Subsidies and investments in Indian agriculture conference papers New Delhi, July 1997

There appears to be a general consensus that agricultural policies have an economy-wide impact and that there is a direct correlation between Indian agricultural performance and the standards of living of a majority of our population. Hence it is imperative to design appropriate and effective strategies to improve efficiency in Indian agricultural growth. Price policy has always been known to be crucial as it is confronted with the dilemma of providing high agricultural prices as incentives for agricultural producers and low food prices for the consumers. Till recently, this problem had been sought to be resolved by the Indian government with a policy of low prices for agricultural products coupled with low prices for agricultural inputs, such as fertilizers, water and electricity to protect farmers' interests. Subsidy has been used as an instrument for keeping the input prices low. Reduction in prices of certain goods and services induces a higher demand for products that enhance productivity. This may be desirable till they start becoming uneconomical or create distortion in the economy. In an attempt to correct the impact of disincentive prices for farm output, subsidies result in inefficient allocation of resources.

Undoubtedly, subsidies which were used for keeping the input prices low in agriculture were effective in improving agricultural growth to a certain extent, but it is important to make sure that they do not become a permanent feature of the Indian economy. There is a growing criticism against the continuance of agricultural subsidies for the following reasons. First, these subsidies are fiscally unsustainable. Second, they encourage misuse of resources also leading to environmentally malignant developments like land degradation, water logging, depletion of ground water resources, salinity etc. Third, they crowd out public investment resources adversely affecting the overall agricultural growth. Allocation of public resources and investment management is a politically sensitive and economically complex problem. This larger debate encompasses many crucial public decisions regarding shifting available resources from concessions to productive investment channels with a constructive and futuristic focus.