is/are correct? 

(a) 1 only 

(b) 2 and 3 only 

(c) 2 only 

(d) 1, 2 and 3 

Ans: (b)

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Mains

Q. How do subsidies affect the cropping pattern, crop diversity and the economy of farmers? What is the significance of crop insurance, minimum support price and food processing for small and marginal farmers? (2017)

Q. In what way could replacement of price subsidy with direct benefit Transfer (DBT) change the scenario of subsidies in India? Discuss. (2015)

Q. What are the different types of agriculture subsidies given to farmers at the national and at state levels? Critically, analyse the agricultural subsidy regime with reference to the distortions created by it. (2013)