Issues related to Farm Subsidies and minimum support prices;

Any country’s growth depends on agricultural advancement. It plays an important role in the economic development of a nation. Almost all the activities spin around agriculture. It offers employment to around 60 percent of the total workforce in the country. In India, for many years, the government provides subsidies to the agriculture sector in direct and indirect form. For encouraging agriculture production and attaining self-sufficiency, the government provides various incentives together with price supporting schemes. Among the agriculture production incentives, subsidies are considered to be the most dominant device to quicken the growth of agricultural production.

A subsidy (also recognized as a subvention) is a system of financial assistance paid to an individual, a business, or an economic sector in order to accomplish certain policy objectives. This entails that any fiscal exchange which is not directly connected to paying for a service can be defined as a subsidy. Financial assistance in the form of a subsidy may come from one's national or local government, but the term subsidy may also refer to assistance granted by others, such as individuals or non-governmental institutions, although these would be more commonly described as a charity. It was documented in studies that a subsidy was developed broadly in the EU and USA across the two World Wars and the Great Depression to shield domestic food production, but presently it remains important across the world. 

It has been observed that Agriculture subsidies are one of the debatable issues in the world. For many decades, every county provided huge subsidies to the agriculture sector for the development of the agriculture sector. These actions have definitely improved the agriculture sector. But now every country tries to reduce the level of agriculture subsidies to reduce the burden on the economy. According to economics, it is detrimental to the economy and it wants to reduce. Agriculture experts argued that Agriculture subsidies are really beneficial for the growth of the agriculture sector.

There are two major categories of agriculture subsidies, the first one is direct and another is indirect. Agricultural subsidies are funding to farmers to support their operations. Subsidies may be provided directly, in the form of cash payments, or they may take the form of indirect support. Whenever a subsidy takes the form of a cash payment or grants to a recipient, it is characteristically considered a direct subsidy. Any non-cash benefit that a recipient receives that helps it operate or compete is regarded as an indirect subsidy. The benefit is considered to be indirect because its primary purpose may be unrelated to the recipient or not designed for the recipient alone but provides a significant benefit to the recipient tangentially. Governments can device tax policies that considerably decrease the tax burden for anyone who qualifies. A lawmaker may have a particular industry in mind when the law is crafted but, typically, the benefit is neutral.

Types of Agricultural Subsidies:

Basically, there are several types of Federal Farm Subsidies:

=> Direct payments ‘‘Direct’’ payments are cash subsidies for producers of selected crops like wheat, corn, sorghum, barley, oats, cotton, rice, soybeans, minor oilseeds, and peanuts. Direct payments are based on a historical measure of a farm’s acreage used for production, but some payments go to owners of the land that is no longer even used for farming.

=> Marketing loans The marketing loan program is a price support program that began in the New Deal era. The program encourages overproduction by setting a price floor for crops and by reducing the price variability that would otherwise face producers in the free market. The marketing loan program covers the same crops as the direct subsidy program.

=> Insurance When viewed internationally, the Risk Management Agency runs the USDA’s farm insurance programs, which are available to farmers to protect against adverse weather, pests, and low market prices.

=> Disaster aid. In the federal system, the government operates various crop insurance and disaster assistance programs for farmers. In addition, Congress frequently declares ‘‘disasters’’ whenever the slightest adverse event occurs and often distributes special payments to farmers regardless of whether they sustained substantial damage.

=> Export subsidies The USDA operates a range of programs to aid farmers and food companies with their foreign sales.

=> Agricultural research and statistics Most American industries fund their own research and development programs.

India has made extraordinary advances in the agricultural front during the last decades. For huge success, credit should go to several million small farming families that form the support of Indian agriculture and economy. Policy support, production strategies, public investment in infrastructure, research, and extension for the crop, livestock, and fisheries have considerably helped to increase food production and its availability.

Agricultural subsidies in India:

In India, major items of agricultural subsidies are food, fertilizer, irrigation, power, and credit. While food and fertilizer subsidies are borne by the Centre, power and irrigation subsidies are borne by the respective state government. 

=> Explicit Input Subsidies: 

These are specific cost subsidies made to farmers to help them manage the input costs needed before production. These are made through cash as in the PM-Kisan scheme of the government of India, KALIA scheme of Odisha, or Rythu Bandhu scheme of Telangana. These are generally made to small and marginal farmers who cannot purchase high-quality inputs by themselves. The objective is to optimize production using new technologies. 

=> Implicit Input Subsidies:

These are hidden subsidies, not directly in terms of payments. The input prices of the products are administered in this case for example: through low electricity charges etc.

