Question

While subsidies encourage farmers to use new technology, they are a huge burden on government finances. Discuss the usefulness of subsidies in the light of this fact.

Answer 1

Subsidy means availing some important inputs to farmers at a concessional rate that is much lower than its market rate. During 1960s, in order to adopt new technology HYV seeds and use of modern fertilisers and insecticides, farmers were provided inputs at a subsidised rate. Thus, the public sector role was needed to invest heavily, so as to raise the income of people that will in turn raise the demand and so on.

The following arguments are given in favour of subsidy:

1. Subsidy is very important for marginal land holders and poor farmers who cannot avail the essential farm inputs at the ongoing market rate.
2. Subsidy in 1960s was basically an incentive for the farmers to adopt modern techniques and vital inputs like fertilisers, HYV seeds, etc. The subsidy was mainly of convincing and lucrative nature so that the farmers do not hesitate to use these modern techniques.
3. Subsidy is generally provided to the poor farmers with the motive of reducing inequality of income between rich and poor farmers and to promote an egalitarian distribution of income.
4. It is argued that the adoption of new technology and techniques are not risk free and only daring farmers are only willing to adopt them.

The following arguments are given against subsidy.

1. It is generally argued that subsidy favours and benefits fertiliser industries than the farmers. Subsidies provide a protective shield against the market conditions and, consequently, these industries need not to bother about their market share and competition.
2. Subsidies are also enjoyed by the potential farmers who do not need them. This often leads to the misallocation and wastage of the scarce resources.
3. Subsidies, if provided at a much lower rate than the market rate may lead to the wastage of resources. For example, subsidised electricity leads to the wastage of energy.
4. There is a general consensus that in order to assess the benefit and feasibility of a particular technique, subsidy should be provided but once the performance has been judged subsidies should be stopped.

Hence, based on the above pros and cons, we can conclude that although subsidies are very useful and necessary for poor farmers and to overcome uncertainties associated with farming, it put an excessive burden on the scarce government finances. Thus, a proper planning, suitable reforms and allocation of subsidies only to the needy farmers is required.