Farmers Movement Archive

Centre should stand by its promise on GST and simply borrow more to meet financing needs: Montek

The group of experts headed by Montek Singh Ahluwalia, economist and former deputy chairman of the Planning Commission of India, submitted its first report, titled ‘Medium & Long Term Post Covid Economic Strategy for Punjab,’ to the Punjab government earlier this month. As several questions have been raised from various quarters on the recommendations, Ahluwalia shared his views with Sanjeev Verma to clear the air on troublesome issues. Q. Your experts’ group has been criticised for making anti-farmer recommendations. Your comments. The report is in no way anti-farmer. On the contrary, it charts a strongly pro-farmer strategy. Let me explain. We were asked to propose a medium to longer term strategy for Punjab post-Covid that would bring Punjab back to its earlier pre-eminent position. From that perspective, a critical objective for Punjab must be agricultural diversification, moving away from the traditional focus on food grains and expanding production of maize, fruits and vegetables, dairy etc which will generate much more income per hectare. Punjab farmers are rightly proud of the contribution they made to food security in the days when our total food production was inadequate. But the situation has now changed. Total food grain production is more than adequate as other states have increased production. Public sector stocks are about 90 million tonnes, more than twice the required level! Over time, you can be sure that there will be much less willingness to increase the MSP for wheat and paddy just to feed surplus stocks. We should anticipate this and shift away from paddy which is highly water intensive. We have recommended reducing paddy acreage by one million hectares over the next five to six years. Q. Why do you think this point is not being understood? Everyone agrees that diversification is desirable, but farmers feel they cannot diversify unless there is an assured and attractive MSP. But that approach assumes that the government must always provide a market for agricultural surpluses. That was feasible for nonperishables like food grains. It is simply not feasible for perishables. In any case, the government doesn’t have to be the only buyer for farmers. Punjab has seen a tremendous growth in cotton production, which is sold in the market. The solution lies in modernisation of agricultural markets. This, in turn, means allowing the private sector to enter and invest in modern storage and handling capacity and creating other logistical infrastructure, including links to food processing. This is the way to build a ‘farm to fork’ supply chain. Q. Some of the recommendations in your report like opening up agriculture marketing beyond APMC are on the lines of three farm ordinances being pushed by the Centre and opposed by the Punjab government. We have not been influenced by the central government’s ordinances. We are only recommending what the Punjab government should do and it doesn’t need central ordinances for this. Personally, I have always been in favour of liberalising access to the private sector into marketing of agricultural goods, including allowing contract farming. Both the Eleventh Plan and the Twelfth Plan finalised during the time of the NDA recommended this explicitly. We cannot expect to solve the marketing problem of diversified agriculture with an FCI-type government purchase operation, based on assured MSPs and open-ended support of losses. We need to encourage the private sector to enter into agricultural marketing and build high quality storage facilities and encourage a linkage with food processing and also exports. Q. Your report has been criticised for advocating abandonment of free power for agriculture. We never actually advocated abandonment of free power because we recognised that this is a politically-sensitive issue and the government had already announced that it would continue the policy and we took that as a political constraint. We did, however, draw attention to the implications of free power over the medium term. This issue does need to be discussed more thoroughly. Farmers are not impressed by the argument that free power puts a strain on the budget because they feel it is a ploy to withdraw a benefit from farmers to improve the budget. That is not our approach. Our view is that more resources need to be directed into agriculture, including for building infrastructure, incentivising diversification and expanding agricultural R&D. However, since total resources are limited it is relevant to ask whether the resources presently spent on free power would be more beneficial for farmers if they were redirected to these ends.. The political case for free power is usually made on the grounds that small and medium farmers need support. That is certainly true, but it is actually the relatively small number of large farmers who get most of the benefit of free power. A cash subsidy per hectare of tilled land, up to a maximum of say five hectares, would be much better targeted. A major problem created by free power is that it reduces the cost of extracting water, thereby encouraging water intensive crops such as paddy. This is an ecological disaster and has led to an alarming decline in the water table every year. Free power is in fact a hidden subsidy to paddy, with no comparable subsidy for other less water using crops. That is why we have recommended giving a cash incentive to farmers if we want them to switch away from paddy. The extra expenditure will be compensated by the reduced need for a power subsidy. All these aspects need to be considered carefully over the medium term. For the present, we have recognised that there are political constraints so we have said that if free power must continue, we should explore second best solutions such as separation of agricultural feeders and introduction of schemes such as the ‘Paani Bachao Paisa Kamao’ scheme. Q. Economists in Punjab believe that the focus of the experts’ group is more on inclusion of the private sector and since most of the group members are from outside Punjab, they have less knowledge of the ground realities. They also feel that there are many such recommendations which have already been given earlier by learned economists. I have no doubt that the private sector has to play the lead role in the modernisation of both agriculture and industry in Punjab. That is true for the country as a whole and also for Punjab. However, I must point out that we are not neglectful of the role of the public sector. Infrastructure development for example is an area where the public sector has a major role to play, including through supporting various forms of PPP. In the area of health, we have clearly said that the Covid pandemic shows that public health has been neglected. This is actually true in all states, but Punjab spends less on health than it should, given its per capita GSDP. We have recommended a 20% increase every year for the next five years in government expenditure on public health. As for the criticism that many of the recommendations have been given earlier, I must plead guilty. If policies recommended earlier have not been implemented but are still valid, it should not prevent later expert groups from repeating them. The call for diversification of agriculture, for example, has been around for 40 years. It remains valid today and