National Farm Subsidies and Minimum Support prices etc.


Issues of Direct and Indirect Subsidy for farm sector and other social sectors. 

  • Subsidy is one of the powerful fiscal instruments, besides taxes and others, by which the objective of growth and social justice may be achieved.


  • Subsidies alter relative prices and budget constraints and thereby affect decisions concerning production, consumption and allocation of resources. Like many other countries, subsidies in Indian economy are pervasive. These are explicit or hidden and include the areas such as education, health, environment and variety of economic activities including agriculture and transport. Nearly 66 per cent of the people in India are still dependent on agriculture. The subsidies to agricultural sector provided by the government have recorded phenomenal rise during the past two decades.


  • The agricultural subsidies act as an incentive to promote agricultural development. In order to attain the goal of self-sufficiency in food, government adopts short term policies such as support prices of products and input subsidy to stimulate the products to increase the food production. It is expected that subsidies contribute to better cropping pattern, employment and income of the beneficiaries. But in most development programmes, subsidies are one among the many developmental inputs being provided. Thus the observable changes in cropping pattern, employment level and overall incomes are because of the joint effect of all the efforts going on. Therefore, these changes cannot be attributed solely to subsidies.


  • 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.


Subsidies in Indian agriculture are of four types :


 Explicit Input Subsidies


  • Explicit input subsidies are payments made to the farmers to meet a part of the cost of an input. These are in the nature of explicit payments made to the farmer. For example, subsidy on improved or high yielding variety seeds, plant protection chemicals and equipments, improved agricultural implements and supply of minikits containing seeds, fertilizers and plant protection chemicals for certain crops are the explicit subsidies.

Implicit Input Subsidies


  • While there is transparency in explicit input subsidies, implicit input subsidies are hidden in nature. The latter arise on account of the mechanics of pricing of inputs. If inputs whose prices are administratively determined are priced low as compared to their economic cost, it becomes a case of implicit subsidization. As far as the farmer is concerned, he does not receive any direct payment but somebody in the economy accounts for the difference.


Output Subsidies Subsidization of agricultural sector through output pricing means that by a restrictive trade policy, the product prices in the domestic market are maintained at levels higher than those that would have prevailed in the absence of restrictions on trade. On the other hand, if the trade policies have resulted in keeping the domestic prices lower than the corresponding border reference price, the policies have taxed the agricultural sector. The border reference price is the free on board prices in the case of exportables and cost, insurance and freight price in the case of importables.


Food Subsidies This apart, there is an important subsidy linked to the agricultural sector and that is the food subsidy. The twin policy of providing market support to the foodgrains producers and supplying atleast a part of the requirement to consumers at reasonable prices, along with the policy of maintaining a buffer- stock of required quantity for national food security, involved cost in the form of meeting the differences between the economic cost and issue prices of foodgrains.


There are several types of Federal Farm Subsidies:

  1. 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 land that is no longer even used for farming.


  1. 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.
  2. 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.


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


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


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



  • The agricultural sector in Madhya Pradesh enjoys both input and output subsidies. This chapter provides an overview of agricultural input subsidies in the state, based on secondary data. It is presented in four sections. The first section gives the kinds of subsidies admissible in the year 2000-2001 under different agricultural programmes of State Agricultural Department. The second section gives an account of direct subsidies made available by the Departments of Agriculture, Horticulture, Animal Husbandry and Fisheries. The third section gives details of estimation of the indirect subsidies viz. fertilisers, power and irrigation and in the fourth section the total agricultural subsidies both direct and indirect are analysed.


  • Subsidies do not reach the marginalized farmers


The marginalized farmers, the main target audience for the government to come up with subsidies in the first place are found wanting of the same. Effectively, the more well off farmers end up taking more than their fair share.


  • The fiscal burden on the government


The government fails to recover its costs because of taxation issues and is thus led to borrow from other sources. Ineffective taxation policies end up taking their toll on the government’s developmental plans.


  • The APMC Act


The APMC Act was set up by the government, as a means to improve the efficacy of the process of the farmers getting their rightful price due to them, through the establishment of middlemen acting as links to the chain. Sadly though, their main prerogative was rendered ineffective, due to their own middlemen.


