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Time for pre-poll sops – especially for farming community
During the last four and half years of administration, Modi government has touched every corner of the economy at its fullest extent. There were few remarkable legislations like GST, insolvency & bankruptcy code etc., which made the economy more formal and forever changed the way business was done between the lender & borrower. GDP growth rate advanced from 6.4% in FY14 to 8.2% in FY16. However, it declined to 6.7% in FY18, mainly due to twin shocks of currency demonetization and implementation of national tax administration (GST). This government is criticized on two fronts i.e. having a job less growth & rising unemployment. And another one is the rising farmer’s woes arising from falling crop prices and higher cost of farming, thereby cumulatively impacting their income. Recently, after the Comptroller and Auditor General of India (CAG) report on the off-budget financing another major concern arising is of worsening fiscal space. Generally, these first two issues easily get attention from the general masses and can become a relevant concern in the upcoming national elections.
Firstly, the rising unemployment cannot be addressed through short term measures, however the government has touched the right note by allowing 10% reservation in jobs and education for the economically weaker section from the general category without disturbing other caste category reservations. But in totality the real question is where is the employment? If we go by the recent Centre for Monitoring Indian Economy report, around 11mn Indians lost their jobs in 2018, taking unemployment rate to 7.4% in Dec. 2018. So job creation would be long term process and the government would like to address this through its continued thrust on infrastructure creation and initiatives that would bridge the gap between the skillset possessed and skillset demanded by the job creating industries. Considering the interim nature of the budget, we feel that the later part would not be touched by the government.
Rising farming worries was first reflected in the Gujarat assembly elections. Subsequently, the government has increased the MSP of majority of crops, which guarantees 50% price above the cost of produce. Other previous initiatives like crop insurance, e-NAM, PM Aasha were also streamlined and implemented without any result. Higher MSP prices too did not have any impact as the prevailing market prices were below it and procurement from the government agencies has been limited as they already had overflowing stocks that they cannot offload without incurring massive losses. Increasing farm worries became a major poll issue in the assembly elections in three hindi heartland i.e. Rajasthan, Madhya Pradesh and Chhattisgarh. BJP’s loss in the hindi heartland has created a apprehension of nation-wide farm loan waiver among the party and masses. With PM Modi airing publically, that he is not in favour of farm loan waiver, but instead would consider taking effective steps to address the agrarian distress ahead of a national election. After taking various initiatives over the last 4-5 years that would lead in doubling the farm income by 2022, we strongly feel that the government has limited short term measures and instead go for providing income support to the farmers, which is also the current flavor to address the agrarian crisis.
Since this will be the last budget, conventionally, a government at the end of its term had gone in for a vote on account rather than a full budget. Nevertheless, considering the immediate requirement and larger interest of the economy, the government would at least address the above two issues and additionally might give tax sops to woo the voters. Another important area to check is the fiscal deficit level and the disclosures towards off-balance sheet financing. A five year report card would also be presented highlighting the achievements.
* Below are some of the steps the government would take in the coming Finance Bill 2019:
* Sops for farming sector
1. Income support for farmers
2. Zero interest crop loan
3. Higher allocation towards interest subvention on crop loans
* Introduction of universal basic income, but implementation to be deferred
* Continued thrust on infrastructure creation for employment generation
* Clarity on Angel Tax
* Relief in personal income tax
* Surprise element would be removal of long term capital gain tax
* Anticipating a slight miss on the disinvestment target
* Fiscal situation serious; consolidation to be prolonged
* Sops for farming sector:
To address the farm distress, the government is likely to provide income support for the farmers, which would be in-line with the Rythu Bandhu and Krushak Assistance for Livelihood and Income Augmentation (KALIA) scheme implemented by Telangana and Odisha state government, respectively. PM Modi might remove the anomalies in these schemes, so that it is beneficial for the targeted population. The budget might provide an assistance of Rs. 5,000 per acres per season for the farmers owning land up to five acres. The central government’s income support policy would most likely resemble the KALIA scheme, which covers small farmers, tenants and farm labourers. According to the 10th Agricultural Census 2015-16, small & marginal farmers (S&MF) with less than two hectares (i.e. around five acers) of land account for 86.2% of all farmers in India, but own just 47.3% of the crop area. As per our calculation, total cost for providing support to the S&MF would be around Rs. 918.3bn for land cultivated one time and Rs. 1,836.7bn for land cultivated twice in a year. Since farming is under state government domain, respective state government would have to share this cost. Assuming 40% to be shared by the state governments, cost of income support to the central government would comes out to be Rs. 551bn for single cultivated land and Rs. 1,102bn for land cultivated twice in a year. Further, we believe that it would not be an annual exercise/cost, but would be implemented for limited period say five seasons. In the mean time, the government would further streamline its various farm policies/initiatives, so that it is effective in doubling the farm income by 2022. If this becomes an annual exercise for a considerable period of time, the government would combine all farm subsidies i.e. fertilizers, seed, MSPs etc. and pay farmers cash to get rid of subsidies.
