Address farmer distress without fracturing fiscal discipline

The protest by various farmer unions now underway at the Punjab and Haryana border is a stark reminder to the Narendra Modi-led National Democratic Alliance (NDA) government to remain empathetic to the inevitable role of agrarian economic wellbeing even as the mojo surrounding big ticket projects and numbers sound sanguine. As India looks to become the world’s third-largest economy, it is imperative to design farm welfare schemes while engaging in a constructive dialogue with the protesting stakeholders.

The populist wave that swept across Europe and Northern America over the last few years found much of its genesis in the farmer woes driven by falling standards of living and poor price support owing to import of cheaper agricultural products from China and elsewhere in Asia, thus making the latter richer at the expense of the former. Farmers’ welfare has always garnered media and civil society attention, emerging as one of the common themes blurring the ideological boundaries between the West and the East.

Even as globalisation has acquired a bad name in the eye of Right-leaning political establishment, the growing inequity in incomes as a fallout of acute trade imbalances has prompted narratives surrounding nationalist fervour to seize the majoritarian view.

Policymakers need to take cognisance of the imminent needs of their domestic constituency, even while professing the merits of globalism hinging on equitable distribution of welfare. It is no surprise, trade barriers in the form of import tariffs and other prohibitive measures disguised as ‘national security’ have sought to protect the domestic constituency — even if their economic reasoning is flawed. Historical precedence informs us that sentiments matter much more than state welfare, as the latter even if economically prudent could be constructed as morally problematic. Reducing farm subsidies falls well within this category. Meeting the legitimate aspirations of the citizens without jettisoning macroeconomic sanctity should be the guiding principle.

In keeping with the above argument, it is important to critique the Modi government’s inability to meet the farmers’ aspirations without criticising the fiscal prudence despite temptations to sound populist amidst an imminent electioneering jamboree. The inability of the government to increase the outlay towards direct cash transfer (DCT) to farmers by keeping it at Rs 60,000 crore is a disappointment.

Even going by an assumed annualised nominal growth of 8 per cent, it wouldn’t be imprudent to increase the outlay by Rs 30,000 crore enabling an increase in cash transfer from Rs 6,000 to 9,000, an increase of 50 per cent. It is meritless to discuss the quantity of transfer as any incremental cash would go towards boosting consumption at varying levels.

Boosting rural consumption would inevitably be seen as growth positive besides sending a positive signal on the intention of the government towards enhancing farm welfare. From a fiscal point of view, the additional outlay wouldn’t increase the deficit by more than 10 basis points. Without looking at it as an unwarranted ‘revenue expenditure’ from a conventional sense, viewed from a welfare perspective, it ought to be seen as fiscally positive with ramifications on consumption, which bodes well for the economy.

To meet this additional expenditure, government can float an innovative instrument in the form of ‘India Farm Bonds’ available for all categories of investors — foreign, domestic, and retail. It doesn’t make much of an argument to associate a thriving agrarian sector with the overall economic growth as agriculture still constitutes 15 per cent of the economy. Tax exemptions against investment in these farm bonds could act as an essential catalyst in spurring investments with a rate of return compensating for inflation. Alternatively, floating these as zero-coupon bonds (issued at a discount and redeemed at par) could be worthy of consideration.

In the long run, establishing an exclusive ‘Farm Bank’ with a mandate different from the likes of NABARD augurs well towards providing calibrated credit based on the risk-return profile of farmers’ needs, rather than loans being doled out on benevolent terms sans credit checks with an ever-increasing probability of forbearance and write-offs creating an expensive fiscal leakage.

Finally, it is also time for small finance banks (SFBs) to be recognised as priority lenders with a mandated exposure to the agricultural sector to imbibe the much-needed discipline of serving the poorest without restricting to the ‘urban poor’ in prosperous regions, which essentially dilutes the mandate for which these institutions were actioned in the first instance.

As India looks at the cusp of a rising economic superpower, it is essential to ensure the benefits of development transcend every stakeholder, including the farmers, to achieve an equitable welfare state.

(Ullas Rao is Assistant Professor of Finance, EBS Dubai. X: @Ullasrao7.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.