Indirect Subsidies

The Government provides a variety of subsidies to the farmers in India. All such subsidies can be classified into:

1. Indirect Subsidies: Those subsidies that are provided through market intervention. These subsidies distort the prices in the market. These can further be divided as:
   • Input subsidies: For example, cheap supply of fertilisers (fertiliser subsidies)
   • Price support subsidies: For example, Minimum support price (MSP) enables the purchase of farming goods from the farmers.
   • Export support: These are typically provided in the western countries on the volume of export.
2. Direct subsidies: Those subsidies which are transferred into the accounts of the farmers directly. Such subsidies do not distort the market. All indirect subsidies can be converted into direct subsidies. For example:
   • Input subsidies: Instead of providing fertilisers at a cheaper price, the government can allow farmers to buy fertilisers from the open market and pay the price difference into the account of the farmers directly.
   • Subsidy on produce: The government can allow produce to be sold in the mandis openly at any lower price than the MSP, and then provide the difference between the MSP and the market price as a subsidy to the farmers in their account directly.

Direct subsidy vs Indirect subsidy

Limitations of Indirect subsidy:

• It will distort the market, leading to over-utilization or over-production.
  1. Over-Production: We have seen that the mechanism of Minimum support price has led to the over-production of rice in India and the mechanism of Fair and remunerative price (FRP) has led to the over-production of sugar in various parts of India.
  2. This often becomes a vicious cycle. The greater the production, the greater the amount of subsidy, which in turn encourages farmers to produce even more of the same crop.
• Overuse: India uses Urea in an excessive amount which pollutes the land as well as the water bodies.
• International backlash: Indirect subsidies are against the Free market principle. Under the WTO’s agreement on Agriculture, no country can provide subsidies greater than 10% of the total value of production of the product. But indirect subsidies often value more than that.
• Environmental Hazard: the tendency for overproduction is often done at the cost of greater utilisation of groundwater, pesticides and fertilisers which is not good for the environment.
• Ignores the real market demand: India, for example, imports oilseeds and pulses, but the wrong subsidy structure demotivates farmers from growing these crops.

In conclusion, through indirect subsidies, it is the government that decides what to grow and what not to, which is inherently faulty.

However, Indirect subsidies have certain advantages over direct subsidies.

Advantages of Indirect subsidies over direct subsidies

• More Effective: It gives a clear indication to the farmer about what to grow and what not to. This has enabled India to achieve food security.
• Little exclusion and Inclusion errors: Indirect subsidies are generally based on market mechanisms and are open to all. However, for direct subsidies, one has to be identified as an eligible beneficiary, which can cause bureaucratic hurdles.

Minimum Support Price (MSP)

Minimum Support Price (MSP) is a scheme designed for price assurance on farm produce.

• Crops included: It is now applicable on 23 farm commodities:
  • 7 cereals (paddy, wheat, maize, bajra, jowar, ragi and barley),
  • 5 pulses (chana, arhar, moong, urad and masur),
  • 7 oilseeds (groundnut, soybean, rapeseed-mustard, sesamum, sunflower, nigerseed and safflower) and
  • 4 commercial crops (sugarcane, cotton, copra and raw jute).

Crop	2021-22	2022-23	% rise
	(Rs/quintal)	(Rs/quintal)
Wheat	1,975	2,015	2.03
Barley	1,600	1,635	2.19
Gram	5,100	5,230	2.55
Masur (lentil)	5,100	5,500	7.84
Rapeseed and Mustard	4,650	5,050	8.6
Safflower	5,327	5,441	2.14

Procedure for Determination of MSP

Recommendation: CACP (Commission for Agricultural Costs and prices) recommends MSP for 22 crops and Fair & Remunerative Price (FRP) for sugarcane.

Factors taken into account in the determination of input costs:

• Cost of production, Changes in input prices.
• Input–output price parity, Demand and supply, Inter-crop price parity, and Parity between prices paid and prices received by the farmers.
• International price situation, Trends in market prices.
• Effect on industrial cost structure, cost of living, general price level, issue prices and implications for subsidy.

