By Soumya Kant Ghosh
The rural and inclusive orientation of the Budget is distinctly apparent. There are a couple of quite useful suggestions that might have escaped the public glare or have caught the public glare with the wrong interpretation. First,the move to facilitate the tenant farmers for access to bank credit will free the tenant farmers from the clutches of money lenders.
This is because, around 70% of the farm land is being currently cultivated by tenant farmers who have no access to bank loans. There is also a need to protect rights of landlord and incentivise him to enable better registration of tenant farmer. This is one of the reason why only 30% of agri loans are covered by banks as tenant farmers can’t produce land documents. This has remained a big gap in the system for several decades and it is high time that it is now being addressed.
Now, the issue of fixing the right MSP for farmers that have caught the media glare with two wrong interpretations, the estimation and the inflation impact. First, the estimation. Presently, there is MSP for 25 crops, but official procurement at the MSP is effectively limited to few crops, namely rice and wheat, and concentrated in a few States. To address this issue, the Government in budget FY 2018-19, has announced to fix MSP for all Rabi and Kharif crops (both announced and unannounced) at least 1.5 times of the cost of production. Presently, Commission for Agricultural Costs and Prices (CACP) gives three definitions of production costs: A2, A2+FL and C2. C2 costs are more comprehensive, accounting for the rentals and interest forgone on owned land and fixed capital assets respectively, on top of A2+FL.
The MSP declared by CACP for FY19, suggests it is only above the A2+FL cost where the margin is over 50% and it is not on C2 cost. However, to address this anomaly, the government has additionally announced in the Budget that whenever the price in the agricultural produce market is less than the MSP, then, the government will purchase crops either at MSP or work in a manner to provide MSP for the farmers through some other mechanism (prices based on C2 inputed cost may be higher or lower than wholesale prices).
The detailed guidelines on this will be put in place by Niti Aayog, in consultation with Central and state governments.
We expect that that the Central government may come out with a scheme, like ‘Bhavantar Yojana’ which is already introduced in states like Madhya Pradesh and Haryana. This scheme will immensely help farmer in situations when wholesale price of the crop is less than the MSP (as it is happening in the current fiscal).
The cost of such a programme is minimal as there is no procurement. Our estimates suggest it is only 11% of the farm loan waiver announced by states. Further, benefit of this scheme is, the price difference will be directly paid into farmers accounts like other DBT scheme, so, the accounts of the farmers will remain active, with continued flow of transactions.
Secondly, the net impact on food inflation may not be significant. Empirical study conducted by RBI found out that, the longrun impact of hikes in MSP of food crops, namely, rice and wheat on food inflation were not as “over-bearing as were generally perceived” (Sonna et. al., 2014). There are several other measures in the Budget that has not received attention but could do wonders if executed effectively. For example, Government has announced the launch the ”Prime Minister’s Research Fellows (PMRF)” Scheme under which 1,000 best B.Tech students will be selected and would voluntarily commit few hours every week for teaching in higher educational institutions which will have far-reaching impact on education quality.
Also, the literacy rate of ST population in India is only 58.9% (Male: 68.5% and Female: 49.3%) which is far lower than the national average of 74.0% (Male: 82.1% and Female: 65.5%). Hence in order to improve literacy penetration Government will start Ekalavya Model Residential School in every block which has more than 50% ST population and at least 20,000 tribal persons. These Ekalavya schools will be on par with Navodaya Vidyalayas and could have a definitive impact.
The new health protection scheme will encourage people to take health insurance given the fact that penetration of health insurance is quite low in India compared to emerging economies. Health insurance penetration in India is only around 5% overall with about 13-15% in urban areas.
Finally, some numbers on tax front. The buoyancy in personal income tax for FY17 and FY18 (RE) is 1.95 and 2.11 respectively (vis-a-vis 1.1 pre FY17). This indicates that the excess revenue collected in the last two financial years from personal income tax compared to the average buoyancy pre FY17 amounts to a total of about `90,000 crore / 0.5% of GDP and the same can be attributed to the strong anti-evasion measures taken by the Government.
(Author is group chief economic advisor, State Bank of IndiaBSE 0.27 %. Debashis Padhi)