Economics of Subsidies in a Welfare State: Dynamics of Populist Policies and Farm Profitability

Abstract

Economic gains from subsidies provided by welfare states have remained contentious in the literature due to their inherent paradoxical consequences in promoting competition, economic growth and equitable distribution in developing economies. State largesse on farm subsidies has increasingly become a populist tool for political gains. The politics involved with subsides have immense emotional appeal than fulfilling the objective of social and economic justice. Despite international consensus of removal of farm subsidies, its magnitude has grown in recent years. In India, the arguments in favour of farm subsidies have gained larger acceptance due to sudden spurts in farmer suicides during last two decades. Since electoral fortunes are hugely dependent on populist policies on subsidies, Minimum Support Prices (MSPs) and farm loan waivers, policymakers have not been able to introduce necessary reforms to make Indian agriculture competitive. The agricultural sector has become excessively dependent on government grants and remained unprofitable for most of the small and marginal farmers. The results of this study find that subsidies are poorly correlated with cost of cultivation and farm profitability with collateral interactions with other sectors of Indian economy.