Growing Indian Agriculture by Leaving Farmers Alone

The Economic Times of India published an article titled “Need policies to ensure farmers get better prices: Arvind Panagariya” last week. Though the article itself is relatively short, it fits into a broader policy debate that is being held in the Indian government. Namely, there has been a lot of discussion recently about whether to tax rural farmers, and if so, how much. The Indian central government does not have the constitutional authority to levy taxes on agriculture, so the debate is focused on a state by state basis, where taxing agriculture is allowed.

The Context

The National Institution for Transforming India (NITI Aayog), the leading think-tank in India, and India’s prime minister, Narendra Modi, have stated a goal of doubling agriculture income in India by 2022. Supporting technology adoption and ensuring competitive prices domestically and internationally are the main intended methods to achieve this growth. While India’s economy has developed significantly in recent years, its poorest citizens are still largely living in an undeveloped economy. According to Arvind Panagariya, “80% of the poor… in rural areas are dependent on farming.” In addition, it appears that most farmers in India rely on agriculture for subsistence.

NITI Aayog leaders and the prime minister have been asked about taxation of agriculture income in India. Almost unanimously, policy leaders have stated that there is not even a question of taxing agriculture income. However, most reports do not give a complete picture to the phrasing of “no question” when it comes to taxing farmers. Do they mean that it is obvious a provision will be included to tax farmers in the future, or that it is obviously a bad idea to tax subsistence farmers and the rural poor.

In a separate report, the Chief Economic Advisor, Arvind Subramanian, suggested that taxation of agriculture income is possible. He added, policymakers must make a distinction between rich and poor farmers.

The Model

Luckily, there are clear models that address production and wealth gains over time. Depending on the structure of the tax, a farmer would consider it as a fixed cost or a variable cost in their production function. In a developing economy, we must also realize that any money a farmer has to pay to the government cannot be used to re-invest in their farm, either as better inputs or durable goods. When analyzing this issue, it is important to make the same distinction that Mr. Subramanian did. Wealthier farmers, or those who have commercialized and see yearly profits, have much more flexibility to be taxed.

Unless state governments face strains, taxing all farmers would make the poorest and subsistence farmers much worse off, since their year on year gains in wealth and potential reinvestment would be undercut. In general, taxing farmers as their income increases from subsistence to commercial would reduce productivity and would be counterproductive to alleviating poverty.

On the most basic level, taxing subsistence farming would push the poorest farmers into a worse position, and would not encourage adoption of new inputs and technologies. In order to commercialize and take advantage of the government’s push to raise prices for agriculture products, poor farmers need access to new technology. We discussed the incentives farmers face when adopting new technologies; they must be educated and the benefits must outweigh the costs.

These policymakers are correct in their belief that taxing agriculture should be out of the question. By taxing agriculture, subsistence and poor farmers face a greater cost or diminished benefit to their yearly yields. In the face of uncertainty, they will be less likely to experiment with new technologies and will not have the resources to try new crops and inputs. The agricultural technology adoption model shows farmers each running experiments over time is the best way to increase their output. By limiting the resources for experimentation, agricultural growth will be significantly slowed, and this effect will compound over time.

Another factor of the agricultural technology adoption model at play in this decision is “information neighbors”. The policymakers aim to increase the prices of crops. In order for their ultimate goal to be achieved, doubling rural income by 2022, the first phase must be giving farmers the means to adopt new technologies. However, the real gains in production are compounded over time as farmers experiment and communicate with their neighbors.

Conclusion

If India’s policymakers are serious about increasing agriculture productivity and income, then taxation is absolutely “no question”. In a country like the United States, where industrial agriculture is the norm, taxation is possible because of the surplus that farmers face. However, in India’s case most farmers need to be nudged into commercialized agriculture and educated about the new technologies available. In order to achieve this, the whole system should be tailored toward the goal. Also, based on NITI Aayog’s statistics, increasing rural income can benefit a huge portion of the impoverished population in India as well. Based on these facts, Indian policymakers have made the right decision for ensuring growth of agriculture output.

 

 

Sources Cited:

http://economictimes.indiatimes.com/news/economy/policy/need-policies-to-ensure-farmers-get-better-prices-arvind-panagariya/articleshow/58432724.cms

http://economictimes.indiatimes.com/news/politics-and-nation/bjp-to-promote-pm-narendra-modi-govts-pro-farmer-policies/articleshow/57918815.cms

http://economictimes.indiatimes.com/news/economy/policy/no-question-of-taxing-agriculture-income-arvind-panagariya/articleshow/58424238.cms

Image:

http://www.newsgram.com/what-indian-agricultural-sector-needs-to-learn-from-denmark/

 

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4 thoughts on “Growing Indian Agriculture by Leaving Farmers Alone”

  1. The article does a good explanation of the issue of whether to tax rural farmers or not. Throughout the article, the author first presented the current situation of the rural farmers in India, which is that some farmers are rich while others are poor, and implementing tax regardless of situations can be damaging. The author then presented the model that shows the result if the tax is implemented, as well as possible methods that could both increase tax while not hurting the benefits of the poorer farmers.

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  2. This article is pretty interesting regarding the issue of whether to tax farmers in India. I do not think that these farmers should be taxed, since they provide food for people in hard to reach areas where it is underdeveloped. I feel that the large company farms should be taxed though, since they have the revenue to offset costs. Also, in the United States, the cost of farming is also offset by the government with the granting of several subsidies, but that is probably not the case in India. They also do not have access to the farming technology that Americans have nor do they have the fertilizers or tools to make their crops grow efficiently.

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  3. Since much of the industry in India is agricultural, it is easy to see taxation from the perspective of policymakers. People farming commercially, earning profits, should absolutely be taxed on what they earn. However, the government might also want to think about subsidizing large scale farming systems, so that they can provide cheap crops for citizens who may otherwise be subsistence farming. My reasoning is that ultimately, India may want to shift the structure of its economy from agrarian to one based on providing goods or services. Subsidized farming may then act as a kind of social safety net so that people in poorer villages can contribute their labor to other ventures. Perhaps, if the goal is to get citizens to work within the broader society and not just farm for themselves, a tax on even small farms will be an incentive to pursue other means of survival. Of course, this wouldn’t work without widespread welfare measures.

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