REPORT

ON
“Subsidies an integral
part of agricultural
finance”

Group 5
Name PRN
Bhanu Piyush Singh 22020242011
Janhvi Pulast 22020242024
Kshitij Gour 22020242031
Kushal Sagar 22020242034
Rajib Debnath 22020242048
Suman Barik 22020242058
Sudhanshu Chhatrapati Wakade 22020242065
Table of Content:
 Overview
 For and Against
 Analysis
 References
 Bibliography

Overview
 A subsidy is a grant of money from an outside third party to either the
buyer or the seller of a commodity. Subsidies allowed buyers to procure a
commodity/service at a lower price than would otherwise have been
necessary. Similarly, a business firm will not stay operating unless
revenue is enough to cover cost plus some return on investment. If
revenue from buyers is insufficient, a subsidy from an outside agency
may keep the firm in operation.
 The effect of a subsidy is the opposite of the effect of a tax and a
subsidy is the opposite of a direct tax while a subsidized commodity is
the opposite of a taxed commodity. Hence, subsidies are sometimes
called negative taxation. Providing minimum consumption entitlement
 to the poor by subsidizing the items consumed by them is an extremely
important welfare dimension of fiscal policy.
 Subsidies can correct for the under-consumption of goods with positive
externalities. With the social benefits of a particular service or
commodity exceeding the aggregate of private benefits to individual
consumers, market solutions result in underconsumption and subsidies
can make the necessary correction. However, the benefits can be
maximized only when the subsidies are transparent, well-targeted, and
suitably designed for effective implementation without any leakages.
However, subsidies can generate negative effects also. Once received,
people become dependent on the subsidies.
 Hence, subsidies are sometimes termed sweet poison. Misuse of
subsidies for political purpose is known worldwide. Subsidies support
one industry at the expense of the other. When a person is given a subsidy
benefit, it imposes burden on some other person in the country. Subsidies
interfere with the free working of the economy in the following ways
Through subsidies, free money circulates in the economy without
increase in actual income/production.
 Subsidies make the beneficiaries lethargic.
 Subsidies in India lead to misallocation of resources. Malpractices have
often been noticed in the administration of subsidies.
 Subsidies are often misused by politicians. Subsidies represent a sizable
item of the non-Plan revenue expenditure of the Government of India. In
the 2006-07 budget, they accounted for Rs. 46,213 crores (13.4 percent)
out of total non-Plan revenue expenditure of Rs. 3,44,430 crores.
 Food and fertilizers are the two main items subsidized by the
Government through budgetary support. Of late, drastic changes have
occurred in Government's policy towards subsidies. The crux of this
policy is to roll back subsidies and thus curb the growth of non-Plan
expenditure. Another dimension of the present policy is to restrict the
availability of subsidized items to vulnerable sections of society.
 Three reasons account for the increase in the Central Government
subsidies in recent years: moving the petroleum sector to a transparent
system of budgetary subsidies and delay in the announced phasing out of
the subsidies on PDS, kerosene and domestic LPG.
 Increase in input costs unaccompanied by any improvement in recovery
rates resulting in escalation of implicit subsidies on a variety of economic
and social services. The reforms programme initiated in 1991 aimed at,
among other things, reducing fiscal imbalances and improving allocative
 efficiency by minimizing the distortions in relative prices arising from
budgetary and fiscal imprudence. Containing and targeting subsidies
constituted an essential element of reforms. Containment and targeting of
subsidies can serve the following objectives: remove economic
distortions, thereby improving economic efficiency and growth. achieve
redistributive objective.

National Common Minimum Programme (NCMP)

The government of India pledges: "All subsidies will be targeted sharply at the
poor and the truly needy like small and marginal farmers, farm and urban poor."
Government showed its seriousness about targeting subsidies for the poor and
the truly needy in the budget speech for 2006-07.
Extensive discussions with stakeholders on three major subsidies, namely food,
fertilizer and petroleum were held for the purpose. Views of the general public
were also sought. Working groups/ committees have gone into the question of
fertilizer and petroleum subsidies.
The latest committee formed in this regard is Dr. C. Rangarajan Committee.
Government is trying to evolve a consensus on the issue of subsidies. However,
the Government has pledged that all subsidies will be targeted sharply at the
poor and the truly needy the small and marginal farmers, farm labor and urban
poor. Subsidies are offered by the Government of India in the following
divisions:
▫ Subsidies for Agriculture and Allied Sectors
▫ Subsidies for Food Security
▫ Subsidies for Industrial Development and Export Promotion
▫ Subsidies for Employment and Labour Welfare
▫ Subsidies for Energy and Transport Development
▫ Subsidies for Health and Education
▫ Subsidies for Housing and Urban Development
▫ Subsidies for Rural Infrastructure and Development
▫ Subsidies for Welfare of Women, Children and Disadvantaged Groups
▫ Subsidies for Development of Special Problem Regions