CACP gives three definitions of production costs

• A2 costs: It covers all paid-out expenses, both in cash and in kind, incurred by farmers on seeds, fertilisers, chemicals, hired labour, fuel, irrigation, etc.
• A2+FL covers actual paid-out costs and an imputed value of unpaid family labour.
• C2 costs: It also covers rentals & interest forgone on owned land and fixed capital assets respectively.

Procurement

• Declaration: It is then declared by CCEA (Cabinet committee on Economic affairs) on the recommendation of CACP. FRP for Sugarcane is declared by the Department of Food &Public Distribution on the recommendation of CACP.
• Procurement: through various public and cooperative agencies: FCI, Cotton Corporation of India (CCI), Jute Corporation of India (JCI), Central Warehousing Corporation (CWC), National Agricultural Cooperative Marketing Federation of India Ltd. (NAFED), National Consumer Cooperative Federation of India Ltd. (NCCF), and Small Farmers Agro Consortium (SFAC).

Besides, State Governments also appoint state agencies to undertake Procurement operations.

Sugarcane Subsidy

Fair and Remunerative Price (FRP) of sugarcane:

The current scheme for the procurement of Sugarcane has been effective from the 2009-10 sugar season. CACP is similarly required to pay due regard to the statutory factors listed in the Control Order, which are similar to MSP’s factors:

• Cost of production of sugarcane, the return to the grower from alternative crops and the general trend of prices of agricultural commodities;
• Availability of sugar to the consumers at a fair price;
• Price of sugar & recovery rate of sugar from sugarcane;
• The realization made from the sale of by-products viz. molasses, bagasse and press mud or their imputed value (inserted in December 2008) and;
• reasonable margins for growers of sugarcane on account of risk and profits (inserted in October 2009).

State Advised Price(SAP):

Declare by the state govt., usually higher than the FRP.

• Populist measures in SAP have resulted in excessive production of sugarcane.
• This has resulted in large arrears owed by the mills to the farmers.

Note: These costs vary from region to region depending on factors determined by CACP.

M S Swaminathan committee’s recommendation

The Swaminathan Commission has recommended fixing MSP at “at least 50% more than the weighted average cost of production”.

• Budget 2018-19: The government declared that it has announced Swaminathan-compliant prices for all 14 crops in Rabi 2018 season
• In March 2018 Mann ki Baat, PM clearly defined ‘cost’: It takes into account the cost of workers employed, expenses incurred on own animals and cost of animals and machinery taken on rent, cost of seeds, cost of each type of fertilizer used, irrigation cost, land revenue paid to the state government, interest paid on working capital, ground rent in case of leased land, cost of labour of the farmer himself or any other person of his family who contributes his or her labour agricultural work. This includes all operational costs.
• This is A2 + FL

Importance of MSP:

• Glut in the market: A fall in demand leads to exploitation by traders.
• Prevent Distress Sale– When there is a glut in the market and produce is being purchased through away price, an assured income helps in recovery of the cost of production.
• Social Objectives: distribution of Income.
• Setting a Benchmark– A minimum income is ensured.
• Better Investing Capacity next season– encouragement to invest more in the land and machinery.
• Selecting the right crop– As government announces MSP before sowing, indirectly incentivizing certain crops.
• Food Security:
• Allied sector: Value chain: Food processing + Livestock
• Technology + mechanization.
• Credit & Insurance.

“MSP has distorted cropping patterns, with excessive focus on the cultivation of wheat, rice and sugarcane in the procurement states at the expense of other crops such as pulses, oilseed and coarse grains,” the NITI Ayog said in its Three Year Action Agenda

Major challenges of the MSP regime:

Cropping pattern & Crop diversity

• Discourage market development: Hikes in MSP also adversely affect exports by making Indian farm goods expensive. It also discourages private players from entering an overly protected market.
• Crop Imbalance: it favours rice, wheat and sugarcane disproportionately even when India imports Oilseeds, pulses and millets. It also does not cover perishables.
• Ecological Disaster– Rice – Wheat – Rice cycle due to more prominence and popularity of MSP in these farmers are reluctant to change crops which discourages crop rotation, excess use of water, deterioration of soil health etc. ultimately leading to disaster for ecology.
• Regional disparities not taken into account:The cost of cultivation varies across states but MSPs are based on the All India Average. There are many regions of the country like the north-eastern region where the implementation is too weak. The Shanta Kumar committee to review the functioning of the Food Corporation of India (FCI) found that only 6% of farmers benefit from the MSP.
• Discourages innovation and Commercialisation of Agriculture.

