Farm bills are seen by farmers to deliver freedom — not to them, but to private capital

Written by HIMANSHU 

On Friday, September 25, farmers’ organisations across the country gave a call for a bandh to protest the three bills passed by Parliament. These bills, namely the Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Bill, 2020 (FPTC), the Farmers (Empowerment and Protection) Agreement of Price Assurance and Farm Services Bill, 2020 (FAPAFS), and the Essential Commodities (Amendment) Bill, 2020 were passed amid protests by the Opposition parties, without discussion in Parliament. Even the government’s allies, such as the Shiromani Akali Dal, have raised apprehensions, lending their voice to the farmers’ demands.

Projected as historic reforms, the government promises freedom to the farmers from the “villainous and exploitative” Agricultural Produce Marketing Committee (APMC) mandis and from the middlemen who charge commission from trade in these mandis. Most farmers would agree that the functioning of the mandis is inefficient, opaque, politicised and often controlled by cartels. The attempt to reform the functioning of the mandis is not new and has been in process for the last two decades, starting from 2001 when the expert committee on agricultural marketing submitted its report. Since then, three different model APMC acts have been proposed by previous governments (in 2003, 2007, and 2013) and in 2017 by the current government, none of which led to the kind of protests that have been witnessed over the last two weeks.

Rather than welcoming the freedom from mandis, this time farmers are on the streets fighting for restoring the primacy of the mandis in agricultural trade primarily because APMC mandis are an essential part of the agricultural trading ecosystem. While they may have a confrontationist attitude to the functioning and administration of mandis, they also share a symbiotic relationship with the middlemen and the mandis extending beyond matters of transaction in agricultural produce. The middlemen are a source of information, inputs, and sometimes credit without collateral.

The anger against the bills is not just about restoring the primacy of the APMC mandis but also over the manner in which the bills were thrust upon the farming community. Not only the farmers’ organisations, but even state governments and allies have not been consulted. Secondly, all the earlier attempts at reforming agricultural marketing respected the constitutional separation of powers. While the Centre proposed the model acts, these were implemented by state governments. And most of these proposals were actually acted upon by state governments with waves of reforms in the functioning of the APMC in most states.

Out of 36 states and union territories, 18 states have already enacted reforms allowing for establishment of private market yards/private markets, 19 states have enacted reforms allowing for direct purchase of agricultural produce from agriculturists by processor/bulk buyer/bulk retailer/exporter, 20 states have enacted contract farming acts. Kerala and Bihar do not have APMC mandis and Tamil Nadu has a different system. Most states have exempted levy of taxes and fees on sale of fruits and vegetables. Most of these reforms were enacted by the state governments and rules were framed with farmers welcoming these changes, even though the changes were suggested by the Centre.

On the other hand, the current reforms completely bypass the state governments and weaken their ability to regulate agricultural markets even though it is a state subject. Further, unlike earlier reforms where the focus was on strengthening the functioning of APMC mandis while allowing for greater private market access and participation, the current FTPC bill bypasses the APMC altogether, creating a separate structure of trading. In any case, mandi trade accounts for less than one-fourth of the total agricultural trade with the rest accounted for by private markets/traders. The absence of regulation and exemption from mandi fees creates a dual market structure which is not only inefficient but will also encourage unregulated trade detrimental to the primary purpose of providing market access to farmers for better price discovery and assured prices.

Most farmers realise that the FTPC Bill is not about delivering on the promise of freedom to farmers but freedom to private capital to purchase agricultural produce at cheaper prices and without any regulation or oversight by the government. Farmers also realise that this will eventually lead to shifting of trade from regulated APMC mandis to private markets without any commitment to investment in infrastructure and regulation from government. With unequal and differentiated terms of engagement, the decline and disappearance of the APMC is only a matter of time.

The fight to retain the APMC despite its shortcomings is also a fight to extract a commitment from the government on maintaining state support to the agricultural sector. With government investment in agriculture declining in real terms and rising input costs and declining subsidy, farmers fear the withering away of the last remaining instrument of state support in the form of the Minimum Support Price (MSP) regime. While MSP based procurement did not benefit the majority of farmers and only a few states contributed to the procurement operations of the Food Corporation of India (FCI), it did work as a lifeline for the farmers in those states. Its effectiveness was only in two crops, wheat and paddy, among more than 1,000 crops grown, but it did provide the assurance that the state was willing to step in when required. It also contributed to revenue to the agricultural marketing boards which was partially utilised in improving infrastructure in the mandis.

These fears are compounded by the contract farming bill and amendments in the essential commodities act. Apart from the fact that the provisions of these bills are highly skewed in favour of private capital, with no limits on stockholding and restrictions of government interventions, there is limited recourse to any independent grievance redressal mechanism.

What has also angered the farmers is the deep divide between the rhetoric of the government and its actions on the ground. Even while enacting these reforms and promising greater freedom to farmers, the government has moved swiftly to ban the export of onions and reduced, increased and again reduced import duty on masur in a matter of three months. Agricultural terms of trade have moved against agriculture with rising input prices (with the government increasing diesel prices despite the collapse in international prices) and declining farm gate prices.

The last three years have seen a collapse in prices of major agricultural products. At a time of general demand deflation and the economic slowdown, promising the farmers a bumper increase in agricultural prices through a free market is as good as the promise of “achhe din” by the party that came to power in 2014.

The writer is associate professor, Centre for Economic Studies and Planning, JNU, Delhi

What is the basis of MSP? How is it fixed, and how binding is it?

Indian Express Explained 

A mere sentence, to the effect that nothing in this Act shall stop the government from announcing MSPs and undertaking crop purchases at these rates as before, might have blunted any criticism of the new law being “anti-farmer”.

What does the law say about MSP?

The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Bill does not give any statutory backing to MSP. Forget making it a legal right, there isn’t even a mention of either “MSP” or “procurement” in the Bill passed by both Houses of Parliament last week.

Agriculture Minister Narendra Singh Tomar has said the new legislation has “nothing to do with MSP”. Instead, its objective is simply to grant farmers and traders the freedom of choice to sell and buy agricultural produce outside the premises of APMC mandis. MSP and procurement, according to him, are entirely separate issues: “MSP was not part of any law before. Nor is it part of any law today.” The minister isn’t wrong.

The National Food Security Act, 2013 (NFSA), passed by the previous Congress-led UPA government, provides a legal basis for the public distribution system (PDS) that earlier operated only as a regular government scheme.The NFSA made access to the PDS a right, entitling every person belonging to a “priority household” to receive 5 kg of foodgrains per month at a subsidised price not exceeding Rs 2/kg for wheat and Rs 3/kg for rice. Priority households were further defined so as to cover up to 75% of the country’s rural population and 50% in urban areas.

MSP, by contrast, is devoid of any legal backing. Access to it, unlike subsidised grains through the PDS, isn’t an entitlement for farmers. They cannot demand it as a matter of right.

What is the basis of MSP then?

It is only a government policy that is part of administrative decision-making. The government declares MSPs for crops, but there’s no law mandating their implementation,” explained Abhijit Sen, former Planning Commission member and chairman of the Commission for Agricultural Costs & Prices (CACP).

The Centre currently fixes MSPs for 23 farm commodities — 7 cereals (paddy, wheat, maize, bajra, jowar, ragi and barley), 5 pulses (chana, arhar/tur, urad, moong and masur), 7 oilseeds (rapeseed-mustard, groundnut, soyabean, sunflower, sesamum, safflower and nigerseed) and 4 commercial crops (cotton, sugarcane, copra and raw jute) — based on the CACP’s recommendations.

But the CACP itself is not any statutory body set up through an Act of Parliament. This, despite its coming to existence in 1965 and MSPs being announced since the time of the Green Revolution, starting with wheat in 1966-67. The CACP, as its website states, is just “an attached office of the Ministry of Agriculture and Farmers Welfare, Government of India”. It can recommend MSPs, but the decision on fixing (or even not fixing) and enforcement rests finally with the government.