Provision for Public Goods

The government is big and important in our times. We depend government to
protect ourselves against external aggression, injustice, exploitation,
unemployment and poverty.
Furthermore, government is expected to provide educational, medical and
housing facilities, build roads, bridges and communication networks, ensure
personal freedom and enforcement of contracts and maintain our democratic
institutions and cordial relations with foreign countries. Though the list is not
exhaustive, it does provide an idea of the amplitude of the multifarious activities
of modern governments.

Market for Private Goods

Market mechanism operates almost successfully in the case of private goods.

The two chief characteristics of private goods are:
Benefits derived are internalized, and consumption is rival. In other words, the
market for private goods functions on the basis of the exclusion principle ording
to this principle, he who pays the price gets the commodity, and he who does
not pay the price is denied the same. The principle applies in the case of private
goods like food, furniture, houses, cycles, and hundreds of other marketable
goods. As we see in our daily life, the nature of these goods is such that the
exclusion principle can be readily applied. When A pays the price, he is handed
over the shirt but B is refused the same if he fails to make the payment. This is
so because benefits derived are internalized and consumption is rival.
Limitations of Market Mechanism:
▫ Left to itself, the market mechanism cannot perform all economical
functions optimally. The premise that the market mechanism reduces in
the cheapest way what consumers want the most is based on the
following assumptions:
▫ There is a perfect competition in the factor market as well as in the
commodity market.
▫ Individuals can be excluded from consuming goods if they do not pay for
them.

These conditions are rarely fulfilled in practice. Monopolistic and oligopolistic

tendencies replace competitive forces to rob capitalism of its virtues. To quote,
"In reality, various difficulties arise. Markets may be imperfectly competitive,
production may be subject to decreasing cost, consumers may lack sufficient
information or be misled by advertising, and so forth.

State intervention becomes necessary to curb such tendencies to protect

consumers' interests. Even if it is assumed that competition is assured in the
factor and commodity markets, still certain goods, because of their peculiar
production and consumption characteristics, cannot be provided through he
market mechanisms. In view of the problem of externalities, certain services
(like defense, and street lighting) have to be provided through the public sector.
This leads us to the discussion of public or social goods.

Public (or Social) Goods

According to Richard Musgrave, "Social goods are goods the consumption of
which is non-rival. That is, they are goods where A's partaking of the
consumption benefits does not reduce the benefits derived by all others." Two
appropriate examples or non-rival consumption are:
(a) defense services
(b) internal security.
Market mechanism fails in the case of public goods. The production and
consumption characteristics of social goods are that they cannot be provided
through the market economy. It would be inefficient to apply exclusion
principle in the case of above two services. Efficient resource use requires that
price should equal marginal cost. Since the marginal cost in this case is zero, the
additional Consumer should be admitted even if he pays zero price. It is
noteworthy that exclusion, even if desired, is not possible in the above
mentioned two cases. In short, market may fail due to non-rival consumption or
due to non-excludability or both of these reasons.

Classification of Subsidies (in order of preference)

Subsidies are financed either from tax or non-tax revenue, or result in a deficit.
Since some subsidies are less justifiable than others, it is important to categories
services in terms of their desirability vis-à-vis subsidization.
Subsidies are generally classified into the following three categories: public
goods, merit goods and non-merit goods.
Public Goods: The best examples of public goods are defense, internal security
and general administration. These services are characterized by non-rivalry and
non-excludability in consumption. Such services are available to all citizens and
cannot be priced. Hence, they are not included in the calculation of subsidies.
Merit Goods: These goods encompass a large variety of services like anti-
pollution measures, malaria eradication programme, primary education and
health, roads and bridges, scientific research, flood control, and soil and water
conservation. The social benefits resulting from these services are much greater
than the sum of private benefits to individual consumers. This is so because
these services contain elements of externality beneficial to the society as a
whole. Subsidies on these services are justified because of availability of
benefits in the form of externality.
Non-merit Goods: These include, inter alia, food, fertilizers, higher education.
The element of externality is either absent or limited. Social and equity
objectives are generally the ground for subsidizing these services. Considerable
controversy exists about such subsidies.

