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Types of subsidies

The rationale behind providing agricultural subsidies is that it will promote agricultural
development besides equitable distribution of income. The subsidies may be classified as:

1. Based on the mode of payment

Direct subsidies and Indirect subsidies

A. Direct subsidies
• Direct subsidies are money transfers by the Government that reach the ultimate
beneficiary through a predetermined formal route.
• For example, Direct benefit transfer for fertilisers
• Merits of direct subsidies are:
1. There would be no problem of identification, as through JAM trinity or
Aadhar, payments can be made directly to the beneficiaries.
2. It will reduce the problem of ghost beneficiaries.
3. It is likely to control inflation and decrease the price of fertiliser, and other
agricultural products as well
B. Indirect subsidies

• Indirect subsidies are provided through a price reduction, welfare, and other ways but do
not include a direct cash payment.
• They reach the farmers, along with the use of input. Therefore, these are directly
proportional to the amount of use of inputs by farmers.
• Generally, more the use of inputs required higher the subsidies they enjoy.

Explicit subsidies and implicit subsidies

• Explicit input Subsidies are payments made to the farmers to meet a part of the cost of
input. These are like explicit payments made to the farmer. For example, subsidy on
improved or high yielding variety seeds, fertilisers, and plant protection chemicals for
certain crops
• Implicit input subsidies are hidden in nature. In the implicit input subsidies, prices of
inputs used are administratively determined and priced low as compared to their
economical cost.

2. Based on inputs:

A. Irrigation and power subsidy

• Irrigation facilities are available to the farmers at a cheaper rate under the
umbrella scheme of Pradhan Mantri Krishi Sinchai Yojana.
• Kisan Urja Suraksha Evam Utthaan Mahabhiyan (KUSUM) scheme is run by the
Government to provide financial and water security to farmers.
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• Solar pumps are provided at the subsidised rate to the farmers.

• Power subsidy implies that the Government charges low rates for the electricity
supplied to the farmers. Power subsidy acts as an incentive for farmers to invest
in pumping sets, bore-wells, tube-wells, etc. This subsidy is used to draw
groundwater.
B. Fertiliser subsidy
• Disbursement of cheap chemical or no-chemical fertilisers among the farmers
• Urea is being provided to the farmers at a statutorily notified Maximum Retail
Price.
• These subsidies are provided to the farmers in the form of direct benefit transfers.
• In some cases, this kind of subsidies are granted through lifting the tariff on the
import of fertilisers.
• Neem coated urea is being provided to farmers at the subsidised rates. Earlier,
35% of the total urea production is neem coated, which has now increased to 75%.
• The Government rationalises the urea subsidy bill with the new Urea policy, 2015.
C. Seed Subsidy
• Seed subsidy is granted through the distribution of high-quality seeds at a price
less than the market price of the seeds.
D. Credit Subsidy
• Credit subsidy is the difference between the interest charged from farmers and
the actual cost of providing credit
• Loans to farmers are included in the priority sector lending.
• Interest subvention schemes are there, which aims at providing short term credit
to farmers at the subsidised interest rate.
• Kisan credit cards are made available to the farmers for easy availability of credit
to the farmers. It also helps in reducing the middlemen.
E. Subsidy to farmers for crop loss
• State Disaster Response Fund and National Disaster Response Fund will assist the
farmers in the form of agriculture input subsidy (where crop loss is 50% and above)
for damages caused to all types of agriculture and horticulture cropped areas due
to the notified natural calamity.
• Pradhan Mantri Fasal Bima Yojana is a flagship scheme of the Government which
is used to incentivise the farmer by providing loss in case of disaster.
• 2% Interest subventions to the farmers affected by natural calamities.
F. Agriculture Marketing infrastructure subsidy
• Agriculture Marketing Infrastructure (AMI), sub-scheme of an integrated scheme
for Agriculture Marketing, is a demand-driven scheme for assisting in the creation
of agri-marketing infrastructure, including storage.
G. Minimum Support Price

