MSPs – The Wire

Time to Course-correct and Use Budget to Make India More Sustainable, Equitable: Policy Body

The People’s Commission on Public Sector and Public Services also urged the government to “abandon” its policy of disinvestment in public enterprises.

New Delhi: The People’s Commission on Public Sector and Public Services, a policy consultations body, has urged the Union government to use the budget – which is due to be presented later this month – to reconsider its tax policy and undertake capital investments in public sector undertakings as a means of promoting sustainable and equitable growth.

Of the government’s tax policy, the Commission said it had deviated from “a fundamental canon of tax policy that it not be regressive – that is, a tax policy that burdens the poor instead of the rich”.

It said that schemes like the performance-linked incentive program “[favour] sections of Big Business without resulting in any significant increase in national capacity or result in promoting self-reliance” and urged the government to “abandon” its policy of disinvestment in public enterprises.

It also recommended that the government “make a commitment towards meeting the demands of peasant organisations that [it] adhere to its promise to fully implement the recommendations of the Farmers’ Commission headed by the late M.S. Swaminathan,” adding that the minimum support prices it announced are inadequate.

The Commission’s statement is reproduced below.

There is widespread consensus today that deep and widening economic inequality, compounded by the mounting burden of unemployment lies at the root of India’s economic problems. These problems worsened significantly during the pandemic, particularly because of the government’s failure to use fiscal policy as a tool to provide support to an ailing economy. Thus, a budget that fails to correct course would be deemed a failure.

The unequal nature of economic growth since the pandemic – what several notable economists have referred to as being “K-shaped” in nature – requires the Union finance ministry to adopt measures that promote economic growth while simultaneously providing a measure of relief to large sections of people who have been bypassed by the growth process in the last few years.

In the realm of fiscal policy the Commission urges the government to reverse the deviation from a fundamental canon of tax policy that it not be regressive – that is, a tax policy that burdens the poor instead of the rich. This implies that the growing dependence of the government, particularly in the last ten years, on indirect taxes – most notably the Goods and Services Tax (GST) and other levies – while reducing the emphasis on direct taxes, must be reversed immediately because this reflects a regressive tax structure. The Commission also draws attention to the empirical fact that the tax structure is also regressive because it results in smaller companies paying a much higher tax rate than large corporate entities. Given the series of catastrophes smaller units have faced – demonetisation (2016), the GST (2017) and the pandemic (2020-2022) – this urgently requires attention in the Union Budget.

The Commission notes that schemes like the Performance Linked Incentive (PLI) scheme favours sections of Big Business without resulting in any significant increase in national capacity or result in promoting self-reliance. Even more importantly, as the Commission has emphasised several times in the past, there is an urgent need to use capacities available with Indian PSUs and undertakings such as the Indian Railways to kickstart economic activity. This is particularly important because the Indian private sector, despite much pleading and cajoling by the political establishment, has refused to budge.

The recent spate of railway accidents, to which the Commission has drawn attention to in the past, is indicative of a much bigger malaise – the prolonged failure to renew and build Indian railway capacity that is stretched to its limits. Investments in the Railways would have a significant economic multiplier effect – a fact that a chief economic adviser during the early years of the first Narendra Modi government had drawn attention to in the Economic Survey.

The Commission urges the government to undertake capital investments in PSUs via the budget as a means of promoting growth that is not only sustainable but also qualitatively better and potentially more equitable. Such investments would be far better than sops like the PLI scheme.

A natural corollary of a course correction on the lines we have suggested would require the government to abandon the policy of disinvestment in public enterprises or the pursuit of the policy of “monetisation” of national public assets, a euphemism for the allowing parasitic private players to flog national assets in return for paltry sums. The Commission reiterates that every single instance of privatisation, including the ones by the current regime, has been scandalous. In fact, the pressure from employees’ associations and civil society representatives that thwarted the privatisation of CEL and Pawan Hans on scandalous terms. Privatisation neither enhances national capacity nor promotes growth; in fact, it hinders both.

Thus, while expanding the reach of the public welfare programmes such as the MNREGS and those aimed at food and social security and higher provisions for education, the Budget ought to also make a commitment towards meeting the demands of peasant organisations that the government adhere to its promise to fully implement the recommendations of the Farmers’ Commission headed by the late M.S. Swaminathan, in both letter and spirit. The Commission draws attention to recent evidence that shows that the minimum support price (MSP) announced by the government trails by a significant margin the rise in cost of inputs paid by farmers. The Budget would be the occasion for the government to redeem its pledge to farmers.