Role of Subsidies

♦ Subsidies play a vital role in the economy of a country. A country has

various resources which are to be gainfully deployed for the benefit of the
population of the whole country.
♦ Subsidies are provided to ensure equitable utilization of the resources for
the people. The developed, developing and underdeveloped have different
kinds of subsidies. countries are provided to ensure equitable utilization
of the resource for the people.
♦ Subsidies are the converse of indirect taxes and are specific to the transfer
of goods and services. Subsidies are different from payments, which are
straight income supplements to individuals, who are normally poor and
vulnerable.

Effects of Subsidies
 Positive Effects of Subsidies: Providing minimum consumption entitlement to
the poor by subsidizing the items consumed by them is an extremely important
welfare dimension of fiscal policy. Subsidies can correct for the under-
consumption of goods with positive externalities. With the social benefits of a
particular service or commodity exceeding the aggregate of private benefits to
individual consumers, market solutions result in under-consumption and
subsidies can make the necessary correction. However, the benefits can be
maximized only when the subsidies are transparent, well targeted, and suitably
designed for effective implementation without any leakages.
Negative Effects of Subsidies: Subsidies can generate negative effects also.
Once received, people become dependent on the subsidies. Hence, subsidies are
sometimes termed as sweet poison. Misuse of subsidies for political purpose is
known worldwide. Subsidies support one industry at the expense of the other.
When a person is given subsidy benefit, it imposes burden on some other person
in the country. Subsidies interfere in the free working of the economy in the
following ways Trough subsidies, free money circulates in the economy without
increase in actual income/production. Subsidies make the beneficiaries
lethargic.

Measures for Effective Utilisation of Subsidies

Operational inefficiency in the case of provision of any public good or service
leads to higher cost of production and greater subsidies. There is a wedge
between subsidies that are actually received by the users of the service and
subsidies that are borne by the Government. Several types of inefficiencies may
accompany the public provision of services. Apart from direct costs like
overstaffing, poor maintenance of assets, procedural delays, and delays in
taking critical decisions, there are systemic inefficiencies.
Subsidies can prove effective to achieve the desired goals if they have the
following components:
1. The focus should be on physical achievements and not on financial
disbursements.
2. The effects of subsidies should be monitorable and measurable in terms
of quality or quantity.
3. Subsidies should be given as a one-time help or for a short period.
Subsidies on continuing basis should be avoided.
4. The parameters fixed for the subsidy should be transparent.
 5. Subsidies should be cost-effective. Most of the assistance should reach
the intended beneficiary and very small amount should be spent on
administrative arrangements
6. Subsidies should be properly targeted, i.e., benefit should go to the really
deserving.
7. Timing of subsidies should be made proper. For example, free seed
distribution should be just before sowing

Subsidies in India
Subsidies represent a sizable item of the Centre's non-Plan revenue
expenditure. In the 2006-07 budget, they accounted for Rs. 46,213 crore (13.4
per cent) out of a total non-Plan revenue expenditure of Rs. 3,44,430 crores.
Food and fertilizers are the two main items subsidized by the Government
through budgetary support.

Vadilal Dagli Committee (1979):

The Committee was set up to evaluate and review the whole gamut of controls
and subsidies and make suitable recommendations under the chairmanship of
Shri Vadilal Dagli. The Committee submitted its report in May 1979.
The manner in which subsidies had actually operated whether or not the
objectives sought to be achieved had actually been achieved. In what manner
was the system of controls connected to the system of subsidization in the
national economy. Are such subsidies justifiable and will it be possible to
moderate or eliminate the system of subsidisation by suitable modification in
the system of controls. The Committee noted with concern the substantial
growth in the magnitude and diversity of subsidies.
It identified three types of subsidies:
 Direct subsidies
 Cross subsidies: without any budgetary implications where one set of
consumers subsidies the other
 Covert subsidies: the cost of a subsidy is borne by the budget but not
shown as such.

