Farm distress, MSPs and UBI

In my commentary yesterday on the substantial revision of minimum support prices (MSPs) of the current kharif crops in these pages (“Unsound Modinomics of MSPs”), I had concluded that remunerative prices are just one means to achieve higher farm incomes, not sufficient, but the Modi government has assumed, wrongly, that higher prices would automatically lead to stable and rising incomes.

Consider a hypothetical case: Due to a prolonged drought, farmers harvest a paltry amount, which even if sold at prevailing market prices, naturally well above the MSPs, will not help them recoup their losses, leave alone earn income of any kind. Such situations arise almost every year, in some part or the other of the country.

Consider also cases when market prices lower than MSPs do not add to farmer distress. The loss of seats the Bharatiya Janata Party (BJP) suffered in the 2017 Gujarat Assembly elections was popularly attributed to the prevalence of farmer distress caused by low prices. That was certainly true of Saurashtra, where the BJP lost 17 seats. Yet the BJP retained its share of 36 of the 63 rural seats in the rest of Gujarat. It also increased its winning margins in these by 50 per cent. Dairying and market gardening have both been rewarding activities in the region and apparently kept rural voters content. I had then concluded that, “we would be barking up the wrong tree if we thought only market prices of crops, or for that matter, farming as an enterprise, defines rural distress. The more pertinent indicator would be rural livelihood as a whole.  Agriculture is but one means to that end” (goo.gl/mR3jx2).

Illustration by Binay Sinha
While equating rural occupations with agriculture and, in turn, with seasonal crop cultivation is conceptually wrong and contrary to facts in the aggregate, for the vast majority of the peasantry, that equality is a stark reality. Not only are occupational opportunities outside agriculture scarce, but also within farming, a lack of resources and remoteness of markets restricts the scope of cash-generating activities such as dairying and market gardening for the most part. Subsistence farming becomes the employer of the last resort, which is the root cause of rural distress.

Historically, a substantial shift of the rural populace out of agriculture has been a pre-condition to development. That includes China as well, a large and once rural country. In India, even today, over 600 million depend on agriculture for their livelihood. It does not require rocket science to conclude that shifting anything but a small fraction of this mass of people out of agriculture is entirely unrealistic. Is rural India then condemned to the poverty trap? And will measures such as enhanced MSPs act as mere palliatives? These questions should also be relevant while parsing the government’s intention of doubling farm incomes by 2022.

Such desperate scenarios call for ways of dealing with the rural existential crisis beyond market interventions of the MSP kind, or their modifications such as the Madhya Pradesh scheme of reimbursing farmers the difference between the price they received and the MSP (this appears to be accompanied by cumbersome procedural difficulties, including prior registration, and delays are built into the reimbursement). One such idea is universal basic income (UBI).

The rather appealing notion of the state paying all its citizens a basic income has been around for centuries. The American revolutionary Thomas Paine was one of its votaries. Its first modern day variant appears to be Brazil’s noted Bolsa Familia from 2008 onwards. The Oxford economist Vijay Joshi and the soon-to-be retiring chief economic advisor to the Government of India, Arvind Subramanian, are its major Indian proponents. Dr Joshi discusses it in his most recent book, India’s Long Road (2016). Dr Subramanian has devoted an entire chapter in Economic Survey 2016 to it.

At its core, the concept that appeals to both these learned and compassionate economists involves payment of a fixed annuity to all citizens.  The quantum is to be determined on the basis of lifting the lowest tier above the poverty line (the Tendulkar line seems to be the most commonly accepted one). 

They have espoused universal payment, since that avoids the targeting bias at the source itself.

The payment of UBI is also to be accompanied by the removal of most subsidies, especially those of direct relevance to the poor (the bulk of whom would have a rural/agricultural background), such as fertiliser and food subsidies. Although neither scholar refers explicitly to MSPs, removing them as well would be consistent with their logic.

After elaborate calculations, Dr Joshi estimates that the cost of paying Rs 17,500 (2014-15 prices) per year per person to be 3.5 per cent of the gross domestic product (GDP). He also estimates that if subsidies are comprehensively reviewed and reformed, the government would have a wiggle room of about 6 per cent of the GDP. He concludes, “[E]stablishing a robust safety net [UBI] would make it easier to undertake other reforms such as… liberalisation of agricultural markets”.

Dr Subramanian too performs rigorous scenario analyses and concludes, “but given the... multiplicity, costs, and questionable effectiveness [of current anti-poverty and social programmes], and the real opportunities afforded by the rapidly improving ‘JAM’ infrastructure, UBI holds the prospects of improving upon the status quo. This chapter provides some illustrative costs for a UBI (varying between 4 per cent and 5 per cent of GDP)”. 

The Telangana Rytu Bandhu scheme envisages paying all farmers Rs 10,000 per hectare per season. It has found some supporters in the academia. But it does not quite come close to UBI because it has a size bias (larger farmers receive greater amounts) and is silent on landless families.

This writer would readily concede that UBI as a concept is still a work in progress and needs much debate and elaboration. Its acceptance would be fraught with political risks. But I strongly believe that it is high time we started contemplating this road less travelled.

Dr Subramanian deservedly has the last word. He adds, for good measure, “The Mahatma would have been conflicted by the idea but, on balance, might have endorsed it.”
/> (This was written before Dr Subramanian’s article “Universal Basic Income in action” appeared in Business Standard, July 11)