How will farm loan waivers impact the Indian economy?

Farm loan waivers will strain the finances of states, and harm both farmers and banks over the long run

The debt waiver packages, even if limited to a few states, will likely prove to be counter-productive and offer little gains to farmers over the long run. Photo: Mint

The debt waiver packages, even if limited to a few states, will likely prove to be counter-productive and offer little gains to farmers over the long run. Photo: Mint

In its policy statement released last week, the monetary policy committee (MPC) of the Reserve Bank of India (RBI) pointed out that the implementation of farm loan waivers across states could hurt the finances of states and make them throw good money after bad, and stoke inflation.

How much of an impact will the waivers have on the Indian economy?

Mint analysis suggests that the cumulative impact of farm loan waivers is likely to be lower than that of the power-restructuring package, Ujwal Discom Assurance Yojana (UDAY), unless they are extended to all Indian states. However, the debt waiver packages, even if limited to a few states, will likely prove to be counter-productive and offer little gains to farmers over the long run.

So far, three major states—Uttar Pradesh (UP), Punjab and Maharashtra—have announced large-scale farm debt waivers. The debt waiver packages of UP and Punjab were aimed to fulfil poll promises made by the Bharatiya Janata Party (BJP) and the Congress party, respectively, in these two states. The cumulative debt relief announced by the three states amounts to around Rs77,000 crore or 0.5% of India’s 2016-17 GDP.

UP’s debt waiver of Rs36,400 crore is equivalent to one-fourth of the total estimated farm debt in the state. Punjab’s debt waiver worth Rs10000 crore is  equivalent to less than one-seventh of the total estimated farm debt in the state. Maharashtra’s farm debt waiver appears slightly more generous as it appears to cover almost one-third of the state’s farm loans.

If poll-bound states—including Gujarat, Karnataka, Rajasthan and Madhya Pradesh— too announce farm debt waivers and extend it to one-third of farm loans in their respective states, then the aggregate amount of farm debt waivers before the 2019 elections would balloon to Rs2 trillion, or 1.3% of India’s GDP.

The Rs2 trillion hit to state finances is not a small amount but it is lower than the fiscal burden of the UDAY scheme, which originally envisaged states to take over Rs3 trillion of discom (distribution companies) debt. As of now, the UDAY website shows that 15 states have pledged to issue bonds worth Rs2.7 trillion, or 1.8% of India’s GDP.

This means that the current cost of debt waivers, though large, is not yet alarming. But what if all states, and not just the poll-bound ones, decide to waive farm loans, and extend it to half of all farm debt rather than just one-third? In such a case, the total waiver amount will substantially increase to Rs6.3 trillion or around 4% of the GDP.

The extreme case of 50% farm debt waiver should raise concerns as it will worsen states’ debt-to-GDP ratio by 4 percentage points on average. This will jeopardize India’s stated aim to reduce its total public debt, Centre and states combined, to 60% of the GDP.

State-wise outstanding farm debt has been estimated by using available break-up (for previous years) of agricultural loans extended by scheduled commercial banks and regional rural banks. The estimates thus obtained have been scaled up to the total value of institutional farm loans at Rs12.6 trillion. This figure was cited by Union minister of state for agriculture Parshottam Rupala in November last year in response to a question on farm debt.

While the effect of increased public debt will play out over the long run, the increased interest burden due to higher debt will hit state finances immediately. Even if we assume a benign scenario, where debt waiver amounts to only one-fourth of all farm debt, as in the case of Uttar Pradesh, the aggregate interest payment burden of states will rise by 8% (over their 2016-17 levels). Interest payments of states are already quite high, and often eclipse their spending on important infrastructure areas such as roads and irrigation.

The impact on state finances could have been justified had the waivers provided meaningful relief to India’s distressed rural economy. But that is unlikely to happen since the poorest farmers in India typically rely on non-institutional sources of credit, as a previous Plain Facts column pointed out. Instead, as the experience of 2008 shows, farm loan waivers can discourage subsequent lending by banks in districts with greater exposure to the debt waiver, harming farmers over the long run.

Given that farm loans will be transferred from the assets side of banks’ balance sheets to the liabilities side of government’s books as part of the waivers, will distressed banks gain from such moves? Not much, according to a review into the non-performing asset (NPA) portfolio of banks.

