Putting the Cart before the Horse, India Agri policy

 

Every finance minister wants their first budget to be a path-breaking one in giving fresh impetus to the economy, unleashing the “animal spirits” of the investor community and above all, raising the overall economic growth with due safety and stability. In this aspect, the first budget speech of the union finance minister, Nirmala Sitharaman, if not pioneering, is definitely resplendent in laying out a 10-point vision for making “a $5 trillion economy of India by 2024.”

Such a vision about the evolution of the economy cannot be accomplished merely by crunching numbers in the budget, but requires relevant policy initiatives, some of which Sitharaman’s budget had incorporated.

 

Yet it is hard to dismiss that the feasibility of such massive transformational planning does call for some evidence-based policymaking at the various levels of governance. In this context, one thing that is expected of the finance minister is to bring trust and transparency in the numbers/estimates accounted in the budget. However, the veracity of the estimates of some crucial macroeconomic indicators presented in this budget—such as the fiscal deficit—has been a matter of contention.

The fiscal deficit is a macro-number that is carefully watched by the investor community. But the finance minister’s estimates of this being at below 3.5% of the gross domestic product (GDP) for the 2018 financial year (FY) has been challenged by the Comptroller and Auditor General’s (CAG) estimates of 5.85% (due to off-budgetary borrowings by the public sector undertakings) on the one hand, while on the other, a recently published report in the Financial Express has put it at 6.1% for FY2019, based on a methodology that is similar to the CAG’s.

 

At the same time, the estimates related to the agri-food sector do not lend much credibility to the “transparency” aspect of the estimates in the budget. The subsidies on food and fertilisers are under-provisioned every year, in the budget. As a result, the Food Corporation of India (FCI) keeps borrowing from the banks and National Small Savings Fund (NSSF), and its borrowings crossed ₹ 2.48 lakh crore in FY2019 (Figure 1, p 34). The current budget provisions a food subsidy of ₹ 1.84 lakh crore for FY2020, while the overdues of the FCI are already at ₹ 1.86 lakh crore.

Thus, in the case of the food subsidies, there is more under the carpet than in the budget. An almost similar picture emerges in the case of the fertiliser subsidies. A provision of ₹ 80,000 crore is made in the budget on this account. But the Fertiliser Association of India (FAI) claims that the government has not cleared their dues of ₹ 38,000 crore, which by the end of FY2020 are likely to cross ₹ 50,000 crore. Under such a situation, how can the budget bring any cheer to the fertiliser industry or for that matter even to the FCI?

 

 

But the real issue for us is to see whether the budget has agri-food policies and programmes that can bring fresh momentum to agricultural growth. So, the relevant question is: can it put agriculture on the trajectory of the 4%-plus GDP growth path on a sustainable basis and also help augment the farmers’ real incomes?

 

 

Growth in agriculture depends upon investments, and incomes of the farmers from agriculture depend on productivity and profitability, which takes into account the prices of inputs and outputs. Investments in agriculture have been falling lately, from a peak of 18.2% of the agricultural GDP in 2011–12 to 13.8% in 2016–17.1 Private sector investment comprises more than 80% of the overall investments in agriculture.

But with the profitability in agriculture being under squeeze, there is no hope and sign of revival of the private sector investments in the sector. The demand for tractors, for example, has dropped by more than 13% over past one year. This is not good news for agriculture.

 

Given this setting, now the real burden of propelling agriculture is on public investments. Our earlier research found that the marginal returns of public investments on agricultural research and development (agri-R&D) are way higher than those from the investments in roads, education, irrigation, or subsidies on power, fertilisers, and irrigation water (Gulati et al 2018).Under the standard national accounts, however, public investments in agriculture basically comprise of the investments in irrigation.

In this context, it would be good to look at the public expenditure outlays on the agri-food space as provided in the budget documents.

 

Cart before the horse: Table 1 gives this break-up under four heads:

(i) the safety nets, which include public expenditures on three major programmes, namely food subsidy with an outlay of ₹ 1.84 lakh crore, the Pradhan Mantri Kisan Samman Nidhi (PM-Kisan) that has started from 2019 with a budgetary provision of ₹ 75,000 crore, and the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) programme with an outlay of ₹ 60,000 crore,

(ii) input subsidies like fertilisers, interest subvention on short-term credit, premium subsidy on crop insurance, and

(iii) the public investments as in the Pradhan Mantri Krishi Sinchayee Yojana, the Pradhan Mantri Gram Sadak Yojana, etc, and finally

(iv) other development schemes that come under the Ministry of Agriculture and Farmers’ Welfare (MoAFW).

