Agricultural sector of Indian economy- Union budget 2011-12

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Analysis of budget 2011-2012: D&B​

The Union Budget FY12 has been presented at a time when the Indian economy is heading towards a high growth trajectory, albeit certain challenges such as elevated inflation, high Current Account Deficit (CAD), and moderating growth of industrial production, which have surfaced in the recent past. At the current juncture, what was required from the Budget was to address the issue of inflation and support growth momentum, while maintaining the focus on fiscal consolidation and continuing ahead on the reform agenda. Increased allocation of planned resources towards infrastructure projects along with the proposals to direct foreign funds and private saving towards infrastructure sector will unlock much of the growth potential of the sector.

Although the continued thrust on infrastructure along with agriculture and education sectors is expected to provide significant impetus to economic growth in the medium-term, measures to control inflation in the immediate future were missing in the budget announcements. Having said that, the emphasis on addressing structural concerns such as weak supply chain linkages, and shortcomings in distribution and marketing systems of agriculture commodities is expected to provide long term solution to these issues, which have been contributing to high inflation in the past. Nonetheless, effective and timely implementation of proposed initiatives remains the key to tackle these long pending issues in the agricultural supply chain.

Even as the Budget FY12 reinforces the need for continuation of the reform agenda, it lacks major announcements on this front. While the emphasis of the budget on active consideration of a new fertiliser policy for urea, direct transfer of cash subsidy to BPL people for better delivery of kerosene, LPG and fertiliser, further liberalisation of the FDI policy, et al is definitely positive, how these proposals fare on the implementation front remains to be seen. Rescheduling the implementation of Direct Tax Code (DTC) and Goods and Service Tax (GST) by April 2012 does spell out some concerns on the governance front, but were much anticipated. The decision to propose the revised Companies Bill in the current parliamentary session and intention to introduce the National Food Security Bill (NFSB) during the course of this year are indeed welcome.

On the fiscal deficit front, the budgeted fiscal deficit of 4.6% for FY12, below the Finance Commission’s target of 4.8% for the same year reiterates the Government’s commitment on the fiscal consolidation. This augurs well for India’s growth prospects, given that it enlarges the resource space for private enterprises.

Fiscal Arithmetic for FY12:

For FY12, total expenditure is budgeted to increase by 3.38% to Rs 12,577.29 bn as compared to the revised estimates (RE) of Rs 12,165.76 bn for FY11. As in the last budget, the Plan expenditure received a major boost with an allocation of Rs 4,415.47 bn, an increase of 11.78% over the FY11 RE. The non-plan expenditure, however, is budgeted to register a marginal decline compared to the revised estimates of FY11; the expenditure on this front is slated to decline by 0.65%. The subsidy burden is budgeted to decline by 12.54% during FY12 over FY11 (RE), owing to relatively lower budgeted fertiliser & petroleum subsidy burden and decline in budgeted payments to lending institutions against debt waiver and debt relief scheme for farmers. It is important to note here that if the international crude oil prices continue to rise unabated, the strain on petroleum subsidy might increase.

The expectations regarding the economy moving back to the high growth trajectory of pre-crisis period seem to have guided the revenue target for FY12. Gross tax revenue for FY12 is budgeted to increase by 17.88% over the FY11 RE, driven by a 19.42% increase in direct tax revenue coupled with 17.36% increase in revenue from indirect taxes. On the direct tax front, improvement in corporate profitability along with marginal increase in the rate of minimum alternate tax (MAT) to 18.5% from 18% is expected to garner higher revenues from the corporate sector; revenue from corporate tax is budgeted to increase by 21.46%. Despite the broadening of the income tax slabs, the personal income tax collection is budgeted to increase by 15.40% in FY12 over the FY11 RE. Within indirect taxes, revenue from customs and excise duty is budgeted to increase by 15.10% and 19.12% respectively. The widening of the service tax gamut to include new services is expected to augment service tax revenue, which is budgeted to increase by around 18.16% over the FY11 RE.

Non-tax revenue, on the other hand, is budgeted to record a significant decline of 43.02% during FY12 compared to the RE of FY11. This decline is primarily due to substantially higher non-tax revenue collections during FY11 backed by one-time revenue gain from the 3G spectrum auction. Disinvestment proceeds, however, will play a role in augmenting revenue collections; proceeds from ‘disinvestment of equity in public sector enterprises’ is budgeted to increase to Rs 400 bn in FY12 from Rs 221.44 bn in FY11 RE. Further, market borrowings are slated to come down by around 6.68% and be around Rs 4,171.28 bn during FY12 as compared to Rs 4,470.00 bn in FY11 RE.

However, in the current scenario, fiscal deficit target though encouraging seems highly ambitious. Continuing its focus on the fiscal consolidation, the Budget has set the rolling targets at 4.1% and 3.5% for FY13 and FY14 respectively. Moreover, the decision to introduce an amendment to the FRBM Act, laying down the fiscal road map for the next five years during the course of the year reiterates Government’s commitment towards fiscal prudence in the years to come.

