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Mainstream, Vol XLVII, No 30, July 11, 2009

An Open Letter to the Finance Minister

Saturday 11 July 2009, by Kripa Shankar

The following piece reached us late and could not be published before the presentation of the Union Budget. It is being carried now as its contents continue to be relevant.

It is characteristic of the Central Budget that only three per cent of its expenditure goes to agriculture along with animal husbandry, soil and water conservation, irrigation, cooperation, storage and warehousing, crop insurance, watershed development, wasteland and rain fed area development agricultural education etc. when the bulk of the population depends directly on agriculture. Neglect of agriculture has resulted in a situation where per capita foodgrains production is falling and pulses and edible oil have to be imported in large quantity.

Over the years the government has not adequately taxed the richer sections unlike many other countries. The income tax rate on the highest slab of income in India is 30 per cent whereas it is round 40 per cent in many developed and developing countries. Besides, there are many exemptions which have made the effective tax rate 20 per cent. This is the case with corporation tax also. The Central Budget document of 2008-09 revealed that the total loss to the exchequer through various exemptions was of the order of Rs 2,79,000 crores. If these exemption and concessions are withdrawn the Plan outlay can be increased by 70 per cent and annual borrowing can be reduced by 80 per cent. Significantly the Interim Budget has withdrawn this information for reasons best known to the government. Maybe the figure might have been very embarrassing.

Unlike most of the countries there is no dividend tax, no wealth tax (which was abolished in 1993) no inheritance tax or gift tax in India although the number of billionaires is on the rise, and they are stashing money in foreign banks. The Global financial Integrity Report has estimated that every year 22-27 billion dollar is stashed away illegally from India. The Swiss Government prepared to give the details but the government is not keen to pursue the matter.

The point is that unless the income and wealth of those at the top is taxed heavily there can be no rise in public investment which also crowds in private investment. The first priority should be to provide assured irrigation to more than half of the cultivated area which is still unirrigated. Among other things, the focus should be on watershed development through rain water harvesting and its conservation. It may be mentioned that the so-called drought prone areas are not deficient in rain. As a matter of fact the rainfall is higher in these areas than in Punjab a Haryana which are the granaries of India. It is the inability to conserve rain water for irrigation purposes that explains the lower productivity in such regions. Only if a network of check dams, dug walls, contour bunding, ponds etc. could be constructed to conserve every drop of rain water, irrigation can be assured for all the fields at a low cost. Besides this would provide employment to lakh of persons in the rural areas. But the Central Government’s allocation for watershed development in the Interim Budget is only less the Rs 2000 crores or 0.3 per cent of the total expenditure. The panchayats can better execute these works but they have no funds. The Central Governent’s grants to panchayat is not even Rs 5000 crores. The Constitution through the 73rd amendment has entrusted the Government to devolve power and funds to the panchayats so that they may function “as institutions of self-government”. The Constitution in the Eleventh Schedule has mentioned 25 developmental activities which should rest with the panchayts and these, inter alia, includes development of irrigation and water resources. Village India will have a new beginning if this directive is implemented by transferring adequate funds. This will make the bureaucracy almost redundant and the energy of vast masses will be unleashed to build a new India and break the age-old inertia. History will note that Rajiva Gandhi was farsighted and bold in bringing about this amendment but his successors only paid lip-service. In the interest of aam aadmi let a new beginning be made with panchayats which should be empowered to play their role in the rejuvenation of the country.

Public investment has to be supplemented by private investment given the enormity of the problem of reconstruction. On account of the highly skewed distribution of income private investment is going in wrong directions to buttress the wasteful consumerism of the rich. Nationalised banks should be directed to restrict lending to such sectors and direct bank credit to small and medium producers. As a matter of fact the government should guarantee such loans to the small borrowers to induce banks to finance liberally such producers. At present only 10 per cent of bank credit goes to the agricultural sector and one per cent to artisans. The credit deposit ratio of the rural branches of banks is les than 40. In other words, the bulk of rural savings is being taken out for the urban sector. Among other reasons it is the difficulty in getting a bank loan, particularly for the poor, that is the main problem. Poor persons borrow from moneylenders at exorbitant rates of interest while rural banks drain out rural savings to metropolitan and urban centres. The mater has been further compounded as banks now make an illegal cut of 10-20 per cent on all loans, particularly those which are granted to small borrowers.


The National Commission of Farmers has recommended that farmers and other poor should be provided bank loans at an interest rate of four per cent as they are in deficit. But banks can do so if they are provided with interest subsidy to make up for the loss. They usually lend at 14 per cent and would have to be provided with an interest subvention of 10 per cent. An interest subvention of Rs 10,000 crores will enable cheap credit flow of Rs 1 lakh crores to the poor who will not only be liberated from the age-old oppression of moneylenders but this will also enable them to make small productive investments in areas which suit them. The missing link in the anti-poverty programme is the phenomenon of poor not being provided with remunerative assets on perennial job opportunities. If they have access to remunerative assets the imperative to have a job may decline. But this is no alternative to job creation as providing jobs to the poor is the basic requirement.

In this connection National Rural Employment Guarantee Scheme has to be so strengthened that almost the whole of the rural unemployed and under-employed may find work which in the first instance should be oriented towards rain water harvesting. The NREGA has been found to be the most effective job creating activity for the poor and the imperative is to raise the budgetary allocation for this head by several folds even by imposing a surcharge. This is the only item of budgetary expenditure of nearly Rs 10 lakh crores. that directly helps the poor by giving them job opportunity.

The stigma of farmers’ suicides still haunts the country. It is a national shame and to end this it is imperative to introduce universal almost free crop insurance which will compensate the farmers from crop losses. The Interim Budget provided les than Rs 700 towards crop insurance which needs to be raised manifold to be meaningful. Likewise there should be a strong cooperative marketing network so that farmers may not sell the produce immediately after the harvest which depresses the price. The farmers can get bank advance on the hypothecation of the produce to meet their immediate cash requirements. The government has been lukewarm towards the development of cooperative marketing and providing remunerative prices to farmer. Even while fixing the minimum support price (MSP) for various foodgrains it does not take all the costs into consideration and surprisingly does not allow them any profit. That is why the National Commission on Farmers has recommended that the MSP should be fixed at 50 per cent higher than the cost of production.

In the recent meltdown the government has been over-generous to bail out the corporate sector. Its direct concessions have meant a revenue loss of over Rs 70,000 crores. Besides, it has increased bank liquidity by over Rs. 3 lakh crores through reduction in Cash Reserve Ratio, Statutory Liquidity Ratio, Repo Rate Reverse Repo Rate and reduction in interest rate etc. so that corporate houses may have larger access to bank credit. But corporate investment is nowhere on the rise. The economy can be put on a sustained growth path only when the commodity producing sectors particularly agriculture grow at a much faster pace which will create a rising market for non agricultural goods. Dependence on foreign markets will only prolong the current recession. By all accounts the government has been zealously serving the corporate aadmi. The rhetoric of aam aadmi must be reflected in the coming Budget.

Allahabad Kripa Shankar

The author is an Honrary Fellow, Govind Ballabh Pant Social Science Institute, Allahabad.

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