A bold experiment for a tough problem
There’s much in favour of Telangana’s Rythu Bandhu scheme but a lot that goes against it as well
For decades, an important income transfer from the (largely non-farming) rich to the (largely farming) poor in India occurred through elevated prices of farm produce. This had its side-effects: chronic high inflation, fiscal challenges, and the resultant high interest rates and periodic bouts of currency weakness. But there was no other government-administered mechanism of comparable scale where taxes paid by the rich could be transferred to the poor.
In the past few years, as persistent surpluses across most food categories have pushed down prices, this income transfer has stalled, particularly badly in crop agriculture, which accounts for 92 per cent of the agricultural workforce. This is as much a political problem (nearly half the workforce is in farming) as it is an economic policy challenge (low incomes depress consumption for the poor, whereas growth in disposable income for the rich only raises savings).
Bereft of ideas, the Union and state governments have so far been attempting to address this problem through farm loan waivers that are hard to administer, and a plethora of subsidies (for fertiliser, power, seeds and machinery) that are too small to be meaningful.
Telangana has a higher proportion of the workforce in agriculture than the national average, and also a higher acreage allocated to crops such as cotton and oilseeds, where global prices have fallen sharply. In the last four years, the state government followed the set template of loan waivers and subsidies, in addition to large irrigation projects and quintupling warehousing capacity. With a year to go for the next elections, it has now embarked on two interesting schemes.
The first is a farmers' group life insurance scheme that provides ~500,000 life cover to 4 million farmers for death due to any reason: the premium of ~9 billion is borne by the government. The more ambitious scheme is the Rythu Bandhu (RB) scheme or the Agricultural Investment Support Scheme. In mid-May this year, a month before sowing started for the kharif season, the state government distributed cheques to nearly 6 million farmers at the rate of ~4,000 per acre of land owned. This transfer is to be repeated for the rabi season later this year. The total planned expenditure of ~120 billion is 1.5 per cent of the state's annual output, 7 per cent of the government expenditure, and does not come with any cuts in other subsidies or transfers.
This is not really Universal Basic Income, but there are no conditions other than land ownership. The farmland owner gets the benefit irrespective of whether the land parcel is fallow or cropworthy, whether the farmer intends to plant a crop or not, and whether this money is used for agricultural investment or just for consumption. According to the government, the absence of conditions is to obviate discretion at the lower levels of administration, to avoid leakage: a pragmatic assumption.
As the condition for both the RB as well as the life insurance scheme is evidence of land ownership, the state revenue department undertook a 100-day 'mission' to prepare a clean database of computerised land records. Multiple levels of checks were made, including public hearings in every village. As per the Chief Commissioner for Land Administration, more than 90 per cent of the land titles were undisputed and the transfers are being made against them. Each has been Aadhaar-linked.
While leakage gets stemmed, there are three obvious limitations one can think of. The first is that this only benefits landowners, but as per the 2011 census, nearly two-thirds of the 9.1 million agricultural workers in Telangana were landless labourers. The burden of low prices and rising costs has indeed fallen mostly on the farmers, but the landless workers are generally poorer, and rural wage growth has weakened too. Second, this does not benefit tenant farmers: from an operational perspective, this too is understandable, as the state does not have a tenancy register (most tenancy agreements are verbal). However, the stress of weak farm incomes is on the farmer and not the landowner, who could be sitting pretty elsewhere: recently, I got to know of a fund manager who apparently received ~50,000. Third, while 91 per cent of farmers hold less than five acres each, their collective holding is only twothirds of the total land area, implying 9 per cent of land-owners get ~40 billion.
How is this scheme being funded? The fiscal deficit is expected to remain within bounds, but an allocation choice has been made: in the current financial year, nearly two-thirds of incremental spending in Telangana is budgeted to be in agriculture, social welfare and irrigation. The state has also improved tax collections: the tax to gross state domestic product (GSDP) ratio has climbed from 7 per cent in 2016 to 8.4 per cent in 2018 and is budgeted to be 8.8 per cent this year.
The RB scheme is so large, and so radical, that it is hard to envisage implications in advance. Academic studies have been commissioned to study the impact of this scheme, but it will be a while before even preliminary results are available. The amount of ~4,000 an acre covers about 18 to 34 per cent of the cash costs of kharif crops and is expected to replace borrowing from the money-lender, but it appears likely that much of this would be used for consumption. With the value of holding land now elevated, and the yield on land now higher by 1 to 2 per cent, land prices may rise as well, creating a positive wealth effect for land-owners.
Will other states also adopt this scheme? If the Telangana government is voted back to power next year, one can imagine the temptation for others to follow suit. But this scheme not only requires the necessary fiscal space but also a clean and computerised land record system -- both are tough asks and could slow down the uptake among states.
Deeper questions are whether such schemes slow workers' inevitable transition away from agriculture and if by diverting funds away from more productive uses this hurts the economy's long-term prospects. On the other hand, is it not better that the people choose how to spend the money rather the government deciding for them? Can there be fairer distribution without introducing roadblocks? There are no obvious answers: as democratic forces shape our policies, these questions require deeper thought.