The day after Davos
So, the prime minister graced the World Economic Forum in Davos and delivered a good speech, befitting the occasion. The sentiments he espoused were what the audience in Davos would like to hear. After exhorting them to work in India, be in India and live in India, he returned. They were stirring words. He also did a service to his own government by echoing those sentiments. His speech allows the spotlight to be turned on the actions that the government has taken or not taken that are inconsistent with the spirit of his speech.
We have seen comments on how India attempted to turn its back on a contract with General Electric for the delivery of diesel locomotives, etc. Then, there is the pending issue of retrospective tax claims on Vodafone Group Plc., disputes with Cairn Energy Plc., etc. The directorate of safeguards has recommended a 70% duty on imported solar modules and panels even as the prime minister reiterated India’s commitment to the Paris accord on climate change and to renewable energy. India’s outstanding issues with foreigners are nothing but a reflection of the contradictions and inconsistencies in policies towards Indians in India.
The farm sector is a classic example. On paper, India worships its farmers. It subsidizes their inputs or offers them at zero cost, provides a floor price for their output and does not tax their income. But, in reality, the price support falls short of what is needed, or the procurement is too little to be useful. Importantly, when farm output prices rise, the government orders big imports, sending prices crashing. Then, when global prices of agricultural commodities rise, the government prevents farmers from benefiting from them by imposing minimum export prices. In other words, there is little more than symbolism in exempting agricultural income from tax when farmers’ incomes are not allowed to rise. It only helps rich urban dwellers to disguise some of their incomes as farm income and evade taxes.
So, for the spirit of Davos to be matched by action, India must set its farmers free and not hit them through imports and price restrictions on their exports. In this regard, the draft note put up by the Union minister for commerce to the cabinet for abolishing minimum export prices (MEP) deserves praise and support. In fact, the note recommends the abolition of MEP for non-essential commodities. The government should do away with MEP altogether and even commit that governments will not take recourse to it in future. Setting a minimum export price reflects an urban bias in policymaking.
On the face of it, India has two conflicting objectives. One is keeping inflation low and the other is ensuring farmer and rural prosperity. It need not necessarily be conflicting if productivity in the non-farm sectors and competitive forces keep price increases reasonable in the other 50% of the price index, since food items comprise roughly 50% of the consumer price index.
If I were the policymaker, I would prioritize rural incomes, prosperity/elimination of poverty, and tackle the potential inflation risk through other measures, as outlined broadly. But not by imposing price controls on non-food items, of course! On inflation management, the Union finance ministry should renegotiate the inflation target with the Reserve Bank of India. It can keep the central inflation rate at 4%, with the upper band at 6% and the lower band at 3%. That does send a signal that, at this stage of the development cycle, India is prepared to tolerate a wee bit higher inflation rate for the sake of its farmers. That is both a politically smart and an economically correct signal to send. Given the recent history of double-digit inflation (2009-14), the bond market might react nervously but the measure can be rather easily defended, articulated and explained well. Then, the market will accept it.
India should let farmers reach the front doors of consumers locally and globally with as little intervention, intermediation and distortion as possible. With the bulk of the eligible labour force engaged in or still tied to farming and national prosperity tied to rural prosperity, it is important to let the farmer gain the benefits of the market without the government denying him that opportunity. Only then will the farmer be more willing and open to accepting the vagaries of the market when they turn adverse and learn to prepare for and mitigate the downside risk.
In general, following through on his speech at Davos, the prime minister should announce the following guiding principles for economic policymaking in his government:
(1) The government will let the market function and discover prices as an interaction of buyers and sellers.
(2) It will encourage and facilitate the increase in number of buyers and sellers so that no one has an undue influence on prices.
(3) Where prices are manipulated and distorted by unfair trade practice or malpractice, the government will use all its coercive and legal powers to intervene and end them.
(4) Where adverse price developments are due to factors beyond the control of buyers and sellers, the government will provide specific, targeted and time-bound cash support in return for corrective action on the part of buyers and sellers.
The commerce ministry has smartly couched its proposal on the abolition of MEP in terms of honouring export commitments. But, its pay-off will be significant for farmers, for rural prosperity and for the entire economy.
V. Anantha Nageswaran is an independent consultant based in Singapore. He blogs regularly at Thegoldstandardsite.wordpress.com. Read Anantha’s Mint columns at www.livemint.com/baretalk
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