Types of Farm subsidy in Indian Agriculture

By Hemant Kumar|Updated : January 1st, 2020



The subsidy is derived from the Latin word “subsidium", which implies assistance from behind. A subsidy is often viewed as the converse of a tax and an instrument of fiscal policy.

The rationale behind subsidies

  • The economic justification of subsidies lies in incentivizing the producers to invest in productive activities and increase production leading to a high Gross Domestic Product growth rate
  • The social rationale of subsidies lies in reducing inter-personal income inequality and inter-regional development.
  • If subsidies are provided in the agriculture sector, it will promote agricultural development besides equitable distribution of income.

Types of subsidies:

The subsidies may be classified as

1. Based on the mode of payment

Direct subsidies and Indirect subsidies

  1. Direct subsidies
    • Direct subsidies are money transfers by the government that reach the ultimate beneficiary through a predetermined formal route.
    • For example, Direct benefit transfer for fertilizers.
    • Merits of direct subsidies are
      • There would be no problem of identification, as through JAM trinity or Aadhar, payments can be made directly to the beneficiaries.
      • It will reduce the problem of ghost beneficiaries.
      • It is likely to control inflation and decrease the price of fertilizer, and other agricultural products as well
  2. Indirect subsidies
  • Indirect subsidies are provided through a price reduction, welfare, and other ways but do not include a direct cash payment.
  • They reach the farmers, along with the use of input. Therefore, these are directly proportional to the amount of use of inputs by farmers.
  • Generally, more the use of inputs required higher the subsidies they enjoy.

Explicit subsidies and implicit subsidies

  • Explicit input Subsidies are payments made to the farmers to meet a part of the cost of input. These are like explicit payments made to the farmer. For example, subsidy on improved or high yielding variety seeds, fertilizers, and plant protection chemicals for certain crops.
  • Implicit input subsidies are hidden in nature. In the implicit input subsidies, prices of inputs used are administratively determined and priced low as compared to their economical cost.

2. Based on inputs, subsidies can be classified as

  1. Irrigation and power subsidy
    • Irrigation facilities are available to the farmers at a cheaper rate under the umbrella scheme of Pardhan Mantri Krishi Sinchai Yojana
    • Kisan Urja Suraksha Evam Uthaan mahabhiyan (KUSUM) scheme run by the government to provide financial and water security to farmers.
    • Solar pumps are provided at the subsidized rate to the farmers.
    • Power subsidy implies that the government charges low rates for the electricity supplied to the farmers. Power subsidy acts as an incentive for farmers to invest in pumping sets, bore-wells, tube-wells, etc. This subsidy is used to draw groundwater.
  2. Fertilizer subsidy
    • Disbursement of cheap chemical or no-chemical fertilizers among the farmers.
    • Urea is being provided to the farmers at a statutorily notified Maximum Retail Price.
    • These subsidies are provided to the farmers in the form of direct benefit transfers.
    • In some cases, this kind of subsidies are granted through lifting the tariff on the import of fertilizers
    • Neem coated urea is being provided to farmers at the subsidized rates. Earlier, 35% of the total urea production is neem coated, which is now increased to 75%.
    • The government rationalizes the urea subsidy bill with the new Urea policy, 2015.
  3. Seed Subsidy
    • Seed subsidy is granted through the distribution of high-quality seeds at a price less than the market price of the seeds.
  4. Credit Subsidy
    • Credit subsidy is the difference between the interest charged from farmers and the actual cost of providing credit
    • Loans to farmers are included in the priority sector lending.
    • Interest subvention schemes are there, which aims at providing short term credit to farmers at the subsidized interest rate.
    • Kisan credit cards are made available to the farmers for easy availability of credit to the farmers. It also helps in reducing the middlemen.
  5. Subsidy to farmers for crop loss
    • State disaster response fund and national disaster response fund will assist the farmers in the form of agriculture input subsidy(where crop loss is 50% and above) for damages caused to all types of agriculture and horticulture cropped areas due to the notified natural calamity.
    • Pardhan Mantri fasal bima yojana is a flagship scheme of the government which is used to incentivize the farmer by providing loss in case of disaster.
    • 2% Interest subventions to the farmers affected by natural calamities.
  6. Agriculture Marketing infrastructure subsidy
    • Agriculture Marketing Infrastructure (AMI), sub-scheme of an integrated scheme for Agriculture Marketing, is a demand-driven scheme for assisting in the creation of agri-marketing infrastructure including storage.
  7. Minimum Support Price
    • The minimum support price is the price the government agrees to buy all the grain offered for sale at this price.
    • It assures farmers that in case of excessive production leading to oversupply in the market, the government will procure the food grains at the predetermined price.
    • PM-AASHA scheme is there, which aims at ensuring remunerative price to the farmers and is comprised of Price support scheme, price deficiency payment scheme, Pilot of Private Procurement, and stockiest scheme.
    • Various schemes of the state government such as Bhavantar Bharpayee yojana and Bhavantar Bhugtan yojana are there intending to pay the deficit amount to the farmer or the procuring person.
  8. Direct subsidy to the farmer in the form of cash
    • Pardhan Mantri Kisan Samman Nidhi is a central sector scheme with 100% funding from the government of India.
    • Under the scheme, income support of Rs 6000 per year is provided to all the farmer's families across the country in three equal instalments of Rs 2000/- each every four months.
  9. Agriculture Extension
    • Subsidies are provided for the agriculture extension, warehouse, and other storing facilities. Kisan Vigyan Kendra, through Kisan call centres, provides free assistance to the farmers.
  10. Export Subsidies
    • This subsidy is provided to farmers who export agriculture products in the foreign market. Farmers earn money for themselves as well as foreign exchange for the country.

Subsidies on livestock

  • Government is providing subsidies to the farmer under the national livestock mission
  • National livestock mission is organized into the following four sub-missions 1) Sub-mission on livestock development. 2) Sub mission on pig development in northeastern region 3) Sub-mission on fodder and feed development 3) Sub-mission on skill development, technology transfer, and extension.
  • Further subsidies are provided for the indigenous breed of cattle
  • Similarly, subsidies are provided for the development of inland fisheries in the country.

Reasons in favour of agriculture subsidies

  • Fertilizer subsidy is a development subsidy. It accelerates the fertilizer use and promotes agriculture production. In 2003 agriculture subsidies were reduced as a result of production also decreased.
  • Seeds are distributed for subsidized rates, and subsidies are also provided for farm mechanization to boost the agriculture productivity
  • Subsidies offer employment to the unskilled workforce and contribute to the human capital for agriculture needs.
  • In India, nearly 50 % of people are involved in the agriculture sector. Subsidies help them in reducing inequalities.

Reasons against agriculture subsidies

  • Farmers are using excessive fertilizer than required that are harming not only the soil but the whole environment, including the health of farmers itself.
  • Subsidies given to farmers for electricity has resulted in the drawing of groundwater in huge excess. This has resulted in the lowering of the water table and soil salinity in the area. For example, Punjab
  • Rich Farmers get the most benefit of the subsidies instead of small marginal and landless farmers.
  • The excess subsidies come at the cost of public investment in agriculture research.
  • Environmental effect and decline in soil fertility.

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write a comment
Shreya Sunakshi
Thanks sir. It is really helpful.
Vishnu Vardhan Reddy Kona
Thank you sir for your analysis,it's better and very helpful...
Sir Hindi valo pr dya kariye. Please Hindi me available kra dijiyega

NidhiJan 2, 2020

Hindi please
Rehana Mansuri
Hindi me bhi diya karo
Harjot Singh
Very well written brother

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