“The government can procure at the MSPs if it wants to. There is no legal compulsion. Nor can it force others (private traders, organised retailers, processors or exporters) to pay,” Sen noted. The government does buy wheat and paddy at their MSPs. But that’s more out of political compulsion and the need to supply the PDS’s foodgrain requirements, more so post the NFSA.

The only crop where MSP payment has some statutory element is sugarcane. This is due to its pricing being governed by the Sugarcane (Control) Order, 1966 issued under the Essential Commodities Act. That order, in turn, provides for the fixation of a ‘fair and remunerative price’ (FRP) for cane during every sugar year (October-September). But even the FRP — which, incidentally, was until 2008-09 called the ‘statutory minimum price’ or SMP — is payable not by the government. The responsibility to make FRP payment to farmers within 14 days of cane purchase lies solely with the sugar mills.

Has there been any move to give MSP legislative backing?

The CACP, in its price policy report for the 2018-19 kharif marketing season, had suggested enactment of a legislation conferring on farmers ‘The Right to Sell at MSP’. This, it felt, was necessary “to instil confidence among farmers for procurement of their produce”. That advice, predictably, wasn’t accepted.

The ongoing farmer protests essentially reflect a loss of that very confidence. Is the dismantling of the monopoly of APMC mandis in wholesale trading of farm produce the first step at ending even the present MSP-based procurement programme, largely limited to wheat and paddy? If APMCs were to turn unviable due to the trades moving outside, how will government agencies undertake procurement that now takes place in mandis?

These questions are playing in the minds of farmers, particularly in states such as Punjab, Haryana and MP that have well-established systems of governmental MSP purchases. For them, freedom to sell to anyone, anywhere and anytime has little value compared to the comfort of assured procurement at MSP.

What has the government done to address these questions?

Prime Minister Narendra Modi, on September 20, tweeted that the “system of MSP will remain” and “government procurement will continue”. The Agriculture Minister , too, has pointed out that past governments never thought it necessary to introduce a law for MSP. So why even talk about MSP, leave alone incorporate guarantees relating to its continuance, in an apparently unrelated law?

It remains to be seen whether these finer points would go down well on the ground. By announcing the MSPs of rabi crops for the ensuing planting season on September 21 (this was last year done on October 23) and kickstarting kharif procurement from early next month, the government may hope to counter any major farmer backlash.

Farm Bills will give farmers greater choice. Opposition must rise above partisan politics

Bhupender Yadav

In 1947, when India gained Independence, the urban-rural income ratio was estimated to be 2:1. That ratio now stands at about 7:1. The decline came even as farm production grew to the point that India became self-sufficient in food production and also kept exporting some food crops. For 60 long years, governments kept ruling in the name of poor farmers and ensuring that they remain stuck in poverty.

Even as India attained surplus growth in agro commodities, our policies remained anachronistic and did not factor in the variety of post-production activities. No thought was given to processing, value-addition or marketing, and trade of farm produce to make the Indian farmer self-sufficient. Less than 5 per cent of India’s food and agriculture produce is processed in contrast to over 50 per cent in developed countries.

Over 50 per cent of India’s population, directly or indirectly, depends on agriculture, which contributes about 12 per cent to GDP, a fact that our budgetary allocations have chosen to gloss over in the Congress era of governance. Public investment in agriculture has been below 5 per cent resulting in low capital formation and low private sector investments, leading to poor agri infrastructure. No policies were drafted to allow farmers to market their produce and earn the profits that an open, competitive market would have allowed them to make.

It is against this backdrop that the government has pushed for the 

 (Promotion and Facilitation) Bill, Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Bill and Essential Commodities (Amendment) Bill. Together, these three pieces of legislation will create a system in which farmers and traders can sell and buy agri products outside mandis. The Bills provide for a system that encourages intra-state trade and reduces transportation cost. The Bills formulate a framework on agreements that allow farmers to engage directly with agri-business companies, exporters and retailers for services and sale of produce. All this will be achieved by giving the hardworking farmers of India access to modern technology.

India’s agricultural markets restrict farmers from selling directly to retailers and getting the right price for their produce. Also, the existing system forces farmers to pay undue commissions. The Opposition has misinformed people saying the Bills open the road for corporates to exploit farmers. In fact, these pieces of legislation bring uniformity into contractual farming rules and provide a framework for trade agreements on farm produce. Farmers cannot be forced to enter into any agreement. They will be free to choose who they want to sell their produce to and a regulatory framework will protect them.

Concerns over contract farming are also misplaced. Contract farming is not anti-farmer by its nature. As much as 66 per cent of poultry business in India is under contract farming. Once contract farming is mainstreamed, agribusinesses will be able to pool farmers, invest in their land and make the latest agri technology available to them.

The Bills are part of the Narendra Modi government’s commitment to double farmers’ income and follow its credo of minimum government and maximum governance. They are designed to free the farmers from the hold of government-controlled markets. The Essential Commodities (Amendment) Bill makes provisions for the removal of items such as cereals and pulses from the list of essential commodities and attract foreign direct investment in the sector. Some sections have raised the fear that this will compromise on food security. They must know the Food Corporation of India will continue to stock essential commodities such as wheat and rice, ensuring that India’s food security isn’t hit. Also, traditional mandis will stay. The proposed pieces of legislation will only remove trade barriers and allow digital trading of farm produce.

A lot of misinformation is being spread about the Minimum Support Price (MSP). A fear psychosis is being created amongst farmers by telling them that with the passage of the Bills, MSP will be done away with. Parliament has repeatedly been assured that MSP will stay. Those opposing the bills have either not read them or are just worried that an empowered farmer doesn’t fit into their scheme of vote bank politics.

During 2009-2014, the budget allocation for agriculture increased by a meagre 8.5 per cent. From 2014-2019, the Modi government took it much higher – an increase of 38.8 per cent. Today, the parties that are responsible for the poverty of those who feed us are questioning our commitment to farmers.

Agriculture sector badly needs high-end technologies, digital tools, entrepreneurs and farmer organisations to provide services to farmers. The Modi government has already created 2,000-plus Farmer Producer Organisations (FPO) and 10,000 more are in the works with a budgetary allocation of Rs 5,000 crore. Over 1,000 agri start-ups, driven by young technology graduates, have been created and over 20,000 agri clinics have been made possible by agriculture graduates. None of this can grow if reforms don’t happen.

India has given the new-age farmer internet access. Nobody should now try to stop this empowered farmer from using the same internet to access markets to sell his produce. The Modi government will do everything to empower this new-age farmer; we owe this to the people who feed us. I hope the Opposition will rise above partisan politics for this cause.

This article first appeared in the print edition on September 22, 2020 under the title ‘Power to new-age farmer’. The writer is national general secretary of BJP and Rajya Sabha MP

It’s a no green signal from the farm world

Himanshu

In a virtual rally, the Prime Minister blamed the Opposition parties for misleading farmers about the three Bills on agriculture, in Parliament. While the Opposition may have taken up the cudgels recently, the fact is that farmers have been protesting against the Bills ever since it was promulgated as ordinances in June. These are The Farmers' Produce Trade and Commerce (Promotion and Facilitation) Bill, 2020, the Farmers (Empowerment and Protection) Agreement of Price Assurance and Farm Services Bill, 2020, and the Essential Commodities (Amendment) Bill, 2020. The resignation of Food Processing Industries Minister (and Shiromani Akali Dal MP), Harsimrat Kaur Badal, from the Union Cabinet, and dissenting voices from various mass organisations affiliated to the Rashtriya Swayamsevak Sangh suggest that the opposition to the Bills may not be politically motivated; rather, it may be a reflection of the genuine concerns of farmers.

In brief, the Bills aim to do away with government interference in agricultural trade by creating trading areas free of middlemen and government taxes outside the structure of Agricultural Produce Market Committees (APMCs) along with removing restrictions of private stockholding of agricultural produce. Attempts to reform the APMC are not new and have been part of the agenda of successive governments for the last two decades. Most farmer organisations also agree that there is excessive political interference and there is need for reform as far as functioning of mandis are concerned.

