The Hindu Editorial Analysis | 4th July 19

Table of Contents

A scheme for farmers that has not reached most farmers

PM-Kisan is limited in both scope and implementation
The Pradhan Mantri Kisan Samman Nidhi (PM-Kisan), a cash transfer programme that draws on major initiatives by two State governments, has a long way to go in terms of both its implementation and scope of coverage. Even as the cropping season is under way, the scheme’s support has not reached farmers in most of the country’s regions.
Launched by the Centre at the end of its previous tenure and made effective retrospectively from December 1, 2018, the measure is a necessary state response to assuage agrarian unrest. The scheme’s original objective, to “supplement financial needs” of the country’s Small and Marginal Farmers (SMFs) and to “augment” farm incomes, has now been broadened to include all categories of agricultural landowners. This expansion would benefit an additional 10% of rural landed households.
PM-Kisan offers ₹6,000 a year per household in three instalments. Broadly speaking, this amounts to only about a tenth of the production cost per hectare or consumption expenditure for a poor household. Hence, though what the programme offers is meagre, it promises some relief to poor farmers by partially supplementing their input costs or consumption needs.

Not linked to land size

The cash transfer is not linked to the size of the farmer’s land, unlike Telangana’s Rythu Bandhu scheme, under which farmers receive ₹8,000 per annum for every acre owned. While landless tenants have been left out in both the schemes, the link with land size makes the support provided by the Telangana scheme more substantial. PM-Kisan also falls short of Odisha’s Krushak Assistance for Livelihood and Income Augmentation (KALIA) scheme, which includes even poor rural households that do not own land.
Though the first quarterly instalment, for the December 2018-March 2019 period, was to be provided in the last financial year, the benefits of PM-Kisan have not reached farmers in most parts of the country. With kharif cultivation activity under way already, the scheme’s potential to deliver is contingent on its immediate implementation.
There are 125 million farming households owning small and marginal holdings of land in the country, who constitute the scheme’s original intended beneficiaries. However, at present, the list of beneficiaries includes only 32% (40.27 million) of these households.
Further, a majority of the intended beneficiary households are yet to receive even their first instalment of ₹2,000. Only 27% (33.99 million) received the first instalment, and only 24% (29.76 million) received the second. In budgetary terms, only 17% of the estimated ₹75,000 crore expenditure has been spent. Moreover, implementation in certain States has been prioritised. U.P., for instance, accounts for one-third of total beneficiary households — 33% (11.16 million) in the first instalment and 36% (10.84 million) in the second. About half of the State’s SMF households have been covered. Only two other States — Gujarat and Andhra Pradesh — have gained a prominent share. A total of 17 States have received a negligible share of the first instalment, accounting for less than 9%.

Larger structural issues

For the scheme to be effective, PM-Kisan needs to be uniformly implemented across regions. However, one needs to be mindful that it is not a fix for larger structural issues.
Cash transfers will cease to be effective if the state withdraws from its other long-term budgetary commitments in agricultural markets and areas of infrastructure such as irrigation. Subsidies for inputs, extension services, and procurement assurances provide a semblance of stability to agricultural production. Food security through the National Food Security Act is also closely linked to government interventions in grain markets. If the budgetary allocations shift decisively in favour of cash transfers, they will be a cause for great concern.
Further, the scheme recognizes only landowners as farmers. Tenants, who constitute 13.7% of farm households and incur the additional input cost of land rent, don’t stand to gain anything if no part of the cultivated land is owned. Hence, there is a strong case to include landless tenants and other poor families.
Moreover, though the scheme is conceptualized to supplement agricultural inputs, it ceases to be so without the necessary link with scale of production (farm size) built into it. It becomes, in effect, an income supplement to landowning households. If income support is indeed the objective, the most deserving need to be given precedence.
Bhim Reddy is a Fellow at the Institute for Human Development, Delhi; Abhishek Shaw is a doctoral student in Economics
Faltering GDP growth, a consumption slowdown, a truant monsoon that has already hit kharif sowing, global trade tensions and a freeze in the credit market that has set alarm bells ringing across the financial system. This is the backdrop to the maiden Budget of the Finance Minister, Nirmala Sitharaman.

Walking a tightrope

The Minister has had less than a month to work on this crucial Budget which is expected to work its magic on the economy. Ms. Sitharaman’s position is unenviable. She has to push for growth, which means stimulus measures, but also stay fiscally responsible, which means sticking to the fiscal deficit glide path. This balance is almost impossible to achieve in an environment where tax revenues do not offer enough support for a stimulus package.
The questions before Ms. Sitharaman are simple: Should she opt to stimulate consumption in the economy even if it means putting the fiscal deficit glide path in temporary cold storage? If yes, what is the best way to do that?
Following from the above are subsidiary questions such as these: Will the resultant higher borrowings crowd out the private sector borrowers and push up market interest rates at a time when the monetary authority is driving rates down? What will be the impact on inflation? Should the stimulus be in the form of cutting taxes and putting more money in the hands of the consumer? Or should it be in the form of even higher spending on infrastructure that will have definite fiscal spin-offs? And what about welfare spending? The government has already announced an expansion of the Pradhan Mantri Kisan Samman Nidhi Yojana that will take away ₹87,500 crore this fiscal. And there are many other pet schemes of this government that need to be funded.

