About half of Indian population is involved in agriculture for a living. This contributes to about 1/5th of India’s GDP. This gives the farmers a right to carry out peaceful protests in a democracy. But are their demands justified? What if the government accepts these demands? How will it affect the Indian economy? Let’s find out.
What are the Farmers Demanding?
Delhi Chalo protest is organized by farmers from the states of Punjab, Haryana, Uttar Pradesh, Rajasthan, and Madhya Pradesh. Their major demand is around fixing the Minimum Support Price (MSP) at 50% premium of what is required to procure the crop. This is to safeguard the farmers from price fluctuations in the market. While only 22 crops have MSP currently, farmers are asking for MSP across all crops.
Other demands include loan waivers, pension, withdrawal of cases against protestors from previous protests. Farmers are also asking for 200 days of guaranteed employment under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGA). Currently, the scheme offers 100 days of guaranteed employment.
What the Government is Already Doing for Farmers
Let us look at the actual spend of Indian government for FY’23. About INR 2.7 lakh crore was spent on food subsidy. This is the amount the government spends to procure food grains (wheat and rice) from farmers at a Minimum Support Price (MSP), allowing a safety net for the farmers and protecting them from predatory middlemen. Next, over INR 2.5 lakh crore was spent on fertilizer subsidy. Crop insurance schemes attracted a spending of over INR 10,000 crores. The Prime Minister commented that ‘over 6.5 lakh crore was spent for the agriculture sector’.
Apart from this, farmers get other benefits such as subsidized electricity (states such as Punjab benefit from free electricity). The government provides subsidized loans to farmers at 7% for up to 3 lacs. The impact on government spending? An additional budgetary provisioning of INR 35,000 crore!
Further, agricultural income is exempt from tax. An interesting article from The Economic Times comments that by taxing only the top 4% farmers (at 30% tax slab), the government can earn an additional INR 25,000 crore, roughly equal to 8.33% of this year’s GDP.
What will Happen if the Government Agrees
The government spends around INR 2 lakh crore on MSP annually. If it were to introduce an MSP guarantee law, this would lead to an additional INR 10 lakh crore spending per year, almost equaling the amount budgeted for infrastructure development.
According to an article from The Hindu, more than 18 lakh crores of agricultural loan was outstanding in 2021. Non-performing assets (a bad loan that the bank may not be able to recover) in agriculture loans stood at 6500 crores – about 3% of outstanding loan amount. This shows that a small segment of outstanding loans end up being written off or declared as non-performing assets.
Assuming only 20% of these outstanding loans are waived off, the government will be paying 3.6 lakh crore. This is almost equal to the spend on the nation’s defence in FY23 (3.9 lakh crore).
Lastly, ~20% of the Indian population comprises of senior citizens. That would be about 28 crore senior citizens. Considering half of these work in agriculture, we end up at a number close to 14 crore people being eligible for agriculture pension. Considering a mere ten thousand rupees of yearly pension would mean an additional 1.4 lakh crore of yearly pension!
On the surface level, by agreeing to the protesters’ demands, the government would easily end up spending over 15 lakh crore.
Secondary Consideration
When government agrees to guarantee MSP and waive off loans, they need to provide for this cost from some source. This would mean either higher taxes for the working class or borrowing money. Since the government is increasing the expenses without increasing its revenue, the amount of money in circulation will increase, therefore causing inflation. As a result, the cost of procuring raw material for farmers will increase and lead to a possible situation where they end up at the same place where they are.
Similar deductions can be made on loan waivers. As loans are waived, the government has to write-off them from the books of NABARD and other public-sector or private sector banks. This means the government is letting go off some income that it had anticipated earlier. To compensate for this lost income, it will charge the next borrower a higher amount. As a result, interest rates for loans would increase for everyone, including farmers. They may take another loan, but struggle to clear it, leading to a vicious cycle.
Conclusion
I feel the government appoints top officials who understand the implications of multiple things and take decisions in the best interest of the nation. This is the reason why officers are reluctant to agree to the demands of protestors. Ceding to the requests may have an enormous blow on India’s economy and will require major re-budgeting that will affect other development projects and welfare schemes.
Government is trying to negotiate terms by offering a bonus over and above the MSP for 2024 – 7% higher than in 2023. While this may still be losing, it dodges a major overhaul that may shake the budget.
Sources:
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