Budget 2008 – Eyewash for the farmers

Thousand of farmer suicides and more importantly an election year finally resulted in a so-called farmer friendly budget or as the Congress put it, an ‘Aam aadmi’ Budget. Let me at this point forewarn you that a farmer friendly budget does not necessarily mean a ‘Poor Friendly’ budget! (Something that I will delve into in my upcoming article) The loan waiver of INR 60,000 crores (taxpayer’s money) that has been allocated for the cause is an eyewash and the most unfortunate part is that the farmers in actual need will not even realize that till the time they are educated about the glaring GAPs. The following are the questions that the farmers should ask of the government before they get their hopes up:

1- Will waive off be applicable to the loans taken from the non-institutional sources? The government has proposed waive off for farmers with small and marginal holdings. However, waive off is only applicable to the loans taken from institutional sources. This is perhaps the biggest GAP that the government should not have ignored. National Sample Survey Organization has highlighted in its findings that less than 60% of the indebted farmers have availed the loan from institutional sources such as Scheduled Commercial Bank, Regional Rural Bank, and Cooperatives. The 40% plus who are mostly small and marginal farmers for whom waive off is intended, have availed such loans from money lenders and therefore are not even eligible for the benefit. Therefore, who is the government actually benefiting? The answer is majority those farmers who are capable of paying off the loans.

The worst part is that such waive off will not only fail to benefit majority of those who are in actual need, but also that it will become counter productive. Waive off will breed inefficiency amongst the farmers who can pay as they will no longer have the incentive to increase productivity as they will now believe that every fourth year before election, the party in power will replicate, if not better the offer for the farmers. Consequently, agriculture sector that currently contribute only a dismal 2.3% of the GDP, will keep growing at the sluggish rate. (If not fall)

It is basic economics, marketing (failure to reach out to the target segment) and common sense that the incentive lacks!

2- Will waive off be implemented and benefit the ‘lucky few’ in need? The government spend INR 4/- for every INR 1/- of subsidy intended for the farmer. Therefore, is the government spending INR 60,000 crores or is it actually spending INR 15,000 crores? Further, the institutional sources are not exactly farmer friendly and would derive pleasure (if not tangible monetary benefit) from harassing those in need. The proposed implementation of smart card or vouchers would be a step in the right direction.

3- Why was the Price Risk Mitigation Fund as proposed by the Radhakrishna committee ignored? The fund that was proposed to compensate the farmers in case of a price collapse was required to provide a support to the small and marginal farmers and thereby provide them a cover against their propensity to fall into the clutches of the money lenders was conveniently ignored. This is the root cause of the farmer suicides and required special attention of the government.

4- What has the government done to increase the public investment in agriculture? Mr. P Chidmabram may pat himself on the back for increasing the rate of capital formation to 12.5% (FY-08) from 10.2% (FY 03-04), but one needs to ask him the performance in the agriculture sector. The rate of capital formation in the agricultural sector has in fact dipped from 8% (performance of previous NDA government) to 6% under the UPA government.

5- What has the government done for the long run benefit of the farmers? The INR 60,000 crores, as lucrative as it sounds is only intended to address the short run problems of the farmers. The fund could have been better utilized if a part of it was also diverted in providing better inputs (seeds) and irrigation facilities to the farmers. The problem of farmer debt will only resurface after 3-4 years if the root cause was not addressed. Consolidation of land holdings is another important step that should not have been ignored so blatantly. To conclude, let me reiterate that I am not pro/anti UPA. I believe every government in power would have done the same thing. Every government will unfortunately indulge freely in its predilections. This is the kind of inertia that has burdened the economy over the last 60 plus years of Independence.

Will India see some change leaders to address these issues?

This entry was posted on Monday, March 3rd, 2008 (I migrated from blog.co.in)

Budget 2008 - The Politics and Economics

The Finance Minister Mr. P Chidambaram would have prepared the final draft of Budget 2008 that he will be presenting on February 29, 2008. With an eye on the elections, what remains to be seen is that whether this will be an UPA budget aimed at appeasing the masses or the front has the confidence of proposing a budget for the long term sustainable growth of India. The INR 30,000 crores of debt waivers for the small and marginal farmers (refer to my previous article for the ills of such a policy) would indicate that getting re-elected is a top priority and not what is best for India.

The major issues that need to be immediately addressed by the budget are as under:

1- Inclusive Growth: It is the need of the hour that the benefits of a high growth rate generate more jobs. The current growth rate of jobs is 2.25% as against the desired level of 3.5% that is essential to reduce the unemployment backlog and for that to happen the Farm Labor needs to migrate to labor intensive sectors such as textile, food processing, retail, manufacturing, etc. The government needs to encourage FDIs in these sectors. Also, the government needs to give tax breaks to industries that employ labor intensive techniques rather than capital intensive techniques.

2- Agricultural Reforms: The largest employer of India contributes only 2.3% of the total GDP. This does not augur well for the sustainable growth of the economy at the rate of 8% - 10% in the long run. There has been negligible improvement in the irrigation facilities and the current state of infrastructure is appalling. The Finance Ministry needs to treat agriculture as an industry and pass on all the fiscal benefits that will act as a catalyst in increasing productivity. The marginal land holding needs to be consolidated and leased to farmer cooperatives. The acceleration of the creation of cold chain infrastructure will also be a shot in the arm for the agriculture sector. Perhaps Mr. Sharad Pawar needs to exhibit some dynamic leadership in the agricultural ministry that has been associated with him as far as the BCCI is concerned.