Banks might gain in the short run as their loan book gets lighter and they get rid of some non-performing assets. But such waivers and their anticipation in future would damage credit culture. It is not surprising that after the farm debt waiver in 2008, the drop in banks’ agricultural bad loans or NPAs lasted for barely a year before rising sharply once again.

But to put things in perspective, the share of agricultural loans in the total basket of NPAs today is low. In fact, banks with more NPAs tend to have a smaller share of agricultural loans in total NPAs, as the chart below shows. This means that even temporary relief for stressed banks will be quite modest.

Given that the promise of farm waivers have seemed to help both the Congress and the BJP win in Punjab and Uttar Pradesh, respectively, it is likely that India’s political class will increasingly adopt this option in the run-up to the 2019 Lok Sabha elections.

But the above analysis suggests that such waivers are unlikely to help the cause of either distressed farmers or troubled banks over the long run. And they may well impair the quality of public spending by states, as the central bank fears.

a new movement is born

A new movement is born

Yogendra Yadav
Over 150 farmers’ bodies have come together on a common agenda

A new movement is born
TWIN AGENDA: The focus is on fair and remunerative prices and freedom from debt.

Yogendra Yadav

IS the farmers’ movement in India entering a new phase? Six weeks is too short a window to answer this question with certainty. But the nature of farmers’ protest across the country since the beginning of farmers’ strike in Punjab shows signs of something new. This impression is confirmed in a two-week journey connecting farmers, organisations and movements across six states. This journey, Kisan Mukti Yatra, began on July 6 at Mandsaur, exactly a month after the police firing that killed six farmers. The yatra passed through six states before arriving at Delhi. This yatra was a good window into the new world of farmers’ movements, closer to the ground, I am now convinced that we are witnessing the beginnings of a tectonic shift in the history of farmers’ movements.  The media has begun to notice some outward signs of this shift. There have been stories about jean-clad new-age farmer activists. The use of WhatsApp and smartphones has also drawn public attention. But such stories tend to miss the real point. Farmers’ movement is adjusting to the new realities of Indian agriculture and the changing nature of Indian politics.  This is the third generation of farmers’ movements. The first generation comprised a series of peasant rebellions in colonial India. The Mappila peasant rebellion; Gandhian Satyagrah in Champaran, Khera and Bardoli; and Tebhaga struggle in Bengal were largely a reaction of the oppressed peasantry to the British colonial land tenure system. Indepedence brought hope to the peasantry; their movement subsided for a while. The second generation of farmers’ movements took place in the 1980s, led by Mahendra Singh Tikait, economists-turned-activist Sharad Joshi and maverick Majumdar Swami. This was a protest of the relatively better-off farmers, who faced marginalisation in modern, industrial economy. The struggle was waged principally on the issue of remunerative prices. On a parallel track were the struggles of landless labourers, led mostly by Naxalites, against oppression by big landlords. The third generation of farmer activists faces a new context. In the last generation, landholdings have fragmented. The farming sector, as a whole, has faced pauperisation. Farming is clearly an unviable activity. The economic and the ecological crisis of Indian farming is turning into an existential crisis for the Indian farmer. Today’s farmer movement has to face the reality of farmers’ suicides. This new movement is erasing the traditional distinctions of landlord, peasant, sharecropper or landless farmer. Impoverishment of rural India has forced farmers’ movements to bring all sections of farmers together. ‘Kisan mazdoor ekta’ has been a slogan of the Left for a long time, but it is only recently that the slogan has found resonance inside farmers’ movements.This expanded definition of farmer has encouraged the inclusion of various social segments. Dalits and Adivasis are predominantly engaged in farming activities. Yet they were not seen as farmers by mainstream farmers’ movements. This prejudice is beginning to change. As is the greater willingness among peasant movements to engage with Dalits and Adivasi issues. There is also a willingness to recognise women farmers who contribute about two-thirds of the labour. In ideological terms, the new farmers’ movement is moving away from older binaries. The earlier focus on landed versus landless has given way to a realisation that both of them are victims of the economic system. The urban-rural divide epitomised by the binary Bharat versus India has also undergone some rethinking. There is, after all, large chunk of Bharat within India, if not the other way round. There is also a growing realisation that the ecological crisis affects farmers as well as non-farmers and unhealthy farmer cannot but produce unhealthy food for the country. The move away from ideological rigidities has allowed for political unity and policy focus. In an unprecedented move, more than 150 farmer organisations have come together under the umbrella of All India Kisan Sangarsh Coordination Committee. This coalition includes organisations with very diverse political-ideological leanings. It brings together organisations from different parts of the country representing different crops. If this coalition holds, it has tremendous potential for decisive intervention on this issue. Perhaps for the first time, all the farmers’ organisations have agreed upon a common agenda. All organisation within AIKSCC, and even those outside, have agreed to focus their energies on the twin agenda of fair and remunerative prices and freedom from debt. In keeping with the broader definition of a farmer, both these demands have also been defined in a more comprehensive manner. Fair and remunerative price is not limited just to MSP and procurement which benefit less than 1/10th of the Indian farmers. Now the farmers’ movements are demanding actual delivery of the support price announced by the government for all crops and for all farmers. Alternatively, they want deficit payment to cover the gap between the price announced by the government and the price realised by the farmers. Similarly, the demand for freedom from debt is not confined to Kisan Credit Card loans or loans from rural cooperative banks. The demand now also includes freedom from the debt trap of private moneylenders.  This basic shift is reflected in the changing leadership of the new farmers. At the middle rung, the leadership of farmers’ movement comprises leaders with rural roots and urban exposure. They are from farming families, but not always practicing farmers. They understand the pain of the farmers but also speak the language of policy makers. They lead struggles on the ground, but also use RTI and litigation as tools. This youth leadership is the backbone of the new farmers’ movements. Would this new generation of farmers’ movement be more effective than its predecessors? While the need for farmers’ struggle has become more acute than before, the conditions for their mobilisation are more difficult today. It would take an imaginative and uncompromising yet inclusive leadership. Herein lies the challenge for farmers’ movements.


