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An Insight into the Problems of Agricultural Subsidies in India

An Insight into the Problems of Agricultural Subsidies in India

By Archish Mazumdar

Edited by, Anandita Malhotra, Senior Editor, The Indian Economist

 The Indian government has, since independence subsidized many industries and products from petrol to food. On the other hand India has been found to be not so kind when it comes to sectors other than that of agriculture, like education health and infrastructure. According to the UNESCO, India unfortunately has the lowest public expenditure on higher education per student in the world.

So, with so much of the GDP going primarily into agricultural subsidies over the years, why is it that India still remains dependent upon the same?


A subsidy is essentially defined as a converse of a tax. More formally, a subsidy (agricultural subsidy) is essentially a government influx of liquidity, paid to farmers and agribusinesses effectively:

  • Supplement their income.
  • Manage supply of agricultural commodities
  • Influence cost and supply.

For regions such as the northern part of the country, widespread subsidies exist. Overall, a 2005 article by International Herald Tribune stated that subsidies amounted to nearly 14% of India’s GDP. But there still remain certain concerns regarding the nature of subsidies and their effectiveness to the developmental process.

Key Concerns

The key concerns regarding the subsidizing process still plaguing the system are as follows:

  • Subsidies do not reach the marginalized farmers

The marginalized farmers, the main target audience for the government to come up with subsidies in the first place are found wanting of the same. Effectively, the more well off farmers end up taking more than their fair share.

  • The fiscal burden on the government

The government fails to recover its costs because of taxation issues and is thus led to borrow from other sources. Ineffective taxation policies end up taking their toll on the government’s developmental plans.

  • The APMC Act

The APMC Act was set up by the government, as a means to improve the efficacy of the process of the farmers getting their rightful price due to them, through the establishment of middlemen acting as links to the chain. Sadly though, their main prerogative was rendered ineffective, due to their own middlemen.

The APMC act established mandis, where farmers auction their produce. The presence of middlemen, effectively multiplied prices at each level which thus led to higher prices and lower profits for the farmers.

A Solution Strategy

A proposed solution strategy to be effective would need to work on three basic levels. Them being,

  • Customer Base Identification and Selective Targeting
  • Effective channelization of subsidies
  • Logistics Support.

Customer Base Identification

Segmenting farmers into three broad categories based on their economic status, to ensure that the subsidies reach the ones most in need. A proposed model that takes in certain parameters, assigning them different weights through Principal Component Analysis (PCA) and comparing it through a seismic inspired model.

 The Proposed Model

Our proposed model is an integration of two specific models, namely Principal Component Analysis and a Seismic Intensity model. Through this model we are trying to come up with a more effective segregation of economic status among farmers helping to better channelize the flow of government subsidies.

The Principal Component Analysis Model

The PCA Model is one that seeks to sensitize data across parameters over a specific time horizon. We achieve this by assigning weights to the parameters concerned, which might change across certain time equivalents.

Dependent variable= Farmer Income (I)

Independent variables/Parameters= Area of land (A)

                                                                 Productivity levels (P)

                                                                  Mechanization (M)

Note:- All parameters are in dimensionless percentages achieved via

             (Amount of parameter in North Zone/Amount of parameter in India overall)

We propose to use the Cobb-Douglas Model for this purpose.

Where , and are the specific weightages attached.

Reasons:- (i) The multiplicative form is more flexible.

                 (ii) It allows for non-linear responses.

The Calculation

From the raw data present we calculate mean and subtract it from all data points associated for a particular parameter.

Then from the new refined (mean subtracted) data we calculate standard deviation (

After having done this for all the three parameters concerned, we find their covariance between themselves and other parameters (AA, AP, AM, PP, PM, MM)

From these obtained covariance values, we calculate correlation values among the same variables (AA, AP, AM, PP, PM, MM)

Assigning these values to form Correlation Matrix (); n=no. of parameters

n=3 in this case

We calculate the eigenvectors and the eigenvalues associated with each parameter and assigned the lowest eigenvalues as weightages to the parameters with the highest covariance among itself (AA, PP, MM)

The Seismic Model

The Seismic Model first determines a standard value of the parameters by calculating the median. The impact of each of the values is measured as the logarithm to the base 10 of the ratio of these values to the standard value as we believe using weightages as given above, the parameters will increase exponentially.

The logarithmic function being slowly growing would also give us a workable dimensionless index to insert into our model.

I =

Fertilizer Subsidy Crisis in India

India presently subsidizes only urea as a fertilizer. From an environmental standpoint it is but evident that urea continues to remain detrimental to the fertility of arable lands and thus it becomes necessary to move on to more feasible forms of agriculture such as Organic Farming.

The proposed model of segmentation would effectively work as thus. The farmers having been differentiated into three economic groups namely HIGH, INTERMEDIATE and LOW would thus be taxed/subsidized according to their need, thus ensuring an effective channelization of precious resources.

  • Low – Provided subsidized urea
  • Intermediate – Neither subsidized nor taxed
  • High – Taxed on urea usage

The idea is to push the HIGH end farmers towards Organic farming, and helping the marginalized ones to reach the same levels of profitability. The eventual up-gradation of intermediate farmers to the HIGH end (and the same for the LOW end farmers) helps us in not only making sure that the people in need are helped but also helps ensure that our taxation policies take on a more effective outlook.

Not only that, Organic farming helps improve the fertility of the soil and thus effectively reduces the need for urea or any other sort of chemical fertilizer to have any permanent damaging effects on the soil.


From a logistical standpoint the system needs to develop into a more transparent setup. This can be ensured by integrating the UID (Aadhar) system into the fold. This integration would ensure that leaks are prevented and a more transparent and effective system of monetary transfer is established. Cashless and quick transfer of funds could thus become possible, helping weed out the need for middlemen in the system as a whole.

The author understands that this proposed model may not be fully effective and has its fallacies. He also realizes that this may not be the best way of coming out with this issue. But, the issue of ineffective agricultural subsidization is one of national importance. This is but a endeavor to think about the same and to come up with something that could help enliven the lives of our farmers.   

 Archish Mazumdar is your normal everyday college-kid, currently in his third year of college, pursuing a BS in Economics from IIT Kanpur. His passions in life include quizzing, debating and food! Quick in both words and actions, he usually finds solace while writing (mostly poetry). He spends his free time reading vociferously, watching movies (plenty of them) and listening to Bob Dylan. When not doing the usual stuff, he is mostly found convincing people that he is not actually jobless.

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