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Budget 2018
Last Updated : Jan 20, 2018 04:10 PM IST | Source: CNBC-TV18

Balancing growth & deficit: What can Budget 2018 do to boost agriculture?

While Budgets, at one level, are just statements of income and expenses, in India, the Budget speech is also the government’s statement of policies and intent and with FY19 being the last year of the National Democratic Alliance (NDA) government’s term and with a rather strong rejection by some voters in rural districts in Gujarat, the Budget 2018 is expected to have a farm focus.

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While Budgets, at one level, are just statements of income and expenses, in India, the Budget speech is also the government’s statement of policies and intent and with FY19 being the last year of the National Democratic Alliance (NDA) government’s term and with a rather strong rejection by some voters in rural districts in Gujarat, the Budget 2018 is expected to have a farm focus.

On the other hand, the previous Budgets have been emphasizing investments in roads and railways in a bid to pull in the missing private capex piece in the Indian economic growth story.

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So what can one reasonably expect from the current Budget by way of a growth stimulus is the big question today.

In an ongoing pre-Budget series, Balancing Growth and Deficit, CNBC-TV18’s Latha Venkatesh speaks to Indira Rajaraman, NIPFP, Sachchidanand Shukla, Chief Economist at Mahindra and Mahindra (M&M) and Neelkanth Mishra of Credit Suisse on what they expect from the Budget and the government’s fiscal roadmap.

Below is the verbatim transcript of the interview.

Q: In terms of incomes, the government would be constrained perhaps because you are not very sure of how much the goods and services tax (GST) revenues are going to be next year and in terms of expense, there is a constraint in terms of fuel prices having risen, is there enough space for a growth stimulus fiscally?

Rajaraman: Probably not. This is an extremely tight and uncertain time for the fisc at the centre. The principal reason being of course that as everyone knows the states are protected by the 14 percent year-on-year increase in compensation that they have been granted under the GST framework and GST revenues have fallen.

So there is uncertainty and probably not much room for a growth stimulus.

However, that said, there is a lot that can be done without any expenditure implications for the agriculture and rural sector generally and I will just mention one – although there are many others – there is a need to configure crop insurance in this country to reconfigure it as weather insurance and to ensure it over a national pool.

When that is done, premia can come down and the very needed element of lowered risk in agriculture is needed if we want to promote growth there and jobs, livelihoods.

Q: What is your sense, do you think one can assume a better growth in GST revenues since the system would have stabilised therefore what are you expecting as a percentage of GDP or of the total expenses by way of an investment or a capex from the government?

Mishra: On the revenue side, I think there are a few things that happened. The first is that we get 12 months of indirect taxes versus 11 months in FY18. As you know because of scheduling issues and this has been well-flagged that the last month’s revenue till 27th under the excise, sales tax and service tax used to come in the same fiscal year but in GST it will fall into the next year. So we have effectively 11 months of indirect taxes this year, we will have 12 next year.

The second is that if you look at the split of excise duty what used to be and which sectors drove that, the contribution from if you remove petrol and diesel and the contribution from petrochemicals like naphtha or a fuel oil and all that and steel, in cement, plastics, chemicals etc is very high. For most of these, we are seeing revenue growths in the high double digits or rather say high teens at least. So we have a strong pick up in prices, we have decent volume growth. So even if you assume this year’s GST revenues are the base, whether good or bad, you should be building in a meaningful jump next year partly because of more months and partly because there is inflation in some of these products.

On the direct taxes side, I think the government also should expect meaningful pick up if Nifty EPS is going to be as high as what has been assumed, I think it will see cuts but even if it is 14-15 percent, you should see a meaningful improvement in corporate tax collections.

Now, on the expenditure side, my problem is that – I fully agree with Dr Rajaraman, the crop insurance scheme and the Pradhan Mantri Fasal Bima Yojana, I think the government is working on a revamp of that. There is scope to do more there but that is more an income protection scheme. It is not an income growth scheme.

So from a policy perspective, of course, it is imperative that we do it but from a political perspective given that farm income growth has been weakened by low farm prices, you need to have schemes which boost incomes and I cannot think of anything which can be that meaningful. It is not very easy to spend – spending Rs 20,000-30,000 crore is not going to make that big a difference but at the same time it is very hard to imagine how the government can spend Rs 60,000-70,000 crore more. So while there will be a lot of schemes, I think in terms of the absolute quantum, the numbers may disappoint.

Q: You have half your revenues coming from the rural sector, so what would be your wish list in terms of what can be done for the farm sector?

Shukla: Even before we move on to the wish list, let me just take a step back and look at the kind of stimulus, you have been talking about it and Neelkant Mishra and Dr Rajaraman have spoken about it, just look at the nominal gross domestic product (GDP) growth. I think a one percentage point swing and even if you keep the fiscal deficit ratio the same 3.2 or even if you signal fiscal consolidation, depending upon what number you want to present, 3.2 versus 3, you are getting a delta of 20 to about Rs 50,000 crore. In absolute borrowing terms also, it is going to be higher than last year. So in any sense, this is going to be a stimulus thanks to the denominator.