Government announces minimum support prices (MSPs) on the recommendations of the

Commission for Agricultural Costs and Prices (CACP) for 22 mandated crops and fair and
remunerative price (FRP) for sugarcane. The mandated crops are 14 crops of the kharif
season, 6 rabi crops and two other commercial crops.
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o The minimum support price is the price the Government agrees to buy all the grain
offered for sale at this price.
o It assures farmers that in case of excessive production leading to oversupply in the
market, the Government will procure the food grains at the predetermined price.
o PM-AASHA scheme is there, which aims at ensuring remunerative price to the
farmers and consists of Price support scheme, price deficiency payment scheme,
Pilot of Private Procurement, and stockiest scheme.
o Various schemes of the state governments, such as Bhavantar Bharpayee Yojana
and Bhavantar Bhugtan Yojana, are there intending to pay the deficit amount to
the farmer or the procuring person.
H. Direct subsidy to the farmer in the form of cash
• Pradhan Mantri Kisan Samman Nidhi is a central sector scheme with 100% funding
from the Government of India.
• Under the scheme, income support of Rs 6000 per year is provided to all the
farmer's families across the country in three equal instalments of Rs 2000/- each,
every four months.
I. Agriculture Extension
• Subsidies are provided for the agriculture extension, warehouse, and other storing
facilities. Kisan Vigyan Kendra, through Kisan call centres, provides free assistance
to the farmers.
J. Export Subsidies
• This subsidy is provided to farmers who export agricultural products in the foreign
market. Farmers earn money for themselves as well as foreign exchange for the
country.

AGRICULTURAL PRICE POLICY

The emergence of agricultural price policy in India was in the backdrop of food scarcity and price
fluctuations provoked by drought, floods and international prices for exports and imports. It is a
tool to influence the price of agricultural produce. Besides ensuring stable farmer’s income, the
stability of agriculture price is essential since the higher agriculture prices affect the purchasing
power of consumers and greater input cost to the industrial users. The reduction in the
purchasing power of the consumer has implications on demand for industrial goods. The broad
objectives of agriculture price policy in India are:
• To set remunerative prices with a view to encourage higher investment and production
in agriculture and ensure farmer’s income.
• To set the prices at levels so that the consumers are not adversely affected.
• Agriculture prices should be such that the terms of trade between agriculture and non-
agriculture sector are not adversely affected.
• To set price in such a manner, so that, optimal crop mix can be achieved.

Minimum Support Price (MSP)

It is a form of market intervention by the Government of India to insure agricultural producers
against any sharp fall in farm prices. The minimum support prices are announced by the
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Government of India at the beginning of the sowing season for certain crops based on the
recommendations of the Commission for Agricultural Costs and Prices (CACP).
MSP is price fixed by the Government of India to protect the producer - farmers - against
excessive fall in price during bumper production years. The minimum support prices are
guaranteed price for their produce from the Government.
The major objectives are to support the farmers from distress sales and to procure food grains
for public distribution. In case, the market price for the commodity falls below the announced
minimum price due to bumper production and glut in the market. Government agencies purchase
the entire quantity offered by the farmers at the announced minimum price.

Historical perspective of MSP

The Price Support Policy of the Government is directed at providing insurance to agricultural
producers against any sharp fall in farm prices. The minimum guaranteed prices are fixed to set
a floor below which market prices cannot fall. Till the mid-1970s, Government announced two
types of administered prices:

• Minimum Support Prices (MSP)

• Procurement Prices

The MSPs served as the floor prices and were fixed by the Government in a long-term guarantee
for investment decisions of producers, with the assurance that prices of their commodities would
not be allowed to fall below the level fixed by the Government, even in the case of a bumper
crop. Procurement prices were the prices of kharif and rabi cereals at which the grain was to be
domestically procured by public agencies (like the FCI) for release through PDS. It was announced
soon after harvest began. Normally, the procurement price was lower than the open market price
and higher than the MSP. This policy of two official prices being announced continued with some
variation up to 1973-74, in the case of paddy. In the case of wheat, it was discontinued in 1969
and then revived in 1974-75 for one year only. Since there were too many demands for stepping
up the MSP, in 1975-76, the present system was evolved in which only one set of prices was
announced for paddy (and other kharif crops) and wheat being procured for buffer stock
operations.