 

 

As one can see from Table 1, the public expenditure pattern given in the union budget is highly skewed in favour of the safety nets. Food subsidy is the most dominating budgetary item as far as the agri-food space is concerned. The real burden of food subsidy alone amounts to ₹ 3.7 lakh crore, part of which is the cumulative dues of the FCI (₹ 1.86 lakh crore) and part is the annual allocation for FY2020 (₹ 1.84 lakh crore).

Along with this, the two other big items are the MGNREGA and the PM Kisan. Next comes the public expenditure on input subsidies. In comparison to the cumulative expenditures on the safety nets and the input subsidies, the expenditures on public investment (₹ 41,776 crore) and development schemes (₹ 11,611 crore) related to agriculture (Table 1) are much, much smaller.

 

It appears that India has already become a welfare state before generating enough wealth. It has actually put the cart before the horse! Such policies and patterns of public expenditure can neither deliver higher agricultural growth nor increase farmers’ incomes on sustainable basis. The budget, however, is totally silent on any reforms for the agri-food sector. Let us now pick up some of these mega public expenditures, and see what could have been done for higher growth of agriculture and higher incomes for farmers on a sustainable basis.

 

Food subsidy:

First and foremost is the food subsidy, which is already going through the roof, potentially as the result of the United Progressive Alliance (UPA) government’s flagship National Food Security Act (NFSA) passed in 2013. Under this, 67% of the population is being given rice and wheat at ₹ 3 a kilogram (kg) and ₹ 2 a kg respectively, while the economic cost of rice to the FCI is around ₹ 35 a kg and that of wheat is about ₹ 25 a kg.

Open market prices in several rural areas of the country are actually even less than these economic costs of the FCI. After three years since its inception the NFSA does provide for any revision of the issue prices. But this government has not tried to raise these prices.

 

One can understand the political expediency of not raising these prices before the elections. But now after a strong mandate, if the Narendra Modi government does not fix this, it is going to bleed agriculture even more—resources will dry up due to the dearth of any boost in investments that are needed desperately. The point to ponder is: do we really need to provide safety net at 90% subsidy level to 67% of the population? My humble answer is a “no.”

 

We urgently need to rationalise this subsidy to release resources for more productive investments.

First, we need to limit the beneficiaries to about 30% of the population. The Shanta Kumar panel set up by this government during its previous tenure had recommended the share of the beneficiaries at 40% of the national population in January 2015. Second, the issue prices need to be linked to at least 50% of procurement prices. Third, a gradual move towards direct cash transfers to the beneficiaries’ accounts to enable them to buy any food from the open market is needed. It can start from the urban areas, and grain-surplus states.

 

This would reduce the pressure on the FCI to procure large quantities from states where the water table is going down at an alarming rate such as Punjab. The FCI can still keep strategic reserves of grains to the tune of 15 million–20 million metric tonnes, and the procurement also needs to shift to the eastern belt where the market prices of paddy are often 20%–30% below the minimum support prices (MSP).

All these changes—if rolled out over the next two to three years—can release a minimum of ₹ 50,000 crore from the food subsidy bill on a yearly basis, which can be invested in agri-R&D and better irrigation and water management. If the current government does not act now, it will lose the golden opportunity to fix the irrationalities in the food and agriculture sector.

 

PM Kisan:

With an allocation of ₹ 75,000 crore, this is a new policy based on an income approach. It endeavours to directly transfer money to the farmers’ accounts. Before the 2019 parliamentary elections, the small and marginal farmers, constituting about 86% of the total peasantry in the country, were declared as potential beneficiaries. But now this scheme is extended to each farming family, irrespective of their farm sizes, at the rate of ₹ 6,000 per year. This amounts to roughly 5% of the annual income on an average farming household.

It would be more meaningful to merge the subsidies on fertilisers, agri-credit and crop insurance with this amount and transfer the sum directly into their accounts. The sums will be bigger, and it may empower the farmers to choose the best options. It will further give a fillip if the food subsidy is also merged with this sum, at least for all small and marginal farmers. Then, and only then, the PM Kisan will mark a tectonic shift in policy.

