Extending fiscal support to agriculture, SMEs

The agriculture sector should get special priority in the national budget for FY21. The economic adversity caused by Covid-19 has reemphasized the importance of food security through food production, and also the need for increased public food stockholding. FY21 will be a crucial period from the perspective of ensuring food security both in the Covid and post- Covid periods. The agriculture sector would be one of the vital sectors for providing a cushion for the 'new poor' emerging from the Covid-19 pandemic. A vibrant agriculture sector will also support the cause of creating additional employment opportunities for people who are likely to lose jobs and livelihood opportunities in urban and peri-urban informal sectors and for migrant workers who have been forced to return home.

Keeping in view the four strategies set by the government for implementing national budgets over the next three years, following steps should inform the design of FY21 budget.

a) Budget allocation for agriculture sector has been declining over the years - from 4.48 per cent of total budget in FY16 to 2.69 per cent in FY20. Given the demand for additional funds, particularly for implementing important priority projects associated with providing food security and creating employment opportunities, the allocation for the agriculture sector needs to be raised at least 3.0 per cent of total budget in FY21.

b) The additional budget should be used to fast-track some of the ongoing projects in the agriculture sector with a view to completing those in FY21. These include among others:

 -construction of new food warehouses with a capacity of 1.05 lakh tonnes;

-repairing old food warehouses;

-production of lentil and oilseeds for strengthening food security;

 -production and distribution of certified seeds to farmers and provision of relevant training;

-strengthening flower supply chain by developing market infrastructure, storage and transport facilities;

-livestock and dairy development;

-breed upgrading of livestock through progeny test;

-beef fattening through modern technologies;

-extension of technology support at union levels for fish production;

-establishment of brood bank;

-renovation of water bodies for enhancing fish production, and

 -enhancing production of Black Bengal goat and others.

c) Agriculture sector needs to ensure proper utilisation of subsidy during FY21.

Despite an allocation of Tk 90.0 billion over the last three years, a significant part of the allocated amount remained unutilised. For example, Tk 25.70 billion, Tk. 53.90 billion and Tk 38.0 billion remained unutilised in FY16, FY17 and FY18 respectively.

Similarly, allocation for food subsidy needs to be increased from Tk.

35.70 billion in FY20 in order accommodate the additional expenditure for food support required to cover the additional households planned for coverage under the SSNPs. Listing of targeted beneficiaries and distribution of food to them should be transparent and free from political influence and interference.

d) Government needs to allocate about Tk63.73 billion in the FY21 for the procurement of rice, paddy and wheat during Boro season. Besides, more funds will be needed for procurement during the following Aus season. Hence, necessary financial resources should be earmarked in the national budget for FY21 taking into consideration the overriding needs of maintaining food security both during the pandemic period and afterwards.

It is to be noted that the government has decided to procure 0.8 million tonnes of paddy (at Tk 26 per kg) and 1.15 million tonnes of rice (at Tk 36 per kg) and 75 thousand tonnes of wheat (at Tk 28 per kg) for FY21.

e) Given the limited success in procurement of paddy in earlier years (less than 10 per cent of the targeted amount of paddy had been procured), the government should give priority to procurement of paddy as it directly benefits the farmers. Farmers' list which is prepared for procurement of rice should be publicly disclosed and procurement should be done in open places such as in local haats and bazars.

f) The stimulus package for the agriculture sector and agro-based industries (Tk. 50.0 billion credit line at the subsidised interest rate of 4.0 per cent) should give priority to those farmers who were most-affected such as vegetable farmers, poultry, chicken and egg producing SMEs. Local level agriculture and livestock offices should send a list of affected farmers to their concerned Ministries for necessary action.

g) The Ministry of Finance may consider a number of fiscal measures for the affected agro-based industries which could include waiver of VAT at the domestic stage for the period of March-June, 2020, deferred payment of quarterly advance income taxes till June, 2020 and payment of corporate taxes for FY20 by instalments till March, 2021. These waivers could be continued in the FY21 budget.

Besides, companies which are incurring losses during FY20 may be allowed to 'carry back losses' against the taxable profits for the two previous years: FY18 and FY19.

h) In view of urban to rural migration and lower number of workers going abroad for overseas jobs, it is likely that there will be increased pressure on the rural labour market. The Ministry of Finance may consider following a 'go slow' policy as regards incentivising labour-displacing mechanisation. Further reduction of duties at import stage for agricultural machinery (TTI: 12.4-27.5 per cent) should be stalled, preferably till FY22. Similarly, disbursement of credit at subsidised rate to farmers for agricultural mechanisation should be slowed down during the FY2021period.

