Budget 2019: India Needs To Focus On Agriculture As A Single-Point Agenda, Says Jahangir Aziz

A worker cleans rice paddy at an Agricultural Produce Market Committee (APMC) wholesale market in Jalandhar, Punjab. (Photographer: Dhiraj Singh/Bloomberg)

The cycles are repetitive and, by now, familiar.

An election is approaching and the farm sector needs focus. What should be done to ensure that the nearly 60 percent of Indian population dependent on agriculture is not aggrieved? Raising support prices for key crops or waiving farm loans is an easy option. Certainly easier than undertaking structural reforms that may take years to pay dividends. We can do that later.

But artificially high support prices may also prompt excess production, eventually leading to lower prices and incomes. Which brings the situation full circle and pressure builds to drum up another farm support scheme.

That's exactly what is playing out right now, said Jahangir Aziz, head of emerging market economics at JPMogran. A long-time watcher of the Indian economy, Aziz said that a farm support scheme, this time in the form of a cash transfer, cannot be ruled out even if it comes at a expense of fiscal consolidation.

Every time the arguments are exactly the same, which is that we understand there are medium-term structural changes needed but those will take a long time. However, we need immediate relief for the farming community because it is hurting. The same argument will be used again....This time there could be some kind of income transfer rather than high MSPs because they have tried that in past and it didn't work.

Jahangir Aziz, Head-Emerging Market Economics, JPMorgan

A scheme involving cash transfers to farmers is indeed in the works. On Monday, Bloomberg News reported that such a scheme could subsume existing farm-related subsidies and cost the exchequer Rs 70,000 crore.

That would be the only way to make such a cash transfer scheme fiscally palatable. According to JPMorgan, the consolidated fiscal deficit of the centre and states is close to 6.5 percent of GDP, leaving no space for further unfunded liabilities.

Even if the government were to find space to announce a cash transfer scheme for now, a single focus on reform of the agriculture sector is now imperative, said Aziz.

The old models of let's keep expanding manufacturing and we will be able to absorb the excess employment in agriculture into manufacturing and that will solve the agriculture problem....you have tried it for 70 years. It hasn't worked. India needs to focus on agriculture as a single item in the agenda. If we don't do it, we will be facing serious problems.

Jahangir Aziz, Head - Emerging Market Economics, JPMorgan

Government's Fiscal Report Card

While pre-election fiscal slippage cannot be ruled out, Aziz said the current government has done a reasonable job of containing deficits.

The central government's fiscal deficit has dropped from over 4.5 percent of GDP to close to 3.5 percent of GDP now. The problem is that progress made by the central government has been compromised by the state governments.

“On the central government side, they have tried to bring it (the fiscal deficit) down. But for the overall deficit, it is like nothing has happened,” he said. The combined deficit remains at 6.5 percent of GDP and is even higher at close to 8 percent if you take off-balancesheet borrowings by public sector entities into account, JPMorgan had noted in a report earlier this month.

Aziz is also critical of the manner in which the government dealt with the period of low oil prices. The government chose to raise taxes and did not allow the full benefit of lower oil prices to flow through to consumers. Had they done this, inflation would have fallen and interest rates could have been brought down.

If you think of scenario where the entire oil price benefit was passed on to consumers, we could be looking at completely different world. At that point in time, when inflation was very high, it could have been brought down...That would have allowed the RBI to bring down interest rates significantly and provide the kind of support which investors and consumers needed at that point in time. That management is questionable.

Jahangir Aziz, Head - Emerging Market Economics, JPMorgan