Lack of liquidity in the cash economy causing farm distress: Pronab Sen


Pronab Sen, programme director for the International Growth Centre (IGC), had a long distinguished career in the government as the principal adviser in the Planning Commission and later as the first chief statistician of India. In an interview, Sen spoke about the challenges before the government as it prepares to present the interim Budget. Edited excerpts:

What do you think the government’s priorities will be since it is a pre-election budget?

The priorities are straightforward. The government has already given us an indication by highlighting agriculture and MSME (micro, small and medium enterprises) as the focus areas. They are certainly going to make announcements on both. What those announcements are, I don’t know. The only thing I think they will not do is a loan waiver. This is going to be an interim budget.

What can a government do or not do in an interim budget?

There is a difference between an interim budget and a vote on account. In a vote on account, you can do absolutely nothing. So, whatever was the approved budget for the previous year, you do a pro-rata expansion for three or four months of the next fiscal year. An interim budget has a little more flexibility which is that you can’t introduce any new head of expenditure, nor can you change direct taxes. But within the expenditure heads, you can actually increase or decrease the allocation. And of course, on indirect taxes, you can do whatever you like. But, you cannot introduce new schemes. What they can do is, in an existing scheme, they can change the scheme or they can put more money into it.

But in 2014 interim budget, then finance minister P. Chidambaram introduced One Rank One Pension scheme.

No, it was not a new scheme since the head of the account is pensions. He didn’t create a new expenditure programme.

So, are you saying that government cannot introduce a direct benefit transfer to the farmers or a limited Universal Basic Income (UBI) kind of scheme in the interim budget?

They have to figure out which existing scheme they can put it under.

Do you think a direct cash transfer or a limited UBI will be sustainable within the fiscal space available?

Direct cash transfer, as far as I can make out, though I don’t know all the schemes that exist, will be difficult to do. I don’t think there is an expenditure head which can accommodate that.

But besides the technicalities, do you think we have the fiscal space for it?

Much will depend on how you structure it. It was quite clear that in order to finance it, you have to do away with a few subsidies. Now which subsidies you do away with is the real question. Everybody keeps drawing parallels with the Rythu Bandhu scheme (of Telangana), but it was over and above all existing subsidies. If you have to fund it through reduction of subsidies, then you actually have to weigh the tradeoff, because normally, subsidies will cover a wider spectrum of people than a direct transfer which would probably be much more targeted and therefore a lot of people will lose out. So, there has to be some sense of the pros and cons.

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Should any such scheme be funded partly by the centre and partly by the states?

The point is, any scheme which is in the domain of the states under the Constitution or in the Concurrent List should be done with discussion of the states. For instance, Ayushman Bharat, the centre did it without consulting the states. This creates a problem for the states. Have they figured out their finances, how they can afford it? There are parallel schemes running, those schemes cannot be closed down overnight. So, there are a whole bunch of issues that need to be discussed. The problem is the centre has always taken the position that they are going to announce the scheme and ask the states to contribute and if they don’t contribute, the centre will make it a political issue telling people “We are ready to give you money, your state government is not”. That may be politically a very smart trick, but it is a terrible thing to do for the people. But all central governments at all times have been guilty of this.

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What do you think is the root cause of the current farm distress?

My personal reading is that the farm distress is essentially caused by lack of liquidity in the cash economy. There simply is not enough cash available in the cash economy. So, traders do not have enough cash. Remember, agriculture is an operation where the trader buys a huge amount of agricultural products within a very short period of time—of a week to 10 days. And then he sells it over the next four-five months. So, what you need is a bunching of cash available at those points in time. If that cash is not there, the trader is unable to buy the produce because he is limited by the amount of cash he has. My sense is what we are seeing essentially that. So, it is not a question of how much cash is available in the economy, it is whether or not, given the lumpy nature of agriculture marketing and purchase, whether or not you have those supplies of cash during those peak periods.

But why is cash not available during those peak demand periods?

Mainly because of demonetization, but there are other causes as well. What demonetization did is that people who were used to holding a large amount of cash for transactional purposes had to put it in the banks. I don’t think those cash balances have been restored to those levels. But should not it be a demand-supply issue? If the traders need more cash, they will store more cash. Where do they get the cash from? Who is giving it to them? Banks are not. When the government is monitoring all cash withdrawals above .50,000, you are not going to do it.

So what is the solution then?

My sense is, you need to infuse more cash into the cash economy. One way of doing that is through the procurement operation. But there again, the debate is wrong. The whole debate is what is the MSP (minimum support price)? MSP is not what is really important. What is important is the total amount of money used in procurement. Whether you do it through high MSP and a relatively lower quantity, or you do through a lower MSP and a much higher quantity is a call that you need to take. My sense is the second is always better. But the point is how much are you spending. So today, you have a situation where the government already owes the Food Corp. of India (FCI) 70,000 crore. You have a situation where the banks are already stressed. So, how much they will actually be able to procure is really the question. And it is the procurement operation which injects more money into the cash economy. MGNREGS (Mahatma Gandhi National Rural Employment Guarantee Scheme) is another source of cash into the cash economy. Government has announced additional 5,000 crore funding; that’s all very well. But the fact is the government has essentially not been paying the states for money already spent. So, how much of this 5,000 crore is actually going in to settle last year’s dues, I am not too sure about it. My sense is not much money going in there. Two major sources of liquidity injection into the cash economy have actually been impaired in last five years.

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Some analysts say our sole focus to curb retail inflation where food items have a larger weight is partly responsible for the farm distress. Do you agree?

The Reserve Bank of India earlier used both WPI and CPI inflation. The focus has shifted not just to retail inflation but to headline retail inflation. I have always felt that this was wrong in a situation where food is such a large component of retail basket. We really should have had two targets: one for headline inflation and the second for core inflation. The headline inflation should have a much wider band while the core inflation should have a much narrower band. So if you were to ask me what is consistent, I would say headline inflation of 4% plus or minus 2% and core inflation of 3% plus or minus 1%. If you look at it that way, today core inflation is running way above what I am talking about.

Why is services inflation running above 5%?

We don’t know. I think there is a data problem. That’s my suspicion at the rural level. Earlier, the rural price data was being collected by the post offices. In the later part of last year, the contract ended and now it is being collected by the National Sample Survey Office (NSSO). Whether in the transition we had a problem only the NSSO guys will know.

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