2016: రెండేళ్ళ తెలంగాణా వ్యవసాయ రంగం: సవాళ్ళు పరిష్కారాలు

తెలంగాణా విద్య వంతుల వేదిక సెమినార్ లో సమర్పించిన వ్యాసం

160605 two years of telangana 2.0

సెమినార్ లో సమర్పించిన ఇతర వ్యాసాలు

TVV Final


In water-stressed Andhra, farmers sign pact to share ground water

 KumKum Dasgupta, Hindustan Times, Anantapur
Ram Chandru Reddy, a 67-year-old agriculturist, has been farming his three-acre plot at Kummaravandla Pally, a hamlet in Anantapur district, for as long as he can remember.
“Farming is in my blood. But I nearly gave it up couple of years ago because of water crisis,” says Reddy, who grows rice, groundnut and red gram. “But the crisis was averted because we decided to share groundwater”.
Anantapur is the second-most backward and drought-prone district in India. Over the past six months, 22 farmers have committed suicide in Anantapur.
Till 2010, the water shortage was manageable. “We did not have to dig deep; we used bullocks to draw water from wells to irrigate our lands,” recalled Venkat Ramana Reddy, a 50-year-old farmer.
Post 2000, the region’s semi-arid weather, deep hard rock aquifers, perversely incentivised power and monetary subsidies, and absence of any formal legislation or social regulation to govern extraction led to competitive borewell digging, all of which led to a rapid fall in groundwater levels. The water shortage led to tension between borewell and non-borewell owning farmers, even as cultivation of water-intensive crops continued.
Read: India’s groundwater crisis
India draws more groundwater each year than the US and China combined; with 89% of groundwater extracted used in the irrigation sector. With rain the most significant source of groundwater recharge, any change in the rainfall pattern influences the groundwater level.
India has a rough estimate of how much groundwater it has but there is no micro-level data and this hampers groundwater management at a localised level.
“The national aquifer mapping programme can help generate granular data for groundwater and make it available for public policy. The idea is to show groundwater is not an infinite resource that can be pumped out endlessly,” said Mala Subramaniam, CEO, Arghyam, a Bangalore-based non-profit. “Second, gram panchayats should be equipped with the basic understanding of hydrogeology and traditional knowledge to help them manage the groundwater efficiently”.
Instead of blaming the monsoon and fate, farmers at Kummaravandla Pally joined hands with the government and WASSAN, an NGO, to tackle the crisis in 2010. After a situational analysis, 25 farmers formed a collective – Kolagunti Ummadi Neeti Yajamanya Sangham — to “share groundwater with each other” to sustain their crops.
Watch | How farmers from Anantapur found a solution to the groundwater crisis

