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Farm subsidies form an integral part of the government’s budget. In the case of developed countries, the agricultural or farm subsidies compose nearly 40 per cent of the total budgetary outlay, while in India’s case it is much lower (around 7.8 per cent of GDP) and of different nature.
Direct farm subsidies: These are the kinds of subsidies in which direct cash incentives are paid to the farmers in order to make their products more competitive in the global markets. The developed countries (USA and Europe) spend huge amounts of their annual budgets on the agriculture, farm and fisheries subsidies. Direct farm subsidies are helpful as they provide the right levels of purchasing power to the farmer and can significantly help in raising the standards of living of the rural poor. They also help in checking the misuse of public funds as they help in the proper identification of the beneficiaries.
Indirect farm subsidies: These are the farm subsidies which are provided in the form of cheaper credit facilities, farm loan waivers, reduction in irrigation and electricity bills, fertilizers, seeds and pesticides subsidy as well as the investments in agricultural research, environmental assistance, farmer training, etc. These subsidies are also provided to make farm products more competitive in the global market.
The subsidies provided on the fertilizers as ‘input’ subsidies are in the form of indirect subsidies. But if the government does not incentivize the farmer by an effective cost reduction in prices of the fertilizers, but provides direct cash incentives after the produce, is known as a direct subsidy.
The World Trade Organization (WTO) has put some ceilings on the amount of direct and indirect subsidies being provided by the various developing and developed nations due to the fact that these subsidies distort
the free market forces which have their own implications.
First thoughts are encouraging. A panel headed by Montek Singh Ahluwalia (the then Deputy Chairman, Planning Commission) recommended that the power ministry, instead of paying power-distribution companies, hand out electricity subsidies directly to farmers through a smart card linked to the unique identity number.
India spends about Rs. 1,60,000 crore every year or roughly 2 per cent of its GDP on subsidies, all indirectly . For example, in fertilizers, which accounts for two-thirds of total subsidies, the government fixes a low selling price and compensates the producers by paying the difference between the selling price and the actual production costs (plus a pre-decided profit margin) as subsidy. Important issues related to farm subsidies are as given below:
(i) The indirect subsidy has been blamed for benefiting big farmers more than the small and medium farmers, for whom the subsidy is intended. This is because the bulk of the subsidised fertilizers is picked up by the rich farmers, because the small and marginal farmers account for just 37 per cent of the farm land.
(ii) Indirect subsidy has also discouraged improvements in production processes since manufacturers have no incentive to increase efficiency. This will also play a big part in bringing down India’s overall subsidy bill. For instance, according to industry estimates, the money spent on poor farmers could potentially come down to Rs. 37,000 crore from the current Rs. 100,000 crore.
(iii) Another advantage of cash subsidies is that it will free up the distribution system and allow the people who receive the subsidy to choose where they buy their goods from. The complexity is not so much in the transfer of funds, as it is in the identification of the beneficiaries.
Other Countries: The idea of disbursing subsidies directly to the beneficiaries is becoming popular among the development thinkers and policymakers. It’s already a part of policy in many parts of the world—predominantly, in Latin America where 16 countries have this practice, and also in other countries such as Jamaica, Philippines, Turkey and Indonesia.
The biggest and most cited of such programmes is Brazil’s Bolsa Familia .
It started in 2001, with a programme aimed at education. It expanded in 2003 to include a range of services like food and fuel, and now covers 2.6 million families in that country. The government transfers cash straight to a family, subject to conditions such as school attendance, nutritional monitoring, pre- natal and post-natal tests. By many measures, the programme is a success. Brazil’s poverty levels dropped by 15 percentage points between 2003 and 2009, at least a sixth, thanks to Bolsa Familia (economic growth played a big part, too.) Millenium Development Goals initiative, which in 2000 sought to halve poverty by 2015, doesn’t even mention cash transfers. But, Brazil achieved the goals 10 years ahead of the deadline. And the cost of these transfers has been 0.4 per cent of GDP.
The big question is not whether a direct cash transfer is the perfect solution, but whether it’s an improvement over the existing systems. The evidence—its success in other parts of the world— and the poor performance of indirect subsidies so far would suggest so. Looking at it, the GoI has already started a pan-India scheme to disburse all forms of subsidies derectly, through the Direct Benefit Transfer (DBT) since 2015–16 onwards.