How do you spend this money? I think one paradigm shift that has happened on the farm side is that Indian farmers individually are poor but collectively they are rich and if you look at the farm output, it has gone up some 5x in 5-6 decades. Last two years, you had bumper crops, and yet you have farm distress.

So I think the policy response function in agri now needs to recognize that we need some income buffers and as Neelkant Mishra pointed out, how or what can you do about it? I think as he rightly said, apart from MSP and MSP is needed because in the absence of technology or non-farm variables, MSP is the variable. Howsoever problematic or you can point out problems with that but I am afraid without MSP and higher procurement there is nothing that you can do in the short-term to alter the terms of trade.

So I think quality versus quantity and again even with the same kind of money you can see that insurance for example which he mentioned, the Budgetary allocations of the same government waxes and wanes. So irrigation, insurance, if there is consistency and doubling some of these things won’t matter, Rs 20,000-30,000 crore incremental is not a problem. The problem is consistency and how do you provide for this income support.

Q: MSP will not obviously be part of the Budget itself, but it could be a statement of intent if the government needs to make it that way. First of all, do you think that they would use the MSP as an instrument to alleviate farm distress? Even if they do announce, is there the administrative bandwidth to even procure so much?

Rajaraman: I think the general trend of thinking right now is to wean farmers away from the major grains of which we have a very satisfactory buffer stock and to shift them towards horticulture crops. And this is what the states have been doing by prescribing very high MSPs for onions and so on. But as we have seen in the last two years, there has been a tragic overproduction in response to the high MSPs for horticulture crops and there was this almost Kafkaesque problem of not having enough warehousing to store that excess production and failed promises, ultimately because of warehousing inadequacy, the onions were not bought, the MSP promise was reneged on. But I actually have a constructive solution for this. We have a substantial outlay for the MNREGA. It is a national scheme and there is nothing to stop the government from dovetailing that with the need for additional warehousing.

So instead of having construction projects on roads which are going to get washed away the next monsoon, what we need to do is to harness MNREGA labour towards building warehousing for stocks of horticulture goods and that can feed into the business of providing income support and income consistency what Neelkanth and Sachchidanand were referring to, the much-needed support in good years. Crop insurance is for bad years and we have had two good years and we have not been able to raise farmer incomes because of warehousing insufficiency.

Q: You said that the government will not be able to spend Rs 60,000-70,000 crore. You are seeing an inability to raise that much money as to be able to expend that much on the farm sector? Was that your point?

Mishra: No, I am talking about the fiscal room, if they want, it can be found. The challenge is in being able to spend. So it is very hard to spend. I struggle to spend even small amounts of money. The point is spending Rs 20,000-30,000 crore is very hard. I do not think it is very easy. And you need to have the plumbing for the money to start to flow through, for the projects to have been created. If you see, some of the more successful schemes that we have had, even the Pradhan Mantri Gram Sadak Yojana or even the initial National Highway Development Project (NHDP) that launched in 1998, it took 3-4 years for the system to start functioning and I think the government would know that that just making a large allocation to some scheme will not work.

But yes, what Dr Rajaraman was saying, if you have an existing pipe, it is possible to push more through that. There is a possibility that you could just go ahead and hike MNREGA labour rates, but that would be too distortionary and against the principles that this government has measured itself up against. So, I doubt that even MNREGA allocation can go up by more than Rs 5,000-10,000 crore.

Q: What do you think we should expect? Just an announcement of big names to placate frayed nerves of farmers and pretty much the same thing going on or do you expect some policy shift or administrative shift?

Mishra: I honestly do not see what administrative shift. At this stage, we cannot be talking latitudes and one million feet level policy discussions. I have heard from everyone saying that the government is going to spend and boost rural income and then you ask a question so what exactly do you think they can do and I think they have no idea. I do not blame them because people that I talk to our investors and their job is to invest, not to design policy.

But the point is you have to get down to what are the rupees that they can spend on each scheme and other than expanding the allocation to the Krishi Sinchayee Yojana or launching a pilot scheme of the Bhavantar Bhugtan Yojana that Madhya Pradesh is experimenting with, you can actually potentially, if this scheme works, you can provide some price certainty to farmers and provide them support at a lower budgetary cost. But the point is these schemes are untested in other states. I do not have the infrastructure to implement them. So I think that it is going to be very hard to find schemes.

In fact, some of the policy suggestions that have been made to the government by agricultural experts, they are all long-term. We need to promote farm exports because if you are creating surpluses in the economy, the only way that can boost income is if you somehow allow it to go out and as one of the farmers in the last week's meeting was talking about, even the capsicum that you grow for India is different from the capsicum that you can export. So it is not that if you have surplus capsicum in India, you can suddenly start exporting into Europe.

