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

Current crisis has exposed limitations of central banking framework

Ishan Bakshi 

Over the past few months, the Reserve Bank of India, along with the monetary policy committee, has undertaken a slew of measures to arrest the economic slowdown, and address the fallout of the COVID-19 pandemic. Yet, their actions, guided by multiple considerations — inflation and growth management, debt management and currency management — have inadvertently exposed the limitations of and the inherent contradictions in the central banking framework in India.

Take the monetary policy function. The MPC is guided by the goal of maintaining inflation at 4 plus/minus 2 per cent. Since February 2019, the MPC has, and rightly so, attached primacy to reviving growth, lowering the benchmark repo rate by 250 basis points. However, in its August policy, despite dire growth prospects, it chose to maintain the status quo. This decision was driven, in part, by elevated inflation which continues to average above the upper threshold of the inflation targeting framework. This raises the question: At the current juncture, should the MPC be driven by growth considerations or should short-term inflation concerns dominate?

That there is considerable uncertainty over the trajectory of inflation is beyond debate. But at its core is a question: Is COVID inflationary or disinflationary? Will it be inflationary in the short run (retail inflation is elevated largely due to supply dislocations) but disinflationary over the medium term (with demand falling)? Or does the MPC believe that it will remain inflationary over the medium term with supply-side disruptions outweighing the effects of a fall in demand?

In large part, the current rise in inflation (CPI had fallen from January to March) is driven by supply-chain dislocations owing to the lockdowns. This is evident from the growing disconnect between the wholesale and consumer price index. Since April, while WPI has been in negative territory, CPI has been elevated, indicating, excess supply/low demand at the producer/wholesale level but excess demand/low supply at the retail/consumer level, suggestive of dislocations in the intermediate supply chain. Accepting this implies that the spurt in retail inflation will be temporary, and it will begin to trend lower as these disruptions ebb.

Monetary policy is supposed to be forward looking. So, if on balance, COVID is likely to be disinflationary over the medium term, although this will show up with a lag, then there is a case for looking beyond the current spike in retail inflation. And given the collapse in the economy and that the transmission of rate cuts takes time, it tilts the balance in favour of further easing. Worries of lower rates translating to higher future inflation may prove to be misplaced considering the extent of the fall in demand, the idle capacity in the system, and the little pricing power of producers.

Considering that the MPC expects inflation to trend lower in the second half of the year (presumably due to easing of supply side disruptions), its stance in the August meeting was puzzling. The MPC’s mandate is to deliver stable inflation over long periods of time, not just a few months. Yet, it would appear as if it is more concerned about elevated inflation in the short run. Will a few more months of data end its uncertainty that this is not a cyclical deviation but a structural downshift? Perhaps. Unless the current MPC believes that it has approached the limits of conventional easing.

One could also argue about the inefficacy of monetary policy at the current juncture, and thus the limited options before the committee other than to hold, and keep the power dry. But this argument is driven more so by the absence of policy levers available to the committee other than the repo rate. Expanding the range of policy levers available to it may well render this argument void.

Equally puzzling is the refusal to provide any firm projection of future inflation. While there is considerable uncertainty over economic conditions, surely, the committee members are basing their decisions on some expectation of future inflation and growth. These should have been publicly disclosed. While it is possible that the minutes of the MPC meeting shed light on their expectations, ideally, all MPC members should provide their individual estimates of inflation and growth.

This growth-inflation conundrum is just one part of the story. The current crisis has also brought to the fore the inherent contradictions between the MPC’s operations, and the RBI’s debt and currency management functions, pointing towards a larger structural challenge.

As manager of the government debt, the RBI is tasked with ensuring that the government’s borrowing programme sails through smoothly. To this end, it has carried out several rounds of interventions popularly known as operation twist. These interventions involve the RBI buying longer-dated government bonds, while simultaneously selling an equivalent amount of shorter-dated securities — pushing down long-term Gsec yields, and exerting upward pressure on short-term yields as a consequence. In doing so, the RBI ended up doing exactly the opposite of what the MPC was trying to achieve by cutting short term rates, well before it reached the lower limit of its conventional policy response.

