The govt has wasted four years already, but can revolutionise both agriculture and fix subsidies if UBI is done well.
If the Narendra Modi government comes out with a modified universal basic income (UBI) scheme for farmers along the lines of Telangana’s Rhythu Bandhu or Odisha’s Kalia, it will be ironic since the Shanta Kumar panel on restructuring the Food Corporation of India (FCI) had recommended this four years ago. Though setting up the panel was one of the first things Modi did when coming to power, he sat on the report and continued to tinker with farm sector reform in the period after that.
In the process, his party lost important state elections in Chhattisgarh and Madhya Pradesh. Indeed, in the run-up to the last set of assembly elections, it was clear farm distress would be a big factor against the BJP. Instead of a UBI that would have had an immediate impact, Modi allowed his bureaucrats and Cabinet colleagues to convince him that increasing procurement prices was good enough—sadly, he still mentions the increase in MSP as a big achievement of his government—despite there being enough evidence to show that it would do nothing of the sort. Right now, mainly rice and wheat are procured in just 4-5 states—as the Shanta Kumar panel put it, just 4-5% of all farmers benefit from such procurement. Yet, despite there being no evidence of a system of increased procurement being put in place across various states, the prime minister was led to believe that higher MSPs, and for more crops, would be the BJP’s brahmastra.
It was similar bad advice that caused a slowdown in exploration and production of natural gas in the country a few years ago. After it became clear that the cap on prices at a level much below international levels—producers were paid $4.2 per mmBtu versus the $8-12 being paid for imports—was discouraging production, the UPA set up the Rangarajan panel to examine this; that recommended doubling prices for five years in addition to coming up with a roadmap to decontrol prices after that. Since a series of UPA scams like 2G convinced the BJP that every UPA action was a potential scam, the government didn’t increase prices; as a result, potential investors put their plans on hold. The BJP raised prices two years later, but with oil prices having crashed by then, it took a year more for RIL-BP to announce a big investment.
While the lack of effective procurement has resulted in a situation where farm prices of most crops are 20-30% below the announced MSP, another big reform announcement—that of a pan-Indian electronic market, e-NAM—also came a cropper; indeed, anxious to show high sales, some BJP states even started showing FCI procurement as e-NAM sales! While the government got good press from states like Maharashtra—and Delhi when it was under the President’s rule—abolishing the APMC control over mandis like Azadpur and Vashi, this had little impact on the prices farmers got since the government never provided free land around them to set up new mandis that were not controlled by cartels.
A series of ill-advised farm-loan waivers—Modi kicked off this race in the Uttar Pradesh campaign—also resulted in a reduction in the number of farmers covered by the ambitious insurance scheme since all farmers taking bank loans were covered by this automatically. Large delays in settling claims also turned off farmers despite the fact that they were paying a small fraction of the annual premium.
If Modi is to come to power again, hopefully he has learned the lessons of the past, that well functioning markets are the only way for farmers to get their dues and that, till the time it takes to get them to function, direct income support is a better bet than schemes like MSP that get cornered by just the top farmers. Indeed, in even the case of subsidies like those on fertiliser or electricity—the latter are given by the state governments, not the Centre—these are cornered by farmers with large landholdings.
While Telangana’s Rhythu Bandhu had the advantage of treating farm distress directly, it was disproportionately directed towards larger farmers since it gave money on a per acre basis and, by virtue of that, had nothing for landless labourers. Odisha’s Kalia takes care of that since the scheme is only meant for small and marginal farmers, sharecroppers and landless labourers; this has associated risks, of which more later.
If Modi is to move towards a UBI, as various media reports suggest he is planning, he will not only be able to start resolving farm stress—there is no long-term substitute for ensuring markets are freed up—he will also be able to trigger off a big agriculture reform since government-mandated MSPs will no longer drive production, this will be determined by market demand. But if such a scheme is to be viable, it needs to be accompanied by a phasing out of existing agriculture subsidies.
Instead of the current FCI-led system, for instance, it is better to give the 80 crore people covered by the Food Security Act Rs 20-25 per kg—the difference between the ration-shop and free-market prices—for their 5-kg monthly entitlement. Even while an attempt should be made to get the better-off people to #GiveItUp (as in LPG), this alone will result in a Rs 30,000-40,000 crore annual saving in subsidies as a result of not having to run the FCI-ration shop system. Once this is done, the government can also dispose off FCI’s mountain of excess buffer stocks; this will, in turn, fetch over a lakh crore rupees. A related benefit is that, with limited FCI procurement, to just a small buffer stock, India’s WTO problems will also get resolved since those are related to FCI’s procurement and then selling at a discount to clear stocks; some exporters buy and sell this wheat/rice, giving rise to the charge that India is subsidising its exports. Needless to say, big farmers and states like Punjab and Haryana — that gain the most from the MSP system — will try to convince Modi, as in the past, that the system will never work.
In the case of fertilisers, once farmers get a fixed UBI, and fertilisers are then sold at market prices, this will also ensure lower consumption and less damage to the soil due to overuse; only then will fertiliser firms be exposed to competition. UBI, only if accompanied by a removal of other subsidies—as finance minister Arun Jaitley has been recommending—is in many ways the silver bullet to the farm sector’s problems.