Answer: 

A subsidy is defined as a form of financial assistance paid to an economic sector (institution, business or individual) to achieve certain policy objectives. Both Central and State governments provide various subsidies for the development of the agriculture sector and the welfare of farmers.

• Direct Subsidies: Direct subsidies are those subsidies which involve an actual payment of funds toward a particular individual, group, or industry. These subsidies are delivered in the form of cash subsidies to the consumers. The beneficiary purchases the commodity at the market price.

• For example, Farm loan waiver scheme and PM Kisan Samman Nidhi Scheme, under which support of Rs.6000/- per year is provided to all land holding farmer families across the country, irrespective of land size, in three equal installments.

• Indirect Subsidies: Indirect subsidies are those subsidies which are provided in the form of discounts to lower the price of a particular commodity. It does not include direct cash payments to the beneficiary. It is intended to increase the consumption of a particular commodity by lowering its price in the market.

• For example, Indirect subsidies in agriculture include input subsidies (Water, electricity, fertilizers, pesticides, seeds etc.), Minimum Support Price and Interest subvention on short term loans.

• Lack of Targeting: Subsidies often fail to reach small and marginal farmers who need support the most. 
• For example, Fertilizer subsidies are apportioned by rich farmers.
• Inequitable Distribution: Subsidies are often distributed unevenly among regions, crops, and farmers. This inequitable distribution leads to distortions in production patterns and can perpetuate regional disparities. 
• For example, higher MSP for wheat and rice has led to skewed cropping patterns in favor of these crops.
• Environmentally Unsustainable: subsidies artificially lower the cost of inputs, which can encourage overuse. This can have negative environmental consequences and affect long-term sustainability. 
• For example, subsidy on electricity led to overexploitation of groundwater, subsidy on fertilizers led to water and soil pollution etc.
• Low Investment: High subsidy burden on the government translates to lower public investment in agriculture which can have serious ramifications for long term growth of the sector. 
• For example, Agri Subsidies = 8.2% of Agri GDP and public investment = 2% of Agri GDP.
• Exclusionary: Subsidies benefit only a small group of people. 
• For example, as per MS Swaminathan Commission, only 6% farmers benefited from the MSP regime.

• Rationalization of Subsidies: There needs to be periodic re-evaluation of the need of a particular subsidy. The scope of subsidies can be gradually reduced. 
• For example, NITI Aayog highlighted the need to reduce food subsidy bills by reducing the coverage under PDS.
• Better Targeting: The government can gradually reduce the input subsidies and replace them by Direct Benefit Transfer (DBT).
• e-RUPI: It is basically a digital voucher which a beneficiary gets on his phone in the form of an SMS or QR code.  It is a pre-paid voucher, which he/she can go and redeem at any center that accepts it. 
• For example, the government can provide e-RUPI vouchers to farmers for purchase of fertilizers. This voucher cannot be used for any other purpose or person. Thus, e-RUPI is person and purpose specific.
• Increase Public investment: The government should increase public investment in the agriculture sector by funds saved through rationalization of subsidy. 
• For example, creation of irrigation infrastructure would result in long term productivity gains in rainfed regions.

Going forward, the government should relook at its subsidy policy. The share of direct subsidies should be increased gradually. Moreover, Dalwai Panel highlighted that subsidies do not solve structural problems of Indian Agriculture – Fragmented landholding, access to markets etc. Thus, the government should undertake other reforms as well.