Further, the RBI’s interventions in the currency market — intervening in order to prevent the rupee from appreciating — have constrained its ability to carry out open market operations as these would have led to further liquidity injections into the system. Put differently, its debt management functions have run up against its currency management functions. Underlining the complexity of all this is the talk of sterilisation — the opposite of injecting liquidity in the system.

The central bank must develop a clear strategy on what to do. At the one end, it is legally bound to an inflation target. Yet, at this juncture, there is a strong argument to look past the current spurt in inflation, and test the limits of both conventional and unconventional monetary policy. At the other end, while it may want to intervene to prevent the rupee’s appreciation, in doing so, it is constricting its debt management functions which will have its own set of consequences. There are no easy answers.

This article first appeared in the print edition of Indian Express on August 19, 2020 under the title ‘RBI’s dilemma’. ishan.bakshi@expressindia.com

Covid-19: It is a long haul for India Inc

Business Line Editorial
Nassim Nicholas Taleb gets irritated when people call coronavirus a ‘Black Swan’ event. The celebrated author who coined the term for describing events ‘that lie outside the realm of regular expectations’ but have ‘extreme impact’ in his 2007 book of the same name would rather prefer to call it a ‘White Swan’ event.

After all, people like Bill Gates had clearly warned of an impending pandemic. Whatever its classification, Covid-19 has caught companies across the world by complete surprise.

The resultant shock has upended established business models of many and laid to waste carefully crafted business plans of almost all of them.

After all, it took the virus just three months to infect over 2.6 million people across the world and kill as many as 1.80 lakh and, in the process, locking down half the global population.

The economic impact of the virus, still unravelling, is something the world has not seen before.

Under the circumstances, the question uppermost in the minds of entrepreneurs is ‘how bad will they be hit before normalcy is restored?’ While it is too early to provide a definitive answer, one thing is certain — they have to prepare for the long haul.

This crisis will be far worse than the 2007-08 financial crisis. When the global financial meltdown happened then, India was in the midst of a strong demand growth. Companies were in a better position to handle the shock supported by a banking system that was reasonably healthy. Also, the crisis lasted just six months.

Coronavirus, on the other hand, manifested at the most inappropriate time for India Inc.

Companies were already struggling in the wake of a slowdown in demand which has hurt their margins and stretched their balance-sheets.

In addition, the country’s banking system is in a crisis and government’s fiscal space to revive the economy is limited. What is worse, the effect of the virus could play out for a much longer time as the vaccine is not expected before 12 months.

Severe test ahead
While the impact is expected to vary for different sectors, what is clear is that weaker players will die and even the fittest of them all will be put through severe test. Collapse in demand, supply-side shocks, higher costs, people- and trade-related issues will challenge them.

Demand: The IMF has estimated the Covid-hit global economy to shrink by 3 per cent in 2021. In fact, advanced economies will de-grow by as much as 6 per cent. The WTO has projected that global trade will drop by a third this year. All this will badly hurt India’s export demand. In fact, the top 10 countries affected by Covid-19 accounts for 45 per cent of India’s exports. Both product and services exports are set to see a double-digit fall.

Domestic demand which has often come to the rescue is likely to remain muted this time around. Consumer confidence is set fall from already low levels as people hit by job loss and pay cuts tighten their purse strings and spend only on essentials.

Discretionary spending will certainly take a back seat. Government spending will also be low.

Most State governments have seen sharp fall in revenues (GST and their own taxes from sale of fuel and alcohol).

On top of that they are borrowing way beyond their means to fight the virus and will have no option but to cut back on productive expenditure.

Supply-side shock: Companies will face significant challenges in re-starting their operations as Covid-related restrictions are expected to continue for some time. Their capacity utilisation will be low due to social-distancing norms and restriction on number of workers they can employ at a given time. Bigger players will also face challenges from their supply chain who are typically smaller players.

These players will need additional working capital to even start their operations. Banks don’t offer these without additional collaterals which these entrepreneurs lack. Those depending on imported inputs will face delays and many, who employ migrant labour, will experience shortage of hands. Logistical issues will remain as truck fleet operators are struggling to find drivers.

