Tax burden on food

Desperate situations call for desperate remedies. Waging a virtually unsuccessful battle against raging food inflation, the Government appears to have given up hope on the food prices front. The food market has consistently beaten all the brave forecasts of experts and specialists within the policymaking circle and outside. The many fiscal, monetary, trade policy and administrative measures of the last two years have delivered hardly any genuine relief to the aam aadmi . A deeply concerned Prime Minister has now stepped in to make out a case for a paradigm shift in institutional arrangements. Additionally, he has urged State governments to waive local levies such as mandi tax, octroi duty and the like.

Without doubt, there is merit in what Dr Singh recommends, although these suggestions are not really new. It is simply that for New Delhi agricultural market reforms at the grassroots level were never a priority. In most States agricultural commodities are taxed at the local level and often these multiple taxes add up to a significant amount. For example, cumulative taxes on wheat in Punjab and Haryana are over 10 per cent. Cities routinely levy octroi duty even on essential goods of mass consumption. States charge an agricultural produce market cess, not only on domestic produce, but also on imported ones. However, most States fail to offer any services commensurate with the fee collected; nor are adequate funds ploughed back into the market for improving infrastructure. Given that agriculture and agri-marketing are State subjects, New Delhi can only strongly recommend, not mandate, a waiver of local taxes. It is for the State governments to take a call. But who will compensate the State governments for revenue foregone? The latter, in their self-interest, must take the initiative to reduce substantially, if not eliminate, any kind of tax on essential food articles. Ideally, to avoid market distortions, it is essential that there is uniformity across the States. This is a tall order.

The Prime Minister's statement calling for a paradigm shift in institutional arrangements, including the need to shore up farm supply chains by bringing in organised retail players, has come as a big boost to proponents of large-format organised retail. Admittedly, there is scope for reform in the system of agricultural marketing; but it would be naïve to believe that promoting organised retail by itself will bring about much-needed change in produce marketing. Organised retail is a business opportunity but the potential for value capture is limited at the front end. At the farthest end of the supply chain is the poor farmer who runs the risk of being squeezed by the big boys. Affirmative action is the way forward. Even as organised retail expands, policymakers must work towards building capacity among small and marginal growers to withstand market vagaries.