 

Broadly, what all this will imply is that the government can move away from the policy of subsidising farmers to that of augmenting their incomes directly. This switch from price policy approach to income policy approach will reduce leakages, would be environmentally better, and create least distortions in markets, thus promoting the efficient use of resources. Can the Modi government do it? The budget does not mention anything about it. It simply lacks that vision for the agri-food sector.

 

Zero budget farming:

What it has instead is a move towards Zero Budget Natural Farming (ZBNF). To the extent we know about this, it uses dung of a desi cow (not cross-bred), its urine, jaggery, dal, etc, in certain proportions (under jivaamrit) to activate the soil bacteria, uses mulching that is highly labour-intensive, and so on. If this is the line along which the country wants to promote its agriculture, the method needs to be systematically evaluated by independent experts.

However, the large subsidy on chemical fertilisers in the budget (₹ 80,000 crore) encourages farmers to use more chemical fertilisers, which is contrary to the objective of ZBNF. In such a situation, it will make all the more sense to convert fertiliser subsidy into direct cash transfers to farmers and let them choose whether they want to use chemical fertilisers or the jivaamrit of ZBNF.

 

Credit and R&D:

Let us now take the case of interest subventions and loan waivers in the agri-credit system. Though no nationwide loan waiver is announced in the budget, there is indication of zero interest rate on short-term crop loans. This has often led to the misuse of agricultural loans. There are several states (more notably in the south, like Kerala, Tamil Nadu, etc), where the agricultural loans exceed the total value of the inputs used in farming.

In fact, in many cases the loans even exceed the value of the agricultural GDP. This is suggestive of the fact that these so-called agricultural loans are being diverted to non-agricultural uses, and the cause behind that is the policy of interest subvention. The finance minister needed to rationalise this policy but the budget is again silent on this.

 

Further, the budget has allocated ₹ 8,079 crore (about $1.2 billion) for agri-R&D, which is literally for the whole country and for all crops. This allocation has remained almost unchanged from the previous year’s budget. In contrast, just one global company, Bayer, had spent $2.3 billion (about ₹ 16,000 crore) on agri-R&D in 2018.

If India’s public agri-R&D outlays cannot even compete with one global company’s expenditure on agri-R&D, how can we even dream of making our farmers globally competitive and increase our agricultural exports as envisioned by the finance minister in her 10-point agenda? During the last five years agricultural exports from this country evidenced negative growth rate. The peak of $43 billion (about ₹ 3,00,000 crore) worth of agricultural exports reached in 2013–14 has not yet been touched under the Modi government.

 

Lastly, this budget is not in sync with the Bharatiya Janata Party’s (BJP) 2019 election manifesto. The BJP had promised to spend ₹ 25 lakh crore in agriculture in the next five years to bring this sector on track. From that angle, this budget should have provisioned at least ₹ 5 lakh crore for agri-investments, be it irrigation, R&D, rural roads, rural electrification, or several other agricultural development schemes under the budgetary head of the green revolution.

But all these investments and development schemes add to just ₹ 53,387 crore (Table 1, p 34), which is about one-tenth of the promised amount!

 

With this massive divergence between promises and budget provisions, how can one hope that the agriculture sector can recover from the stress that it has been undergoing during the past five years? It may be worth noting that the annual average agricultural GDP growth during the previous tenure of this government—that is, from 2014–15 to 2018–19—was only 2.9% compared to the 4.3% under its predecessor in 2009–10 to 2013–14.

And with the budget of FY2020, it does not appear that the fate of the Indian agriculture can be improved and the Prime Minister’s motto of doubling farmers’ incomes by 2022 will remain a pipe dream.

 

 

The union budget for FY2020 remains a pedestrian budget as far as the agri-food space is concerned. There are neither any bold moves on the policy front, nor any big allocations for investments and development schemes. What it has is massive welfare programmes of food subsidy and MGNREGA, which are predominantly the remnants of the UPA’s welfare policies, and now topped by the PM Kisan.

The vision for higher growth, higher productivity, and environmental sustainability of agriculture is missing. If this structure continues for the next four more budgets of the Modi 2.0 government, I am afraid, Indian agriculture and peasantry will keep limping without much relief. The wisdom lies in using the massive political mandate that Modi 2.0 has got to usher in major structural reforms in the agri-food space as early as possible, so that this complex sector—that can touch the lives of the majority of Indians—is put on the path of efficiency and sustainability. Only then the image of inclusiveness embedded in sabka saath, sabka vikas can hold water.