Cost impact: With zero sales for 40-odd days and significant carrying stock, most companies will see their interest costs rise.

This, despite, fall in interest rates (provided banks pass on the lower rates to them). Even as commodity and fuel prices have come down, the benefit that will accrue to the industry will be marginal as their prices are typically linked to international rates.

Also, the rupee has weakened quite sharply and transportation costs have risen. That apart, low capacity utilisation means their fixed costs margin will be hit. In all, they will have to contend with higher costs.

Looking ahead
Considering the above factors, the next one year could well be hard for India Inc. The first quarter is expected to be almost a washout. Companies expect to ramp up production (demand supporting and Covid permitting) in the second and third quarters, but that will depend entirely on three factors:

Second wave: As the lockdown is eased, risk of a second wave increases. South Korea, China and Singapore are already battling such a scenario. If India sees a sharp increase in cases post-lockdown, restrictions will be have to be reintroduced. That will be a setback.

Strong government stimulus: As things stand today, all the four engines of economic growth — exports, private investments, consumption, government spending — are badly hit.

The economy will easily slip into a recession without a large stimulus to kick-start it. So far, only a welfare package amounting to just one per cent of GDP has been announced. A lot more is needed.

Bank support: A revival will not be possible unless banks give up their reticence to lend. No economy can do well if bank credit grows at less than its nominal rate of growth.

In spite of various measures by the RBI, if banks do not rise to the occasion, it will be driving the last nail into the coffins of a lot of companies — small, medium and large.

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

No apocalypse now

Shah Alam Khan
In The Plague, Albert Camus describes the French town of Oran, which is swept by a plague leading to the death of thousands of inhabitants. Camus’s novel is the story of a community struck by a destructive force, to which it refuses to surrender. The outbreak of the COVID-19 Novel Coronavirus epidemic and the response to it from people and countries are not so different from Camus’s plot.

In India, there has been an unprecedented response to this brewing pandemic. Conferences and public events have been cancelled, weddings postponed, schools have been closed and even Prime Minister Narendra Modi called off the regular Holi milan programme fearing the spread of the virus. Visas have been cancelled and the country is in a virtual lockdown. The frantic buying of protective masks and hand sanitisers and the surge in prices of these items is a small indicator of the collective paranoia which has swept us. The WHO has declared the disease a pandemic.

In a situation like the current one, there is a thin line between paranoia and logic and the reinforcement of one leads to the natural erosion of the other. Having said this, let me clarify that the threat posed by the COVID-19 Novel Coronavirus pandemic is very real but our paranoid response to it is not. A scientific and historical perspective is thus essential to understand why the fear of the coronavirus in India is exaggerated, if not hyped.

Flu pandemics are among the commonest ones to affect the world. Three influenza pandemics occurred at intervals of several decades during the 20th century, the most severe of which was the Spanish Flu (caused by an A (H1N1) virus), estimated to have caused up to 50 million deaths in 1918-1919. The other two pandemics were the Asian Flu caused by an A(H2N2) virus in 1957-1958 and the Hong Kong Flu caused by an A (H3N2) virus IN 1968. Both were estimated to have caused 1-4 million deaths. A deeper analysis of these three pandemics reveals something interesting for the Indian context.

In a World Health Bulletin published in 1959, I G K Menon wrote that even at the peak of the Asian Flu pandemic of 1957, 44,51,785 cases of influenza were reported in India (in a population of 360 million at the time) with a case fatality rate of 242 deaths every million cases. The pandemic saw a total of just 1,098 deaths in the country. These figures are low when compared to the fatality of the pandemic in countries such as Singapore, Malaysia and China. There could be multiple reasons for this phenomenon, of which demographic patterns and the extant immune status of the population probably played an important role.

An analysis of the Hong Kong flu pandemic also reveals a similar picture. The pandemic, which reached India by September 1968, killed around 33,800 people in the US and had affected about 15 per cent of the total population of Hong Kong. Yet, its fatality rate was low in India. The exact number of deaths remains uncertain but multiple papers asserted that among the Asian countries affected, India reported a very low death rate.