=> Output subsidies:

It is the restrictive trade policies through which prices at the domestic market are kept at a higher rate than those that would have prevailed in case of the absence of such restrictions. Similarly, On the basis of mode of payment, agricultural subsidies can also be Direct Subsidies and Indirect Subsidies.

Food subsidy is the difference between the price at which the Food Corporation of India (FCI) procures from farmers and sells through the Public Distribution System (PDS). The food subsidy in India was Rs.56002 crores in 2009-10 and it increased to Rs 1.16 lakh crore in 2020-21.

For fertilizer inputs, the subsidy is the difference between the price paid to fertilizer manufacturers and the price received from the farmers. For other inputs, it is the difference between the economic cost of input and issue price to the farmers, which is paid by the government.

Credit subsidy is relevant for short term loans provided for production purposes for a period of one year. It is the difference between the cost of credit and the actual interest paid by the farmers. Credit subsidy includes interest subvention and interest subsidy. In the case of Nationalised Banks, interest subvention is only applicable and it is provided by the Government of India through the RBI. For the Co-operative Banks, both the interest subvention and the interest subsidy is applicable and it is given through the NABARD.

=> Power subsidy is granted on the power that is used to draw on groundwater. Accordingly, it is a subsidy to privately drawing and privately-owned means of irrigation. Power subsidy is the difference between the price paid by the farmer for the usage of electricity and the actual cost of generating the electricity.

=> Irrigation subsidy is the subsidy provided on the usage of government-provided canal water. Irrigation subsidy is the difference between operating and maintenance costs of irrigation infrastructure in the state and irrigation charges recovered from farmers. This may work through provisions of public goods such as canals, dams which the government constructs and charges low prices or no prices at all for their use from the farmers

To enhance the agricultural production, the Government of India is providing some other subsidies to the farmers, through the Farmers’ Co-operative Societies in the form of seeds, development of oilseeds, pulses, cotton, rice, maize, crop insurance schemes, and price support schemes.

Farm subsidies may weaken the economy. In most industries, market prices balance supply and demand, profit levels signal investment opportunities, and entrepreneurs modernize to provide better products at lower prices. Those market mechanisms are blunted in U.S. agricultural markets. Farm programs variously result in overproduction, misuse of marginal farmland, less efficient planting, excess borrowing by farmers, inadequate attention to cost control, and less market innovation. Farm programs are prone to scandal. Farm programs are subject to bureaucratic inefficiencies, recipient fraud, and pork-barrel politics.

Minimum Support Price:

Minimum Support Price is the price at which the government purchases crops from the farmers, whatever may be the price for the crops. Minimum Support Price is an integral part of India’s agricultural price policy. The minimum support prices are announced by the Government of India at the beginning of the sowing season for certain crops on the basis of the recommendations of the Commission for Agricultural Costs and Prices (CACP). Support prices normally affect farmers’ decisions indirectly, regarding land allocation to crops, the quantity of the crops to be produced, etc. In this way, the MSP becomes a big incentive for the farmers to produce more quantity. Based on the recommendations of the Commission for Agricultural Costs and Prices (CACP), the Government of India declares Minimum Support Price (MSP) for 24 crops under 5 groups viz. Kharif Crops, Rabi crops, Sugarcane, raw jute, and copra.

The MSP was declared used for the first time in 1965 as a mechanism for agricultural price policy to fulfill the various objectives. Since then, the MSP performs an important function in realizing the various objectives related to agricultural price policy. MSP originally was begun for the safety of farmers through a guarantee that if their produce is left unsold in the market, it will be bought by the government. Another purpose was to incentivize farmers to produce more crops so as to ensure food security in India. It shields farmers from the unjustified fluctuation in prices caused by the variation in supply, lack of market integration, information asymmetry, and other elements of market imperfection plaguing the agricultural markets.

MSP is currently announced for 24 commodities including

> Seven kinds of cereal: Paddy, Wheat, Jowar, Bajra, Barley, Maize, and Ragi.

> Five Pulses: Gram, Arhar, Moong, Urad, and Lentil.

> Eight Oilseeds: Groundnut, Rapeseed/Mustard, Toria, Soyabean, Sunflower, Sesamum, Niger seed, and Safflower seed.

> Cash Crops: Raw Cotton, Copra, Raw Jute, and Virginia Flu Curved Tobacco.

MSP: Historical Context

The system of MSP in India was started in the mid-1960s amid food shortages. The idea was to create a favorable environment and incentivize farmers to increase production by adopting “High Yield Variety” seeds and technology for cereals like Wheat and Rice.

