(Sample Material) UPSC IAS Mains GS Online Coaching : Paper 3 - "Issues Related To Direct And Indirect Farm Subsidies"

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Subject: General Studies (Paper 3 - Technology, Economic Development, Bio diversity, Environment, Security and Disaster Management)

Topic: Issues Related To Direct And Indirect Farm Subsidies


Subsidies and the WTO- Green, Blue, Amber and Red Box Subsides

Differentiate between the Green, Blue, Amber and Red Box Subsidies under the WTO Regime Subsidies have been provided widely throughout the world, as; a tool for realizing government policies, in such forms as grants (normal subsidies), tax exemptions, To interest financing, investments and export credits. There are six primary categories of subsidies, divided by purpose:

• Export subsidies,
• Subsidies contingent upon the use of domestic over imported goods,
• Industrial promotion subsidies,
• Structural adjustment subsidies,
• Regional development subsidies,
• Research and development subsidies. By  beneficiary , there are two primary categories:
• Subsidies that are not limited to specific businesses-or industries (non-specific subsidies), and
• Subsidies those are limited to specific businesses and industries ( specific subsidies) .

Although governments articulate ostensibly legitimate goals for’ their subsidy programmes, it is widely perceived that government subsidies rrlay give excessive protection to domestic industries. In such cases, subsidies act as a barrier to trade, by distorting the competitive relationships that develop naturally in a free trading system. Exports of subsidized products may injure the domestic industry producing the same product in the importing country. Similarly, subsidized products may gain artificial advantages in third-country markets and impede other countries’ exports to those markets.

Because of this, for industrial goods, the WTO agreements prohibit export subsidies and subsidies contingent upon the use of domestic over imported goods, as having a particularly high trade-distorting effect. Even for subsidies that are not prohibited, it-allows.

Member countries importing subsidized goods to enact countermeasures, such as countervailing duties if such goods damage domestic industry and certain procedural re quir e me n ts a recomplied with. For agricultural products, it requires obligations such as reducing export subsidies and domestic supports.

The WTO agreement stipulated that the Development countries would reduce their subsidies by 20% in 6 years and developing, countries by 13% in 10 years. But/the developed countries mis used this and circumvented this agreement by providing Green Box Subsidies and Blue Box Subsidies to agriculture.

In WTO terminology, subsidies in general are identified by “boxes” which are given the colors of traffic lights: green (permitted), amber (slow down — i.e. be reduced), red (forbidden).

Fertilizer Subsidies : Issues “with Nutrient Based Subsidy scheme.

Nutrient-based subsidy (NBS) scheme was launched in 2010. The issues with this scheme are as follows:

• There has been unprecedented hike in prices of non-Xtrea fertilisers after the introduction of NBS scheme.
• It has been suggested that NBS policy shifted be withdrawn and the previous system of fixed MRP should be restored.


• In India, Urea is the only controlled fertilizer, which is sold at statutory notified uniform sale price . The Phosphatic and Potassic fertilizes are under a decontrolled regime and are sold at indicative maximum retail prices (MRPs).
• The problems faced.by the manufactures in earning a reasonable return on their investment with reference to controlled prices, are mitigated by providing support under the New Pricing Scheme (NPS) for Urea units and the concession Scheme for decontrolled Phosphatic and Potassic fertilizers. The statutorily notified sale price and indicative MRP is generally less than the cost of production of  the irrespective manufacturing unit. The difference between the cost of production and the selling price/MRP is paid as subsidy/concession, to manufacturers
• As the consumer ‘ prices of both indigerious and imported) fertilize are fixed uniformly, financial support is also given on imported urea and decontrolled Phosphatic and Potassic fertilizers. New Pricing Scheme III or NPS-III for Urea
• Till 2003, the subsidy to urea was under the provisions of the Retention Price Scheme (RPS). Under RPS, the difference be tween retention price ( cost of production as assessed by the Government plus 12% post tax return on networth) and the statutorily notified sale price was paid as subsidy to each urea unit. Later the RPS regime was dismantled and a Concession Scheme for urea units based on the prices of feedstock used and the vintage of plants was introduced, which was called New Pricmg Scheme or N PS. This scheme was introduced from April 1, 2003. It had various phases like NPS-I (2003-2004), NPS-II (2004-2006) and NPS-III (2006 onwards).


• The problem with this scheme was that the fertilizer companies started bleeding due to fixed Urea prices and rising cost of Inputs such as Natural Gas and Naptha. As much as 80% of India’s production of urea is gas-based. The price of Urea was increased by 10 per cent from 1st April 2010. After that in October 2012, the government agreed to hike the prices of urea- based fertilizers by Rs. 50 per tonne. This was the last increase in Urea Price. With this increase, urea-based fertilizers will now cost Rs. 5,360 per tonne,, still a lot cheaper than potash and phosphate fertilizers, which cost Rs. 24,000 per tonne.
• Thus we see that Urea is available at such a cheap, price that people not only started unbalanced use of this fertilizer but a1so Urea was illegally exported to neighbouring countries. So, the New Pricing Scheme III needed a modification so that the companies are allowed to hike urea prices and also there can be a check on the unbalanced use of soil nutrients and reduce government’s subsidy burden. Earlier, the government had plans to decontrol the urea sector by bringing it under the nutrient based subsidy (NBS) scheme.
• A committee headed by Planning Commission member Soumitra Choudhary had also suggested freeing of the sector. But somehow, the political class could not take bold steps and Urea is still under price control regime.

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