BUDGET, FARMERS AND SOCIAL SECTOR
Ruddar Datt
Ruddar Datt
Finance Minister Mr. P C Chidambaram presented his 2008-09 budget on 29th February 2008. The budget was hailed as ‘revolutionary’ by the Congress leaders, but ‘irresponsible’ by others who felt that the Finance Minister to satisfy a large section of the farmers has proposed a huge package of Rs. 60,000 crores of relief. So far as the marginal and small farmers (with holdings less than two hectares) are concerned, full waiver of outstanding loans has been promised, while for other farmers there will be one-time settlement (OTS) for all loans that were overdue on December 31, 2007. Under OTS, a rebate of 25 % will be given against payment of balance of 75 percent.
Many questions have been raised by the critics. Firstly, the loan waiver was used during Mr. V P Singh regime and it impacted on the culture of credit. The defaulters were rewarded and honest farmers who repaid their due installments were penalized. Moreover, the defaulters would be eligible for fresh loans after the waiver and they would continue to default and wait for a waiver package in future. Thus it creates a moral hazard since farmer-borrowers are likely to assume that the future outstanding loans will also be written off.
The Government had appointed a Committee headed by Mr. R. Radhakrishna to study the problem of agricultural indebtedness. This Committee, as Mr. Chidambaram himself admitted, did not recommend such a waiver. According to the Report of R. Radhakrishna Committee, 48% of the farmers surveyed were indebted. For more than 49% of the indebted farmers – with holdings up to 2 hectares, also the target of Chidambaram’s waiver – the sources of loans were non-institutional agencies. The package promised by Mr. Chidambaram will thus be available to a little more than half of the marginal and small farmers.
According to the National Sample Survey Organization 59th Report, 43 percent of the farmers obtained loans from non-institutional sources, mainly money lenders. 53 percent of the loans carried an interest rate of more than 15%. The more distressing fact is that 16 percent of the loans from non-institutional sources were burdened with an interest rate of 30 percent. Since the loan-waiver covers only institutional credit taken from commercial banks, rural regional banks and co-operatives, a big proportion of the most vulnerable group of farmers has been left out of the benefit of loan waiver. The Finance Minister intended to produce a dramatic effect for his political adventure of loan waiver in view of the impending general election, rather than take more enduring measures to remove the deep distress of farmers. It would have been far more prudent to take up the non-dramatic measures recommended by Radhakrishna panel.
Radhakrishna Committee had recommended “formalization of non-formal credit of farmers” who have taken loans from moneylenders. The banks could be used to provide one-time long term loans to farmers to enable them to repay their debt to moneylenders. This could be achieved by taking the help of Panchayati Raj institutions, NGOs and farmers organizations to negotiate settlement of loans by the moneylenders. Simultaneously, the committee had recommended the creation of Moneylenders Debt Redemption Fund with a corpus of Rs. 1,000 crores to begin with. But instead of providing more enduring relief to the most vulnerable section of the farmers, the Finance Minister, being in a hurry to produce a ‘magic effect’ opted for a blanket waiver for all loans from banks and co-operatives. Need it be mentioned that two lakh suicide deaths of farmers during the last decade were mainly due to the crushing burden of moneylenders loans on the farmers, according to the Study of Tata Institute of Social Sciences.
Secondly, the National Commission on Farmers had recommended that agricultural credit should be provided at 4% rate of interest. Nothing seems to have been done to move towards this goal so that the poor farmers could be helped on a longterm basis in reducing the burden of debt.
Thirdly, the Finance Minister did not make any distinction on the nature of land i.e. whether it is irrigated or dryland. States like Chattisgarh, Maharashtra, Madhya Pradesh and Rajasthan with 53% to 75% of the small and marginal farmers would be adversely affected. Such a distinction was made while fixing ceiling on agricultural holdings in the seventies. This legitimate distinction should have been made by the Finance Minister in view of social justice criterion.