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This led to the concept of networking of borewells to secure rain-fed crops of all farmers, irrespective of borewell ownership. By linking all borewells with a network of pipelines and outlets, all farmers can now access groundwater. To ensure compliance, the farmers signed a MoU in the presence of district officials.
The agreement’s institutional norms include the following clauses: The committee would have farmers with and without borewells; a joint account would be opened in the names of these members; equal contribution towards share capital, irrespective of borewell ownership; annual contribution towards the maintenance fund, on per acre basis at Rs 100 per acre; one farmer would be elected for monitoring the schedule for water distribution/allocation and also collect contribution from each member.
Read: Six charts that explain India’s water crisis
There are non-institutional norms for sharing too. No new borewells should be dug for 10 years without the permission of committee; the irrigated area under borewells will not be increased but the critically-irrigated area can be ; in the critically irrigated areas, water should be given for sowing, flowering, pod development, and crop harvesting; crop budgeting exercise must before sowing ; the System of Rice Intensification, which uses less water, should be practiced for paddy cultivation; micro Irrigation system (drips and sprinklers) should be used to conserve water; and any repairs to the borewells during critical phase (June to November) will be borne form the maintenance fund. During the rest of the year, borewell maintenance will be done by the owners.
FINE PRINT: The Borewell Sharing Agreement
Farmers with or without borewells can join, if they contribute equally towards share capital
Members have joint accounts; annual contribution towards maintenance fund is Rs 100 per acre
One farmer elected to monitor water allocation and collect contribution
No new borewells for next 10 years, irrigated area to remain the same as 2009
Critically irrigated area can increase, but water provided for four key crop phases
Crop water budgeting exercise a must before sowing
If paddy is cultivated, the System of Rice Intensification (SRI) should be practiced
Micro irrigation system such as drips and sprinklers to be used to conserve water
The farmers got financial support from the government for pipeline network and regulators for connecting existing borewells, sprinklers and drips systems. For promoting diversity in agriculture, the National Food Security Mission and the agriculture department provided red gram and groundnut seeds were provided free.
Government schemes such as horticulture plantation in five acres of land; water and soil conservation works under the MGNREGS and NADEP compost pits for non-pesticide management are used by the farmers.
The agreement led to a new way of agriculture in the 72 acres of land of 25 farmers. Since 2010, the cropping pattern has changed, leading to diversity of crops, reduction in costs of cultivation; improvement in value of produce and profit.
According to a study by the Department of Rural Development and Social Work, Sri Krishna Devaraya University, Anantapur, the use of pipeline system instead of field channels has increased water use efficiency. Critical irrigation helped in preventing crop loss, and raised productivity of groundnut. Groundwater levels have been sustained since 2009 , while the area under agriculture and critical irrigation improved, shows data.
Thanks to the success of this borewell pooling, the Andhra Pradesh government is scaling it up across the state via the Indira Jalaprabha Scheme.
In Telangana, several villages in six districts — Mahbubnagar, Ranga Reddy , Warangal, Medak, Karimnagar and Adilabad — are piloting this participatory groundwater management programme.
The author tweets at @kumkumdasgupta

Telangana Cooperatives Act 2016

The Andhra Pradesh Mutually Aided Cooperative Societies Act, 1995 came in response to an understanding  in the state government, that the policy and legislative environment for investment sensitive, investor owned and controlled business was being increasingly opened, while usage-sensitive, user owned and controlled business continue to be very tightly controlled. In order for rural producers and others to engage with labour, financial, commodity markets effectively, it was understood that disadvantages communities needed a more liberal cooperative law.

However, the G.O.28 significantly takes away the spirit of autonomy available in the AP Mutually Aided Cooperative Societies Act, 1995. The G.O. assuming that cooperatives as “peoples” institutions – Cooperatives are not peoples’ organisations; they are their members’ institutions. The GO restores some of the key provisions to the department of cooperation (excluded in APMACS Act 1995) that have been used over decades to control cooperatives. These provisions include:

