Four priorities for Finance Minister in Budget 2020

Pic courtesy: Business Today

There are three very significant findings that should shape the lists of economic measures that the Finance Minister Nirmala Sitharaman is expected to spell out while presenting the budget on Feb 1. Especially at a time when the challenge is to pull the country out from an economic slowdown, a few corrective steps in the right direction can surely pave the way for churning back the stalled wheels of growth.

A few months’ back media had talked about people thinking twice before buying a pack of biscuits costing Rs 5. This was followed by a consumer expenditure survey report of the National Sample Survey Office (NSSO) – which was later shelved by the government – concluding that the purchasing power of the rural poor is on a decline, computing that the poor in the villages are able to spend only Rs 19 a day to buy food. And more recently, the Niti Aayog itself has acknowledged in a report on Social Development Goals (SDG) Index 2019 released a few weeks back saying that poverty, hunger and inequality has grown in 22 to 25 States and Union Territories.

Taking these three reports together, and weaving a set of measures that brings more money into the hands of the poor, is what will drive the economy. This is what mainline economists call as generating more demand. Most economists agree that the problem is on the demand side, which means unless the poor is able to purchase a Rs 5 packet of biscuits without thinking twice, and unless the rural farm and non-farm wages show an upward trend, which in turn depends largely on revival of agriculture. With farm incomes dipping to the lowest in 15 years, and farm wages on the decline for the past five years, rural spending continues to be low thereby pulling down rural demand.

In other words, since agriculture engages nearly 50 per cent of the population, and has the potential to re-energise the dampening rural economy, Finance Minister’s focus should be on providing more income into the hands of farmers. In any case, let’s not forget that growth in real income of farmers has been almost ‘near zero’ in the past seven to eight years. Therefore, tax concessions to the corporate and the middle class can wait, but the poor can’t. In addition, to enhancing the budgetary provisions under MNREGA, the four priorities that Nirmala Sitharaman must focus on are:  

To begin with, providing an enhanced direct income support, through the PM-Kisan Samman Nidhi scheme, should be the first priority. Adding to the financial allocation of Rs 75,000-crore already made in the previous budget, another provision of Rs 1.50-lakh crore needs to be made under this scheme enabling farmers to receive Rs 18,000 per year as guaranteed income, which comes to Rs 1,500 per month. This amount may not be anything significant for the urban middle class but imagine the difference it will make to farm livelihoods in half the country where the annual farm incomes are a maximum of Rs 20,000 per year. This scheme is already applicable to all land owning farmers, and further it needs to be expanded to include tenant farmers. My first recommendation to the Finance Minister therefore is to provide an economic stimulus package for agriculture, which surely will go a long way in boosting rural spending.

My second suggestion is to set up a fund, call it price support fund or farm livelihood fund, under which a cess is imposed on all value added products which are based on agricultural commodities. For instance, Punjab produces 120-lakh tonnes of rice. If a cess of Re 1 per kg is imposed, Punjab alone will generate a price support fund of Rs 1,200-crore from rice. Take another example of Kerala, which produces 40-lakh tonnes of rice, which means Rs 400-crore can flow into the fund. Similarly, for wheat, a cess of Re 1 for every kg of atta sold, will bring in a huge revenue. Add to it major farm products like sugar, dals, milk and milk products, spices, edible oils, cotton textiles etc, a huge fund can be generated every year. Not only major agricultural commodities, value added products and processed foods too need to have a cess imposed, the cess value varying from a product to product depending on its profit margin.

All these years, farmers have been subsidising the consumers. An OECD-ICRIER study shows that between 2000 and 2016, farmers had incurred a loss of Rs 45-lakh crore on account of being denied their rightful income. The report also says that the loss farmers suffered helped consumers get a retail price advantage of 25 per cent. I think the time has come when consumers need to pay back farmers, and contributing through a price support fund is the most appropriate way.

In last year’s budget, Finance Minister had talked about Zero Budget Natural Farming (ZBNF) but had refrained from making any financial allocations. This was followed by the Prime Minister Narendra Modi asking farmers to move away from chemical fertilisers. Speaking on the Independence Day he had appealed to farmers to shun chemical farming. This is a very significant suggestion coming at a time when intensive agriculture is being blamed for at least a quarter of the greenhouse gas emissions (GHGs). Numerous studies globally have shown how chemical agriculture has led to serious environmental destruction, mining of underground water, and contaminated the entire food chain.

