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G. Ramachandran

INDIA'S general economy is plugged into low and risky net incomes because the farm sector is plugged into high input prices. Farmers and processors are exposed to risks that could be eliminated, ameliorated or shifted away, but they have limited means to manage these risks. Farmers are plugged into low farmgate prices for their output though they pay high prices in the retail marketplace as consumers. As a result, India's farm sector earns low but risky gross incomes.

Yet, most farmers are subjected to the highest modal or most frequently observed tax rate on incomes. The monstrously high modal tax rate is levied through mandi fees — a form of turnover tax. Mandi fees are paid as percentages of prices at which farm output is sold to processors and traders. Farmers pay mandi fees regardless of the magnitude of gross incomes and even when there are gross losses. No other sector of the economy pays taxes on losses. There are no `setoffs' in the farm sector against past period losses. As a result, India's farm sector earns very low and very risky net incomes.

Quite inevitably, this has an impact on the purchasing power of the general economy. Nearly 100 million households derive their incomes from activities that constitute the farm sector. Their modal per capita income is less than $100, but their aggregate private final consumption expenditure (PFCE) is considerable. Low and declining consumption by households that derive incomes from the farm sector is India's principal economic problem. Improving the net incomes of these households should, therefore, be India's principal economic objective. Lowering the riskiness of their net incomes should be the joint objective. Together the two would have a favourable impact on the PFCE of households plugged into the farm sector and, thereby, on the general economy.

Fiscal, feeble

The two joint objectives — high modal incomes and low riskiness of incomes — are unlikely to be achieved through fiscal steps such as higher excise duties, sales taxes, import duties, and agricultural income taxes.

Prof P. R. Brahmananda has recommended higher excise duties, sales taxes and agricultural income taxes if they offer better and rising terms of trade to agriculture (Business Line, February 2). He has rightly emphasised the condition — better and rising terms of trade to agriculture — and the justification for fiscal steps. But duties and taxes levied by government over the past five decades have not had a stunning impact on farm incomes.

Duties and taxes would have had a lasting impact on development and demand if they had been used to support activities that empower and serve the farm sector. India's farm sector has neither been empowered nor served. Farm incomes, where they are high, have benefited from high procurement prices. Procurement policies play a vital role in assuring supplies to urban and semi-urban consumers.

The Government has acknowledged the failure of procurement policies in spreading purchasing power and fuelling demand-driven growth. The National Agriculture Policy (July 2000) is the first policy statement that emphasises the importance of demand as a determinant of growth. Towards expanding demand, it recommends more freedom to the farm sector and more opportunities to earn low-risk incomes. Both are sound recommendations and do not involve fiscal steps. The Government has made an earnest beginning. The intent to amend the Essential Commodities Act, 1955, has been announced. It is a pity that cotton would continue to be a commodity in captivity.

Á bon chat, bon rat

The plight of the government and the manufacturing sector is similar to that of dependent parents plugged into the meagre incomes of their children. Such large-scale dependence is unique to India. Parents dependent on children with high incomes usually have better access to nourishment and health — the equivalents of tax flows and cash flows. The farm sector has had to surrender to policies aimed at economic certainty in other sectors.

The Business Intelligence Unit (BIU) provided the first empirical evidence of the importance of the farm sector to aggregate demand. Its analyses showed that households that derive incomes from agriculture constitute the fundamental ballast on which demand for food and beverages, textiles and apparel, personal products, home appliances, and services such as transport and entertainment is founded (Business Line, September 9, 1999).

These are the mundane and unexciting components of the economy, but they comprehensively drive cash flows, tax flows, and the demand for capital goods and infrastructure.

Consumption and demand were regarded from 1952 through 1991 as the twin evils of capitalism while production and supply were naively regarded as virtues.

The farm sector was thought to be the fulcrum of production and supply, and quite ironically is being presented now as the fulcrum of consumption and demand. Policy-makers and investors have to work towards rapidly improving the farm sector's purchasing power before they begin to promote policies and activities aimed at higher incomes in the general economy. The importance of the farm sector to aggregate demand is quite clearly retaliation in kind — á bon chat, bon rat (to a good cat, a good rat).

Ad astra per aspera

Revitalising India's farm sector is a daunting task, but it has to be revitalised. The farm sector has been the principal and most glaring victim of the two-force equilibrium that has characterised the economy for five decades. It has been made subordinate to manufacturing and services. It has had to forgo numerous economic freedoms and as a cog in the nation's supply machine it has had to submit to many a revolution — - green, white and what not.

These were production revolutions aimed at supplying to known consumers who derived their incomes from activities outside the farm sector. They were not consumption revolutions aimed at spurring new demand. The production revolutions merely enabled expanded and new production to satisfy known demand. Policy, legislation and policing aimed at securing supplies were easy to work with since they merely required curbs on the freedoms of the farm sector and its organic allies. The Essential Commodities Act, 1955 is an example. After a set of `do not' and `shall not' laws were promulgated from time to time, governance became an effortless activity because the `do not' and `shall not' laws applied to the public. India needs a consumption revolution aimed at tapping the known and undiscovered production capabilities of its myriad producers. It needs a revolution that spurs new demand. It needs a revolution that spurs new economic activities and incomes. The economy needs a set of `do' and 'shall' laws that apply to government and make governance a useful effort. The emphasis is on government and not on political parties.

The past successes of the production revolutions, even if limited, show how innumerable heterogeneous economic entities unconnected by ownership, management and ideology can deliver the desired results. The economy grew quite vigorously when the `do not' and `shall not' laws were applied to producers. The Centre is a homogeneous entity that is somehow connected by common objectives and management. The State government too is a homogeneous entity in each State that is somehow connected by common objectives and management. The economy should be made to grow more vigorously when the `do not' and `shall not' laws applicable to producers are revoked. By launching the revolution aimed at spurring new economic activities, incomes and demand, government could prove that it is capable of delivering the desired results and that it can reach the stars by hard ways — ad astra per aspera. Government has to begin with the farm sector.

Physical, strong

The revitalisation of India's farm sector is in the interest of government and the general economy, but is unrelated to any investment in infrastructure. There is a view that new investments in infrastructure — dams, canals, warehouses and glittery marketplaces — would spruce up the farm sector. The limited emphasis on investments in dams, canals, warehouses, marketplaces and seeds reflects the supply orientation of the past when the farm sector was the fulcrum of the economy's supply machine.

The farm sector needs more than dams and marketplaces if it has to be transformed into the fulcrum of the economy's demand machine. It needs services and governance that spur latent demand. Government has to emulate the efforts of companies such as Reliance Industries, Mahindra and Mahindra, EID Parry, ITC, Tata Chemicals, Nagarjuna, Cargill, Rabo, ICICI, Financial Technologies and Hindustan Lever. The Government's revolution has to begin with serving the farm sector for the benefit of the farm sector and the general economy. That is the only way to plug into high modal incomes and sustainable prosperity.

(The author is a financial analyst.)

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