The APMC act established mandis, where farmers auction their produce. The presence of middlemen, effectively multiplied prices at each level which thus led to higher prices and lower profits for the farmers.


Dealing with Harmful Subsidies


Excess subsidisation is not just an unwarranted fiscal cost. It can do significant damage. For example, oversubsidisation of fertilisers, leads to excessive use of fertilisers, pesticides and other agricultural inputs that have environmentally detrimental effects leading to erosion, compaction, and denitrification of top soil. Similarly, excess subsidisation of water causes drying up of rivers, declining water tables and soil erosion. Excess subsidisation of diesel compounds environmental pollution.


  • Solution Strategy


A proposed solution strategy to be effective would need to work on three basic levels.


  1. Customer Base Identification and Selective Targeting


  1. Effective channelization of subsidies



  1. Logistics Support.



  1. Customer Base Identification


  • Segmenting farmers into three broad categories based on their economic status, to ensure that the subsidies reach the ones most in need. A proposed model that takes in certain parameters, assigning them different weights through Principal Component Analysis (PCA) and comparing it through a seismic inspired model.


  • Logistics From a logistical standpoint the system needs to develop into a more transparent setup. This can be ensured by integrating the UID (Aadhar) system into the fold. This integration would ensure that leaks are prevented and a more transparent and effective system of monetary transfer is established. Cashless and quick transfer of funds could thus become possible, helping weed out the need for middlemen in the system as a whole.


  • This proposed model may not be fully effective and has its fallacies, this may not be the best way of coming out with this issue. But, the issue of ineffective agricultural subsidization is one of national importance. This is but a endeavor to think about the same and to come up with something that could help enliven the lives of our farmers.


 Current strategy of Government for social sector subsidies


  • In its three-year action plan for the economy the government think-tank mooted a reduction in food subsidies as a proportion of GDP by 2019-20 through better targeting and rationalisation measures.


  • Within revenue expenditures, subsidies have tended to crowd out the socially more productive expenditures such as those on education and health.


  • While in absolute terms, the allocation towards food subsidy, as per the Aayog, will increase marginally to ₹1.57 lakh crore from ₹1.24 lakh crore, as a proportion to GDP, the expenditure will come down to 0.73% from 0.90% in 2015-16.


  • The government’s allocations are based on reduction in food subsidy as a proportion to GDP from 0.90% in 2015-16 to 0.73% in 2019-20.


  • The efficiency of social expenditure must be improved to deliver better outcomes. This may be done for example through better targeting and the use of direct benefit transfers. Open ended schemes that can absorb rising expenditures and lack clearly identified beneficiaries must be avoided.



Historical context

  • The emergence of agricultural Price Policy in India was in the backdrop of food scarcity and price fluctuations provoked by drought, floods and international prices for exports and imports. This policy in general was directed towards ensuring reasonable food prices for consumers by providing food grains through Public Distribution System (PDS) and inducing adoption of the new technology for increasing yield by providing a price support mechanism through Minimum Support Price (MSP) system.
  • In recognition of the importance of assuring reasonable produce prices to the farmers, motivating them to adopt improved technology and to promote investment by them in farm enterprises, the Agricultural Prices Commission (renamed as the Commission for Agricultural Costs and Prices in 1985) was established in 1965 for advising the Government on agricultural prices policy on a continuing basis.
  • The thrust of the policy in 1965 was to evolve a balanced and integrated structure to meet the overall needs of the economy and with due regard to the interests of the producers and the consumers. The first Commission was headed by Prof M L Dantwala and in its final report the Commission suggested the Minimum Support Prices for Paddy.


Minimum Support Price (MSP):- is a form of market intervention by the Government of Indiato insure agricultural producers against any sharp fall in farm prices.

  • The minimum support prices are announced by the Government of Indiaat the beginning of the sowing season for certain crops on the basis of the recommendations of the Commission for Agricultural Costs and Prices (CACP). 
  • MSP is price fixed by Government of India to protect theproducer – farmers – against excessive fall in price during bumperproduction years.
  • The minimum support prices are a guarantee price for their produce from the Government that this will be the minimum price at which their product will fetch.
  • If the market price is above,MSP,the farmer can obviously sell it at the marketIn case the market price for the commodity falls below the announced minimum price due to bumper production and glut in the market,government agencies purchase the entire quantity offered by the farmers at the announced minimum price.The major objectives are to support the farmers from distress sales and to procure food grains for public distribution.

