Farm subsidies are a governmental subsidy paid to the farmers to supplement their incomes and enhance their farm productivity. In India, the overall farm subsidies amount to 2-2.25% of GDP. Further, agricultural subsidies can be categorized into direct and indirect farm subsidies.

• Direct Farm subsidy: It involves rendering cash to the recipient farmers. It is provided in the form of MSP base procurement, direct cash transfer etc.
• Indirect Farm subsidy: It is an indirect way of supporting farmers, which includes cheap credit facilities, farm loan waivers, reduction in irrigation and electricity bills, investment in agricultural research, farmer training etc.

While the agricultural sector in India is highly dependent on these subsidies, both these types of subsidies have their own merits and demerits.

Merits of direct farm subsidy

• Increased productivity: It increases the purchasing capacity and choices for the farmers. The farmers can take decisions on the type of crops to be grown according to the local conditions and profitability.
• Better targeted: Use of JAM Trinity and DBT has ensured that there are less pilferages and leakages. The funds are directly transferred to the accounts of the beneficiaries.
• Counters inflation: According to RBI, direct transfer will improve efficiency in expenditure, reduces fiscal deficit and thereby helps keep inflation under control.
• Behavioural changes: DBT incentivises the farmers to make judicious use of fertilizers and water.

Demerits of direct farm subsidy

• Diversion of funds: It is highly likely that funds might be digressed to non-agricultural and non-productive uses like purchase of alcohol.
• Exclusion: Owing to the inefficiency in the land administration system, many rightful beneficiaries may not get the benefits. Tenancy farmers: Direct transfers, if linked to land ownership, offers no support to tenant farmers.
• Exposure to market risks: Direct transfers, in the absence of indirect subsidies, exposes the farmers to volatility of the market mechanisms. They might have to buy seeds and fertilizers at a much higher rate due to inflation in the market.

Merit of Indirect Farm subsidy

• Favourable to small and marginal farmers: These farmers cannot buy farm inputs at the market rates. Therefore, indirect subsidy helps in maintaining sustained flow of inputs like fertilizers, water supply, electricity, hybrid seeds at reasonable prices.
• Creation of better human resources: Indirect subsidy in the form of training support and technological assistance helps in enhancing the farmers’ knowledge, and thereby, improves farm productivity and income.

Demerits of indirect farm subsidy

• Affects cropping pattern: It distorts the cropping pattern as farmers are incentivized to dedicate more resources to subsidized crops (wheat, rice, sugarcane etc.) leading to less production and higher prices for other items like fruits, vegetables etc.
• Unsustainable use of resources: It leads to overutilization of fertilizers and power subsidies that causes land degradation due to increased salinity and reduced fertility of the soil. Also, it diminishes ground water resources in regions where high subsidy is accorded to the crops like sugarcane and rice.
• Mistargeting: Indirect subsidies are not successful in reaching the target beneficiaries because of several lacunas in identification, corruption, lobbying by rich farmers etc.

Even though India’s agriculture sector is largely dependent on subsidies for sustainability, the government must look to rationalize the subsidies in a manner that it should not distort resource allocation and lead to over utilization of resources.