Why are states turning their backs on farmers?

One year after the implementation of 14th Finance Commission recommendations, 14 states have cut back on rural spending


Photo: Priyanka Parashar/Mint
Photo: Priyanka Parashar/Mint

New Delhi: At a time when everybody is talking about rural distress, it seems many state governments have decided to turn their back on farmers. Data from the Reserve Bank of India’s (RBI) Analysis of State Budgets report shows that 14 out of 31 states cut their rural spending in 2015-16 compared to the previous year. In 2014-15, only one state brought down its rural spending. That this cutback has happened in the second straight year of drought makes it all the more harsh.

Rural spending described here includes expenditure on agriculture and allied activities, rural development, special area programmes, and irrigation and flood control. Numbers for 2013-14 are actual spending figures while those for 2014-15 are revised estimates and for 2015-16 budget estimates (BE).

What is the reason for this apathy towards farmers?

A reduction in central funds seems to be part of the answer. That appears counter intuitive since 2015-16 was the first year when the recommendations of the 14th finance commission (FC) were implemented. These recommendations were hailed by many on account of a 10 percentage point increase in states’ share in central taxes.

To be sure, this never meant that net receipts from the Centre to states were to increase by this amount. That’s because in order to make up for its loss of resources, there was to be a cutback in central government support to many centrally-sponsored schemes (CSS).

Thus, seven states saw a decline in net receipts from the Centre in 2015-16. An overwhelming majority saw a deceleration in growth of net receipts from the Centre in 2015-16 compared to the pace of the year earlier.

This was not entirely unexpected. The impact of FC recommendations on net receipts (taxes plus grants) from the Centre was not going to be uniform for all states simply because CSS funds were not distributed uniformly through states. For example, Bihar was an important beneficiary of Backward Region Grant Fund (BRGF), funding for which was discontinued after the implementation of FC recommendations. Therefore, in comparison to a state which was not a major beneficiary of any CSS, Bihar would have gained much less in terms of net receipts under the new arrangement. Note that not all CSS funding was discontinued: some like the MGNREGA were left unchanged, some saw a change in sharing pattern, while some were completely discontinued.

As FC member and former professor of economics at Jawaharlal Nehru University (JNU), Abhijit Sen (who wrote a dissent note to its report) argued in a 2015 article that net gains to states from the FC recommendations were likely to be nominal because of a cutback in CSS funding.

RBI’s report says that “consolidated state revenues from central transfers (share in central taxes plus grants in aid) have come down by 0.3 percent of GDP in 2015-16”.

The cut in rural spending needs to be seen in another context too. Five of the 14 states which saw a cut in rural spending also reduced their overall expenditure in 2015-16.

That said, while some of these states have indeed suffered a reduction in net receipts from the centre, a larger number of states cutting back on rural expenditure suggests that there is more to rural austerity than a reduction in central funds.

This takes us to the question of whether states have used their freedom to spend untied receipts to shift rural spending to other places. Himanshu, an associate professor of economics at JNU, said that it is likely that this has been the case but it might be too hasty to assume that FC recommendations have only increased austerity.

Also, as Mint reported last month, most states have retained their focus on capital spending at the cost of revenue expenditure in 2015-16. This might have been a result of greater freedom given to the states under the new spending arrangements.