How else to finance farm loan waivers

Helping distressed farmers is a political imperative that resonates across the political spectrum. This is especially true in Karnataka which has now declared a drought for the third consecutive year. Given this backdrop, the H D Kumaraswamy government decided that waiving loans was going to be its preferred policy option to address the immediate agricultural distress.

The waiver is estimated to cost Rs 34,000 crore to the state exchequer. The total government expenditure Budget for 2018-19 is Rs 2,01,535 crore. This means that the loan waiver single-handedly accounts for nearly one-seventh of the Budget size. The question that needs to be answered now is: how will the government finance an exercise of this scale?

The government appears to have decided that it will mobilise additional revenue sources by way of increased taxation. The taxes on petrol and diesel were increased by 2% each. Excise Duty on Indian Made Foreign Liquor (IMFL) was hiked by 4%. Taxes on electricity were also raised from 6% to 9%. The motor vehicles tax on private service vehicles was also increased by 50%. This volley of increased taxation will have inflationary effects all across the board and will pinch every resident of the state.

There is another way that the Karnataka government can raise additional revenues without resorting to extractive taxation or a distress asset sale. This option is to use the ongoing crisis as an opportunity for structural reforms. After all, how far will the government continue raising taxes on goods already weighed down by high taxes? A brief analysis of Karnataka’s Budget suggests that there is room for the government to raise additional revenues.

Options to explore

Here is a list of some of these opportunities. Reforming the electricity sector by making consumers pay the actual cost of power is the first such avenue. Power subsidies currently amount to a whopping Rs 9,250 crore per year. Every year, the ESCOMs in Karnataka, reeling under debt, ask for a revision of the tariffs and every year the KERC (Karnataka Electricity Regulatory Commission) settles for a hike revision that is just marginal.

This cycle has led to unreliable power supply from the ESCOMs on the one hand and poor electricity generation infrastructure on the other. A reduction in this subsidy over time — starting with the more privileged sections first — can provide some wiggle room for the government. The money raised from such a tariff hike will be a recurring revenue source for the government.

Two, the government should charge a fee for scarce resources such as curbside parking spaces in city centres. Failing to charge for using a public resource — public roads in this case — is in effect a net transfer of resources to the wealthiest sections of the society.

Our conservative estimate showed that the government is losing out on revenues in the order of Rs 1,000 crore per year in Bengaluru alone as a result of free parking. By collecting parking fees in other major cities of the state, the government can earn an additional Rs 500 crore per year. This will be a recurring revenue source which will keep giving higher year-on-year returns.

Three, the Karnataka government can consider divestment from PSUs. While companies run by the Union government have come under the scanner, what barely gets noticed are the PSUs run by state governments. The Karnataka government alone runs a total of 93 PSUs. According to a 2017 Comptroller & Auditor General (CAG) report, at least 12 of these PSUs are in a non-working state. The government must speed up the divestment of such firms. This move will generate one-time revenues for the government.

Four, the government can consider lifting the ban on lottery schemes to raise revenues. States such as Kerala, Punjab and Sikkim have already done this. To ensure that this translates into public revenue generation, the government can allot a fixed number of lottery licences with a predefined reserve price. The government can then enter into a revenue-sharing agreement with these licensees. This method will again generate recurring revenues for the government over successive years.

Finally, better land use and improving property tax collections are some other areas the government can think of. In general, pricing scarce resources will help them allocate efficiently while generating revenues for the government in a sustainable manner.

To plan for subsequent droughts the government can consider parking the money raised from the avenues mentioned above into a CM’s Agricultural Relief Fund. This fund can then act as a special purpose vehicle that buys out loans of small and marginal farmers in cases of future droughts.

A loan waiver alone will not solve farmer distress in Karnataka. But if this loan waiver is used as an opportunity to push structural reforms, this can at least become a stepping stone for improving the lives of the people of Karnataka.

(The writer is a Fellow at the Takshashila Institution, a Bengaluru-based think tank)