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Mainstream, Vol XLV No 26

Union Budget and the Rural Sector

Tuesday 19 June 2007, by Kripa Shankar


The overall economic performance may be satisfactory but the agricultural sector is stagnating. Foodgrains production has not increased during the last six years and per capita availability of foodgrains is declining and is at the same level as it was fifty years back. It was expected that the Budget would address this issue in a bold manner by, among other things, considerably |

Provision of cheap and hassle-free institutional credit is crucial for agricultural growth. But despite much lower interest rates charged by the banks as compared to the private sources, if the farmers resort to borrowings from the latter it calls for some introspection. The latter is hassle-free and no collateral or guarantor is required in most of the cases. The banks are reluctant to lend to farmers as recovery from a large number of farmers scattered over a large area is a problem. They can lend profusely if the government can guarantee small loans to farmers. The government has guaranteed loans to big entities worth more than Rs 1 lakh crore, according to the Budget papers of 2007-08. It can equally guarantee loans to farmers who are in distress.

According to Banking Statistics, 2003, the credit deposit ratio of the rural branches of Scheduled Commercial Banks was 44 and more than Rs 1 lakh crore was siphoned off from the rural branches to the urban and metropolitan centres. The credit deposit rates in semi-urban areas is even less at 38 per cent and Rs 1.7 lakh crore was siphoned off from semi-urban centres to urban and metropolitan centres. To check this outflow it is necessary, among other things, to make bank loans hassle-free and, more importantly, to reduce the interest rate for small borrowers. The National Commission on Farmers, under the chairmanship of Dr M.S. Swaminathan, has recommended that the farmer’s loan should carry an interest of four per cent per annum. This is not acceptable to the banks unless they are provided with an interest subsidy to the extent of 10 per cent as they generally lend to farmers at the rate of 14 per cent. In view of the extreme distress of farmers, interest subsidy was introduced in 2006-07 and this year’s Budget has provided an amount of Rs 1677 crores to it. If farmers’ distress is to be seriously addressed this amount must be raised manifold. It would also go a long way in improving the credit deposit ratio of rural banks as such savings would be utilised in the rural areas.

THE question of raising the income of the farming community is connected with raising the yield which in India is quite low as compared to the agriculturally advanced countries. It requires more public and private investment. The latter crowds in the former; hence in the initial stages only massive public investment will raise private investments. Connected with this issue is the question of proving remunerative prices to the producers. As the farmers are the only producers who do not fix the price of their produce, their exploitation is essentially through the price mechanism controlled by the traders. The farmers have no holding capacity and to meet various cash requirements they sell after the harvest often at a price which does not cover the operational cost. It is paradoxical that the government which procures foodgrains from the farmers with a view to ensure better income does not allow any profit to them. The procurement price covers all the cost of production but provides no profit. Still the farmers prefer to sell because what the traders offer is even lower. It is worth noting that although the National Commission on Farmers had made a radical recommendation that the procurement price should be 50 per cent higher than the cost of production, the government has rejected it outright.

Table 1
Budget Provision on Rural Employment and Land Improvement Schemes (Rs Crores)
S.No. Scheme 2006-07 (Revised) As % of Total Budgetary 2007-08 Budget Estimate Total As % of Budgetary
Expenditure Expenditure
1. Sampoorna Gramin Rojgar Yojana 2700.00 0.46 2340.00 0.34
2. Assistance for REGS 10170.00 1.75 10800.00 1.58
3. National Wastelands Development Board 3.00 - 4.50 -
4. Integrated Wasteland Development Programme 453.00 0.08 - -
5. Drought Prone AreaProgramme 360.00 0.06 - -
6. Desert Development Programme 270.00 0.04 - -
7. Integrated Watershed Management Programme - - 1088.55 0.16
8. Total 1 to 7 13956.00 14233.00
9. Total Budgetary Expenditure 581637.04 2.40 680520.51 2.09
Source: Union Budget 2007-08

It is agriculture which has financed industrial development wherein the prices of agricultural produce are kept low and consequently the price of agricultural law materials and wage bill remain subdued. This has been the story in all developed industrial countries and India is also following the same route. Whatever maybe the government’s rhetoric, the fact remains that no effective steps have been taken to bring about a situation where farmers could determine the price of their produce. If there were a well-integrated cooperative marketing structure the farmers could store their produce in the village godowns constructed for the purpose. They could get advance from the banks on the hypothecation of the produce to meet their immediate cash needs which would obviate the necessity to sell immediately after the harvest which is the root cause of low prices. Construction of rural godowns has never been on the agenda unlike construction of Panchayat Bhawans. The current year’s Budget has made a token provision of Rs 65 crores towards construction of rural godowns. The Central Plan allocation for food, storage and warehousing is Rs 333 crores only.

What emerges from the above is the fact that very massive resource mobilisation is necessary to raise public investment across the board. But there appears to be no effort in this direction. The tax-GDP ratio at 10 per cent in India is the lowest in the world except a few insignificant contries. The same is more than twice in the USA and more than thrice in many European countries. There are exemptions galore in direct and indirect taxes and, according in Receipt Budget 2007-08 (pp. 52), the revenue foregone through these exemptions amounted to Rs 206,700 crores in 2005-06 and Rs 235,191 crores in 2006-07. If these exemptions were to be withdrawn the Plan outlay could be raised by 73 per cent. Arrears of tax revenue stand at Rs 90,255 crores. If this could be realised and exemptions withdrawn the Plan outlay could be doubled.

The author is an Honorary Fellow, G. B. Pant Social Sciences Institute, Allahabad

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