Subsidies: Sustainability Issues

Interconnected concerns of water and energy use in the agricultural industry are an example of potential environmental or sustainability difficulties originating from current subsidy schemes. India’s agricultural production increased dramatically during the Green Revolution in the 1960s and 1970s, thanks in part to a major rise in agricultural irrigation, mainly from groundwater sources.

While increased irrigation has helped the country sustain itself, it has also resulted in a groundwater catastrophe, the scope of which has become clearer in recent years. Many portions of the country are experiencing groundwater table declines, ranging from 20cm per year in Punjab to 3 to 5 meters per year in Gujarat. In such a situation, the medium to long-term threats to agriculture varies from a potential loss in water resources to saltwater intrusion in coastal locations.

Pumping groundwater from deeper and deeper wells demands an increasing quantity of electricity as groundwater tables fall. Farmers have little motivation to adopt water-saving practices because electricity for agriculture is subsidized, creating a vicious cycle of water and energy usage. Gujarat’s government has launched a pilot program to test strategies to shift farmer incentives toward more water- and energy-efficient equipment and practices.

Agenda for Reforms

The report highlights the vast scale of government subsidies in the provision of economic and social services. Even if merit subsidies are excluded, the remaining subsidies account for 10.7% of GDP, with center and state subsidies accounting for 3.8 percent and 6.9 percent of GDP, respectively. The average recovery rate for these non-merit goods/services in India is only 10.3 percent, implying a subsidy rate of nearly 90%. Unjustified subsidies have macroeconomic costs, which are reflected in persistently huge fiscal deficits and, as a result, higher interest rates. Furthermore, an excessively high level of subsidization, reflected in low user charges, causes substantial microeconomic distortion.

Excessive demand for subsidized services, pricing distortions, and resource misallocation are some of its most visible symptoms. In the case of certain input-based subsidies, these can be seen. These issues are exacerbated when the subsidy system is plagued by leakages that do not ensure equity or efficiency. The agenda for reform should therefore focus on-

  • Reducing the overall scale of subsidies
  • Making subsidies as transparent as possible
  • Setting clear limits on the duration of any new subsidy schemes
  • Using subsidies for well-defined economic objectives
  • Instituting systems for periodic review of subsidies
  • Focusing subsidies on final goods and services with a view to maximizing their impact on the target population at minimum cost.

Major subsidies on Agricultural Inputs

Food Subsidy- The government incurs food subsidies in order to satisfy its distributive justice obligations, and the food security system’s twin objectives are to provide minimal nutritional support to the poor through subsidized food grains and to ensure price stability in different states. The difference between the economic cost of food grains and the issue price is refunded to FCI, which is used to distribute wheat and rice to the poor and maintain a buffer stock. A food subsidy is a one-time payment made by the government to ensure the country’s food security.

Farmers selling their crops to the Central Government through FCI contribute to food security in two ways. FCI pays MSP to farmers and transfers them to FCI godowns, then to government godowns, then to PDS, and finally to consumers. The overall subsidy involved is food subsidy, which starts with farmers selling grains and ends with consumers receiving grains.

Foodgrains have an economic cost that is equal to the sum of MSP, transportation, storage, and handling costs. Other costs, in addition to MSP, may even outweigh the value of MSP. The government will be burdened much more as a result of this.

Power and Irrigation Subsidies: The state governments provide subsidies for power and irrigation. The power that is utilized to draw on groundwater is eligible for a subsidy. As a result, it is a subsidy to privately drawn and privately operated irrigation systems. The discrepancy between the price paid by the farmer for electricity usage and the actual cost of generating electricity is known as a power subsidy.

The long-term viability of power subsidies has been questioned in recent years, owing to the financial difficulties of state electricity boards. States such as Punjab and Tamil Nadu have supplied free electricity to farmers, resulting in waste and financial losses for state electricity boards. According to one estimate, the average cost recovered by SEBs from the farm sector is barely 10% of the cost of energy generation.

Irrigation subsidy: A subsidy for the use of government-provided canal water is known as an irrigation subsidy. The gap between the state’s operation and maintenance costs of irrigation infrastructure and the irrigation charges collected from farmers is known as the irrigation subsidy. This might be accomplished by providing public commodities like canals and dams, which the government creates and charges farmers little or no fees for their usage. It could also be through the use of low-cost private irrigation equipment like pump sets.

Irrigation subsidies are no longer viable, owing to states’ failure to develop a rational price plan for canal water. According to estimates, the canal water pricing did not cover more than 20% of the canals’ operations and maintenance costs.

Fertilizer Subsidies: The subsidies for fertilizer are paid for by the government at the top. There is a need for a fertilizer subsidy because the government has a very low price policy for fertilizer. In order to make sure that the fertilizer industry gets a fair return on its investment, the government sets a price policy for fertilizers. This policy makes sure that farmers can get fertilizer at a low and affordable price so that they will use it and produce more. To meet the first goal, the government has been keeping the selling prices of fertilizers the same across the country.