No consultation

Several reforms at the level of the central government as well as at the State level have been introduced and welcomed by farmers. However, in this particular case, the issue is not about the Bills; it is also about the process of their introduction. As was pointed out by Ms. Badal, the government has failed to have or hold any discussion with the various stakeholders including farmers and middlemen. This is also true when it comes to consultation with State governments even though the subject of trade and agriculture are part of subjects on the State list. The attempt to pass the Bills without proper consultation adds to the mistrust among various stakeholders including State governments. While the lack of consultation has certainly added to the element of mistrust between the government and farmers, some of the issues raised by farmer organisations are also genuine; recent trends in agricultural prices and incomes have only confirmed these fears.

While farmer organisations see these Bills as part of the larger agenda of corporatisation of agriculture and a withdrawal of government support, the immediate concern has been the attempt to weaken the APMC mandis and eventual withdrawal of the Minimum Support Prices (MSP) guaranteed by the government. Although the government has clarified that these Bills do not imply withdrawal of procurement by the State at MSP, there is a genuine fear among farmers about the true intentions of the government. The mistrust is not unfounded given the track record of this government on many issues including demonetisation of 2016, the introduction of Goods and Services Tax and so on. There may not be direct evidence of crony capitalism, but the entry, in a big way, of two of the biggest corporate groups (Adani and Reliance) in food and agricultural retail and the timing of the Bills have not gone unnoticed.

Reflects poor understanding

The idea of allowing greater participation of traders and farmers outside the APMC has already been in place in different form. Even otherwise, APMCs account for less than a fourth of total agricultural trade. But APMCs do play an important role of price discovery essential for agricultural trade and production choices. The vilification of APMCs and the middlemen who facilitate trade in these mandis is a poor reflection of the understanding of functioning of agricultural markets. The middlemen are a part of the larger ecosystem of agricultural trade, with deep links between farmers and traders. Most farmers are familiar with the functioning of mandis and see it as an essential part of agricultural trade despite shortcomings. While the proposed Bills do not do away with the APMC mandis, the preference for corporate interests at the cost of farmers’ interests and a lack of regulation in these non-APMC mandis are cause for concern. The absence of any regulation in non-APMC mandis is being seen as a precursor to the withdrawal of the guarantee of MSP-based procurement.

The Bihar example

The dominant concern in this regard has been expressed by farmers in Punjab and Haryana. Farmers in these States have genuine concern about the continuance of the MSP-based public procurement given the large-scale procurement operations in these States. These fears gain strength with the experience of States such as Bihar which abolished APMCs in 2006. After the abolition of mandis, farmers in Bihar on average received lower prices compared to the MSP for most crops. For example, as against the MSP of ₹1,850 a quintal for maize, most farmers in Bihar reported selling their produce at less than ₹1,000 a quintal. Despite the shortcomings and regional variations, farmers still see the APMC mandis as essential to ensuring the survival of MSP regime.

While retail prices have remained high, data from the Wholesale Price Index (WPI) suggest a deceleration in farm gate prices for most agricultural produce. This has happened despite increased procurement through the MSP-based regime for paddy and wheat. Decline in basmati rice prices by more than 30% and despite higher international prices suggests the limitation of market intervention in raising farm gate prices. For most crops where MSP-led procurement is non-existent, the decline has been sharper. Even cash crops such as cotton have seen a collapse in prices in the absence of government intervention. With rising input costs, farmers do not see the market providing them remunerative prices. At the same time, ad hoc interventions by government such as raising import duties on masur and a ban on onion exports also raise suspicion about the intent of the government to leave the price discovery mechanism on the market. The protests by farmers are essentially a reflection of the mistrust between farmers and the stated objective of these reforms.

Himanshu is Associate Professor, Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University, New Delhi

India adrift, optimism hard to sustain

Jean Drèze and Amartya Sen 

The recent estimate of GDP growth for the third quarter of 2019-20, at around 4.7 per cent, has prompted a predictable sense of gloom. However, even the 4.7 per cent estimate is deceptive, since in per-capita terms, the corresponding figure would be just above 3 per cent. This, sadly, is no more than half the growth rate of per-capita GDP that India enjoyed five years ago.
The reasons for alarm, however, go much beyond the slowdown of GDP growth. If anything, there is too much rather than too little concern with growth estimates. We have to look beyond per-capita growth to what the people of India get from economic progress — health, education, social security and other necessities of a reasonably good life. If per-capita GDP is distant from better indicators of human development (such as life expectancy, mortality rates, morbidity indicators, literacy, schooling rates), even more distant are measures such as the total size of the economy. And yet policymakers today seem obsessed with India’s becoming a 5-trillion dollar economy and with its ‘overtaking’ — in this oddly devised race — more prosperous economies with much smaller population size. Confusion in economic objectives yields confounded economic policies. From the comfort of the total size of the economy for a large nation, we have to shift our gaze to the incomes of individuals and families, and from there to the capabilities to lead good lives that people can in fact enjoy. Optimism is hard to sustain as we get closer and closer to the miserable lives that a great many Indians have to live.
Economic indicators today related to people’s living conditions are indeed depressing. For instance, real agricultural wages have barely risen in the last few years. According to National Sample Survey data, there was an unprecedented decline in per-capita consumer expenditure between 2011-12 and 2017-18 (just after demonetization), and unemployment rates have never been higher since the mid-1970s. It is hard to avoid a sense of malaise if not a crisis.
Even in terms of macroeconomic indicators, many of them have turned for the worse in recent years: the investment rate, export growth, and bank credit, among others.
All this has been widely noted and discussed. What is less well understood is that this economic slowdown has been aggravated by the resilient inertia of social policy. In the first edition of An Uncertain Glory: India and Its Contradictions, published in 2013, we argued that India’s development strategy is fundamentally flawed in so far as it overlooks the central role of human capabilities, both as valuable in themselves and as means of further progress. That basic deficiency has not been removed over the years — quite the contrary.
To illustrate, there has been no significant initiative in the field of education under the NDA government. Six years have been spent waiting for the New Education Policy, which is yet to materialize (a draft was finally released last year, from which it is hard to get much encouragement). Meanwhile, it is business as usual.
The Indian public is perhaps insufficiently aware of the pathological nature of the country’s frail and fragmented education system. According to Unesco data, the proportion of children having to study in private schools at the primary level is just 12 per cent in the world as a whole. Among those who study in private schools, many are enrolled in non-profit educational institutions run by NGOs, churches, trade unions and other civic organizations. In India, by contrast, the proportion of children studying in private schools is around 35 per cent and rising, and the bulk of private-school enrolment is in profit-oriented schools. As elementary education turns into a market commodity, and quality depends on ability to pay, the schooling system reproduces the social inequalities it is meant to reduce. Even within the government sector, there are enormous variations in the quality of education facilities, with the worst being normally reserved for the poorest families and communities. Every year, millions of underprivileged children, who have much the same abilities and potential as other children, see themselves condemned to a life of harsh labour as they leave the schooling system without the most basic educational skills. None of this, however, seems to be a subject of major concern or even of serious discussion in Parliament, the media, the courts or other public forums.
Similar things can be said about other critical fields of social policy, such as health and social security. Spending on the Central government’s flagship health programme, Ayushman Bharat (farcically called “the world’s largest government funded healthcare programme” by the finance minister two years ago) was a microscopic Rs 3,200 crore in 2019-20 — that’s less than 0.02 per cent of GDP. The neglect of primary healthcare for all is appalling. Social security is also neglected, with the Central government’s contribution to old-age pensions frozen at a measly Rs 200 per month since 2006 and maternity benefits restricted to Rs 5,000 for one child per family in violation of the National Food Security Act. Even child welfare programmes, such as school meals and the Integrated Child Development Services, are still reeling from the deep budget cuts inflicted by the Narendra Modi government’s first full-fledged budget in 2015-16. The more essential a public service, the less interest it seems to receive today. Meanwhile, the country’s attention and energies are endlessly diverted by Hindutva’s pet projects, from cow vigilantism and the abrogation of Article 370 to the Citizenship (Amendment) Act and the construction of a temple at Lord Ram’s alleged birthplace. These distractions, deplorable as they are in their own right, also exact a heavy price in the form of reduced engagement with economic and social issues.
Alas, the prospects for the future have also been damaged by another recent setback — the retreat of democracy. ‘Retreat’ is a mild term in a situation where all democratic institutions are under attack and the most elementary democratic norms are being undermined — starting with the freedom of expression and dissent. The government is actively promoting a dangerous notion of good citizenship aligned to blind obedience to the State. Criticism of the government is increasingly seen as ‘anti-national’, and discouraged in every possible way. Anyone who speaks out against the government is at risk of being harassed in one way or another: NGOs may lose their FCRA, media agencies may be deprived of advertisement revenue, political leaders risk a tax raid, and poor people can simply be beaten up — or worse — for speaking up. Even mild criticisms of the government on social media can lead to sedition charges, a colonial relic in the Indian Penal Code. These tactics have huge chilling effects, as more and more citizens and institutions are anxious not to get on the wrong side of the government.
Along with the general weakening of democratic freedoms goes the championing of Hindu sectarian pursuits in the political arena, so there is a simultaneous weakening of democracy and India’s long commitment to secularism. What is no less disturbing is that resistance to these attacks on democracy and secularism has often been hard to present. Editors who defy State pressure to print strongly critical headlines, vice-chancellors who defend their students’ right to protest, judges who try to be fair without favouring governmental points of view, often face — direct or indirect — punishment from the ‘authorities’. There have still been defiant voices and dissents, and they have been very encouraging from the suppressed public, but there is room for many more.
In this respect, the recent nonviolent protests against the Citizenship (Amendment) Act and the National Register of Citizens are a tremendous source of inspiration and hope. The sit-in at Shaheen Bagh in New Delhi and the peaceful demonstrations it has inspired across the country are a living expression of the constitutional values of liberty, equality and fraternity. They have forged new solidarities across old divides and unleashed an unprecedented wave of creative thinking and action around democratic ideals. It is not surprising that these protests, too, have become a target of attack. Few things are more important at this time than to defend and expand these democratic spaces.