  1. The Government is competent authority to make provisions, from time to time, take necessary steps for making provisions with respect to the incorporation, regulation and winding up of co-operative societies based on the principle of voluntary formation, democratic member control, member economic participation and autonomous functioning as deemed necessary – which goes against the spirit of the right to form cooperatives. The bylaws of the cooperative could be compulsorily amended, again, even against the general body’s resolution to the contrary. Earlier this provision was almost always used to exempt the government or the registrar from fulfilling responsibility, such as the timely conduct of elections, audit.
  2. The powers given to the Registrar for registration and renewals which is against the spirit of the right to form cooperative. If Cooperatives are filing returns, it is the responsibility of registrar to verify and take measures at their level. Why do they go for renewal? The department as well as cooperatives would develop a vested interest.
  3. Admission of members and removal from membership and intimation to Registrar within 30 days: Government can make effort to ensure that the registrar would play its role in enable the cooperatives, and then regulate only where regulation was imperative. But keeping these types of provisions would undermine the functions and role of the management of cooperative societies.
  4. Size and term of the Board: The 1995 Act has sought, through this provision, to prevent to the extent possible, any vacuum in management, which has been experienced under the 1964 Act, to bring in the dreaded “Person-in-Charge” for the interregnum. By having less than half the directors retiring at any time, the 1995 Act has tried to ensure that there is always a quorum, and a democratically elected body is in position.
  5. Functional directors in the Board: Coopt persons as the functional directors to the Boards of cooperatives, and resolutions of the board could be annulled, if the nominated directors were uncomfortable with them. This means, all the cooperatives are in the hands of “professionals”. These people will have influence on decision making of the board without having membership responsibilities, ownership on the affairs of cooperative, accountability and liability of financial results of the cooperatives
  6. Conduct of elections: Based on experience, It is simply not possible for any third party to organize elections to all tiny and large cooperatives when their elections fall due.  It is also not possible for them to print ballot papers with specific symbols chosen by candidates of each cooperative – the result is that ballot papers are printed en mass; common election dates are fixed for similar type of cooperatives; the fixing of common dates requires the deliberate withholding of elections where those have become due, for ease of management by the external party; politicisation takes place as media and parties begin to get involved in the results of a large number of cooperatives going to elections on the same day. In fact, the cost of elections shoots up as centralized printing, security arrangements, TA/DA of officers, etc, are all to be borne by the cooperatives. Further, centralized elections reinforce the misconception that cooperatives are state agencies.
  7. It is responsibility of every cooperative society to conduct member education programs based on their activities, need and importance. What way TSCU is concerned about it. Who will bear the certification cost? Who is benefiting from this clause???
  8. All amendments to bye-laws require registration in this GO. The company law requires registration only to changes in the memorandum (which provides the ‘identify’ of a company). Amendments to articles only required filing of the amendment for record. This is why, in the 1995 Act, amendments to only key provisions were listed for registration- the rest were to be sent for taking on record only.
  9. Registrar’s role to fix the staffing pattern, qualifications, pay scales and other allowances to the employees of the society; this will undermine  functions & role of management. If registrar is involved, staff of cooperatives, feel more privileged in society than accountable to the cooperatives that they work with.
  10. Supersession of the Board and appoint the official Administrator(s) to manage the affairs of the society: Elections to cooperatives were not their own business – they are conducted by the registrar, under government fiat. Where other provisions had rendered the cooperative impotent in its business, provisions related to elections made the cooperative a potent political instrument in the hands of the party in governance, for accommodating party workers who could not be made legislators. Elections were withheld for years in most states, and often held under court directions.Elected boards could be superseded by the government/registrar on any  number of times either for serious or frivolous charges, based on ‘the opinion of the registrar’. In this case, restraining the board for not conducting elections on time as per their bye-laws is contradicting.
  11. Dissolution by Registrar: A  cooperative is a creature of its members, and, therefore, it provides for the members to choose not to continue their association with one another, to dissolve their cooperative.
  12. Settlement of disputes by registrar: If the registering authority is given the right to unilaterally dissolve a cooperative on any of these counts, as such right may lead to unhealthy practices.

In the 1995 Act, the approach was to ensure that the department would not develop a vested interest in cooperatives, even while it had some core corrective measures in its hands. The effort was to ensure that it would play the role of registration, and then regulate only where regulation was imperative, and that these functions would not be undermined by any management role.


  1. 160601 Letter to Commissioner for Co-operation & Registrar of Co-operative Societies, Govt. of Telangana
  2. 2016AGLC_MS28

Farmers Tax Exempt—So Is Company With Rs 215-Cr Profit


It’s reasonably well known that income from agriculture attracts no tax in India.