Small and medium enterprises: Domestic small and medium enterprises (SMEs) were particularly hard hit in view of the corona pandemic. As is known, these account for majority of economic enterprises - about 87.5 per cent of these enterprises are cottage and 11.0 per cent are small scale enterprises. Moreover, majority of these enterprises operate informally: 51.0 per cent of enterprises have no formal registration and 90.2 per cent enterprises have no Value Added Tax (VAT) registration. The businesses of these enterprises are overwhelmingly dependent on a few important religious and cultural events. In that context, cancellation of the Pohela Baishakh festival as part of government's Covid-19-related restrictive measure has resulted in significant losses to these SMEs. These losses are expected to rise further with the duration of public holidays having been extended till 15 May, 2020, which will significantly affect businesses that take advantage of the Ramadan and Eid-ul-Fitr.

To compensate for these losses, the national budget for FY21 should target fiscal policy and sectoral measures (along with monetary policy support measures) with a view to increasing cash flows to the SMEs in the form of working capital and raising their investment capacity. ADP projects that support SME development should be given priority.

In view of the above, following measures need to be taken into consideration in FY21 budget proposals:

a) Considering the adverse financial situation facing particularly the cottage, micro and SMEs, MoF should consider raising tax exempted yearly turnover limit for SMEs from Tk 5.0 million to Tk 10 million for FY21.

b) The MoF may consider several fiscal measures for the affected SMEs which could include waiver of VAT at the domestic stage for the period of July-September, 2020; deferred payment of quarterly advance income taxes for July-September quarter of FY21, and payment of corporate taxes for FY20 by instalments till March, 2021.

Besides, companies which are incurring losses in FY20 may be allowed to 'carry back losses' against taxable profits for the two previous years (FY18 and FY19).

c) ADP projects related to the development of SME sector need to get priority in the budgetary allocations, and timely implementation of those in view of FY21 budget need to be ensured. Ministry of Industry (MoI) which is in charge of implementing SME-related projects was not accorded priority in the budget allocations over the past years; indeed, its share in total budget allocation has been declining over the years - from 0.48 per cent of total budget in FY16 to 0.29 per cent in FY20.

Given the demand for quick implementation of important SME projects during FY21, allocations for SME-related projects need to be increased beyond business-as-usual trends.

d) MoI should give priority to those SME-related projects which are planned to be completed in FY21 and which could contribute to setting up SMEs by the private sector and/or enhancing SME-related activities over the near-term future. Some of these projects include completion of BSCIC industrial estates by FY21 which are currently being implemented in Borguna, Bhairab, Dhamrai, Chuadanga and Narshingdi, and BSCIC industrial park in Tangail and economic zone in Jamalpur, to name a few.

e) Government has announced a stimulus package of Tk 200 billion, of which Tk 100 billion is exclusively allocated for SMEs as credit line facility at the subsidised interest rate of 2.0 per cent. Of the total amount under the package, the share of micro and small industries would be 70.0 per cent and the remaining 30.0 per cent would go to medium-sized industries. Besides, 15.0 per cent of the credit would be distributed to rural SMEs and 5.0 per cent to women entrepreneurs.

Cottage and micro enterprises which remained outside of the banking channel can also take out loans under the package, subject to submission of written financial statement about their businesses.

Proper selection of affected enterprises and timely delivery of credit to the deserving enterprises are highly important from the point of view of delivery of the expected results. In this connection, the central bank may take support from the business bodies/associations, chambers, local business samities and specialised commercial banks. Database on SMEs maintained by these entities could help proper identification and selection of the affected enterprises. 

Dr Fahmida Khatun, executive director, Centre for Policy Dialogue (CPD); Professor Mustafizur Rahman, distinguished fellow, CPD; Dr Khondaker Golam Moazzem, research director, CPD; and Mr Towfiqul Islam Khan, senior research fellow, CPD. [email protected] ; www.cpd.org.bd

[The article is based on CPD IRBD 2020. Research support was received from Md. Zafar Sadique, Mostafa Amir Sabbih, Muntaseer Kamal, Md. Al-Hasan, Abu Saleh Md. Shamim, Nawshin Nawar and Tamim Ahmed]