Why the government's claim about a farmer-oriented Budget is rather exaggerated

A country's Budget is a statement of intentions. It’s no different from a household budget, where we prioritise expenditures and plan to provide for them through incomes and savings. Budgeting often implies trade-offs. It’s like a parent giving up cigarettes to provide more milk for the growing children. When you want to create additional space or need to repair a leaking roof, you need to make a capital expenditure, which is made possible by making other cuts or trade-offs or even borrowing. The only difference between the budgets of a Union government and a household is that the nation state has a printing press, where it can runoff more money when it falls short. This is called the fiscal deficit.

It normal circumstances, the Budget is mostly a reaffirmation of ongoing expenditures. Most of the Budget is decided by past commitments, existing structures, and ongoing programmes. In other words, more than 95% of the Budget is pretty much a given. Long-term fiscal planning and tax policies also serve to stablise budgetary regimes. It is only when there is a crisis or when a major directional change is needed that Budgets deviate.

Worrying trends

For the past two years, approximately half of the country’s rainfed areas, which account for almost 60% of the cultivated areas, have been gripped by a severe drought. The numbers show the impact. Since 2011-'12, foodgrain production has been grounded at about 260 million tonnes. In 2014-'15, it was down to 253 million tonnes and the production has grown by less than a million tonnes in the past year.

The economic manifestation of a drought is in the huge fall in purchasing power, which has been visible in the abrupt decline in rural consumption of tractors, motorcycles, white goods and fast-moving consumer goods. Another alarming factor is the rise in farmer suicides, which has been highlighted by the media.

Clearly there is an emergency. We are yet to see any efforts to create jobs in the affected areas. One would have thought that the Union finance minister would have been sensitive to this issue and addressed the situation more directly.

The other big trend, which should cause concern, is the fall in the savings to Gross Domestic Product ratio, which is down to 31% last year from 38% in 2008. This has had consequences on the investment to GDP ratio, which in turn has fallen from 39% to 31% this year. When investment begins to decline, GDP growth and job creation slows down, which is very apparent at the moment.

The government had forecast a nominal GDP growth of over 12.5% last year, but at 5.1%, what was finally achieved was less than half of the projection. Mercifully for the official statisticians, we had a Wholesale Price Index deflation of 2.5%, which is how the “real” GDP is seen growing at 7.6%. But revenues and taxes accumulate at nominal rates, and that too has had an impact on government expenditure. In 2012-13, the expenditure to GDP ratio was 14.1%. Last year, it was down to 13.1%.

Big promises

All these are worrisome trends. The question then is whether the government is doing anything to remedy the problems.

The prime minister made a rather dramatic statement that he would ensure that farmer incomes double in the next five years. The finance minister repeated this assurance in his Budget speech on Monday. There are only two ways to fulfill this promise.

One is if food production stagnates at the current level, as it has done these past years, in which case increased demand will drive up prices. Surely the government does not want this to happen.

The other approach is to substantially increase farm productivity and to convert to better paying horticulture and vegetable farming. Such conversions are also capital intensive. And while the land use is being changed, there are implied issues of sustenance. But does the Budget provide for such an eventuality? Sadly, no.

Rather, the finance minister is guilty of a chicanery. He announced on Monday that the allocation for agriculture has been raised from Rs 15,809 crore in 2015-'16 to Rs 35,983 crore for 2016-'17 – a huge jump of 127%. The minister has made this possible by transferring subsidy on farm loans from the accounting head of the Department of Financial Services to the Department of Agriculture. He has simply moved money across columns by creating a new label. Very sharp indeed.

Minimal takeaways

There are small takeaways for rural employment though. The finance minister has resisted the temptation to cut allocation for the previous government's flagship Mahatma Gandhi Rural Employment Guarantee Act. He has also provided an additional amount of almost Rs 4,000 crore, to provide a total of Rs 19,000 crore for the Pradhan Mantri Gram Sadak Yojana. This will create jobs, as smaller rural roads tend to be more manpower intensive.

Despite the finance minister’s claims about the Budget’s supposed focus on irrigation, the sad reality is that he has not made significant changes to the outlay for the Pradhan Mantri Krishi Sinchai Yojana, which only went up by Rs 197 crore, from Rs 7,392 crore to Rs 7,589 crore. Therefore, the claim that the Budget is farmer-oriented is a bit exaggerated and the government has not put the money where its mouth is.

Dr Arvind Subramaniam, the Chief Economic Advisor, told us about how a large chunk of subsidies are being wasted on the undeserving – an issue also highlighted in the Economic Survey.

Last year, the government earmarked Rs 2,57,801 crore for subsidies, of which Rs 1,40,000 crore was for food and Rs 72,000 crore was for fertilisers. The total subsidy outlay has been hovering around this level for the past few years, not owing to any restraints, but because the petroleum subsidy has come down from Rs 85,378 crores in 2013-'14 to Rs 26,947 crores this year because of the fall in oil prices. So the government has benefited from a windfall rather than any display of political will or new thinking.

Another saving I was hoping for was that the revenue foregone by way of deductions, exemptions and write-offs would have come down somewhat. This has remained almost steady during the last two years at about Rs 5.7 lakh crore, out of a total tax collection of about Rs 13.5 lakh crore. This is a big chunk.

The finance minister has ignored the usual blandishments for a a bigger tax cut and we must be grateful for small mercies. This is a Budget in the old direction and with no new intentions.