Farm subsidies form an integral part of the government’s budget. In the case of developed countries, the agricultural or farm subsidies compose nearly 40 % of the total budgetary outlay. Subsidies are extended to the farmers to make agriculture a lucrative job and help the farmers generate healthy income from the same.
Direct farm subsidies: These are the kinds of subsidies in which direct cash incentives are paid to the farmers in order to make their products more competitive in the global markets. The developed countries of USA and Europe spend huge amounts of their annual budgets on the agriculture, farm and fisheries subsidies. Direct farm subsidies are helpful as they provide a purchasing power to the farmer and can significantly help in raising the standards of living of the rural poor. They also help in checking the misuse of public funds as they help in the proper identification of the beneficiaries.
Indirect farm subsidies: These are the farm subsidies which are provided in the form of cheaper credit facilities, farm loan waivers, reduction in irrigation and electricity bills, fertilizers, seeds and pesticides subsidy as well as the investments in agricultural research, environmental assistance, farmer training etc. These subsidies are also provided to make farm products more competitive in the global market. Let us take an example to understand the direct and indirect subsidies. The subsidies provided on the fertilizers as input subsidies are in the form of indirect subsidies. But if the government does not incentivize the farmer by an effective cost reduction in prices of the fertilizers but provides direct cash incentives after the produce, is known as a direct subsidy.
The World Trade Organization (WTO) has put some ceilings on the amount of direct and indirect subsidies being provided by the various developing and developed nations due to the fact that these subsidies distort the free market forces which have their own implications.