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Mainstream, Vol XLVI, No 24

Budget and the Rural Sector

Monday 2 June 2008, by Kripa Shankar


The national Sample Survey data in “Income, Expenditure and Productive Assets of Farmer Households” 2003 have shown that the average annual income of a farmer household from cultivation is less than Rs 12,000 and that from all sources is less than Rs 25,000. It found that 96 per cent of the households are in deficit and half of the households are indebted. Debt waiver can only be welcomed in such a situation. Marginal and small farmers, once indebted, will hardly be in a position to repay the debt even if it is from institutional sources where the interest rates are much lower than what is charged by private money-lenders. But what about the moneylenders’ debt which is far more onerous and higher in magnitude? The solution lies not in periodical debt waivers but in creating conditions where agriculture becomes a paying proposition. This requires, among other things, a massive public investment much higher than the current debt waiver of Rs 60,000 crores apart from facilitating private investment through access to institutional sources at a nominal rate of interest of say, four per cent as recommended by the National Commission on Farmers. No less important is to make the loans hassle-free as far as the institutional sources are concerned. The RBI may have directed the banks to grant loans to marginal and small farmers without any security or guarantor and without any hassle but that has remained on paper. Now a new phenomenon of bribe has surfaced and the banks and cooperatives, according to the World Bank and NCAER, deduct 10 to 20 per cent of the loan amount as bribe. The time taken to process a loan is 33 weeks in case of banks.1 Unless the banks grant loan instantly without any collateral, the moneylenders will continue to rule the roost. All the rural households should be provided with credit cards in the first instance and loans should be provided at a nominal interest rate of four per cent.

Banks cannot obviously do so unless they get an interest subvention of, say, 10 per cent as they usually lend at 14 per cent. An interest subvention of Rs 30,000 crores would have enabled the farmers to redeem their old debts to the moneylenders through fresh borrowings from the banks to repay the debt of the moneylenders as also enabled them to make capital investment in farm and non-farm activities. Loan waiver, howsoever desirable, will not solve the credit problem of the farmers. The problem of providing collateral can also be solved if the government guarantees such loans to the farmers just as it has guaranteed huge loans of big entities amounting to more than Rs 1 lakh crores according to the Budget documents. If bank loans are hassle- free and available at low rates of interest, the credit deposit ratio of rural banks, which at present is round 44 per cent, will increase significantly resulting in greater private investment in the rural areas. The total deposit of the rural branches of commercial banks is round Rs 2 lakh crores and credit at Rs 85,000 crores means that over Rs 1 lakh crore at present is siphoned off to the urban centres.

It is strange that the Budget has no package for those who suffer crop loss due to natural calamities, pests and diseases and adverse weather conditions. Agriculture is the riskiest business and in a situation where the majority of farmers remains indebted and in a deficit position, crop insurance should be the top priority. There should be a universal, almost free, crop insurance scheme which alone can prevent farmers’ suicide. The cost of running such a universal crop insurance scheme will not even one-tenth of the debt waiver amount but it has been put on the back burner. The provision for crop insurance at Rs 644 crores and weather crop insurance at Rs 50 crores do not constitute even 0.1 per cent of the budgetary expenditure.

It may not be out of place to mention that every car is insured and the government gives a subsidy of Rs 10,000 to every car owner per annum by way of subsidised petrol and diesel but it is not prepared to bear any burden by introducing an almost free compulsory crop insurance scheme. Debt waiver is not going to address any of the basic problems being faced by the peasantry but in an election year its electoral appeal cannot be denied.

Agricultural production is stagnating. Per capita production of foodgrains is declining and is no higher than what it was 50 years back. One of the major reasons is the inability to provide assured irrigation. The irrigated area under foodgrains is stagnating around 55 million hectares since 1998-99 despite public expenditure of more than Rs 25,000 crores per annum. Seventy per cent of the expenditure on irrigation goes to meet the establishment charges, according to the Vaidyanathan Committee, and little is left for capital expenditure.

A more glaring inadequacy in the irrigation policy has been the complete neglect of harnessing rainwater with the result that the water table is falling at an alarming rate making ground water irrigation all the more costlier. The Centre commands the bulk of the public resources but its Budget for water resources is Rs 880 crores in the current year. A scheme of Integrated Watershed Management Programme was initiated last year with a symbolic allocation of Rs 1088 crores and the same has now been raised by Rs 600 crores although the total receipts of the Central Government are slated to rise by over Rs 70,000 crores.