Fourthly, there is a need to improve the minimum support price (MSP) for farmers. The Government is faced with the problem of stagnation of foodgrains production, especially that of wheat, during the last few years. Consequently, the government is forced to import 5 million tonnes of wheat at much higher international prices in comparison with the minimum support price to farmers. As a consequence, our food security is being threatened and a larger proportion of food subsidy will be consumed for food imports. It is, therefore, desirable that MSP for farmers should be raised keeping in view the rising costs of cultivation with an escalation of the prices of agricultural inputs – seeds and fertilizers.
Fifthly, a major cause of suicides, more especially in Vidharbha and other cotton producing regions was due to the very low prices of international cotton. The Government of USA is providing huge subsidies to its cotton producing farmers. As a result, international cotton prices are depressed. There is a strong need to protect Indian farmers against this unhealthy competition.
Last, but not the least, is the decline in public investment in agriculture after the introduction of economic reforms in 1991. Although it was expected that private sector investment would increase, yet it was observed that private sector investment was concentrated in diesel pumping sets, tractors, harvesters etc. which led to the mechanization of agriculture. Excessive use of diesel pumping sets resulted in a decline in water table, even in agriculturally better off state like Punjab which also reduced increase in foodgrains production. Public investment in irrigation and watershed development declined in the post-reform period. Consequently, gross capital formation in agriculture which was 2.45 percent of GDP in 1999-00 indicated a decline to 2.1 percent in 2002-03 and it further declined sharply to 1.61 percent in 2006-07. However, 58% of the population was dependent on agriculture for its livelihood in agriculture. There is a need to reverse this trend, more especially, in agriculturally backward states to improve the lot of farmers.
Although the Finance Minister announced a loan-waiver package of Rs. 60,000, he did not make any provision in the budget to compensate for the loss to the banks. There was speculation among the top bank executives that the Government may be issuing bonds so that the banks can writer off the loans and clean their balance sheets of the non-performing assets created by the defaulter farmers-borrowers. Business Line in its editorial dated March 5, 2008 clarifies the point: “what does this magical figure represent? The entire outstandings of the scheduled banks’ credit to the sector upto December 2007 or are the NPAs a fraction of that – Rs. 7,637 crores by March 2007. The Finance Minister’s figure is the total outstanding credit due to all the three entities – banks, co-operative banks and RRBs.”
But the Prime Minister clarified in the Parliament that the government will pay the lending institutions out of the expected increase in tax revenues over the budgeted provision. There is, therefore, uncertainty about the budgetary provision for loan waiver scheme even now.
From an analysis of the loan-waiver scheme, it follows that the scheme was politically motivated. That is why the opposition described the 2008-09 budget as an “election budget.” The government opted for a dramatic measure of debt relief for all marginal and small borrowers and partial relief for other farmer-borrowers. It was restricted to institutional borrowers and 43% of the non-institutional borrowers were left to shiver in cold. Keeping in view the vulnerability of non-institutional borrowers and the high rate of interest ranging from 15 to 30% charged by the moneylenders, they deserved to be bailed out first. Moreover, an illogical decision was taken to have a uniform cutt-off of less than 2 hectares of landhording, irrespective of the fact whether the holding was irrigated or unirrigated. This runs counter to the concept of social justice. No effort has been made to adopt the recommendation of Radhakrishna Panel to create Moneylenders Debt Redemption Fund and help farmers to come out of the clutches of the moneylenders. Neither did the Scheme emphasize reduction in rate of interest to a level of 4% as recommended by the Swaminathan Commission on National Farmers.
It would have been far better to adopt more enduring measures to improve the plight of farmers, but since the UPA Government seemed to be in a hurry, it presented a half-baked loan waiver scheme intended to have an electrifying effect on farmers. Whether it will be able to provide relief to 4 crore farmers by 30th June 2008 as targeted by the Finance Minister is also considered very doubtful, given the past record of our bureaucracy. The experience of loanwaivers in our country in 1990 underlined the lesson that such schemes are recipes for disaster, rather than becoming instruments in structural change in agriculture.
