Wheat stalks stand in a field during a harvest near Sonipat, India. (Photographer: Pankaj Nangia/Bloomberg)

Budget 2018’s Building Blocks For A New Rural Governance System

Subscribe to Bloomberg | Quint
The Daily Newsletter
News & Stock Alerts

In the Indian polity, there has always been an impression that rural voters tend to vote as a group and are hence seen as a vote bank. The approach has generally been to provide short-term sops to garner votes, particularly when elections are around the corner. Budget 2018 has also been seen as a political budget, however, what separates it from other earlier approaches is the attempt to have a holistic approach to put in place elements on which future work can be built.

Agriculture used to account for 56.5 percent of India’s gross domestic product in the 1950s. This share fell to 45.9 percent by the beginning of the 1970s, 20 percent in 2006-07, and is now at 16 percent. Even as this decline picked up pace, the 2001 Census showed agriculture providing employment to over 58 percent of India’s population.

The population currently supported by the rural agrarian economy is estimated at just under 50 percent.

The fall in the share, by itself, is not a concern. Globally, as economies have developed, the share of agriculture and employment in the agricultural sector have fallen, sharply. In India, the big concern is the continued large share of employment that agriculture continues to provide. It is not surprising that the per capita income of a family in the agricultural sector has fallen sharply, while it has risen in other sectors like industry and services.

What Is The Rural Indian Spending Time And Money On?

Anecdotal evidence from the corporate social responsibility activities of companies that have taken their commitments seriously suggests that where companies have built rural roads, provided water and health support, incomes have doubled in about two years.

Families in rural areas are still spending a disproportionate amount of time fetching water, addressing family members’ health and educational issues. Due to the lack of all-weather roads, the time taken to reach the nearest civic facility is substantially more. Once water is available at the doorstep, roads make access to nearest health centre easy, the family uses the time saved for productive activities and augments the income levels. Imparting locally relevant skill sets like repairing bicycles or motorised two-wheelers, mobiles, solar lamps, and running a small animal husbandry or poultry unit and the like makes families self-sustaining. Microfinance institutions have had significant success in this sphere through timely financial assistance. This segment of the population is compliance-oriented and aspirational, and wants to keep its financial commitments. This is reflected in the near-100 percent recovery rate enjoyed by MFIs.

The cost of funds has never been the issue, the only requirement is timely and adequate funding.
An employee serves a customer inside a branch of Gramin Bank of Aryavat, in the village of Khurana, Uttar Pradesh, India. (Photographer: Prashanth Vishwanathan/Bloomberg)
An employee serves a customer inside a branch of Gramin Bank of Aryavat, in the village of Khurana, Uttar Pradesh, India. (Photographer: Prashanth Vishwanathan/Bloomberg)

Three distinct initiatives have been placed for action in the current Union Budget:

  • Minimum support price support for Kharif crops would be at 150 percent of the cost of production. Certain pilot projects on this move have already been undertaken in Madhya Pradesh, where if market prices are below the MSP, the difference is provided to farmers as a subsidy. With the success of subsidy transfers into Jan Dhan savings accounts, this mode of providing support — which was adopted in the MP pilot — is likely to be considered nationwide.
  • The second initiative is the path-breaking effort to provide health insurance coverage to 10 crore families covering 50 crore beneficiaries. The easiest way of raising funds for this path-breaking health insurance cover for the poor in India is simply by (a) enlarging the list of activities permitted to cover contribution to health insurance cover, and (b) by mandating that 10-15 percent of the Corporate Social Responsibility Corpus of every company should be contributed to the health insurance initiative. This will ensure that a significant portion of the funding requirements will be raised from corporates.
  • The effort to double microfinance loan support, taking total lending to Rs 3 lakh crore for micro-enterprises, to provide income generating loans. 76 percent of existing loans are to women and over 50 percent of loans are to socially weaker segments of society.

This article elaborates on the first, in the context of changes underway in the agrarian ecosystem.

Also Read: Modi Trains Sight on Farmers Before Election Battle

The Minimum Support Price

The current debate on the proposal to provide farmers with 150 percent return on their costs generally focuses on the potential inflationary impact and the resultant impact on interest rates. At a macro level, a large number of families in agriculture continue to treat their participation in the sector as a tradition and not as a ‘business’. The effort, the output, and the returns are not measured on risk/reward trade-off terms.

Thus, the agriculture sector’s return on capital employed is the poorest among the three segments that make up India’s GDP.

As a result, capital does not flow into the sector as returns are higher in the other two segments.

The second major constraining factor is the low productivity in the sector. India has the second largest area of arable land in the world after the United States. This is even after the fact that India’s total land area is only a third of China’s.

India’s arable land area is slightly larger than China’s, but China produces 40 percent more rice and wheat than India.
Farmers plant rice in the paddies near Madur, India. (Photographer: Namas Bhojani/Bloomberg News)
Farmers plant rice in the paddies near Madur, India. (Photographer: Namas Bhojani/Bloomberg News)

Also Read: Modicare May Only Take Off In FY20, Says Finance Secretary Adhia

The key to increasing the income of families in agriculture depends directly upon the levels of productivity. This is linked to related issues of:

  • levels of landholding,
  • agricultural practices, including the use of fertilisers and water, power costs, choice of seeds, awareness of soil conditions etc.
  • choice of crops, driven by market demand, price realisation and price support,
  • increasing farmers’ holding power at the time of harvest and warehousing plus liquidity support,
  • institutional mechanisms that bridge the gap between, and revamp the role of, existing players,
  • an enabling legal framework,
  • the flow of risk capital and return thresholds needed for doubling farmers’ incomes,
  • managing the seemingly opposite positions of farmers and consumers, insofar as price points are concerned.

