Moving towards income transfers

A recent working paper on the ministry of finance's website provocatively titled 'Crossing the Rubicon' calls for a paradigmatic shift in the country's current system of foodgrain management. The paper moots the transformative idea of shifting from the current system of open-ended procurement at minimum support prices (MSP) to an income support based policy regime. Though such a move is likely to encounter resistance owing to its political implications, Alok Sinha, former head of the Food Corporation of India (FCI), says, "such a shift is possible, provided fears of various stakeholders are addressed."

Critics of the current regime argue that the policy of open-ended procurement from farmers at MSP, by assuring farmers of a minimum price, has created a perverse incentive in favour of rice and wheat production. Under an income policy, instead of direct procurement, farmers would be given a lump sum amount as income support, inclusive of all farm subsidies (fertiliser, power and others), on a graded per hectare basis. It is argued that as subsidy would be provided irrespective of the crop sown, it would induce farmers to shift to crops based on market signals. A shift in production towards vegetables and fruit, in line with the changing consumption patterns of households, would also ease pressure on food inflation.

The importance of the paper stems from the fact that while the views put forth by the author are held by many in the government, putting it up on the ministry of finance's website does seem to suggest radical reforms are in the offing. Although the government is yet to clarify its position, the articulation of such radical ideas, coupled with recent initiatives undertaken by the government laid out in the paper, do indicate a new direction of thinking on policy within the government.

Further, the government's renewed commitment to the Direct Benefits Transfer (DBT) programme or Aadhaar and the recently launched Pradhan Mantri Jan Dhan Yojana should be seen to this end. Taken together, the two schemes would enable rationalisation of food and fertiliser subsidies through better targeting and create a platform to facilitate a shift towards cash transfers. Shifting to income transfers would not only lower the governments subsidy burden but would also take care of the objections raised by the World Trade Organization as income support is classified as non-trade distorting under the rules. Also, as the author argues, the recent government initiative to provide soil health cards to each farmer should be viewed as a step towards formulation of an income policy.

The paper also calls for limiting the role of the government in agricultural markets to encourage greater private participation in the sector. This, as the author lays out, can be achieved by limiting the role of FCI to procuring foodgrain on the requirements of select states/UTs and for maintaining buffer stocks which would effectively "end the policy of open ended procurement", thereby easing the food subsidy burden of the government. Recent government initiatives highlighted in the paper seem to suggest some movement in this direction. The decision to import rice for northeastern states rather than depending on transportation from surplus states like Punjab, if economical, is likely to further limit FCI's procurement activities. This, coupled with the formation of a committee to suggest ways to restructure FCI, which is expected to give its report shortly, could be construed as signs that reforms in these areas are imminent.

Although the government is yet to articulate its position, indicating the contentious nature of such reforms, Biraj Patnaik, Principal Advisor to the Commissioners of the Supreme Court, who is deeply sceptical of the proposals in the paper says "winding down procurement operations is an anti-poor and anti-farmer step that will set us back decades".

Under an income policy, instead of direct procurement, farmers would be given a lump sum amount as income support, inclusive of all farm subsidies, on a graded per hectare basis