What isn’t quite as well known is that of more than 400,000 taxpayers claiming exemption for agricultural income in the assessment year 2014-15, the biggest were seed giant Kaveri Seeds—it claimed Rs 186.63 crore exemption and made a profit of Rs 215.36 crore before tax—and multinational Monsanto India, which claimed Rs 94.40 crore as exemption from agricultural income and earned Rs 138.74 crore profit before tax.

Agro-companies growing crops are allowed the same tax relief as individuals in states levying no agricultural income tax, although some states do indeed tax some kinds of farming.

“Allowing big farmers—individuals or companies farming more than say 30 acres—agricultural income-tax exemption makes no sense,” said R Durairaj, CEO and founder,Mother India Farms, an organic farm. Durairaj farms 200 acres of family land and supports agricultural-income-tax reform—although he does not pay any tax on his agricultural income.

On 39 million Indians, falls the country’s tax burden

The rural crises that beset India are unprecedented this century, but agriculture also hides a number of companies and rich farmers, whom no finance minister will tax–although with their numbers declining, as we shall see, these are reasonably easy to identify.

“Agricultural income is exempt from taxation in spite of large agricultural holdings,” said the 2014 Third Tax Administration Reform Commission (TARC) report. “…a large number of rich farmers, who earn more than salaried employees in the cities, get away with paying no tax at all in view of the government’s lack of will to consider an agricultural income tax.”

Taxing large agriculturists would help widen India’s taxpayer base—as the 2016 Economic Survey recommended—beyond the current 5.5%, or 39 million earning individuals, who pay tax.

The aversion to taxing agriculture is the fallout of a colonial experience when farmers were taxed, but it is not very widely know that some states do indeed tax some farms.

Why agriculture has–largely–not been taxed for 130 years

When India introduced income tax in 1886 under colonial rule, income tax on agriculture was kept out of its ambit because of existing land levies and the right to collect any form of agricultural income tax was vested with the main colonial administration.

In 1935, the right to land revenue, and to potential agricultural income tax, was transferred to the provinces, today’s states. Since then, each state has developed its own agricultural income- tax policy, with wide interstate disparities.

Consider these examples:

    • Uttar Pradesh introduced agricultural income tax in 1948, and repealed it in 1957, one of six states to flip flop thus in the first decade post Independence, “to move away from oppressive agricultural taxes under the British, one of the reasons for the freedom struggle”, said Indira Rajaraman, leading economist and RBI Chair Professor, National Institute of Public Finance and Policy, New Delhi.Or, because “the meagre prospect of revenue of the tax on income arising from cultivation of non-plantation crops and also the growing cost of collection compelled some states to abandon this tax in course of time”, writes Biswadeb Chatterjee in Tax Performance in Indian States: A Comparative Study.
  • Assam introduced agricultural income tax in 1939. But it levies the tax, up to 45% (the highest slab), only on tea-cultivation income.

“Leaving agricultural income taxation to individual states has resulted in plantations in Kerala being taxed at 50% while our competitors in neighbouring Tamil Nadu pay no tax,” said Thomas Jacob, managing director, Poabs Estates, a 6,000-acre coffee, tea, cardamom and pepper plantation.

“High taxes leave us with very little to reinvest in the land; consequently, plantations in Kerala, including our own, are loss-making,” said Jacob, who is also vice chairman of the Association of Planters of Kerala. “Talk about one India must translate into practical action; agricultural income tax should be totally abolished or be made uniform across India.”

How bigger farmers justify their agricultural-income-tax-free status

States should pass a resolution under Article 252 of the Constitution authorising the Centre to impose tax on agricultural income, and all such taxes collected by the Centre, net of collection costs, could be transferred to the states, said the 2014 tax administration reformreport.

Against a tax-free limit of Rs 5 lakh on agricultural income, farmers with incomes around Rs 50 lakh could be taxed, recommended the report.

That’s easier said than done, of course.

Large farmers and agro-corporations with tax-free agricultural income wield significant clout over the government and they will lobby against it.



Khushwant Singh, 43, writer and novelist, farms 12.14 acres in Punjab, a state where the average farmer holds 3.77 acres of land. There are 367 others like him in Punjab with holdings above 4 hectares, classified as medium farmers, or above 10 hectares, classified as large farmers, potential taxation targets, some economists argue.

Here’s how some big farmers and farm companies justified their stance against agricultural income tax to IndiaSpend.

