Agricultural subsidies are necessary for farmers but distort markets and resource allocation. Critically examine.

Agricultural subsidies are financial support provided by the government to reduce production costs, stabilise farm incomes and ensure food security. In India, they are provided in both direct forms (e.g., PM-KISAN, Interest Subvention, PMFBY) and indirect forms (e.g., fertiliser subsidy, electricity subsidy). According to the Union Budget 2025–26, the Central Government has allocated over ₹1.7 lakh crore towards major agricultural support schemes and subsidies.

Need for farm subsidies:

• Income support: Protect farmers from low and volatile farm incomes, particularly small and marginal farmers.
• Reduce production cost: Subsidies on fertilisers, electricity, irrigation and credit lower the cost of cultivation.
• Food security: Encourage production of essential food grains required for buffer stocking and the Public Distribution System.
• Risk mitigation: PMFBY and interest subsidies reduce production and financial risks.
• Correct market failures: Credit constraints, information asymmetry and weather uncertainties justify government intervention.

However, prolonged and poorly targeted subsidies have also generated significant economic and environmental distortions.

• Distorted Cropping Pattern: MSP-backed procurement and input subsidies encourage excessive cultivation of rice and wheat at the expense of pulses, oilseeds and coarse cereals. Example: Punjab-Haryana paddy cultivation despite groundwater stress.
• Inefficient Resource Allocation: Fertiliser subsidy (especially under the urea pricing regime) reduces incentives for inefficient fertiliser plants to modernise because the government compensates much of their higher production cost. It leads to sub-optimal utilisation of scarce resources such as natural gas, besides increasing the fiscal burden.
• Environmental Externalities: Input subsidies encourage overuse of fertilisers, electricity and irrigation, leading to imbalanced nutrient application, declining soil fertility, groundwater depletion and increased greenhouse gas emissions.
• Fiscal Burden: Large subsidy commitments increase revenue expenditure, reducing the government's fiscal space for productive capital investment in irrigation infrastructure, agricultural R&D, storage, extension services and rural logistics.
• Failure to Address Structural Constraints: Agricultural subsidies largely address the cost of cultivation rather than the structural constraints affecting agriculture. Persistent issues such as fragmented landholdings, weak marketing systems, inadequate storage, poor food processing and inefficient value chains continue to constrain productivity and farmers' incomes despite substantial subsidy support.

Hence, future reforms must shift from price and input distortions towards income support, productivity enhancement and sustainable resource use, thereby making Indian agriculture both competitive and environmentally sustainable.