Subsidies in India: Types, Benefits & Need for Rationalising

• Food and fertilizer subsidies exceed ₹4 lakh crore in FY 2024–25, accounting for over 20% of government expenditure.

What is a subsidy?

• A subsidy is financial assistance provided by the government to individuals or businesses through cash payments, grants, or tax breaks.
• Primary Purpose: To make essential goods and services more affordable for the people and to encourage the production and consumption of certain items.

Types of Subsidies

Agricultural Subsidies

• Direct subsidies: Involve actual payments made to farmers, businesses, or individuals.
  • Example: PM Kisan Samman Nidhi Scheme, which provides Rs 6,000 annually to all landholding farmer families in three installments.
• Indirect Subsidies: Help lower the price of a particular commodity or service, making it more affordable for farmers.
  • Example: Fertiliser subsidies, Interest rate subsidies (Kisan Credit Card) etc.

Fertiliser Subsidy

• There are two main types of fertiliser subsidies:
  1. Nutrient-Based Subsidy (NBS):  Under the NBS scheme, a fixed amount of subsidy, decided on an annual/bi-annual basis, is provided on subsidized Phosphatic and Potassic (P&K) fertilisers depending on their nutrient content including Di-Ammonium Phosphate (DAP).
  2. Urea Subsidy: Urea is sold to farmers at a fixed Maximum Retail Price (MRP), with the government subsidizing manufacturers/importers by covering the gap between the delivery cost and market price.

Current Affairs

Food Subsidy

• Government provides food grains to targeted beneficiaries at highly subsidised rates through various central schemes.
  • Example: National Food Security Act (NFSA), 2013. 

Interest Subsidies

• Aims to reduce interest rates for specific sectors like education, housing, and agriculture.
  • Examples: The Central Sector Interest Subsidy Scheme (CSIS) for students.

India’s Expenditure on Food and Fertiliser Subsidies

• Food & Fertiliser Subsidies: Together accounted for over 50% of the Union Budget’s rural and agriculture spending in FY25 (Report by the Indian Council for Research on International Economic Relations).
• Food Subsidy: The food subsidy budget for FY26 is slated to be Rs 2.03 lakh crore. India is providing free food (rice or wheat, 5 kg per person per month) to more than 800 million people.
  • Nearly 73% of India’s agriculture budget is allocated towards welfare schemes and subsidies, leaving limited space for investment and innovation.
• Fertiliser Subsidy: The fertiliser subsidy is estimated to be ₹1.56 lakh crore in FY26.

Advantages of Subsidies

• Incentivize production: Leading to an increased supply of critical goods and services such as food, water, and education, thereby improving access for the broader population.
• Control inflation: By reducing the cost of essential goods, such as fuel, particularly during rising global prices.
• Support key industries: Help prevent the decline of key industries like agriculture and fishing, ensuring these sectors remain viable and continue to support the population.

Potential Drawbacks of Subsidies

• Inflationary Pressure: Excessive subsidies can increase the money supply, raising overall demand and pushing up prices, which may contribute to inflation.
• Fiscal Burden: Subsidies require significant government spending, increasing fiscal deficits and reducing funds available for development projects like infrastructure, healthcare, and education.
• Market Distortions: Subsidies artificially lowers prices disrupting the natural supply-demand balance, discouraging private investment and leading to inefficiencies in resource allocation.

Need for Revisiting Food and Fertiliser Subsidies

• High Fiscal Cost: Food and fertiliser subsidies together exceed ₹4 lakh crore in FY 2024–25, straining public finances and limiting developmental spending.
• Systemic Inefficiencies: PDS leakages (30%) and urea diversion persist, despite Aadhaar and POS-based reforms.
• Environmental Harm: Excessive urea use skews the N:P: K ratio (7:2.7:1), causing soil depletion and contributing to 20% of agri-related GHG emissions.
• Cropping Pattern Distortion: Subsidies and MSP-procurement focus promote water-intensive crops like paddy and wheat, aggravating regional water stress.
• Improved Welfare Delivery: Declining poverty (below 5%) and Aadhaar-linked DBT enable better-targeted support, reducing the need for blanket subsidies.
• Evolving Agri and Dietary Patterns: Urbanisation and demand for diversified diets call for shifting support beyond cereals toward high-value, sustainable agriculture.

Way Forward

• Food Coupons: Giving beneficiaries food coupons (digital wallet) to buy nutritious food like pulses, milk, and eggs from designated stores. It will help plug leakages, diversify diets, promote nutrition, and diversify the production basket.
• Fertiliser Coupons: Farmers can use these coupons to purchase chemical fertilizers and bio-fertilizers or engage in natural farming.
• Deregulating Fertiliser Prices: Correcting the imbalance in the use of nitrogen (N), phosphorus (P), and potassium (K), reducing leakages, and encouraging innovation in the fertilizer sector will be possible if the government moves towards price deregulation in the fertilizer sector.
• Invest in Agricultural Research and Development: Every rupee spent on agricultural research and development yields much better returns than fertilizer subsidies, power subsidies, education, or roads.

Reforming food and fertiliser subsidies is crucial to ensure efficiency, sustainability, and targeted support for farmers. This shift is essential to achieving climate goals, ensuring nutritional security, and promoting inclusive rural development.

Reference: Indian Express

PMF IAS Pathfinder for Mains – Question 246

Be Prelims Ready!

Q. Despite significant progress in poverty reduction and economic growth, India continues to allocate a large share of its fiscal resources to food and fertiliser subsidies. Critically evaluate whether the current structure of these subsidies promotes inclusive growth or entrenches systemic inefficiencies. (250 Words) (15 Marks)

Approach

• Introduction: Write briefly about the current status of food and fertiliser subsidies in India by mentioning the current fact.
• Body: Write current structure of these subsidies promotes inclusive growth, entrenches systemic inefficiencies and way forward.
• Conclusion: Highlights the need to redesign its subsidies to align with the net-zero 2070 goal, SDG 2 (Zero Hunger), and farmer income objectives, ensuring efficient, equitable, and sustainable agricultural support.