Agriculture subsidies are integral part of the farmer’s life in India. It is a government incentive paid to agri-business. Agricultural organization and farmers manage the supply of agriculture commodities and influence the cost and supply of such commodities. This paper focuses on the incidence of subsidies in agriculture growth. Subsidies have a significant impact on agriculture growth. MSP is an incentive to ensure remunerative prices to farmers and subsidies on inputs encourage them to reduce the cost of production and increase agricultural produce through adoption of modern technology. Timely availability and distribution of subsidy inputs results in effective utilisation and benefit to the farming community and society at large.
In the initial years of independence, agriculture was totally primitive with small and fragmented land holdings. The situation was such that India was facing acute shortage of food grains cater to the ever rising population of the country. To meet the crisis of deficiency of food grains there was a need to shift from the traditional agriculture practices to modern technology. However, expensive costs of inputs like high yielding variety of seeds, farm mechanization and modern technology etc. discouraged farmers to move towards adoption of new technology. In 1964, government of India started the scheme of subsidies on purchase of various agriculture inputs to facilitate the farmers and enhance the agriculture growth. Agriculture export is really beneficial for growth of agriculture sector. Recently every country tries to avoid subsidies and reduce the burden on the economy. What exactly happen regarding agriculture subsidies? According to the economist it is harmful to the economy. In this backdrop a study on incidence of subsidy on agriculture is taken to find the insights of the concept. The concepts like Agricultural growth, Agricultural production and yield, Agricultural Pricing, Access to agricultural credit and insurance, Nutrient based subsidy policy and Agricultural trade are focussed in this paper.
Agricultural growth has been fairly volatile over the past decade, ranging from 5.8% in 2005-06 to 0.4% in 2009-10 and -0.2% in 2014-15. Such variance in agricultural growth has an impact on farm income as well as farmers’ ability to take credit for investing in their land holdings. Key issues affecting agricultural productivity include the decreasing sizes of agricultural land holdings, continued dependence on the monsoon, inadequate access to irrigation, imbalanced use of soil nutrients resulting in loss of fertility of soil, uneven access to modern technology in different parts of the country, lack of access to formal agricultural credit, limited procurement of food grains by government agencies, and failure to provide remunerative prices to farmers. Some of the recommendations made by committees and expert bodies over the years include bringing in agricultural land leasing laws, shifting to micro-irrigation techniques to improve efficiency of water use, improving access to quality seeds by engaging with the private sector, and introducing a national agricultural market to allow the trading of agricultural produce online.
Agricultural production and yield
The production of major crops over the past few decades has improved total production of food grains increased from 51 million tonnes in 1950-51 to 252 million tonnes in 2015-16. According to the second advance estimate by the Ministry of Agriculture, food grains production is estimated to be 272 million tonnes in 2016-17. The production of wheat and rice took off after the green revolution in 1960s, and as of 2015-16, wheat and rice accounted for 78% of the food grains production in the country. The country’s requirement for food grains in order to provide for its population is projected to be 300 million tonnes by 2025. The estimate of food grains production in 2015-16 is 252 million. This implies that the crop output needs to grow at an annual average of 2%, which is close to the current growth trend. Despite high levels of production, agricultural yield in India is lower than other large producing countries. Agricultural yield is the quantity of a crop produced on one unit of land. Agricultural yield of food grains has increased by more than four times since 1950-51, and was 2,070 kg/hectare in 2014-15. India’s yield is low when compared to countries such as China, Brazil and the USA.