As for the second goal, the government came up with the “Retention Price Scheme” plan in 1977. Indian Prime Minister Indira Gandhi bought 18000 tonnes of hybrid wheat seeds from Mexico in 1967 when she was still in charge. Incredibly, it worked very well. The wheat harvest that year was so big that grain spilled out of storage facilities. These seeds needed chemical fertilizers to get the most out of them. Getting fertilizer into the hands of farmers who didn’t have enough money to buy food, clothes, and shelter was the goal.

There was a time when giving cash or vouchers to millions of farmers across India seemed like an impossible task that could be tainted by fraud. To help fertilizer companies, the government gave them money. Companies agreed to sell fertilizer for less than the cost of making it at prices set by the government. This is the basic idea of a subsidy for fertilizer. Some fertilizer companies started up all over the country, and they started making it.

When Nagarjuna Fertilizers and Chemicals Ltd. went public, it became one of the most profitable businesses in India. The country of India is now one of the world’s top producers and users of fertilizers. The amount of fertilizer being made now is 16 million tonnes. 23 million tonnes are used each year, too. Scheme: When it was first set up in 1977, the “retention price cum subsidy scheme” (RPS) was used. The “retention price” is the fixed amount that the company is paid, and the difference between that amount and the selling price is the subsidy. When Manmohan Singh took over in 2003, he changed it to a new pricing scheme called NPS.

Retention Price Scheme: Under RPS, the government sets a fair price for fertilizers made by different companies. People who make things are paid by the government for what it costs them to make and for how much profit they make after taxes if the factory is running at 90% of its capacity.

Calculation of Fertilizer Subsidy: If a farmer wants fertilizer, he or she gets it at a low price called a “maximum selling price.” They were paid an amount called “Retention Price.” This price is set at a high level so the manufacturer can cover his costs and still make 12%.

Fertilizer subsidies in the Post Reform Period

Policymakers had to make a very serious effort to change the fertilizer price policy in order to make the fertilizer subsidy more reasonable. Complex fertilizers like di-ammonium phosphate (DAP) and muriate of potash (MOP) were not controlled by the government in 1992, as part of economic reforms that began in the early 1990s. The government also gave these fertilizers a flat-rate discount. There are still restrictions on how much urea can come into the country.

Following the advice of several groups, including the High-Powered Fertilizer Pricing Policy Review Committee (HPC) and the Expenditure Reforms Commission (ERC), a New Pricing Scheme (NPS) for urea units was implemented in stages from April 2003. The goal was to bring transparency, uniformity, and efficiency and cut the cost of production. Another policy has been put in place because of the recommendations of the Expert Group on P (Phosphatic) and K (potassium) fertilizers.

Nutrient Based Subsidy Scheme: It was put into place by the Indian government in 2010, and it is called a “Nutrient Based Scheme.” Under the NBS scheme, a fixed amount of money is given out per KG based on nutrients every year. Micronutrients are also given extra money.

With the goal of giving farmers the best fertilizer for their crops and soil, the government has added a new grade of complex fertilizers to the NBS scheme. As long as the NBS is in place, manufacturers can set the price of their goods. A subsidy from the government pays for the rest. The farmers pay only 50% of the cost of Phosphate (P) and Potash (K).

Neem Coated Urea Policy, 2015: People who make fertilizer in the United States have to “Neem coat” at least 75% of their urea (It can even go up to 100 percent ). In the past, there was a cap of 35% on this. The government has also let manufacturers charge a small 5% extra fee for Neem-coated urea. Checking how much urea is being used as the goal of that. This is because too much urea is hurting soil health and decreasing crop yield. It cut the amount of money that was spent on subsidies. It also kept urea from being used for industrial purposes.

Limitations: The subsidy savings arising out of this pales beside the enormity (financially and politically) of the fertilizer subsidy that is paid on the three major fertilizers, N, P, and K.

New Urea Policy, 2015

To encourage the use of P (phosphorus) and K (potassium) fertilizers made in the U.S. and to allow them to be transported for free. I’ll be able to use it from 2015 to 2019. (4 Financial years). India is the third-largest consumer of fertilizers in the world, but it has to import a lot of urea because it doesn’t have enough of it on its own. There are about 80 million metric tonnes of urea that India needs now, out of a total of 310 million metric tonnes that the country needs.

The goal was to make more Urea in the country so that the government didn’t have to pay for it, cut down on the amount of money the government had to pay for it, and make Urea production more environmentally friendly. This will be done by revising specific energy consumption rules, making the Urea production plant use the best technology available and become globally competitive, cutting subsidies, and making sure farmers get their Urea on time and at the same price.

The most important thing was that the government will pay for all of the costs of natural gas, which is the main source of urea. Also, the movement plan for P&K fertilizers has been changed so that any company can sell any P&K fertilizer in any part of the country. Rail freight subsidies will be given in lump sums so that businesses can save money on transportation costs. This will help farmers and lessen the strain on the rail network. This would cut the annual subsidy bill and increase production by 2 million tonnes each year.

Problem with fertilizer subsidy

For more than three decades, India has provided generously subsidized fertilizers to farmers.