Economy of Farmers:

• Fiscal stress & lack of economic foresightedness –It takes above ₹1L cr to run the MSP scheme every year.
• Inflationary Pressure: MSP acts as a benchmark for the market; it often aims to push the market prices higher.
• Monopoly and corruption: The mechanism of procurement using agents or Arahtias, brings in corruption killing the competition and reducing system efficiency.
• Market distortion: output is exceeding well beyond market demand. It is difficult for Small farmers to sustain themselves.

Flawed Arithmetic:

• The MSP was announced by the government at a 50% premium of A2 + CL cost but farmers demand it at 1.5 times C2 according to the Swaminathan Commission.
• Doesn’t cover risk premium/C3 Costs: C2+ 10% managerial costs[Recommended by Ramesh Chand Committee]To account for risk premium and managerial charges.

Procurement Issues

• Lack of procurement machinery: Only a minimal amount of other crops are procured due to lack of capacity.
• Lack of storage facilities: This results in huge piling of stocks in the warehouses or spoils in rain outside storage facilities. The stock has now become double the requirements under the schemes of PDS, Buffer stock etc.

International Pressure:

• Countries like Australia have complained of the MSP on wheat, US and EU complained of sugarcane and pulses MSP. It is seen as a highly trade-distorting scheme, breaching the 10% norm for subsidy on farm production set by the WTO.

Price Discovery Strategies:

The current mechanism is based on a procurement system, driven by the prices declared by the Government.

• Open procurement system: Quite effective in the case of rice and wheat, where procurement infrastructure is good.
• Limited Procurement System: Procurement should continue till market prices touch MSP. It will not work if the MSP is fixed at a level to which the market price will never rise.

The Better way is to move toward direct subsidy structures. This can be done in two ways:

1. Price Deficiency Schemes
2. Farm Support Schemes

Price Deficiency Schemes

The price deficiency mechanism refers to paying the difference between the market price and the MSP. The government can sell the excess farm produce through various subsidies and utilize it in its welfare programs.

MSP – Actual Selling Price = Price Deficiency

Examples:

• Bhavantar Bhugtan Yojana: Started in MP for select oil-seeds.
• 2020 Bhavantar Bharpai Yojana(Haryana): Started for 19 fruits an vegetables.

Advantages fo price deficiency Mechanism:

It takes all the advantages of the Direct Benefit Transfer (DBT) –

• Little leakage and less corruption,
• And therefore more efficiency.
• Further, the government do not need to invest in the infrastructure for collection and storage of farm produce.

Problem: This doesn’t change the status of unsustainably high production over ‘normal demand’.

Farm support Schemes:

What if we don’t tell the farmer what to grow and instead hand them some cash directly instead. We have several examples of such schemes in India:

• Rythu Bandhu Scheme (Telangana): But it doesn’t cover tenants who are actual cultivators.
• Krushak Assistance for Livelihood and Income augmentation(KALIA) Scheme (Odisha):
• Krishak Bandhu: West Bengal
• Mukhyamantri Krishi Ashirwad Yojana: Jharkhand.
• The Indian Government has launched the PM KISAN.

Such schemes have several advantages:

• Equal treatment to all citizens without any social discrimination. It removes inclusion and exclusion errors.
• Liberty: It is anti-paternalistic, and opens up the possibility of flexibility in agricultural markets.
• Efficiency: It promotes efficiency by reducing waste in government transfers.
• Administrative Efficiency: When the trinity of Jan-Dhan, Aadhaar and Mobile(JAM) is fully adopted the time would be ripe for a mode of delivery that is administratively more efficient.

Disadvantages: These are only income support schemes, and do not promote increased productivity or production.

Pradhan Mantri Kisan Samman Nidhi (PM-KISAN):

The PM KISAN provides a subsidy of ₹6000/year to the farmers having cultivable land up to two hectares (1 Hectare= 2.47 acre).

