Equity risks, state support and the subsidy debate

Detail

1. The risks people feared from the Green Revolution (NCERT)

• Green Revolution: the large rise in foodgrain output that came from HYV seeds (high-yielding variety seeds: seeds that give much more grain per hectare) used together with fertiliser, pesticide and assured irrigation.
• Risk 1: wider inequality between small and big farmers.
• HYV seeds work only with costly inputs: fertiliser, pesticide and water.
• Only big farmers could afford all of these.

• So people feared that big farmers would take most of the gains.

• Risk 2: pest risk.

• HYV crops are more prone to pests.
• A small farmer has no savings to fall back on, so they "could lose everything in a pest attack".

2. How the state responded

• Low-interest loans to small farmers, so they could buy seeds and inputs.
• Subsidised fertiliser. A subsidy is a payment by the government that lowers the price a buyer pays below the real cost.
• Research institutes' services that reduced the pest risk.
• Result:
• "Output on small farms equalled the output on large farms in the course of time."

• The Green Revolution helped both small and rich farmers.

• NCERT's lesson: without "an extensive role" for the state, the Green Revolution "would have favoured the rich farmers only".

3. What the critical studies say

NCERT's view is the optimistic one. Many studies find that inequality did widen, mainly in Phase I (mid-1960s to mid-1970s, when HYV use was limited to wheat and to states with good irrigation).

• Regional inequality (gaps between regions):
• Punjab, Haryana and western UP had irrigation, so they gained first and gained most.

• Eastern India and rain-fed areas lagged behind.

• Interpersonal inequality (gaps between people in the same place):

• Tenant eviction: land values rose, so landlords took back leased land to farm it themselves.

• Labour displacement: tractors and machines replaced farm workers.

• Exam use: give NCERT's view first, then add these points as a balanced critique.

4. The debate over subsidies (NCERT)

For continuing subsidies	Against
Any new technology looks risky, so subsidies were needed to get farmers to try it	Once the technology is profitable and widely used, their purpose is served, so phase them out
Farming is still risky, and most farmers are very poor	Much of the fertiliser subsidy benefits the fertiliser industry
Removing them would widen inequality and go against equity (fairness)	Among farmers, the subsidy goes mostly to prosperous regions
Fix: target them better, do not abolish them	They are a huge burden on government finances

• Size of the burden today: the final budget allocation for the Department of Fertilizers was raised to ₹1,91,836.29 crore (2024-25) [5].

5. Box 2.6: prices as signals

• Price signal: a price rise tells people that a good is scarce, so they economise (use less of it).
• Subsidies block this signal.
• Power and water are free or cheap → farmers in water-scarce regions grow water-intensive crops such as paddy and sugarcane → groundwater runs out faster.

• Fertiliser and pesticide are cheap → farmers overuse them → soil and water are harmed.

• NCERT's question: is it wise, "from the economic viewpoint", to give free electricity to farmers?

6. Fertiliser subsidy: how it works today

(a) Urea is under price control

• Urea is sold at a statutorily notified MRP (a maximum retail price fixed by government under law), whatever its cost of production [2].
• MRP: ₹242 per 45 kg bag, not counting neem-coating charges and taxes [2].
• How the subsidy is calculated [2]:
• Urea subsidy = delivered cost of urea at the farm gate − net market realisation of the maker
• (Net market realisation is roughly the MRP minus dealer margins and similar charges.)
• The subsidy is paid to the manufacturer or importer, not to the farmer.

• Worked example (numbers for illustration only): delivered cost ₹1,500 per bag, net realisation ₹220 → subsidy = ₹1,280 per bag. The farmer pays only about ₹242.

• Urea is outside NBS.

(b) P and K fertilisers come under NBS

• Nutrient Based Subsidy (NBS), in force from 1 April 2010 [3]:
• The government pays a fixed subsidy per kg of nutrient: nitrogen (N), phosphorus (P), potassium (K) and sulphur (S) [3].
• Rates are fixed once or twice a year, based on world prices of fertilisers and raw materials [3].

• Products covered include DAP (di-ammonium phosphate), MOP (muriate of potash) and complex fertilisers. Their prices are partly decontrolled (the government does not fix them fully).

• When world prices jump, the government gives special packages on DAP on top of the NBS rates [11].

(c) Import dependence (2023-24) [9]

• Consumption about 601 lakh metric tonnes (LMT). Domestic production 503.35 LMT. Imports 177 LMT.
• Production rose from 385.39 LMT (2014-15) to 503.35 LMT (2023-24).
• Share met by domestic production: urea about 87%, DAP about 40%. MOP: 100% imported.

7. The NPK ratio problem

• NPK ratio: the ratio in which nitrogen, phosphorus and potassium are applied to the soil.
• Recommended ratio: 4:2:1. India's actual use is heavily skewed towards nitrogen [6].
• Why:
• Urea (the nitrogen fertiliser) has a fixed, very low price.
• P and K fertilisers have partly free prices, so they cost much more.

• This price gap pushes farmers to use more urea [6].

• Qualification: ICAR (Indian Council of Agricultural Research) says no single "ideal" ratio fits the whole country. The right ratio depends on the crop, the soil and the climate [6].

• Nutrient use efficiency (NUE): the share of applied nutrient that the crop actually takes up. In India: N 30–45%, P 15–25%, K 50–60% [8].

• Worked example: a farmer applies 100 kg of N. At 35% NUE, the crop uses 35 kg. The other 65 kg is lost through evaporation and leaching (washing down into groundwater), and it pollutes the environment.

• Link to Box 2.6: cheap urea is a clear case of a subsidy blocking the price signal.

