For the past four years, farmers’ income have remained static, and political parties are still playing games of hiking minimum support price and loan waivers, while ignoring a financially sound system of direct subsidy
By Bhavdeep Kang
IT’s that time of the election cycle, again, when the political class revisits the ‘Jai Kisan’ slogan. The never-ending agrarian crisis, marked by falling farm incomes and rising input costs, is sought to be addressed through a variety of quick-fix measures.
The formula for relieving farmers’ distress and/or mobilising votes has thus far revolved around loan waivers and an increase in Minimum Support Prices (MSP). Both have proved to be effective vote-catchers but have failed to deliver benefits to the majority of farmers. The new flavour of the year is, thus, the direct farm subsidy.
Before analysing the above schemes, let’s take a look at what really ails India’s farm economy.
At first glance, there’s something very wrong with the picture. On the one hand, we have rising food, fertiliser and power subsidies to the farm sector and spiralling credit flows. On the other, there is increasing rural debt and farm input costs, low public investment in agriculture and falling groundwater tables.
On the one hand, record sowing and bumper harvests of cereal crops are reported year after year. On the other, NSSO data reveals that most rural households live a hand-to-mouth existence, earning just enough to cover their basic expenses.
Farming is a high-risk profession, vulnerable to any number of variables: weather, crop pests and diseases, price volatility in global and local markets, policy changes and availability of inputs, irrigation and labour.
Risk management, in the form of publicly administered crop insurance, is poorly implemented and in any event cannot insulate the farmer against all these factors.
Added to these are the problems of misdirected subsidies and credit flow, fragmentation of land holdings, exploitation of tenant farmers, encroachment and degradation of village commons, health risks posed by agro-chemicals, archaic and anti-farmer laws on marketing of produce, lack of post-harvest infrastructure and climate change – the list of farmers’ grievances is virtually endless.
Farming is a high-risk profession, vulnerable to any number of variables: weather, crop pests and diseases, price volatility in global and local markets, policy changes and availability of inputs, irrigation and labour
Thus far, our food security strategy has been consumer- rather than farmer-centric. Boosting farm incomes took a backseat to keeping food prices low. With agriculture providing half the employment in the country, the huge gulf between agricultural and non-agricultural incomes must be addressed. In relative terms, farmers are getting poorer by the year.
Bumper harvests can be as big a disaster as failed crops, leading to price crashes – to the point where it makes more sense to let the produce rot on roadsides than take it to the market. In recent years, prices have hit lows of 20 paise a kilo for potatoes and Re 1 per kilo for tomatoes and onions – a fraction of the production costs.
The end result is static farm incomes. Estimates of average monthly farm income range from Rs 1,600 (Economic Survey, Vol 2, 2016-17) to Rs 6,426.00 (National Sample Survey, 2012-13, 70th round). By contrast, a central government employee gets a minimum of Rs 18,000. Small wonder that estimates of indebtedness are as high as 35 per cent to 52 per cent of rural households.
The plan to double farmers’ incomes, as Prime Minister Narendra Modi had promised in 2014, centres around four elements: first, higher prices for produce by reforming markets; second, increasing productivity; third, reforming agricultural land policy; and fourth, crop insurance.
A discussion on better remuneration for farm produce is usually MSP-centric. Last year, the MSP of food grains was sharply increased. The current method of computation takes into account the cost of inputs, family labour and the interest on borrowings and fixes the MSP at 50 per cent over the total. On the face of it, this sounds reasonable.
If open market prices are ruling above MSP, the farmer need not sell to government procurement agencies. So, MSP is meant to be a safety net and not a benchmark price for food grains.
Sadly, that is precisely what it has become. The relentless focus of the MSP system is on paddy and wheat, leading to an overproduction of these two crops and consequent soil and water degradation. Of late, procurement of pulses and oilseeds has picked up, moderating prices of these commodities.
The biggest drawback of MSP is that it benefits only a handful of farmers who actually have a disposable surplus large enough to sell to procurement agencies: just six to ten per cent and that too in select states. The rest are at the mercy of private traders.
To extend benefits from higher MSPs to all farmers, the Price Deficiency Payment (PDP) or Bhavantar Bhugtan Yojana was floated. When open market prices fall below MSP, farmers can sell their produce to private traders, but claim the difference from the government.
On paper, the scheme has a dual advantage: it gives the farmers income support and spares the government from the headache of procuring and storing produce.
Middlemen continue to rule the roost in the state. Government-licensed arhatiyas take home a staggering Rs 15,000 crore each year!