    As of 2015-16, Minimum support prices are currently announced for 24 commodities,which includes food grains like Wheat,paddy etc and non-food crops like raw cotton,raw jute etc.

  • A pilot project under the Direct Payment Deficiency System (DPDS) for paying MSP guarantee for the cotton farmers has been initiated at Hinganghat taluka of Maharashtra in 2015. Under this system, the farmers will directly get the amount which is the difference between the Minimum Support Price (MSP) and the market price, should the market price fall below the MSP. For availing of the benefit, farmers would have to present proof of cotton sold at Agriculture Produce Market Committee yards, plus other papers such as ownership document, yield estimation and other details. If the pilot is successful, the DPDS would be rolled out in all cotton growing regions, as per the present decision. DPDS is essentially a mode of direct benefit transfer to cotton farmers.Then there is this concept ofPROCUREMENT PRICE, which is the price at which government procures food grains for buffer stocking and PDS purposes through FCI.
  • Consider the situation where,in the wake of an imminent food shortage that may occur, the traders are willing to procure food grains in advance,driving up the market price.


  • When the market prices are much higher than the MSP,the farmer will obviously be willing to sell it in the market.
  • But the government,still, needs to procure food grains on its own to meet its distribution commitments inPDS at subsidised rates(issue price) and to create the buffer stock,necessary to intervene from supply side in case there is food deficiency and high food inflation.
  • Therefore the government so as to fulfil these commitments,declares a Procurement price which is > or = to the MSP.The major difference between MSP and PP is that while PP is forfood grains only, MSP is for 24 crops which includes both food grains and non-food grains.


Method of Calculation

  • In formulating the recommendations in respect of the level of minimum support prices and other non-price measures, the CACP takes into account a comprehensive view of the entire structure of the economy of a particular commodity or group of commodities.
  • Other Factors include cost of production, changes in input prices, input-output price parity, trends in market prices, demand and supply, inter-crop price parity, effect on industrial cost structure, effect on cost of living, effect on general price level, international price situation, parity between prices paid and prices received by the farmers and effect on issue prices and implications for subsidy.
  • The Commission makes use of both micro-level data and aggregates at the level of district, state and the country.

Supply related information – area, yield and production, imports, exports and domestic availability and stocks with the Government/public agencies or industry, cost of processing of agricultural products, cost of marketing – storage, transportation, processing, marketing services, taxes/fees and margins retained by market functionaries; etc. are also factored in.

Report of National Commission for Farmers (NCF) had recommended that MSP should be at least 50% more than the weighted average cost of production. However, this had not been accepted by the Government.
Procurement at MSP

  • Farmers are made aware of the procurement operations by way of advertisements like displaying banners, pamphlets, announcement for procurement and specification in print and electronic media.
  • Some States have taken steps to pre-register farmers for ensuring procurement from them through a software system.
  • Keeping in view the procurement potential areas, procurement centres for MSP operations are opened by Government agencies, both Food Corporation of India (FCI) and State Government, after mutual consultations.
  • Procurement centres are opened by respective State Govt. Agencies/ FCI taking into account the production, marketable surplus, convenience of farmers and availability of other logistics / infrastructure such as storage and transportation etc. Large number of temporary purchase centres in addition to the existing mandis and depots/godowns are also established at key points for the convenience of the farmers.
  • The Govt. agencies also engage Co-operative Societies and Self Help Group which work as aggregators of produce from farmers and bring the produce to purchase centres being operated in particular locations/areas and increase outreach of MSP operations to small and marginal farmers. These Co-operative Societies are in addition to the direct purchases from farmers.
  • Co-operative societies/Self Help Groups are engaged in many States like Bihar, Chhattisgarh, Odisha, Maharashtra, Karnataka, Jharkhand and Rajasthan. Whereas, in some states like Punjab and Haryana, the Government of India has permitted the State Governments to engage locals for procurement of food grains from the farmers on payment of commission. These steps have been taken by Government of India so that Govt. agencies can procure maximum food grains directly from farmers by expanding out- reach of MSP benefit to farmers.
  • Food Corporation of India (FCI) is the designated central nodal agency for price support operations for cereals, pulses and oilseeds.


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