The question is how much of it goes to farmers’ pockets and how much to fertilizer firms. According to a study conducted in Ahmedabad, farmers receive 67 percent of all subsidies. Another question is how much of the money goes to small, struggling farmers and how much goes to large farmers. According to the same study, small farmers receive 52 percent of the subsidy.

How much of the subsidy goes to developed areas and how much goes to developing areas? The top five states, Uttar Pradesh, Andhra Pradesh, Maharashtra, Madhya Pradesh, and Punjab, receive more than half of the subsidy. Rice, wheat, cotton, and sugarcane are just a few of the crops that are heavily subsidized. Excessive use of urea over phosphorus and potassium fertilizers is a major issue.

Actions by the Government

India’s former UPA government established a new subsidy program in the hopes of replenishing the soil by incentivizing farmers to utilize a better combination of nutrients. However, as part of a major compromise, the government kept the previous urea subsidy in place, which means farmers would still have a strong incentive to use too much of it. Recognizing the policy failure, Mr. Singh’s government declared a year ago that it would phase out the present subsidy scheme in favor of a new direct transfer plan. Allowing the price of urea to rise much, however, would almost surely spark protests in rural India, where 70 percent of the voters live, according to political commentators.

Imbalance in Fertilizer Use Consumption

Over the years, government interventions in fertiliser policy have resulted in an asymmetric pricing structure and nutrient use. As a result, India’s fertilizer usage pattern and application are distorted. N-Nitrogen, P-Phosphate, and K-Potash application in agriculture is skewed. In India, the optimal ratio of N: P: K is 4:2:1.

However, due to an incorrect price structure, India’s N: P: K ratio jumped to 10:3:1 in 1997-98. In the years that followed, the ratio deteriorated even more. The present situation has improved slightly, with the N: P: K ratio in 2013-14 being 8.2:3.2:1.

The cause for such a large disparity is the relatively low cost of urea (Nitrogen) in comparison to the other two nutrients, phosphorus, and potassium. The imbalanced and excessive usage of urea had also resulted in environmental and soil fertility damage.

Excess Usage of Urea in India


Manmohan Singh, then India’s finance minister, wanted to get rid of the subsidy in 1991 because it was putting a lot of money into the country’s bank account. Most fertilizer companies fought hard to keep the program. Many legislators also didn’t want to end the subsidy because they feared a backlash from farmers. The government has given money to other fertilizers, not just urea. In times of tight budgets, some of those fertilizers have had their subsidies cut or reduced, but ureas haven’t. That’s because urea manufacturers have a powerful lobby, and farmers are the most dependent on this fertilizer, which makes it a political hot potato to raise the price of this fertilizer. This made a lot of mess afterward.

There are too many fertilizers being made and used, which harms the environment. Farmers in the state of Haryana used 32 times more nitrogen than potassium in the fiscal year that ended in March 2009, a trade publication says. This is much more than the recommended 4-to-1 ratio. In Punjab state, they used 24 times more nitrogen than potassium, as shown in the figure. This is a never-ending loop. A few years ago, the soil was a lot stronger. Now, it’s not as strong. We need more and more urea to get the same amount of food.

The use of urea is so bad for the soil that some crops aren’t growing as well and imports have been going up. There has been a 19 percent rise in the cost of food in the last year. In the past, Pakistan, Sri Lanka, and Bangladesh were much poorer than the country was now. It now produces less rice per hectare than these countries. China has 6.5 tonnes per hectare, Pakistan has 3.5 tonnes, and India has 3.4 tonnes per hectare.

The extra fertilizers make their way into the food chain, causing harm to humans, animals, birds, and insects, as well as messing with the soil’s ecosystem. Groundwater and other water sources could be harmed by too many fertilizers being used too much. All of this can be bad for people, plants, and animals who live near it. People who eat food that has been grown with too many fertilizers run the risk of getting many different illnesses.

Seed Subsidy: Seed subsidy is granted through the distribution of quality seeds at a price that is less than the market price of the seeds.

Credit Subsidy: It’s the gap between the interest charged to farmers and the actual cost of providing credit, plus other expenses like bad loan write-offs. Credit availability is a key issue for disadvantaged farmers. They are cash-strapped and unable to access the credit market because they lack the necessary collateral. They approach local money lenders to carry out production activities. 

Lenders take advantage of the impoverished farmers’ weakness by charging exorbitantly high loan rates. Many times, even farmers with substantial collateral are unable to obtain loans because banking institutions are predominantly urban-based and do not frequently engage in agricultural lending operations, which are deemed hazardous. For the poor, (such as collateral requirements) can be reduced. 

Infrastructural Subsidy: In many locations, private efforts to provide basic infrastructure are insufficient to boost agricultural production. For carrying out production and selling operations, good roads, storage facilities, power, market knowledge, transportation to ports, and so on are essential. These facilities are under the category of public goods, whose prices are high but whose advantages are shared by all cultivators in a given area.

Because of the extended gestation period and accompanying income collection issues, no individual farmer will volunteer to provide these services (no one can be excluded from its benefit on the ground of non-payment). As a result, the government assumes responsibility for their provision, and given the state of Indian agriculture, a cheaper price can be paid to the poorest farmers.

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