Union finance minister Pranab Mukherjee will soon begin confabulations with industry leaders and sectoral experts on the formulation of Budget 2011-12. Like Manmohan Singh and P Chidambaram in the past, will he deliver an historic budget? Singh as finance minister in 1992 launched the Indian economy's liberalisation by encouraging foreign investment and slashing import duties, which was to put an end to the 'Hindu' rate of economic growth. Chidambaram as finance minister in 1997 announced substantial reduction in income and corporate taxes, leading to buoyant tax collection in future years. Mukherjee in 2011 can present a path-breaking budget by focussing on the rural economy and agriculture sector, which can set India on a permanent high growth trajectory of over 10% in the foreseeable future.
While the reforms and budgets of the last two decades have produced a vibrant urban economy, their impact on the rural economy has been minimal. Past budgets have seen farmers being pampered with sops and subsidies that have created an extreme dependence on the government among people living in rural areas. Except for the mode of production linked to the farmer, government is the biggest provider of services and buyer of goods produced in the rural economy.
Schools, hospitals and most other essential services in rural India are mostly government-run and, with the introduction of the Mahatma Gandhi Rural Employment Guarantee scheme five years ago, the government has become the employer of the first resort. The farmer also gets from the government free electricity and subsidised credit and fertilisers for production of crops. Most commodities thus produced are procured by the government through the minimum support price (MSP) mechanism.
The rural economy needs an impetus to get out of this rut. The upcoming budget provides Mukherjee an opportunity to lay out a vision for transitioning the rural economy and agriculture sector into the market economy.
To be fair to the finance minister, addressing rural India's necessities requires large sums of money while introducing major agriculture reforms requires considerable courage and determination. Mukherjee might face substantial resistance from members of Parliament who are beholden to special interests in the current system. Industry associations will make their usual set of demands: continuation of stimulus and labour reforms. Stock market participants will want him to focus on insurance and pension reforms, and pave the way for multi-product retailing.
The agriculture sector - of paramount importance to poverty alleviation, food security and overall economic welfare - is in urgent need of long-term investments and reforms. It employs more than 225 million people whose livelihoods could be threatened without investments and reforms in the coming years. The finance minister should seize the moment and deliver a budget exclusively focussing on the rural economy.
Agriculture remains the most repressed sector in the economy, facing frequent government interventions and with a distorted market structure. It faces several other challenges including low crop yields per hectare, low incomes for farmers and unpredictable weather conditions. With population growth expected to add another 300 million people in the next three decades, a food crisis looms large unless there is a sizable increase in the production of rice, wheat, sugar, pulses, edible oil and other essential commodities. A substantial budget allocation should be made to improve agricultural productivity by addressing farming's research needs to facilitate introduction of modern technology that makes agriculture less susceptible to the weather's vagaries, and by altering market structures which requires cooperation from state governments.
Apart from the focus on increasing agricultural productivity, transformation of the rural economy requires policy changes to attract private investments in the education and health sectors, a direct cash transfer scheme to the needy along with price decontrol of agricultural commodities. The budget needs to accommodate some measures that will attract investments from non-governmental sources to create infrastructure for direct marketing of produce and supply of quality raw materials as well as support contract farming while protecting the interests of small and marginal farmers.
Amendments should be made to education and health programmes to give more freedom and incentives to private service providers and NGOs that can deliver quality education and health at the lowest cost in rural areas. Along with a cash transfer scheme, a policy proposal to implement decontrol of prices of the 20-odd commodities still under the MSP regime needs to be addressed. Decontrol of commodity prices, which should be done over a period of time, will eliminate the need for the government to procure and distribute commodities. With issuing of UID numbers well underway, a cash transfer scheme can be successfully implemented that will mitigate any adverse effects of price decontrol.
There have been just two path-breaking budgets in the last two decades. By making the rural economy and agriculture sector the centrepiece of Budget 2011-12, the finance minister has an historic opportunity to present a third one at the start of this decade. The right set of reforms and incentives can lay the foundation for agriculture's consistent growth at over 4% and an overall economic growth of over 10% that will ensure long-term prosperity for all Indians.
Source: The Times of India
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