Budget 2020: Food, urea subsidy reforms must be priorities

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Published: January 20, 2020 12:43 AM

Budget 2020 India: The budget must be transparent on, and fully account for the Food Subsidy dues to FCI. IF DBT is adopted for food and Urea subsidies, the govt can save upto Rs 50,000 crore.

Budget 2020 India, Budget 2020-21Budget 2020-21: The real fundamental reform for Modi 2.0, would be to move toward direct cash transfers to the intended beneficiaries of food subsidies.

Union Budget 2020 India: Although the Union budget is basically an accounting exercise of revenues and expenditures for the coming year, economy-watchers wait anxiously for the finance minister to announce some major economic reforms. In that sense, the budget of 1991 remains historic; it changed the course of the Indian economy from being a largely socialist, state-controlled one to a somewhat more liberal, market-oriented economy. The results of exchange rate correction, trade policy changes, and delicensing of industry are for everyone to see. The foreign exchange reserves have shot up from $1.4 billion in July 1991 to more than $450 billion today. This is the biggest achievement of the 1991 budget, and has given the economy ample resilience against external shocks. On an economy-wide growth, expectations have been lifted from the famous “Hindu rate of growth” of 3.5% per annum, a term coined by the late agri-economist Raj Krishna, to about 7-8% per annum. Any government that fails to deliver at least 7% growth in GDP on a sustainable basis for the next 10 years would be considered failing on the economic front. The economic credibility of the Modi 2.0 government is at stake on this very account. Can the upcoming budget unleash animal spirits and lift growth to 7% while rationalising some major policies? Here, we focus on agri-food policies.

On top of the list, would be food subsidy. In last year’s budget, food subsidy was provisioned at Rs 1.84 lakh crore. But, the Food Corporation of India (FCI) had uncleared dues from the government to the tune of Rs 1.86 lakh crore. This is simply ‘cheating’, as it were, with regard to transparency in the Union budget. My first submission to the FM would be to ensure transparency, and fully account for food subsidy. And, if she, and the prime minister—the buck stops with him for any major reforms—have any guts to reform this, the country can gain enormously. I had explained in detail what needs to be done in this regard in my last article in this newspaper (bit.ly/2NB4tcd). Suffice it to say that the situation is getting worse by the day. Look at the January 1 picture, against a buffer stock norm of 21.4 million tonnes (mt), the actual stock of grains with the central pool was 75.5 mt, 3.5 times what the government needs to hold. At its economic cost, the value of excess stock with the government stands at Rs 1.6 lakh crore. This high level of ‘dead stocks’ speaks of the government’s sheer incompetence when it comes to reform. There is no better way for the FM to generate revenue than to liquidate these stocks. But, actually, it is a call for the PM to make. Unless he focuses on reforms, inefficiency of the grain management system will keep increasing, and the nation will keep suffering. Also, it is time to revise the central issue price and link it to procurement price, say, half of procurement price. And, if he can limit the applicability of the high food subsidies—rice costs Rs 3/kg and wheat Rs 2/kg—to, say, 40% of the population, he can certainly rationalise food subsidy to a large extent. The real fundamental reform for Modi 2.0, however, would be to move toward direct cash transfers to the intended beneficiaries of food subsidies.

The next big-ticket item is fertiliser subsidy. This is, again, a sector that has been crying for reforms for long. While the last budget provisioned Rs 80,000 crore for fertiliser subsidy, the fertiliser industry had pending bills to the tune of Rs 39,000 crore. The fertiliser industry, today, is demoralised, and even the best private sector players (like the Tatas), with one of the most technically efficient plants, have quit the sector. No new private sector player is enthused for new plants; and, finally, the government has forced its public sector units to invest in five new urea plants, whose costs remain murky, and certainly higher, than the average cost of existing units. The real problem of this sector is the imbalance in the policy for fertiliser subsidisation: while urea (N) is subsidised to the extent of 75% of its cost, this is only 25% for phosphatic (P) and potassic (K) fertilisers. The result is a highly unbalanced use of N, P, and K on farmers’ fields, giving a low fertiliser-to-grain response ratio, and degrading soils, underground water, and environment with excessive nitrogen. All this is nothing short of cruelty to our natural resources, and farmers, especially the ones who want to pursue natural farming, as they don’t get subsidies anywhere near the what chemical-based fertilisers do. The solution to this is either to bring nitrogenous fertilisers under the nutrient-based subsidy (NBS) scheme or, better, to move towards direct cash transfers to fertilisers on a per hectare basis, with some adjustment for irrigated tracts (say, irrigated land will get 1.5 times the subsidy than the unirrigated kind due to higher cropping intensity on the former).

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If Modi 2.0 can usher in this fundamental reform, i.e., moving towards direct cash transfers to intended beneficiaries, in food and fertiliser subsidy, he will go down in history for setting the agriculture sector on a sustainable growth path, with a minimum annual saving of Rs 50,000 crore. These can then be invested in better water management, especially drip irrigation (‘more crop per drop’); better infrastructure for agri-markets, along with reforming APMC laws so that farmers can get better prices for their produce; in putting up ‘solar trees’ to harvest solar power on farmers’ fields, with buy back arrangement for surplus power, etc.

All such investments will go a long way to augment farmers’ incomes in a sustainable manner. Else, I am afraid, much of the talk regarding agri-reforms in the Union budget will remain mere rhetoric!

The writer is Infosys Chair Professor for Agriculture, ICRIER. Views are personal.

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