• Exclusions: Certain categories of beneficiaries of:
  • Higher economic status such as institutional land holders, former and present holders of constitutional posts, persons who paid income tax in the last assessment year etc. shall not be eligible for benefit under the scheme.
  • For the purpose of exclusion State/UT Government can certify the eligibility of the beneficiary based on self-declaration by the beneficiaries.
• Good thing:
  • The Government has identified that Bataidar, Tenants are the most distressed farmers. The tenancy is as high as 60% in some areas.
  • Households covered: It covers 12.56Cr households in India. [In India there are 25Cr total families according to the government & 29Cr according to Industry.]
  • Frequent loan waivers are beneficial for only larger farmers & those who can avail of loans from formal channels.
  • Community-based benefit: PM-KISAN identifies that land ownership rights are community-based in many North Eastern states and promises that an alternative method of beneficiary identification would be developed.

Challenges in the implementation of PM KISAN:

• The Family unit is defined as the Husband, Wife & Minor children. However, sometimes local administration uses different definitions.
• One size does not fit all: The 2-hectare standard for all farmers is bad.
• Not Universal: MGNREGA is a universal program for those who are willing to do manual work; PM-KISAN is targeted.
• Identification of Beneficiaries in a messy system:
  • Weak Land records. In many states, they are not digitalized. The state has been implementing the Digital India Land Records Modernisation Programme for more than a decade. But it has not been completed. Verifying the claims of ownership is thus a daunting task. Several states are told to overhaul the databases immediately for the scheme.
  • Exclusion Errors: How would the government identify the beneficiaries who are landowners without titles? Especially the landless labours, bataidars & tenants. In some cases, Absentee landlords might actually receive the benefit.
  • Inclusion Errors: Single families may hold multiple land parcels of land, in the absence of digitized land records, exclusion of such families would be difficult.
  • Payment Problems: There is a general lack of banking infrastructure in rural areas. In MGNREGA the payments are frequently delayed by more than 50 days, against SC orders. Less than a third of payments are made on time.

Pradhan Mantri Annadata Aay SanraksHan Abhiyan’ (PM-AASHA):

It has 3 components complementing the existing schemes of the Department of Food & Public Distribution:

1. Price Support Scheme (PSS): Physical procurement of pulses, oilseeds and copra will be done by NAFED & FCI.
2. Price Deficiency Payment Scheme (PDPS): This will cover all oilseeds for which MSP is notified and the Centre will pay the difference between MSP & actual selling/model price to the farmer through DBT. Farmers who sell their crops in recognised mandis within the notified period can benefit from it.
3. The pilot of Private Procurement and Stockiest Scheme (PPSS): A private player can procure crops at MSP when market prices drop below MSP & will then be compensated up to a maximum of 15% of MSP. This is optional for states and to be used for oilseeds procurement.

Advantage:

1. Comprehensive: covers gaps in the procurement and compensation,
2. Reduces crop bias in favour of wheat, paddy and sugarcane and encourages crop diversification.
3. Use of DBT – increased efficiency.

WTO agreements on Agriculture:

• Under GATT, India is under obligation to introduce a reduction in subsidies and keep it to 10% of farmers’ value output.
• Introduction of patenting in agriculture: Under GATT, a farmer is not automatically permitted to use seeds of the protected varieties that he saved for sowing the next crop. He has either to pay compensation for the use of the seeds saved by him or to obtain permission from the breeder.
  • Ex: Farmers in Karnataka had registered their protest against this arrangement by attacking the farm of Car gill seeds, a Multi-National Seed Company.
• A jump in food prices appears to be an inevitable outcome of liberalisation. The international prices of food grains are higher than domestic prices. Any rise in food prices would hit the poor hard.

 Agreement on Agriculture

The WTO’s Agreement on Agriculture (AoA) classifies policies for agriculture into three:

• Import duties: tariff (market access).
• Export Subsidies: India does not implement such subsidies.
• Domestic Support: These include: input subsidies, subsidies for R&D, subsidies for food security etc. These are the most actively used set of policy instruments by countries for promoting their agricultural sector.