Post-liberalization Thinking on Subsidies:

Of late, drastic changes have occurred in Government's policy towards
subsidies. The crux of this policy is to roll back subsidies and thus curb the
growth of non-Plan expenditure. Another dimension of the present policy is to
restrict the availability of subsidized items to vulnerable sections of society.
Reasons account for the increase in Central Government subsidies in recent
years:
o Moving the petroleum sector to a transparent system of budgetary
subsidies and delay in the announced phasing out of the subsidies on PDS
kerosene and domestic LPG
o Increase in explicit budgetary subsidies on food and fertilizer, and
increase in input costs unaccompanied by any improvement in recovery
rates resulting in escalation of implicit subsidies on a variety of economic
and social services.
o The reforms programme initiated in 1991 aimed at, among other things,
reducing fiscal imbalances and improving allocative efficiency by
minimizing the distortions in relative prices arising from budgetary and
fiscal imprudence.
Containing and targeting subsidies constituted an important element of reforms.
Containment and targeting of subsidies can serve the following objectives:
 Remove economic distortions
 Improving economic efficiency
 Growth

Subsidies for Agriculture and Allied Sectors

These are the various sub-sections under which the subsidies are provided to the
farmers for agriculture development as a whole.
 Agricultural Development in General
 Agriculture Extension Work
 Irrigation Development
 Use of Fertilizers
 Cooperatives
 Animal husbandry
 Horticulture
 Fisheries

Current scenario of Subsidies in Agriculture

  The government expects to budget around 2.3 lakh crore for food
subsidies in the upcoming fiscal year, compared with 2.7 lakh crore for
the current year to March 31 which shows how the government has
started to think about reducing the quantum of subsidies provided.
 A/c to government officials who are aware of the proceedings, spending
on fertilizers subsidies will likely fall to about 1.4 lakh crores compared
with about 2.3 lakh crore. The scenario will be clear when the budget of
2023-24 Budget in the parliament.
 The reduction in fertilizer is not just a tool for reduction in the
expenditure but it is also driven by the global market forces as crude oil
prices are expected to be low and the revision in gas procurement policy
for fertilizer companies.
 This clearly indicates that the government is trying to trace the number of
subsidies and curtail the quantum of money diverted to schemes which
are not the need of the hour by keeping up with the dynamics of the
market and accordingly adjusting the expenditure pattern.
 Considering the current ongoing economic crisis due to inflation rate
floating around 6%, the government along with RBI is finding various
sources for revenue generation through tax collection along with
decreasing its expenditure to avoid the headwinds and meet the fiscal
deficit target of 6.4% of GDP in FY 23.
 Food and fertilizer subsidies alone account for about 1/8 th of India's
total budget spending of 39.45 lakh crores this fiscal year(Source:
Reuters)
Road ahead for subsidies
 The reduction in fertilizer is not just a tool for reduction in the expenditure but it is also
driven by the global market forces as crude oil prices are expected to be low and the
revision in gas procurement policy for fertilizer companies.
 This clearly indicates that the government is trying to trace the number of subsidies and
curtail the quantum of money diverted to schemes which are not the need of the hour by
keeping up with the dynamics of the market and accordingly adjusting the expenditure
pattern.
 For FY 22-23, 27.6 billion $ is allocated for food & Agriculture
subsidy
 After this huge support there is no any great improvement in farming
sector or farming community
 45% of India's population involved in Agri sector after this the
contribution of Agriculture sector is only 16-17%
 The main issues in this sector are lack of innovation, training, wastage
reduction and market reforms which is remained unaddressed
 Subsidy in power, irrigation and fertilizer led to over usage of natural
recourses as in case of Punjab it Leds to desertification
 Subsidies is being used as Vote bank

 Once received people often become dependent on the subsidies. Hence,

subsidies are termed as sweet poison
 Subsidies support one industry at the expense of the other
 As per economic survey of 2018, rich farmers are benefitted over small
farmers from the farm subsidies
 A/c income tax act 1961 section 10(1) says farmers are exempted 100%
from paying taxes and also used as tax evasion
 0.7% farmer is having more than 10 ha land
4.25% farmer is having land between 4-10 ha land
 As per IMF, India should cut its fiscal space as their expense is
continuously increasing which can lead to lower the GDP and increase
the Inflation
References:

Bibliography:
 Subsidies in India-A book by Rishi Dwivedi
 Reuters Intelligence
 BBC: Agriculture Census (2010-11)
 Articles from Business Line
 IMF report
 Statista(Indian Ministry of Finance)