Although the name suggests Zero Budget, it does not mean that the promotion and expansion of natural farming does not require any budgetary allocation. My third suggestion to the Finance Minister is to provide at least Rs 25,000-crores for replicating Andhra Pradesh’ experiment with natural farming in a phased manner. This has to be followed up with the creation of a separate marketing network for organic produce.

And finally, lack of adequate marketing infrastructure is coming in the way of farmer’s getting the right price for their produce. Against the requirement of 42,000 Agricultural Produce Marketing Committee (APMC) regulated mandis there exists at present some 7,000 mandis. Although the government had two years back announced upgrading 22,000 village haats, the progress is very slow. Besides speeding it up, adequate allocations need to be made to widen and improve the network of available mandis, and village link roads. #

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Rural Economic Distress led to Slowdown

Terming the economic slowdown as unprecedented and perhaps the worst in the past 70 years, the Niti Aayog Vice Chairman Rajiv Kumar had called for extraordinary steps to fuel the economy. But strangely I did not find the Niti Aayog raise any alarm bells when it became known that Indian farmers suffered a back-breaking loss of Rs 45-lakh crores in the 17 years period, between the years 2000 and 2017.

The unprecedented crisis in agriculture, which was evidently passing through its worst phase in the past 70 years, did not evoke any response from the mainline economists as well as the policy makers. Not only the OECD-ICRIER study that pointed to the denial of rightful income to farmers and thereby leading to a loss of Rs 45-lakh crore, an earlier leaked Periodic Labour Force Survey 2017-18 report of the National Sample Survey Office (NSSO) had shown that 3.4-crore casual labourers in rural areas, of which 3-crore were farm workers, had lost their job between 2011-12 and 2017-18. The signs of a terrible rural economic distress were all there but it is only that the policy makers refused to see it.

It was as if nothing had hit the Indian economy, which strangely feels turbulence only when the industry fails to perform. It was as if rural India does not exist; as if rural India is somewhere situated in sub-Saharan Africa, so far away so not be of any concern. But if only the Niti Aayog had woken up in time to the grim realities that continued to plague Indian agriculture perhaps the economic slowdown being felt now wouldn’t have been so pronounced. The slowdown is essentially an outcome of a downward spiral in domestic demand, which emanates from a slump in real farm incomes thereby resulting in a collapse in rural demand. Low liquidity has nothing to do with the present crisis.  

With ‘near-zero’ growth in real farm income in the past two years, and with less than half a percent growth per year in the preceding five years, between 2011-12 and 2016-17, it was quite apparent that the rural economy was undergoing a sharp slump. Farm incomes are at a low in 14 years. To add to the dismal scenario, a report of the Reserve Bank of India had shown that public sector investment in agriculture had also remained very low -- between 0.3 to 0.4 per cent of the GDP between 2011-12 and 2016-17 -- clearly showed that how a sector which provides the largest employment in the country has been neglected all these years.

All efforts should therefore be to revive the rural economy. But on the contrary, while the crisis was in agriculture it was the industry which built up a sob story showcasing how auto sales were down, the inventory for the real estate was building up, underwear sales were refusing to pick up and Parle biscuits had warned of 10,000 workers at the verge of being laid off since the poor were thinking twice before buying a Rs 5-pack of biscuits. Seeking an economic stimulus package of Rs 1-lakh crore, industry lobby groups were backed by a large section of the media. In the deafening noise that the drum-beaters created, farmers and rural poor were once again forgotten. 

All measures to kickstart the slowing economy harbours on improving sentiment, provide more sops and tax concessions to the rich, and thereby providing more money into the hands of affluent sections of the society. But I wonder how will all this help in creating more demand. How will it help in providing more money into the hands of the poor? While everyone agrees that the slowdown is essentially because of a collapse in rural demand, I don’t understand how will measures that provide more money into the hands of those who are actually responsible for the slowdown, be helpful. Isn’t it like what the Chief Economic Advisor K Subramanian had said of India Inc’s tendency to “privatise profits, and socialise losses?”

After all, with almost Rs 8.5 lakh crore of bad loans written-off in the past 12 years, since 2007, and with banks staring at another Rs 17-lakh crores of stressed loans, of which many analysts say Rs 12-lakh crores is unlikely to return, it is the private sector which has already sunk a black hole. Since 2009, ever since the days of the global economic meltdown, the Indian industry has been getting an economic stimulus package of Rs 1.8 lakh crores every year. In other words, it has already received Rs 18-lakh crores by way of a bailout package in the past ten years. All this is in addition to an annual tax concession in the range of 5 per cent of GDP. The Chief Economic Advisor was right when he said that the industry should learn to fend for itself, and not run to the government every time it is faced with a slowdown. When the government provides a stimulus package to bail out loss-making Air India, the industry cries for privatising the public sector airline; but when the loss-making industries seek a bailout package to survive why shouldn’t they be nationalised? 