“With yields across India having stagnated and most farmers lacking bargaining power to sell their produce, agriculture doesn’t leave much on the table for farmers. Significant economies of scale don’t kick in from farming large tracts of land because the cost of key inputs–seeds, fertiliser and water–rises almost proportionately,” said Sandeep Saxena, managing director,Big India Farms, a farming and food-chain supply company.

“Other business activity isn’t curtailed, whereas the land ceiling act restricts the land holding per family. Treat agriculture like any other business, hike the land ceiling per family to 100 acres at least; then consider taxing agricultural income,” said Khushwant Singh, a writer and novelist who farms 30 acres.

In Punjab, the law permits a family to hold 17.50 acres of irrigated land; and up to 32 acres of barren land without irrigation.

A 17.50-acre farm is not enough to support a family nor does it justify mechanisation, said Singh. A tractor becomes cost effective only at double that size.

Singh, his father and his brother collectively farm 60 acres and own two tractors between them. To augment family income, Singh senior has started a dhaba and Singh’s brother runs a resort, Citrus County.

Land prices have appreciated so significantly in rural India that the temptation to cash in is immense.

“We earn 0.1% of the value of our land; what businessman would stick on with those terms? Clearly, the math is against agriculture as a profession,” said Singh. “We’ll stick it out, but our next generation will definitely not live on the farm.”

Fewer big farmers should make agricultural income tax easier to administer

Conventionally, taxes are based on self-declared income.

“Self-declaration has been shown to work in plantation agriculture, which is closest to manufacturing in terms of scale of operation, year-round operation, formal records of accounts and links to the banking system,” said Rajaraman, the economist.

Assessing taxable agricultural income on the basis of declared figures would be arbitrary, and in all likelihood, lead to endless appeals.

“How could the revenue officer make objective assessments of income or challenge the declared income when it depends on so many variables and no criteria exist to define those variables? Rainfall, the sun, soils pests and diseases, irrigation, etc. are some of the influencing factors,” said Sudhir Prakash, chairman, DLX Ltd, owner of Glenburn Tea Estate, Darjeeling, West Bengal, and an associated tea estate in Assam.

West Bengal does not tax agriculture produce or plantations, whereas such tax in Assam is more or less at par with central income-tax rates, 45% as we said.

Source: Agriculture Census 2010-11


The silver lining could be the dwindling number of medium and large farmers, defined as holdings exceeding 4 hectares and 10 hectares (24.7 acres) respectively, as per the 2011 agricultural census, as well as the acreage held by medium and large farmers. Today, India has roughly two-thirds of the number of medium farmers it had in 1971, and about a third of the number of large farmers.


The big earners would be easy to target, tax and draw into the banking system. Medium and large farmers make up 10% or more of the farming community only in four states: Punjab (35%), Rajasthan (22%), Gujarat (12%) and Madhya Pradesh (10%), according to the 2011 agricultural census.


Agricultural income declared by taxpayers, in returns filed up to November 28, 2014, for exemption in the 2014-15 assessment year, stood at Rs 9,338 crore.


Source: Agriculture Census 2010-11


“Currently, transactions in the farming sector (except plantations) are mainly in cash,” said Prakash. “To track transactions, you need them to be routed through the banking infrastructure, and to transact through banks, you need ‘literate farmers.’”


How panchayats could tax agricultural income


If farmers do not use the banking system and maintain accounts, could rich farmers be taxed on the basis of what they have assumed to have earned?


Farmers could be taxed based on the area sown with high-return crops, proposed Rajaraman in a 2004 paper Taxing Agriculture in a Developing Country: A Possible Approach. High-return crop cultivators whose yield falls below a stipulated threshold would be exempted for the sake of fairness.


She suggested, in her 2003 book, A Fiscal Domain for Panchayats, that such tax be collected by village councils.


“Property tax is paid locally, why not tax on agricultural income?” said Rajaraman. “Agriculture thrives only when law and order prevails, and the panchayat governs locally. Farming makes use of local utilities, so it should give back locally.”


That would make local governance more responsive than it might by receiving handouts from Delhi, as the recent budget provided for with Rs 2.78 lakh crore ($41.34 billion) in grants topanchayats (rural councils) and urban local bodies, or above Rs 80 lakh per panchayat.


“A panchayat that benefits from tax collection is more likely to ensure compliance,” said Rajaraman, “than a distant state government.”


(Bahri is a freelance writer and editor based in Mount Abu, Rajasthan.)


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