The third major constraining factor is the lack or inadequacy of a coherent macro level agricultural policy in several of these areas, and the lack of apex institutional structures — with each of the institutions responsible to drive a defined segment of the whole sector, in line with the policy structures. Two critical pieces which fit in this area are : (a) local solutions, particularly in areas like infrastructure — local roads and local water storage solutions (like check dams), solar energy for at least one light in every household to begin with, primary health and education, and (b) trusting the innate intelligence of the local population to understand and harness economic opportunities for augmenting income levels.

Rural Infrastructure

The current budget proposals talk of providing infrastructural facilities after production and using market mechanisms — including futures and options on exchanges — to provide farmers with price support and indications of prices going forward, so that informed decisions are taken as to the choice of crops to be sown.

The budget proposals mention that over 86 percent of India’s farmers are small and marginal. They need hand-holding, training, liquidity support and constant guidance to use the intended facilities. Such support has to come from groups which have local knowledge. It would be a great opportunity for institutional players in the sector to set up such human intervention facilities for the benefit of these less-empowered groups.

In a nutshell, the primary focus has be to put in place these infrastructural requirements locally. Unfortunately, there are currently no institutional mechanisms which are charged with a focussed responsibility in this area, at a central level. At the apex level, we have the National Bank for Agricultural and Rural Development (NABARD), which is both a regulator and a developmental bank.

It is time to revisit this organisation and separate the regulatory and the development functions of NABARD.

NABARD, today, facilitates development but does not take up the activities itself. It is time that NABARD becomes a National Highway Authority of India (NHAI) - type entity which has primary responsibility for execution for planning and implementing rural infrastructure. It has a pan-Indian presence and has qualified rural and agriculture professionals. NABARD’s role must be revised to charge it with the task of building local agricultural extension services to small and marginal farmers in particular, locally relevant check dams, make water available through pipes at homes of villages, and build all-weather roads in partnership with state governments.

Also Read: Need Faster Growth? Spend More on Educating India's Children

Finance Minister Arun Jaitley addresses the Board of Directors of NABARD at the Ministry of Finance, in New Delhi on March 6, 2017. (Photograph: NABARD)
Finance Minister Arun Jaitley addresses the Board of Directors of NABARD at the Ministry of Finance, in New Delhi on March 6, 2017. (Photograph: NABARD)

Entities like National Commodity & Derivatives Exchange Ltd. (NCDEX) and National Collateral Management Services Ltd. (NCML) must be encouraged — alongside a revised NABARD — to take up the responsibility of providing forward-pricing data to farmers and handhold them on growing crops that are expected to be short in supply.

Even as the current Agricultural Product Market Committees are being dismantled, it is essential that someone else performs the role that APMCs have.

APMCs performed two critical functions: spot market price discovery, and liquidity to farmers who come to sell their produce, albeit through middlemen. The new approach must have an entity which provides both these functions. Currently, someone in the market buys the produce from the farmers, and makes it available to buyers through the cycle, till the next crop arrives. This new entity, therefore, has to be built around warehouses, which stores farmers’ produce, provides them liquidity and advises them when to sell, based on price movements. Once you have a chain of local warehouses, these can gather data on the area under sowing for a particular crop and estimate the productions levels for the coming season, for suitable price support interventions, where needed.

A key commitment needed from the government is that it stays away from banning agriculture-commodity contracts on exchange platforms whenever prices rise.
Workers unload wheat from a trailer at a trader’s store at the New Grain Market in Karnal, Haryana, India. (Photographer: Prashanth Vishwanathan/Bloomberg)
Workers unload wheat from a trailer at a trader’s store at the New Grain Market in Karnal, Haryana, India. (Photographer: Prashanth Vishwanathan/Bloomberg)

Further, we need a NASSCOM-like apex organisation for agriculture, which looks at trends that could emerge over the next five to seven years and recommends a suitable crop-wise policy framework, and changes in the enabling legal framework to the central and state governments. The Essential Commodities Act needs an urgent revamp, to align it with emerging policy contours. Crops like sugar have no place in an updated list of essential commodities.

Returning to the funding avenues available to the rural citizen, the manner in which the microfinance lending entities have reemerged robustly — after the Andhra Pradesh microfinance industry imbroglio — is incredible. There is now a strong credit bureau oversight and regulatory framework which checks excess lending to borrowers in this segment. The repayment track record of borrowers in the microfinance segment (except when there has been political interference) has clearly established that borrowers are compliant, aspirational and want to grow steadily.

The success of microfinance funding, as well as that of CSR experiments, shows that is a good deal of entrepreneurial talent which wants to stand on its own. The government’s approach in rural areas has to be to provide basic infrastructure, operating requirements, and skill-set training through the rendering of locally-relevant services, and not for employment in a traditional sense.

PH Ravikumar is the non-executive chairman of Bharat Financial Inclusion and was the founder, managing director, and chief executive officer of NCDEX. Views expressed are personal.

The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.

BloombergQuint
Follow All The Budget 2018 News On BloombergQuint
Subscribe to Bloomberg | Quint
The Daily Newsletter
News & Stock Alerts