Hard Choices

UNION BUDGETS are often a ‘please all’ tool to buy support from diverse constituencies in India. The trend has been so pronounced that each Budget has its own set of ‘winners’ and ‘losers’. But on February 1st, when Finance Minister Nirmala Sitharaman stood up in Lok Sabha to present the annual financial statement, she was very clear about what was needed to bring back a pandemic-battered economy on the rails.

What made her presentation exceptional was the absence of populist measures in a year when Assembly elections are due in five states. When one considers that farmers from Punjab and Uttar Pradesh (UP)—key agricultural states in election mode—have been agitating, the agricultural proposals in the Budget are nothing short of being brave and clear-sighted about the economy. The slashing of key subsidies was long overdue and signals the Government’s seriousness about economic revival.

The provisions for agriculture in the 2022-23 Budget cannot be seen in isolation from the political economy of the Budget. In any Budget, the finance minister has multiple pulls and pressures on resources from a bewildering array of constituencies. It is an established fact that since the 1960s, government expenditures for the most part are a network of subsidies and populist spending for political reasons. No Government has been immune to such spending, even reformist ones.

In the case of the present Government, serious political capital was expended to reform the system. It was understood that agricultural subsidies could not be eliminated but at the same time the farm economy could be moved to a more productive equilibrium. If one sketches a line from the June 2018 address by Prime Minister Narendra Modi to double farmers’ income by 2022 to the withdrawal of the three farm reform laws in November 2021, the trajectory neatly maps the change in agriculture strategy. The doubling of farmers’ income depended on reforms with continuing support. The first part of the equation is gone. The second part, the continuation of unsustainable subsidies, was also open to question.

The slashing of subsidies in the 2022-23 Budget should be seen in this light. It was quite meaningless to continue with these subsidies largely cornered by rich farmers. The downward trend in these subsidies is now very clear. In 2020-21, the quantum of food and fertiliser subsidies was a whopping ₹ 6.69 lakh crore. Much of the food subsidy in that year was also due to cleaning of balance sheets by the Government. The Food Corporation of India’s (FCI) accounts were opaque for a long time and were cleaned up that year. Even accounting for this extraordinary measure, the quantum of subsidies was gigantic. This figure came down to ₹ 4.26 lakh crore in 2021-22 (revised estimates). In 2022-23, this sum is budgeted at ₹ 3.12 lakh crore. This is an extraordinary pruning of subsidies often considered politically impossible to pare down. In an oped on January 31st, Ashok Gulati—a reform-minded economist—said that food and fertiliser subsidies along with items like PM Kisan would easily cross the ₹ 4 lakh crore mark and it was likely that they would even cross ₹ 5 lakh crore. That did not happen.

It is important to make a distinction between food and fertiliser subsidies and expenditures on schemes like PM Kisan and the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA). Although the expenditure is all directed at the rural sector, subsidies mostly go to the rural rich while the latter are skewed in favour of the rural poor and marginal farmers. The latter expenditures are also important to maintain political order in a country with greatly skewed income distribution even if the money could be profitably spent on creating infrastructure. But after the launch of such schemes (MGNREGA), it becomes politically difficult to do away with them.

SOON AFTER the Budget was tabled, there were noises that the Budget did not have ‘anything’ for farmers. This was a clear hint at the slashing of subsidies. But much like political criticism of most Budget proposals, this one was also removed from the difficult realities of the past two years. It is worth noting that India’s economy had begun slowing even before the Covid-19 pandemic struck the country. When the pandemic hit, droves of workers from rural areas who had migrated to cities in search of better lives marched back to their homes. Since then, the most vibrant sector of the economy—the services sector—has been the worst hit. That was also one of the biggest drivers of employment. The result is a mad rush for any and every job available. The problem is most acute in rural India and in those towns and cities that continue to have umbilical links with villages. The recent violence in Bihar and UP in the context of railway recruitments is a case in point. Such incidents of violence were just a warning about what might happen if job creation were not taken seriously.

