The budget has
mostly received flak for what is has not done or one that is too little. The story that seems to have largely been missed is the one related to Rural areas. One article says that there
is no shift away from the past. Another details various
measures including a price stabilisation fund, establish a national market for
farm produce, irrigation schemes, agricultural universities, warehouses and
rural internet connectivity, measures for providing credit to tenant farmers
and providing long-term credit. The criticism that these measures may be mere 'tokenism' is to an extent valid. However, it is important to understand that not everything needs to be taken up by announcing it in the budget or the parliament. In the area of Rural Development, a number of important measures in this budget are more likely to be remembered over the next few decades for their social and political impact rather than only for their economic impact. These changes, if used
adroitly have the potential to rework the caste/class relations in the rural
areas – much like the manner in which some policy interventions were used in
the 1970s and 1980s. Good examples of such changes are those related to
cooperatives and poverty alleviation programmes. In other words, the BJP can do
what the INC did to its power base. Interestingly, the possible long-term
consequences that the budget could possibly trigger (subject to implementation
of policy) have largely been missed. This is not to claim that the changes are
likely to play out immediately. The budget is probably indicative of the
direction in which various attempts to rework socio-economic changes are likely
to be experimented in the next few years. To cut a long-story short, the Union Budget could probably be only a dress rehearsal to the story that may unfold in the next 3-4 years. .
The Budget has
promised many investments in agriculture and Rural Development. The impact of
these steps will vary and will depend on the ability to implement
projects/programme – always government’s Achilles heel. A large part the
analysis/views on are based on field experiences over the past few years. They
may or may not be applicable to the country as a whole. These important
announcements though do not have much funding considering the size of the
country or the task, may be the beginning of the trend. The important measures
that caught my attention in the budget include:
- More funding for various programmes related to agriculture, rural housing, water and roads;
- Enhancing Warehousing infrastructure by providing Rs.5000 crores assistance
- Improve post-harvest lending to farmers which also calls for reinvigorating the framework of Warehouse Development and Regulatory Authority (Point 127 of Budget Speech).
- Long-term credit and increased funding to NABARD.
- Broadband connectivity to villages under Digital India Initiative and National Rural Internet and Technology Mission. (Point 62& 63 in Budget Speech)
- Establish 100 Mobile soil testing centres.
- NABARD to encourage 5,00,000 Joint Farming Groups to help tenant farmers (Point 80 in Budget Speech)
- Producers’ Organisation Development Fund (Rs.200 crores) to build 2000 producers organisations (Point 90 of Budget Speech).
- Expanding Financial Inclusion through a Financial Inclusion Mission (Point 130 of Budget Speech);
It is quite
surprising that the most important business newspapers have not covered at all
or have simply not bothered to understand the ramifications of some of these
measures especially those related to Producers and broadband connectivity to
the villages. Of course, the reason to explain overlooking the broadband
connectivity measure is not difficult: pushing technology often turns out to
possess a tinge of elitism to it, especially by the time the policy decision is
transmitted from policy level to implementation level. Inexplicably, missing
the part about Producers Organisations is inexplicable. Probably not many
expect these to succeed. Interestingly, an overwhelming number of cooperatives
that have succeeded have mostly been in the sphere of credit or petty commodity
production. However, I believe that even a partial success of these programmes
will provide extraordinary political benefits to BJP. Infact, their success may
be more in the realm of the political and social sphere in the rural areas
rather than the economic sphere.
Among the many
measures in the budget at least five of them are likely to have large scale
ramifications in the long-term – even if there are problems related to faulty
and uneven implementation. These include:
- 1Improving agricultural storage facilities.
- Financial Inclusion Mission
- Digital India Initiative and National Rural Internet & Technology Mission
- Joint Farming Groups
- Producers Organisation Development Fund
The first of the
above measures has widespread ramifications for consumer interests while the
other four have extraordinary potential to unleash social and economic changes
in the rural areas. These changes are likely to put in place a new classes and
castes firmly in control of rural areas. Some of them are dealt with below:
1.
Improving
Agricultural Storage
and expanding the scope of the commodity market has obvious advantages but the
measures proposed in the budget can work both ways. Depending on government
policy and oversight they are likely to become a double edged sword.The
advantages are well known and have been discussed over the past many months.
However, there is a need for abundant caution since the measures have the
potential to create a massive information asymmetry which, if combined with
trading in the commodity markets has the potential to be detrimental to
consumer interests. However, if used with abundant safeguards it can provide
substantial succour to the consumers by enhancing storage facilities.