Jean Drèze is visiting professor, department of economics, Ranchi University; Amartya Sen is professor of economics and philosophy at Harvard University. A new edition of their joint book, An Uncertain Glory: India and Its Contradictions, has just been published by Penguin

The budget should increase spending in rural areas, cut taxes and bring back trust in financial system

Soumya Kanti Ghosh

The Union budget will be presented in the context of an entrenched slowdown that is becoming increasingly difficult to overcome. Coupled with this, the recent increase in inflation (notwithstanding the current methodology) has complicated the budget-making exercise. We believe that this budget could make a substantial difference by challenging the conventional wisdom that does not stand the test of scrutiny.

The primary purpose of the budget is to lay out a receipt-expenditure statement and thereby the fiscal deficit estimates. This year is, perhaps, different as the slowdown has derailed the fiscal arithmetic. Our estimates show that the shortfall might be anywhere between 0.5-0.7 per cent of the GDP in the current fiscal after adjusting for revenue shortfall and expenditure rationalisation.

Given that the government is now facing such a huge mismatch, the fiscal deficit glide path is likely to be recalibrated. But, here lies strong resistance from the votaries of fiscal consolidation, which is echoed in government circles too with independent reports pegging the fiscal deficit estimate at 3.5 per cent for 2020-21. We believe the government must not target a number in FY21 that is not credible and achievable. The growth dynamics suggest that with a nominal GDP growth that could be at 10 per cent, a 3.5 per cent target will result in the absolute fiscal deficit in FY21 being lower than in FY20, and that again will be unachievable.

In this context, the fiasco in FY12 bears mentioning. The government wanted to reduce the fiscal deficit from 4.8 per cent of the GDP to 4.6 per cent. But, in absolute terms, the difference between the fiscal deficit in FY11 and FY12 jumped four times as the 3.3 percentage point collapse in growth was not factored in. Thus, the temptation of having a 3.5 per cent deficit target in the budget must be avoided at any cost as we face a similar growth slowdown. Instead, the fiscal deficit must be kept only at a marginally lower level or the same level in FY21 (vis-à-vis FY20). We must focus on growth. A large fiscal compression in the budget, through a reported expenditure curtailment of Rs 2 lakh crore, could be an unmitigated disaster for growth and will definitely raise the possibility of lack of transparency in the fiscal numbers of FY21 in the eyes of the market.

So, what are the options before the government? First, is the apparent trade-off between tax concessions and stimulating the economy by giving a fillip to the rural economy. There is now an apparent consensus that with only 4 per cent of people paying income tax, a tax concession might be a wrong approach to stimulate demand. There are, however, two fallacies with this argument. First, even when 2 per cent of the people paid income tax during 2004-08, the Indian economy expanded by close to 8 per cent on average. Second, the 4 per cent population accounted for a significant part of overall consumption, and in FY19, the overall gross taxable income of this population was Rs 46 lakh crore, which is 40.8 per cent of the overall private final consumption expenditure. Hence, it is possible to tweak both the slabs and the tax rates to increase consumption, which is key to growth. The only issue with such tax changes that could make the government wary is the revenue foregone. Our estimates suggest that a 5 per cent cut in taxes across income buckets can result in a revenue shortfall of only 0.5 per cent of GDP.

Second, the idea of a rural push through PM-KISAN scheme is understandable, but efforts must first be made to cover all the farmers under the scheme. It is quite puzzling that despite 92 per cent of the land records being digitised, PM-KISAN still covers only half of the eligible beneficiaries. As was promised in the 2018 budget, a tenancy certificate must be issued to every tenant farmer — 70 per cent of farmland is cultivated by tenant farmers, who are not entitled to any benefit because they do not own land. Third, the government should think about increasing the Rs 6,000 yearly amount in a calibrated manner (say Rs 500 per year over the next four years) as the incremental cost will be negligible. As this will create a feel-good factor across the farming community, why not start from this year itself?

Third, the government must think about the trade-off between tax adjustment and incentivising savings. When the government notified an increase in the public provident fund (PPF) limit by Rs 50,000 to Rs 1,50,000 in August 2014, its impact on household savings was enormous. For example, an increase in the 80C limit by Rs 1 lakh to Rs 2.5 lakh for individual households will lead to additional savings of more than Rs 2 lakh crore as compared to a revenue and interest foregone amount of Rs 40,000 crore. The question is thus of incentivising consumption, or savings or both?

In this context, let me also comment on the repeated fallacies of commentators who advocate in favour of fiscal conservatism on the ground that entire household financial savings are being used to finance government borrowings. The numbers suggest otherwise. Of the Rs 11.2 lakh crore of net financial savings in FY18, total claims on government were around Rs 70,000 crore, while Rs 7.74 lakh crore were claims on insurance, pension and provident funds (assuming FY17 ratios). Household claims on pension, insurance and provident funds are purely savings for the households’ retirement corpus and it is completely naïve to equate such claims as financing government borrowings. The decision of such retirement funds on where to invest their corpus is a purely portfolio-decision, just as is the household decision to investment in small savings.

Apart from such fiscal measures, the budget must announce its intent to bring back trust in the financial system. To this end, a simultaneous recognition of stressed assets of NBFCs and thereafter immediately initiating measures to help them to raise capital by initiating takeovers/mergers if required and giving the rest a clean chit, thereby, increasing the confidence to lend, is required. We must not repeat the mistake we made with banks when we first initiated recognition of bad loans through the asset quality review in 2015, then brought resolution through the IBC law in 2016, and then resorted to recapitalisation in October 2017. The sequence should have been resolution first, and recognition and recapitalisation simultaneously thereafter.

We can also think of forbearance for large NBFCs by deferment of principal repayments by systemically important NBFCs and HFCs. These NBFCs and HFCs can allow similar deferments to their clients. Since interest would be paid during this period, lenders would not make a loss. This should be adequate to get the cash flows from stuck projects going and to ensure the fulfillment of the prime minister’s vision of Housing for All by 2022.

