Union Budget: The way forward

Income support, not subsidies

Three important highlights of the Interim Budget presented by Piyush Goyal at the beginning of this month are:

(i) Under PM Kisan Samman Nidhi, the Centre will give Rs 6,000 per year to small and marginal farmers (land holding up to two hectares) to be deposited directly in their account to benefit a total of 120 million. The support is with effect from December 1, 2018, and the first installment of Rs 2,000 was transferred to beneficiaries last Sunday;

(ii) Under PM Shram Yogi Mandhan, persons working in the unorganised sector and earning less than Rs 15,000 per month will get a pension of Rs 3,000 per month on attaining 60 years. For this, a worker joining at the age of 29 years will contribute Rs 100 per month with matching contribution by the Centre. A person joining at the age of 18 years will contribute Rs 55 per month, with equal amount by Centre. This will benefit over 100 million workers;

(iii) Salaried persons earning up to Rs 5 lakh per annum will get full rebate from payment of income tax. This will benefit 30 million persons (albeit from the middle class).

Seen in the backdrop of growing disenchantment among these classes with the BJP — as was manifest in the results of elections in the three Hindi heartland states of Madhya Pradesh, Rajasthan and Chhattisgarh — and the impending general elections, the budget proposals might hold the potential of turning the tables in the party’s favour.

Under PM-KISAN, giving farmers Rs 6,000 a year translates to Rs 500 per month, which may appear to be a paltry sum. But look at things from the perspective of a farmer who owns just one acre or less and whose monthly income from farming is a meagre Rs 2,500-3,000. These farmers are leading a subsistence existence and are forced to borrow from moneylenders at high interest rates for needs such as fertilisers/seeds or even household consumption.

In this backdrop, supplementing the income by Rs 500 a month is a good move. Together with hike in the collateral-free credit limit for farm loans from the existing Rs 1 lakh to Rs 1.6 lakh announced in the RBI monetary policy, it will go a long way in ameliorating their condition.

Importantly, all existing subsidies on inputs — fertilisers, irrigation, power, seeds, etc — continue. At present, input subsidies cost the exchequer about Rs 2 lakh crore annually. However, only a fraction of this goes to small/marginal farmers. According to the Economic Survey 2015-16, “24% of fertiliser subsidy is spent on inefficient producers, 41% is diverted to non-agricultural uses, and 24% is consumed by larger, presumably richer farmers”. This leaves a meagre 11% for poor/small/marginal farmers.

The government also spends about Rs 1.1 lakh crore by way of minimum price support (MSP), which is also appropriated mostly by larger/richer farmers who have marketable surplus.

The way forward is to do away with subsidies and MSP and use the resultant savings to give direct income support (DIS) to the poor farmers as well as to landless workers who are also impoverished but have escaped the attention of policy-makers.

The savings of Rs 3.1 lakh crore from withdrawal of subsidies and MSP plus an additional budgetary support of Rs 50,000 crore (against Rs 75,000 crore needed under PM-KISAN) or a total of Rs 3.6 lakh crore can be used to give DIS to 120 million small and marginal farmers at Rs 18,000 a year — thrice the amount under PM-KISAN — and to 120 million landless workers at Rs 12,000 per month against ‘NIL’ under PM-KISAN.

This dispensation will also generate collateral gains by way of preventing misuse of subsidy, excessive use of fertilisers and other agricultural inputs such as electricity/water. Together with increase in yield, this will help augment farmers’ incomes and promoting sustainable agriculture.

Provision needs work

The idea of giving pension to workers in the unorganised sector is a good innovation. With contribution of a mere Rs 55-100 per month (depending on the age of joining work), a monthly pension of Rs 3000 in old age is fascinating. However, for 100 million workers, the liability on the government will be about Rs 9,000 crore annually (taking an average contribution of Rs 75 per month) — against a token provision of Rs 500 crore in the budget.

Furthermore, by restricting the coverage only to workers below 40 years of age, the government has ended up excluding a large chunk. Some mechanism needs to be worked out to cover those above 40 years (say, by asking them to contribute at a higher rate of Rs 200 per month). Else, the laudable objective of covering all 500 million workers in the unorganised sector would look laughable.

The budget has given a bonanza to the salaried person by exempting income up to Rs 5 lakh from tax. However, retention of existing tax slab at Rs 2.5 lakh and Rs 5 lakh (with applicable tax @5%) has created an anomalous situation. This means that in case the net taxable income after availing deductions under 80C (provident fund, insurance premium, bank deposit, etc.) is higher than Rs 5 lakh, then tax has to be paid as per current structure.

Nonetheless, for all those salaried persons who become eligible for rebate (those with net taxable income up to Rs 5 lakh), this is a welcome relief. The consequential increase in their net disposable income will also help growth by boosting both consumption and investment demand.

Articulating the vision for a ‘New India’, Goyal rightly emphasised the dire need to build infrastructure and create a conducive environment for a $10 trillion economy by 2030 to catapult it to the status of third largest — next only to US and China. But that will require far reaching policy reforms, shedding the incremental approach followed during the last five years.

(The writer is New Delhi-based policy analyst)