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Are farm loan waivers a political gimmick?

Caption: With the announcement of crop loan waiver, the Congress in Karnataka has clearly gained upper hand against the BJP.

Caption: With the announcement of crop loan waiver, the Congress in Karnataka has clearly gained upper hand against the BJP.

Loan waivers remain the preferred solution for governments to tackle farm distress. S. Mahendra Dev and M. Govinda Rao talk about the inability of governments to think of long-term solutions to tackle farm distress, in a discussion moderated by Vikas Dhoot . Edited excerpts:

Despite farm productivity rising, severe distress in the sector is a concern. How grave is the situation, especially for small and marginal farmers?

S. Mahendra Dev: Farm distress is real because there have been low agricultural prices and low farm incomes. The farm sector growth rate is much lower than in earlier periods. As a result, farm prices are low despite production rising. The demand is also low. So, whether the increase in farm production is enough for incomes is not clear. For small and marginal farmers, the additional problem is that the size of land holdings is declining. Earlier, the average size was two hectares, now it has come down to nearly one hectare. Marginal farmers have less than half a hectare. With these sizes, income is difficult to sustain. The recent stress is also because prices are much lower than the MSP [minimum support price] in the market, while long-term problems such as low capital formation in agriculture persist. Public investment in the sector as a percentage of GDP is also stagnant. So, these factors, along with two years of drought, have led to this. Another thing is that the non-farm sector creates jobs. As per NABARD [National Bank for Agriculture and Rural Development] data, 23% of rural income is from agriculture, so the rest is from non-farm activity. The rate of growth in agricultural wages has stagnated and is lower than in earlier years when MGNREGA and the construction sector helped boost wages. The rural economy overall, agricultural as well as non-farm, is facing a demand problem and low incomes, which has caused farm distress.

Would you say the government’s focus on managing inflation in the early years of its tenure and the inability to generate jobs that could have created non-farm avenues for the youth in farming households has contributed to the stress?

SMD: Yes. The agriculture focus is short term, [which is why we have] loan waivers, but the focus on how to generate incomes and jobs has been lacking. The construction sector was earlier responsible for higher wages and demand, but now that sector is also stagnating.

Eleven years ago, the UPA announced a massive farm loan waiver scheme. Do you think it’s an easy way to deal with a far more complex problem?

SMD: Yes, the UPA did, but the impact on farm income was limited. Second, institutional credit to farmers is just 64%, so the rest is from non-institutional sources. The large farmers corner the institutional credit, and small and marginal farmers get non-institutional credit at interest rates of 25-30%. Moreover, there is a moral hazard problem as banks get affected — farmers say they don’t have to repay the loans as there will be a waiver some time. There are opportunity costs for this loan waiver spending. Several States have started them, including Madhya Pradesh, Rajasthan and Chhattisgarh. This will also have fiscal implications. But some people say banks have written off ₹5 lakh crore of corporate sector debt, so why not farmers? But both the write-offs are bad.

The Centre has announced the PM-KISAN scheme under which ₹6,000 per year will be given to 12 crore small and marginal farmers holding cultivable land up to two hectares. Is this any different from the loan waiver in terms of quality spending?

SMD: This is similar but only slightly better than loan waivers, as smaller farmers could also get this amount. Telangana and Odisha have also started such schemes. The amount may not be very high for farmers, but its implementation may be relatively easier as it’s a direct cash transfer. But it’s also similar to farm loan waivers and is just a palliative.

The Congress had announced farm loan waivers in States like Madhya Pradesh. It has also promised a new law to waive farm loans, a separate farmer budget, and a minimum income support scheme.

SMD: In general, I support cash transfers to the poor. Farmers and agricultural labourers face several risks, so some social protection measures are important for an economy which has 90% of the workforce in the unorganised sector. But on the other hand, if you want to remove distress, these are not the solutions. In the NYAY [Nyuntam Aay Yojana] scheme announced by the Congress, it’s not clear where the money will come from.

Loan waivers create a moral hazard for even those willing and able to repay their farm loans, so could this make banks wary of lending to the sector in the future?

SMD: The moral hazard is a difficult problem as borrowers don’t repay in the hope of a waiver being announced.

Dr. Rao, what is your view on farm loan waivers?

