Reportedly, the union government is contemplating to give universal basic income [UBI] of Rs 4000 per acre to each land owning farmer to soothe the nerves of farming community who gave a befitting blow to the Modi – dispensation in assembly elections held in three Hindi heartland states for ignoring their interest.
Whether, this will help BJP [the party that Modi leads] during the upcoming general elections remains to be seen. Meanwhile, it is important to understand its full ramifications, in particular, how it stacks up vis-à-vis existing support mechanisms for the farmers.
With a view to make fertilizers, irrigation, power, credit etc affordable to farmers, the government gives subsidy on these inputs and is routed through their manufacturers/suppliers. The latter supply at a low price unrelated to the cost and get reimbursement for the excess as subsidy from the former. The total annual subsidy payments are about Rs 200,000 crore.
The government also gives minimum support price [MSP] to farmers on sale of their produce. Its agencies such as Food Corporation of India [FCI] purchase wheat and rice at MSP for meeting the requirements of beneficiaries under the National Food Security Act [NFSA]. Besides, they buy significant quantity of pulses and oilseeds. Last year, it expanded the coverage of MSP program to include 23 crops.
According to Niti Aayog, the cost of reimbursing the shortfall in actual realization from sale vis-à-vis MSP – up to a specified level – for 23 crops – including wheat, rice, pulses and oilseeds works out to over Rs 110,000 crore per annum.
Both types of financial support viz. subsidy on inputs and MSP aim at protecting the income of farmers. While, the former does it by lowering the expenses on growing crop, the latter does it by ensuring higher realization from its sale. If, the government decides to give direct income support then, it won’t be justified in continuing with the existing subsidies and MSP.
On discontinuation, it will save Rs 310,000 crore which can be used for giving them direct income support. If, it is distributed among 120 million land owning farmers, each would get about Rs 25,833/-. This is over two-and-a-half times the amount Rs 10,000/- [@Rs 4000/- per acre and assuming that each farmer owns 1 hectare] the government is intending to give.
There are an equal number of landless workers who mostly work on farms. Under the existing dispensation, they are left high and dry. When, a land owning farmer faces drop in income, even the laborer is affected as he gets less wage or no income in a scenario of no work. While, the former may still get some relief say, compensation under PMFBY [insurance scheme] or a loan waiver, the latter get nothing. The system is highly inequitable and discriminatory.
Under direct income transfer, it should be possible to take care of both thereby making the system equitable and non-discriminatory. An idea worth pursuing would be to give Rs 1500/- per month to land owning farmer and Rs 1000/- per month to landless worker. This will cost the exchequer Rs 3600,000 million [1500x12x120+1000x12x120] or Rs 360,000 crore.
This will be funded by Rs 310,000 crore being the savings from stoppage of input subsidies and MSP plus additional spend of Rs 50,000 crore from the budget. This extra amount has to be viewed in the light of giving comfort to millions of landless workers [hitherto ignored] apart from helping land owning farmers. Besides, this will yield unprecedented benefits in many other ways.
The suppliers of inputs who are currently getting away with reimbursement of higher cost [due to inefficiency, cost padding] – under extant cost plus pricing dispensation – will be forced to improve their working and lower price to farmers. Black-marketing of urea and diversion to chemical factories will be a thing of the past. Innovation will get a boost even as manufacturers develop customized fertilizers to meet farmers needs.
With cash coming directly in to farmers account, they will use the money in a manner and in areas where it delivers maximum value. For instance, if the soil is deficient in phosphate and potash nutrients or secondary/micro-nutrients, the farmer will deploy it wholly or substantially for buying these fertilizers. They will also be prompted to use all inputs more efficiently.
The excessive use of urea – main source of nitrogen – will stop even as farmers go for more balanced fertilizer use. This will stem the current trend of deterioration in soil health and contribute to the sustainability of agriculture in the long-term. It will also help in improving the environment.
The UBI idea is good. But, for this to deliver the intended results, existing subsidies and MSP have to go. That seems unlikely in view of the deeply entrenched vested interests. Who will have the gumption to remove control on urea MRP and let it be sold at market determined price? Do our politicians have the guts to stop subsidy on power supply to farmers? Can the MSP scheme be abolished? Will any government pick up the courage to withdraw interest subsidy?
If, these bold steps cannot be taken then, why talk of UBI? Yet, this may have been prompted by a similar scheme Rythu Bandhu [under it, the state gives Rs 4000 per acre to each farmer every season] launched by the ruling dispensation viz. Telengana Rashtra Samithi [TRS] in Telengana early last year. The scheme reaped political dividend for TRS in the state elections.
The UBI for farmers even while keeping subsidies in tact may [or may not] help Modi politically but surely, this won’t be good economics. Even at modest @Rs 4000 per acre, it will only end up guzzling an additional Rs 120,000 crore – over and above a mammoth Rs 310,000 crore already being spent on subsidies et al – and all the distortions and inefficiencies germane to existing regime.
The message is loud and clear. UBI is the way forward but, the government of the day must shun subsidies.