Agriculture: Chapter test

The economic cost starts from the pooled cost of grain, which is the MSP plus any bonus paid to farmers; procurement incidentals and the distribution cost are added on top. So a higher MSP feeds straight into the acquisition cost and therefore the economic cost of every quintal procured. The central issue price and the OMSS reserve price are selling prices: raising them changes how much of the cost is recovered, and so lowers the subsidy, but not the cost of acquiring and handling the grain. A rise in the number of beneficiaries changes the quantity issued and the total subsidy bill, not the cost per quintal. This is why every MSP hike announced for wheat and paddy is followed by estimates of a higher food subsidy.

The Central Issue Price (CIP) is the price at which wheat and rice are issued from the Central Pool to State Governments and Union Territory administrations for distribution under the public distribution system and other welfare schemes. It is fixed by the Centre and kept below the economic cost, and the gap is borne by the Union as food subsidy (CAG Report 31 of 2015). Under the National Food Security Act, 2013 the CIPs were Rs 3, 2 and 1 per kg for rice, wheat and coarse grains; from 1 January 2023 the Government made NFSA grain free of cost to beneficiaries. The CIP is different from the reserve price for open market sales and from the cost-sheet rates at which FCI reimburses State agencies.

The Economic Survey and FCI's own cost sheets build the economic cost in layers. First, the pooled cost of grain is the MSP plus the bonus, if any, paid by the Centre or a State. Adding procurement incidentals (statutory and non-statutory charges up to the first storage point) gives the acquisition cost. Adding the distribution cost (freight, handling, storage, interest, transit and storage losses and administrative overheads incurred in moving and holding grain until it is issued) gives the economic cost. Statement 3 places the wrong block at the wrong stage: expenses from the field to the first storage point are procurement incidentals, part of the acquisition cost; distribution cost starts after that point. So statements 1 and 2 are correct.

FCI's economic cost has two blocks. The acquisition cost is the pooled cost of grain (the MSP plus any bonus) plus procurement incidentals: the expenses incurred from purchase up to receipt at the first storage point. The incidentals include statutory charges such as mandi fees, purchase tax or VAT and the arhatiya or society commission, and non-statutory charges such as mandi labour, gunny bags, custody and maintenance, and transport to the first godown (CAG Report 31 of 2015; IEG Working Paper 464). The second block, distribution cost, covers freight, handling, storage, interest and losses incurred in moving grain onward to consuming areas and PDS warehouses. Charges paid at the time of buying therefore belong to procurement incidentals.

Category II of the PLISFPI is meant for small and medium enterprises making innovative or organic products, which cannot match the scale of big firms. Statement 1 is wrong. The Cabinet note says the minimum sales and mandated investment conditions of Category I do not apply to these applicants. Instead, the guidelines set a light test: the applicant must be registered as an MSME (Udyog Aadhaar/Udyam) and must have achieved minimum sales of Rs 1 crore in 2019-20 for each innovative or organic product proposed. Compare this with Category I thresholds such as Rs 500 crore of food sales for ready-to-eat foods. Statement 2 is correct. The Cabinet approval specifically listed innovative and organic products of SMEs including free-range eggs, poultry meat and egg products. Statement 3 is correct. To prevent false 'organic' claims, an applicant for an organic product must be registered with APEDA, the agency under the Department of Commerce that runs the National Programme for Organic Production for exports. These features try to bring niche Indian products into the PLI net.

Category I of the PLISFPI gives incentives on incremental sales to large firms in four segments: ready-to-cook and ready-to-eat foods (including millet-based products), processed fruits and vegetables, marine products and mozzarella cheese. These were chosen because India has a natural advantage in raw material, a large domestic market and good export potential, while the processing level in these areas is low. So items 1 and 2 are covered. Edible oils and sugar are not. Edible oil is handled through other measures, such as the National Mission on Edible Oils, import duty policy and oilseed support, and its refining is a large, separate industry. Sugar is a regulated industry under the Department of Food and Public Distribution, with its own controls on pricing and export. Each segment has its own minimum sales and investment thresholds for Category I applicants, for example Rs 500 crore of food sales for ready-to-eat foods and Rs 600 crore for marine products. The incentive rate falls over the years so that firms do not depend on it forever.

The food subsidy released to FCI has two parts. The consumer subsidy is the gap between the economic cost of grain and the price at which it is issued for the public distribution system and welfare schemes. The carrying cost of buffer stocks reimburses FCI for holding grain over time: storage charges, interest on the money locked up in stocks, and storage losses (official subsidy series report 'consumer subsidy' and 'carrying cost on buffer foodgrains' separately). So when stocks swell far beyond the norms, as in 2025-26, the carrying-cost component grows even if offtake is unchanged. Reports in January 2026 noted that surplus stocks were inflating FCI's subsidy needs beyond the budget estimate. Both statements are correct and Statement-II explains Statement-I.