Besides these major pandemics, other influenza outbreaks have also had a minimal effect in India. According to the US’s Centers for Disease Control and Prevention (CDC), the 2009 swine flu (H1N1) affected nearly 61 million people in the US. It caused 12,4699 deaths in the US and 5,75,400 deaths worldwide. On the other hand, India reported 33,761 cases and 2,035 deaths from swine flu. The lower death and infection rates in India can again be attributed to many sociodemographic and genetic factors. Other global pandemics have also followed a similar pattern. The Severe Acute Respiratory Syndrome (SARS) of 2003 and the Middle East Respiratory Syndrome (MERS) of 2012 are classical examples.

This historical perspective on influenza pandemics in India notwithstanding, it is imperative to take action against the ongoing COVID-19 pandemic. But to believe that we are facing an apocalypse and react accordingly is sheer madness. Yes, we must not lower our guard but we must also not fall prey to propaganda.

It is interesting to note that there are businesses that do quite well out of disease. During pandemics like the present one, the sales of respiratory masks, hand sanitisers, anti-fever medicines and similar drugs have skyrocketed. According to data from the All Food and Drug License Holders Foundation (AFDLHF), the total market for masks has swelled up to Rs 450 crore over the last two months alone, from about Rs 200 crore annually. Donald Rumsfeld, former US Defence Secretary, has made more than $5 million in capital gains from selling shares in the biotechnology firm that discovered and developed Tamiflu, the drug which was bought in massive amounts by different governments to treat a possible bird flu pandemic.

It is important to know that we are neither China, Japan nor Italy. In a country like ours, where health struggles to find mention in the common political discourse, it is assuring that the current pandemic has caught the national imagination. But we must remember that the health of a nation is not measured by its response to pandemics. It is determined by the health of its poor, its women and its children. Unfortunately, we have failed them at every level.

Our national consciousness should be equally sensitive to diseases like tuberculosis and malnutrition, which kill more people than all the influenza pandemics put together. We need to be vigilant but not vehement in our response to the coronavirus pandemic. The best option would be to undertake a dynamic risk assessment of the situation using available scientific and historical knowledge and to maintain trust and confidence between the organisations and people who are at the helm of affairs. If we are to avoid the so-called coronavirus apocalypse, we need to be guided by evidence, science and collaboration, not hype, hyperbole and impulse.

The writer is professor of orthopaedics, AIIMS, New Delhi. Views are personal

Faced with severe challenges to the economy, the government has proved to be clueless and timid

P Chidambaram

The so-called tax concession given to the income tax payer in the lower brackets has cluttered the tax structure and created confusion.

Budget 2020-21 was presented on February 1, 2020. It made the headlines and was the subject of editorials on February 2 but, on the next day, it practically vanished from the front pages of newspapers and from television channels. It was like a movie that bombed on the first day.

The BJP, the Prime Minister and the Finance Minister have to blame themselves. They cannot blame the Chief Economic Adviser (who gave some sound advice in the Economic Survey) or the economists and the businesspersons who met the PM for pre-Budget consultations. There were many ideas on the table. Reflecting the buzz in the markets, I had, in my column of January 26, listed 10 things that the FM could do in the Budget.

If the FM did not heed the advice of the CEA or the economists or yield to the demands of businesspersons, it was because of the following reasons:

1. The government is in denial

The government has not accepted that demonetisation and a flawed GST were monumental mistakes that killed MSMEs and destroyed jobs. It has not acknowledged that the slowdown is due to declining exports, instability in the financial sector, inadequate credit supply, lower household savings and reduced consumption, collapse of mining and manufacturing, and pervasive uncertainty and fear. Unfortunately, the FM made no reference in her speech to these negative features of the economy.

2. The government’s assessment of the state of the economy is hopelessly wrong

The government believes that the slowdown of the economy is due to cyclical factors and the upturn will happen if they do more of the same — scrounge for money, put more money into on-going programmes, and announce new programmes. If the causes of the slowdown are more structural than cyclical — as many economists believe — the government has virtually foreclosed the options it had to revive the economy.

