Why Agriculture Is Different: Subsidies, Farm Incomes and India’s FTA Red Lines
A free trade agreement can reduce a tariff on a car and give consumers more choice.
Try doing the same thing with milk.
The economics changes immediately.
For an automobile manufacturer, greater foreign competition may force investment, efficiency and product upgrading. For a small farmer, the same exposure can affect the price received for a crop or livestock product—and therefore the income of a household whose production is often spread across a small holding and whose ability to absorb a price shock is limited.
This is why agriculture repeatedly becomes a red line in India’s free trade negotiations.
The issue is not simply that farmers dislike imports. Agricultural markets are shaped by a combination of foreign subsidies, domestic farm structure, domestic price policies and livelihood dependence that makes agricultural competition fundamentally different from ordinary industrial competition.
India’s agricultural protection, therefore, cannot be understood simply as resistance to liberalisation.
It is an attempt to manage a much more complicated distributional problem.
Agriculture is not just another traded sector
The first difference is the structure of the producer.
Manufacturing tends to have relatively identifiable firms, production facilities and investment cycles. Agriculture is much more fragmented.
Millions of farm households participate in production, often at very different scales and with very different capacities to withstand changes in prices.
A change in the international price of a commodity does not therefore affect one company. It can affect a large number of households simultaneously.
That makes the political and economic consequences of import competition unusually broad.
It also means that the question facing an Indian negotiator is not simply:
Can India produce this commodity competitively?
It is also:
What happens to farm incomes if the domestic price falls when imported supplies become more competitive?
That distinction becomes crucial when the competing producers abroad receive substantial government support.
The foreign farmer may not be competing on market prices alone
Agricultural support takes several forms.
Governments can provide direct payments to farmers. They can subsidise inputs such as fertiliser, electricity or other production costs. They can also support domestic commodity prices.
The Producer Support Estimate, or PSE, measures the annual value of transfers that agricultural producers receive through government policies, from taxpayers and consumers.
The OECD’s agricultural policy data show the scale of this support. During 2022–24, the EU’s average annual PSE was about $97.3 billion, while the United States recorded an average annual PSE of about $38.2 billion in the relevant OECD estimates.
These figures are not simply government cheques handed to farmers.
The EU’s support included about $58.6 billion annually through direct and miscellaneous payments, $16.2 billion through input subsidies and another $22.5 billion through policies that raised domestic farmgate prices above corresponding border prices.
In the United States, that support was made up of roughly $22 billion in direct payments, $13.4 billion in input assistance and $2.7 billion in commodity price support.
The implication for trade negotiations is important.
An Indian farmer competing with an imported agricultural product may not be competing against the foreign farmer’s production cost alone.
The competing producer may operate within a much larger system of public support.
That does not mean foreign subsidies automatically make every imported product cheaper or every Indian farmer uncompetitive. It does, however, change the conditions under which agricultural liberalisation takes place.
India’s own farm policy creates a very different picture
The comparison becomes more complicated when India is examined on the same terms.
India does provide substantial agricultural support.
Across 2022–24, India’s agricultural input support averaged about $47.9 billion, covering areas such as fertiliser, electricity, irrigation, credit and farm machinery.
India’s direct income transfers and other payments to farmers, including support delivered through schemes such as PM-Kisan, averaged roughly $7.9 billion.
At first glance, these numbers might suggest that Indian agriculture is also heavily protected through state support.
But the picture changes when commodity prices are included.
For India, the estimated annual contribution from commodity market price policies was -$129 billion over 2022–24.
The OECD’s Agricultural Policy Monitoring and Evaluation 2025 estimates India’s net agricultural PSE at approximately -$73.1 billion, equivalent to -14.5% of gross farm receipts during 2022–24. The OECD attributes the negative result to the price-depressing effects of domestic marketing regulations and trade-policy measures despite substantial budgetary support.
The figure captures the downward effect of measures governing how agricultural goods are stocked, moved and marketed, together with periodic export restrictions. These policies can leave the price received at the farmgate below the relevant border or export-parity level after domestic costs are taken into account.
The result is striking.
The negative commodity price support more than offset India’s input subsidies and direct payments.
In other words, India’s agricultural policy does not fit neatly into the simple category of a government subsidising farmers.
It can simultaneously support agricultural inputs while depressing the prices received by farmers.
That distinction matters for trade policy.
The farm-income problem is therefore more complicated than “protect farmers”
This is the central paradox.
India may impose tariffs to protect farmers from cheaper imports while domestic policies themselves can depress the prices farmers receive.
The border can be protective while the domestic market remains restrictive.
That means agricultural protection cannot be evaluated in isolation from agricultural policy.
If domestic restrictions suppress farmgate prices, simply increasing import protection does not automatically solve the underlying income problem.
At the same time, abruptly exposing farmers to international competition can create additional downward pressure on prices, particularly in commodities where foreign producers have substantial support.
The two policy problems therefore intersect.
India is trying to protect farmers from international competition while also operating a domestic agricultural system that can weaken their bargaining position.
