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HOW FERTILISER SUBSIDY WORKS

Context: The government proposes to limit the amount of fertilisers each farmer can buy during a cropping season. What is the objective of this move, and what will its implications be, including on the subsidy bill?

Relevance:

  1. GS Paper 3: Farm subsidies and MSP and issues therein (direct and indirect); 

Mains questions:

  1. What are the different types of agriculture subsidies given to farmers at the national and state levels? Critically analyse the agriculture subsidy regime with the reference to the distortions created by it. 15 marks
  2. How do subsidies affect the cropping pattern, crop diversity and economy of farmers? What is the significance of crop insurance, minimum support price and food processing for small and marginal farmers? 15 marks

What is the farms subsidy?

  • Agricultural subsidies are monies given to farmers to support their operations. Subsidies may be provided directly, in the form of cash payments, or they may take the form of indirect support.
  • Fertilizer subsidy: Farmers buy fertilisers at MRPs (maximum retail price) below their normal supply-and-demand-based market rates or what it costs to produce/import them.

Types of the farms subsidy:

  1. Explicit input subsidy: Explicit input subsidies are payments made to the farmers to meet a part of the cost of an input. E.g. Subsidy on agriculture inputs like seeds etc.
  2. Implicit input subsidy: it is hidden subsidy or the government gives these subsidy indirectly to the farmers. E.g. Subsidy on Urea.

Rational behind farms subsidy:

  • High inputs costs: The chemical fertilizers, pesticides, seeds and other inputs are costly. The poor and marginal farmers can afford these costly inputs so the government gives subsidy on these inputs.
  • Low productivity: In India the productivity is low as compared to other countries therefore to improve the yields the government gives subsidy so that yield can be increased.
  • Food security: The farms productivity is directly related to the agricultural production. So the government provides cheap inputs so that high productivity can be maintained.
  • Doubling of farmers income: the high productivity gives higher income to farmers.
  • Protection from adverse circumstances: it helps during droughts and other adverse circumstances.

Issues related to farms subsidy in India:

  • Heavy fiscal burden: The total outgo on fertilizer subsidy alone in 2018-19 was more than Rs. 70,000 crore.
  • Excessive use of Ground water: The power subsidy has led to overuse of ground water which has further resulted into dramatic fall in ground water levels. In several villages, wells have gone dry. Water extracted from deep inside earth has shown contamination of Arsenic and other heavy metals.
  • Environmental Effects and decline in Soil Fertility: Indiscriminate use of fertilizers (recommended ratio of NPK fertilizer is 4:2:1 while actual usage is 8:3:1. Similarly, urea consumption has increased to 60% in 2018 from 55% in 2010-11) harm the soil fertility, biodiversity, and also leads to eutrophication and bio-accumulation/biomagnification.
  • No benefits to the targeted groups: Fertilizer subsidies are generally cornered by the manufacturers and the rich farmers of Punjab, Haryana and Western UP.
  • Cereal Centric, Regionally Biased, and Input Intensive: The farms subsidy has made Indian agriculture cereal centric, and neglectful towards pulses, oil seeds and coarse cereals. This has led to import of these crops and food insecurity in lower strata which depend upon coarse cereals. Also, most of the subsidies go to the rich farmers, and the rich states which are able to grow marketable surplus and have well developed infrastructure.

Measures to address the issues related to farms subsidy in India:

  • A better targeting of subsidies with the usage of JAM (JanDhan – AADHAAR- Mobile Number) trinity can reduce the fiscal burden. E.g. Under PAHAL Scheme, the government provides direct subsidy to customers. It reduced the fiscal burden of the government.
  • The government should focus on Separate agriculture feeder network (under Deen Dayal Upadhayay Gram Jyoti Yojna). This separate agriculture feeder will supply electricity only for a few hours a day. The process has shown positive results in arresting decline of ground water levels in Gujarat.
  • Creating awareness among farmers, increasing penetration of soil health card scheme, promoting organic farming and innovative products like neemcoated urea will go a long way to check the issues related to decline of social fertility and other environmental issues.
  • Crop diversification by including more crops under MSP, Mission on Integrated Development of Horticulture, Organic and Cooperative farming, food processing, mixed farming, Direct Benefit Transfer.

Recent development related to fertilizer subsidy:

  • Proposal: The Centre is working on a plan to restrict the number of fertiliser bags that individual farmers can buy during any cropping season.
  • Reasons: Being super-subsidised, urea is always prone to diversion for non-agricultural use — as a binder by plywood/particle board makers, cheap protein source by animal feed manufacturers or adulterant by milk vendors — apart from being smuggled to Nepal and Bangladesh.

Way forward: The time has come to seriously consider paying farmers a flat per-acre cash subsidy that they can use to purchase any fertiliser. The amount could vary, depending on the number of crops grown and whether the land is irrigated or not. This is, perhaps, the only sustainable solution to prevent diversion and also encourage judicious application of fertilisers, with the right nutrient (macro and micro) combination based on proper soil testing and crop-specific requirements.

Background

Minimum support price: Minimum Support Price is the price set by the government to purchase crops from the farmers, whatever may be the market price for the crops.

  • Recommended by Commission for Agricultural Costs and Prices (CACP).  it is an attached office of the Ministry of Agriculture and Farmers Welfare, Government of India.
  • The Cabinet Committee on Economic Affairs (CCEA), Government of India, determines the Minimum Support Prices (MSP) of various agricultural commodities in India.
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October 2022
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