 "Budget 2025: Food, fertiliser, direct, indirect, interest subsidies decoded")
In the Union Budget, subsidies play a crucial role in economic planning and welfare. In India, both central and state governments offer subsidies to ease the financial burdens on farmers and improve agricultural productivity. Subsidies also help stabilise prices, promote economic growth, and support vulnerable populations.
The Union Budget 2025 is scheduled for February 1, 2025, when Finance Minister Nirmala Sitharaman will present her eighth consecutive Budget in front of the Parliament. Here is a closer look at what subsidies are and how they are allocated.
What is a subsidy?
A subsidy is financial assistance provided by the government to individuals or businesses through cash payments, grants, or tax breaks. The primary purpose of subsidies is to make essential goods and services more affordable for the people and to encourage the production and consumption of certain items, particularly those with positive societal benefits.
Agricultural subsidies can be broadly classified into direct subsidies and indirect subsidies:
Direct subsidies
These subsidies involve actual payments made to farmers, businesses, or individuals. The government directly transfers funds or provides financial aid to the beneficiary.
This type of subsidies in India include the PM Kisan Samman Nidhi Scheme, which provides Rs 6,000 annually to all landholding farmer families in three installments, and farm loan waivers, where the government repays farmers’ loans using public funds to ease their financial burden.
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Indirect subsidies
Indirect subsidies help lower the price of a particular commodity or service, making it more affordable for farmers. These subsidies are generally provided in the form of discounts, reducing the cost of key agricultural inputs or services.
Common examples of indirect subsidies in India include Minimum Support Price (MSP) for crops, fertiliser subsidies (urea), irrigation subsidies (PMKSY), interest rate subsidies (Kisan Credit Card), crop insurance subsidies (PMFBY), electricity subsidies for irrigation, infrastructure subsidies (cold storage loans), and research and extension services to improve farming practices.
Interest subsidies
Interest subsidies in the budget aim to reduce interest rates for specific sectors like education, housing, and agriculture. Examples include the Central Sector Interest Subsidy Scheme (CSIS) for students, the Interest Subvention Scheme for farmers, and the Credit Linked Subsidy Scheme (CLSS) for housing loans for the economically weaker sections.
Food subsidy
The government of India provides food grains to targeted beneficiaries at highly subsidised rates through various central schemes under the National Food Security Act (NFSA), 2013, and other welfare schemes (OWS) such as Priority Household (PHH), Antodaya Anna Yojana (AAY), PM Poshan (earlier known as Mid-day Meal), and Integrated Child Development Services (ICDS).
Food-grains for these schemes are procured through two primary modes:
1. Centralised procurement (CP) mode: The states and their agencies procure the food grains and hand them over to the Food Corporation of India (FCI), which then releases funds to the states as per the provisional cost sheet issued by the Department of Food and Public Distribution (DFPD). The state lifts food grains from FCI based on the allocation order issued by the DFPD for distribution under central schemes.
2. Decentralised procurement (DCP) mode: Here, the responsibility for the procurement and distribution of food grains under central schemes lies with the state government. If surplus food grains are procured, they are delivered to FCI. In case of a deficit, FCI supplies the required food grains to the state. A Memorandum of Understanding (MOU) is signed between the state and DFPD to facilitate this process.
The DFPD releases funds to FCI and DCP states to maintain adequate buffer stock and distribute food grains under various central schemes, including the National Food Security Act (NFSA) and other welfare schemes (OWS).
Food subsidy released:
- FY 2021-22: Rs 2,88,718.54 crore
- FY 2022-23: Rs 2,72,501.70 crore
- FY 2023-24: Rs 2,11,394.39 crore
In July 2024, the government allocated Rs 2,05,250 crore for food subsidies.
Fertiliser subsidy
Fertiliser subsidies are provided to help farmers buy fertilisers at a lower cost. The government provides these subsidies to make sure that the agricultural sector can thrive by keeping the prices of fertilisers affordable, especially since the cost of fertilisers can change due to fluctuations in the international market. How does the fertiliser subsidy work?
The government gives subsidies to companies that make or import fertilisers. These subsidies are paid based on how much fertiliser is actually sold to farmers by local retailers. The subsidy is transferred directly to fertiliser companies through a system called Direct Benefit Transfer (DBT).
To ensure that the benefits reach the right people, the government uses Aadhaar cards, Kisan Credit Cards (KCC), or Voter Identity Cards to identify eligible farmers. The subsidies are transferred on a weekly basis.
There are two main types of fertiliser subsidies:
1. Nutrient-Based Subsidy (NBS): This subsidy is for Phosphatic and Potassic (P&K) fertilisers. The amount of subsidy depends on the nutrient content of the fertiliser, and it’s decided on an annual or semi-annual basis. The Maximum Retail Price (MRP) is set by fertiliser companies based on market conditions
2. Urea Subsidy: For urea (a common fertiliser), the government covers the difference between the cost of urea and the price at which urea is sold to farmers. Urea is sold at a fixed price, and the government compensates manufacturers for the difference.
Fertiliser subsidy budget:
- For FY 2022-2023 the government spent Rs 2,25,222 crore on fertiliser subsidies.
- For FY 2023-2024, the government had allocated Rs 1,75,103 crore for fertiliser subsidies.
- In July 2024, the fertiliser subsidy was set at Rs 1,64,000 crore
Advantages of subsidies
Subsidies offer several advantages, including lowering prices and controlling inflation by reducing the cost of essential goods, such as fuel, particularly during rising global prices. They also help prevent the decline of key industries like agriculture and fishing, ensuring these sectors remain viable and continue to support the population.
Additionally, subsidies incentivise production, leading to an increased supply of critical goods and services such as food, water, and education, thereby improving access for the broader population.
Potential drawbacks of subsidies
Despite their benefits, subsidies can also have some drawbacks. One major disadvantage is the potential for supply shortages, as increased demand driven by subsidised prices may outpace production capacity. Additionally, measuring the success of subsidies can be difficult, making it challenging to assess their long-term economic impact. Finally, funding subsidies often necessitates higher taxes, which can place a financial burden on the general population and businesses, as they contribute to the government’s ability to subsidise industries.