While all eyes are on the Rs 1.76-lakh crore lifeline that RBI has provided, the best option to revive economic growth lies in providing more money into the hands of rural poor. Considering that the average income of a farm family in 17 states of India or in roughly half the country is only Rs 20,000 a year, the cash reserve should be used to double the direct income support to farmers under the PM-Kisan scheme. At present, land owning farmers are given an income support of Rs 6,000 per year. It should be doubled to Rs 12,000 per year per family, which effectively means an income support of Rs 1,000 per month. It is also time to include the landless farmers under the ambit of PM-Kisan. 

In addition, public sector investment in agriculture needs to be enhanced significantly. To begin with, efforts should be geared up to upgrade the promised 20,000 village haats into modern mandis. #

READ MORE - Rural Economic Distress led to Slowdown

Minimum Support Price for farmers can be raised three times.

Pic courtesy: Hindustan Times

Finally, the government has admitted in Parliament that it is not possible to double farm income by 2022. Replying to a question by Samajwadi party leader Ram Gopal Verma in Rajya Sabha, the Minister of State for Agriculture Purshottam Rupala, categorically stated: “We agree with Ram Gopalji’s query that it is not possible to double farm incomes with the current growth rate in agriculture sector. “

With a growth rate in agriculture hovering at less than 4 per cent annually, the minister agreed it wasn’t possible to double farmers’ income in the stipulated period. The Dalwai committee on Doubling Farmers Income (DFI), set up in April 2016, had projected a farmer income growth rate of 10.4 per cent to achieve this, and many economists say this would require a very high economic growth rate.  Knowing this may sound too ambitious, I am glad the minister has finally put a lid on a promise that wasn’t so easily workable. He agrees to follow other approaches, including enhancing non-farm income.   

This should hopefully put an end to endless series of seminars, conferences and workshops on Doubling Farmers Income that are being held in universities, institutes, colleges and by civil society organisations for over two years now knowing very well that it wasn’t possible to do so. At a time when real growth in farm incomes had remained ‘near zero’ in the past two years, and prior to that the Niti Aayog had estimated real farm incomes to be growing at less than half a percent every year during the five year period 2011-12 to 2015-16, not many talked of the radical structural transformation that agriculture is crying for. Instead the emphasis remained on following upgradation and refinement of available approaches by focusing on schemes like soil health cards, neem coated urea, Fasal Bima Yojna, National Agricultural Markets (e-NAM), more crop per drop etc., which are important but surely not enough for doubling farm incomes. What is needed is direct income support, which is a better way of income augmentation.  

Although the government has set up an Empowered Committee for implementation and monitoring of the recommendation of the DFI Committee report, submitted in Sept 2018, the acknowledgement that doubling farmer income in the next two years is not possible, it will certainly help in initiating long-term reforms that the sector is in dire need of, and where the focus needs to shift to. The first and foremost is the need to boost public sector investment in agriculture. The continuing bias against agriculture becomes apparent when one looks at the Reserve Bank of India statistics, which tells us that the public sector investment in agriculture had remained close to 0.4 per cent of the GDP between 2011-12 and 2016-17. Considering that nearly half the population is dependent on agriculture, this speaks volumes of the deliberate neglect of farming.

I don’t think any economist can vouch for a miracle in agriculture without adequate investments flowing in. Not even half a per cent of the GDP is being invested in agriculture year after year, primarily because the dominant economic thinking does not consider agriculture to be an economic activity. The entire effort therefore has been to move people out of agriculture rather than to focus on making farming a viable and sustainable enterprise. This has to change, and an indication to this came from the BJP manifesto which promised an investment of Rs 25-lakh crore in agriculture. But the Budget 2019-20 makes a provision for Rs 1,30,485-crores for agriculture, including Rs 75,000-crore allocated for the remaining three instalments of PM-Kisan scheme. Besides direct income support, agricultural market infrastructure (including warehouses and godowns) needs appropriate budgetary allocations along with investments for village link roads connecting villages with new upcoming APMC mandis.