In sum, the Commission urges the government to use the Budget, the primary instrument of fiscal policy, to set India on a more sustainable and equitable path. That this would require a significant course correction – indeed a U-turn – would appear to be obvious.

People’s Commission on Public Sector and Public Services

About the Peoples’ Commission on Public Sector and Public Services (PCPSPS): Peoples’ Commission on Public Sector and Services includes eminent academics, jurists, erstwhile administrators, trade unionists and social activists. PCPSPS intends to have in-depth consultations with all stakeholders and people concerned with the process of policy making and those against the government’s decision to monetise, disinvest and privatise public assets/enterprises and produce several sectoral reports before coming out with a final report. Here is the first interim report of the commission – Privatisation: An Affront to the Indian Constitution.

Why People in Himachal and Uttarakhand Need to Know More on the Farm Laws and Protests

Measures like MSPs are key to the survival of the mountain populace at present. However, mainstream media and remoteness has made it impossible for people in the hills to mobilise over this.

Shimla: “When someone is in pain,” Harpreet Singh panted as he was whisked away by the Shimla police just a week before the famers’ parade on Republic day, “they go to their own people for support.”

He, along with two other farmers from Singhu border, had come to Shimla to spread awareness about their ongoing struggle.

Even before they could unfurl their banner at the famous Ridge Maidan in the capital of Himachal Pradesh, the police arrested them and shoved them down the Mall Road to the police station. Harpreet Singh said, “This is a government that does not want people’s voices to be heard – a government that curbs the right to speech”.

Media persons present at the spot asked why Singh and two other farmers were being treated like a “security threat”. In the context of the western Himalayan region though, the more compelling inquiry that regional media has not made so far is, “What have pahari or hill farmers on tiny terrace-fields got to do with mainland farmers’ cause?”

The BJP-led Himachal and Uttarakhand governments have vehemently supported the three new farm laws, which the farmers’ agitation is demanding be repealed. The media has created the narrative that the lack of Minimum Support Price for certain commodities concerns neither the subsistence mountain farmers nor the ‘progressive’ fruit growers in the region.

Food production a challenge for the subsistence mountain farmers. Photo: Manshi Asher

The dominant narrative that this movement is limited to a few large landholders from Punjab and Haryana, has been challenged on multiple fronts since the agitation began.

One of the key arguments in favour of MSP zeroes in on the critical question of food security – that secure MSPs enable the government to procure food grains directly from sarkari mandis and then distribute them at subsidised rates through the universal Public Distribution System (PDS). This is a fact that Himachal Pradesh, and its neighbouring mountainous regions, cannot afford to overlook.

Also read: India’s Farm Protests: A Basic Guide to the Issues at Stake

Himachal Pradesh is not only one of the states with the highest percentage of PDS using households (90%) in the country, but according to the India Human Development Survey, the percentage of heavily dependent households (who get more than 70% of their grains from PDS) is greatest here, comprising 33.2% of the state’s population.

Another study indicates that in Uttarakhand, the percentage of ‘Below Poverty line’ cardholders among ration cardholders is 45%.

Himachal’s population depends heavily on the PDS in both urban and rural areas. Photo: Manshi Asher

A large number of almost landless or small landholders belong to Dalit communities in Uttarakhand and Himachal. Even for the ‘Above Poverty Line’ cardholders in Himachal, with a well-functioning PDS, ration items like rice, wheat flour, pulses, sugar, kerosene and oil are comparatively more affordable than buying from the open market and are commonly used to supplement food supplies through the year. The imminent threat, with the end of MSPs and the government’s simultaneous push for direct cash transfers, to replace distribution of food, is of consumers being forced to purchase food at market rates.

A ‘State of Himalayan Farming and Farmers’ report published by the Integrated Mountain Initiative in 2018 highlights that “only 15% of the farmers in the north-west Himalayas are producing enough food for themselves”.

Mountain terrains are mostly covered with forests, pastures and rocky outcrops. The nature of the soil and low landholding size (averaging at one hectare or less per family) has always been a limitation for adequate grain production.

In the post-Independence era, land reform measures in states like Himachal, as well as the policy push to develop horticulture, supported the farm-based economy.

