Is ABIC scheme better than IS scheme

We now understand that NITI Aayog is actively considering an Area Based Income Compensation (ABIC) Scheme which we believe is somehow similar to price differential scheme (PDS) and though costs much less than the income support (IS) scheme, it will serve the desired purpose that an income support scheme might do. The only difference that ABIC scheme has with PDS is that in the case of former, the scheme is willing to compensate any price gap as opposed to PDS where the compensation is capped to certain extent.

The Union Budget 2018-19 has proposed a pre-determined principle of offering to farmers a threshold MSP of at least 1.5 times the cost of production for both the Rabi and Kharif crops. However, the monthly mandi prices in 2018-19 indicate that the market prices of all Rabi crops are ruling below the MSP in major producing States. For example: wheat prices ruling below MSP in UP, Rajasthan and MP, gram prices below MSP in all major producing States like MP, Maharashtra and Chhattisgarh etc. This trend shows that a high MSP is not only a policy instrument to sustain higher production and income but it should also be backed up by an effective procurement mechanism to arrest the falling prices.

Despite the Budget announcement to implement price differential scheme, till now no improvement has happened. Our estimate suggests that if an ABIC scheme akin to Price Differential Scheme (PDS) is implemented for Rabi crops, i.e, Wheat, Barley, Gram & Lentil only, the cost could be around Rs 17,000 crore (~Rs 1600/acre) whereas if income support is provided for same crops, then the cost could be Rs 41,969 crore (total area under Wheat, Barley, Gram & Lentil is 42.46 ml hectare) which is significantly higher than the differential scheme.

However, the ABIC scheme has many disadvantages. For example, the scheme could potentially cover only 1crore farmers (against an universe of 15 crores) that is too little. Also, there are some additional costs such as transportation cost, storage cost, information gap that are not covered in ABIC scheme. Also, delay in timely payment, quality checking and window for selling the crops under the scheme is limited to two to three months etc that are too restrictive. The only advantage is that ABIC scheme will not alter the market mechanism and the cost is much lesser in comparison to income support scheme.

Similarly under Income support scheme, some major challenges are like identifying the proper beneficiary, exclusion of tenant farmers, 100% digitalisation of land records which is still undone in some States etc. Apart from this, if the scheme is implemented based on per acre per year, then idle and uncultivated land owner will also get away with the benefit. In certain cases, it may discourage some farmers to produce as even if he doesn’t produce he can still get the cash benefit.

But the most positive aspect of this scheme is, it will have no leakage under DBT transfer and have multiplier effect on the economy. Hence we actively recommend an immediate roll out of an income support scheme based on a per farmer basis. The Government could decide the quantum of income support per farmer (@Rs 4000 per farmer for all farmers is Rs 60000 crore, if for small and marginal farmers, the cost could decline to Rs 50,000 crore).

(Dr Soumya Kanti Ghosh is Group Chief Economic Adviser, State Bank of India)