Recently, during launch of a book, union finance minister, Arun Jaitely concurred with the author [an economist] that increase in capital formation in agriculture is a far better way of helping the farmers instead of the extant system of giving subsidies.
The increase in investment – be it in soil conservation and improvement in its health, irrigation and water conservation, agricultural implements, infrastructure for storage/handling/quality testing, information technology, marketing infrastructure and use of modern technology for crop production – lays the foundation for sustainable increase in the income of farmers.
This is in sharp contrast to subsidies on agricultural inputs viz. fertilizers, seeds, pesticides, power, credit, fuel etc whose positive impact is felt only as long as these are given. The moment these subsidies are withdrawn, their beneficial impact will also go away. Besides, even when these are given, there is no guarantee that the outcome will necessarily be positive.
For instance, much higher level of subsidy on urea [carrier of nitrogen or ‘N’] under the extant dispensation than on complex fertilizers [carrier of phosphate ‘P’ and potash ‘K’] prompts farmers to go for excessive urea use and less of complexes leading to imbalance in nutrient use ratio. This leads to lower crop yield and deterioration in soil health which affects production in the long-term.
Even where farmers are able to garner higher yield – based on judicious and balanced application of fertilizers – this does not necessarily translate into higher income. This is because in the absence of adequate handling and storage facilities, a big portion of the crop production gets damaged or farmers may not get a good price due to lack of marketing arrangements.
That investment oriented support is a much better way of helping the poor applies with equal force to all sectors of the economy – not just to agriculture.
A person getting gainful employment/work in a factory or service establishment [or becoming self-employed by setting up a small shop] is much better equipped to take care of him and his family than someone who merely depends on doles from the state. While, the former is capable of generating a regular income stream over the entire time span of his productive age [and even save handsome amount for the period thereafter], the latter survives only as long as the state assistance is available.
Even as both the approaches require deployment of substantial resources, the investment is a viable route as it focuses on building assets. While, helping the entities with higher and regular income, it also carries with it a possibility of paying back the initial investment. On the other hand, resources spent on giving doles/subsidies are simply sunk; no assets created.
Moreover, the subsidies entail a perennial burden on the exchequer and impairs the ability of the government to stick to the fiscal consolidation path. This creates ripple effects such as increase in debt, higher interest cost and higher inflation. This in turn, necessitates more spend on subsidies.
Despite the serious ill-effects, during the last over 4 decades or so, successive governments had taken recourse to distributing subsidies with ever expanding coverage and ballooning spend. Three major subsidies viz. food, fertilizers and petroleum alone guzzle about Rs 250,000 – 300,000 crores or 1.5% – 2% of GDP. At the same time, capital expenditure which would have delivered long-term benefits was neglected with impunity.
Ever since taking charge [May 2014], prime minister, Narendra Modi has made a serious attempt to change this trend. His government has undertaken massive investment in irrigation, water bodies, rural roads, highways/expressways, rails, ports, water-ways etc. It has also taken up building social infrastructure viz. schools, hospitals, toilets, homes, electricity and gas connection in a big way.
Team Modi has also implemented far reaching reform measures to unclog private sector projects, speed up approvals [including environment clearance], stem the rot in banks by ensuring recovery of bad loans and infusing capital, improved the policy environment to attract foreign investment and steps to boost private consumption for spurring industrial growth.
However, considering the huge population of over 1.3 billion and nearly 2/3rd of it in the working age, a lot more needs to be done and that will require investment and resources on a much bigger scale than happening now. This is where there is an urgent need for cutting heavily on the subsidies. But, ALAS! Even Modi does not seem to be having the gumption to crack the whip.
In India, where elections are held round the clock and almost all political parties have put subsidies at the core of their election manifesto, the BJP [the party that Modi leads] is in the fore front of the mad race. A vivid demonstration of this may be seen from the announcement by Vasundhara Raje – the incumbent chief minister in Rajasthan – to give electricity free to farmers in the state. This happened on the very day October 6, 2018 when the Election Commission of India [ECI] announced the schedule of assembly elections in 5 states including Rajasthan.
To be fair to Modi, if he does not commit to subsidies – even as other parties continue to make such promises – he [and his party] will be perceived as anti-people and therefore, sure to lose. Clearly, he won’t indulge in self-triggered political massacre.
No wonder, when in the Economic Survey for 2016-17, the then chief economic advisor [CEA], Dr Arvind Subramanian advocated universal basic income [UBI] instead of a plethora of subsidies given currently, Jaitely while addressing a group of economic editors on February 1, 2017, opined that “UBI is an idea whose time should come but, politics of this country is not mature yet for its implementation”.
Under the idea floated by CEA, state assistance is not being withdrawn; instead, subsidies under a variety of heads are replaced by an omnibus UBI. Yet, it is not found practical. And, here we are talking of completely doing away with doles.
Things won’t change unless people shun the present mindset of living eternally on sops and take a clear-cut view that they want to earn a living with dignity. The ball lies entirely in their court.