Interestingly, as we write on the budget priorities, the Supreme Court judgment on telcos’ adjusted gross revenues could just about tilt the budget arithmetic in the government’s favour. On the flip side though, this order could lead to significant market disruptions and possibly impact consumption as well.

This article first appeared in the print edition on January 21, 2020 under the title “The deficit bogey”. The writer is group chief economic advisor, State Bank of India. Views are personal.

Government must choose between tax reductions and increasing rural spending

Written by Suvodeep Rakshit
The first advance estimate pegs India’s economic growth at 5 per cent in 2019-20 — the slowest since the global financial crisis of 2008. While one may quibble over whether the actual print may be lower or higher, the cause of the slowdown can be attributed to subdued private consumption and investment activity. And given the current trend of high frequency indicators, not much upside to growth is expected.

The slowdown can be attributed largely to a structural demand problem in the economy along with some cyclical factors. Despite largely stagnant incomes, private consumption, which is the largest driver of growth, has been financed over the past few years through progressively lower savings, easy credit, and certain one-offs such as the Seventh Pay Commission led payouts. The household savings rate has dipped to 17.2 per cent of GDP in FY18, from 22.5 per cent in FY13. And after the recent NBFC crisis, overall credit in the system has dried up as incremental resources from NBFCs to commercial sector were at (-) Rs1.3 trillion in the first half of FY20 compared to Rs 0.9 tn in first half of last year.

The rural economy has been reeling from low wage growth and largely stagnant farmers’ incomes. Rural wage growth has averaged around 4.5 per cent over the past five years, but adjusting for inflation it has been only 0.6 per cent. The rural population, which was dependent on urban real estate/construction has faced headwinds in the recent past with lower private sector investments and a weak real estate sector.

Looking at the key drivers of growth in the short term, there is limited scope for a sharp recovery. The slowdown in private consumption is a structural issue linked to low household income growth. That in turn is linked to the basic problems of low job creation, and stagnant farm incomes. None of these factors are likely to change immediately. Investment is unlikely to rebound sharply given the challenges on both income and balance sheet of the government, private sector, and households. And government consumption, which has been supporting growth over the past few years, remains under stress. The combined Centre and states’ fiscal deficit is close to 6.5 per cent of GDP. Along with an additional 2.0-2.5 per cent of GDP of central PSE borrowings, the public sector is already weighing on the limited domestic financial resources, ruling out space for an aggressive fiscal stimulus.

The government to its credit has shown a clear preference to rely on supply-side measures to support growth. Yet, expectations will be high that the upcoming Union budget addresses the demand side concerns as well. To this end, the government will possibly need to choose between income tax rate reductions, and substantially increasing allocation to the rural sector. Given the narrow income tax base, any sacrifice of the fiscal room would be beneficial only for a limited number of people. Based on filings for the assessment year 2019, out of around 58 million tax filers, only 15 million tax filers had a return income above Rs 0.5 million. Further, the impact on consumption would vary widely depending on the relative gains across income brackets. On the other hand, spending on rural infrastructure and employment (MGNREGA, PM-KISAN, PMGSY) can help alleviate some of the pain in rural areas.

The recovery will depend on the utilisation of the fiscal space, and also the health of the financial sector, especially that of NBFCs. The PSU banks are being nursed back to health, but credit flow from NBFCs to certain segments such as MSMEs needs to pick up.

Addressing India’s long term growth concerns and to push the country into the middle-income group of economies requires a broad-basing of the income and consumption profile. Economic reforms in the past have worked to enhance the capacity of the top few hundred million consumers. The next set of reforms should enhance the capacity of those in the middle and the bottom of the income pyramid.

Further, given the huge infrastructure gap in the country, it is essential that the private sector’s role in infrastructure creation is much more inclusive.

In four key areas of infrastructure — electricity (generation, transmission, and distribution), transport (airports, roads, railways, metros), telecom, and water (irrigation, sanitation, sewage, water supply) — the private sector’s involvement is largely restricted to generation in electricity, inter-city roads, airports in transport, and telecom. The rest are largely in the hands of the Centre, state, and local governments. Policies need to focus on ownership (which is largely government dominated) and pricing (which provides the private sector with a remunerable internal rate of return). It is important to note that creating an enabling environment is to a large extent in the purview of the state and local governments.

Given the degree and nature of the growth slowdown, policymakers should continue to focus on measures that raise the potential growth of the economy. Reforms which increase the productivity of the factors of production, provide an enabling environment for competitive production of goods and services, and ensure steady and substantial growth in purchasing power for a larger section of the population should be the focus. After all, why let a crisis go waste.


(This article first appeared in the print edition on January 10, 2020 under the title ‘Limited scope for sharp recovery’. The writer is Vice-President and Senior Economist in Kotak Institutional Equities.)

GDP fall smooth as waterfall

Ashok V. Desai
The graph is smooth like a waterfall: in the quarters beginning with April 2018, the year-on-year growth in gross domestic product at constant prices has been 8.1, 8.0, 7.0, 6.6, 5.8, 5.0 and 4.5 per cent. The Central Statistics Office has not released details of GDP composition. But in the April-September half-year, GDP growth fell from 7.3 per cent in 2018 to 4.6 per cent in 2019. Manufacturing, which in the previous half year had grown by 9.4 per cent, shrank this year by 0.2 per cent. Growth of construction fell from 9.1 to 4.6 per cent. Agricultural growth declined from 5 to 2.1 per cent. The only sector that boomed was — no prize for guessing — government, whose growth rose from 8.1 to 10.1 per cent.

The government dismissed the governor of the Reserve Bank of India, and sent its obedient servant from Delhi to Mumbai to take his place. The new governor transferred a good deal of RBI’s capital funds, carefully accumulated over decades, to finance the Central government. This is old news; but the figures underlying it are shocking. In the budget it presented in February, the government had planned to borrow Rs 4.48 trillion during the year ending next March. By September, it had borrowed Rs 4.78 trillion — Rs 300 billion more than it had planned to borrow in the year. It sold Rs 612 billion of its loans to the National Small Savings Fund and, as if that was not enough, it raided small savings and took away another half a trillion. That was what it did till September; we can only wait and see what further havoc it would wreak in the current half year.

Why is the government so desperate? Why has it destroyed the independence of the central bank? Why is the government of a once fairly well-run state following in the footsteps of reckless Latin American governments? Argentina is the country of gold — in name. Living with a few hundred per cent a year of inflation and without any gold or foreign exchange reserves is normal for Argentina and other Latin American states. India is one of the world’s largest hoarder and importer of gold. Does India want to move from drinking chai to dancing cha cha cha?

Why should it not? It has only to look at its own history to see why. From 1947 till 1991, it had at least one balance of payments crisis every decade. Everyone clapped if the government brought down inflation below 8 per cent. Finance ministers believed that profligacy was patriotic, and spent without caring a hoot about the economy. Finally, the humiliation of running abroad repeatedly with a begging bowl made P.V. Narasimha Rao change the government’s ways. But that is all history. Today, with foreign exchange reserves touching $450 billion, who cares? The finance minister is playing her maiden innings; does she understand the importance of macroeconomic policy? Let us dance duffmuttu, and let the treasury take care of itself — though taking care of the economy is not its priority. A Man peeps through the gates of a closed Shalimar Paints factory in Howrah. Telegraph file picture

But some economists just cannot help worrying about the economy. Arvind Subramanian and Josh Felman have collected reams of statistics and investigated what led to India’s great slowdown. As they show, industrial growth in India has been modest for years; but in the last year, output index of consumer goods industries hardly grew, whilst investment index fell. Direct tax collections show no growth this financial year; non-oil exports are stagnant, whilst imports have fallen. Growth of power generation is close to zero — the lowest in three decades. The world’s fastest growing economy has suddenly given up on growth. The government has drastically reduced corporate tax, and the RBI has cut its interest rate, but the economy has refused to perk up.