Ground Realities

To be sure, the answers are not easy. But just consider these. GDP growth fell to 5.8% in the fourth quarter of 2018-19, with important industry segments reporting a fall in growth. Sales of automobiles, the bellwether for the larger economy, has been sliding since October last year and in the first quarter of this fiscal, sales volumes are down by about 18%. Fast moving consumer goods, two-wheeler and consumer durables manufacturers are all reporting dull rural sales.
Real estate and construction, one of the biggest job creators in the economy, have been in stupor for several months and are a direct cause of the credit freeze in the markets now. It is clear that the bottom has fallen off consumption demand, something reflected in the annual results of a host of companies in the consumer sector.
Given these, there is little doubt that the economy needs a stimulus. The downside to the government embarking on this path is clear. Direct tax revenue growth failed to meet budgeted levels in 2018-19, falling short by ₹82,000 crore from the target of ₹12 lakh crore.
Goods and Services tax collections, though rising, are still not stabilizing at the required level of between ₹1,00,000 and ₹1,10,000 crore a month.
It will be next to impossible for the government to meet its over-ambitious tax estimates in the interim Budget for 2019-20. And then there are the bills to pay from last year to the Food Corporation of India and a couple of other public sector undertakings which helped the government ‘achieve’ the fiscal deficit target last year.
Pros and cons of options
There are a few options that the government can consider for off-balance sheet financing. First, go big on asset sales. The interim Budget had earmarked ₹90,000 crore from disinvestment but if the government is able to successfully pull off the Air India sale, it would be almost half-way there. There are a host of other government companies that can be sold off to raise the targeted proceeds.
Second, a one-time transfer from the Reserve Bank of India’s reserves, which is under the consideration of the Bimal Jalan Committee. However, if reports of the committee’s deliberations are to be believed, it may be futile for the government to hope for a major windfall here. The committee will anyway submit its report well after the Budget is presented.
Third, 5G spectrum auctions. While there is reason to hope for some support here, it is unlikely that it would materialize this fiscal. The telecom companies are still licking their wounds from the combined effect of past excesses and bruising competition in the market. Their appetite, as it is, is poor for any more spectrum. So pushing through a 5G auction now would be disastrous.
That leaves us with just one option — that of increasing borrowings which will, of course, mean curtains for the fiscal deficit target of 3.4% this fiscal. Higher government borrowings may elbow the private sector borrowers out.
Increased borrowings by the government will have the unintended negative consequence of pushing up market rates which is something that the government would not desire. And then, of course, there will be questions to answer from Standard & Poors and Moody’s which are certain to take a dim view of the fiscal indiscretion.
But then there is some good news too. Thanks to the recent directive of the stock market regulator, the Securities and Exchange Board of India directing mutual funds to put away 20% of their liquid scheme investments in government securities, a new market opens up for the government. Whether it is deep enough to absorb the increased borrowings is a matter of detail but it can certainly cushion the market to some extent.
Second, yields on government securities are at around 6.82% currently. So even a 10 or 20 basis point rise due to higher borrowings may not cause much dissonance. The market is aware of the difficult circumstances now and should be able to take this in its stride.
As for the ratings agencies, the government needs to be in dialogue with them, reiterate its commitment to fiscal discipline and reassure them that this is a temporary aberration.
On stimulus
So, once the decision is made to be accommodative, Ms. Sitharaman’s problem will be to identify the best way to impart stimulus. There are two choices — either to cut taxes and let consumers to go out and spend the excess. Or just borrow and spend on asset creation in infrastructure. Given that there is a serious slowdown in consumer-facing sectors, the better option may be to put more money in the hands of consumers.
A good option to consider would be adjusting income tax slabs and increasing deductions under Section 80C which is a measly ₹2 lakh now. Better still would be to increase the interest deduction for housing loans which would also give a boost to the real estate market. These measures would run counter to the reform objective of easing out all exemptions and lowering rates. But then that is under examination by the Direct Tax Code (DTC) panel; the concessions given now will automatically become a temporary measure assuming that the DTC is soon implemented.
The fall in tax revenues from the concessions will be eventually made up downstream from indirect taxes if consumers spend the extra money in their hands. The choice to borrow and spend is indeed a difficult one but in the current circumstances this may be inevitable. Fiscal conservatives are bound to frown at this and there would be dire warnings of the consequences of not adhering to the fiscal deficit commitment. The best answer is that this government now has five years to make up for the indulgence. Will Ms. Sitharaman go the whole way?