This helps explain why agricultural trade negotiations are so sensitive.
Dairy becomes a different kind of red line
Few examples illustrate the problem more clearly than dairy.
New Zealand is one of the world’s major dairy exporters.
India’s agricultural economy, meanwhile, includes a vast domestic dairy sector involving large numbers of producers.
Opening the market to heavily competitive foreign dairy supplies is therefore not equivalent to allowing more imported consumer goods.
The potential effect reaches directly into farm incomes.
The India-New Zealand FTA reflects this sensitivity.
The Ministry of Commerce’s official FTA factsheet records that India offered concessions on 70.03% of tariff lines covering 95% of bilateral trade, while 29.97% of tariff lines were excluded. Those exclusions include dairy and several other sensitive agricultural products.
The carve-outs cover dairy products—including milk, cheese, cream, butter and yoghurt—as well as onions, sugar, edible oils, spices and rubber.
This was not because the agreement rejected trade liberalisation altogether.
India offered broad access in other areas and New Zealand committed to duty-free access for Indian exports.
The distinction was sectoral.
Open where the domestic adjustment risk is manageable; protect where the livelihood exposure is unusually high.
That is a recurring logic of agricultural trade policy.
Staples are sensitive for the same reason
The same logic extends beyond dairy.
Products such as rice, wheat, sugar, edible oils and other staples are closely connected to food consumption and farm livelihoods.
A sudden increase in imports can affect domestic prices, but the consequences are not symmetrical.
For a consumer, a lower food price may be beneficial.
For a farmer whose income depends on selling that commodity, the same lower price can be a loss.
This is one of the clearest examples of the distributional nature of agricultural trade.
The consumer and the producer can be standing on opposite sides of the same price change.
That makes agricultural liberalisation politically more difficult than liberalising a product with little domestic production or limited livelihood exposure.
It also explains why agricultural exclusions can survive even when a government is simultaneously pursuing a broader strategy of trade integration.
But India is not simply uncompetitive in agriculture
This is where the argument needs an important qualification.
If Indian agriculture were broadly incapable of competing internationally, agricultural protection would be easier to explain as a defensive strategy.
The actual picture is more varied.
India is competitive in several agricultural and food products, particularly in higher-value or export-oriented segments.
In 2024–25, India exported substantial quantities to the EU, including shrimp and prawns, cuttlefish and squid, coffee, tea, grapes, rice, sesame, dried onion, cucumbers and gherkins, cumin and turmeric.
The reported export values included about $518 million for shrimp and prawns, $362 million for cuttlefish and squid, $775 million for coffee and $176 million for grapes.
This matters because it changes the question.
India does not necessarily need to protect all agriculture from global competition.
It needs to distinguish between agricultural sectors where foreign competition poses a significant livelihood risk and sectors where greater access to foreign markets can create opportunities for Indian producers.
Agricultural trade policy is therefore not simply about closing the border.
It is about deciding which parts of Indian agriculture need protection, which can compete, and which can benefit from better foreign market access.
Not every trading partner creates the same agricultural risk
This distinction becomes particularly important when comparing potential partners.
The threat posed by an agricultural FTA depends partly on what the partner is competitive in and how heavily those sectors are supported.
The available evidence draws a significant distinction between the EU and the United States.
The U.S. case involves several commodity lines in which additional import access could materially change competitive conditions, including corn, soyabean, ethanol and cotton.
The EU presents a different pattern.
The evidence indicates that the EU is less competitive across many agricultural commodities, although certain products such as cheese remain relevant. Greater agricultural access to the EU could, by contrast, expand opportunities for Indian exports such as seafood, fruits and vegetables, beverages, spices and rice, while presenting a different competitive challenge from U.S. agriculture.
The point is not that one partner is inherently safe and another inherently dangerous.
It is that the agricultural consequences of an FTA depend on the structure of the two agricultural economies being connected.
Trade policy therefore cannot be designed around the generic category of “agriculture”.
It has to be commodity-specific.
New Zealand shows what selective opening can look like
The India-New Zealand deal offers a concrete example of this model.
India kept sensitive agricultural products outside the concessions while allowing opportunities in other areas.
At the same time, New Zealand committed to agricultural productivity cooperation involving products such as apples, kiwifruit and honey.
The cooperation package focuses on better planting material, farmer and technical capacity, orchard and post-harvest practices, food-safety systems, research, and dedicated centres of excellence.
This is a different model of agricultural integration.
Instead of assuming that market access alone will make Indian agriculture more competitive, it combines selected trade opening with efforts to improve domestic productive capability.
That distinction is important.
Tariff protection can delay competition. Productivity improvement determines whether producers can eventually compete.
An agricultural trade strategy that relies only on the first can preserve vulnerability rather than remove it.
Why agricultural red lines persist even during an FTA push
India’s recent trade strategy shows that agricultural sensitivity has not prevented wider liberalisation.
Rather, agriculture has become one of the areas around which liberalisation is negotiated.
This explains why an agreement can simultaneously contain substantial tariff concessions and very limited access for particular agricultural products.
