Model Answer
0 min readIntroduction
Agricultural subsidies are government interventions aimed at influencing the price of agricultural commodities, supporting farmers’ incomes, or ensuring food security. In India, these subsidies have evolved significantly since independence, becoming a crucial component of the agricultural policy landscape. However, these subsidies have frequently drawn scrutiny from the World Trade Organization (WTO), which aims to promote fair trade practices. Recent concerns revolve around India’s procurement policies and their potential to distort global agricultural markets, particularly in the context of food security. This answer will detail the various subsidies provided to the Indian farm sector and the issues raised by the WTO in relation to them.
Direct Subsidies
Direct subsidies are those provided directly to farmers, usually linked to inputs or production.
- Fertilizer Subsidies: A significant portion of fertilizer costs are subsidized by the government through Nutrient Based Subsidy (NBS) scheme, aiming to ensure affordability and balanced nutrient application. (As of 2023-24, the total fertilizer subsidy was estimated at ₹1.75 lakh crore).
- Seed Subsidies: Subsidies are provided for the purchase of improved seeds, particularly for oilseeds, pulses, and cotton, under schemes like the National Food Security Mission (NFSM).
- Irrigation Subsidies: Subsidies on electricity for irrigation, and schemes promoting micro-irrigation (like PMKSY-Per Drop More Crop) reduce water costs for farmers.
- Income Support: The PM-KISAN scheme provides ₹6,000 per year to small and marginal farmers, directly transferring income support.
Indirect Subsidies
Indirect subsidies are those that benefit farmers through policies affecting input costs or output prices.
- Minimum Support Price (MSP): The government announces MSPs for 23 major agricultural commodities, providing a price guarantee to farmers. Procurement at MSP, particularly for rice and wheat, is a major indirect subsidy.
- Procurement Operations: Government agencies like FCI procure grains at MSP, storing and distributing them through the Public Distribution System (PDS). This creates a guaranteed market and supports prices.
- Power Subsidies: Subsidized electricity rates for agricultural use, though often leading to inefficiencies.
- Credit Subsidies: Banks provide agricultural loans at subsidized interest rates, often below the prevailing market rates (through interest subvention schemes).
- Export Subsidies: While officially phased out, various export promotion schemes can indirectly act as subsidies.
WTO Concerns Regarding Agricultural Subsidies
The WTO’s Agreement on Agriculture (AoA) categorizes subsidies into three ‘boxes’ – Green, Amber, and Red – based on their trade-distorting potential.
| Box | Type of Subsidy | WTO Rules |
|---|---|---|
| Green Box | Subsidies decoupled from production (e.g., research, infrastructure) | Generally not subject to reduction commitments. |
| Amber Box | Subsidies linked to production (e.g., MSP, input subsidies) | Subject to reduction commitments based on a formula. |
| Red Box | Prohibited subsidies (e.g., export subsidies) | Illegal under WTO rules. |
- Domestic Support Limits: The AoA sets limits on the total amount of domestic support a country can provide to its agricultural sector. India’s domestic support has often been close to, or exceeding, these limits, particularly due to MSP-based procurement.
- Market Price Support (MPS): WTO is concerned about India’s MSP program, arguing it provides significant price support, distorting global markets. The calculation of MPS is complex and a point of contention.
- Public Stockholding for Food Security: India argues that its procurement policies are essential for food security, and the MSP-based procurement should be exempt from subsidy limits. However, WTO members are hesitant to grant a permanent exemption.
- Peace Clause: A temporary ‘peace clause’ was negotiated allowing India to continue its MSP-based procurement without facing legal challenges, but it requires strict adherence to reporting requirements and is subject to review.
- Export Restrictions: While not a subsidy *per se*, WTO rules also address export restrictions, and India’s occasional restrictions on agricultural exports have raised concerns about market access.
The ongoing negotiations at the WTO aim to find a permanent solution to the issue of public stockholding for food security, addressing the concerns of both India and other member countries.
Conclusion
India’s agricultural subsidies are a complex issue, balancing the need to support farmers, ensure food security, and comply with international trade obligations. While the WTO acknowledges the importance of food security, it remains concerned about the trade-distorting effects of certain subsidies, particularly MSP-based procurement. Finding a mutually acceptable solution that addresses India’s concerns while upholding the principles of fair trade remains a significant challenge in the ongoing WTO negotiations. A shift towards decoupled subsidies and investments in agricultural infrastructure could be a pathway towards a more sustainable and WTO-compatible agricultural policy.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.