Who will fund the farmer’s Rs one lakh crore income support?

Prime Minister Narendra Modi is an expert curator as in every budget since his BJP government came to power, you can see the magicians hand in it. Pre-budget announcements such as demonetization and GST virtually devastated the economy with cash strapped economy reeling especially the farm sector, msmes, and small trader and salaried class, who need cash on hand.

With elections just four months away, May 2019, Modi’s government went on war footing and presented an almost a full scale budget under the guise of an “ Interim budget “ by an interim finance minister in the absence of the full-fledged finance minister recovering from an illness overseas. The purpose was to reverse the damage caused by earlier policies.

In an election year, the scope for the Modi government was limited, and as Piyush Goyal, said his budget speech he had limited scope because of the election year and the advice from the PM to him was to present a “honest and transparent budget without fudging figures in any way”. So the FD figures claim to be straightforward after accounting for the massive outlay of Rs one lakh crore ( rs 20,000 crore in revised estimate of FY 2018-19 + Rs 75,000 crore in Budget Estimate of FY 2019-20) to peg  it at 3.4% of GDP instead of 3.3% for current year and 3.1% for FY 2019-20.

Let’s take this statement on face value. The Modi government , known to be radical, chose to present a virtually full scale budget under the guise of an “ Interim Budget “ with sops to middle class, salaried class, traders, msmes, and massive outreach programme called Pradha MantriKisanSammanNidhi scheme (PMKSN) that seeks to provide an income support of rs 6,000 in a full financial year equated into three instalments of rs 2,000 each in addition to the income they earn from farm produce taking advantage of the MSP scheme for the crops.

Modi has provided rs 20,000 crore in the current year for the scheme and rs 75,000 crore in the next financial year to provide direct transfer benefit , which means the monies flow directly from government treasury into the bank accounts of small and marginal farmers who have 2 acres or less of cultivable land. Sounds real good. Just as the scheme he has announced for middle class NO TAX for income uptoRs 5 lakhs and virtually NO TAX upto incomes of Rs 6.25 lakhs if monies are invested in specified savings schemes that allow deductions under 80CC of the Income Tax act. He has also provided relief on rental income and raised the threshold of TDS , raised standard deduction to rs 50k from rs 40k, and exempting notional income from a 2nd house and capital gains tax from the sale of a second property if it came under rs 2 crore.

No doubt the Modi government has launched a massive outreach programme to redress immediate problems of the economy, reversing the effects of demonetisation, reversing a cashless economy, redressing the agrarian distress under the clasp of money lenders and institutional credit, slow growth, joblessness and lack of manufacturing.

An interim budget has its own limitation in an election year and Goyal has virtually walked the tight rope while giving the sops as the constitution does allow aoutgoing government to present a vote on account or a budget. BJP chose the latter but still strictly conscripted by electoral guidelines which prevent any government going into any minute details in direct or indirect tax. Govt could not tinker with the taxation slabs which would have been more meaningful, and dealt with corporate tax for industries, or tinker with the excise and customs duties commodity wise but  left it to the new government.

But the Modi government has intelligently trapped the new government, whichever it Is BJP or Congress led mahaghatbandhan, into implementing the main provisions of the electoral sops. The BJP has the majority to adopt the budgetary proposals for FY 2019-20 and Rajyaabha, where it has lesser numbers, has no right to disapprove a money bill but only return it to the lower house.

But the new government has every right to present a full scale budget in June when it assumes power but will face major challenges in adopting the interim budget proposals, which it has to constitutionally, at least for the voters sake, however it can  introduce amendments to make them financially viable.

The biggest worry for either Congress in the states (MP, Rajasthan, and Chhattisgarh) or BJP at the national level is their race to woo the farm lobby for vote in their haste to write off farm loans or provide income support. The worry is after having got the vote to rule how they are going to raise the funds for these schemes.

Many agrarian economists have time and again criticised government in power to waive farm loans without thought as it affects a states finance to handle day to day matters and other social welfare schemes,  which become short of funds. Rahul Gandhi criticised the farm income support as giving Rs 17 a day to farmers which was an outright insult. BJP was quick to retort in an twitter war that RG as usual didn’t understand economics and that this was an income support scheme where rs 2,000 was being transferred directly into the farmers ( small and marginal with landholding of 2 hectare or less) bank accounts. When Congress did farm loan waivers most of it was eaten away by middlemen and hardly anything reached the farmers, BJP alleged.

One thing all governments are forgetting is that the Agrarian Distress is triggered by not repayment of institutional credit of state owned banks but by usurious money lenders who charge interest on interest and make loans un-payable. (Film Mother India is an example which highlighted the farmer’s crisis). Government on the other hand raises prices of agricultural inputs, such as seeds, fertilisers, urea, and pesticides and does not provide electricity or water at subsidised rates. Even if they do its at heavy cost and the urban middle class subsidises this in the end.

It’s one thing to make an announcement of a massive relief by a government in power but it’s another as to how to fund the schemes. How is the government going to fund rs one lakh crore scheme of income support to over three crore farmers is the big question.

So one can expect, when a new government comes to power in June, and Is forced to implement the scheme, the options that it will explore are 1) an agricultural cess of 2% on every salaried tax payer, 2) float agricultural bonds like an IPO 3) borrow from world bank 4) raise taxes on various commodities under the indirect tax category basket of commodities. Raise excise and customs duties on a variety of luxury and semi luxury items. This might literally wash away the benefits of the schemes announced for the middle class .

The fine print of the budget is that taxation benefits announced are implementable only after April 2019 and IT benefits of exemption of rs 5 lakhs is available only when you file returns in July 2020, you will end up paying the same taxes you paid last year in this current year also, that is FY 2018-19 in assessment year 2019-20.

Has Modi tricked the voters? No, he has intelligently trapped the next government, into implementing the sops for the middle class, salaried class, msmes, and farmers. If the mahaghatbhandhan comes to power it has to implement because it’s on the same wave length as the ruling party on the concessions, it can only come up with amendments and raise taxes on commodities to fund the massive rs one lakh farm income support.

Modi will take the credit and the onus of implementation will fall on the new government if it comes to power. Here Is a summary of what agrarian economists say against farm loan waiver schemes. 1) Farm loan waiver benefits only the big farmers who borrow from institutions and not small farmers who borrow from usurious money lenders 2) the prices of inputs tractors, seeds, fertilisers and pesticides are still out of reach for the farmers; government needs to subsidise this first.  3) The race between the opposition and ruling party to woo the farmers with interest sub-ventionschemes, loan waivers and income support must not be introduced without proper foundation on where the money Is going to come from.

Votes may cascade in favour of one party or the other depending on their manifestoes filled with concessions , but the big question on how the government will fund populist schemes will haunt them till the end of their term ,only incurring the wrath of the very same people who voted them to power.—-