ABSTRACT

India introduced seed-water-fertilizer technology during the 1960s with an objective to achieve self-sufficiency in food grain production. The Indian government provided these inputs at a subsidized rate in order to make them available, accessible and affordable to the farmers. Both input subsidies and support price for the output were used as complementary instruments of the twin policy of promoting productivity and stabilizing the agricultural prices. Over time these subsidies have been questioned on the basis of unsustainable burden on the finances of the central and state governments, distortions in cropping pattern in favour of water intensive crops, adverse environmental effects and interregional/interpersonal disparities in development (Gulati and Sharma 1995; Rao and Gulati 1994; Singh and Joshi 1989). Subsidy on irrigation through electricity and canal water has caused distortion in cropping patterns in favour of water-intensive crops like paddy in Punjab, Haryana, and sugarcane in Maharashtra. In a case study of Gujarat, Shaheen and Shiyani in 2005 conclude that flat tariff rate is the major factor of groundwater overexploitation in the region as subsidization of electricity for pumping ground water reduces the marginal cost of extraction to near zero and thereby encourages the farmers to use this resource inefficiently. On the equity issue, it is well-established now that most of the benefits of these subsidies are appropriated by well-developed irrigated regions and large farmers.1 The issue of input subsidies also came into the limelight due to subsidy commitments under the Agreement on Agriculture (AoA). Recent notifications to WTO (World Trade Organization) on domestic support to the agricultural sector show that India has no obligation to reduce agriculture subsidy. However, due to problems associated with input subsidies at the domestic front, there is a demand for the rationalization of agricultural subsidies (Gulati and Narayan 2003; Rao 2001).