Subralman trace back its travails to the global financial crisis of 2008. To save the Indian economy from the global slowdown, the government spent madly on infrastructure — mainly power — projects. State governments buy votes with electric power; they give it to their voters free or below cost. So the private companies that were foolish enough to invest went bankrupt. That led to the Twin Balance Sheet Problem — the insolvency of companies that had borrowed to invest in infrastructure loaded up banks’ balance sheets with bad debts, which we prefer to call non-productive assets. Export growth too sputtered.

The government ran deficits. Many new lenders came up, and their loans started a home building boom. By 2017, the housing boom, too, sputtered: there were no buyers for flats, builders went bankrupt, and so did the lenders — whom we prefer to call non-bank finance companies. The balance sheets of builders and their lenders got loaded with bad debts; the Twin Balance Sheet problem turned into a Quadruple Balance Sheet problem.

How to sort out this mess? Subralman opt for five Rs. First, recognition. Raghuram Rajan had organized an Asset Quality Review to establish the real quality of bank loans — which were good, bad and doubtful, and what could be recovered from no-good loans. There should be another AQR, covering banks as well as NBFCs. Second, resolution. Urjit Patel and Viral Acharya had spelt out the resolution procedure in February 2018; detail was added to it in June 2019. Subralman essentially argue for a law that would strengthen creditors’ hands and limit the courts’ and tribunals’ power to hold up and delay resolution. They also propose two specialized resolution drivers — ‘bad banks’ — which would take over banks’ bad loans to power and real estate sectors respectively and accelerate resolution.

Next, regulation: Subralman want greater powers for the RBI. It should strengthen its prompt corrective action framework, and extend its supervision to NBFCs. Fourth, the government must give its banks more capital on the condition that they recognize NPAs correctly and clean up their balance sheets. Fifth, reform. The government should sell stakes in its banks to the private sector and let it run them; if it cannot, it should at least transfer its investments in banks to a holding corporation with an independent management. There is also a comprehensive programme to improve figures — a fiscal commission to look at the budget, an AQR, to be done by Raghuram Rajan, and a statistical commission, to be chaired by Abhijit Banerjee. Then, there is agriculture: replace fertilizer and power subsidies with direct transfers, create a single market for agricultural products, have a stable policy on agricultural exports and imports as well as on livestock, incentivize water conservation, and give permission to genetically modified crops.

Subralman are so concerned about economic policy even though they get nothing material out of India — no power, no function, no profit — because there is so much to be done, and the case for doing it is so strong. But it is difficult to see a government that abolished the planning commission and dismissed first-class economists understanding the need for good policy. The people have handed the present government the power to rule them; unless they change their minds, it is difficult to see a change in governance; expect a crisis and economic decline every few years. But whatever his idea of governance, the prime minister certainly makes a spectacular show of it.

Combating Hunger, Malnutrition and National dishonour

Harsh Mander
The abiding disgrace of new India is that despite unprecedented quantities of wealth and the vulgar ostentation which has become customary in the gaudy glitter of city life, India is unable to overcome hunger and malnourishment. This is even more unconscionable when government warehouses are overflowing with stocks of rotting rice and wheat. The 2019 Global Hunger Index (GHI) report brings sombre tidings this year: India’s poorer neighbours — Bangladesh, Nepal, and even Pakistan — have overtaken India in the battle against hunger.

Hunger is the failure to access the calories that are necessary to sustain an active and healthy life. It results in intense human suffering and indignity, as parents are forced to helplessly watch their children ache as they sleep hungry, as their brains and bodies are unable to grow to full potential, and, as they fall ill too often and are snatched away too early.

This is a colossal national dishonour for two reasons. One, this suffering is entirely preventable. Given appropriate public policies — sensitively designed, adequately resourced and effectively implemented — the country has both the wealth and the food stocks many times over to end hunger entirely. The relative success of our neighbours in combating hunger — Nepal emerging from 15 years of civil war and Pakistan still torn by internal conflict — is a sobering reminder of what India has not accomplished. Two, this failure does not spur public outrage and the introspection that it should.

The GHI report ranks India at a lowly 102 out of 117 countries listed. The GHI scores are based on four indicators — undernourishment (the share of population with insufficient calorie intake); child wasting (children with low weight for height, indicating acute undernutrition); child stunting (children with low height for age, reflecting chronic undernutrition); and child mortality (death rate of children under five).

Among all the countries included in the report, India has the highest rate of child wasting (which rose from the 2008-2012 level of 16.5 per cent to 20.8 per cent). Its child stunting rate (at 37.9 per cent) also remains shockingly high.

The report is instructive as it explains why Bangladesh and Nepal have surged ahead of a much wealthier India. The Bangladesh success story is attributed to pro-poor economic growth raising household incomes as well as significant improvements in “nutrition-sensitive” sectors like education, sanitation and health. Nepal, likewise, shows increased household wealth, maternal education, sanitation, health and nutrition programmes.

What must India do better to at least keep pace with its South Asian neighbours in tackling hunger? This is the question that Dipa Sinha, Parth Shrimali and I seek to answer in our essay in the latest 2018-19 India Exclusion Report of the Centre for Equity Studies.

We observe the cruel irony of the largest population of food-insecure people being food producers — farm workers, tenants, marginal and small farmers, fish workers and forest gatherers. To end hunger, food producers must be supported to receive adequate remuneration. We recommend sound measures to protect farmer incomes, including income transfers to farmers, minimum support-price guarantees and crop insurance, and a massive expansion of farm credit. For farm workers, a refocus on land reforms is called for, and, a greatly expanded and effectively managed rural employment guarantee programme with attention to land and watershed development, small irrigation and afforestation. There must also be an urgent and comprehensive shift to sustainable agricultural technologies less dependent on irrigation, chemical fertilisers and pesticides, to reverse our agri-ecological crisis.

The other large food-vulnerable population comprises informal workers. Hunger can’t be combated without addressing the burgeoning job crisis. It also entails labour reforms which protect job security, fair work conditions and social security of all workers. We also argue that the time has come for an urban employment guarantee programme, to help build basic public services and infrastructure for the urban poor — especially slum and pavement residents, and the homeless. This should also include employment in the care economy, with services for child-care, children and adults with disability and older persons.

The Public Distribution System must be universalised (excluding income tax payees), and should distribute not just cereals but also pulses and edible oils. Further, we need to reimagine it as a decentralised system where a variety of crops are procured and distributed locally. Both pre-school feeding and school meals need adequate budgets, and the meals should be supplemented with nutrient-rich foods such as dairy products, eggs and fruits. Social protection also entails universal pension for persons not covered by formal schemes, universal maternity entitlements to enable all women in informal work to rest and breast-feed their children, a vastly expanded creche scheme, and residential schools for homeless children and child workers.

Malnourishment results not just from inadequate food intakes, but also because food is not absorbed due to frequent infections caused by bad drinking water, poor sanitation and lack of healthcare. India’s nutrition failures are also because of persisting gaps in securing potable water to all citizens, and continued open defecation despite optimistic official reporting. There is an urgent requirement for a legally enforceable right to healthcare, with universal and free out-patient and hospital-based care, free diagnostics and free medicines.

All of this is not unknown. Yet, India continues to fail children born in impoverished households, to homeless people and single mothers, and to oppressed castes and social groups. Our economic policy continues to be trapped in an elite capture, dominated by measures that support big businesses to the exclusion of farmers and workers. Social rights are broken and betrayed.

At its core, the reason for India’s continuing failures to end hunger and malnutrition of its millions is the indifference of people who have never known the agony of involuntary hunger. This is ultimately the result of our enormous cultural comfort with inequality, our gravest and most culpable civilisational flaw.

The writer is a human rights worker and writer

Waiving loans doesn’t end the distress

Rajalakshmi Nirmal
After the Yogi Adityanath government waived farm loans of about ₹36,000 crore for UP farmers, pressure has mounted on other States to follow suit. But contrary to common belief, debt waivers aside from possibly guaranteeing electoral victory, do little to alleviate the plight of farmers. Neither do they help kick-start the rural economy nor spur agriculture investment. In fact, loan waivers only compound the problems faced by farmers by tarnishing their credit history and restricting access to institutional credit. Worse, they create a moral hazard by disrupting the credit discipline among borrowers.