Social Sector in 2008-09 Budget
The Finance Minister in his budget speech mentioned: “The revenue deficit is estimated at Rs. 55,184 crore, which amounts to 1.0 percent of GDP…. However, because of the conscious shift in expenditure in favour of health, education and the social sector, we may need one more year to eliminate the revenue deficit. In my view, this is an entirely acceptable deferment” (Budget Speech 2008-09, p.22).
Since total expenditure of the budget has increased from Rs.6,80,521 crore in 2007-08 (BE) to Rs.7,50,884 crores in 2008-09 (BE), it implies 10.3% increase in overall expenditure. Total social sector expenditure in the budget has increased from Rs. 61,137 crore in 2007-08 (BE) to Rs. 72,093 crore (BE) – an increase by 17.9%. Due to the overall increase in expenditure by 10.3%, the social sector has been provided 7.6% more than the normal expected increase. In absolute terms, the budget increase in social sector expenditure for 2008-09 works out to be Rs.10,956 crore which is only 19.9% of total revenue deficit of Rs.55,184 crore. The Finance Minister has, therefore, over-estimated the impact of increase in social sector expenditure as the principal cause of revenue deficit. FM should, therefore, find other factors responsible for the remaining 80 percent increase in the revenue deficit.
As a proportion of total budget expenditure, social sector expenditure was 9.0% in 2007-08 (BE) and it has been increased to 9.6% in 2008-09 (BE). This is a very marginal shift in the proportion of social sector expenditure, which cannot be described as “conscious shift”.
However, it may be noted that while Rs. 61,137 crore were budgeted for social sector in 2007-08, the revised estimates now place it at Rs. 57,050 crore – Rs. 4,087 crore less than the budgeted expenditure. This implies that the utilization rate of social sector of the budget provision was 93.3 percent. Consequently, social sector expenditure (revised estimate) accounts for only 8% of total expenditure in 2007-08 (BE). The biggest slippage was in education in which the utilization rate was only 88.7%, followed by health & family welfare 94.8%. The upshot of this analysis is that providing large increases in two major items of social sector – education and health – should also be accompanied by improvements in the utilization rate, failing which the intended objective of higher allocations may not be achieved. It is necessary to improve the absorptive capacity with higher provisions under various heads.
Under-estimation of the Revenue and fiscal deficits
Unlike the Railway Budget (2008-09) which has made a provision for the escalation of expenditure as a consequence of Sixth pay Commission recommendations, the Central government budget has not made any provision for the purpose. However, it has been estimated that this may require Rs. 20,000 to 25,000 crores. Besides this, Rs. 20,000 crores to be paid to commercial banks and co-operative banks due to the loan waiver scheme in 2008-09 have not been provided. Taken together, there is a demand for Rs. 40,000 to 45,000 crores likely to arise due to both these expected expenditures.
Even if it is conceded that as a consequence of better tax compliance, an additional Rs. 15,000 crores becomes available, it still leaves a gap of Rs. 30,000 crores.
The Government is toying with the idea of raising it by marginal disinvestment of public sector enterprises, but due to strong opposition from left parties and trade unions, it may not succeed or achieve its target of generating Rs. 11,065 crores only partially.
Keeping these factors in mind, the inevitable conclusion is that there is an under-estimation of revenue deficit. The Finance Minister has already pleaded for post-ponement of FRBM target of attaining zero revenue deficit by one more year, i.e. instead of 2008-09 to 2009-10. The whole purpose of reducing revenue deficit to zero as per the FRBM target in 2008-09 was to obtain more resources for governments’ capital expenditure. (Fiscal deficit minus revenue deficit is the amount of borrowed money available for capital expenditure, mainly infrastructure) which is very necessary for promoting and sustaining high GDP economic growth.
