What's Behind Rural India's Budget Bonanza?Published: July 16, 2009 in India Knowledge@Wharton
India's rural economy has received more attention and resource commitments in the government's latest budget proposals than in recent years. More funds have been allocated for programs that involve rural job guarantees, food subsidies and farm lending. Wharton professors and other experts say that encouraging growth in rural India is a welcome trend. Still, critics also point out that the government is doing much less than the situation requires.
At first glance, Finance Minister Pranab Mukherjee's budget is generously tilted in favor of rural India. For instance, the budget provides for a 144% funding increase over last year's estimates for programs under the three-year-old National Rural Employment Guarantee Act, to Rs. 39,100 crore (about $8 billion). This covers higher unemployment payments and an expanded scope of the program. Another program for the 2009-2010 year ensures that every poor family will get 25 kg of rice monthly at Rs 3 (six cents) each.
In addition, the Pradhan Mantri Gram Sadak Yojana, a high-profile program that aims to connect every village with a motorable road, has been given a 59% higher allocation in Mukherjee's budget over that of 2008-2009 at Rs. 12,000 crore ($2.5 billion). A rural housing program (Indira Awaas Yojana) is 63% richer compared to last year, with an allocation of Rs. 8,800 crore ($1.8 billion). Other programs promise to bring integrated development to combat caste-based discrimination in villages, housing subsidies for the poor and other poverty eradication measures.
The budget's pro-poor and pro-rural biases are not surprising. "Poverty in India is predominantly a rural phenomenon," says a recent World Bank report. "About 70% of the population, and about 75% of the poor, live in rural areas and … agriculture provides livelihood to 60% of the rural people..." Residents of India's hinterlands will take a direct hit from the poor monsoons, since less than 40% of the cultivated area in India is currently irrigated, according to the report.
Jagmohan Singh Raju, a professor of marketing at Wharton, welcomes the budget's rural initiatives. "The main strength of the budget is the emphasis on infrastructure development and investments in the rural sector," he points out. "This will result in job creation, improve agricultural productivity and hopefully keep a check on prices." The budget's focus on rural India is particularly important because "growth brings with it the potential for greater income disparity. I believe the focus on rural India and rural jobs is appropriate. They have not been a part of India's growth story. These efforts will also improve productivity and eventually increase the buying power of rural India."
Saikat Chaudhuri, who teaches management at Wharton, agrees. "I was initially underwhelmed by the budget's absence of policy direction, but I like the emphasis on infrastructure development and the inclusiveness the budget shows towards rural India," he says. "This is very important, because lack of inclusiveness has been apparent in recent years. Economic growth has been concentrated in the cities rather than in the villages. Protests in various parts of the country clearly show that people don't want to be left behind."
Gopal Naik, chairperson of the Centre for Public Policy, a think tank at the Indian Institute of Management in Bangalore, says the increased allocations are welcome. "For some time, the rural sector was neglected [by Union budgets]." The budget stimulus could help sustain the momentum rural India achieved last year, which helped dampen the impact of the global recession on the nation's economy, Naik notes, adding that bountiful monsoons and higher prices for agricultural output over the past two years have helped augment rural purchasing power.
Still, this year, "question marks hover over the monsoon," as Naik puts it. "The fear is that half the country will be affected by drought," he adds, noting that if rains don't arrive by end-July, "the kharif [crop] is gone." The kharif planting season (April-July) accounts for 54% of India's cultivable cropland of 260 million hectares; the rabi season (September-November) accounts for the rest. The cumulative seasonal rainfall was 36% below normal levels as of July 8, according to the Indian Meteorological Department.
Even as the country waits for the rains, the rural employment guarantee program "has tremendous scope to transform rural India in many ways," especially in "capacity building," according to Naik. The program bypasses the previous "contractor-driven" system of identifying projects that bring employment by vesting those powers to the village gram panchayat, a local governance body. The contractor-driven system was prone to abuses and leakages, he says, while the panchayat-led system helps develop local expertise in project selection and management, budgeting and accounting for expenses, among other functions.
The latest budget extends the rural jobs program of labor intensive projects, such as road works, to include agriculture and forestry. It also increases the minimum daily wage from Rs. 80 ($1.64 cents) to Rs. 100 ($2.05 cents) and provides a minimum employment of 100 days for every rural household, up from the current 45 days. The government's plan to extend them to include privately-owned lands, should help improve rural fortunes significantly, says Naik.