But conditions for subsistence, mountain, forest and farm-based livelihoods only became more unfavourable. Fragmentation of land into small farms has affected yields. In addition, transition from traditional crops like millets and barley to cash crops (like apple and vegetables), younger generations moving out of non-remunerative subsistence farming, along with the weakening of a livestock rearing economy – these are trends that have emerged with state-driven, and in recent decades, neoliberal market interventions.

Apple Economy supporting Himachal farmers Photo: Prakash Bhandari

The availability of subsidised food grains from the plains facilitated the move to commercial fruit and vegetable production and continued to keep the farming sector at the centre of the mountain economy.

However, horticulturists too are vulnerable today. They are left to the vagaries of the market and, in recent years, the weather.

Increased warming, erratic rainfall patterns, hailstorms and floods due to the climate crisis makes even commercial farming a precarious livelihood option with dwindling profit margins. In Himachal, the primary sector’s contribution to the state gross domestic produce has seen a sharp decline in the last few years, going from 14% in 2012 to 9.40% in 2017. The policy thrust on tourism and service sectors has meant that farming became even less lucrative.

Also read: Three Farm Bills and India’s Rural Economy

In the year of the pandemic and resultant lock-down, access to labour and markets was compromised. As a result, horticulturalists in the mountains suffered immensely.

In the wake of the crisis, Himachal’s fruit and vegetable producer unions and organisations stressed time and again for the need for MSP for their produce. While the present system is already in disarray due to market pressures and lack of protection for farmers, the current regime’s ‘reforms’ which promise relief from ‘middlemen exploitation’ will ultimately expose them to bigger risks. At present, procurement of fruit produce includes APMC mandis, private vendors and even big companies like Adani and ITC.

Fruit growers are well aware that weakening of the APMC mandis would mean a corporate monopoly, and thus an adverse impact on prices.

Solidarity protest at Dharamsala Collectorate in Himachal. Photo: Sumit Mahar

Environmentalists are often critical of the trajectory of the mountain states’ dependence on the state and markets for food and livelihoods. In the long run, given the concerns around ecology and sustainability, we argue that ‘food sovereignty’ and not just ‘security’ needs to be the goal. This requires strengthening of agroforestry, pastoralism and revival of traditional crops apart from several structural changes.

Having said this, protective measures like PDS and MSPs remain the key for survival of the mountain populace at present.

Yet, barring protests led by Left-leaning farmer’s organisations, opposition parties and few social activists, there is a lull on this issue in the hills.

The reasons could be multiple: the direct implications of the three new laws are difficult to comprehend for common people, especially when the mainstream media reportage is pro-government and against the farmers’ agitation. Plus, the difficult conditions of the mountain regions marked by remoteness as well as the harshness of day-to-day life makes organising more tedious. Most importantly, critical voices tend to be drowned out because the actual numbers of mountain farmers (population) is smaller. In the larger scheme of things, it is the vast population concentrated in the ‘bread-basket’, the northern plains, who were bound to be the front-liners in this battle. This does not mean, though, that this struggle is theirs alone.

The ‘food bowl’ of the country runs parallel to the Himalayas with deep geographical, ecological and cultural connections. The Indus and Ganga rivers – originating in the Himalayas – gave birth to and nurtured the fertile Indo-Gangetic plains with their rich sediments and perennial waters.

On the Indus river-powered plains arose diverse cultures, religions, agrarian and semi-industrial economies and trade. From the ancient to the feudal, from the colonial to the modern nation state, each era has contributed to the evolution of shared social and political vulnerabilities of these two distinct but interconnected landscapes and the people who inhabit them.

Fields submerged in the backwaters of Tehri Dam in Uttarakhand Photo: Sumit Mahar

Let us remember that the green revolution was ushered in by building large dams like Bhakra, Pong and Tehri on the Himalayas rivers.

Thousands of families in Himachal Pradesh and Uttarakhand were displaced by these mega projects which swallowed precious farms and forests. Resistance was silenced in the name of national interest. Their ‘sacrifice’ was sought on the promise of a ‘greater common good’ for generations to come.

Also read: How Could the New Farm Laws Bring Agricultural Income Under the Tax Net?

Be it the mountain farmers, who gave up their homes for this good, or those in the plains who were forced to take their lives over the recent decades of the agrarian crisis – their families are living testaments of a shared deception by the failed promise of ‘development’. A development that, inch by inch, is privatising resources and wealth in the hands of a few. Delhi’s borders are reverberating with voices against a blatant takeover, calling the state to account for many shared sacrifices.