The return of the Bharatiya Janata Party-led National Democratic Alliance government in 2019 with a resounding majority in the 17th Lok Sabha raises pertinent questions about the future of federalism in India. Will a “strong” Union government which does not require the support of “regional” allies be detrimental to the interests of States? While the Prime Minister has often invoked the need for “cooperative federalism”, the actions of his government in its first term sometimes went against this stated ideal. These include dismantling the Planning Commission and transferring its power to make state grants to the Finance Ministry; introducing terms of reference to the Finance Commission which threaten to lower the revenue share of the southern States; and the partisan use of the Governor’s office to appoint Chief Ministers in cases of hung Assemblies.
The most blatant abuse of power was the imposition of President’s Rule in Opposition-ruled Arunachal Pradesh and Uttarakhand, decisions the Supreme Court subsequently held as unconstitutional. Further, through the Lieutenant Governor (LG), the Centre ran a protracted war with the Delhi government which brought its administration to a stalemate until the Supreme Court affirmed the primacy of the elected government. A similar long-running battle between the LG and Chief Minister of Puducherry has now reached the Supreme Court. This case will further test the strength of Indian federalism in the Modi era.
Distinct provisions
Since the appointment of Kiran Bedi as the LG in May 2016, Puducherry Chief Minister V. Narayanasamy has protested her continual interference in the daily affairs of the Puducherry government and running an alleged parallel administration. The Union Government, in clarifications issued in January and June 2017, further bolstered the case of the LG. When this was legally challenged, the Madras High Court quashed the clarifications issued by the Union government and ruled that the LG must work on the aid and advice of the Council of Ministers and not interfere in the day-to-day affairs of the government. The Union government challenged this decision in the Supreme Court where a vacation Bench passed interim orders recently restricting the Puducherry cabinet from taking key decisions until further hearing.
The Madras High Court had relied on the 2018 decision of the Supreme Court regarding the power of the National Capital Territory (NCT) government of Delhi. In that case, a five-judge Bench unanimously held that the Chief Minister and not the Lieutenant Governor is the executive head of the NCT government, and that the LG is bound by the aid and advice of the Council of Ministers. It held that the executive power of the NCT government is co-extensive with the legislative power of Delhi’s Legislative Assembly and the LG must follow the decisions of the cabinet on all matters where the Assembly has the power to make laws.
Puducherry, like Delhi,is a Union Territory with an elected legislative Assembly and the executive constituted by the Lieutenant Governor and Council of Ministers. However, Puducherry and Delhi derive their powers from distinct constitutional provisions. While Article 239AA lays out the scope and limits of the powers of the legislative assembly and council of ministers for Delhi, Article 239A is merely an enabling provision which allows Parliament to create a law for Puducherry. Interestingly, while Article 239AA restricts Delhi from creating laws in subjects such as police, public order and land, no such restriction exists for Puducherry under Article 239A. In fact, the Government of Union Territories Act, 1963 which governs Puducherry vests the legislative assembly with the power to make laws on “any of the matters enumerated in the State List or the Concurrent List”. Hence, the legislative and executive powers of Puducherry are actually broader than that of Delhi.
After analysing the laws and rules governing Puducherry, the Madras High Court held that the LG has very limited independent powers. Under Article 239B, the LG can issue an ordinance only when the Assembly is not in session and with the prior the approval of the President. If there is a “difference of opinion” between the LG and the cabinet on “any matter”, like in Delhi, the LG can refer it to the President or resolve it herself if it is expedient. However, the Supreme Court in the NCT Delhi case held that “any matter” shall not mean “all matters” and it should be used only for “exceptional” situations. Hence, there is no legal basis for the LG to exercise powers independently and bypass the elected government of Puducherry.
Respecting federalism
Ultimately, the question is whether state actions should respect the underlying principles of democracy and federalism. Why should a legislative Assembly be elected and a Council of Ministers appointed if actual powers are independently exercised by an unelected nominee of the Centre? The Supreme Court, in the NCT Delhi case, rightly employed a purposive interpretation of the Constitution to hold that since representative government is a basic feature of the Constitution, the elected government must have primacy. Given this precedent and the fact that Puducherry has lesser legal restrictions on its powers, the Supreme Court should uphold the Madras High Court judgment and ensure that the LG acts only as per the aid and advice of the elected government.
Perhaps because of its distance from Delhi, small area and relatively low political heft, the constitutional crisis in Puducherry has received far less attention than it deserves. However, the questions it raises are fundamental to the concerns regarding federalism in India. While Puducherry may not be a “State” under the Constitution, the principle of federalism should not be restricted to States but also include the legislative Assemblies of Union Territories and, arguably, councils of local governments. As more centralising measures such as simultaneous elections to Parliament and State Assemblies are being proposed by the Centre, it is important to reaffirm the values of federalism at every forum.