Agricultural Subsidies in India: A critical balancing act

Introduction

Since the 1960s, agricultural subsidies have been a critical policy tool in India to support food security and livelihoods, as well as to promote agricultural production and productivity. These subsidies continue to attract attention due to both their size and their composition. With the rural poverty rate around 12.9% in 2021 and 16.3% of the population undernourished in 2019-21, India uses subsidies to support agricultural production and farmers' incomes and to boost food security for consumers. This article explores two of the most important subsidies for farmers in India: price support and input subsidies.

Ensuring a Fair and Remunerative Price Through Price Support

India introduced price support in 1965. This is granted through an administered or procurement price-the minimum support price-at which the government procures stocks from farmers to maintain buffer stocks and run its public food program: the Public Distribution System, which guarantees 75% of rural and 50% of urban dwellers a minimum quantity of subsidized foods.

The minimum support price is announced before the sowing season on 25 crops, including rice, wheat, coarse cereals, pulses, groundnuts, soybeans, sunflower, sugarcane, raw jute, and cotton. After purchase, the stock is distributed at a subsidized price. Government or semi-government bodies procure oilseeds, pulses, cotton, and other crops to stabilize market prices when they fall below the minimum support price. The minimum support price also acts as a reference price for open markets, even though not all sales are conducted at this price.

The procurement policy has been the most successful in reaching paddy and wheat farmers-about 37% and 17% of production was procured at the minimum support price in the respective marketing seasons for 2021/22. A recent analysis found that this minimum support price benefits 13% of rice farmers and 16% of wheat farmers, though this share varies from state to state. The policy has also benefited small farmers. Several analysts say this policy has contributed to increased production and helped achieve self-sufficiency in rice and wheat but has been less successful at triggering growth for crops such as oilseeds and pulses, where procurement has been low.

The minimum support price and the public distribution system play a critical role. On the one hand, they assure farmers a guaranteed price that has been vital amid rising input costs and food price crashes. This has spurred regional rural demand by ensuring incomes and increasing the purchasing power of farmers. It has also enabled many farmers to produce more food while investing in productive assets, such as agricultural machinery and irrigation and transport equipment; in resources, such as buying and improving land; or spending on technologies related to seed varieties, harvesting methods, and increased use of fertilizers and pesticides. These policies have also helped farmers sustain livelihoods and meet their own food security. Most importantly, smooth procurement through a minimum support price has been necessary to meet the food security needs of India's population.

The minimum support price and the public distribution system have also played a key role in stabilizing prices, especially of cereals, and have often prevented price crashes by procurement and sale of buffer stocks in India. Similar tools have been or are used across the world at national or regional levels with or without price support, such as in the United States, the European Union, Britain, Norway, Brazil, Egypt, China, Indonesia, Zambia, Mali, Philippines, and Bangladesh. The European Commission says that "15 Asian countries (out of 26), 13 African countries (out of 33) and 7 Latin-American countries (out of 22)" used buffer stocks to deal with the 2008 food crisis. Many countries have used this tool since the crisis, while Ethiopia, the Economic Community of West African States Regional Reserve Project, and the Association of Southeast Asian Nations Plus Three Emergency Rice Reserve, among others, plan to secure food reserves in the future.

Buffer stocks are a critical tool in the context of high price volatility and concentration in global agricultural markets. As evident during the Russia-Ukraine crisis, the dominance of a few countries or agribusiness companies in most agricultural product markets means that any disruption in supply conditions in these countries, further aggravated by speculative activities, can affect both global and domestic markets in terms of supplies and prices, creating major uncertainties for producers and consumers. Buffer stocks, with or without price support, can help stabilize food prices.

The price volatility and concentration of global agricultural markets mean that India cannot depend on them to meet its food needs.

