Montek Singh Ahluwalia’s ringside insight into India’s agri-policies shows, without reform on food subsidy and MSP, unlocking resources for growth will be difficult.
Last month, Montek Singh Ahluwalia’s book Backstage – The story behind India’s high growth years (Rupa Publications) was released. The book is a travelogue of India’s economic reforms journey, of which Montek had been an insider for about 30 years. Besides some very interesting anecdotes from personal and professional life, the book is full of useful insights into the complexities of policy debates. And, in many instances, it has hardcore evidence of the impact of those policies. This can be extremely useful, moving forward, in propelling the growth of a sluggish economy, and abolishing poverty at the earliest. It is impossible to cover all the interesting things in the book, so here, I shall confine myself to the policy debates and choices in agri-food space.
Agriculture strategy appears in the chapter on inclusive growth. During the UPA period, from 2004-05 to 2013-14, it was premised that inclusive growth is not feasible unless agriculture grows at about 4% per year, while the overall economy grows at about 8% per year. The reason was simple: More than half of the working force at that time was engaged in agriculture, and much of their income was derived from this. But, many political heavy weights, even within the Congress, did not believe that agri-growth could reduce poverty fast enough.
The main instrument of agricultural strategy was the Rashtriya Krishi Vikas Yojana (RKVY), which gave more leverage to states to allocate resources within various schemes pertaining to agriculture. This, along with other infrastructure investments in rural areas, had a beneficial impact both on agri-growth, which increased from 2.9% during the Vajpayee period (1998-99 to 2003-04) to 3.1% during the UPA-1 period (2004-05 to 2008-09), and further to 4.3% under UPA-2 (2009-10 to 2013-14). I strongly believe that the agri-GDP growth under UPA-2 was driven not so much by RKVY as it was by high agri-prices in the wake of the global economic crisis in 2007-08. Nevertheless, this had significant impact on poverty reduction, whichever way that was measured—be it based on the Lakdawala poverty line, or the Tendulkar poverty line, which was actually higher. The rate of decline in poverty (head count ratio), which was about 0.8% per year during 1993-94 to 2004-05, accelerated to 2.1% per year, and for the first time, the absolute number of poor declined by a whopping 138 million during 2004-05 to 2013-14. By the way, this turns out to be true even on the basis of international poverty line of $1.9 per capita per day (on 2011 Purchasing Power Parity) (see graphic).
Interestingly, instead of drum-beating the success of this growth strategy in alleviating poverty faster, several NGOs, and even Congress stalwarts, remained sceptical. They wanted food subsidy under the Right to Food campaign. Sonia Gandhi and her National Advisory Council (NAC) came up with the proposal to subsidise 90% of people by giving them rice and wheat at Rs’3/kg, and Rs’2/kg, respectively. Montek tried to convince them that this is likely to create an unsustainable burden on the exchequer, and that India may also land up importing grains to the tune of 13-15 million tonnes per year. He favoured a capping those covered under the Food Security Act at 40% of the population as the poverty ratio (HCR) in 2011-12 was 22%. He also favoured opting for smart cards for the beneficiaries, so that they can choose to buy other, more nutritious foods also rather than relying only on rice and wheat. That would also have allowed diversification of agriculture, augmenting farmers’ incomes. But, he could not convince Sonia’s NAC of this idea, although the coverage for food subsidy was reduced from the originally proposed 90% to 67% of the population.
Montek also argued against export bans on agricultural commodities as these impacted farmers’ incomes adversely. But, the political configuration often ended up taking the consumer’s side as that was considered pro-poor. This reduced farmers’ incentives, which then had to be compensated by increasing input subsidies.
No wonder, years later, when we estimated the Producer Support Estimates (PSEs), as per the OCED methodology used by a large number of countries that produce more than 70% of the global agri-output, we found a deep negative PSE, indicating implicit taxation of agriculture through trade and marketing policies, even when one accounted for large input subsidies going to farmers (see graphic).
Today, the biggest item in agri-food space in the Union Budget is food subsidy. For the FY21 budget, it is provisioned at Rs’115,570 crore. But, this hides more than it reveals. Lately, the government has been asking the Food Corporation of India (FCI) to borrow from myriad sources, and not fully paying for the food subsidy which should logically be a budgetary item. The outstanding dues of FCI are more than the provisioned subsidy, and if one adds these to the budgeted subsidy, the effective amount of food subsidy comes to Rs’357,688 crore. That shows how much the consumer bias in the system is.
How do we move forward, and what lessons can one learn from Montek’s engagement in policy formulations? The Economic Survey for FY20 makes a case for restricting food subsidy to 20% of population, as the Head Count poverty (as per World Bank’s poverty definition) was only 13.4% in 2015. For the others, beyond 20% of the poorest population, the issue prices of rice and wheat needs to be linked to at least 50% of procurement price, or better still, 50% of the economic cost of FCI. Unless we make progress on this front, it is difficult to unlock ample resources for growth of agriculture, which has again slumped from 4.3% during UPA-2 to 3.1% during Modi 1.0.