A boost to those who need it most

The government has aimed at supporting the ‘new middle class’ and farmers. This will help the economy cross the $5 trillion mark too

Himanshu | April 22, 2019


#PM KISAN   #economy   #middle class   #agriculture   #farmers   #PM Modi  
Illustration: Ashish Asthana
Illustration: Ashish Asthana

What are 600 million people? Almost twice the population of the US. What are 500 million people? About three-fourth of the population of Europe. Why are we talking about these numbers? Well, because as per a study by Sandhya Krishnan and Neeraj Hatekar (‘Rise of New Middle Class in India and Its

Changing Structure, Economic and Political Weekly, June 3, 2017), 600 million is what constitutes the new middle class in India (defined as having daily per capita consumption expenditure of $2-10), while 500 million are the small and marginal farmers engaged in India’s agriculture. Farmers and middle-classes are the largest constituents of our population that require active government support to raise their standard of living. These sections have one of the highest marginal propensities to consume and are the real drivers of the country’s consumption demand, which in turn is the main engine of India’s GDP. Therefore, aspirations of farmers and middle-classes are a key component of New India. 

The union government has taken care of these sections of citizens by announcing a number of benefits and schemes to ease their living standard. The middle class and the farmers (small and marginal) are the prime beneficiaries of the policies of the government. Consider the middle class: the interim budget has proposed to increase the taxable income limit from '2.5 lakh to '5 lakh. It simply means that taxpayers with gross income up to '5 lakh will be exempt from paying tax on income. Similarly, taxpayers with gross income of up to 6.5 lakh will be given a full tax rebate if they invest in any of the designated plans under Section 80C. The move is likely to increase the consumption demand and boost spending in the economy as the beneficiaries will have more disposable income to spend on goods and services. 
 
While these are immediate, short-term benefits to the economy, in the medium to long term, the move can put India on track to becoming a $5 trillion economy and strategically dodging the low-income trap. For India to embark upon the higher income path, a greater number of people would have to be brought under the tax net. For this, people need to be incentivised to report their income while it is still low so that they can be taxed appropriately later once their income increases. Standard economic theory which justifies this is called the Laffer Curve. The Laffer Curve shows the relationship between tax rates and tax revenue. Moreover, the socio-economic objective of income tax is to achieve equity and fair redistribution of income. Therefore, a person with lower income should pay lower income tax as compared to high net worth individuals. The tax rebate provided in the budget has followed this principle of progressive taxation and is a step towards making India’s tax structure more progressive. The measure will achieve the twin objective of increasing the overall levels of income disclosure in the society and progressive taxation. 
 
Moving on to farmers, the finance minister in his budget speech mentioned that the “agriculture sector is the main driver of the rural economy”. The Indian farmer is ‘annadata’ to the nation and the government is committed to improve their lives. The budget proposes a structural income support scheme, Pradhan Mantri Kisan Samman Nidhi or PM KISAN, to small and marginal farmers who find it difficult to access cash for procuring necessary inputs like seeds and fertilizers, and other needs on timely basis without relying on moneylenders. The PM KISAN will provide direct income support of '6,000 per year (periodically transferred into bank accounts) to all small and marginal farmers owning land up to 2 hectares. It will benefit 86 percent of the farming population (12 crore households). Proposed to be made operational retrospectively from December 1, 2018, it would entail an annual expenditure of '75,000 crore. Critics ask how the PM KISAN will benefit small and marginal farmers. The 70th round of NSS 2013 conducted the Situation Assessment Survey (SAS) of agricultural households provides us some evidence. The SAS reported some of the key estimates related to income, expenditure, assets and indebtedness of the agricultural households. 
 
It reported that the average monthly income per agricultural household at '6,426. As per the survey, 69 percent of agricultural households in rural India were estimated to possess less than 1 hectare of land, and 17 percent has land between 1 hectare and less than 2 hectares. The average monthly incomes derived from different sources for each class of land are shown in the accompanying graph.
 
For the households belonging to the lowest land class (0.01 to 0.40 hectare) maximum income comes from wage and salary (57.5%) and net receipts from cultivation account for 16.5% of income. For households owning 0.41 to 1.00 hectares, net receipts from cultivation account for 40.9% of income, followed by 38.3% from wages and salaries. For households owning 1.01 to 2.00 hectares land, net receipts from cultivation account for 57.3% of income. 
 
The SAS report further reveals that the monthly consumption expenditure of the households owning up to 2 hectares of land outweighs their income from all sources, indicating indebtedness. For instance, households owning 0.01 to 0.40 hectare land had average monthly consumption expenditure of '5,401 as against the total income of '4,152. For households owning 1.01 to 2.0 hectares land, average monthly consumption expenditure was '6,020 as against the total income of '5,247. The survey revealed that around 52 percent of the agricultural households in rural India have outstanding loans. The average amount of loan per agricultural household was approximately '47,000. Many of the indebted households have to rely on informal sources of credit like moneylenders, landlord and traders to finance their immediate consumption and cultivation needs creating a vicious circle of debt.    
 
It is against this backdrop, the PM KISAN looks more promising and will certainly help in mitigating the farm distress. The programme is likely to benefit 86 percent of small and marginal agricultural households who are suffering from low land holdings and lack of income from farming and indebtedness. It is the first time that a government is directly focussing on providing an assured income to the farmers. 
 
However, this measure should not be seen in isolation. but instead. as complementing a series of other measures. Right from its beginning, this government has focused on increasing productivity of small and marginal farms through assured and remunerative income and marketing opportunities. It has fixed MSP for all 22 crops at 1.5 times more than the cost of production. It also launched PM Annadata Aay Sanrakshan Abhiyan (PM-AASHA) to ensure that farmers gets paid a fair and remunerative price and PM Fasal Bima Yojana to mitigate the monsoon and price risk faced by farmers. Taken together, all these measures attempt to provide holistic support to farmers, increase their income levels and protect them from vagaries of nature and market that they are exposed to. 
 
To conclude, the government has been targeting and focusing on the middle class, salaried and small and marginal farmers. The measures adopted will boost consumption and saving in the economy which will translate into higher aggregate demand and output growth.  Moreover, the government in budget 2019-20 has has met the rising expectations of millions of citizens while maintaining fiscal prudence. 
 
Himanshu is a Young Professional with Economic Advisory Council to the PM. Views expressed are personal.
(This article appears in the April 30th, 2019 edition)

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