The price volatility and concentration of global agricultural markets also mean that India cannot depend on them to meet its food needs. This vulnerability is evident in the fact that despite being a major exporter of rice and wheat, India has often imposed export restrictions on these commodities to ensure they are available domestically. As evident during the COVID-19 pandemic, the public distribution system has been a vital public policy program to meet food security needs. According to the Indian government, the public distribution system is operative in 26 states/union territories, covering 650 million beneficiaries-importantly, around 80% of the population was eligible to get subsidized food in India during the pandemic. A World Bank study also shows that "food transfers usually result in a higher increase in calorie consumption and cash transfers in a higher increase in food expenditures." In that regard, the minimum support price and public distribution system have been important to ensure the survival of farmers and consumers.

Input Subsidies in an Escalating Cost Scenario

The other key subsidy is for agricultural inputs, such as fertilizer, irrigation, and electricity, along with some credit and crop insurance subsidies. Input subsidies were introduced to ensure farmers could obtain essential inputs for production because input costs were prohibitively high and have been rising since the 1990s, especially compared to product prices. These subsidies are granted to suppliers to provide these inputs at subsidized rates, and the central and state governments reimburse the difference from actual costs.

Data on input subsidies are complicated due to the allotment under different budgets. India's notifications to the World Trade Organization (WTO) indicate that input subsidies on fertilizer, irrigation, and electricity amounted to USD 25 billion in 2011, rose to USD 32 billion in 2021-2022, and then climbed to USD 48 billion in 2022-2023. Fertilizer and power absorb 45.6% and 30% of all input subsidies, respectively, while irrigation, credit, and crop insurance get 16.4%, 5.07%, and 2.69%, respectively.

Research suggests that input subsidies have benefited production and incomes in the agriculture sector-sometimes more than public investment-and that power subsidy is the most effective component of input subsidies, followed by fertilizer subsidy. Input subsidies, however, have been most useful when targeting specific needs and areas. For example, fertilizer subsidies worked best in underdeveloped areas where input use, productivity, and farm incomes are low, and the proportion of small and poor farmers is high. Electricity subsidies are more effective in areas where irrigation needs are high and water-intensive crops are grown.

Are Indian Subsidies Fit for Purpose?

India's agricultural subsidy policy has received a fair amount of criticism, both within India and abroad. Some of these concerns relate to the lack of effective delivery and inequitable outcomes; inadequate information on the minimum support prices before sowing season; failure to reach small farmers; bias in favour of large farmers and industry (e.g., fertilizer subsidies); and inequity between regions, crops, and irrigated vs non-irrigated agriculture.

Another criticism is that minimum support prices in India trail market prices. The Organisation for Economic Co-operation and Development and the Indian Council for Research on International Economic Relations found that the price farmers received from 2000 to 2016 was usually less than corresponding international prices and that India's agricultural policies actually end up taxing (rather than supporting) its farmers.

Some criticism has targeted financial aspects -the high pressure on the budget; the diversion of public capital investment, including for research and development; the discouragement of private investment in markets, storage, and warehouses; and insufficient diversification and commercialization of agriculture.

On the trade front, some WTO members say India's price support policy has exceeded its de minimis limit of trade-distorting subsidies for rice in recent years. However, this is partly due to the outdated method of calculating subsidies that are considered to distort trade and production under the WTO Agriculture Agreement, which is based on fixed 1986-88 prices for rice and other commodities. Many developing countries use a price support mechanism to run their public stockholding programs, and many are breaching this limit due to this obsolete reference price. This has led to a demand by developing countries in the WTO to allow such subsidies even if they breach de minimis limits. While an interim solution was agreed in the Bali Ministerial Conference of 2013, a permanent solution on this issue was mandated to be delivered by 2017 but still remains pending. Indian farmer groups have strongly supported the demand for a permanent solution on public stockholding at the WTO that will protect price support.

Some WTO members also say India's high level of input subsidies gives its farmers a trade advantage. However, Article 6.2 of the WTO Agriculture Agreement permits unlimited input subsidies to "low-income or resource-poor producers in developing country Members." According to Indian government notifications to the WTO, farm holdings with less than 10 hectares (with an average operated area below 5.72 hectares) fall under this category. According to the latest Indian Agricultural Census 2015-16, such holdings account for 99.99% of farm holdings.

