Although the Union budget is basically an accounting exercise of revenues and expenditures for the coming year, economy-watchers anxiously wait for the finance minister to announce major economic reforms. In that sense, the budget of 1991 remains a historic one that changed the course of Indian economy from being largely a socialist, state-controlled to a somewhat more liberal and market oriented economy. The results of exchange rate correction, trade policy changes, and delicensing of industry are there for everyone to see.
Foreign exchange reserves have shot up from $ 1.4 billion in July 1991 to more than $ 450 billion today. The biggest achievement of the 1991 budget is that has provided the economy with ample resilience against external shocks. On the economic growth front, expectations have been lifted from the famous “Hindu rate of growth” of 3.5 per cent per annum — a term coined by the late agri-economist Raj Krishna — to about 7-8 per cent. Any government that fails to deliver at least 7 per cent growth on a sustained basis for the next 10 years would be considered as failing on the economic front. The economic credibility of the Narendra Modi 2.0 government is at stake on this account. Can the budget unleash animal spirits and lift growth to 7 per cent? Here we focus on agri-food policies.
On top of the list would be the food subsidy. In the last budget, a provision of Rs 1.84 lakh crore was made for it. But the Food Corporation of India (FCI) had uncleared dues to the tune of Rs 1.86 lakh crore. This is simply “cheating” as we say in exams with regard to transparency in the Union budget. My first submission to the FM would be to ensure transparency and to fully account for the food subsidy. And if she, and the Prime Minister, as the buck stops with him for any major reforms, have the courage to reform this, the country can gain enormously.
I had explained in detail on what needs to be done in this regard in my last article (‘Lifting growth, containing inflation’, IE, January 6). Suffice it to say, the situation is getting worse by the day. Look at the picture at the beginning of the year: Against a buffer stock norm of 21.4 million tonnes (mt), the actual stocks of grains with the central pool stood at 75.5 mt, which is 3.5 times what the government needs to hold. At its economic cost, the value of the excess stocks with the government stands at Rs 1.6 lakh crore. This high level of “dead stocks” speaks of the sheer reluctance of the government to reform. There is no better place to find revenue for the FM than to liquidate these stocks. But actually, it’s a call for the PM to take. Unless he focuses on reforms, the inefficiency of the grain management system will keep on increasing and the nation will suffer.
It is also the time to revise the central issue of price and link it to the procurement price — say at half the procurement price. And if he can limit this highly subsidised food of Rs 3/kg for rice and Rs 2/kg of wheat to say 40 per cent of the population, he can certainly rationalise the food subsidy to a large extent. The real fundamental reform for Modi 2.0, however, would be if he moves towards direct cash transfers for the intended beneficiaries of food subsidy.
The next big ticket item is the fertiliser subsidy. This is again a sector that has been crying out for reforms for a long time. While the fertiliser subsidy in the last budget was provisioned at around Rs 80,000 crore, there were pending bills of the fertiliser industry to the tune of Rs 39,000 crore. The fertiliser industry today is demoralised and even the best of the private sector players (like the Tatas), with the most technically efficient plants, have quit this sector. For new plants, no new private sector player is enthused. Further, the government has also forced its public sector units to invest in five new urea plants whose costs remain murky and certainly higher than the average cost of the existing units.
The real problem of this sector is the imbalance in the policy of fertiliser subsidisation: While urea (N) is subsidised to the extent of 75 per cent of its cost, phosphatic (P) and potassic (K) fertilisers are subsidised only to the tune of about 25 per cent of their cost. The result is the highly imbalanced use of N, P and K on farmers’ fields, giving a very low fertiliser-to-grain response ratio, and degrading the soil, underground water, and even the environment with excessive nitrogen use. All this is nothing short of cruelty to our natural resources, and farmers, especially those who want to pursue natural farming as they don’t get subsidy anywhere near the amount chemical-based fertilisers do. The solution to this is either bring nitrogenous fertilisers also under Nutrient Based Subsidy (NBS) scheme or better, to move towards direct cash transfers for fertilisers on a per hectare basis, with some adjustment for irrigated tracts (for instance, irrigated land could get 1.5 times the subsidy amount for unirrigated land due to the higher cropping intensity on the former).
If Modi 2.0 can usher in these two fundamental reforms in food and fertiliser subsidy, that is move towards direct cash transfers to the intended beneficiaries, he will go down in history for setting this sector on a sustainable growth path with minimum saving of Rs 50,000 crore annually. These savings can then be invested in better water management, especially drip irrigation (“more crop per drop”); for better infrastructure for agri-markets, which along with reforming the APMC laws will help farmers get better prices for their produce; in putting “solar trees” to harvest solar power on farmers’ fields with buy back arrangements for surplus power.
All such investments will go a long way to augment farmers’ incomes in a sustainable manner. Else, I am afraid, much of the talk in the Union budget for agri-reforms will remain mere rhetoric.
This article first appeared in the print edition on January 20, 2020 under the title ‘A farm wish list for the budget’. Gulati is Infosys Chair Professor for Agriculture at ICRIER.
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