The Constitution, under Section 243G, has enjoined that Panchayats should function as institutions of self-government and the scheme of economic development and social justice should to be devolved to them. In view of large scale leakage it is even more imperative to devolve such schemes to the Panchayats beginning with harvesting of rainwater through construction of bundhies, ponds, drug wells etc. It would have been a highly appreciable package if the Budget would have provided a significant devolution of funds to the panchayats from the exchequer. Only if one-fourth of what has been provided as loan waiver could have been made available to the Panchayats, village India could pulsate with a new life and vigour. Through watershed development programmes all the fields could have been provided with assured irrigation at little cost. It could have also provided considerable job opportunities to the rural underemployed and the unemployed within the rural areas. The National Rural Employment Guarantee Programme could also be geared to rainwater harvesting but allocation for it at Rs 16,000 crores is only marginally higher over last year’s allocation.

It is the inability to harness rainwater through micro watershed development programmes that has turned vast land into dry ones as otherwise these areas are not deficient in natural rainfall. The normal annual rainfall in Punjab and Haryana, which are the granaries of India, is less than 650 millimetres while it is twice in the Bihar plateau. Every other region except Rajasthan has higher rainfall. If rainwater could be conserved much of the dry land could get irrigation. The unutilised land in the country is round 40 million hectares. This could also be brought under some sort of irrigation where crops like pulses, oilseeds etc. could be grown as these require little irrigation. More inferior land could be planted with trees of various sorts including jatropha. Poverty is more concentrated in the so- called dry regions and with sound water management a large part of such land could be put to productive use.

The Budget has again ignored the construction of rural godowns. The farmers are forced to sell immediately after the harvest to repay loans taken in connection with agricultural operations as well as to meet other consumption needs. If there were a network of cooperative marketing godowns they could store their produce and get pledge loans from banks on the hypothecation of the produce. This could ensure them fair prices afterwards while at present they may have to sell at a price which may not cover their cost of production. The Budget has provided Rs 174 crores only for agricultural marketing out of which a small part has been earmarked for construction of rural godowns. The government gives a small subsidy for construction of rural godowns but the resource-poor farmers are unable to avail it. Every village Panchayat has a Panchayat Bhawan for holding meetings. It remains vacant or is used as a drawing-cum-guest room of the village Pradhan. It can be more productively utilised if it could be converted into a godown. Every farmer can be provided with a Kisan Credit Card with a higher limit for pledge loans along with crop loans. This will enable the farmers to get pledge loans easily and become instrumental in mitigating their lot through price mechanism.2

All in all the Budget provisions are so meagre that it can have hardly any impact on the growth in the commodity producing sectors, particularly agriculture. Nor can it create adequate job opportunities to arrest the deteriorating employment situation. Employment in the organised sector at 264.6 lakhs in 2005 was lower than what it was in 1991. What the country needs is massive investment, both public and private, more so in the former as investment in infrastructure can be intensified only by public investment. All this requires massive resource mobilisation and its productive deployment. But there appears to be no such approach. The tax- GDP ratio in India at 12 per cent is less than half of what it is in many developed countries and some of the developing countries. There are exemptions galore which make the effective tax rate only half of the statutory rate. On account of these exemptions the annual loss to the exchequer was Rs 278,644 crores in 2007-08 as per the Receipt Budget 2008-09. (pp. 58) Instead of withdrawing the exemptions the income tax payers have been given a bonanza of Rs 30,000 crores. Reduction in excise duty of various consumer durables will further benefit them. Wealth and estate duty and gift tax were abolished long back although many other countries have high rates of these taxes. Securities Transaction Tax will fetch only Rs 9000 crores in 2008-09 although the daily securities transaction is of the order of Rs 15,000 crores. If tax exemptions are withdrawn and income and wealth of the richer class are suitably taxed, there will be no need for borrowings which are currently of the order of Rs 133,000 crores. This will lessen the interest burden which will take away Rs 191,000 crores in the current year. That way the budgetary expenditure can be doubled leading to a much faster growth of the economy, more so its commodity producing sectors.


1. World Bank and NCAER, 2003, The Rural Finance Access Survey and World Bank, 2004, Scalling up Access to Finance for India’s Rural Poor.
- 2. Price mechanism has been utilised to extract rural surplus to finance industrialisation in all the developed countries. The ruling class in India also wants to keep agricultural prices as low as possible. A latecomer on the scene, India can compete in the global market only on the basis of cheap labour and cheap agricultural raw materials. Likewise when the government goes in for procurement of foodgrains it offers a price which covers the cost of production only and does not provide for any profit. Still the farmers prefer to sell as the private trader offers still lower price. It imports wheat at double the prevailing market price rather than pay a bit higher price to its own farmers lest the internal prices may rise.

The author is an Honorary Fellow, Govind Ballabh Pant Social Science Institute, Allahabad.

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