The Big Bang Lobbys Invitation

In the article `The Big Bang lobby vs the strategists (May 8), Prof Y K Alagh has raised basically three points: one, that Indian agriculture has not been taxed through planning and controls and therefore Big Bang liberalisers need to scratch their heads and ponder over their arguments in favour of taxation of agriculture; two, that agro-exports from India are not likely to succeed because the developed world continues to impose tariff and non-tariff barriers; and three, that he has been advising many a country on the strategy of trade liberalisation, perhaps implying that India too should follow his advice.

 

On taxation, he says: The Big Bang argument ... follows the World Bank sponsored study by Pursell & Gulati. This study argued that on account of Indian planning and controls, agriculture is taxed, and if such controls are removed and trade options introduced, the Indian farmer will earn considerable additional income. Since I am one of the authors of this study Liberalizing Indian Agriculture: An Agenda for Reform published in `India - the Future of Economic Reforms edited by Robert Cassen & Vijay Joshi (OUP, 1995), I would like to spell out the main issue in the study for a more informed debate.

The study mentions that Indian trade policies had an anti-agriculture bias during the 70s and 80s. The net result was that the manufacturing sector was highly protected and agriculture disprotected. In a standard trade theory framework and two-sector model, this amounts to relative discrimination or implicit taxation of agriculture. The magnitude of this implicit taxation has been large, and a larger share of this comes from protection for the manufacturing sector. Thus, the study favours a faster reduction in the tariff walls of the manufacturing sector as also removing almost all controls on trade of farm products. This would turn the terms of trade significantly in favour of agriculture thereby raising real incomes. Prof Alagh disagrees and questions the empirical basis of the study.

Space does not permit me to present the empirical findings of a study that took more than three years. I would, however, submit the views of at least one well known economist. Manmohan Singh, the former finance minister, in his inaugural address to the Indian Society of Agricultural Economics on November 26, 1994, said: We have to recognise that high protection for industry constituted a heavy implicit taxation of agriculture, leading to reduced resource generation in agriculture and the increasing diversion of the available surplus for industrial development. Isnt it similar to what the study says? Prof Alagh may say this is irrelevant to him, but I see it as a support to our empirical findings and policy prescriptions. On the issue of disprotection of agriculture, let us see what India submitted to the Gatt secretariat during the Uruguay Round. The aggregate measure of support (AMS) for agriculture, after taking into account the positive non-product specific subsidies, was -22 per cent of the value of farm produce (1986-88). The updating of AMS for the 1990s shows only a marginal decline. Notwithstanding the various quirks that this estimation requires, G S Bhalla and Gurmail Singh also estimate this AMS for Punjab to be more than -30 per cent (1981-82 to 1992-93). The figures churned out by the farmer leader, Sharad Joshi, are even higher.

Let me submit to Prof Alagh the thinking and understanding of the ex-prime minister, Mr Deve Gowda, in whose cabinet he was a minister. To the best of my knowledge, Karnataka was the first state to bring out an agricultural policy resolution in July 1995 under the chief ministership of Mr Deve Gowda. The opening para says: Indian policy framework, since independence, grossly discriminated against agriculture and the farming community. The seeds of discrimination were sown in the early developmental process .... High protection accorded to industry, past the stage of infancy, is a subtle but powerful instrument of discrimination against agriculture. Extent of favour done to industrial sector vis-a-vis agriculture, through trade policy alone, amounted to more than 50 per cent. Further, large scale imports of grains under PL 480 during 1950s and 1960s, creation of food zones, restrictions on the free movement of agricultural commodities ..., imposition of compulsory levies, and restrictive exports resulted in depressed agricultural prices. This document has been discussed threadbare in the Karnataka State Planning Board, chaired by Mr Deve Gowda, and which also has economists like D M Nanjundappa and G Thimmiah. Is it not a support to the theory, empirics, and policy prescriptions of the study?

The common minimum programme (CMP) too says that: All controls and regulations that are in the way of increasing the incomes of farmers will be reviewed immediately and abolished wherever found unnecessary. Controls on the movement of agricultural products and on the processing of agricultural products will be taken to ensure that farmers receive fair and remunerative prices for their produce. May I ask Prof Alagh, what the UF government is doing in Punjab to procure wheat? Is it in line with the agricultural policy indicated in the CMP? Is it not a form of implicit taxation on the peasantry? In addition, wheat is being imported for distribution through a largely untargetted PDS. Does this not amount to dumping?

However, the study had also pointed out that while grains were taxed, edible oils were protected. But Prof Alagh does not agree with this. He cites some numbers from Acharyas paper to support his point that the domestic cost of production of major edible oils is not higher than the landed cost. The numbers are for the years 1993-94 and 1994-95. My simple query is: Why is it that we needed 65 per cent import duty on edible oils in 1993-94? If pulses can be imported at 5 per cent import duty, cotton and sugar at zero, and wheat imports subsidised, then why not bring edible oil at zero import duty? Since domestic costs are lower, as per Prof Alaghs understanding, nothing of significance would be imported. But I beg to differ on this. My impression is that at zero duty, edible oil imports would go up from 114,000 tonnes in 1993-94 (when duty was 65 per cent) to more than 2 million tonnes when duty is slashed to zero. Already, at 20 per cent duty, imports have touched 1.2 m.t. Is it not a proof of our empirical

findings and its policy implications?

Regarding his advice that the Big Bang liberalisers should think in favour of taxing agriculture, we have no hesitation in that. The study clearly argued for removing agricultures exemption from income tax (pg 296). Our only concern is that one cant have implicit taxation through trade policies and then explicit taxation through income tax.

As regards other points: that Indian agro-exports dont have a chance to succeed because of tariff and non-tariff barriers by the West. If that is so, by implication nothing would happen even if all export controls on agro-products go. As a strategist, he would, therefore, support eliminating all export controls on agro-products. That is what the `Big Bang lobby is also suggesting. I dont see any contradiction. However, perceptions differ in terms of likely results. We do feel that India would start capturing markets in the Gulf, East Europe, East and South-east Asian economies and South Africa, if not in the US or West Europe. This can give a fillip to agro-exports, and incentives to farmers, so long as the policy is not based on the concept of exporting only residual quantities.

On the third issue, I do not have much to say. I am a professional researcher and try to analyse issues to the best of my capacity. What I lobby for is early action, as India is losing time in quibbles while others are marching ahead. If this is why Prof Alagh has branded me representing a Big Bang lobby, I welcome it and urge upon him to join us for the good of this country!

(The author is chief economist, NCAER)