Determination of MSP
In formulating the recommendations in respect of the level of minimum support prices and other
non-price measures, the Commission takes into account, apart from a comprehensive view of the
entire structure of the economy of a particular commodity or group of commodities, the
following factors:

• Cost of production
• Changes in input prices
• Input-output price parity
• Trends in market prices
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• Demand and supply

• Inter-crop price parity
• Effect on industrial cost structure
• Effect on cost of living
• Effect on general price level
• International price situation
• Parity between prices paid and prices received by the farmers
• Effect on issue prices and implications for subsidy
The Commission makes use of both micro-level data and aggregates at the level of district, state,
and the country. The information/data used by the Commission; inter-alia include the following:
• Cost of cultivation per hectare and structure of costs in various regions of the country and
changes therein;
• Cost of production per quintal in various regions of the country and changes therein;
• Prices of various inputs and changes therein;
• Market prices of products and changes therein;
• Prices of commodities sold by the farmers and of those purchased by them and changes
therein;
• Supply related information - area, yield and production, imports, exports and domestic
availability and stocks with the Government/public agencies or industry;
• Demand related information - total and per capita consumption, trends and capacity of
the processing industry;
• Prices in the international market and changes therein, demand and supply situation in
the world market;
• Prices of the derivatives of the farm products, such as sugar, jaggery, jute goods,
edible/non-edible oils and cotton yarn and changes therein;
• Cost of processing of agricultural products and changes therein;
• Cost of marketing - storage, transportation, processing, marketing services, taxes/fees
and margins retained by market functionaries; and
• Macro-economic variables, such as general level of prices, consumer price indices and
those reflecting monetary and fiscal factors.
The increase in MSP for Kharif Crops is in line with the Union Budget 2018-19 announcement of
fixing the MSPs at a level of at least 1.5 times of the All-India weighted average Cost of Production
(CoP), aiming at reasonably fair remuneration for the farmers.

PDS (Public Distribution System)

The Public Distribution System (PDS) evolved as a system of management of scarcity through the
distribution of food grains at affordable prices. Over the years, PDS has become an important
part of Government’s policy for management of the food economy in the country. PDS is
supplemental in nature and is not intended to make available the entire requirement of any of
the commodities distributed under it to a household or a section of the society.

• PDS is operated under the joint responsibility of the Central and the State Governments.
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• The Central Government, through Food Corporation of India (FCI), has assumed the
responsibility for procurement, storage, transportation, and bulk allocation of food grains
to the State Governments.
• The operational responsibility including allocation within State, identification of eligible
families, issue of Ration Cards and supervision of the functioning of Fair Price Shops
(FPSs), etc., rest with the State Governments.
• Under the PDS, presently the commodities namely wheat, rice, sugar, and kerosene are
being allocated to the States/UTs for distribution.
• Some States/UTs also distribute additional items of mass consumption through the PDS
outlets, such as pulses, edible oils, iodised salt, spices, etc.

