Budget boost to rural India likely

“Striving to better, oft we mar what’s well” - William Shakespeare.

With the Union Budget to be presented on February 1, it is expected that the Finance Minister will make a significantly higher allocation for investment in rural infrastructure. It is highly vital for addressing rural distress. In 2016, it was estimated around 22 per cent Indians are living below poverty line.

The situation could be worse than it looks, particularly in rural areas. Jaitley faces a tricky situation due to certain unexpected economic events between November 2016 and November 2017, such as flawed demonetisation policy, hurriedly implemented Goods and Services Tax (GST) etc.

The Budget is being presented at a time when economic growth has moderated. As per advance estimates, the GDP growth is estimated to slow to 6.5 per cent in 2017-18 from 7.1 per cent in the previous year. The secular decline in gross fixed capital formation from a high of 34 per cent of GDP in 2011-12 to 26 per cent in 2016-17 is another matter of concern. Hence, driving up the economy by stimulating investment and growth assumes special significance. The Budget has to perform a balancing act between maintaining fiscal prudence and providing a growth stimulus.

The GST syndrome
There are several reasons behind lack of clarity in the preparation of the 2018 budget. Besides several problems plaguing the economy for the past two years, the biggest issue is the Goods and Services Tax (GST). The GST Council made sweeping cuts to the GST rates that came into effect on November 15, 2017. This would definitely and sharply hit tax collection.

Besides, the final data for the remaining period (November 15, 2017 – January 31, 2018) will not be available. There is a substantial uncertainty surrounding the quantum of input tax credits to be paid. This will again put the government’s revenue estimates on an unreliable footing. Also, the Budget has to do with more than simply estimating revenues. It has also to do with planning expenditure. It is open that if a government is having trouble in estimating its revenue for the coming year, then its expenditure projections are going to be shaky too. Taking together – revenue estimates and expenditure projection – this has a bearing on fiscal deficit as well.

Demonetisation Factor
Out of around 450 million persons in the total work force, around 92 per cent were in the unorganised and also informal sectors. The Indian unorganized sector still operates with liquid cash as it needs working capital for the purchase of raw material, making payments (on a daily and weekly basis) to casual labour and contract workers, and for other miscellaneous expenditures. The same is the case with agricultural operations carried out by billions of medium, small and marginal farmers.

With small factories idle, small shops struggling, and a shortage of cash to pay farmers for their produce, the rural economy started decaying within three months of note ban. The informal sector accounts for 20 per cent of GDP and 80 per cent of employment. Besides, small industrial units in small towns which employ a large number of semi-skilled workers were thrown into deep financial crisis. Never before the large part of economic activity in rural areas has been brought to a sudden halt and extinction within a few months of demonetisation. The impact of ill-conceived and poorly implemented demonetisation on rural India was disastrous.

Agriculture and rural sector
Trade and price controls are highly restrictive and mostly anti-farmer. Protection extended to the inefficient fertiliser industry is making inputs costs very higher. The farmer is forced to sell in the domestic market where prices tend to be lower than global agricultural prices. Therefore, the government should follow a rational Minimum Support Policy (MSP).

For this the government agencies should buy from farmers when market prices are depressed and sell stocks in open market when prices are escalated. The former measure will boost farm incomes and the latter cushions consumers against excessive inflations.
However, the Chief Economic Adviser of World Bank Kaushik Basu puts a rider to the above policy of MSP.

He has extensively discussed about the mindset behind the reluctance to release stocks to cool rising prices by the Governments in India in the recent past. The argument is that selling at a lower than the purchase price (MSP plus carrying costs) would inflict losses on the exchequer and add to the fiscal deficit. Since procurement spending is a sunk cost, not selling implies even higher fiscal deficit. International wheat prices are 30 per cent lower than in India, yet consumers are forced to pay more.

In the rural India, nearly 54 million households are in the landless i.e., labourer category. Assuming that each such household has 5 members that makes 250 million of the nearly 850-900 million rural population. The remaining rural people hold agricultural land and belong to small and marginal farmers category. In other words, nearly 900 million people are vulnerable to poverty and deprivation due to unprofitable cultivation, vagaries of weather and also policies of State governments.

Now the issue that Union Budget has to address is: does the economy have the capacity to create non-agricultural jobs to both the categories mentioned above. The issues of landless, and small and marginal farmers looking for non-agricultural work should be an immediate and top priority.

Between 2005-06 and 2012-13, the number of cultivators in rural India fell from 160 million to 141 million, and number of landless labour from 85 million to 69 million, both because they found non-agricultural work particularly in construction sector. Construction activity is increasingly absorbing poorly educated rural labour in the rural and urban areas. Construction jobs are growing more slowly since 2011-12, as public investment has fallen.

And with the non-performing assets of banks soaring, private investment has fallen as well. The result: fewer workers have been leaving agriculture since 2011-12. From 5 million leaving agriculture per annum between 2004-05 and 2012-13, the number is down to just over 1 million per annum between 2012-13 to 2015-16.

This is hurting landless labour, and small and marginal farmers the most. On account of rising construction activity, rural incomes in particular would rise, raising consumer demand for simple manufacturing goods, especially in the unorganised manufacturing sectors, raising employment in those sectors especially in rural areas. Here the Budget plays a crucial role in maintaining and enhancing employment, incomes and protecting rural demand to informal and unorganised rural sector.

Two major decisions, namely, demonetisation and the Goods and Services Tax, have had major impact on almost all pillars of economic performance such as GDP growth, inflation, industrial production and export sector. During 2016-17, the GDP growth slowed to 6.1 per cent. The index of industrial production started dipping after July 2017. For that matter industrial activity fluctuated throughout the year 2017 due to lingering effects of demonetisation and the additional burden of GST.

Initially, exports grew and later after October 2017 started contracting because of exporters’ problems with the GST. Exports suffered in the few months following GST roll-out due to input tax credit system. It is expected that effects of GST are likely last little longer.

With 2 out of 3 households living in rural areas their incomes and consumption patterns being critical to increase demand for industry. As per advance estimates of growth in gross value added for 2017-18, farm output will expand by 2.1 per cent compared with 4.9 per cent the previous year, therefore, Budget 2018-19 can be expected to have a strong focus on rural India.

By: Prof AVVSK Rao & Dr M Ramulu
(Prof Rao is an Honorary Professor in Economics at the Jawarharlal Nehru Institute of Advanced Studies (JNIAS), Hyderabad. Dr Ramulu is an Assistant Professor, Dept. of Economics, Osmania University, Hyderabad)