The farmers from the Singhu border were in Shimla to bring home this message. To their own people.

Manshi Asher is a researcher-activist associated with Himdhara Collective based in Himachal Pradesh.

Capital Spending May Be Cut to Prevent Breach of Fiscal Deficit Targets

Gross of devolution to the states, both direct and indirect taxes have recorded a modest growth in April-July 2018, with the former likely to be on account of high refunds.

While the year-on-year (YoY) rise in the fiscal and revenue deficit in the first four months of FY2019, and the piercing of the full year budget estimate for the revenue deficit, are discomfiting, this nevertheless comes on the back of the seasonal trend of modest revenue collections in the early part of the year.

Revenue growth stood at a healthy 15% in April-July 2018, outpacing the 9% rise in revenue expenditure and allowing for a robust 17% expansion in capital outlay. However, for the month of July 2018, while revenue expenditure recorded a considerable 21% growth, capital spending displayed a contraction of 9%.

The YoY decline in the tax revenues of the GoI in the month of July 2018 relative to July 2017, appears to have been led by the provisional settlement of a portion of the unsettled IGST balances between the Centre and the States.

Gross of devolution to the states, both direct and indirect taxes have recorded a modest growth in April-July 2018, with the former likely to be on account of high refunds.

The GoI’s non-tax revenues expanded by a robust 30.1% in April-July 2018, albeit on a small base. Based on the surplus to be transferred by the RBI to the GoI in FY 2019, the amount of dividend from nationalised banks and financial institutions and non-financial PSUs to the GoI would need to rise considerably to Rs. 673.1 billion in FY2019 to meet the target, from an estimated Rs 507.1 billion in FY 2018 Prov., which may prove challenging.

Although disinvestment proceeds stood at Rs 92.2 billion in April-July 2018, recording 11% growth over the collections in the first four months of FY2018, they nevertheless stood at a limited 11.5% of the BE for FY2019.

The market would continue to monitor the likelihood of meeting the budgeted targets for revenues related to the GST, dividends and profits, and disinvestment, and assess whether the outlays required for revised MSPs, the NHPS, fuel and other subsidies, and bank recapitalisation would prove to be adequate.

While a fiscal slippage in FY 2019 may not necessarily arise, there is a risk that capital spending would be curtailed to prevent breaching the fiscal deficit targets.

The size of the market borrowing for both the Central and the state governments for H2 FY2019 as well as the expectations regarding the magnitude of open market operations to be conducted by the RBI, would influence G-sec yields going forward.

Aditi Nayar is the principal economist at ICRA Ltd. The views expressed are her own.

India Needs to Make Crop Insurance Work for its Farmers

Overall crop insurance coverage has decreased in recent years as a result of delay in crop-cutting experiments, its high costs and non-payment of insurance claims.

Over the past few months, farmer protests have erupted across India. The common thread across the protests was the demand for the revision of the minimum support price (MSP) and farm loan waivers. However, the focus on MSP addresses just one aspect of the various risks that farmers in India face.

Another risk mitigating measure that has received relatively less focus has been crop insurance. It is pertinent to understand the roles MSP and insurance play in addressing the various risks farmers face in India.

The risks can be broadly classified into yield risks (risks that arise due variability in crop yield)and price risk (risks that arise due variability in crop price). MSP addresses the latter while crop insurance addresses the former. Yield risks arise due to uncontrolled inputs attributable to weather or pests and disease. Yield risks, specifically weather-related risks, are critical and account for nearly 60% of the variation in crop yield. This is primarily induced by weather fluctuations (rainfall etc.).

Weather shocks can create health and nutrition problems that undermine long-term earning capacity. Thus, formal risk mitigation mechanisms, such as crop insurance play a critical role in this sector.

Globally, crop insurance schemes have not succeeded as they have failed to address moral hazard and adverse selection risks. Currently in India, we have two main crop insurance schemes namely the Pradhan Mantri Fasal Bhim Yojana (PMFBY) and the Revised Weather-Based Insurance Coverage Scheme (RWBICS).

