Issues related to direct and indirect farm subsidies

By BYJU'S Exam Prep

Updated on: September 13th, 2023

Agricultural subsidies are the positive intervention taken by the government for the farmers in the agrarian sector to help them produce more and get the desired remuneration. It helps in managing the supply of agricultural commodities, influencing the cost and supply.

It helps in promoting agricultural development, balances inter-regional disparities and stimulates agricultural production. It is also expected that subsidization improves mechanization of agriculture, promotes better cropping pattern, employment opportunities etc.

Types of Agricultural Subsidies

  • 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 KALIA scheme of Odisha or Ryuthu 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 absence of such restrictions.

Similarly, On the basis of mode of payment, agricultural subsidies can also be Direct Subsidies and Indirect Subsidies.

Direct Subsidies

These are the subsidies through which government transfers money to the ultimate beneficiary through formal procedures. These can be given for purchasing input, or unrealized cost or cost difference, for example, Bhavantar Bhugtan yojana of Madhya Pradesh. These can also be for allied sectors like animal husbandry, marine or aquaculture, horticulture or for loss in agricultural during calamities like natural floods, droughts.


  • Schemes like Pahal in LPG and MGNREGA shows the success of direct benefit transfer
  • With emerging technologies and usage of Aadhar to form JAM trinity, payments can be made directly to the beneficiary without any issue of identification or exclusion error.
  • This also helps in curbing inefficient usage of inputs like fertilizers etc and behavioural change among farmers. and hence also helps in reducing inflation.
  • The farmers could get the freedom to grow the crops they want, promoting crop diversification. They can also use it for allied purposes or use for value addition to the produce.
  • Will help in better nutrient crops with better remuneration as cereal centric food policy ignores this.


  • There is a chance that the cash can be mismanaged by the farmers and diverted to non-farm unproductive needs.
  • This can hamper the food security of the country, as the produce may decrease
  • Farmers will be open to the volatile market mechanisms and can be conned by the middle man in the process.
  • Lack of awareness and illiteracy among the farmer can hamper the growth of agriculture in the country.

Indirect Subsidies

These are indirect as they do not involve any direct transfers or payments. They can take the form of price reduction, welfare mechanisms, cheaper credits, insurance facilities, farm loan waivers etc. These subsidies mostly reach the farmers along with the use of inputs and hence are highly correlated with the amount of their use.


  • These help in the development of priority areas which are not developed.
  • The purpose was to achieve food security in the 1960s when the country was facing an acute food shortage. The green revolution provided for good quality seeds and fertilizers to the farmers.
  • These are meant to provide training support and technical assistance to farmers to improve productivity.


  • These have led to cereal centric agriculture with distorted cropping patterns. Natural resources like groundwater are declining at a heavy rate. They do not see any incentive in saving the resources.
  • Regional disparities and biased toward large farm holders is another disadvantage. They are generally not successful in reaching the target beneficiaries because of loopholes like corruption, identification, lobbying by rich farmers etc.
  • It is generally misused to gain political mileage during elections, for example, farm loan waiver etc.
  • It does not lead to infrastructure creations.

Overall Issues related to Agricultural subsidies and their solution:

  1. 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.
  2. Subsidy in the form of free electricity has led to 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 network can be used which will supply electricity only for a few hours in a day. Precision irrigation or micro-irrigation facilities can be incentivized.
  3. The recommended use of NPK fertilizer is in the ration 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.
  4. The subsidies many a time have great exclusion error and it missed out on the farmers who are at the utmost need of this. Technological interventions like Aadhar based identification, JAM trinity can help in solving this issue.
  5. 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. The 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 the produce. eNAM can be used for marketing purposes.

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