It’s time to make a distinction between the rich and poor farmer so that the welfare spending needed to fund the latter is partially offset by taxing the former
Agrarian distress has come to take centrestage in the Government’s political and economic discourse, more so after the Bharatiya Janata Party’s (BJP) electoral losses in the three Hindi heartland States of Madhya Pradesh, Rajasthan and Chhattisgarh. The Modi sarkar had originally intended to deliver on its commitment of doubling farmers’ income by 2022 without resorting to populist welfarism. But as farmers’ protests turned out to be more demanding, the ruling regime is hard-pressed for time to explore alternate avenues for imminent redressal as it is in its last lap of governance. With just three months in hand, it’s important that the Government gets the pulse of the voters right and strikes the right economic notes in its sixth and final Budget. This will, perhaps, be the most crucial Budget session that will greatly determine the electoral outcome for the BJP.
There are compelling reasons for the Government to deviate from an election-year convention to go beyond a vote-on-account by including bigger policy proposals in its last Budget. As vast sections of society need redressal of economic woes, the interim Budget is expected to increase the income tax exemption limit from Rs 2.5 to 5 lakh rupees to win over the middle class. It is also expected to vastly increase allocations for rural development. Raising outlay for the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGS) by nine per cent to Rs 60,000 crore and supplementing farmers’ income through an upfront subsidy via direct benefit transfer of annual income support capped at Rs 15, 000 per hectare are justifiable, given the prevalent agrarian distress. Deviation from fiscal prudence in difficult times warrants such consideration as it affects the livelihood of half of the population that disproportionately contributes to only a fifth of the Gross Domestic Product (GDP).
India remains a low per capita income economy since decades, with agriculture recording a contribution of just 15 per cent to the GDP in 2017, which is lower than what the manufacturing and service sectors contribute. As economies mature, the asymmetrical contribution of agriculture to GDP is a healthy and expected outcome. However, a proportionate lowering in the share of our dependence on agriculture as a livelihood needs to happen from the current 45 per cent in order to come closer to the global average of 26 per cent in the long-term.
The present Government has been more than sensitive in its response to rural concerns, having provisioned Rs 2.2 trillion in subsidies on fertiliser, power, crop insurance, seeds, credit, irrigation and massive programmes of procurement of grains at above market prices. The Indian Government continues to subsidise food grains for 75 per cent of the rural population; has continued with the guaranteed employment of the United Progressive Alliance (UPA) for 100 days to one adult in each rural household; tried to improve on the payment to a premium ratio of the Pradhan Mantri Fasal Bima Yojana; and set up e-markets for the benefit of farmers.
However, much more needs to be done by successive regimes and this not just as a crisis response. Solutions do not lie in band-aid measures like farm loan waivers, which only tend to disrupt the credit discipline of loans. Long-term solution lies in helping the farmers exit from agriculture and absorbing them into the manufacturing and services sector; acceleration of food processing industries, which would reduce distress selling as perishable produce is channelised for value-add through processing; a continued focus on employment generation programmes like ‘Make in India’ and ‘Startup India’; retaining the thrust on labour-intensive construction and infrastructure; hastening building of smart cities; and greater provisioning for MSME dispersal.
The intermediate solution to agricultural distress, which has seen a revival of interest by the Government, has been re-considering a Universal Basic Income (UBI), as some basic income will give partial monetary relief to farmers. In the course of economic surveys in the past, the Government had contemplated the possibility of implementing direct benefit transfers, even if it was a quasi-universal basic income, as proposed in 2017 by the then Chief Economic Advisor, Dr Arvind Subramanian. A quasi UBI (QUBI) identifies specific demographics and supports them with an unconditional basic income.
Given the three options to address farmer distress through either a loan waiver, a price support scheme, or an income support scheme, the best mid- term solution seems to be the QUBI proposed by senior agri-economists. The second option of a price support scheme (gap between MSP and market prices getting reimbursed) has been tried but could not deliver desired results as trader groups exploited it by artificially depressing prices to be paid to farmers. Also, as India is self-sufficient in food grains, increasing productivity and output is not the solution either as it would pose a marketing challenge and depress prices; while exporting the surplus would attract countervailing duties.
Looking at UBI beyond being just a pre-election measure, the option of modelling the scheme on the lines of Telangana’s Rythu Bandhu scheme is seen as most doable. If implemented on a pan-India level, it is estimated to cost more than Rs 2.5 lakh crore. One way proposed is to implement a scaled down version where marginal and small farmers are rewarded individually, instead of per acre. So, as per the cost calculated per person, it lowers drastically to Rs 60,000-70,000 crore.
The State’s adoption of the successful Rythu Bandhu DBT scheme launched in 2017, which benefitted 57 lakh farmers, is deemed as a proactive policy and not a last-minute populist measure as economists define it as an “investment rather than welfare policy.” Every farmer gets Rs 4,000 per acre per sowing season, therefore, Rs 8,000 per acre is in his bank account, whether he cultivates his land or not. This is the first farm income support scheme that complies with the World Trade Organisation (WTO) guidelines, which discourages input-based support schemes to farmers and instead gives out direct benefit transfers.
Suggestions to better the scheme include that aid should be linked to inflation, cost of production and risk in cultivation. Second, this scheme was viable because the revenue department took up a massive upgradation of land records after a gap of 60 years. Only States, that have a bank of land records, can implement such a scheme. Digitisation of records is, therefore, the key to such a scheme. Pilot studies on UBI in eight villages in Madhya Pradesh showed that outcomes were encouraging as villagers used the money allocated judiciously.
Given that agri-distress is turning into a dominant electoral theme, with little time left before the model code of conduct kicks in around March this year, it leaves little time to further examine the economic risk-reward of UBI. The essential principle behind basic income is the idea that all citizens are entitled to a liveable income, “whether or not they contribute to production and despite the particular circumstances into which they are born.”
While it is an egalitarian motive, in order to implement the UBI, existing welfare programmes would have to be terminated to free up the resources as UBI will then subsume all other welfare provisions. Consequently, the Government’s multiple welfare programmes such as the food subsidy or public distribution system (PDS), and subsidies on fuel, fertiliser, electricity and interest subventions, would have to be ultimately merged with the UBI in future. Current social welfare schemes cost India about 3.7 per cent of GDP but UBI is expected to cost 4.9 per cent of GDP. The question is: Where will this extra funding come from?
One answer lies in re-thinking the idea of taxing the rich farmer. Because in India, the agriculture sector is hugely unequal, both in terms of land holdings and incomes. While small agricultural households have to rely on non-farm wages to supplement their subsistence level income, those holding 10 plus hectares of land, while being only 0.4 per cent of all agricultural households, gain most from agricultural income being tax-free.
By taxing the incomes of the top 4.1 per cent of the total agricultural households, it is estimated that Rs 25,000 crore could be collected as agriculture income tax. At present, all agricultural income is exempt from income tax. While the provision is meant to protect small farmers, non-agricultural entities sometimes use it as a route to evade taxes by declaring agriculture as source of income. Land being a state subject, State Governments can impose appropriate taxes after determining the cut-off threshold, as the Centre has Constitutional restrictions. It’s time both the Centre and States make a distinction between the rich and the poor farmers so that the welfare spending needed to fund the latter is partially offset by taxing the former.
(The writer is author, columnist and Chairperson for National Committee on Financial Inclusion and Literacy for Women constituted at NITI Aayog)