PMFBY is yield-based insurance that uses crop-cutting experiments (CCEs) to determine the yield lost by farmers due to natural catastrophes and adverse weather conditions. The yield obtained through the CCE’s determine the payout made by the insurance firm to the farmer. The new scheme looks to improve on the existing schemes by removing caps on the premiums and making use of modern technology. However, there are several problems that exist with the PMFBY such as the delay in crop cutting experiments and its associated high costs, delayed/non-payment of insurance claims to farmers and lack of transparency. As a result, farmers lose interest in the crop insurance schemes.

Another problem that faces crop insurance schemes in India is coverage. The new scheme reveals that overall area insured has decreased over the last 2 years (from 53.7 million hectare in 2015-16 and 57.2 million hectare in 2016-17 to 47.5 million hectare in 2017-18). This is less than 24% of the gross cropped area (against a target of 40%) as compared to 89% in the US and 69% in China.

A promising insurance product that mitigates the risks associated with yield based crop insurance is weather-indexed insurance. It is a financial instrument consisting of contingent claims contracts held by farmers. The payouts are determined by a combination of objective weather parameters (rainfall, temperature etc.) that are highly correlated to crop yields and are automatically triggered once the weather parameters reach a pre-specified level. This results in timely payouts farmers and low administrative costs as there is no need for field-level damage assessment. As the weather index is publicly available & transparent, it allows the insurance companies to transfer a part of their risk to international markets.

However, for weather-indexed insurance to be viable, it is necessary to mitigate basis risk. Basis risk is the possibility that the insurance may not pay out even though the customer has experienced a loss or the insurance pays out even though no loss occurs. In order to address basis risk, it is pertinent to increase the density of automatic weather stations (AWS) and rainfall data loggers in India. At present, there are only 706 AWS installed by the government across the country.

According to a working paper by the Indian Council for Research on International Economic Relations(ICRIER) , the entire country could be covered by installing an additional 33,000 AWS and 170,000 rainfall data loggers. This would cost the government anywhere between Rs 300 crore and Rs 1,400 crore. As weather indices are lead indicators, the government can ensure timely payments by linking land records of farmers with their Aadhaar numbers and bank accounts. Also, the unit area covered under the insurance scheme should be the village for effective targeting and minimisation of basis risk. At present, the only state government to have defined the village as the unit area under insurance is Odisha.

Despite the advantages of weather-indexed insurance, coverage under WBICS continues to remain an issue and the number of farmers insured has declined from 11.25 million in 2014-15 to a little over 2.1 million in 2016-17.

In order to increase coverage, it is necessary for the government to effectively communicate to the farmers the value of insurance products.

At present, insurance products are viewed as an additional cost that the farmer who sees no benefit in purchasing insurance unless mandated as a part of the loan that is extended by rural banks.Credit: Reuters/Files

Research has shown that a farmer’s willingness to buy insurance may be greater when it is tied to credit and the farmer’s knowledge of how index insurance works along with their initial levels of wealth. At present, insurance products are viewed as an additional cost that the farmer has to endure and the farmer sees no benefit in purchasing insurance unless mandated as a part of the loan that is extended to the farmer by rural banks.

This year’s Union budget increased the allocations to PMFBY (Rs 13,000 crore, a 22% increase over its revised estimate in 2017-18) but that alone does not guarantee increased coverage if the above-mentioned measures are not undertaken.

At the end of the day, insurance is a financial instrument that serves to transfer risk not necessarily reduce it. With the effects of climate change becoming more pronounced, risk across the board increases and it is very likely that insurance may no longer be financially viable for the firm and the government which subsidies the insurance scheme. In order to avoid this, it is incumbent upon the central and state governments in creating the necessary infrastructure that allows farmers to adapt effectively to the effects of climate change and thereby reduce the impact of climate change on them.

At present, 52% of India’s total land under agriculture is still unirrigated and rain-fed. The Economic Survey 2017-18 states that climate change could reduce annual agricultural incomes by between 15% and 18% on average, and between 20% and 25% particularly for unirrigated areas. The measures that governments need to take up on war footing include extending irrigation via efficient drip and sprinkler technologies and replacing untargeted subsidies in power and fertiliser with direct transfers.

The Narendra Modi government has made a serious attempt at addressing agrarian distress in India by announcing the revised crop insurance scheme a couple of years ago.

But alas, both the PMFBY & WBICS have neither received the push it ought to have nor have they been accompanied by the financial literacy programmes required for their widespread success.

Nibu Pullamvilavil is an alumnus of the Indian School of Business (ISB) and former LAMP Fellow 2015-16.