A
hypothetical case of the worst case scenario is explained: Assume that a few
large players or a syndicate of medium/large players who own/operate warehouses
work in coordination and share information about the volume of food-stocks they
hold on their own or on behalf of their clients – in other words, form and
operate as a cartel. Assume that they control stocks through their merchant/social
or peer networks to the tune of approximately 10% of the total warehouse
storage capacity (easily possible). In case of a delayed monsoon or failed
monsoon (as in the present year), these players will be the only ones with the
price sensitive information. Assume that these players work in tandem with one
or more of the largest food companies in the country and share the information.
The result: these companies will have sufficient power to move prices in the
direction that is profitable to them but, detrimental to the larger consumer
interests. The moot question is it possible for such a scenario to play out in
real life. I think the probability is very high. Example: the case of Cement
Industry in India, which routinely indulges in “Production management” –
basically price fixing.
The
private sector will find the Warehouse trading receipts extremely profitable,
especially when they can be traded in a calibrated manner in the commodity
markets provided the user has the right information and trading access at their
disposal. In my years in the field and an observer of various markets, I have
constantly pointed out that the most important and price sensitive information
is always very expensive and is accessible only to a few. A general, but
horribly wrong perception is that internet has made information more easily
accessible and democratised it availability. Unfortunately, that is not the
case. The information that is available free or at a low cost usually has no
relevance in the market place.
A
logical and obvious question that arises is if it possible to avoid such
tactics? The short answer is that it is not difficult. The government can
compulsorily requires a mandatory filings by all warehouses to declare the
stocks moving in and out of each and every warehouse, preferably on a real time
basis (or at least hourly basis) along with figures of the net stock available
in each warehouse at any given point of time. Even better, if the owner of the
stock is declared (just as participants have disclose their identity in case of
block deals to purchase or sell equities) This information should be placed on
the government website and distributed free of cost.
2.
Financial
Inclusion Mission Combined with Digital India: Frankly, I did
not expect the present government to push this programme. The fact that it did
probably indicates the realisation of the importance of the banking sector in
general and Financial Inclusion (FI) in particular. Mission mode execution is
likely to bring with it a sense of urgency. Opening bank accounts is not, in
itself a big deal. There are already millions of non-operational/unused
accounts. The importance of the programme lies in the opening accounts with an
inbuilt credit mechanism (if press reports are to be
believed and if the FM’s speech is an indicator). Reports point out that these
account will be given an overdraft (reported at Rs.5000 in the press but not
stated by the FM). Assuming that the banks are able to open 50 million new
accounts and provides credit to another 50 million account holders already
possessing a bank account. Assuming that the credit provided is as little as
Rs.5000 per account, it translates into 100 million multiplied by 5000. It
provides a huge push to the rural economy. Interestingly, I find that a large
number of people have borrowings in the range of Rs.500 to Rs.10,000 from
pawnbrokers in rural areas. This means a household can balance their very
short-term cash flow requirements by a judicious use of the bank accounts.
Expansion
of FI can have huge long-term ramifications. I have found in Kolhapur district
that the establishment of a Business Correspondent outlet and the disbursal of
a bank loan have increased incomes of small businesses by 30-40% (based on
interactions – no data gathered. The benefits accrued by way of amount saved as
interest rate differential (saved by borrowing from the formal sector), time and
money saved making the weekly trip to the bank, advantage of paying online to
suppliers and so on. The catch lies in completing financial literacy classes. The
banks do not have the infrastructure to take up such a large scale financial
literacy drive. Often financial literacy training is a programme that the banks
take up only due to regulatory compliance. The second question is who will meet
the costs related to financial literacy training.
It
is in the above context that we have approach the broadband push. Ideally, the
broadband push should start with villages or regions that presently do not have
any connectivity. In my experience that means about 20% of the villages.
Assuming that this happens then the change can be quite substantial.
There
are three critical pre-requisites for the success of these two measures: (a)
Convince the banks to offer credit, (b) role of corporate entities serving as Business
correspondent and, (c) who controls the broadband/information highway?
The
first, convincing the banks, is easy: the government can offer a
counter-guarantee or a loan insurance wherein the premium is paid by the
government for two loan cycles on the over-draft facility offered on each
account. In order to make the banks more interested in expanding the business
and to collect the loans, the insurance itself can be offered on the basis of a
larger loss sharing in the first loan cycle (say 90:10) and a lower loss
sharing in the second loan cycle (say 50:50). Since the loan second loan cycle
will not be needed in case of a default, the banks need not worry about the
second loan cycle. In case the default occurs during the second loan cycle,
they get only 50%.