Evolution of PDS system

• PDS in the 1960s - Public distribution of essential commodities was in existence in India
during the interwar period. However, PDS, with its focus on the distribution of food grains
in urban scarcity areas, had emanated from the critical food shortages of the 1960s. PDS
had substantially contributed to the containment of rise in food grains prices and ensured
access of food to urban consumers. As the national agricultural production had grown in
the aftermath of the Green Revolution, the outreach of PDS was extended to tribal blocks
and areas of a high incidence of poverty in the 1970s and 1980s.
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• Revamped Public Distribution System (RPDS) - The Revamped Public Distribution System
(RPDS) was launched in June, 1992 with a view to strengthen and streamline the PDS as
well as to improve its reach in the far-flung, hilly, remote and inaccessible areas where a
substantial section of the poor live. It covered 1775 blocks wherein area specific
programmes such as the Drought Prone Area Programme (DPAP), Integrated Tribal
Development Projects (ITDP), Desert Development Programme (DDP) were being
implemented and in certain Designated Hill Areas (DHA) which were identified in
consultation with State Governments for special focus. Food grains for distribution in
RPDS areas were issued to the States at 50 paise below the Central Issue Price. The scale
of issue was up to 20 kg per card. The RPDS included area approach for ensuring the
effective reach of the PDS commodities, their delivery by State Governments at the
doorstep of FPSs in the identified areas, additional ration cards to the left-out families,
infrastructure requirements like additional Fair Price Shops, storage capacity, etc., and
additional commodities, such as tea, salt, pulses, soap, etc., for distribution through PDS
outlets.
• Targeted Public Distribution System (TPDS)- In June, 1997, the Government of India
launched the Targeted Public Distribution System (TPDS) with focus on the poor. Under
the PDS, States were required to formulate and implement foolproof arrangements for
identification of the poor for delivery of food grains and for its distribution in a
transparent and accountable manner at the FPS level. The scheme, when introduced, was
intended to benefit about 6 crore poor families for whom a quantity of about 72 lakh
tonnes of food grains was earmarked annually. The identification of the poor under the
scheme was done by the States as per State-wise poverty estimates of the Planning
Commission for 1993-94 based on the methodology of the "Expert Group on estimation
of proportion and number of poor” chaired by Late Prof Lakdawala. The allocation of food
grains to the States/UTs was made on the basis of average consumption in the past, i.e.,
average annual off-take of food grains under the PDS during the past ten years at the time
of introduction of TPDS
• ANTYODAYA ANNA YOJANA (AAY) AAY- AAY was a step in the direction of making TPDS
aim at reducing hunger among the poorest segments of the BPL population. A National
Sample Survey Exercise pointed towards the fact that about 5% of the total population in
the country sleeps without two square meals a day. This section of the population could
be called "hungry”. To make TPDS more focused and targeted towards this category of
population, the "Antyodaya Anna Yojana” (AAY) was launched in December 2000 for one
crore poorest of the poor families. AAY involved identification of one crore poorest of the
poor families from amongst the number of BPL families covered under TPDS within the
States and providing them food grains at a highly subsidised rate of Rs.2/- per kg. for
wheat and Rs.3/- per kg for rice. The States/UTs were required to bear the distribution
cost, including a margin to dealers and retailers as well as the transportation cost. Thus,
the entire food subsidy was passed on to the consumers under the scheme. The scale of
issue that was initially 25 kg per family per month was increased to 35 kg per family per
month with effect from 1st April 2002.
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National Food Security Act

The enactment of the National Food Security Act, (NFSA) 2013 on July 5, 2013, marks a paradigm
shift in the approach to food security from welfare to a rights-based approach.