3. The government’s ideological pre-dispositions are obstacles to revival

The government believes in outdated philosophies like protectionism, import substitution, a ‘strong’ rupee etc. It does not believe in the multiple benefits of external trade and seems to have given up the effort to find ways to boost exports. It has embraced the retrograde idea of increasing import tariffs. It also appears reluctant to let the rupee find a more realistic level. Given these pre-dispositions, the government finds itself short of solutions.

4. The government is unwilling to reverse measures that have deepened the distrust between the government and business

The government has criminalised many economic laws. It has conferred extraordinary powers on even the lowest-rung officers of the tax-collecting departments and the investigating agencies. Tax collection has become tax terrorism (remember V G Siddhartha). The process of contesting or paying the taxes that are demanded — the process itself — has become the ultimate harassment. The Charter of Rights of Taxpayers promised by the FM has provoked a cynical reaction — why doesn’t the government simply withdraw the carte blanche given to the authorities and agencies?

5. The government has proved itself to be an incompetent manager

From demonetisation to GST, from Swachh Bharat Mission to electrification of homes, from Ujjwala Yojana to UDAY, every programme has serious shortcomings. Unfortunately, the government lives in an echo chamber and hears only adulatory responses. Hence, while humongous amounts of money have been spent on these programmes, the outcomes have been unsatisfactory. The administrative machinery lacks the capacity to improve the implementation or report the true outcomes.

Therefore, there is no surprise that the FM settled for a lacklustre Budget, modest nominal growth of GDP and misplaced optimism about tax revenues. While nominal GDP is estimated to grow at 10 per cent, gross tax revenues are estimated to grow at 12 per cent — an unlikely outcome. Further, the estimated revenues were distributed among a number of programmes — good and bad — as a result of which there was little scope to allocate more funds to programmes that would have ensured that more money reached the hands of the poor quickly. Funds have been unspent in the current year or slashed in the next year for MGNREGA, the Mid-day Meal Scheme, food subsidy, PM Kisan Samman etc. I do not foresee a rise in rural incomes/wages or household consumption.

The so-called tax concession given to the income tax payer in the lower brackets has cluttered the tax structure and created confusion. The estimated benefit of Rs 40,000 crore is not certain and, any way, too small to be impactful.

Nor is there any incentive that will boost private investment. The abolition of DDT has merely shifted the burden of the tax from the company to the shareholders. Besides, when capacity utilisation in manufacturing is at about 70 per cent (thermal power generation is at about 55 per cent of installed capacity), there is little scope for new investment.

In sum, the FM has not addressed the needs of a demand-constrained and investment-starved economy. Nor has she appreciated the multiplier effect of boosting exports. She was compelled to rely on one engine — government expenditure — but that engine too is short of fuel and the spectre of fiscal instability looms over the government. She has also ignored the two most pressing issues — massive unemployment and closure of MSMEs.

Faced with the most severe challenges to the economy in recent years, the self-proclaimed strong and decisive government has proved to be clueless and timid.

A Brief Exercise in Not Taking the Economic Survey 2020 Seriously

S. Subramanian
This is a quick summary review of the latest Economic Survey (2019-20). I have to admit that this quickly-written assessment is a product of an equally quickly-read Survey. If I have not quite pored over it, it is because I found no evidence in the Survey to suggest that it is a document that was intended to be taken seriously – solemnly perhaps, but not seriously. Under the circumstances, I hope I will be forgiven for having spared myself the ordeal of a detailed study of the Survey, and the reader the even greater ordeal of a detailed review of it. Hence this considerately brief commentary.

The Survey is in two volumes, Volume 2 being given over to a purported assessment of the state of the economy, and Volume 1 to the—ah—philosophical perspective guiding it. As far as one can tell, the Vision directing the enterprise seems to be inspired by an infatuation with the perceived virtues of wealth creation and the market. These virtues are seen to be embedded in our civilisational origins (there is much talk of Kautilya and the Thirukural in this tract), and they are extolled with a somewhat startlingly passionate ardour for freedom of the market and against intervention by the government.