Procurement of agricultural commodities is the purchase of food grains by the central or state governments. The Food Corporation of India is responsible for the purchase, storage, movement, distribution and sale of agricultural produce. Minimum Support Prices MSPs are the prices at which the central government purchases food grains from farmers. MSPs are fixed by the central government in order to ensure remunerative prices to farmers. Factors taken into consideration in determining MSPs include costs of cultivation and production, productivity of crops, and market prices. High MSPs of crops provide incentives to farmers to adopt modern technologies and farming practices, to increase the overall productivity of their crops. The government announces MSPs for 22 crops, but the Public Distribution System primarily distributes wheat and rice to its beneficiaries. Since procurement is mainly carried out for wheat and rice, farmers have focused on the cultivation of these crops over other crops such as pulses and oilseeds. The largest procurement at MSPs is for rice and wheat. About a third of the wheat and rice produced in the country is procured by the central government. In 2015-16, 33% of the wheat and 30% of the rice produced in the country was procured by the central government. Note that India is a big exporter of wheat; in 2014-15, of the 90.8 million tonnes of wheat produced in the country, 28 million tonnes was procured for the central pool, and 29 million tonnes was exported.
Effectiveness of MSPs
Although MSPs are declared for various crops, procurement at these prices mainly happens for wheat, rice, sugarcane and cotton, in a few states. As a result, in procuring states, farmers focus on cultivating these crops over other crops such as pulses, oilseeds, and coarse grains. MSPs are declared prior to each sowing season (in June and October) so that farmers are aware of the minimum price the government will offer for their produce. This is meant to encourage them to increase their investment in the production of crops. In a report to measure the efficacy of MSPs, the NITI Aayog found that a low proportion of farmers (10%) were aware of MSPs before the sowing season. 62% of the farmers were informed of MSPs after sowing their crops. The pricing policy of MSPs would be effective only if farmers are aware of it at the time of deciding what crops to grow. The NITI Aayog recommended that the awareness level of farmers regarding MSPs must be increased and the medium of dissemination of this information must be strengthened. Other issues with the implementation of the MSP regime include long distances to the procurement centres, increasing cost of transportation for farmers, irregular hours of the procurement centres, lack of coverage for shortage of go-downs and inadequate storage capacity, and delays in the payment of MSPs to farmers. The NITI Aayog notes that the agricultural pricing policy needs to be reviewed to ensure that farmers are receiving remunerative prices for their produce. One of the measures it recommends is a price deficiency system. Under such a system, farmers would be compensated for certain commodities if their prices fall under a specified threshold. This would reduce stock-holding by farmers who store commodities until prices increase, and also incentivise farmers to produce different crops. Farmers would be paid by using the direct benefit transfer system, through bank accounts linked to their Adhaar numbers.
Access to agricultural credit and insurance
Access to agricultural credit is linked to the holding of land titles. As a result, small and marginal farmers, who account for more than half of the total land holdings, and may not hold formal land titles, are unable to access institutionalized credit. Farmers may require credit for short term uses such as purchasing inputs, weeding, harvesting, sorting and transporting, or long term uses such as investing in agricultural machinery and equipment, or irrigation. Farmers with land holdings of less than a hectare primarily borrow from informal sources of credit such as moneylenders (41%), whereas those with land holdings of two or more hectares primarily borrow from banks (50% or more). Other major sources of agricultural credit include shopkeepers, relatives or friends, and co-operative societies. Key issues relating to agricultural credit are lack of access to formal credit owing to unclear land records, skewed ratio between short term and long term agricultural credit, and inadequate access to crop insurance. Short term credit is generally taken for pre-harvest and post-harvest activities such as weeding, harvesting, sorting and transporting. Long term credit is generally taken in order to invest in agricultural machinery and equipment, irrigation and other developmental activities, etc. Over the past few decades, the trend of short term and long term agricultural credit in the country has reversed. In 1990-91, a majority of crop loans taken was long term credit, whereas short term credit accounted for only about a quarter of all agricultural loans. As of 2011-12, 61% of crop credit was short term, whereas long term credit had a share of 39%. In addition, small and marginal farmers, who account for about 86% of total land holdings, take more short term loans than farmers with medium or large land holdings. This group of farmers also has the highest share of borrowings from informal sources of credit such as moneylenders, family and friends.
