india

Updated: Dec 20, 2018 08:16 IST

The Narendra Modi government has launched an interministerial review of the state of the rural economy to pin down reasons behind crops selling below their minimum support prices (MSP) and to find ways to raise rural wages to offset a challenging spell of farm distress — believed to be a key reason for its defeat in recent assembly elections in Rajasthan, Chhattisgarh, and Madhya Pradesh, where incumbent BJP governments were voted out.

The government will also propose lowering the goods and services tax (GST) on a majority of items currently in the highest slab of 28% to 18%, as announced by the Prime Minister on Tuesday, to boost consumer sentiment ahead of general elections.

A meeting of the GST Council, which collectively decides the rates, is slated for Saturday.

The farm-, rural- and consumer-friendly measures are part of the National Democratic Alliance’s efforts to regain lost ground with voters who swept it to power with a majority not seen in 30 years, in 2014.

In the week since the results of assembly elections to the three Hindi heartland states came out, the government has been busy.

The rural development ministry has already written to the finance ministry seeking revision in rural wages under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), a government official said, asking not to be identified.

Agriculture ministry officials, led by its secretary, along with representatives from the banking sector, cooperatives and government agencies responsible for buying farm produce, are expected to explain to the Prime Minister’s Office why MSPs , which were raised 1.5 times by the government, are not helping, a second government official said. MSPs are meant to serve as a floor price for private trade in food items, thereby helping to avoid distress sales by farmers.

There is no “formal proposal” for a national farm loan waiver yet, the second official said, adding the government did not want to rush into any hasty decision. “The brief is to pinpoint the problems first… exact nature of problems faced by farmers and only then the course of action,” the official added, asking not to be identified.

Lowering of GST rates, meanwhile, is likely to crank up economic activity and yield political dividends too, said Pratik Jain, leader, indirect tax, at PwC India.

Currently, there are four different GST slabs: 5%, 12%, 18%, and 28%. There are about three dozen widely traded articles in the 28% slab, including tyres, digital cameras, air conditioners, dish washers, set-top boxes, monitors and projectors. The prices of at least some of those can be expected to come down.

“It is a good move at a time when the revenue collection [of GST] has stabilised. Typically, by lowering indirect tax rates, you can spur demand, which can address concerns of revenue loss due to the rate cuts,” PwC’s Jain added.

Stagnating rural wages are a major reason for the rural crisis. In January 2018, wage growth slowed to a three-year low of 3.09%. In March, rural wage growth (men) for both farm and non-farm labour was 3.53%. But since rural consumer inflation was higher at 4.4%, this meant real wages (income minus inflation) were negative. Overall, rural wages are growing at their slowest pace in a decade.

A technical reason has prevented proper wage hikes under the MGNREGA, the rural development ministry has argued. MGNREGA wages, which are linked to inflation, influence overall rural wages.

Wages under the MGNREGA are still indexed to the “consumer prices index (CPI) agricultural”, an outdated category which was replaced with “CPI rural” after India overhauled its entire retail inflation norms with 2011-12 as the base year in 2014.

Food items have a far higher weight in the old category, and since food prices are currently low, rural wage revisions have also been low. Moving from “CPI agricultural” to “CPI rural” would allow for upward correction in rural wages, the ministry has argued.

That’s likely to happen now.

The Modi government may also ask more BJP-ruled states to waive rural electricity bills on the lines of Gujarat. According to a third government official who spoke on the condition of anonymity, the Centre may extend this waiver nationally. On an average, a state would not require more than Rs 500-600 crore to implement the scheme. “The money can be transferred directly to the bank accounts of the eligible beneficiaries,” the official said.

The National Rural Livelihood Mission is also set to get more than 50% additional fund during the forthcoming vote on account budged. NRLM forms the backbone of financial support to boost non-farm rural incomes .

The lowering of GST rates has been made possible by healthy receipts. The average monthly GST collection in 2017-18 was Rs 89,885 crore, which rose to Rs 97,040 crore in the current financial year, giving a headroom to absorb the revenue losses due to a proposed lowering of GST rates. In general, a lowering of rates is usually offset by higher volumes