Give direct subsidy to farmers

The Prime Minister has assured the farmers of the country that their incomes will be doubled in the next five years. While an increase in the incomes is possible, that will require a change in the policies. The policy of the Modi government in the last 3 years has been to enhance the incomes of the farmers by securing an increase in production. The Prime Minister wants to expand irrigation.

He has started a scheme to provide free ‘Soil Health Cards’ to the farmers. The government will examine the soil of the fields and inform the farmers of the exact fertilizers that he should apply. The application of correct quality and quantity of fertilizers will enhance his production and, supposedly, his incomes.

Alas! That is not to be. Reason is that increase in production and reduction in incomes often go hand in hand. Last year our farmers had a bumper crop of potatoes. The price of potato in the market fell to Rs 3 per kilo and the farmer could not even recover the cost of harvesting and transporting the crop to the market. Many farmers dumped potatoes on the roads. Increased production became a curse for them. Modi is pushing them into a similar distress by getting them to increase production without ensuring that there is no decline in the prices.

Preventing a decline in prices is, however, difficult because we have integrated our domestic agricultural markets with the world markets. The price of agricultural goods in the country is determined largely by global supply and demand. The global prices of agricultural produce show a long term decline. The production has increased hugely due to the adoption of new technologies, bringing new areas into cultivation and expansion of irrigation.

However, the demand for the agricultural crops has increased only minimally because there has only been a small increase in the global population. The large increase in global supply coupled with a minimal increase in global demand has led to oversupply and a decline in the global prices. Therefore, it is not possible to arrest a decline in the prices.

In fact, the government has added to the woes of the farmers by implementing an import-export policy that is harmful for them. The government restricts exports of crops when the price in the global markets are high so that domestic prices do not increase in tandem with the global prices. On the other hand, the government imports food items when domestic production is less and domestic prices are likely to increase.

The farmers are paying a heavy price in the form of these restrictions on exports and imports. Professor Ashok Gulati of Indian Council for Research on International Economic Relations says that “restrictions on exports suppress farm prices are implicit taxes on India’s farmers”. The farmers obtain lower prices for their produce when exports are banned; and they are deprived of higher prices of their produce when imports are made by the government.

These policies of the government deprive farmers of income and lead to lower incomes, Modi should take note. A possible way out is to impose GST on cash crops like bananas, ginger, menthe, mulberry, pepper, red chilies and sugarcane. These crops also consume large amounts of water and contribute to environment degradation. Another way of collecting tax on cash crops is to impose a tax on the use of water in irrigation.

A large part of irrigation in the country is undertaken for the cultivation of these cash crops. Raising price of water will therefore translate into higher cost of production of cash crops. Such tax will not impact our food security because the cultivation of staple crops like wheat and bajra requires less irrigation and will also remain outside the GST.

The revenue garnered from high price of irrigation and GST on cash crops can be used to provide all farmers with a basic income. The total burden on the farmers will also be less. Say, Rs 1000 crore is collected from high price of water and from GST on crops. Against this Rs 2,000 crore can be paid as basic income to the farmers.

This basic income will ensure that all the farmers can keep their body and soul together even when the crops fail. That will help reduce the number of suicides. It can be provided that this basic income cannot be attached under recovery proceedings by the banks. In the end the farmer will be happy. He may not get double the income as proposed by the Prime Minister but he will certainly get a minimum assured income which too he is not getting today. This policy will affect the cultivators of cash crops and staple crops differently.

The farmers growing cash crops will be adversely affected. The cost of cultivation of cash crops will increase, their price in the market will increase, the demand will decrease, and the incomes of the farmers growing these crops will also reduce. However, the farmers growing staple crops will be benefitted. They will only be marginally affected by the increase in the cost of irrigation because the staple crops consume less water. On the other hand, they will get an assured income from the payment of the basic incomes.

Another proposed policy requires reconsideration in the above backdrop. Collection of income tax on agricultural income is actively under the consideration of the government. Agricultural income is taxed at par with non-agricultural incomes in most developed countries. The basic principle of fairness requires that farm incomes be taxed at par with non-farm incomes in India as well. Also, the rampant misuse of this window to evade taxes also augurs in favour of taxing these incomes.

Large numbers of rich show their incomes as accruing from agriculture and avoid paying income tax. Many large corporations undertake agricultural activities but do not pay taxes using this window. However, imposition of agricultural income tax will create a huge problem of book keeping for the farmers and give encouragement to tax terrorism by the tax officials.

An alternative is to collect agricultural income tax only from entities who have income from any other source. The exemption for agricultural income tax is misused by persons who have incomes from other sources such as industries and shops. This window will be closed if exemption is given only when the tax payer does not have income from any other source. Author was formerly Professor of Economics at IIM Bengaluru

By Dr Bharat Jhunjhunwala