Implementing this scheme would be a herculean task, as the targeted farmers needs to be identified, post that direct transfer would be easy because of massive financial inclusion that happened over the past years. Also since around 10 states are in the process of or implemented some kind of income support to the farmers, it is unlikely that every state would come onboard.
Additional measure the government would take to increase the agriculture credit outlay. In FY18, the government has exceeded its agricultural credit target of Rs. 10lakh crore by disbursing Rs. 11.62lakh crore. For the current fiscal it has set a target of Rs. 11lakh crore, of which till first half of FY19, it has disbursed around 60% of the target and is expected to again exceed the target. In the budget, the government is likely to increase the agricultural credit outlay to Rs. 13-14 lakh crore for FY20.
It is also likely to provide interest subsidy or provide interest free crop loans, but with conditions. For FY18, the government has budgeted a interest subvention for agricultural loans to around Rs. 15,000 crore as against the actual spent of Rs. 13,000 crore. As on 26th Dec. 2018, it has spent around Rs. 10,555 crore to subsidise interest on farm credit. Currently, the central government pays 2% interest subvention on the base rate of the banks. Additional 3% interest subsidy on crop loan of up to Rs. 3 lakh is paid to the farmers who pays loan in one year. As per certain media reports, in this budget the government is likely to increase the farm interest subsidy outlay to Rs. 23,000 crore.
Few measure would also be taken to improve the farm export, which has plummeted from UDS 42.6bn in FY14 to USD 15.7bn in Apr.-Oct. 2018 period.
Concluding this, a fall in the inflation at the cost of lower food prices combined with farm distress is not a good sign for an economy, which target to have a sustainable economic growth of 8-9%. Rural consumption, which forms around 55% of overall consumption and drives whole economy, if not addressed would pull down the economic growth.
* Introduction of universal basic income (UBI), but implementation to be deferred:
To woo the poor sections of the entire population, the government might introduce UBI, through which it would provide monthly income per individual. Main opposition party Congress has also already said that it will implement UBI once it comes into power. Providing such massive scheme would put severe pressure on the government's finances. However, to counter the same, it would announce it but would implement it in latter part of second term. This again would be a herculean task to identify the poor or below poverty line families. If it is implement, then it would replace other social schemes like Mahatma Gandhi National Rural Employment Guarantee Act, 2005.
* Continued thrust on infrastructure creation for employment generation:
In terms of tax concessions, this was one of our expectations from the 2018 Union Budget, but was not addressed. However, we reiterate our similar expectations from this budget. The government would focus on non-agri labour intensive sectors such as construction, real estate and textile to boost both employment generation and growth. The government should try to give incentives to these sectors in terms of tax concessions for creating employment. This coupled with focus on the infrastructure creation would significantly improve the job market in India and at the same time have a multiplier positive impact on the overall economy. This would also help in remaining attractive when most of the developed economies have reduced the tax rate. However, in current context of expanding fiscal deficit, we feel that the government would not reduce the tax rate but can give some tax concession for creating employment. Additionally, to boost the investment cycle, the government may re-introduce investment allowance for all type of capital expansions and modernization to encourage investment cycle and boost Make in India.
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