Although price subsidies have the advantage that they are automatically targeted to those who are users of the subsidized input, they also create inefficiencies because they embed incentives for fraud, diversion, and waste.
According to the study paper prepared by Bharat Ramaswami of Indian Statistical Institute (New Delhi) for 15th Finance Commission, annual central government subsidies when added with subsidies of the statement governments to farmers are more than two lakh crores. The study focuses in the years 2017 and 2018-19 and presents the following data:
Annual central government subsidies to farmers
Rs. 120,500 crores, includes the following:
Annual State Government Subsidies
Rs. 115,500 crores, includes the following:
When the subsidies of the central government and state governments is added, it goes well above two lakh crores.
Additionally, almost every year governments bring loan waiver for the farmers; sometimes it is the statement governments. For instance, in 2017/18, state governments announced loan waives totaling to Rs. 122,000 crores.
To understand the quantum of subsidies being spent on agriculture; we can compare them with the receipts (other than net borrowings) by the government. According to the data in 2020-21 government expects Rs 22,45,893 crore.
Budget allocation for Agriculture and Farmers’ Welfare in the last two budgets
For anyone who can interpret this much of subsidy being allocated to agriculture, it is difficult to consider that despite all, why there is always a lot of hue and cry for farmers. In the report submitted to the Finance Commission it has been made clear that while the importance of subsidies to farmer livelihoods may vary by region, by crop and by farm size, they form a substantial part i.e. 20% of aggregate farm income. However, according to the report even if the government increases the subsidies significantly, which is already higher, it would not help the in addressing the sectoral gaps in productivity as it is too large.
The major reason behind the gap is small farm sizes as they are the fundamental constraint to farm incomes for a majority of workers in agriculture.
The report to the Finance Commission elaborates well on why the subsidy method is not foolproof as according to it India’s subsidies involve price interventions. Although price subsidies have the advantage that they are automatically targeted to those who are users of the subsidized input, they also create inefficiencies because they embed incentives for fraud, diversion, and waste. Overtime, as price subsidies become deeper and entrenched, these inefficiencies accumulate and may ultimately pose a threat to the sustainability of subsidies itself.
Writing for the Live Mint, Professor Himanshu of Jawahar Lal University says that the demand for guaranteed MSPs is only useful if there is also corresponding procurement. This is also a fact that not all crops are covered under MSP and not all state governments are procuring yields as some of them do not have the required infrastructure, some others do not want to get into the MSP business as well. This is always a reason a number of states have not seen any outrage from farmers as they have never been the beneficiaries of the MSP. It is the Haryana and Punjab farmers who have been selling wheat and paddy at the MSP that is well above the global prices of these two crops, who have benefitted a lot. Now, they fear that the new farm laws would take their MSP privilege away.
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