Subsidy in agriculture means providing 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 to the farmers fertilisers and insecticides, were provided at a subsidised rate.
The following arguments are given to prove the usefulness of subsidies
(i) It was necessary to use subsidies to provide an incentive for adoption of the new HYV technology by farmers, especially the small farmers.
(ii) Any new technology is considered as being risky by farmers. Subsidies were, therefore, needed to encourage farmers to adopt the new technology initially.
(iii) Farming in India is still a risky business and subsidies provide hedging against the risk of climatic conditions.
(iv) Most farmers are very poor and they will not be able to afford the required inputs without subsidies.
(v) Subsidies bring about equity between rich and poor farmers by enabling the poor farmers to use modem technology and inputs.
On the other hand, some economists believe that subsidies should be phased out once their purpose has been served and the technology is now widely adopted due to its profitability. They argue that there is no case for continuing with subsidies as it does not benefit the target group and it is a huge burden on the governments finances.
They give the following arguments against subsidies in agriculture
(i) Subsidies are benefitting the fertiliser industry more than farmers.
(ii) Subsidies are mainly being availed by big farmers in affluent regions, who do not actually need them.
Hence, based on the above arguments, we can conclude that although subsidies are very useful and necessary for poor farmers and to overcome uncertainties associated with farming, it may lead to wastage of resources and thus, put an excessive burden on the scarce government finances. Thus, suitable reforms need to be undertaken in order to ensure allocation of subsidies in a targeted manner only to the needy farmers.