Definition
• Subsidy has been defined as the “money granted by state, public body, etc., to keep down the prices of commodities, etc.”
• A subsidy is a grant or other financial assistance given by one party for the support or development of another.
• Subsidies affect the economy through the commodity market by lowering the relative price of the subsidized commodity, thereby generating an increase in its demand.
• Taxes appear on the revenue side of government budgets, and subsidies appear on the expenditure side.
• While taxes reduce disposable income, subsidies inject money into circulation.
• Subsidies have been advocated for redistributive objectives, especially to ensure minimum level of food and nutrition to all sections of society.
• Subsidies are justified in the presence of positive externalities (social benefits above private benefits), because in these cases consideration of social benefits would require higher level of consumption than what would be obtained on the basis of private benefits only.
• Primary education, preventive health care, and research and development are prime examples of positive externalities. In these cases, private valuation of the benefits from such goods or services is less than their true value to society.

Types of subsidies
1. Direct Subsidies – Direct subsidies are given in terms of cash grants, interest-free loans and direct benefits. For example- Direct farm subsidies are the kinds of subsidies in which direct cash incentives are paid to the farmers in order to make their products more competitive in the global markets. Direct farm subsidies are helpful as they provide a purchasing power to the farmer and can significantly help in raising the standards of living of the rural poor.

2. Indirect subsidies – Indirect subsidies are provided in terms of tax breaks, insurance, low-interest loans, depreciation write-offs, rent rebates. For example- Indirect farm subsidies: These are the farm subsidies which are provided in the form of cheaper credit facilities, farm loan waivers, reduction in irrigation and electricity bills, fertilizers, seeds and pesticides subsidy as well as the investments in agricultural research, environmental assistance, farmer training etc.

The benefits of subsidy as a policy are:
1. Inducing higher consumption/production.
2. Achievement of social policy objectives including redistribution of income, population control etc.
3. It helps in controlling the prices to maintain stability.
4. Especially in case of agriculture where food is basic right of all, you cannot leave everything to market.
5. Offsetting market imperfections including internalization of externalities.

SUBSIDIES TO AGRICULTURE SECTOR
(1) Input Subsidies: Subsidies can be granted through distribution of inputs at prices that are less than the standard market price for these inputs. The magnitude of subsidies will therefore be equal to the difference between the two prices for per unit of input distributed. Naturally several varieties of subsidies can be named in this category

(a) Fertilizer Subsidy:
• It includes Distribution of cheap chemical or non-chemical fertilizers among the farmers. It amounts to the difference between price paid to manufacturer of fertilizer (domestic or foreign) and price, received from farmers.
• This subsidy ensures:
– Cheap inputs to farmers,
– Reasonable returns to manufacturer,
– Stability in fertilizer prices, and
– Availability of fertilizers to farmers.
• In some cases this kind of subsidies are granted through lifting the tariff on the import of fertilizers, which otherwise would have been imposed.

(b) Irrigation Subsidy:
• Subsidies to the farmers which the government bears on account of providing proper irrigation facilities.
• Irrigation subsidy is the difference between operating and maintenance cost of irrigation infrastructure in the state and irrigation charges recovered from farmers.
• This may work through provisions of public goods such as canals, dams which the government constructs and charges low prices or no prices at all for their use from the farmers.
• It may also be through cheap private irrigation equipment such as pump sets.

(c) Power Subsidy:
• The electricity subsidies imply that the government charges low rates for the electricity supplied to the farmers. Power is primarily used by the farmers for irrigation purposes. It is the difference between the cost of generating and distributing electricity to farmers and price received from farmers.

(d) Seed Subsidies:
• High yielding seeds can be provided by the government at low prices. The research and development activities needed to produce such productive seeds are also undertaken by the government, the expenditure on these is a sort of subsidy granted to the farmers.

(e) Credit Subsidy:
• It is the difference between interest charged from farmers, and actual cost of providing credit, plus other costs such as write-offs bad loans. Availability of credit is a major problem for poor farmers. They are cash strapped and cannot approach the credit market because they do not have the collateral needed for loans. To carry out production activities they approach the local money lenders.

(2) Price Subsidy
• It is the difference between the price of food-grains at which FCI procures food-grains from farmers, and the price at which PCI sells either to traders or to the PDS.
• The market price may be so low that the farmers will have to bear losses instead of making profits. In such a case the government may promise to buy the crop from the farmers at a price which is higher than the market price.
• The difference between the two prices is the per unit subsidy granted to the farmers by the government. The price at which the government buys crops from the farmers is called the procurement price.
• Such procurement by the government also has a long run impact. It encourages the farmers to grow crops which are regularly procured.

(3) Infrastructural Subsidy
• Private efforts in many areas do not prove to be sufficient to improve agricultural production. Good roads, storage facilities, power, information about the market, transportation to the ports, etc. are vital for carrying out production and sale operations.
• These facilities are in the domain of public goods, the costs of which are huge and whose benefits accrue to all the cultivators in an area.
• The government takes the responsibility of providing the public goods and given the condition of Indian farmers a lower price can be charged from the poorer farmers.

(4) Export Subsidies
• This type of subsidy is not different from others. But its purpose is special. When a farmer or exporter sells agricultural products in foreign market, he earns money for himself, as well as foreign exchange for the country. Therefore, agricultural exports are generally encouraged as long as these do not harm the domestic economy. Subsides provided to encourage exports are referred as export subsidies.

Objectives of Agricultural Subsidy
• Economic objectives:
– Stimulate agricultural production.
– Compensate for high costs of transport from port or factory to farms that raise costs of inputs.
– Improve soil quality and combat soil degradation (in the case of fertilizer).
– Make inputs affordable to farmers who cannot buy them, owing to poverty, lack of access to credit, and inability to insure against crop losses.
– Learning — to allow farmers to try novel inputs and become familiar with their advantages.

• Social objectives:
– Social equity – to transfer income to farmers who are poor, live in remote disadvantaged areas, or both