Budget 2019 India: Though finance minister Nirmala Sitharaman has to deal with all manner of issues in her maiden budget, from stimulating consumer demand to reviving flagging investment sentiments, perhaps the most important sector for her to focus on is agriculture; not just in terms of increased outlays for irrigation or MNREGA, but in terms of broad policy direction.

One clear direction, set out by prime minister Narendra Modi before the elections, is PM Kisan where each family gets Rs 6,000 per year; after PM Kisan was extended to more farmers, it will cost around Rs 85,000 crore. Ideally, the budget should double or triple this direct cash transfer and, simultaneously, reduce subsidies on fertiliser or agriculture loans since these are, by and large, used by richer farmers.

The government spends around Rs 170,000-180,000 crore each year on FCI procurement at the Minimum Support Price (MSP); buying at MSP raises farmer incomes and the grain purchased meets demand from ration shops. Ideally, the budget should indicate a dramatic shift from this, with a timeline to reducing FCI’s operations to the minimum. Given the Rs 20-25 per kg difference in market- and ration-prices of wheat and rice, even the Food Security Act’s excessive 5kg- per- person- per- month will cost Rs 96,000-120,000 crore. This Rs 70,000 crore saving can be given to farmers in lieu of scrapping MSPs which, at best, benefit 20-25% of farmers, and mostly rich ones. Selling FCI’s excess food stocks can fetch the FM Rs 100,000 crore.

While NITI Aayog is pushing a Price Deficiency Payments (PDP) in place of MSP, this is a bad idea even though PDP means winding down the MSP system; to that extent, it cuts FCI’s inefficiency costs. But PDP is open to large abuse. Under PDP, all farmers will register their cropping details with the government (bit.ly/2Lt0Rc0) and, at the end of the season, they will be paid the difference between the market price and the MSP for their crop. While this amount will be much lower than the MSP—the MSP could be Rs 100 while the gap between it and the market price could be Rs 10 or 20—it will have to be given for all the produce while the MSP, by definition, is paid only to the produce that is brought to the market and sold to government agencies. And, to the extent traders know the government is paying a PDP, there is nothing to stop them from colluding to further depress market prices.

What of the PM’s plans to double farmer income; how will this happen if subsidies like on fertiliser and interest subvention or the MSP are scrapped? On average, each farm household earns around Rs 10,000 per month, so they need around Rs 1.2 lakh more per year to double their incomes. Icrier professor Ashok Gulati (bit.ly/2Xidfhj) points out that, if solar panels are installed at a height of 15-20 feet in fields, this does not have a negative impact on crop growth—in which case, farmers can earn from 1-2 crops a year, as they do now, along with earning from solar power. To the extent this solar power replaces diesel for pumping water, farmer costs also fall. The budget then needs to fund the farmer’s capital costs for solar panels—tax relief for solar-power firms or a capital subsidy perhaps—and ensure the solar power produced is mandatorily purchased by electricity boards; this is the law anyway, but it has to be enforced.

The budget, similarly, should have a subsidy for water-stressed areas, like Punjab, to ensure farmers move away from, for instance, water-guzzling rice to corn which uses around a fifth of the water rice does. This corn can be used to produce ethanol and while the extract is still good protein-rich feed for poultry/cattle, at Rs 55-60 or so per litre of ethanol, that’s a lot of money for farmers. The budget, then, needs to give incentives to industry that produces corn-based starch, poultry- and animal-feed, etc, and it is vital to ensure—with the oil ministry’s cooperation—that oil marketing firms buy all the ethanol produced; blends of upto 15% with petrol require no change in engines of cars/two-wheelers. If farmers still earn less than they did from rice, a direct subsidy must be given to fund the difference. Indeed, the Rs 6,000-7,000 crore of electricity subsidy that the Punjab government gives to farmers to pump up water can also be saved, apart from solving the state’s water crisis. Since eastern India is flush with water, growing rice there is, in any case, a better solution—India’s water crisis cannot, it is vital to keep in mind, be fixed if agriculture keeps guzzling water.

Indeed, along with the solar solution, the government should encourage sugarcane cultivation in eastern UP and Bihar. Water availability is not an issue here and frequent floods will also regenerate the water table. Once again, the key here is ensuring ethanol purchases since, at the current levels of Rs 55-60 per liter fixed by the government, ethanol production is as lucrative as sugar, perhaps even more so. It is critical to ensure that GST levels remain the same 5% on ethanol since, if this is taxed at the same level as petrol, oil marketing firms have no incentive to buy ethanol.

And, if the government can free up agriculture markets, as the Icrier-OECD study points out, farmers can get around Rs 2.5 lakh crore extra per year for their produce. In other words, the FM will do well to use the budget to indicate the government’s new policy and, wherever needed, make the necessary fiscal allocations or policy changes to facilitate the change.