Interestingly, while agricultural scientists and economists normally shy away from spelling out the radical reforms agriculture needs for enhancing real farm incomes as well as to restore the lost pride in farming, the Punjab and Haryana High Court has in a judgement said the Minimum Support Price (MSP) for agriculture should be three times the cost of production to save farmers from distress. “Though the MSP is being announced since 1965, but the stark reality is that it has not boosted the income of farmers to bring them out of abject poverty. Time has come when MSP be given legal force by granting legal rights to the farmers to get fair value for their crops.” The direction to provide a legal status to MSP by bringing in an appropriate legislation came from a division bench of Justices Rajiv Sharma and H S Sidhu who also spelled out a series of reforms measures, including removing middlemen, setting up warehouses, weather-based crop insurance, using internet technology, debt servicing, farmer suicides and so on that agriculture requires.

Earlier, the Commission for Agricultural Costs and Prices (CACP) had also called for making MSP a legal entitlement. It had specifically highlighted how farmers in remote parts do not have access to regulated APMC markets and therefore have to sell their produce in the local haats much below the MSP. In the past two years, farmers had reportedly sold pulses, oilseeds and coarse cereals at prices ruling 20 to 30 per cent lower. Even in the case of wheat and rice, the two crops that are procured, farmers are unable to realise the minimum price except at places where a robust procurement system prevails. Low prices of wheat and paddy in Bihar for instance forces many unscrupulous traders to transport the produce to Punjab and Haryana to get a higher MSP. 

Making MSP a legal instrument instils not only confidence among farmers, but will also assured minimum price to farmers thereby enhancing farm incomes, reducing debt, and minimising farm distress. In addition, raising MSP to three times the average weighted cost of production, including imputed rent and interest on owned land and capital, is certainly a very valid recommendation. This alone has the potential to bring about a remarkable turnaround in the performance of agriculture. It is doable, and my suggestion is to have two price bands – one at which the procurements are made at MSP, and the second be the actual price that the farmer has to be paid. Considering that all farmers are now linked with Jan Dhan bank accounts, the gap between the two bands can be directly transferred to the farmer’s bank account.

Such a delivery system will ensure that food inflation remains in control, and at the same time farmers get the legitimate price they are entitled to but have been deprived of all these years. Of the Rs 25-lakh crore investment promised in the BJP manifesto, even if Rs 5-lakh crore are disbursed as enhanced price to farmers routed through the flagship PM-Kisan scheme, the face of Indian agriculture will change forever, for the better.

The time has come to emerge out of the continued obsession with growth figures in agriculture. It is time now to invest in human resource, which is the biggest strength of Indian agriculture. More investments in raising real farm incomes, more of farmers’ money will automatically be invested in improving farm techniques. Furthermore, higher the farm incomes, higher will be the rural demand generated, thereby speeding the wheels of industrial development. At a time when the country is passing through a slowdown, creating more demand remains the biggest challenge, which can only come from agriculture. Investing in agriculture therefore is the surest way to bailout the economy. This is the way to Sabka Saath, Sabka Vikas.# 

READ MORE - Minimum Support Price for farmers can be raised three times.

Direct Benefit Transfer is not Direct Income Support

No sooner did Finance Minister Arun Jaitley say that “agriculture needs a lot of support for the Indian economy to grow at a steady pace” hinting at the possibility of a package of proposals to be announced for the distressed agriculture sector, a wave of industry sponsored voices across the country, including the credit rating agencies as well as the investment portfolio economists, have begun to question the need for such ‘populist decisions’.

“The aggregate fiscal deficit will come in higher at 3.2 per cent in financial year 2020, which is higher than the financial year 2019 mid-year outlook forecast of 2.8 per cent,” India Rating warns. “A fresh round of economic crisis is in the making”, screams another headline. For almost a month now, ever since the State governments in the Hindi heartland of Madhya Pradesh, Chhattisgarh and Rajasthan announced farm loan waivers, bankers and economists have been crying foul. Some are even questioning the fiscal prudence of providing direct income support along the lines of the Rythu Bandhu scheme in Telengana that provides financial assistance to small and marginal farmers.

Before we try to analyse the question of fiscal imbalances, let’s first look at what measures are likely to be announced in the forthcoming interim budget. Quoting sources several newspapers had earlier reported that the farm package would include interest-free loans without collateral and a direct income support package of Rs 10,000 per acre per year. Among the numerous suggestions was a proposal from the State Bank of India for a financial support of Rs 12,000 per family per year in two instalments, to be split for each of the cropping season. Niti Aayog had its own estimates.

