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Budget 2018: Farm sector gets a boost but customs duty hikes to protect domestic market dampen reform spirit

Indian budgets are generally known for being as much statements of policy as much they are statements of government finances, and the recent Budget has adhered to this feature. Buried in the finance minister’s speech are several laudable as well as some not so welcome items that overturn existing policies.

Rural economy, farming get a boost

The first positive policy refers to the rural economy and agriculture, where the hurdle of the Agricultural Produce Marketing Committee (APMC) Act is sought to be bypassed by strengthening rural haats as Gramin Agricultural Markets or GrAMs. Connected to the electronic national agricultural markets (e-NAM), GrAMs will be exempted from the regulations of APMCs, thus enabling farmers to sell directly to consumers and bulk purchasers.
With agriculture being a state subject, state governments have been reluctant to liberalise agricultural markets.

Representational image. Reuters

Representational image. Reuters

The APMC legislation, first introduced in 2003, has not been too popular and most states have not introduced it at all while others have implemented a weaker version. Moreover, the APMC mandis are not even accessible to most farmers, being few and far between. Recently, a new model agricultural produce and livestock marketing committee act was formulated by the agriculture ministry, including single-point levy of market fee and single trading license across the state, among other provisions to free up sale of farm produce. If the GrAMs can emerge outside of the current mandi regulation system, it may be possible for farmers to exercise choice in selling their produce. With farmer producer organisations and village producer organisations also receiving tax benefits in the Budget, farmers may be able to access better linkages to markets. However, it remains to be seen how these 22,000 haats are upgraded and how state governments will action the policy.

Another interesting statement regarding the agri sector relates to the liberalisation of export of agri commodities. This is buttressed by an announcement on creating an institutional mechanism for price and demand forecasts as also for decisions regarding exports and imports of agri produce. Additionally, testing facilities are proposed to be set up in the upcoming 42 mega food parks to enable meeting global food standards.

In the past, knee-jerk reactions to sudden spikes in domestic prices of certain cereals or vegetables have led to imposition of price controls or prohibitions on their exports. No overseas buyer will trust a supply source that may disappear overnight and this is one reason that agri exports have been discouraged, despite the fact that India can grow a wide variety of agricultural goods. That farmers even in remote areas are able to adapt cropping decisions according to global price signals is most visible in the case of guar seeds, used in the production of shale gas, where production is closely linked to crude oil prices. If agri exports can truly be liberalised, and futures and options markets can be opened up, this can be a viable route to increasing farmer incomes and enhancing India’s presence in the global agricultural markets. It is indeed an unhappy situation, for example, that while India is by far the largest producer of mangoes in the world, it figures nowhere in its top ten exporters.

Fixed term employment

A second major announcement in the Budget is regarding the extension of fixed term employment to all sectors. Recently, the provision was introduced for the textile and apparel sector and was proposed to be extended to the leather and footwear sector, which also depends on seasonal orders. A draft notification for comments was issued in January for covering all sectors under the provision and the Budget actions the policy. With the entire manufacturing sector enjoying this facility, workers can be hired for specific projects when demand spikes are expected in certain goods. The workers would benefit from pro-rata benefits on the same conditions as regular workers, while employers can hire them directly rather than through labour contractors. The policy would encourage job creation in the formal sector and also provide flexibility to employers, making the entire labour system more competitive globally. Earlier, state governments were permitted to amend the Industrial Disputes Act, Factories Act and Contract Labour Act at their end, and hopefully, the policy for fixed term employment will see better results than the progress so far on labour regulations.

The government’s contribution of 12 percent of wages of new employees in the EPF for all sectors for three years is also a departure from the past. Companies are provided tax incentives for capital expenditure such as investment allowance and accelerated depreciation, which leads to a preference for capital-intensive manufacturing rather than labour-intensive processes. While the incentive for new workers is limited to those earning less than Rs 15,000 per month, it will provide relief to small factories. Coupled with the reduction in corporate income tax for smaller companies, the potential for job creation in labour-intensive manufacturing increases.

NPAs in MSME sector

The Budget also addresses the need for a separate policy for tackling non-performing assets of the MSME sector. MSME are dependent on payments from larger companies which often get delayed, impacting their working capital cycle, and this provision can help them to avoid getting tagged as stressed assets by bankers.

Regression or reforms?

There are also some surprising provisions in the Budget which represent backward steps in the reform process. For example, asking SEBI to mandate large corporates to meet a fourth of their financing needs from the corporate bond market is hardly pertinent, given that companies each have different business goals, models and strategies. There are surely better ways to make the bond market deeper and more liquid.

Further, the customs duty hikes targeted at domestic value addition will definitely be seen as protectionist. The finance minister stated that he is making a ‘calibrated departure’ from the policy of lowering customs duties prevalent since 1991. However, there are many underlying causes for low value addition in the country and merely addressing them through the blunt instrument of higher customs duties is unlikely to ameliorate the situation. The coastal economic zones as suggested by NITI Aayog in its three-year action plan may have been a better option as these would have come with better infrastructure, quick administrative processes, and faster logistics arrangements.

The Budget in many ways reverts to the Indian practice of introducing ‘reforms by stealth’. Hopefully, we will see policy reforms through the year that will continue to address structural roadblocks to investments.

The author is consultant with Confederation of Indian Industry (CII). Views are personal.


Published Date: Feb 08, 2018 19:07 PM | Updated Date: Feb 08, 2018 20:27 PM

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