Salient features of the Act

• Coverage and entitlement under Targeted Public Distribution System (TPDS): Up to 75%
of the rural population and 50% of the urban population will be covered under TPDS, with
uniform entitlement of 5 kg per person per month. However, since Antyodaya Anna
Yojana (AAY) households constitute poorest of the poor and are presently entitled to 35
kg per household per month, entitlement of existing AAY households will be protected at
35 kg per household per month.
• State-wise coverage: Corresponding to the all-India coverage of 75% and 50% in the rural
and urban areas, respectively; State-wise coverage will be determined by the Central
Government. State-wise coverage has been determined by the Planning Commission
based on 2011-12 NSSO Household Consumption Expenditure Survey data.
• Subsidised prices under TPDS and their revision: Food grains under TPDS will be made
available at subsidised prices of Rs. 3/2/1 per kg for rice, wheat, and coarse grains for a
period of three years from the date of commencement of the Act. Thereafter, prices will
be suitably linked to Minimum Support Price (MSP).
• Identification of Households: Within the coverage under TPDS determined for each State,
the work of identification of eligible households is to be done by States/UTs.
• Nutritional Support to women and children: Pregnant women and lactating mothers and
children in the age group of 6 months to 14 years will be entitled to meals as per
prescribed nutritional norms under Integrated Child Development Services (ICDS) and
Mid-Day Meal (MDM) schemes. Higher nutritional norms have been prescribed for
malnourished children up to 6 years of age.
• Maternity Benefit: Pregnant women and lactating mothers will also be entitled to receive
maternity benefit of not less than Rs. 6,000 as per scheme to be formulated by the Central
Government.
• Women Empowerment: Eldest women of the household of age 18 years or above will be
the head of the household for the purpose of issuing ration cards.
• Grievance Redressal Mechanism: Grievance redressal mechanism at the District and
State levels. States will have the flexibility to use the existing machinery or set up separate
mechanisms.
• Cost of intra-State transportation & handling of food grains and FPS Dealers' margin:
Central Government will aid States in meeting the expenditure incurred by them on
transportation of food grains within the State, its handling and FPS dealers’ margin as per
norms to be devised for this purpose.
• Transparency and Accountability: Provisions have been made for disclosure of records
relating to PDS, social audits and setting up of Vigilance Committees in order to ensure
transparency and accountability.
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• Food Security Allowance: Provision for food security allowance to entitled beneficiaries
in case of non-supply of entitled food grains or meals
• Penalty: Provision for a penalty on public servant or authority, to be imposed by the State
Food Commission, in case of failure to comply with the relief recommended by the District
Grievance Redressal Officer.

How does NFSA work?

NFSA defines the joint responsibility of the Centre and States/UTs.
• The Centre is responsible for allocation of required food grains to States/UTs,
transportation of food grains up to designated depots in each State/UT and providing
central assistance to States/UTs for delivery of food grains from designated FCI godowns
to the doorstep of the FPSs.
• The States/UTs are responsible for effective implementation of the Act, which inter-alia
includes identification of eligible households, issuing ration cards to them, distribution of
food grain entitlements to eligible households through fair price shops (FPS), issuance of
licenses to Fair Price Shop dealers and their monitoring, setting up effective grievance
redressal mechanism and necessary strengthening of Targeted Public Distribution System
(TPDS).

Issues with the Public Distribution System

• Though PDS has helped provide food grains to millions of people, the recent Global
hunger index report 2020 has highlighted that India is at 94th position out of 107
countries behind Bangladesh, Pakistan, and Nepal. Therefore, the PDS system still has not
been able to fully achieve its objectives, and there is a case to make it universal.
• Exclusion and Inclusion errors for beneficiaries in the PDS:
o Exclusion errors mean that genuine beneficiaries are being left out. This is
attributed to various reasons like non-seeding of Aadhar, non-matching of
fingerprints, technical glitches, and lack of internet connectivity, etc. Hence, while
digitisation of PDS has helped eliminate ghost beneficiaries, it has created a new
set of problems.
o Inclusion errors refer to those not deserving of benefits getting the benefits under
the act.
• Despite several significant, system-wide changes over recent years, high levels of
corruption and leakage continue to plague the PDS.
o Part of this leakage occurs at the level of the fair price shops, where some store
owners exchanged the high-quality goods provided from the Government for
distribution through the PDS with lesser quality goods from the general stores.
o There were very high rates of corruption within the system, in some states, this
was up to 100% leakage or ‘diversion’ from the supply chain.
• Another major issue with the PDS is the burgeoning cost of food security which is a major
concern for fiscally constrained central Government.
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Schemes to improve PDS