The Department of Food and Public Distribution's year-end review (PIB, 2025) explains that food subsidy flows through two channels: to FCI, for grain it procures, stores and issues, and to decentralised procurement States, which procure and distribute on the Centre's behalf and are reimbursed. For 2025-26 the Finance Ministry allocated ₹2,03,000 crore, of which ₹1,29,080.90 crore was for FCI and ₹73,919.10 crore for the decentralised States, so FCI's share was about 64 per cent. Statement 3 is wrong: subsidies are revenue expenditure, since they do not create assets for the Government; the grain is consumed, and the Budget shows food subsidy among the major subsidies under revenue expenditure, along with the fertiliser and petroleum subsidies.

Only objective 3 belongs to RAD (d). Item 3 is right: Rainfed Area Development (RAD), an area-based part of the National Mission for Sustainable Agriculture (NMSA), promotes Integrated Farming Systems. It grows crops along with horticulture, livestock, fishery and agro-forestry, so a farmer in a dry area has more than one income source when the rain fails. Item 1 is wrong: monoculture raises risk. Item 2 is wrong: irrigated rice has nothing to do with a rainfed programme.

Notice why it matters: about half of India's net sown area is rainfed, growing much of its pulses, millets and oilseeds. NMSA is one of the eight missions under the National Action Plan on Climate Change (2008). Related: Per Drop More Crop for micro-irrigation.

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Only one statement is correct (a). Statement 1 is right: India has about 156 million hectares of arable land, among the largest in the world and more than China's roughly 120 million. Statement 2 is wrong: by the data used for the question, China irrigated a larger share of its farmland than India, where much farming still depends on the monsoon. Statement 3 is wrong: China's yields per hectare of rice and wheat are much higher than India's, thanks to more fertiliser, seeds and mechanisation.

Notice the lesson: India's problem is not land but productivity. Small fragmented holdings, rain-fed farming and low investment hold it back, which is why schemes stress micro-irrigation and seeds.

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Statements 1 and 4 are correct (d). Statement 1 is right: the Tea Board was set up under the Tea Act, 1953, so it is a statutory body. Statement 4 is right: it keeps overseas offices in Dubai and Moscow to promote Indian tea in key markets. Statement 2 is wrong: like the Coffee, Rubber and Spices boards, it works under the Ministry of Commerce and Industry, because these are export crops, not under the Agriculture Ministry. Statement 3 is wrong: its head office is in Kolkata; it is the Coffee Board that sits in Bengaluru.

Notice the other boards: the Spices Board is in Kochi and the Rubber Board in Kottayam. The commodity boards have long been under review for merger and reform.

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All three statements are correct (d). Statement 1 is right: Climate-Smart Villages in Haryana, Punjab, Bihar and other States were set up under CCAFS (Climate Change, Agriculture and Food Security), an international research programme. They test farm practices that adapt to climate change and cut emissions. Statement 2 is right: CCAFS ran under the CGIAR, whose system office is in Montpellier, France. Statement 3 is right: ICRISAT at Patancheru, Hyderabad, is one of the CGIAR research centres.

Notice other CGIAR centres: IRRI (Philippines, rice), CIMMYT (Mexico, maize and wheat) and IWMI (Sri Lanka). India's own programme is NICRA (National Innovations in Climate Resilient Agriculture) of the ICAR.

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Only statement 2 is correct (b). Statement 1 is wrong because Scheduled Commercial Banks give the largest share of short-term crop loans in India, well ahead of cooperative banks and Regional Rural Banks. Statement 2 is right. India's short-term cooperative credit system has three tiers: the State Cooperative Bank at the top, the District Central Cooperative Banks in the middle, and the Primary Agricultural Credit Societies in villages. A key job of the DCCBs is to fund the PACS, which lend straight to farmers.

Notice NABARD, which refinances these banks. The Ministry of Cooperation (2021) is now computerising PACS. Since 2020, cooperative banks also come under fuller RBI regulation after amendments to the Banking Regulation Act.

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Items 2, 3 and 6 are public investment (c). Investment creates lasting assets that raise future output. Item 2 is right because computerising PACS builds systems that last. Item 3 is right because social capital, such as farmer groups and trained cooperatives, is a lasting asset. Item 6 is right because cold storage cuts post-harvest losses for years. Item 1 is wrong: MSP is a price policy, not an asset. Items 4 and 5 are wrong: free electricity and loan waivers are subsidies or transfers; they support current income but build nothing.

Notice the common critique that heavy farm subsidies crowd out public investment in irrigation, research and roads. Public investment is part of gross capital formation in agriculture.

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