In the event, Volume 1 reads like a bewildering advertisement of ancient wisdom seeking and finding endorsement in an essentially rudimentary business school view of the world. This combination of ideas and orientations, executed in somewhat individualistic prose, is inspiring—or at least weird if, like me, you are an elderly codger groping in the dark, and old enough to remember that this country once had a CEA of the likes of Ashok Mitra.

And when you encounter reference to our ‘dalliance with socialism’ (presumably in the dark ages before this New Dawn), then things begin to fall into place a little more clearly: you are enabled to see that if the ‘democratic’ and ‘secular’ aspects of our republic, as vouchsafed in the preamble to our constitution, are currently under a new fix, then so is its ‘socialist’ aspect. That, regrettably, is when the jaw starts sticking out and you begin muttering to yourself.

Not that that’s of much help in enabling you to understand why the Survey believes that there is no basis to the criticism that recent growth rates under the NSO’s revised methodology might have been overestimated. Yes: there is actually a chapter in Volume 1 titled ‘ Is India’s GDP Growth Rate Overstated? No!’ All that stuff on civilisation and culture and tradition must have been infectious, because when I encountered the chapter, I was reminded of that old Tamil saying: ‘my father is not in the granary’ (this being the young boy’s defensively blurted declaration in the story about the debt-collectors from whom the lad’s father was hiding).

In the bibliography to the chapter, I found references to quite a few articles taking issue with Arvind Subramanian’s recently expressed reservations on growth rate estimates, but one will search in vain for any engagement with the work of R Nagaraj, the most consistent and meticulously careful commentator on the subject. Just saying.

Finance minister Nirmala Sitharaman is flanked by junior finance minister Anurag Thakur as she arrives to present the budget in Parliament in New Delhi, February 1, 2020. Photo: Reuters/Altaf Hussain

The best is reserved for the last chapter of Volume 1. The chapter, titled ‘Thalinomics’, is an affecting reminder of the Survey’s continuing concern, first reflected in its 2018-19 number, for the common man: ‘What better way to continue this modest endeavour for forcing economics to relate to the common man than use something that s(he) encounters everyday—a plate of food?’ In this cause, we are treated to an extraordinary exercise. Vegetarian and non-vegetarian thalis are constructed and costed in terms of the quantities and prices of their respective ingredients.

A linear trend line for the cost of a thali at current prices is fitted on price data from 2006-07 to 2015-16, from which point in time the price of the thali tends to fall away from the trend line. The difference between the trend (‘counterfactual’) price and the actual price in 2019-20 is calculated, and annualised estimates of the difference—for both a vegetarian and a non-vegetarian thali—are computed and presented as gains to the common man from benign government policy on thali prices: these gains, one understands, are notional estimates of savings arising from things being not as bad as they might have been under a particular, different scenario. The greatest good that can be done to the common man, it appears, is to invite him to count his blessings, considering that things might have been a good deal worse than they are.

Having said this, there is something else in the numbers put out on thalis by the Survey which seems to have quite completely escaped its authors. From Figure 1 (‘Thali Prices at all-India Level’) of Chapter 11, it appears that the cost of a vegetarian thali in 2019-20 is in the region of Rs. 23, and of a non-vegetarian thali, Rs. 37. With weights of 0.3 and 0.7 for vegetarian and non-vegetarian thalis respectively—these are the population proportions of vegetarians and non-vegetarians in India—the weighted average cost of a thali for 2019-20 might be taken to be in the region of Rs. 32.8. The Survey allows for two thalis a day per person, which works out to Rs. 65.60 as the cost of food per person per day.