in fact it is now much more urgent. Q. Your report has also been criticised for not saying enough on how to help MSMEs. MSMEs have been very badly hit by the downturn and there is apprehension that a large number may not even survive. Ensuring survival through the current crisis must be the immediate objective. How far this can be achieved depends upon two things — one is how quickly the economy as a whole recovers. This, in turn, depends mainly on national policies which were outside our terms of reference. The second factor affecting survival is how effectively the credit support measures that have been announced actually work on the ground in Punjab for MSMEs. Credit delivery is the business of the banks and the Punjab government doesn’t control them. We are also concerned that the smaller MSMEs will face problems because most of them do not depend upon credit from the commercial banks. We have suggested that the Punjab government must work closely with industry to ensure that enough of the expanded credit generated actually flows to industry in Punjab to make a difference on the ground. Looking to the post-Covid future, we need to recognise that a healthy MSME sector must be one that is efficient and capable of absorbing modern technology so that it can produce competitively to provide inputs for a modern industrial sector. The present industrial structure is unbalanced. Each sector is characteriesd by a few large units at one end and a very large number of very small units at the other end. There is a ‘missing middle’ which needs to be filled up. This means that some of the more efficient MSMEs need to grow into much more substantial middle-sized units. As these units expand, their market share will increase and they will push out the very low technology low productivity small units which proliferate at present. If this happens in an environment where the economy grows rapidly, the transition may not cause much pain. But if the economy as a whole grows slowly, we will face real problems with a loss of a lot of low wage employment. Q. What other things are you recommending for industrial revival? Our sub-group on industry has compiled a list of about 120 initiatives that respond to the perceptions of industry in Punjab on what could improve the ease of doing business. All the recommendations may not be feasible, but if a large number are actually implemented on the ground, in the next six months or so, Punjab would be well placed to attract investment just as investment interest begins to revive which we expect will only happen in the middle of 2021. We have suggested to the government that we should look at these recommendations not through narrow departmental perceptions but through the wider lens of making Punjab competitive with other states. Our aim should be to put Punjab among the top four or five states as far as ease of doing business is concerned. Attracting investment is a competitve business and Punjab should learn from states which are doing better. We have also made a number of recommendations on how to promote a culture of innovation and encourage start-ups. The start-up revolution has begun in India and Punjab should not miss out on it. Start-ups could over time be a major contributor to job creation. We have recommended a new ‘Innovation Mission,’ headed by someone from the private sector, with the government providing some support. Start-ups could over time be a major contributor to good quality job creation. Q. Implementation of GST is facing so many glitches in its third year and the state governments have been forced to literally beg before the Centre for their GST compensation. What is the way out? This is indeed a very serious problem. GST revenues were disappointing last year even before Covid. They will be much worse this year because the economic contraction means a huge loss of revenue for state governments. Not only will the states’ own GST revenues be lower, their share of central taxes will also be lower. At a time when the economy is already suffering from a demand shock because the lockdown led to a loss of income, it makes no sense for the state governments to respond to the revenue loss by cutting their expenditure. The Punjab CM had written to the Centre suggesting a special Covid grant to the states which could be financed by the Centre by borrowing more, but this has not been accepted. States are now complaining that the Centre has resiled from its promise that it would make up the shortfall if GST revenue fell below a benchmark determined by a projected 14% annual increase that was agreed. The 14% benchmark was admittedly ambitious, but it was promised, and there was no suggestion that it would depend on a particular rate of growth of GDP. On balance I feel the Centre should stand by its promise and simply borrow more to meet the cost of financing the shortfall. This will increase the fiscal deficit of the Centre but this is an exceptional year all over the world. Markets will understand as long as we make clear that we will return to a credible fiscal path when normalcy returns. Fulfilling the promise is also critical for credibility of the commitment to cooperative federalism. Apart from the GST shortfall, the states will also face low levels of tax devolution and also other revenues. The Centre is under no obligation to meet this shortfall, but to avoid expenditure contraction in the states at a time when the economy will not have fully stabilised, the states should be allowed to borrow more if they wish. In fact, they may need accommodation not just for the current year, but also 2021-22, because revenues in that year will only come up to where they were in 2019-20. Perhaps, the Finance Commission should be asked to make recommendations on this issue. FOR BLURBS That (assured MSP) was feasible for non-perishables like food grains. It is simply not feasible for perishables. In any case, the government doesn’t have to be the only buyer for farmers. Punjab has seen a tremendous growth in cotton production, which is sold in the market. Public sector stocks are about 90 million tonnes, more than twice the required level! Over time, you can be sure that there will be much less willingness to increase the MSP for wheat and paddy just to feed surplus stocks. We should anticipate this and shift away from paddy which is highly water intensive. The present industrial structure is unbalanced. Each sector is characteriesd by a few large units at one end and a very large number of very small units at the other end. There is a “missing middle” which needs to be filled up. This means that some of the more efficient MSMEs need to grow into much more substantial middle-sized units. The political case for free power is usually made on the grounds that small and medium farmers need support. That is certainly true, but it is actually the relatively small number of large farmers who get most of the benefit of free power. A cash subsidy per hectare of tilled land, up to a maximum of say five hectares, would be much better targeted. States are now complaining that the Centre has resiled from its promise that it would make up the shortfall if GST revenue fell below a benchmark determined by a projected 14% annual increase that was agreed. The 14% benchmark was admittedly ambitious, but it was promised, and there was no suggestion that it would depend on a particular rate of growth of GDP.

The Times of India

2020-08-30

Chandigarh