8. Reforms to the fertiliser subsidy

• Neem-coated urea (fully mandated 2015):
• The neem coat releases nitrogen slowly, so it stays in the soil longer [2].

• Coated urea cannot be easily diverted to industry (for example, to glue or plywood makers).

• DBT in fertilisers (nationwide from 2018):

• DBT means Direct Benefit Transfer.
• 100% of the subsidy is paid to companies only on actual sales to farmers [4].
• Each sale is recorded on a Point of Sale (PoS) machine at the retail shop [4].
• The buyer is identified through Aadhaar, KCC (Kisan Credit Card) or Voter ID [4].

• Note: the money still goes to companies, not into farmers' bank accounts.

• Nano urea (IFFCO, 2021):

• Liquid urea with nano-sized nitrogen particles, sprayed on leaves.

• It is claimed to improve nutrient-use efficiency, but its efficacy is debated.

• PM-PRANAM (2023) (PM Programme for Restoration, Awareness, Nourishment and Amelioration of Mother Earth):

• A state that uses less chemical fertiliser (urea, DAP, NPK, MOP) than its average of the previous 3 years gets 50% of the subsidy saved as a grant [7].
• Worked example: a state's 3-year average use is 10 LMT and this year's use is 9 LMT. The subsidy saved on 1 LMT is ₹X, so the state gets ₹X ÷ 2.
• In 2023-24, 14 states together cut use by 15.14 LMT [7].

9. Free farm power

• Flat or zero tariffs (for example, Punjab): the farmer's power bill does not rise with use.
• Chain of effects:
• Pumping costs almost nothing → farmers over-pump → groundwater depletion (section 10).
• Power is supplied below cost → discoms (power distribution companies) make losses → less money to maintain the power supply.

10. MSP and the rice-wheat bias

• MSP (Minimum Support Price): the price at which the government promises to buy a crop. It works as a price incentive.
• Assured procurement makes rice and wheat the safest crops → farmers keep growing paddy even in water-scarce Punjab and Haryana.
• The mechanics are covered in agri-marketing-msp-pds.

11. Terms of trade for agriculture

• Definition: the ratio of the prices farmers receive for their output to the prices they pay for inputs and consumer goods. It shows how profitable farming is.
• Formula: ToT = (Index of prices received ÷ Index of prices paid) × 100
• Worked example: prices received index = 120, prices paid index = 110 → ToT = 109.1. A value above 100 means terms of trade favour agriculture.
• Input subsidies lower the "prices paid" side. MSP raises the "prices received" side.

12. Subsidies vs public investment

• Public investment in agriculture: government spending on things that last, such as irrigation, power, roads, market links, and research and extension.

• Extension means teaching new farm methods to farmers in the field.

• Studies find that public investment gives higher returns than input subsidies.

• Public investment fell after 1991. This fall is blamed for slow agricultural growth.
• Crowding out: subsidies use up budget money that could have gone to investment.

13. PM-KISAN: income support instead of input subsidy

• Launched 2019. It pays ₹6,000 a year in three equal instalments (₹2,000 each) by DBT into Aadhaar-seeded bank accounts [10].
• 23rd instalment (June 2026): over ₹18,880 crore paid to over 9.44 crore farmers, including over 2.18 crore women [10].
• Total paid since 2019: over ₹4.46 lakh crore [10].
• Why economists prefer it: it is a fixed cash payment, so it does not distort prices. The farmer still pays the true price of fertiliser and power.
• WTO Agreement on Agriculture boxes are covered in international-trade-policy.

Prelims Hooks

• NCERT names two feared risks of HYVs: wider small-big farmer inequality and pest risk. The state's answer was cheap credit, subsidised fertiliser and research-institute services.
• Urea is outside NBS. It is sold at a statutory MRP of ₹242 per 45 kg bag (plus neem-coating charges and taxes) [2].
• NBS started on 1 April 2010. It pays a fixed subsidy per kg of N, P, K and S for P&K fertilisers [3].
• DBT in fertilisers pays the subsidy to companies, not farmers, after PoS-recorded sales [4]. This is a common trap.
• The recommended NPK ratio is 4:2:1. Actual use is skewed towards N [6].
• Nutrient use efficiency: N 30–45%, P 15–25%, K 50–60% [8].
• MOP is 100% imported. About 87% of urea and about 40% of DAP are met from domestic production (2023-24) [9].
• PM-PRANAM: states get 50% of the subsidy saved, measured against their previous 3-year average use [7].
• Nano urea was launched by IFFCO in 2021. Neem-coated urea was fully mandated in 2015.
• Terms of trade = (prices received index ÷ prices paid index) × 100.

Mains Points

• Growth with equity: the Green Revolution reached small farmers only because the state gave cheap credit, fertiliser subsidies and research support. But regional inequality (Punjab vs eastern India) and interpersonal inequality (tenant eviction, labour displaced by machines) show the limits of input-led growth.
• The subsidy trap: a subsidy that was needed to spread a new technology (1960s) later harms the resources farming depends on. Cheap urea skews the NPK ratio, and free power and MSP push paddy into water-scarce states, depleting groundwater. Suggested reforms: better targeting, NBS-style pricing for urea, DBT, and PM-PRANAM-type incentives for states.
• Fiscal trade-off: the fertiliser budget (about ₹1.92 lakh crore, 2024-25) [5] crowds out public investment in irrigation, research and markets, which gives higher returns. Direct income support such as PM-KISAN [10] protects equity without distorting prices.
• Strategic angle: heavy import dependence (100% for MOP, about 60% for DAP) [9] makes the subsidy bill depend on world prices. Balanced fertiliser use and nano and alternative fertilisers therefore also serve food security.