The Tendulkar Committee poverty lines favoured by the Niti Aayog are Rs. 27 (rural) and Rs. 33 (urban)—or, crudely, say, an average of Rs. 30—per person per day at 2011-12 prices; allowing for a 150% rise in prices (which is roughly what is displayed by the Consumer Price Indices of Agricultural Labourers and Industrial Workers) between 2011-12 and 2019-20, the poverty line in 2019-20 at current prices would be of the order of Rs.45—which is less than 70% of the Rs. 65 (according to the Survey’s own estimate) that would be needed to avoid hunger! That is to say, a person with an income that is 144% of the official poverty line can keep hunger at bay only by completely emptying out his pockets. Thalinomics, in short, shades off into Khalinomics. My apologies, but as indicated earlier, the mood and language of the Survey tend to be painfully catching.

As for Volume 2, well, it doesn’t always quite tally with what a number of economists have read into recent trends in the economy. No doubt it is benighted, if not downright sinister, to entertain the thought that we are looking at a profoundly demand-constrained downturn in the economy, marked by serious rural distress, depressing tendencies in manufacturing output and exports, unprecedentedly high levels of unemployment, opaque estimates of the fiscal deficit, and governmental suppression or/and criticism of data sources that paint an unflattering picture of the economy.

The Labour Force Participation Survey was released only after the elections, and no doubt it would be sensible to wait for the budget to be presented before releasing the NSO’s Consumption Expenditure Survey for 2017-18, the leaked report for which presents a sorry tale of consumption downturn between 2011-12 and 2017-18. As for what the long-term term effects of demonetisation or the continuing impact of GST on the economy might be, why delve into recent history when we have the comforts of ancient history to see us through? Even the IMF and the World Bank, not to mention various credit-rating agencies, have downgraded projected growth beyond what the Economic Survey will do.

And why not? This Survey is about wealth and entrepreneurship and free markets and privatisation, not about poverty or inequality or public employment schemes. The philosopher P.G. Wodehouse frequently reminds us of the girl Pollyanna who was given, at all times, to being ‘glad, glad, glad’; and like his immortal character Gussie Fink-Nottle, we too must set our faces against pessimism. That would be in the spirit of the Economic Survey, which has no use for the low opinion of his fellow-humans’ interest in their own wellbeing that a scurvy fellow like David Hume (unlike Kautilya, apparently) entertained. Indeed, the reader is exhorted along the following lines in the Preface: ‘We hope readers share the sense of optimism with which we present this year’s Survey.’

In one of his essays, Albert Camus describes a brutal boxing match which is preceded by the soothing strains of a violin. He calls it ‘the sentimental music before the massacre.’ For all that the reader might have been led to believe otherwise from this review, the Economic Survey is just like that. It is the sentimental music before the massacre.
 

For on the day after came the budget, with its distressingly inseparable twin, the budget speech.

The author is an economist, independent researcher, former National Fellow of the Indian Council of Social Science Research, and a retired Professor of the Madras Institute of Development Studies.

Continuity and fiscal follow-through

M.Govinda Rao
The appointment of the Fifteenth Finance Commission by the President of India under Article 280 of the Constitution was notified on November 27, 2017. It was required to submit the report by October 30, 2019 for five years for the period 2020-21 to 2024-25. However, due to various political and fiscal developments, notifications were issued first, on July 27 extending the tenure of the Commission up to November 30, 2019, and again on November 29 requiring it to submit two reports, one for 2020-21 and the second covering the period of five years beginning April 1, 2021 and further extending the tenure up to October 30, 2021. The first report submitted by the Commission was placed in Parliament by the Union Finance Minister before presenting the Union Budget on February 1, 2019.

Basis for extension
There were good reasons for extending the tenure of the Finance Commission as making medium-term projections in the current scenario would have entailed serious risks. First, the abolition of Statehood to Jammu and Kashmir required the Commission to make an estimation excluding the Union Territory. Second, the deceleration in growth and low inflation has substantially slowed down the nominal GDP growth which is the main tax base proxy; making projections of tax revenues and expenditures based on this for the medium term could have posed serious risks. Finally, poor revenue performance of tax collection and more particularly Goods and Services Tax combined with the fact that the compensation agreement to the loss of revenue to the States was effective only two years of the period covered by the Commission’s recommendations posed uncertainties.
On projections

The Commission has continued with the approach and methodology adopted by the previous Commissions for tax devolution and revenue-gap grants. It has made projections of revenues and revenue expenditures of the Union and individual States, applied selective norms to the latter, recommended devolution of taxes to the States from the divisible pool, and recommended revenue deficit grants for the States which had post-devolution gaps. Although there were apprehensions that it may deviate from past practice as the terms of reference of the Commission had indicated, “The Commission may also examine whether revenue deficit grants be provided at all”, it continued with the past practice.