Nutrient based subsidy policy
The central government launched the nutrient based subsidy policy (NBS) in 2010 for P and K fertilizers. The policy was formulated with the objective of promoting a balanced use of N, P and K fertilizers. The policy allowed the manufacturers of P and K fertilizers to fix their maximum retail prices (MRPs) at reasonable levels. The subsidy provided would be based on per kilogram of the nutrient. The policy also provided for an additional subsidy to be paid to indigenous manufacturers of fertilizers. The Comptroller and Auditor General of India, in its report on the performance of the NBS policy stated that in the five years since its implementation, the policy had not succeeded in bringing about a balanced use of fertilizers. The fertilizer usage ratio of urea increased from 4.3 in 2009-10 to 8.2 in 2012-13. To meet the production target of 300 million tonnes of food grains by 2025 which was mentioned earlier, 45 million tonnes of fertilizer would be required. Of this, 6-7 million tonnes may be met from organic fertilizers, but the rest would be met by chemical fertilizers (containing N, P and K). The domestic production of fertilizers would have to be increased to meet this demand.
To promote the use of fertilizers by farmers, the central government provides a fertilizer subsidy to the producers of fertilizers. In 2017-18, Rs 70,000 crore has been allocated for fertilizer subsidy, which is the second biggest expenditure on subsidy after food subsidy. Allocations for fertilizer subsidy have been increasing at an annual rate of 11.4% between 2000 and 2016. Of the subsidy allocated for 2017-18, Rs 49,768 crore has been allocated for subsidy on urea. Currently the amount of subsidy to be given is determined based on the cost of production of the fertilizer company. Companies with a higher cost of production receive greater subsidies. This reduces the companies’ incentive to reduce their cost of production. Although the consumption of urea has been increasing over the past decade, no new domestic production capacity has been added in the past 15 years. A Committee that examined the role of Food Corporation of India recommended that cash transfers should be made to farmers to replace the current fertilizer subsidy regime. This would allow farmers to choose fertilizers in the combination best suited to their needs, and help them to fix the fertilizer imbalance in soil. In the Union Budget 2016-17, it was announced that a direct benefit transfer program for fertilizers would be launched on a pilot basis in a few districts across the country. In July 2016, the government announced that it would be conducting pilot studies of direct benefit transfers in 16 districts in 2016-17.
Major commodities imported to India are pulses, edible oils, fresh fruits and cashew nuts. Major commodities exported by India are rice, spices, cotton, meat and its preparations, sugar, etc. Over the past few decades, the share of agricultural imports in total imports has increased from 2.8% in 1990-91 to 4.2% in 2014-15, whereas the share of agricultural exports has reduced from 18.5% to 12.7%. India’s trade policy is affected by factors such as domestic availability of commodities, cost of production as well as global price levels. However, frequent changes in trade policy, such as reducing the import duty on a commodity in response to a shortage in supply, or decreasing minimum export price of a commodity to facilitate its exports, may have an adverse effect on the development of the agro-processing sector.
Agriculture and its produce is the only source which provides food, energy and life to mankind. Agricultural scenario is found to be diminishing due to various reasons like labour problem, lack of farmers’ family members support due to occupation at urban places or unskilled, lazy and uninterested sons in farming activities, attraction towards urban lifestyle, aged and incompetent farmers, irregular or failure of rainfall, crop loss due to weather conditions and low returns for their produce. The rate of increase in demand for food is very high when compared to the increase in agricultural production. MSP is a boon to small and marginal farmers suffering from lack of institutional credit. MSP is an incentive to farmers that ensure remunerative price and encourage them to involve actively and increase their production through technology adoption. Subsidy on agriculture inputs like seeds, fertilisers and technology reduces the cost of cultivation and boost agriculture produce and increase the share of agricultural export. Timely availability and distribution of subsidy inputs results in effective utilisation and benefit to the farming community and society at large. Hence subsidy on inputs is an engine to promote agricultural growth.