Today’s Question ❓

Q The government should prioritize capital investments over subsidies to improve the economic situation of farmers. Discuss.

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Approach 

• Introduce by giving a brief account on agriculture subsidies given by the government in India.
• Discuss in brief the importance of giving subsidies.
• Discuss how prioritizing capital investments over subsidies can help farmers to come out of the
poverty trap.
• Conclude on the basis of the above points.

Answer ✍️

With 60% of India’s total workforce employed in its agriculture sector, incentivizing it is key to stimulate agriculture production and attaining self-sufficiency. An Indian farmer enjoys numerous subsidies – free power, water, heavily discounted fertilizers, interest subvention on loans, discounted premium on crop insurance and minimum support prices for crops. The government spent about Rs. 2.56-lakh crore on various subsidies for the farm sector in 2018-19 which is set to increase further to Rs.2.77-lakh crore for 2019-20.
These subsidies have a lot of benefits such as maintaining sustained flow of inputs like fertilizer, irrigation etc. at reasonable prices to the small and marginal farmers and also protect farmers from any unusual price shocks.
However, the Dalwai Committee on doubling farmers’ income has pointed out that the subsidy- driven agriculture systems are not sustainable. Farm subsidies are thought to be a drain on public finance and there are other related issues. Subsidies are market distorting interventions which lead to pilferage and leakages.
Need to prioritise capital investments:
The issue with prioritising subsidies over capital investments is that subsidies do not address the structural issues with agriculture in India. This leads to a vicious circle where the small farmers are always dependent on the subsidies and thereby leading to fewer amounts available for capital investments. This can be substantiated by:

• Lack of storage infrastructure is a greater concern facing agriculture in India. For instance, only about 15% of the APMCs have cold storage facilities and less than 50% of mandis in the country have weighing machines. This concern can be addressed by capital investment alone.
• According to Indian Council for Research on International Economic Relations (ICRIER), every rupee spent on agricultural research and development yields better returns (11.2), compared to returns on every rupee spent on fertiliser subsidy (0.88), power subsidy (0.79).
• As against subsidies, public money spent on capital investment is expected to be almost 5 to 10 times more successful in terms of the number of people brought out of income poverty. For example, for every million rupees spent on agricultural research, 328 people are pulled out of poverty in comparison to 23 people by money spent on power subsidies.

• Focusing on capital investments can provide a push to agricultural exports without any controversy as support by government in form of capital investments form part of the WTO Green box.
Public investments in agriculture as a percentage of agricultural GDP has declined from 3.9 per cent in 1980-81 to 2.2 per cent in 2014-15, while input subsidies as a percentage of agricultural GDP have increased from 2.8 per cent to around 8 per cent over the same period. This highlights the need to rationalize the subsidies as capital investments translate into productivity capacity without much lag.
In general, subsidies should be employed to change behaviour and solve specific problems rather than to serve as a long-term support for farmers.

Therefore, the government should start gradually by focusing on rationalising the subsidies and preventing their leakage via Direct Benefit Transfer (DBT). Simultaneously, efforts should be taken to scale up capital investments in the sector.

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