Budget 2020

Embracing the rural

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A further increase in agriculture prices will lower the real income of buyers of food.

Economists recognise the existence of a ‘political business cycle’ in western democracies generated by political parties using the Budget to boost the economy before elections.

There, an economy boosted reduces unemployment. In India, where the scale of unemployment is so great as to remain unaffected by small changes in allocation, politics must take another route. It tries to impact welfare. This is what the last Budget of the first Narendra Modi government attempts.

With mostly poor agricultural performance since 2014, a focus on the sector was expected. However, its privileging, evident in the Budget speech, must have surprised most. The Finance Minister (FM) appears to be making up for his government’s near exclusive focus on corporate India over much of its tenure. Now it seems it is to be rural all the way.

At the very beginning of his speech, the FM spoke of his government’s intention of enabling “farmers to produce more from the same land at lesser cost and simultaneously realise higher prices for their produce.” The outcome of such a policy is not uniformly benign. Raising farm prices makes little sense at a time when agricultural prices have, on an average, been rising relative to other prices.

A further increase in agricultural prices via government intervention will lower the real income of the buyers of food, many of whom are among the poorest.

In pursuit of the government’s objective, the FM has announced that the minimum support prices for the next kharif crop will rise. This will be inflationary.

Beyond food production, the Budget speech referred to a plan to build roads to connect rural India’s farms and schools. Further, it aims to encourage clustering in horticulture production and marketing, increase the allocation for organic farming, provide cheaper credit to small farmers and create infrastructure funds for fisheries and animal husbandry.

Among the welfare measures announced, rural women are to receive free cooking gas through the ‘Ujjwala Yojana’ but above all, via ‘Ayushman Bharat’, the government is to provide 10 crore poor families health coverage of upto ₹5 lakh. The FM referred to it as “the world’s largest government-funded health care programme.” This is big. But what about growth? The macroeconomic thinking underlying the Budget is not particularly impressive.

As reflected by the decline in the growth rate in the last two financial years, the macroeconomic problem today is a shortage of demand. One part of this is attributable to contractionary macroeconomic policy — fiscal and monetary — since 2014. The second is a depressed farm sector in the medium term.

The agricultural sector has shown revival recently but gross capital formation in India has been declining with private corporate investment taking the lead. Standard reasoning would recommend raising demand either indirectly by lowering taxes or directly via public investment. Right now, it is the latter that is necessary as lower taxes may leave firms with higher savings but without incentive to invest if they don’t see recovery ahead.

The increase in spending on capital account proposed in this Budget is less than what was budgeted for 2017-18. This says it all.

Embracing the rural

Pulapre Balakrishnan, Professor of Ashoka University and

Senior Fellow of IIM, Kozhikode

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Printable version | Jan 26, 2020 6:43:17 AM | https://www.thehindu.com/business/budget/embracing-the-rural/article22624347.ece

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