There were two options before the Government to handle this emerging situation. One was to go back to the tired formulation of stepping up consumption and incomes through doles. Programmes like MGNREGA and PM Kisan continue to provide a measure of support (both programmes total ₹ 1.41 lakh crore in 2022-23, a tad down from ₹ 1.65 lakh crore in 2021-22). Expanding these programmes, however, makes no sense: what India needs are higher incomes from real jobs and not artificially created work. The Government eschewed that option and decided to bankroll higher capital expenditures. The 2022-23 Budget has seen a whopping 35 per cent increase in capital expenditure over the previous year. At ₹ 7.5 trillion, capital expenditure amounts to 2.9 per cent of GDP. When this sum is added to grants-in-aid to states for capital expenditure, ‘effective capital expenditure’ rises to ₹ 10.68 trillion, or 4.1 per cent of GDP. This is the single largest allocation to this end in recent years.

What makes this allocation attractive is its emphasis on capital expenditures at the level of states, the ‘real’ setting for such spending. Last year, state governments could not undertake any worthwhile spending on this front as all available resources had to be mobilised for managing the pandemic. Given the poor state of state finances, it is only appropriate that the Centre stepped in with resources and help.

THE SHIFTING emphasis from agriculture/rural sector to making an earnest attempt to push economic growth via higher capital expenditures is not just a change in economic strategy but also represents a correction of sorts at the political level. One way to look at the 2022-23 Budget is through the prism of emerging contradictions within agriculture and between agriculture and the rest of the economy. These contradictions existed when Modi became prime minister in 2014. At that time, there were huge expectations that he would carry out reforms that would enable higher economic growth by clearing roadblocks to investment and industrialisation. But given the overall structure of India’s politics, the room for doing so was limited. The fate of the multiple amendments to the 2013 land acquisition law and its repeated defeat in Rajya Sabha illustrated that clearly.

It was tough learning. From that time until November 2019, an attempt was made to take farmers’ along by giving them opportunities to increase their income. But a section of rich farmers’ from Punjab, Haryana and UP defeated that plan. Farmers from other key agricultural states like Maharashtra, Madhya Pradesh, Andhra Pradesh, etcetera did not join the agitation that held the Government hostage for more than a year. This is a contradiction yet to be resolved and the Government has wisely sidestepped this issue, for now. The usual programmes, such as PM Kisan, will continue but the focus has clearly shifted away from agriculture and rightly so. At some point, however, the issue of wasteful expenditures on ever-rising Minimum Support Prices (MSPs) and inequalities associated with them will have to be considered. Hopefully, the committee announced by the prime minister to review MSPs and other issues will examine the matter carefully.

The other contradiction that threatened to engulf the economy itself was between agriculture and the rest of the economy. It is high time attention was paid to capital accumulation and growth. One could always ask why this was not done earlier. One answer could be that in the two years of the pandemic, the priorities were different as they should have been. But at the same time, the changes could not be delayed beyond a point. If the elevated capital expenditures are to show any effect in economic outcomes, that will take time. Then there is the political calendar to be kept in mind: 2024 is just two years away. The shift in priorities could not have been delayed further.

The question that allegedly remains unanswered is: What next for agriculture? It is hard to give clear-cut answers to an issue that is so vexed. But the finance minister did mention in her speech that, “A fund with blended capital, raised under the co-investment model, will be facilitated through NABARD. This is to finance startups for agriculture and rural enterprise, relevant for farm produce value chain. The activities for these startups will include, inter alia, support for FPOs, machinery for farmers on rental basis at farm level, and technology including IT-based support.” This might sound anodyne but this is the way forward for growth in farmers’ income and agriculture. The Economic Survey was equally forthright in spelling out the issue: “While the Government has adopted the use of MSP as signal to encourage crop diversification, there is also a need for coordinated action from the State Governments to facilitate the shift to high value and less water consuming crops to enable realization of the objective of doubling farmers’ income in a sustainable way.”

In these and other recent pronouncements of the Government on agriculture, there is a certain wistfulness that if only farmers’ would understand the nature of what was attempted. Since that comprehension is missing even after all efforts at convincing farmers, a different—hard-nosed—policy approach is necessary. For the time being, the Government has taken the first step in that direction.

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