Farm subsidies should be viewed in the context of the size of India's agricultural sector.

Further, farm subsidies should be viewed in the context of the size of India's agricultural sector. For example, based on notifications to the WTO, India's entire Article 6 subsidies, including input subsidies, represented 8.11% of India's agricultural production in 2018. This is comparable to the subsidies given by many other countries-shares of Japan, Switzerland, and the United States were 9.7%, 12.85%, and 7.05% of the value of agricultural production in these three countries, respectively. When compared to the number of farmers, India's Article 6 subsidies per farmer will be far lower than that of most developed countries.

On the sustainability front, critics point to the increase in mono-cropping of rice and wheat; the adverse impact of price support and input subsidies on biodiversity and natural resources; and blocking innovations of green technology. However, sustainability is a balance of economic, social, and environmental dimensions. For a country with India's socio-economic conditions, the environmental sustainability dimension should be balanced against the need to raise incomes. However, even though boosting farmers' incomes has arguably led to greater investments in land and technology, some fine-tuning of India's subsidy programs could yield better results for the environment.

Agricultural Reality and Subsidies: Which way forward?

Agricultural subsidies in India must be evaluated in their socio-economic context.

Indian agriculture has faced multiple challenges for decades, partly due to a mismatch between the prices of food and agricultural products and the costs to produce them. In spite of major policy shifts since 2000, lagging public investment in research and development and infrastructure, weak input delivery mechanisms, and lopsided access to credit, marketing, storage, and transport facilities have all contributed to this situation.

The food needs of India's billion-plus population have necessitated an overwhelming policy focus on food crops. At the same time, the production of cash crops has been extremely costly, leading to a continuation of farmer suicides and agrarian distress.

On the trade front, massive developed-country agricultural subsidies, including Green Box subsidies, have often led to dumping in global markets that affected farmers in developing countries. For example, U.S. cotton subsidies have been a major challenge for farmers in both Africa and India. Further, recent import duty concessions under Indian free trade agreements (FTAs) have also made farmers increasingly wary. India's FTA with Southeast Asian countries has already seen agricultural imports, led by vegetable oils, far exceed exports and "cause a significant negative impact on livelihoods and food security across several segments of the rural population." Moreover, recently signed FTAs with the European Free Trade Association and an early harvest deal with Australia, as well as forthcoming FTAs with the EU and Britain and a comprehensive agreement with Australia, are expected to result in major tariff concessions on agricultural products, leading to increased import competition. The sum of these factors makes a policy shift away from minimum support prices and input subsidies an economic and political challenge.

Many experts advocate direct income transfers as a more efficient and sustainable alternative to price support and input subsidies. But major challenges remain: a weak banking infrastructure, ineffective identification of beneficiaries including tenants, sharecroppers, and women farmers, as well as corruption in the disbursement system and leakage in the form of non-productive consumption by farmers.

While India's subsidy regime may have many weaknesses and definitely needs greater rationalization, monitoring, and enforcement, withdrawing or redesigning agricultural subsidies and redeploying them toward other policy tools such as research and innovation, including green innovation, especially in the short and medium term, presents an enormous challenge. As mentioned earlier, these subsidies make up 21% of farm incomes in India, are critical for small and marginal farms, and cannot be withdrawn without causing hardship and rural poverty.

Policy-makers must consider the contribution of agricultural subsidies to growth and income generation while keeping in mind the challenges associated with rural poverty, agrarian distress, rural livelihoods income generation, and food insecurity.

In sum, policy-makers must consider the contribution of agricultural subsidies to growth and income generation while keeping in mind the challenges associated with rural poverty, agrarian distress, rural livelihoods income generation, and food insecurity. Further, any recalibration of agricultural subsidies in India must be done cautiously and after wide consultations-not only with scientists and policy experts, but also with farmer groups. As they have the best understanding of the on-the-ground realities, no policy can be successful without their cooperation.

Ranja Sengupta is senior researcher with the Third World Network.

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