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Day 14 – Q 1.Differentiate between direct and indirect farm subsidies. Examine the distortionary effects of some of these subsidies.

1. Differentiate between direct and indirect farm subsidies. Examine the distortionary effects of some of these subsidies.  

प्रत्यक्ष और अप्रत्यक्ष कृषि सब्सिडी के बीच अंतर स्पष्ट करें। इनमें से कुछ सब्सिडी के विरूपण प्रभाव की जांच करें।


An agricultural subsidy is a government incentive paid to agribusiness, agricultural organizations and farms to supplement their income manage the supply of agricultural commodities and influence the cost and supply of such commodities.


The issue of farm subsidies:

  • India and china have jointly submitted a proposal to the World Trade Organization (WTO) for rich countries to reduce high agricultural subsidies.  
  • The reduction process should begin in 2019 to “remove asymmetry” in the WTO’s agreement on agriculture and eliminate distortions in global trade.
  • India’s agricultural subsidy is less than 10 per cent of the market value of total agricultural production. It is far less compared to the developed countries. 
  • The WTO has allowed them higher amounts beyond ceiling levels. Any meaningful attempt at reforms in agriculture subsidies must address the asymmetry between the developed members and developing members.

                      Direct subsidies 

  • The beneficiary purchases the good at market price and the subsidy is transferred to him in the form of cash transfer.
  • Mostly in developed countries.
  • Have direct impact on farmers’ expenditure and their life.
  • More efficient system, because free hands to use money.
  • Individual targets to reach the benefits
                        Indirect subsidies

  • The goods are made available at a lower/subsidized price, credit facilities, loan waiver, reduction in bills etc.
  • Mostly in developing countries.
  • Have implicit impacts, as some part of money paid at required end.
  • Less efficient system, because of less coordination.
  • Mass target of the people to reach the benefits.

Though it is a good measure to address the plight of the farmers, it can also have an adverse effect in the free markets, which can be highlighted as follows:

  • Subsidies directed by the United States government, particularly to corn farmers, can have a spill over affect in developing countries like India. Subsidies granted to the farmers of developed countries are way higher than that given to Indian farmers, thus it can cause distortion to the domestic market of domestic markets as well.
  • Fertilizers subsidy, especially UREA when made available cheaply has resulted in overuse, which degraded soil quality, and in return affected the output productivity. Low productivity of Punjab in wheat can be attributed to above cause.
  • Also subsidise acts as a barrier for entry to the developed market like European Union who held that India’s agricultural products are not up to the mark of WTO’s phytosanitary measures.
  • Farm related equipment production units are running inefficient in countries like India owing to lack profits and efficient managements due to irrational subsidies, which drain up their capital reserves in long run thus affecting investment in cleaner technologies. These give rise to environmental damages.
  • While the developing countries like India and China are not in an affordable position to breach the de-minimus level of Aggregate measures of support(AMS), developed countries like US provides subsidies exceeding 50% in some products such as Canola, cotton, sugar and more than 200% for wool.
  • Most benefits of subsidies are allotted to big farmers while in India, 2/3rd farmers are marginal farmers which can’t utilize the benefit of subsidy properly. Thus the value of produce of such farmer’s decrease.
  • It leads to overproduction of one crop over other like fruit, pulses). Thus sometimes grains are piled up for rotting in warehouse. 
  • Also in market, the trade of such cereals take place on the expanse of other non- subsidised products.

Example: The recent trade war between United and China is also the political consequences of the ill effects of subsidies, provided by a particular nation haphazardly. Therefore, complete compliances with the WTO mandated de-minimus level for both developed and developing countries have to committed by all parties.

Way forward

  • India and China have demanded the developed nations at WTO to cut down the farm subsidies under the agreed multilateral trade rules. In WTO parlance, the subsidies are called Aggregate Measurement of Support (AMS) or Amber Box support.
  • India and China believe that elimination of AMS should be the starting point of reforms rather than seeking reduction of subsidies by developing countries.
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