The India-EU agreement, for example, combines broad market access with differentiated treatment for sensitive areas. The Department of Commerce’s official factsheet records preferential access covering 99.5% of India’s exports by trade value, alongside differentiated treatment including tariff-rate quotas and exclusions in sensitive areas.
The India-New Zealand agreement similarly combines broad trade liberalisation with explicit agricultural exclusions.
The pattern reveals something important about how modern FTAs are actually negotiated.
They are not simple exercises in reducing tariffs across every product.
They are systems of selective exposure.
The negotiators are effectively deciding where Indian producers can be exposed to competition, where they need time to adjust, and where the livelihood consequences are considered too significant for immediate liberalisation.
Agriculture sits near the most sensitive end of that spectrum.
But protection has its own cost
There is a danger in interpreting agricultural exclusions as a complete solution.
Keeping imports out can protect domestic prices from foreign competition.
But it does not automatically increase farm productivity.
It does not automatically improve storage, logistics or food processing.
It does not automatically create better export standards.
And it does not resolve domestic policies that may suppress farmgate prices.
The negative commodity price support recorded for India makes this especially important.
If farmers are protected from imports while simultaneously receiving prices that are depressed by domestic stocking, movement, marketing and export restrictions, the protection may address only one side of the problem.
The more difficult task is to improve the domestic agricultural system itself.
That means distinguishing between border protection and producer competitiveness.
They are not the same thing.
A protected market can provide temporary insulation.
A productive agricultural sector can compete even when protection is reduced.
The long-term policy challenge is to move from the former toward the latter wherever the sector has the capacity to do so.
The real trade-off is between exposure and adjustment capacity
This is why the agricultural question cannot be reduced to free trade versus protection.
There are at least three different situations.
In the first, Indian producers are competitive and have strong export opportunities. Opening foreign markets can create gains.
In the second, Indian producers are potentially competitive but constrained by productivity, infrastructure, standards or supply-chain weaknesses. Immediate import competition may expose those weaknesses before they can be corrected.
In the third, foreign producers have substantial support and Indian production is fragmented and livelihood-sensitive. Rapid liberalisation can create significant adjustment risks.
The policy response need not be identical in all three.
This is precisely why agricultural schedules in FTAs contain exclusions, quotas, safeguards and selective concessions.
The objective is not to freeze agriculture permanently.
It is to control the speed and direction of adjustment.
India’s FTA red lines therefore reveal something deeper about the economy
The persistence of agriculture as a negotiating red line is sometimes interpreted as evidence that India is unwilling to liberalise.
The evidence points to a more complicated interpretation.
India is liberalising.
But it is doing so while confronting an agricultural system in which:
- foreign producers can receive substantial public support;
- Indian farms are highly fragmented;
- domestic policies can simultaneously subsidise inputs and depress farmgate prices;
- some agricultural sectors are internationally competitive;
- other sectors are highly sensitive to import competition;
- and farm income has consequences far beyond the commercial value of the commodity being traded.
That combination makes agriculture structurally different from many industrial sectors.
It also explains why the same FTA can contain aggressive liberalisation in manufactured goods and services while preserving firm agricultural exclusions.
The apparent contradiction disappears once the underlying mechanism is understood.
The defining question is not whether India should open agriculture
It is which agricultural markets India can open, under what conditions, and with what domestic capacity behind them.
Foreign subsidies matter because they alter competitive conditions.
Farm fragmentation matters because it affects the ability to absorb price shocks.
Domestic price-support policies matter because protection at the border cannot compensate indefinitely for distortions within the domestic market.
Export competitiveness matters because agricultural liberalisation can create opportunities as well as risks.
And the structure of the trading partner matters because not every foreign agricultural economy poses the same competitive challenge.
This is why India’s agricultural red lines are not simply another version of the producer-protection story found in manufacturing.
They arise from a different interaction between global subsidy systems, domestic farm economics and livelihood exposure.
The deeper lesson is that agricultural trade liberalisation cannot be separated from agricultural policy itself.
A tariff can keep a foreign product out.
It cannot, by itself, make an Indian farmer more productive.
A subsidy can lower an input cost.
It does not guarantee a better farmgate price.
An export opportunity can open a new market.
It does not guarantee that Indian producers can consistently meet its standards.
And a trade agreement can protect a sensitive sector.
It does not eliminate the need to reform the domestic system that makes that sector vulnerable.
India’s agricultural red lines therefore make sense not as a rejection of global integration, but as a recognition of the conditions under which integration takes place.
Agriculture is different because the object being liberalised is not merely a commodity. It is a livelihood system.
That is why the most durable agricultural trade strategy will not be one that simply keeps markets closed.
It will be one that knows where protection is necessary, where competition can raise productivity, where foreign market access can benefit Indian producers, and where domestic reform must come before deeper exposure.
The real test of an agricultural FTA is therefore not how many tariff lines are opened.
It is whether Indian farmers emerge with greater productive capacity, better market access and a stronger ability to compete when the protection eventually becomes thinner.