Farm Laws and ‘Taxation’ of Farmers

Newspaper Rainbow Series 16th February 2021 Save

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Context: To show Indian agriculture as being net taxed to argue for the farm laws has poor conceptual validity.

Production Support Estimate: as advocated by OECD

What it is? à The OECD defines the PSE as “the annual monetary value of gross transfers from consumers and taxpayers to agricultural producers, measured at the farm gate level, arising from policies that support agriculture...”
Components:
Market Price Support (MPS): gap between domestic and international prices
Budgetary Transfers (BOT): all budgetary expenditure supporting agriculture production.

Idea of ‘net taxation’ on Indian Agriculture: It has been argued that liberalisation of Indian market is essential since farmers are actually taxed (instead of subsidised).

Keeping the prices artificially low: through -
- The protectionist policies have deprived the farmers of higher international prices,
- The administered price system deprived farmers of higher domestic market prices.
Low Producer Support Estimate (PSE): was -6% between 2014-15 and 2016-17 for India
- +18.2% in the Organisation for Economic Co-operation and Development (OECD) countries
- +19.6% in the European Union countries and +9.5% in the US.
Pushes for the new farm laws: The farm laws would weaken restrictive trade and marketing policies in India and “get the markets right”. (In turn, would eliminate negative support and raise farmers’ prices)
- E.g. milk sector has performed well despite the competition from international giants like Nestle, despite the absence of any sort of Minimum Support Price (MSP).

Arguments that debunk the existence of “net taxation” in Indian Agriculture

Negative PSE is not due to actual subsidisation: PSE is negative due to negative MPS and not BOT (budgetary support); A negative MPS may arise due to the following factors:
- - Domestic food security concerns: Thus domestic price remains low. E.g. Rice and wheat.
  - Short-term fluctuations in international prices: since international agricultural markets are infamously imperfect, narrow and dominated by monopolistic multinational companies
  - Small international market: for most agricultural commodities for a large producer like India. (e.g. if India increases exports, the international prices would crash)
- MPS is a wrong measure of taxation in agriculture: Because the international price is no “true price” to be accepted as a benchmark.For E.g. Milk sector also has negative MPS:
  - MPS for milk was Rs -2,17,527 crore, accounted for about 47% of the total MPS in agriculture.
  - This drop in MPS is because of lower domestic prices: which means the average international reference price for milk rose faster than domestic price.

Conclusion: Thus, the arguments of the existence of “net taxation” in Indian Agriculture are flawed, and a positive PSE can be achieved by increasing BOT as the western countries do.