Classification of subsidies:

AoA instructs member countries to reduce trade-distorting domestic supports. These are those which influence price and production. Though the prominent boxes are three; a broad classification based upon all types of specific exemption categories will make them five:

The domestic subsidies are divided into three categories:

1. Green Box: domestic support measures that don’t cause trade distortion or at most cause minimal distortion.
   • They comprise of two support groups:
     1. Public services programmes: such as research, training, marketing, promotion, infrastructure, domestic food aid or public food security.
     2. Direct payments to producersthat are fully decoupled from production.
        • It includes income guarantee and security programmes (natural disasters, state financial contributions to crop insurance, etc.);
        • Programmes aimed at adjusting structures and environmental protection programmes, regional development programmes.

• They are therefore allowed without limits if they comply with relevant criteria.

2. Blue Box: subsidies tied to programmes thatlimit production by imposing production quotas or requiring farmers to set aside part of their land.
   • It covers payments directly linked to acreage or animal numbers (reduction).
   • The blue box measures are exempt from reduction commitments.

3. Amber box is directly linked to production and prices and hence is considered to be trade distorting. [sometimes referred to as Red box]. These subsidies are guided by the AMS system.

Aggregate Measurement of Support (AMS) system

To measure ‘amber box’ support, WTO member countries are required to compute  AMS. It is the total of product-specific support (price support to a particular crop) and non-product-specific support (fertilizer subsidy).

AMS consists of two parts—

• Product-specific subsidy: Total level of support provided for each agricultural commodity.
• Non-product specific subsidy:  Total level of support to the agricultural-sector as a whole. Subsidies on inputs such as fertilizers, electricity, irrigation, seeds, credit etc.

Under Article 6.4(b) of the AoA, developing countries such as India are allowed to provide a minimal level of product and non-product domestic subsidy.

• This ‘de minimis limit’ is capped at 10% of the total value of production of the product, in case of a product-specific subsidy; and at 10% of the total value of a country’s agricultural production, in case of non-product subsidy.
• Subsidies breaching the de minimis cap are trade-distorting. Consequently, they have to be accounted for in the AMS.

Case with MSP:

The procurement at MSP, after comparing it with the fixed external reference price (ERP) — an average price based on the base years 1986-88 — has to be included in AMS.

• Since the fixed ERP has not been revised in the last several decades at the WTO, the difference between the MSP and fixed ERP has widened enormously due to inflation.
• For instance, according to the Centre for WTO Studies, India’s ERP for rice, in 1986-88, was $262.51/tonne and the MSP was less than this. However, India’s applied administered price for rice in 2015-16 stood at $323.06/tonne, much more than the 1986-88 ERP.
• When this difference is accounted for in the AMS, the possibility of overshooting the de minimis limit becomes real.
• Procuring all 23 crops at MSP, as against the current practice of procuring largely rice and wheat, will result in India breaching the de minimis limit making it vulnerable to a legal challenge at the WTO.

Even if the Government does not procure directly but mandates private parties to acquire at a price determined by the Government, as it happens in the case of sugarcane, the de minimis limit of 10% applies.

Very recently, a WTO panel in the case, India – Measures Concerning Sugar and Sugarcane, concluded that India breached the de minimis limit in the case of sugarcane by offering guaranteed prices paid by sugar mills to sugarcane farmers.

WTO regulation on Subsidies

1. Special and Differential Treatment Box (S&DT): WTO gives special concessions to the developing countries under the S&DT box given the backwardness of their agricultural sector. The S&DT measures generally comprise of:
   1. Investment subsidies like tractors and pump sets to farmers.
   2. Agricultural input services like fertilizers to farmers: are provided only to poor farmers in developing countries. Domestic support to producers in developing country members to encourage diversification from illicit narcotic crops is also qualified under the S&D treatment box.
2. De-minimis support: It indicates the minimum level of trade-distorting (AMS) subsidies that can be given by a country to its agricultural secto This de minimis subsidy is expressed as a percentage of the country’s agricultural GDP.  The de minimis level for different countries is:
   1. 5% of agricultural GDP for developed countries, based on 1986-88 prices.
   2. For developing countriesde minimis ceiling is 10%.

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