Second
issue is a problematic one due to ideological reasons. In my experience of
visiting nearly 150 BC outlets, 90% of the Corporate BCs are a failure (I have
come across only one corporate entity that does excellent work – the rest do not
work). Therefore, they should not be allowed to use the programme to gain a
foot in the door and bring the programme to a halt.
The
third issue is who will control the broadband digital highway? Due to its
long-term business and other ramifications, the government should build it and
then lease it out or allow any business or other agencies to use it for a small
fee that allows it to meet costs and future investment needs. Public Private
Partnership (PPP) should be strictly avoided.
If
FI Mission or Digital India plan has to succeed, there is a need for the
Finance Ministries, RBI and TRAI to work in tandem.
3.Joint Farming
Groups for Tenant Farmers: This is another unexpected programme, especially
when seen in the context of the policies of previous NDA governments
(1996-2004). This is a good measure but, if the experience of pre-bifurcation Andhra
Pradesh is indicative, it is going to be a difficult programme to succeed.
Pre-bifurcation AP Government
Socio-economic survey
points out that by the end of 2012-13, a total 5,76,147 tenancy cards (eligible
for a loan) were issued. Media reports cited in the context of the loan wavier
related news items claimed that there were 28 lakh tenant farmers in Residuary
Andhra Pradesh. In other words, less than 25% of the total tenant farmers
possessed a tenancy card.
The
difficulties arise due two reasons: (a) officially acceptable written
recognition of tenancy is possible only with an agreement between the land
owner and the tenant. This is likely to make it difficult to organise the
groups and documenting/identifying the tenant farmers and the fields in which
they work, (b) how to incentivise the banks to lend when there is little or no
security and more importantly, when recovery can go down to near zero in case
of recalcitrant and/or borrowers unwilling to repay the loans?
The
first reason is difficult to deal with consider the rising cost of land that
combines with circuitous or a lack of a quick arbitration mechanism. The
inordinate delays in the judicial system only make it unlikely that the owner
of the land will offer the documentary evidence attesting a tenant farmer’s
status due to fear of litigation. The case of Krishna District is illustrative
of some of the problems. In that region, the land prices vary from Rs.10 lakhs
to Rs.5 crores. In contrast, the lease earned by renting land is less than
Rs.20,000- lower than the returns on a savings bank account deposit. Fear of
litigation, real or perceived, by the
tenant means that land owners are unwilling to risk leasing the land. The possible
manner in which a landowner will agree to accepting formal tenancy agreement is
the laws forbid litigation or to create a judicial framework that disposes off
such cases in less than a year – both of which are unlikely. Such a risk may in
the end leave the programme wide open to building Joint Farming Groups that are
in essence patronage groups of the powers that be. Essentially, it means that
it offers the ruling party a vehicle and reach to expand into the villages at a
hitherto unknown speed. If the Elections results in 2014 are an indication, for
the first time in the history of independent India, the BJP has the possibility
of creating a non-congress, non-left support group right down to the village
level.
The
second issue, incentivising the banks to lend, will be problematic but given
the political advantages, the government owned banks can be subtly forced/convinced
to lend either through refinance or loan insurance (as cited above).
4.
Starting
Producers Organisations: I find this measure the most interesting part of the
Union Budget. It has the potential to completely rework the socio-economic and
political structures – if it works. On the positive side, the Producers’
Organisation can be used to organise, channelise agricultural inputs and market
produce thereby leading to a huge jump in the bargaining power of the
producers, especially the small and medium producers– exactly on the same
grounds as a cooperative. Capacity building can encourage and even drastically
transform the present agriculture. It has the potential to encourage
investments that reduce, if not remove information asymmetry. Among the other positive
effects, it could push intensive farming based on a high degree of
mechanisation. In short, it could be the farmers’ equivalent of the Self help
Group movement for the poor. As an organised collective, it could mean the
emergence of a new, well organised, powerful force in the country side that
have substantial clout – probably for the first time after independence.
But, the advantages go far beyond the
realm of agriculture. Organising the producers has the potential to create a
powerful group of supporters right down to the village level for the ruling
party. Since any party that controls the Central Government controls the banks
and all the organisations that can fund such Producers’ Organisations, the
political benefits are substantial: exactly like what the cooperative did for
the Indian National Congress in the 1970s and 1980s. Since the producers will be
landed interests, for the first time, landed interests can be given a coherent
right-wing orientation and push –something that the first NDA simply did not
have.
Add to these
other changes that we already witnessing in the form of internal migration and
massive mechanisation of parts of the agricultural sector. Probably, we are at
the cusp of huge but, scary set of socio-economic changes – the most important
in nearly half a century. If socio-economic change span out as I think they
will as question that I keep crossing my mind is: where all this will leave the established
left-wing parties and the INC?
