1. Introduction

The Indian Government plays a vital role in agriculture sector development. The government’s role is diverse and varied including, but not limited to, self-sufficiency, employment creation, support to small-scale producers for adopting modern technologies and inputs, reduction of price instability and improvement of the income of farm households.

This vital role can take a number of forms such as import-export policies and domestic policies like price support programmes, direct payments, and input subsidies to influence the cost and availability of farm inputs like credit, fertilizers, seeds, irrigation water, etc. Of all the domestic support instruments in agriculture, input subsidies and product price support are the most common.

Derived from the Latin word ‘subsidium’, a subsidy literally implies coming to assistance from

behind. A subsidy, often viewed as the converse of a tax, is an instrument of fiscal policy.

The subsidies may be direct or indirect, cash or kind, general or particular, budgetary or non budgetary, etc. But their impact is practically visible on both the production and distribution. The economic rationale of subsidies lies in incentivising the producers to invest in productive activities and increase production leading to high growth in national income and obtaining desirable structure of production. The social justification of subsidies lies in reducing inter- personal income inequalities and inter- regional development imbalances. The justification gets strengthened if the subsidies promote agricultural development besides equitable distribution of income.