Or as the Commerce Secretary was saying that even Indian chilies, Bhutan refuses to accept because of pesticides. So it is not easy, some of these require long-term changes and it cannot be an electoral year response, somehow that you turn something magically in 3-4 months. So I think it will be a lot of long-term schemes and policy shift that can happen, but if you are looking at meaningful fiscal allocation which revives farm incomes in the next six months, that is a big ask.

Q: There was a suggestion by Mr Sodhi of Amul that animal husbandry should be included for all the exemptions that agriculture is entitled to. It is agricultural income tax exempt, why not animal husbandry since actually one-third of what we call agri and allied service in the GDP comes, actually, from non-agri products. Would that be an experiment, not just agricultural income tax, but for instance, interest subvention given? Why not for dairy? Is that a thought?

Rajaraman: Yes, absolutely. 100 percent, I totally agree with that. At the same time, the whole business of exempting agricultural income tax has to be evaluated anew. The centre cannot tax agricultural income as per the provisions under the present constitution, but what can be done at state level is to enable panchayats to levy a nominal tax on agricultural income, on some kind of composite basis so that they can be funded without necessarily a big grant going from the centre or from the states towards panchayats for the construction of local infrastructure and so on. So that is something that needs to be explored, but your question about giving the dairy industry parity with crop growing, I absolutely agree.

Q: Since you have written so much on 'Animal Farm'?

Mishra: No, animal farming. Animal Farm was by someone else. I also agree especially given that dairy itself is now bigger than rice and wheat, we do need to get similar policies because it is affecting a large part of the income. There should be parity at least. Secondly, the problem right now is again in milk excess production. So the objective should not be to incentivise more. Of course, we need a lot more milk if we need proper nutrition in the next 10 years, but the problem has been that milk is not properly procured, processed and maybe even for export and therefore, from the dairy industry perspective, perhaps that is where the incentives may be needed, but that can be calibrated. But in principle yes, why consider crop agriculture to be somehow different from dairy, we should treat them at par.

Q: To come to infrastructure, while it may be farms are more dissipated, dispersed, and difficult for the government to ensure anything in the short-run, is it possible that they can speed up railway and road investments, that has been the long-standing promise?

Shukla: Absolutely. Coming back to the same point, agrarian incomes have to be buffered through non-farm initiatives. One of the things that come to mind for a policy maker is infrastructure within which you have roads and railways. We were talking about how roads, we have developed and institutional depth. You have central agencies, you have state agencies, you have the private sector which has executed some of these better projects.

Now, when you have developed that kind of capacity and funding is not a big problem anymore like it used to be earlier and recall the golden quadrilateral was all about 15,000 odd km and now, we are doing 40-42 km a day is a target. Now with that kind of a backdrop, it is easier for somebody on the policy side to funnel more funds. But the key is execution. So sometimes the stumbling block is you do not have the architecture, the public-private partnership (PPP) or now we are experimenting with hybrid annuity model (HAM) and things like that, but why can't we now, we have come to a stage where execution of really biting. It is the real pain point.

How do you incentivise or how do you get about doing it? Can we have a list of roads or road projects which would be completed within 12 odd months, can the Budget signal, I am not saying come up with great initiatives, but can it signal faster execution? And things like these will matter a lot because execution is the real challenge now.

Q: Your thoughts on the infrastructure push?

Rajaraman: I actually agree with all the points that have been made so far. I do not actually see any increase in Budgetary allocation for infrastructure roads or railways likely to happen or even necessary. But, the three points I want to make, first of all, carrying forward the earlier point I made about coherence, I would be so happy if the infrastructure focus, especially in rural areas were on warehousing for horticulture, grain, that is so very important to tie up with the agriculture sector, what we need now is greater coherence across sectors in terms of policy. This does not call for bigger Budgetary allocations. It calls for more sensible Budgetary allocations. Sensible allocation of the infrastructure budget towards the need of the hour which is things like warehousing. That is point number one.

The second point that I would like to really flag once again on the coherence business is that in transportation, in road networks, in particular, we just have not planned properly. We do not have a hub and spoke system. So for instance, take food processing which is one of the very important avenues through which you can stabilise farmer incomes. Now, once a food processing plant has been set up, that happens to be the hub and spokes have to be lead into that hub from the various points from which the peas or the onions or whatever will be transported to that hub.

So that kind of planning at the local sub-state level, at the level of the taluka, at the level of the district, that is very important. And if the Finance Minister was to flag this and finally say that in road and railway, but particularly road infrastructure, there will be an emphasis on hand holding between the centre states and panchayats, district panchayats and gram panchayats one building road networks that feed into a particular need, a local need and secondly, also to take the help of local government for land acquisition.

At the end of the day, it is the land acquisition that has bedeviled many of these road projects and led to non-performing assets in the banking sector and that is in turn, largely if not entirely, because of local problems which local government can help to resolve. So if all these points were to be flagged in the Budget, I would be very happy indeed.

India Union Budget 2018: What does Finance Minister Arun Jaitley have up his sleeve? Click here for live Budget 2018 news, views and analyses.
First Published on Jan 20, 2018 02:23 pm
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