Agri Subsidy and Need for Reform
Kartavya Desk Staff
Source: IE
Subject: Agriculture
Context: Recent discussions in the 2026 Union Budget cycle focus on rationalizing food and fertilizer subsidies—which account for roughly 8.5% of the total budget—by potentially merging them into an augmented PM-Kisan scheme.
About Agri Subsidy and Need for Reform:
What it is?
• Agricultural subsidies are financial aids provided by the government to farmers to reduce input costs (fertilizers, power, seeds) or ensure price stability (MSP).
• Reform is needed because the current “blanket” approach leads to environmental degradation, soil toxicity from urea overuse, and skewed crop choices that favor cereals over nutritious pulses and oilseeds.
Trends and Data on Agri Subsidy:
• Total Outlay: For FY 2025-26, the combined food and fertilizer subsidy is pegged at approximately ₹3.71 lakh crore.
• Food Subsidy Bill: Expected to touch ₹2.03 lakh crore, covering nearly 56% of the population (813 million people).
• Fertilizer Subsidy Bill: Allocated at ₹1.67 lakh crore, making it the second-largest subsidy component in the Union budget.
• MSP tripling: MSP payouts have more than tripled over the last decade, reaching ₹3.33 lakh crore by June 2025.
• Input Imbalance: India’s import dependency for raw materials like potash and phosphate remains high at 90% and 60% respectively, driving up the subsidy burden.
Importance of Subsidies in Indian Agriculture:
• Ensuring Food Security: Subsidies keep staples affordable for the underprivileged under the NFSA and PMGKAY.
E.g. The PM Garib Kalyan Yojana provides 5kg of free grains to 813 million people, shielding them from food inflation.
• Shielding from Global Volatility: Input subsidies protect farmers from sudden spikes in international raw material prices.
E.g. In 2025, the government provided a special package of ₹3,500/t for DAP to keep the MRP stable despite rising global phosphoric acid costs.
• Encouraging Crop Diversification: Targeted subsidies help shift focus from paddy/wheat to oilseeds and pulses.
E.g. Under the Mission on Pulses, 100% of tur, urad, and masur production is being procured at MSP to achieve self-sufficiency by 2027.
• Promoting Modern Technology: Financial aid reduces the barrier to entry for high-tech farming equipment.
E.g. The Sub-Mission on Agricultural Mechanization provides 40-50% subsidies on drones and automated sprayers to marginal farmers in 2025-26.
• Climate Resilience: Subsidies for micro-irrigation and solar power help farmers adapt to erratic monsoons.
E.g. PM-KUSUM has solarized 49 lakh agricultural pumps by early 2026, reducing diesel dependency and lowering operational costs.
Initiatives Taken for Reform:
• Digitalization of PACS: A ₹2,925 crore project to computerize nearly 80,000 Primary Agricultural Credit Societies for transparent credit delivery.
• Nutrient-Based Subsidy (NBS) Expansion: Inclusion of new fortified fertilizer grades (e.g., Magnesium and Zinc) to promote soil health over pure Nitrogen (Urea) use.
• PM-PRANAM Scheme: Incentivizing States to reduce chemical fertilizer use by sharing 50% of the subsidy savings as a grant for alternative fertilizers.
• DBT Integration: Transferring over ₹3.7 lakh crore directly to 11 crore farmers under PM-Kisan, eliminating middleman leakages.
Challenges to Agri Subsidies:
• Skewed Nutrient Use: Massive urea subsidies lead to a N:P:K ratio far from the ideal 4:2:1, causing soil toxicity.
E.g. In North-West India, excessive urea application has contaminated groundwater and depleted soil organic carbon to critical levels in 2025.
• High Fiscal Burden: Subsidies consume nearly 10% of the total budget, leaving less for long-term R&D.
E.g. The ₹2 trillion fertilizer subsidy in 2025-26 dwarfed the entire budget of the Ministry of Agriculture (₹1.37 trillion).
• WTO Compliance Issues: India often nears the 10% de minimis limit for trade-distorting Amber Box subsidies.
E.g. Excessive MSP procurement for rice and wheat often attracts challenges from developed nations at WTO ministerial meets.
• Inequitable Distribution: Benefits are often cornered by large farmers in states with robust procurement systems.
E.g. While Punjab and Haryana benefit from nearly 100% procurement, farmers in Eastern India often sell below MSP due to lack of infrastructure.
• Leakage and Mis-targeting: A significant portion of subsidized fertilizers intended for farms is diverted to industrial uses.
E.g. Despite Neem-coating, reports in 2025 suggest nearly 20-25% of urea continues to leak away into non-agricultural sectors.
Way Ahead:
• Merge Food & Fertilizer Subsidies: Gradually consolidate multiple subsidies into a single, higher-value Direct Benefit Transfer (DBT) under the PM-Kisan framework.
• Urea Rationalization: Bring Urea under the Nutrient-Based Subsidy (NBS) regime to encourage balanced fertilization and reduce groundwater contamination.
• Targeted PDS Coverage: Gradually reduce the PDS beneficiary list from 56% to focus strictly on the extremely poor (Antyodaya) based on World Bank poverty metrics.
• Invest in “Green Box” Measures: Shift spending from price support to R&D, irrigation, and cold-chain infrastructure, which are WTO-compliant and drive long-term productivity.
• Transform FPS into Nutrition Hubs: Convert Fair Price Shops into centres that provide diverse foods like milk, pulses, and eggs instead of just cereals.
Conclusion:
Reforming India’s agricultural subsidies is now essential for environmental sustainability and fiscal prudence. Shifting from price support to direct income transfers and green investments can empower farmers while aligning with global trade norms. A rational, technology-driven subsidy regime can make agriculture a true engine of growth for Viksit Bharat 2047.
Q14. What are the direct and indirect subsidies provided to farm sector in India? Discuss the issues raised by the World Trade Organization(WTP) in relation to agricultural subsidies. (Answer in 250 words)