M. Govinda Rao: This is certainly not a solution. First, it doesn’t really help the needy farmers who borrow from moneylenders. Second, it creates a bad credit culture. As we go along, commercial banks will become hesitant to give loans to farmers because from time to time, this particular problem comes up. This is not a good use of taxpayers’ money. You need to find a solution to the basic problems of farmers. Their distress is real, and on both the supply and demand sides.

Do you need to reorient the entire system, from being consumer-oriented to producer-oriented? Whenever you have a problem, you want to protect the consumer with low prices for farm products. When prices rise, you want to import and ban exports. Your support price policy helps only a few crops for which you undertake procurement. That actually distorts the cropping pattern, so even if paddy and sugarcane are water-intensive crops, farmers prefer them as there is some stabilisation in prices. The money that you are using on farm loan waivers and other subsidies, if only you could use it on infrastructure, developing markets and processing and transportation networks, it would be a huge thing. Removing the oligopoly of agricultural markets is important.

The government wants to double farm incomes by 2022. Would freeing farm markets from excessive regulation along with some safeguards be a better alternative to multiple state interventions at every step of the farming process?

MGR: Exactly. Whichever government is in power, it says it will double farm incomes, put ₹15 lakh in your account, and all sorts of things. I would consider these as election gimmicks. The details are never worked out. Even if you increase procurement prices, it will be useful only for those crops that the government procures. Many States don’t procure most items. Agricultural markets are in very bad shape and marketing reforms are very important as is the removal of middlemen. Many interventions are needed on both the demand and supply side.

SMD: Yes, I think market reforms are the biggest change needed. MSP is not a solution, which focuses on cereals like rice and wheat. Dr. Rao is right — very few reforms have taken place in market infrastructure, value chains, logistics, processing and warehousing to boost farmer incomes. We also need a consistent import and export policy, which is lacking, so that farmers can sell their excess produce. For perishables, a different model is needed. Returns are much higher if the same amount of money spent on loan waivers and income support schemes is deployed on things like water and technology, research and extension services.

Would you say that institutionally the government is predisposed to such policies as it has a vast bureaucracy built around the agriculture sector? The Agriculture Ministry has multiple joint secretaries. Do we need a reboot of these structures?

SMD: Governments generally think short term. When I was in the Agriculture Ministry discussing medium- and long-term solutions, the Minister told me, “We are interested in only short-term things.” They may talk about other things in normal times, but policies are geared towards short-term goals.

MGR: Political parties don’t have a long-term view. Immediate solutions that lend themselves to sloganeering are the big issue. Somebody has to come and say, look, my agenda is not to double farm incomes, but these are the reforms I will implement for a better future for farmers. Another issue is the consolidation of holdings. Small farms have become unviable. Farm labourers are not available because of MGNREGA. Many of them have migrated to urban areas in search of work. We need to legally facilitate the consolidation of holdings. Information asymmetry is a big problem too. When the farmer is going to the market with his bullock cart full of produce, he doesn’t know what prices he is going to get for his produce. If prices are low, he can’t just return as he has to pay rent for the cart and other things, so there is a distress sale as many crops are perishables. We have never thought of this in a comprehensive manner, and unless there is a package of holistic measures, all this talk of doubling farm incomes is meaningless.

The Prime Minister has also talked of a pension for farmers.

MGR: Giving a minimum basic income deserves to be looked at, but you can do that fiscally only when you get rid of all other subsidies and transfers. The basic issue is the sustainability of a policy measure such as minimum income. The other important thing is farm insurance, which needs to be expanded much more so that farmers are protected from the vagaries of nature.

Professor Dev, do you think farm insurance has worked in terms of protecting farmers?

SMD: Compared to earlier schemes, the recent farm insurance programme is better, but still many farmers have not benefited because of implementation problems. It’s a long way to go. We don’t have crop cutting experiments, State governments are not working on it properly when disasters take place. Between subsidies and investments, there is a trade-off — when subsidies increase, investment declines. On old-age pension, there was a scheme that gave ₹200 a month earlier. State governments have offered ₹2,000 in some places. Farmers also come under that scheme. I agree basic minimum income can be considered if you remove non-merit subsidies and move fertilizer subsidy to cash transfers as you can save more and improve soil fertility too.

M. Govinda Rao is an economist and was a member of the 14th Finance Commission.

S. Mahendra Dev is the Director and Vice Chancellor of the Indira Gandhi Institute of Development Research.

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Printable version | Aug 20, 2022 1:44:02 am |