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Mainstream, Vol XLVI No 11

Union Budget 2008-09

Holes in the Budget

Saturday 1 March 2008, by Bharat Jhunjhunwala

The ability of the Budget to garner votes for the Congress will depend upon whether the Opposition can expose the many holes present therein. Much hope lies in the political impact of writing off the loans of farmers. There is a doubt whether this will deliver. The government had similarly written off the loans of farmers two decades ago under the leadership of Choudhary Devi Lal. That measure did not beget votes then. Perhaps the contradiction is not clear to the readers. The Finance Minister has promised to double the flow of credit to farmers in the next two years. He has shown the increase in such a flow of credit as a major achievement of the government. More flow of credit means that farmers are burdened with more loans. The Finance Minister is increasing the indebtedness of the farmers and showing this as a major achievement. On the other hand, the Finance Minister is writing off the debt of the farmers also showing this as a major achievement. If debt is good, then there was no need to write off the same. If debt is bad, then there was no need to double the same. The Finance Minister is like a doctor who gives iron tablets to the patient to increase his blood count only to extract more blood from his veins. He wants to keep the farmers locked in the vicious cycle of more loans, more debts, more loss and more write- offs.

The farmer’s problem is the price of his produce. There was a bumper crop of bajra in Rajasthan a few years ago. Farmers were very happy. However, this euphoria did not last. Soon the price of bajra in the market declined from Rs 5.50 per kg to Rs 2.50. It became difficult for farmers to even retrieve the cost of harvesting. Let us not forget that agricultural productivity has continuously improved in the last fifty years; yet the farmer’s fate has been downcast. The reason is that the gains from increased production are wiped off by a decline in prices. Note that the Finance Minister has not said a word on the need to raise the prices of agricultural commodities in his Budget speech. This silence is ominous. It indicates that the Finance Minister is interested in keeping farm prices on the lower side. In consequence, the gains made by farmers from writing off loans will be small and soon forgotten while the loss incurred by them from low prices will be large and perpetual. This policy will not beget votes for the Congress if the Opposition can raise the question of declining prices.

There is a positive aspect for the farmers, however. The prices of agricultural commodities had been declining in the last three decades. They have started looking upwards in the last two years. There is a fundamental shift in the nature of world agriculture today. Previously agriculture was mainly producing food and fibres like cotton. The limited rise in world population limited the demand for these products. Lately, agriculture has become a source of fuel. Corn is being converted into bio-diesel in the United States. This is leading to a shortage of this crop for feeding purposes and an increase in its price. Brazil is converting sugarcane juice directly into ethanol. This is leading to less availability of sugar in the world markets. India is planning to grow jatropa on dry lands in a big way. This will lead to less production of bajra and ragi. The diversion of agricultural land to production of bio-fuels is leading to an all-round increase in the prices of agricultural commodities. Writing off loans will truly provide relief to farmers in this situation. They will be relieved of the interest burden and benefit from the rising prices. Yet, this may not translate into votes for the Congress because large farmers will benefit from this price rise while a large number of voters will suffer. Small and marginal farmers, agricultural labour and urban people buy their food from the market. They will have to pay higher prices for this. The gain in votes from the farmers will be more than nullified by the loss of votes from these constituencies. Truly, the Congress faces a dilemma. If it pitches for the votes of the farmers and allows prices to rise, then it loses the votes of the poorer workers. On the other hand, if it keeps the prices low then it loses the votes of the farmers.

The Finance Minister could have adopted a different policy. He should have allowed the prices of agricultural commodities to rise and first secured the votes of the farmers. Then he should have got an increase in the wages of the workers and alleviated the pain of high food prices. He could have made a scheme of providing low rates of tax on companies that employ a large number of workers. The condition can be imposed on government contracts to do works by manual labour rather than by tractors and excavators. Machines that eat away jobs like harvesters could be highly taxed. Such policies would lead to higher demand for labour in the market and increase in the wages of workers. Presently, the worker buys wheat flour at Rs 12 per kg and earns Rs 100 in a day. He would have no difficulty in buying wheat at Rs 15 per kg if his daily wages rise to Rs 200 per day. Such a policy would ensure the benefits of high price to the farmers and the benefits of high wages to the workers. Unfortunately, the Finance Minister has not tackled this contradiction head on and left the matter to the vagaries of the market. My hunch is that we will see a huge increase in the prices of food items in the coming months. This will totally undo the political advantage of writing off loans.

The fate of myriads of other pro-poor schemes is likely to be no better. The Finance Minister has increased expenditures on education, for example. This is unlikely to beget votes. The government teachers will benefit more and the people less. In a survey of schools in Uttarakhand I found that government teachers were paid a salary of Rs 10,000 while private teachers were paid only Rs 2500 per month. Yet only 23 per cent of students in government schools were able to solve maths questions against 46 per cent in private schools. Clearly, education is suffering not from lack of funds but from lack of competition and accountability in government schools. This failure of the government system is being camouflaged by giving out free mid-day meals. It is as if the government is providing incentives to students to enroll in government schools so that they do not pass the exams. People are disillusioned with government schools. Increased expenditures on this will not beget votes. The condition of other schemes like employment guarantee and insurance for the unorganised workers will be no better because they all suffer from the same bureaucratic hurdles. The need was to provide education vouchers to the people so that they could encash at government or private schools. In my assessment, this Budget will not beget votes for the Congress if the Opposition highlights these issues.

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