The solution lies in offering ways to improve farmers’ income — whether through better price for produce, introducing methods to generate non-farm income, or saving on costs of farming.

 

In the past
The first-ever nationwide farm loan waiver was announced by the VP Singh government in 1990 at a fiscal cost of ₹10,000 crore. Banks ended up paying a huge price for this as many borrowers started to default, in anticipation of more waivers. An ICRIER paper in 2015 entitled ‘Evaluation of Credit Policy for Agriculture in India’ makes a reference to the study of Shylendra and Singh in 1994 which showed that following the bailout programme, the loan recovery of Primary Agriculture Credit Societies in Karnataka fell sharply. It dropped from 74.9 per cent in 1987-88 to 41.1 per cent in 1991-92.

Debt relief packages destroy the credit culture. A World Bank research paper shows that for a standard deviation of one in bailout exposure, there is a 4-6 per cent decline in the number of loans. This study was done in 2008 after the then Finance Minister P Chidambaram wrote off a massive ₹50,000 crore of farm loans. What happened after the bailout was that banks reduced exposure to districts where the write-offs were high.

Reserve Bank of India data shows that non-performing assets in agriculture for commercial banks rose after the 2008 debt waiver programme. Between 2009-10 and 2012-13, NPAs of SCBs (in agriculture) rose from ₹10,353 crore to ₹30,200 crore.

The claim of the supporters of the bailout programmes that it has a positive impact on rural economy is also wrong, says the World Bank paper. “We used regionally disaggregated data to test for the effect of the bailout on rural productivity, wages and employment. Our results identify a precise zero for each of these outcomes.”

The study has shown a low spending multiplier from the debt relief programme. Debt waivers are bad for everyone: those who receive debt relief as also for those who do not benefit because they didn’t have any overdue loan, says another research paper (‘Borrowing Culture and Debt Relief: Evidence from a Policy Experiment’, April 2013). The first category of borrowers become defaulters in banks’ book, and are denied loans in the future. The other category of borrowers who are discontented because they didn’t benefit the last time, build hopes for a fresh waiver and stop repayments. For fresh loans , they then borrow from the informal sector at a much higher cost. 

 

Not much use
The recent experience in debt waivers in the country has not been good. In 2014, before the elections, both N Chandrababu Naidu’s Telugu Desam Party and K Chandrashekar Rao’s Telangana Rashtra Samithi promised loan waivers to farmers in Andhra Pradesh and Telangana. Both saw victory in the polls and implemented the waiver programme. But, given its massive scale — ₹40,000 crore for Andhra Pradesh and about ₹17,000-20,000 crore for Telangana — the States had to add many riders to the scheme. The loan waiver, finally, only compounded the problems of farmers. According to the National Crime Records Bureau, farmer suicides in Andhra Pradesh went up to 516 in 2015 from 160 reported in 2014, while in Telangana it rose by over 50 per cent, to 1,358 deaths in 2015.

Debt waivers offer only short-term relief. Also these do not offer any respite to the most underprivileged farmers who are seldom entertained by banks and end up borrowing at high interest rates from money-lenders. The data shows about 30-35 per cent of farmers in the country still depend only on non-institutional credit.

Debt waivers should be replaced by a comprehensive package for complementing the income of farmers. The respective State agri departments need to work with their agriculture universities and draw up a plan for improving the non-farm income of farmers through poultry farming, cattle breeding, or fisheries. They should help farmers make the choice of right crops and variety. Ways to reduce costs and improve farm productivity have to be brought in. Ensuring a good price for the produce is also important. E-NAM, the Centre’s flagship electronic national agri market scheme, is still stuck at various levels of implementation. Many States are yet to modify their APMC Act to create a single market for facilitating trade through e-NAM portal. 

 

The insurance angle
The crop insurance scheme is also one way to ensure farmers do not suffer losses because of crop failure. The new version of the scheme, the PM Fasal Bima Yojana, has achieved limited success. By covering largely only loanee farmers ( these are sold through banks that automatically debit the loan account with insurance premium), this scheme has turned to be more advantageous to banks than to farmers. Small tenant farmers under pressure from the high cost of lease rent and borrowing from money-lenders, are still unaware of this insurance. Even when loan waivers become necessary, as during a natural calamity, they should be directed only to small and marginal farmers.

An unconditional bailout for every farmer is an unnecessary burden to the exchequer, when large farmers are capable of absorbing the loss in most cases. Also, the Government should prevent bailout programmes becoming a disincentive for diligent borrowers to pay their dues. Offering credit at a lower rate the following year to good borrowers, for instance, can help reduce the moral hazard to some extent.

Time to Sharpen the focus on growth

C. Rangarajan
Now that the dust and din around the State Assembly elections have settled down, it is time for policymakers to turn their attention to the major task of accelerating economic growth. As of now the prospects are not encouraging. The Central Statistics Office’s second advanced estimates indicate that the growth rate of GDP for 2016-17 will be 7.1% as against 7.9% in 2015-16. The growth rate of gross value added at basic prices in 2016-17 will be 6.7% as against 7.8% in 2015-16. The growth rates projected for 2016-17 do not capture the impact of demonetisation, which when taken into account may bring down the projected growth rate by around 0.5%.

The decline in the growth rate is not a recent phenomenon. It started in 2011-12. The persistence of relatively low growth over a five-year period calls for a critical examination. Even though the new numbers on national income give us some comfort, they do not tell the whole story.

Determinants of growth
Ultimately, the growth rate is determined by two factors — the investment rate and the efficiency in the use of capital. As the Harrod-Domar equation puts it, the growth rate is equal to the investment rate divided by the incremental capital-output ratio. The incremental capital-output ratio (ICOR) is the amount of capital required to produce one unit of output. The higher the ICOR, the less efficient we are in the use of capital. There are many caveats to this bald proposition. As we look at the Indian performance in the last five years, two facts stand out. One is a decline in the investment rate and the second is a rise in ICOR; both of which can only lead to a lower growth rate.

As growth was coming down sharply initially, the investment rate was falling only slowly, implying a rising ICOR. ICOR is a catch-all expression which is determined by a variety of factors including technology, skill of manpower, managerial competence and also macroeconomic policies. Thus delays in the completion of projects, lack of complementary investments in related sectors and the non-availability of critical inputs can all lead to a rise in ICOR.

The Economic Survey of 2014-15 reported that there were in all 746 stalled projects, with 161 in the public sector and 585 in the private sector of a total value of ₹8.8 lakh crore. As of 2015-16, there were still 404 stalled projects, 162 in the public sector and 242 in the private sector with a total value of ₹5.5 lakh crore. In the short run, the biggest gain in terms of growth will be by getting “stalled projects” moving. Of course some of them may be unviable because of changed conditions. A periodic reporting by the government on the progress of stalled projects will be of great help.

Declining investment rate

India’s investment rate reached a peak in 2007-08 at 38.0% of GDP. With an ICOR of 4, it was not surprising that a high growth rate of close to 9.4% was achieved. One sees a steady decline in the investment rate since then. The decline in the rate was small initially but has been more pronounced in the last two years. According to the latest estimates, the gross fixed capital formation rate fell to as low as 26.9% in 2016-17. With this investment rate, it is simply impossible to achieve a growth rate in the range of 8 to 9%.

The major issue confronting us is: why did the investment rate fall? Why are not new investments forthcoming? In 2011 and 2012, in discussions on the Indian economy, the one phrase that used to be bandied about was “policy paralysis”, pointing to the inability of the government to take policy decisions because of “coalition compulsions”. It is true that around this period, the government was preoccupied with answering many issues connected with graft. But that does not explain the steady fall in the investment rate except for a sense of uncertainty created in the minds of investors.

The external environment was also not encouraging. The growth rate of the advanced economies remained low and the recovery from the crisis of 2008 was tepid which had an adverse impact on exports. However, India benefited by large capital inflows except in 2013. For almost three years beginning 2010, India had to cope with a high level of inflation which also had an adverse impact on investment sentiment. Once the growth rate starts to decline, it sets in motion a vicious cycle of decline in investment and lower growth. The acceleration principle begins to operate. We need to break this chain in order to move on to a higher growth path.