Parag Saxena, co-founder of New Silk Route, an investment firm in New York City, notes that the emphasis on rural jobs has its shortcomings. "What the government is ignoring is the old adage, 'Feed me a fish and I will eat today; teach me how to fish and I will eat forever,'" he says, arguing that dollars and rupees need to be shifted to programs that will yield returns on those investments, and not simply serve as short-term solutions. Just forgiving a loan or extending its term "is not likely to yield a return," he adds.
Saxena concedes, however, that though he disagrees with the government's approach, its desire to promote growth in rural India is not misplaced. "One of the initiatives embraced by this government, in addition to dealing with the rural poor, is education. Moving investment to educational programs would yield returns. Training programs for people would be very useful."
Devinder Sharma, an agricultural scientist and policy analyst who runs a New Delhi-based advocacy group called Forum for Biotechnology & Food Security says the budget proposals for rural India are not as impressive as they appear. He points out that the allocation for the rural employment guarantee program is in reality only 6% higher than last year's actual expenditure of Rs. 36,000 crore ($7.4 billion). Finance Minister Mukherjee's claim of a 144% increase reflects the jump over last year's original budget estimates; that had since increased in an interim budget earlier this year and in actual expenditure under the scheme, according to Sharma. "This is the kind of jugglery that has gone all through the [budget] document," he says.
Jayati Ghosh, professor of economics at Jawaharlal Nehru University in New Delhi is also not impressed with the allocation. She wonders how the rural employment guarantee program could be significantly expanded with an increase of only 6% over last year's expenditure, as she recently noted in her column in the DNA newspaper. She also found the increased allocation (of Rs. 8,862 crore or $1.82 billion) for the existing food subsidy program covering much less new ground than the government's claims. "Most of this is already accounted for by the increase in the minimum support prices for the rabi harvest," Ghosh wrote.
Naik is a little more sympathetic to the government on such shortfalls – real or perceived – because "it is a difficult budget, with a fairly big deficit." He, however, felt the higher daily wages under the rural employment guarantee program could upset a fragile farm economic order. Already, farmers have complained that the current Rs. 80-a-day minimum wage offered in projects covered by the rural employment guarantee program has doubled previous wage levels in the Rs. 30-40 range, taking farm labor costs to unsustainable levels, Naik says.
That problem is not easily resolved, especially "when the government controls the output prices (minimum purchase prices for key crops)," says Naik, explaining that farmers' margins are squeezed from both ends. Here, it would help if the government increases the concentration of projects covered by the scheme to the off-peak agricultural months between November and May, Naik suggests.
U. Subrahmanyam, director of the Indian Institute of Economics, a research institution in Hyderabad, praises the government for making "a greater allocation to the social sector, for the first time." Agriculture in India accounts for 17% of its gross domestic product but supports more than 50% of the households and 65% of the country's poor, he says. Also, 50% of India's rural population is on daily wages, and up to 29% of them are farmers, he adds.
Another major budget initiative is a plan to change the present pricing-driven fertilizer subsidy program to make it nutrient-based, according to Naik. Farmers are not well versed with the right NPK (nitrogen-phosphorus-potash) balance in their fertilizer applications and end up distorting that to buy those with the biggest subsidies. "That leads to inefficient farming, and a high nitrogen concentration distorts the soil structure and therefore affects fertility," Naik explains, adding that he hopes the new subsidy regime could help correct this flaw by encouraging farmers to structure their fertilizer purchases with the right nutrient balances.
The budget also proposes providing the fertilizer subsidies directly to farmers instead of the fertilizer factories. "Often, these factories show much higher costs [than what they actually incur]," says Naik, referring to another problem that the current regime the budget attempts to correct. The new plan may not be easily implemented because agricultural records "are not in order," and could therefore lead to delays, he adds.
Farmers need the subsidies before the planting season to buy the required fertilizers, and a new system should be carefully planned to prevent it from becoming counterproductive, according to Naik. Here, the government's plan to develop a unique national identity card system (similar to the U.S. Social Security system) would help in making the subsidy payment mechanism efficient, he says.
According to Sharma, the Indian government "is confused" by wanting to present a budget that is big on both economic reforms and has an emphasis on the social sector; he sees those two as potentially in conflict with each other. Policy makers need to recognize that "the biggest challenges facing agriculture in India" are those of "sustainability and economic viability." Intensive farming and the green revolution, he says, have "destroyed the national resource base." The government's proposals for rural India in the latest budget "are high on verbosity and low on content," he adds, describing Mukherjee's product as "a balance sheet, not a budget."