Agriculture(Budget highlights):

• The total plan outlay for agriculture & allied sector is to be increased by 19.79% to Rs 147.44 bn.
• The target agricultural credit is proposed to be raised to Rs 4,750 bn in FY12 from Rs 3,750 bn in FY11.
• The Government raised the corpus of RIDF (Rural Infrastructure Development Fund) XVII to Rs 180 bn in FY12 from Rs 160 bn in FY11 wherein the additional allocation would be dedicated to creation of warehousing facilities.
• Interest subvention proposed to be enhanced from 2% to 3% for providing short-term crop loans to farmers who repay their crop loan on time.
• In view of enhanced target for flow of agriculture credit, capital base of NABARD to be strengthened by Rs 30 bn in a phased manner.
• Rs 100 bn to be contributed to NABARD’s Short-term Rural Credit fund for FY12.
• An allocation under Rashtriya Krishi Vikas Yojana (RKVY) increased to Rs 78.60 bn in FY12 from Rs 67.55 bn in FY11.
• An allocation of Rs 17 bn for National Horticulture Mission including Rs 5 bn for north east and Himalayan states.
• An allocation of Rs 13.50 bn for National Food Security Mission.
• An allocation of Rs 7.80 bn for Macro Management in Agriculture.
• An allocation of Rs 11.50 bn for National Mission on Micro Irrigation.
• An allocation of Rs 7 bn for National Agricultural Insurance Scheme including Rs 1.50 bn for Modified national Agriculture insurance scheme.
• An allocation of Rs 5.50 bn for integrated oilseeds, oil palms, pulses and maize development.
• Removal of production and distribution bottlenecks for items like fruits and vegetables, milk, meat, poultry and fish to be the focus of attention this year.
• To improve rice based cropping system in the eastern region, an allocation of Rs 4 bn has been made.
• An allocation of Rs 3 bn made to promote 60,000 pulses villages in rainfed areas.
• An allocation of Rs 3 bn to bring 60,000 hectares under oil palm plantations - an initiative to yield about 3 lakh metric tonnes of palm oil annually in five years.
• As an initiative on vegetable clusters, an allocation of Rs 3 bn made for implementation of vegetable initiative to provide quality vegetable at competitive prices.
• An allocation of Rs 3 bn provided to promote higher production of Bajra, Jowar, Ragi and other millets, which are highly nutritious and have several medicinal properties.
• An allocation of Rs 3 bn provided for Accelerated Fodder Development Programme to benefit farmers in 25,000 villages.
• The Government to promote organic farming methods, combining modern technology with traditional farming practices.
• An approval being given to set up 15 more Mega Food Parks during FY12.
• Augmentation of storage capacity through private entrepreneurs and warehousing corporations has been fast tracked.
• Capital investment in creation of modern storage capacity will be eligible for viability gap funding of the Finance Ministry. It is also proposed to recognize cold chains and post-harvest storage as an
infrastructure sub-sector.
• In view of recent episode of inflation, need for State Governments to review and enforce a reformed Agriculture Produce Marketing Act been recognised.
• National Food Security Bill (NFSB) which will be introduced in the Parliament during the course of the current year.
• Extended full exemption from excise duty to air-conditioning equipment and refrigeration panels for cold chain infrastructure.
• Include conveyor belts in the full exemption from excise duty to equipments used in cold storages, mandis and warehouses.
• Basic customs duty reduced for specified agricultural machinery to 2.50% from 5% and the concession is also being extended to parts of such machinery to encourage their domestic production.
• Basic customs duty reduced on micro-irrigation equipment to 5% from 7.50%.
• De-oiled rice bran cake fully exempted from basic customs duty. Simultaneously, an export duty of 10% to be levied on its export.

Positive+:

The slew of measures announced for the agricultural sector highlights the Government’s thrust to facilitate storage and reduce the production and supply chain bottlenecks in the agricultural sector which played an important role in driving inflation in the economy. While establishing an efficient supply chain and removal of production and distribution bottlenecks, especially for food items which has led to inflation has received the Government’s focus during the budget, timely and effective implementation of the initiatives would not only help in reducing the price difference between the whole sale and the retail prices but also provide for better realisation of prices by the farmers. It would also help in combating supply side driven food inflation in the medium to long term. Moreover, if the Agriculture Produce Marketing Act is reformed as highlighted in the budget it would lead to further improvement in the supply chain linkages in the agricultural sector.

In the budget the Government further enhanced its thrust to improve the storage facilities in the agriculture sector by allocating funds for creation of warehousing facilities. Facilitating for further private sector participation will ensure reduction in wastage of farm output, thereby enhancing greater food security going ahead. Moreover, in this budget there has been announcement of new initiatives such as accelerated Fodder Development Programme which bodes well for the sector.

While the Union budget for FY12 witnessed significant plan allocation, the Government also placed due emphasis on resolving the supply chain blockages in the agricultural sector which required serious attention besides, considerably stepping up the credit flow. It was also commendable that the Government placed emphasis on speedy implementation on various schemes under the RKVY and also recommended that the storage capacity through private entrepreneurs and warehousing corporations to be fast tracked.

Fertiliser:

• Capital investment in fertiliser production proposed to be included as an infrastructure subsector.
• Government actively considering extension of the Nutrient Based Subsidy (NBS) regime to cover urea.
• To ensure greater efficiency, cost effectiveness and better delivery for fertilisers, the Government will move towards direct transfer of cash subsidy to people living below poverty line in a phased manner.
• Extension of benefit of investment linked deduction to businesses engaged in the production of fertilisers.

Positive+:

The overall outlook on the fertiliser sector remains positive. The major move in the sector which will drive investment is by including capital investment in fertiliser production as an infrastructure sub sector which will help to mitigate the risk of investing. Moreover, extending the benefits of investment linked deduction to businesses engaged in the production of fertilisers will increase
the flow of capital in the sector. The government’s intention to move to a NBS of fertilisers not only bodes well for the industry but also promotes balanced use of fertiliser and would further link transparently the prices and subsidies to the composition of a product. Further, the proposed system of direct transfer of subsidy for fertilisers is seen as a good move as the domestic industry
has long suffered from under recovery of cost and delay in disbursement of subsidy.

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