Meanwhile, constrained by the outgo on tax revenue foregone, latest reports saying that the government has hardly any fiscal space left for the proposed additional spending on agriculture. The easy option being contemplated by Niti Aayog therefore is to combine all farm subsidies, including subsidies on fertilizer, crop insurance, irrigation and interest subvention, and transfer it in cash to farmers. Since the Finance Minister had already budgeted Rs 70,100-crore for farm subsidies for the fiscal year 2018-19, ending on March 31, the cash transfer of subsidies will not entail any additional budgetary expenditure.

While news agencies say that the rupee and bonds rebounded after the report pegged the cost lower than the over Rs. 2-lakh crore estimated initially, it is certainly not a farm package that is expected to enthuse farmers. Already reeling under terrible distress, with real farm incomes declining for four decades now, agriculture is in urgent need of immediate relief as well as a series of strong measures for course correction leading to an increase in farm incomes. But if direct benefit transfer (DBT) is all that the government has up its sleeves, there seems to be no respite in offing for the beleaguered farming community.

Direct benefit transfer is basically a change in mechanism to deliver subsidies. Launched on Jan 1, 2013, the focus of direct cash transfer is to bring in transparency and reduce pilferage in subsidy distribution. Therefore DBT can by no means be considered as a direct income support measure. DBT only replaces the input subsidies that the farmers are getting for crop cultivation. The cash that the farmers get eventually will be used for paying for inputs like fertiliser, pesticides, irrigation etc. In other words, the cash payment is merely a replacement of the subsidy component.   

There is a clear cut difference between DBT and direct income support that the policy planners must understand. Niti Aayog however is giving an illusion of income support when in reality it actually ends up computing the total subsidy outgo and presents it deceptively as an income support of roughly Rs 15,000 per hectare. It is worrying to see many mainline economists too propagating the same line, which in real sense means that there is a visible reluctance to really help the farming sector in distress, and to initiate steps to bail it out in the long run. DBT is being wrongly projected as a continuation of Telengana model of direct income support, which has now been adapted in divergent forms by Odisha, West Bengal, Jharkhand and Karnataka.

Although agriculture needs a holistic approach to draw it out from the terrible crisis that it has sunk into over the decades, my suggestions to the government would be to initiate the following:  

1) After the farm loan waiver, which benefits roughly 30 to 40 per cent of the farming population, the remaining should be provided with a one-time direct income support of at least Rs 50,000 per family. These are the people who had timely repaid the crop loans and are also in need of immediate relief. This will also ensure that credit line in future is not squeezed. As to where the money will come from, it will come from the same kitty from where economic stimulus package of Rs 1.86-lakh crore for India Inc which still continues since 2009, came from.       

2) Time has come for setting up a Farmers Income Commission with the mandate to ensure a monthly income of Rs 18,000 to every farming family. The Commission for Agricultural Costs and Prices (CACP) should be renamed as a Commission for Farmers Income and Welfare with the mandate to ensure a minimum monthly living income package of Rs 18,000, which should incorporate the income accruing from MSP, FPO and other market interventions. Take the average farm income in every district, and whatever is the shortfall should be paid by income transfer directly in Jan Dhan accounts of farmers.

3) Time to revisit the FRBM Act which provides for a limited outlay for agriculture and rural sectors. For instance, according to CBGA only 6.7 percent of the Madhya Pradesh budget in 2017-18 went for agriculture and allied activities whereas 85% of the population is directly or indirectly engaged in agriculture. Similarly, the macro-economic policies the Reserve Bank of India lays out too are responsible for keeping farming impoverished. By mandating the inflation target at 4 per cent, it actually deprives farmers of the rightful income.

4) Expand the existing network of regulated markets. Against the requirement of 42,000 APMC mandis in 5-km radius, only about 7,600 mandis exist at present. Also, make it obligatory for trade in eNAM markets to purchase at the MSP that is announced for 23 crops. The modal price that eNAMs provide, which is based on the average of the day's price, is nothing but a distress price actually aimed at helping in commodity trading. It is time to learn from the failure of eChaupal that too had the same objectives of eNAM. #

Direct benefit transfer no cure-all for farm crisis. The Tribune. Jan 25, 2019.
https://www.tribuneindia.com/news/comment/direct-benefit-transfer-no-cure-all-for-farm-crisis/718855.html?fbclid=IwAR29TlgzW196zfysvl9IG9r2cxjFXUvdXAV7K9jKOI_MgV5Wi6xDemPJWZQ

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