In order to provide farmers an assured price for their crops and motivating them to adopt advanced technology to increase production the Agricultural Price Commission was set up in the year 1965 on the recommendation of the LK JHA Committee. The role of the Agriculture Price Commission is to advise the government on agriculture price policy.

Objectives of Minimum Support Price:

Government’s agricultural policy has three important mechanisms:

> The MSP

> Buffer Stocks

> Issue of food grains through the PDS

The objective of the MSP is to guarantee remunerative prices to the cultivators for encouraging higher investment and production. It also aims to bring a balanced realization of sufficient food production and consumption needs at the same time ensuring adequate and affordable food grains to all the people. 

The minimum support price is based on economic criteria such as demand and supply situation, trends in domestic and international market prices, cost of production, inter-crop price parity, terms of trade between agriculture and non-agriculture sectors, trade policy in agriculture, the effect on the general price level, and so on.

The CACP in deciding the MSP for various crops takes into account a lot of comprehensive factors including the supply and demand factors of each crop.

Other Major Support Schemes of Government:

=> Market Intervention Scheme (MIS)

Similar to MSP, there is a Market Intervention Scheme (MIS), which is implemented at the request of State Governments for procurement of perishable and horticultural commodities in the event of a fall in market prices.

The Scheme is implemented when there is at least a 10% increase in production or a 10% decrease in the ruling rates over the previous normal year. Proposal of MIS is approved on the specific request of State/UT Government, if the State/UT Government is ready to bear 50% loss (25% in case of North-Eastern States), if any, incurred on its implementation.

=> Price Supports Scheme (PSS)

The Department of Agriculture and Cooperation implements the PSS for procurement of oilseeds, pulses, and cotton, through NAFED which is the Central nodal agency, at the Minimum Support Price (MSP) declared by the government. NAFED undertakes procurement as and when prices fall below the MSP.

Procurement under PSS is continued till prices stabilize at or above the MSP.

=> BUFFER STOCK

Buffer Stock is another main instrument of Agriculture pricing policy in India. India has a policy of maintaining a minimum reserve of foodgrains (only for wheat and rice) so that food is available throughout the country at affordable prices around the year.

The main supply from the government’s buffer stock goes to the public distribution system (now TPDS) and at times goes to the open market to check the rising prices if needed.

Overall Issues related to Agricultural subsidies and their solution:

> The heavy fiscal burden with only fertilizer subsidy going up to 70000 Crore in FY 2018-19. These can be resolved using better targeting and technological interventions like soil health card scheme and Krishi Vigyan Kendra scheme.

> Subsidy in the form of free electricity has led to the overuse of groundwater. The decline is to such an extent that more than 50% of districts in the country are under the dark zone. Water extracted shows contamination of arsenic and other heavy materials. Separate agricultural feeder networks can be used which will supply electricity only for a few hours a day. Precision irrigation or micro-irrigation facilities can be incentivized.

 

> The recommended use of NPK fertilizer is in the ratio 4:2:1, while the actual usage stands at 6.10:2.46:1 in 2017-18. This has harmful effects on soil fertility, biodiversity, leads to bioaccumulation and biomagnification. Promoting organic farming through Paramparagat Krishi Vikash Yojana, zero budget natural farming, innovations like neem coated urea can be used.

> The subsidies many a time have great exclusion errors and it misses out on the farmers who are at the utmost need of this. Technological interventions like Aadhaar based identification, JAM trinity can help in solving this issue.

> Price subsidies like MSP have effected Indian agriculture very badly. It has destroyed the cropping patterns and farmers are no longer producing the traditional crops. Agriculture has been cereal centric and nutrient-based crops are not grown. Even the remuneration is poor for those. Focus can be shifted now to value addition, promotion of horticulture, and district-level interventions. It should be seen that farmers realize their proper amounts of produce. eNAM can be used for marketing purposes.

Way forward

> India and China have demanded the developed nations at WTO to cut down the farm subsidies under the agreed multilateral trade rules. In WTO parlance, the subsidies are called Aggregate Measurement of Support (AMS) or Amber Box support.

> India and China believe that the elimination of AMS should be the starting point of reforms rather than seeking a reduction of subsidies by developing countries.

To conclude, The Minimum Support Price is a significant policy of the Union Government to determine the floor price of major agricultural products every year for protecting the farmers from the brokers and fluctuating market conditions. The minimum support price for major agricultural products is fixed by the Government, each year. A minimum support price is a tool that gives a guarantee to the farmers, prior to the sowing season, that a fair amount of price is fixed to their upcoming crop to encourage higher investment and production of agricultural commodities. The minimum support price is in the nature of an assured market at a minimum guaranteed price offered by the Government.