Indian Taxpayers Subsidising Rich Farmers: How Much Is Too Much?

There is a need to have an honest conversation about the extent of support that is provided to Indian farmers across the country.

It has been repeatedly highlighted by many that bulk of the support is directed to a handful of farmers in primarily Punjab and Haryana. The purpose of this support was to incentivise the production of wheat and rice for a country that faced a huge crisis in the form of less agricultural output to feed its people.

Over time, we became a food surplus country, but the policy support remained the same.

The issue is not of MSPs, farm laws and whatnot anymore, but of subsidies given to the agricultural sector and that they are directed to only a select few.

Incidentally, those protesting against these laws also happen to be the same as those that benefit from these subsidies. The political economy issue here is whether to allow the 6 per cent of Indian farmers that benefit from MSPs to stall a law that would benefit the sector across the country.

There are three broad issues that I would like to address in this article. Let us begin by stating at the onset that this subsidy regime is financed majorly by the Central government through its tax revenues.

That is, it is primarily the taxpayers that finance the expenditure of the government, part of which is extended to farmers as a subsidy. Thus, sitting on a strike seeking further subsidies on diesel, etc, which is causing a daily economic loss of close to Rs 3,500 crore as per an estimate, is counter intuitive.

That is, the loss of economic activity is loss of revenue for government and all of this is to seek an additional subsidy from the government.

A speech by Margaret Thatcher was shared earlier by me where she mentions that there is no such thing as public money and that there is only taxpayer’s money.

The essence of her statement was that essentially, a government could increase its expenditure only by borrowing from savings of people or from increasing taxes.

[Keep in mind that the world has changed since then and my own views on deficits, its financing etc are fundamentally different. While Modern Monetary Theory does suggest a third way, we must recognise that two real constraints exist on higher deficits in the form of inflation and external sector stability. These two constraints become binding in the event of near full employment levels in the economy]

The reason I highlight the speech by Prime Minister Thatcher, who is known to be a polarising figure, is to stress upon the important point regarding government revenues.

The statement echoes a sense of caution, a sense of recognition to be prudent in its utilisation. In the event of extensive subsidies, what we have is people not recognising that the very burden of these subsidies would fall back on to their own shoulders either in the form of high taxes or inflation.

Let us relook at the purpose of subsidies — the very essence of subsidies is for two purposes. First is to redistribute wealth and help support the genuinely vulnerable sections of the population. The second is to incentivise sectors and serve as a signalling tool to attract investments.

There is also a third purpose, which is to garner political capital at the expense of the taxpayers — unfortunately, most subsidies in India fall into this particular category.

It is true that across the world, agriculture is supported by governments in the form of subsidies, but do governments also have massive procurement programmes at guaranteed prices?

More importantly, do they restrict these policies only to a few of their farmers? The growing rural disparity is largely an outcome of a mechanism that unfairly benefits the rich and large farm-owners, and this comes at the cost of the small and marginal landowners.

One good thing that has emerged from these protests is that the country has taken note of the extent of subsidies that are granted to a handful of farmers — and that this system in itself would warrant an overhaul.

The other issue is with regards to many pointing out that agriculture is not profitable, as such, if one were to consider the value of the land as a cost of its production.

That is indeed a fair point — however, if market price of a commodity is lower than the cost price of the commodity, then people need to exit from that business.

Indeed, India does need to switch factors of production towards other sectors. If we want manufacturing activity to pick up in the country, then we need to provide them with land to come and set up their units.

It may be politically incorrect, but we do need to gradually move landless labourers and other surplus workers in the agricultural sector towards the manufacturing sector.

This will serve two purposes — it will reduce the dependency on agriculture and at the same time, it will also improve productivity of the sector.

On the issues of subsidies, a key point that has often gotten missed is with regards to the extensive use of groundwater by farmers in Punjab. This water comes at negligible costs, except for electricity or diesel costs to use their water-pumps.

However, technically, this water should be priced appropriately to prevent its use beyond what is required and justified. That is, Punjab as a state is not fit to produce paddy, but it still does because of MSPs and procurement.

This production comes at extensive damage to the soil of their farms and the depleting water-table can have catastrophic consequences. The sheer value of the subsidy in the form of not pricing water adequately would be far greater than the other hard subsidies that the Central government offers to our farmers.

Another related issue is with regards to stubble burning, whereby farmers of these two states are virtually demanding a licence to pollute freely, which will yet again come at the cost of the taxpayers and residents of the national capital territory of Delhi.

While, of course, the protests are political, but beneath them is a sense of entitlement rather than gratitude for the honest Indian taxpayer, who has for decades, provided for this regime that enabled them to accumulate private capital.

They must recognise that only when the taxpayer earns can this welfare regime sustain and for that, they need to end the blockade.