By stating that, “…stability and predictability of resources is an essential component of good long-term budgeting for both Union and States”, the Fifteenth Finance Commission continued with the recommendation of the previous Commission relating to vertical division of taxes, and adjusted the States’ share to 41% to exclude the share of Jammu and Kashmir. There were media reports that the share would be reduced and by maintaining the share, the Commission has avoided controversy.

However, for the period 2021-25, it has stated: “Our recommendation in the final report would undergo changes and adjustments as appropriate, in the light of subsequent data and analysis”. For the horizontal shares, however, the formula has been changed to consider “fiscal needs, equity and efficiency”.

Addressing States’ concerns
In addition to income distance, population and area and forest cover, it has used two additional factors — demographic performance and tax effort. It has assigned 15% weight to the 2011 population, reduced the weight of income distance to 45%, increased the weight to forest cover and ecology to 10% and 12.5% weight to demographic performance and 2.5% weight to tax effort. There was considerable controversy over the terms of reference of the Commission requiring it to use 2011 population in its formula by the States that had taken initiatives to arrest population growth.

By keeping the weight of 2011 population at 15% and giving an additional 12.5% to demographic performance which is the inverse of fertility rate, the Commission has shown sensitivity to the concerns of these States.

In terms of relative shares in tax devolution, among the major States the biggest loser is Karnataka followed by Uttar Pradesh, Kerala, Telangana and Andhra Pradesh. Kerala and Andhra Pradesh have post-devolution gaps and hence qualify for revenue gap grants. The major reason for Karnataka and Kerala losing on devolution is that their per capita income growth has been faster than most other States. The difference from the highest per capita income in both Karnataka and Kerala is just about 10% now as compared to 34% and 23%, respectively, for the two States when the Fourteenth Finance Commission made the recommendation. In the case of Karnataka and Telangana, as the projected transfer (devolution and revenue-gap grants) in 2020-21 were lower than 2019-20, the Commission recommended a special grant of ₹5,495 crore and ₹723 crore, respectively. However, the government has not accepted the recommendation and has asked the Commission to reconsider it.

Local body grants
The recommended grants for local bodies amount to ₹90,000 crore comprising ₹60,750 crore for panchayats and the remaining ₹29,250 crore for municipal bodies. All the three layers of panchayats will receive the grant and 50% of the grant is tied to improving sanitation and supply of drinking water; the remaining is untied. In the case of municipal bodies, ₹9,229 crore is allocated to cities with a million-plus population and the remaining ₹20,021 is allocated to other towns. In the case of disaster relief, the Commission has recommended the creation of disaster mitigation fund at the

Central and State levels. For disaster management, a total of ₹28,183 crore has been determined of which the Central contribution will be ₹22,184 crore. Inter-State allocation is made based on past expenditures, area and population and disaster risk index.

The Commission has worked out a framework for giving some sectoral grants as well. For 2020-21, it has recommended ₹7,735 crore for improving nutrition based on the numbers of children in the 0-6 age group and lactating mothers. In the main report, it has proposed to give grants for police training, modernisation and housing, railway projects in States taken on a cost-sharing basis, maintenance of the Pradhan Mantri Gram Sadak Yojana roads, strengthening the judicial system, and improving the statistical system. The States are required to prepare the necessary grounds. It has also presented a broad framework for recommending monitorable performance grants for agricultural reform, development of aspirational districts and blocks, power sector reform, and incentives to enhance trade including exports and pre-primary education. The challenge, however, will be to design and dovetail sectoral and performance grants with the existing plethora of central sector and centrally sponsored schemes.

M. Govinda Rao is former Director, National Institute of Public Finance and Policy (NIPFP) and Member, Fourteenth Finance Commission