Solutions

What are the solutions, given the current situation? The standard prescription, whenever private investment is weak, is to raise public investment which can take a longer term view. This standard suggestion is very much appropriate in the present context as well. In the best of times, public investment has been 8% of GDP. The Central government’s capital expenditures even after some increase in the last two years, is only 1.8% of GDP. About 3 to 4% of GDP comes from public sector undertakings and the balance from State governments. What is needed now is for public sector undertakings to come out with an explicit statement indicating the extent of investment they intend to make during the current fiscal. And this intention must be monitored every quarter. This will inspire confidence among prospective private investors.

However, it is also necessary to enhance private investment, and that too private corporate investment. During the high growth phase, corporate investment reached the level of 14% of GDP. Since then it has fallen. In fact, a recent study shows that the total cost of projects initiated by the corporate sector has come down from ₹5,560 billion in 2009-10 to ₹954 billion in 2015-16. This continuing trend must be reversed.

Three things need attention. First, reforms to simplify procedures, speed up the delivery system and enlarge competition must be pursued vigorously. Some significant steps have been taken in this regard in recent years such as moving forward on the GST Bill, passing of the Bankruptcy Act, and enlarging the scope of foreign direct investment.

Second, all viable “stalled” projects must be brought to completion. Third, financial bottlenecks need to be cleared. The banking system is under stress. The non-performing loans of the system have risen and are rising. This has squeezed the profitability of banks with some showing loss. More distressing is the minimal flow of new credit. The problem is often referred to as the twin balance sheet problem. If corporate balance sheets are weak, automatically the banks’ balance sheets also become weak. Really speaking, it is two sides of the same coin.

The solution to clean up the balance sheet of banks lies in taking some “haircuts”. At least some part of the accumulation of bad debts has been due to the slowdown of the economy. The old saying is “bad loans are sown in good times”. Even though a haircut cannot be avoided, wilful defaulters must not go unpunished. Asset restructuring companies are part of the solution and we have some experience of them.

Long-term lending

This is also the appropriate time to revive an idea which had withered away during the reform process and that is to have institutions focussed on long-term lending such as IDBI and ICICI as they were before 1998. The details can be worked out. But the idea needs a rethink.

Investment, as they say, is an act of faith in the future. If there has to be investment resurgence, it is necessary to create the climate which promotes this faith. We have already outlined the actions that can be taken in the purely economic arena. But “animal spirits” are also influenced by what happens in the polity and society. Avoidance of divisive issues is paramount in this context. Undiluted attention to development is the need of the hour.

C. Rangarajan is former Chairman of the Economic Advisory Council to the Prime Minister and former Governor, Reserve Bank of India.

Let us now make more food in India

PULAPRE BALAKRISHNAN

Prime Minister Narendra Modi’s exhortation ‘Make in India’ would make perfect sense till we realise that by ‘making’ he means manufacturing. But could it be that his focus on manufacturing may come a cropper if we do not ensure that agriculture is placed permanently on a sound footing? The history of the great manufacturing nations that the PM has been visiting suggests that. So does recent experience here.

It would, of course, be politically correct to speak of the importance of agriculture at this point when farmer suicides have been in the news. Actually, though, the economy has been signalling for some time that all is not well with the sector. Note that I say ‘economy’, and am therefore not referring to agriculture alone. The performance of agriculture has an implication for a population wider than that contained by it. At least for five years, food price increases have driven economy-wide inflation.

That food-price inflation has persisted suggests that a structural factor is likely at work. The market mechanism can in principle eliminate inflationary pressure emanating from shortage by encouraging the expansion of the sector now made attractive by the increased profitability. That this is not happening with respect to India’s food sector points to structural impediments in place, ones the market cannot eliminate.

Food for thought

Food-price inflation has consequences for more than just economy-wide inflation. It can even impact the part of the economy close to our PM’s heart, manufacturing. This is evident from the reports that while inflation is at a four-month low, the index of industrial production is at a five-month low.

There is a plausible explanation for this. Food price inflation can crowd-out household expenditure on manufactures, leading to declining investment and thus demand for capital goods. Higher inflation also leads to real exchange-rate appreciation, rendering exports uncompetitive. So in many ways, a vibrant manufacturing sector requires a sound agricultural base.

The agrarian crisis in the country partly reflects the structural element in the problem of expanding agricultural production. It has two implications for economic policy.

The first is the message that if the production conditions are the constraint, then, trying to tackle the agrarian crisis by raising procurement price — as has been proposed — is tantamount to no more than feeding inflation.

The UPA 2 had discovered this fact the hard way. Apart from the fact that support prices are mostly confined to cereals, and the price rise is happening elsewhere, producers in India’s non-agricultural sector are not going to be mere spectators in the reduction in their real income. They constitute 80 per cent of the economy, and are likely to raise the price of their outputs to compensate for its reduction.

Now, not only is the original rise in the procurement price generalised across the economy, but also it will connect the inflation rate over time. For, the price would have to be raised again in the next round to restore parity with non-agricultural prices.

Thus, trying to shift the advantage towards the farmers by raising support prices cannot normally succeed.

To both improve the lot of farmers, and for the rest of the economy to reap the benefits of such a move, the yield of land must be raised continuously. This would require non-price interventions. Modi cannot be ignorant of these as they constitute what must count as governance, and he had promised to maximise it.

So, what are the areas within agriculture that require better governance? First and foremost, there is irrigation. Secondly, there is the issue of land policy. 

Watering land

Expanding irrigation has been the bugbear of governments in India. While estimates vary, we know for sure that the share of irrigated land in total cropped area is low. Increasing this share is vital as assured availability of water can overcome some of the disadvantages of small farm size.

Some years ago, the Economic Advisory Council to the PM noted that though the average holding size in much of East Asia was smaller than that in India, the share of irrigated land was much higher in the former. This accounts for the fact that these economies enjoy far greater food security that India does, and must have some bearing on their being world-class manufacturing nations.

However, while the slow growth of irrigated area may be a cause of the tardy expansion of food production in India, it has less to do with funding than with governance. In a study published by the RBI in 2008, Ramesh Golait, Pankaj Kumar and I showed that public expenditure on irrigation and flood control had gone up by over 100 per cent in real terms since 1991, with precious little to show for it on the ground. Low spending cannot account for the glacial spread of irrigation capacity in the country.

To see public expenditure on irrigation fructify, we would need governance encompassing conception, construction, supply and maintenance. It is not clear that farmers are part of the process right now, even as it would be wise to include them, for as potential users they have a stake in the success of the project.

Politicians tend to showcase high expenditure on irrigation, and have succeeded in turning such expenditure into a sacred cow so that querying outcomes is to be “anti-farmer”.

Land issues

The pressure of population has led to fragmentation of many farms to a level below economic size. Sizeable investment is now made difficult.

Further, at low output levels, any adverse fluctuation drives the farmer into poverty and debt, from which recovery is impossible without assistance.

There is a strong case for the prevention of further fragmentation of land by appropriate legislation. At the same time, legislation must also allow for tenancy, which is illegal in many parts of India.

In fact, the State should facilitate tenancy on reasonable terms so that necessary yield increase is not held back due to the uneconomic size of land.

Another issue is the alienation of agricultural land. There is a strong case for disallowing the conversion of farmland except in the rarest of rare cases. In fact, the proposed Social Impact Assessment is perhaps too narrowly conceived. It tends to privilege the rights of those deriving a livelihood from the land in question.

Actually, there is the question of the greater common good, from which point of view food security for the nation as a whole emerges as salient. Given the imponderables, especially due to climate change and the fact that grain production per capita is far lower here than in the developed world, an embargo on conversion, whether undertaken by government or owners, makes much sense.

While there is no need for Modi to put his enthusiasm for manufacturing on hold, he should seriously and urgently address the long-term prospects for our agriculture.

The writer is professor of economics at Ashoka University