3- Fiscal Deficit: The government has been impounding on the public sector bank funds to finance its budget deficit. Nearly 46% of the Public Sector Bank funds are utilized for the said purpose. This hurts the interests of other sectors of the economy such as the manufacturing sector that depend on the Public Sector Bank for its resources. To discourage this, the Finance Ministry must look at privatizing the banks.

4- Tax Rebates: The debt accumulated by the centre is almost 86% of the GDP. This does not augur well for the economy and has potential of leading the country into a crisis situation. The Finance ministry may look westwards, especially at the US and imitate some of the fiscal policies adopted by it. Maybe tax rebates will act as an injection to the economy and will encourage the all important middle class of India to save more. Also, this will encourage them to use the extra money to increase expenditure that will be good for the economy in the long run.

5- Universalize the Integrated Child Development Scheme (ICDS) with quality: Children are the future of a country. A cliché that makes a lot of economic sense. The economy suffers a 2% - 3% loss to GDP due to the presence of malnourished children. Therefore the government should make it a top priority to universalize the ICSD. To universalize the ICSD means setting up of more than 1.4 million Anganwadi centres, amongst other measures that would ensure that 80 million children gets benefited. The Supreme Court order on December 13, 2006 to set up 1.4 million Anganwadi centre by December 2008 and the fact that the current UPA government had committed to the same in its National Common Minimum Program should ensure that it finds a place in the budget. This will require an investment approximately INR 33000 crores or 0.5% of the GDP. One can only assume that despite the political compulsions that takes away almost 98% of the Budget for Defense, subsidies, etc, the Finance Ministry has segregated 0.5% of the budget for ICDS keeping the Supreme Court directive in mind.

6- Not to succumb to self serving industrial agenda: When the Finance Ministry succumbed to Ratan Tata’s agenda of stopping the iron ore exports ‘at all costs’ and imposed an export tax on iron ore, it set a dangerous precedent that could push the economy backwards. Such a gullible tendency of the ministry will encourage other industries to lobby for similar steps that will serve their own interest. The fact is that currently the iron ore manufactured in India is far more that the demand for it. The export tax will burden the mining industry and will result in lower revenues and loss of jobs. Also, it will act as a disincentive to others who plan to invest in the natural resources. The fact is that such a policy may come back to haunt the Tatas (who make steel using the iron ore) as what stops industries such as automobile industries, consumer durables and construction industries from asking for a similar restrictions on the steel industry?

It is time for the Finance ministry to maintain a balance between political and economic compulsions. The Bollywood Badshah - Shahrukh Khan said in an NDTV wards function, “The politicians should be as honest as practically possible” in Mr. P Chidambram’s presence. Maybe that meassage would have sunk in!

This entry was posted on Wednesday, February 27th, 2008 (I migrated from blog.co.in)

Farmer Suicides – Is loan waiver a solution?

Quick fix solutions have always been the mantra of various governments whether it was the NDA or now the UPA. Years of lethargy and inaction has lead to crisis situations that the government at the centre tries to sweep under the carpet by taking desperate decisions. The decision of reservation for SC/ST was a political decision keeping in mind the huge vote bank. That was followed by the sealing/de-sealing drama. Now the government is chalking out plans to appease the largest vote bank of all; the farmers.

Farmer suicide cannot and should not be ignored. Ignore it at your peril as Mr. Chandrababu Naidu found out in Hyderabad. The present government has recognized that and as always has proposed a quick fix solution. It proposes to announce the waiving off the farmer loans on February 29, 2008 when the Budget will be presented by Mr. P Chidambram.

In case such a decision is taken, will it be an economic decision or will it be a political decision? Certainly neither BJP, nor the left will oppose this in parliament as nobody will want to be on the wrong side of the largest vote bank of India. Before we analyze this further, let us delve on a few nummers:

1- The agriculture segment employs the largest number of Indians.
2- It still contributes only 2.3% of the total GDP
3- Over 55% of the farmers produce only 17% of the total output
4- The proposed waive off can be anywhere between 32,000 crores to 90,000 crores.
5- The proposed waive off will be equivalent to almost 2% of the GDP.

Point 1 is perhaps the sole reason why any ruling party will want to take a populist decision and not an economically viable one. However, the teething problems that government will face are as under:

A- How to differentiate between large farmers who can pay off the loan and the small farmers who actually need the benefit? Will such a loan waiver reach the target beneficiaries? Going by the track record of the government whereby out of every rupee 1 of subsidy offered, only 27 paise reaches the target beneficiary (as per the Planning Commission report), it is going to be an arduous task. Improper implementation will mean huge burden on the economy with minimum benefit.

B- The loan waive off will be a short term solution. Most of the farmers have marginal land holdings that are not economically viable. Such bad debt will emerge again and again and therefore a loan waiver cannot be a permanent solution.

C- In light of Point B above, would it not be prudent to rather invest the amount in providing better irrigation facilities, better seeds, and better marketing support? This will be a long term solution.

Then again, with the elections round the corner, we all know that short term political interests will rule over long term National interest that is economically viable and sustainable.

This entry was posted on Sunday, February 24th, 2008 (I migrated from blog.co.in)