End to End Computerisation of PDS Operations Scheme - As part of efforts being made to bring
in reforms in the Public Distribution System and to improve the distribution of food grains across
the country, the Department of Food and Public Distribution, in association with all States & UTs,
is implementing a Plan Scheme on “End-to-end Computerisation of Public Distribution System
(PDS) Operations”

Integrated Management of Public Distribution System (IM-PDS)/ ONE NATION ONE RATION
CARD:
To sustain the reforms brought in by the ongoing scheme of ‘End to End Computerisation of
Targeted Public Distribution System (TPDS) Operations’ the Department of Food & Public
Distribution, Government of India has launched a new scheme namely "Integrated Management
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of Public Distribution System (IM-PDS)” with effect from 1st April 2018 for implementation in all
States/UTs.

The main objective of the IM-PDS scheme is to implement nation-wide portability of benefits
under NFSA, i.e., eligible households/beneficiaries covered under NFSA shall be able to lift their
entitled food grains from any Fair Price Shop (FPS) of their choice in the country by using their
same/existing ration card after biometric/Aadhaar authentication on electronic Point of Sale
(ePoS) device at the FPS in a destination/sale State/UT through ‘One Nation One Ration Card’
System by integrating the existing PDS systems/portals of States/UTs with the Central
systems/portals under Central Repository of all NFSA ration cards/beneficiaries. The creation of
a Central Repository of all ration cards/beneficiary data of all States/UTs shall ensure that no
duplicate ration card/beneficiary exists in any State/UT under NFSA.

Under this system, any eligible migratory beneficiary, if desires, may receive his/her quota of
subsidised food grains in another State/UT/district by just providing the existing/same ration card
number having his/her name to any FPS dealer in the destination State/UT of their migration and
may lift the available entitlements after biometric/Aadhaar authentication on ePoS device.,

The Inter State portability was launched in two clusters of two adjoining States, namely Andhra
Pradesh & Telangana and Maharashtra & Gujarat w.e.f. August 2019. So far, this facility is enabled
in 28 States/UTs, namely- Andhra Pradesh, Arunachal Pradesh, Bihar, Dadra and Nagar Haveli &
Daman Diu, Goa, Gujarat, Haryana, Himachal Pradesh, Jammu & Kashmir, Jharkhand, Karnataka,
Kerala, Ladakh, Lakshadweep, Madhya Pradesh, Maharashtra, Manipur, Mizoram, Nagaland,
Odisha, Punjab, Rajasthan, Sikkim, Tamil Nadu, Telangana, Tripura, Uttar Pradesh & Uttarakhand.

Besides national portability, the following are some of the other key focus areas of the IM-PDS
scheme:

I. National level deduplication of all ration cards/beneficiaries’ data.

II. Integration of States/UTs PDS systems/applications with Central PDS systems/applications.

III. Use of advanced data analytics techniques to bring about continuous improvements in PDS
operations.

IV. Development of advanced web and mobile-based applications.

V. Facilitation of cross-learning and sharing of best practices between States/UTs, etc.

Presently, the facility of national portability of ration cards under “One Nation One Ration Card
plan” is seamlessly enabled in an integrated cluster of 24 States/UTs w.e.f. August 1, 2020,
covering approx. 65 Crore beneficiaries (80% of total NFSA population) in various States/UTs,
namely. This means that within this cluster movement of migrant workers would be possible with
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ration portability fully as well as partially depending upon the requirement of the ration
cardholder.

Strengthening of PDS Operations

(a) PDS – Training - PDS-Training is a scheme component of the umbrella scheme; Strengthening
of PDS Operations. This component aims at strengthening and upgrading skills of the officials/
functionaries engaged in PDS operations in the states/ UTs.

(b) PDS-Evaluation, Monitoring and Research- PDS-Evaluation, Monitoring and Research is the
scheme component of umbrella scheme, Strengthening of PDS Operations. Under the
component, functioning of the Targeted Public Distribution System (TPDS)/National Food
Security Act (NFSA) is evaluated through independent reputed agencies (Monitoring Institutions)
from time to time.