To conclude, budget (2008-09) has mainly focussed on short-term gains and by a populist measure like the loan waiver, it aimed at reaping political dividend in the forthcoming general election. Obviously, politics has taken precedence over economics in the budget. Professor Shyamal Roy of IIM Banglore is right when he draws the following conclusion: “The 2008-09 budget thus runs the risk of being dubbed as a budget with a short term focus.” (Economic Times, March 4, 2008).
Note:
The Government has now realized the flaws in the Scheme and has been forced by its critics to modify it. The Finance Minister has submitted a proposal in the supplementary budget to provide Rs. 10,000 crores for the debt waiver scheme. The Government is also reconsidering the size of the holding in irrigated and dry areas and thus may cover holdings upto 4-6 hectares for the purpose in dry areas.
As a proportion of total budget expenditure, social sector expenditure was 9.0% in 2007-08 (BE) and it has been increased to 9.6% in 2008-09 (BE). This is a very marginal shift in the proportion of social sector expenditure, which cannot be described as “conscious shift”.
However, it may be noted that while Rs. 61,137 crore were budgeted for social sector in 2007-08, the revised estimates now place it at Rs. 57,050 crore – Rs. 4,087 crore less than the budgeted expenditure. This implies that the utilization rate of social sector of the budget provision was 93.3 percent. Consequently, social sector expenditure (revised estimate) accounts for only 8% of total expenditure in 2007-08 (BE). The biggest slippage was in education in which the utilization rate was only 88.7%, followed by health & family welfare 94.8%. The upshot of this analysis is that providing large increases in two major items of social sector – education and health – should also be accompanied by improvements in the utilization rate, failing which the intended objective of higher allocations may not be achieved. It is necessary to improve the absorptive capacity with higher provisions under various heads.
Under-estimation of the Revenue and fiscal deficits
Unlike the Railway Budget (2008-09) which has made a provision for the escalation of expenditure as a consequence of Sixth pay Commission recommendations, the Central government budget has not made any provision for the purpose. However, it has been estimated that this may require Rs. 20,000 to 25,000 crores. Besides this, Rs. 20,000 crores to be paid to commercial banks and co-operative banks due to the loan waiver scheme in 2008-09 have not been provided. Taken together, there is a demand for Rs. 40,000 to 45,000 crores likely to arise due to both these expected expenditures.
Even if it is conceded that as a consequence of better tax compliance, an additional Rs. 15,000 crores becomes available, it still leaves a gap of Rs. 30,000 crores.
The Government is toying with the idea of raising it by marginal disinvestment of public sector enterprises, but due to strong opposition from left parties and trade unions, it may not succeed or achieve its target of generating Rs. 11,065 crores only partially.
Keeping these factors in mind, the inevitable conclusion is that there is an under-estimation of revenue deficit. The Finance Minister has already pleaded for post-ponement of FRBM target of attaining zero revenue deficit by one more year, i.e. instead of 2008-09 to 2009-10. The whole purpose of reducing revenue deficit to zero as per the FRBM target in 2008-09 was to obtain more resources for governments’ capital expenditure. (Fiscal deficit minus revenue deficit is the amount of borrowed money available for capital expenditure, mainly infrastructure) which is very necessary for promoting and sustaining high GDP economic growth.
To conclude, budget (2008-09) has mainly focussed on short-term gains and by a populist measure like the loan waiver, it aimed at reaping political dividend in the forthcoming general election. Obviously, politics has taken precedence over economics in the budget. Professor Shyamal Roy of IIM Banglore is right when he draws the following conclusion: “The 2008-09 budget thus runs the risk of being dubbed as a budget with a short term focus.” (Economic Times, March 4, 2008).
Note:
The Government has now realized the flaws in the Scheme and has been forced by its critics to modify it. The Finance Minister has submitted a proposal in the supplementary budget to provide Rs. 10,000 crores for the debt waiver scheme. The Government is also reconsidering the size of the holding in irrigated and dry areas and thus may cover holdings upto 4-6 hectares for the purpose in dry areas.
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