#71: GS3 | Issues related to (in)direct farm subsidies & MSP

Free GS3 notes

This blog post is a guest contribution by my brother @Conquerias24 who’s a Post Graduate in Economics from Madras School of Economics. Do follow him @Conquerias24

• Govt financial assistance to farmers & related businesses

• Direct Farm Subsidies-
  1. Monetary help from govt to farmers
  2. Often in the form of direct cash subsidy Eg: PM KISAN

• Indirect Farm Subsidies
  1. Non-cash subsidies offered by govt

  2. Eg: Interest rate relaxation on Agri loans

Need for Farm Subsidies

• Boost Agri productivity

• Increase farmer’s income & revenue

• Enhance employment opportunities

• Improve crop quality & output by use of fertiliser & crop subsidies

• Acts as a safety net for farmers in face of uncertainties like droughts, floods etc.

• Acc to FAO, 70% of rural population is dependent on Agri for survival -> Subsidy is the primary tool to reduce poverty & economic disparity
  

• PM KISAN, PAHAL in LPG, Farm loan waivers

• Benefits

  1. Aid in boosting farmers disposable income & general standard

  2. Allows recipients to choose their purchases based on their requirements

  3. Prevents in misuse of public funds

  4. Reduces wasteful use of resources as they are purchased at full price

  5. Reduces govt expenditure by release of funds for storage & transportation

Issues of Direct Subsidies

1. Lack of financial inclusion makes direct cash transfer difficult

2. Farmers can misuse the funds for non-farm & non-optimal uses

3. May result in inflation

4. May threaten nation’s food security

5. Challenges in beneficiaries identification

• No direct transfers or payments involved

• Eg: MSP, lower input prices, welfare mechanisms, more affordable credit, insurance options (PM Fasal Bima Yojana) etc

• Benefits

  1. Crucial in boosting investment in Agri infrastructure

  2. Farmers are able to purchase high quality seeds with input subsidies

  3. Enables adoption of sustainable Agri practices like crop diversification

  4. Ensures nation’s food security

  5. Designed to offer farmers technical and training support to increase productivity

Issues

1. Misuse of environmental resources due to power subsidies, irrigation subsidies etc.

2. Presence of high corruption & leakages

3. Leads to vote bank politics

4. Benefits primarily large farmers & increases the inequality

5. Has failed in achieving developmental goals

Minimum Support Price

What's MSP?

- Price at which govt. procures from farmers
- Calculated at 1.5x cost of production to farmer
- Decided by CACP for 22 crops (FRP for Sugarcane)

3 types of production cost considered for MSP

a) A2: All 'out of pocket' expenses
b) A2+FL: A2+ Family Labor cost
c) C2: A2+FL+ land rental & interest foregone on land

Issues with MSP

1. Leads to distorted production of crops - NSSO trend 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

2. Lead to huge stocks - Due to open ended procurement

   • Wastage

   • Rotting of food grains

   • Warehousing & transportation challenges

3. Presence of middle-men

   • Monopoly of APMC mandis

   • Commission agents charge high commissions

   • Difficulty in accessing mandis

4. Environmental degradation

   • Soil degradation

   • Reduction in water table due to subsidy on water intensive crops

5. MSP reduces scope of competition in Agri sector

6. MSP is announced for 23 crops & procurement is done for just 1/3rd of them.

7. Has led to issues with WTO has developed countries argue that MSP is part of Amber box which distorts trade.

8. No mechanism in place to ensure that every farmer receives at least the MSP as a market floor price

9. Input costs have risen faster than MSP - reduced effectiveness of MSP

Measures to tackle issues

1. Kelkar Committee - convert subsidies into capital investments & gradually eliminate them

2. Rationalise subsidies that aren’t producing desired results

3. Promotion of Agri exports via long term policy planning

4. Enhance financial inclusiveness

5. Introduce time limit for subsidies

6. Encourage cooperative & contract farming

7. Reform of Agri laws - Eg : Farm laws (2020)

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