It is not enough to say that agriculture contributes only 16 per cent to India’s GDP. Nor is it sufficient to state that small farmer households earn about one lakh rupees annually. These statistics do not capture the full extent of the story. For those, particularly outside India, who are unfamiliar with the agricultural and rural heartlands of India, this data conceals a larger narrative.
I say this both as a farmer and as a former finance minister: The impacts go far beyond the economy. What is at risk is social stability and what it could bring is a cultural upheaval that we are not prepared for. For instance, 250 million people are directly dependent on farming, and there are 700 million Indians who are directly or indirectly connected to farming and the rural sector. Protecting the farm sector is not just a policy. It is a survival mechanism for millions, crucial to maintaining economic, social, political and cultural stability.
The argument around agricultural subsidy and tariffs often centres on the Minimum Support Price (MSP) provided to select crops. In the US and much of the EU, the terminoogy and approach vary, but the issue remains the same. If India has MSP, the US has ERP, PLC, ARC and DMC. Let me elaborate.
ERP is the Effective Reference Price, analogous to the MSP. In the US, farmers receive direct payments from the government if market prices fall below this level, and it is called PLC or Price Loss Coverage. Both PLC and ARC (Agriculture Risk Coverage) cover 22 major crops, ranging from wheat and corn to soybean and cotton. These systems are not restricted to farming alone as they also extend to the dairy sector under the Dairy Margin Coverage (DMC) programme. The EU’s Common Agricultural Policy (CAP) provides income support via direct payments if prices fall below intervention levels, which are akin to MSPs.
The crucial difference is that, while in India, the government procures crops at the MSP, in the US the government does not procure crops but instead pays farmers directly if prices fall below the minimum. Given the literacy levels, or lack thereof, and the paperwork involved with enrolling in these various EU and US policies, asking Indian farmers to transition to these systems would create another level of bureaucracy. Moreover, rolling out the US and EU models in India would take years, if not decades.
The pressure on India to dismantle its farm mechanisms, whether MSP or tariffs, and open up to international market forces would be justifiable, if the US and EU were not subsidising their own agricultural sectors. The US spends about $20 billion and the EU about $50 billion on agricultural subsidies. In fact, many of these subsidies remain hidden, while the Indian MSP system is much more transparent.
The focus of US subsidies is large farms, whereas Indian farm policy centres on small farmers. US policy priorities include market stabilisation, income protection, and climate adaptation, while India focuses on supporting small farmers and landholderscol, ensuring regular upliftment of the rural economy. EU subsidies are targeted more toward income support, environmental goals, climate and biodiversity targets.
In the US and much of Europe, 80 per cent of subsidies go to large farms, while in India, it is the reverse with 80 per cent going to small and medium farmers. The EU, in its latest budget provisions, is trying to move away from the US approach towards the Indian model, by targeting small farmers. In fact, the EU’s latest provision in its Common Agricultural Policy (CAP) is 387 billion euros ($451 billion) for 2021-2027, and as recently as last month, they proposed a cap of 1,00,000 euros per year per farmer, in an attempt to shift support from larger farmers to smaller ones. That translates to a cap of one crore of subsidy per farmer.
For India, the real issue is that of equitable and development-centred agreements. Just as the Indian MSP is clear, transparent and focused on the Indian context, the alphabet soup of CAP, ERP, PLC, ARC and DMC is tailored to the US and EU contexts. This perspective arises not only from economics, but also from society, politics and culture. Opening the entire agriculture sector to a free-for-all, when US and EU subsidies distort the market in their favour, would create a kind of asymmetric warfare, with tumultuous consequences for Indian society. The upheaval would be massive.
This stance has been clearly articulated at the highest levels. As Prime Minister Narendra Modi recently said: “For us, the interest of our farmers is top priority. India will never compromise on the interests of its farmers, dairy farmers and fishermen. I know I will personally have to pay a heavy price but I am prepared for it.”
The writer is the former Finance Minister of Punjab