Unfortunately, the scheme ended up becoming just another arbitrage opportunity for middlemen. Private traders and mandi functionaries, who made a killing by underpaying farmers.
The poor farmer then faced enormous trouble in getting his dues from the government. So, private traders benefitted at the cost of the exchequer.
Policy-makers are well aware that the MSP mechanism is no substitute for a robust market. A parallel scheme, with the objective of ensuring that farmers get the best price for their produce, was initiated by the NDA government soon after it came to power.
The National Agricultural Market (eNAM) is expected to link mandis across the country and serve as an online trading platform. E-auctions will serve as the default price discovery mechanism.
A study of the Unified Marketing Platform (UMP) in Karnataka – a sort of precursor to eNAM – showed that farmers benefit from online trading. After its introduction in 2015-16, modal prices of agricultural commodities in UMP-linked mandis increased sharply over the previous year – much higher than the increase in wholesale prices in the rest of the country.
As of last year, almost 600 mandis across the country were registered on eNAM to trade in some 90 commodities, but it hasn’t taken off because of infrastructure, policy and implementation issues.
Apart from dumping restrictions on inter-state and inter-mandi trades, states must ensure that mandis are provided with equipment: seamless internet connectivity, computers/printers, sorting/grading and quality testing machines, etc.
A review of eNAM by the Niti Aayog has found that mandis are ill-equipped to assay farm produce. Most mandis have equipment for weighing and measuring moisture content, but this is not adequate for quality assurance in e-trading.
The review also confirmed that auctions were taking place offline and the data was being entered on the eNAM portal post facto, which defeats the purpose of the platform.
State governments must stop politically powerful middlemen from hijacking the eNAM platform. For example, in Haryana, which topped in eNAM sales in 2017, 60 per cent of the trade on eNAM was actually procurement operations for rice and wheat by the state government agencies.
Taking into account the total trades and bids received, it seems there were only 1.5 bids per e-trade on the average, most of them offline and local. The middlemen walked away with fat commissions, defeating the objective of the platform, which is to connect the farmer directly to the traders.
In fact, middlemen continue to rule the roost in the state. Government-licensed arhatiyas take home a staggering Rs 15,000 crore each year! Their presence is justified on the premise that they extend loans to farmers who do not have access to institutional credit.
Bankers are fearful that the trend of farm loan waivers will encourage farmers not to repay loans, resulting in a gradual increase in agriculture NPAs
This is a specious argument. Why should the state, through commissions to arhatiyas, subsidise informal channels of credit? Why not reform the credit system, which caters to agri-business rather than farmers?
Loan waivers, likewise, benefit a minority. Farmers take loans to meet the cost of farm machinery, irrigation equipment and inputs like seeds, labour, power, agro-chemicals and soil amendments, as well as meeting personal expenses. Most of them, however, have no access to institutional credit and wind up in the hands of moneylenders.
Agriculture economists who have denounced farm loan waivers as unproductive and harmful in the long-term aren’t just whistling in the wind. That loan waivers negatively impact taxpayers is a no-brainer. State governments use public funds to pay off banks who hold farmers’ loans, effectively transferring money from the pockets of taxpayers to borrowers.
Most states face a ballooning fiscal deficit and debt waivers make matters worse. A bloated fiscal deficit means heavy borrowing and debt servicing and therefore, less money for expenditure on health, education, infrastructure and so on. The poor get fewer services and growth is stymied.
The biggest problem is that loan waivers penalise honesty and self-sufficiency and create what bankers call a ‘moral hazard’. That the farmer is an honest soul who likes to repay his debts is not just a romantic fiction, but is borne out by the fact that default on farm loans is a lot less than that of corporates.
Along comes a politician and declares ‘karza maaf’. This is manifestly unfair to farmers who did not – or could not – take loans from banks and also to those who repaid their loans in a timely fashion.
Farmers who have the capacity to repay (and these are the ones who find it easiest to get loans) get away with a free bonus. Those who take loans from informal channels (because banks have refused to consider their loan applications) suffer.
Bankers are fearful that the trend of farm loan waivers will encourage farmers not to repay loans, resulting in a gradual increase in agriculture NPAs. This will make future access to credit harder for all farmers.
Studies have shown that loan waivers result in a subsequent credit squeeze as banks tighten norms – after the 2008 mega-loan waiver, bank lending moved away from the districts which saw the most write-offs.
Yet, farmer leaders lobby ceaselessly for higher MSPs and it is politically expedient for governments to succumb to their demands, regardless of the increased burden of agricultural subsidies and further skewing of the country’s food economy.
The one scheme that has attracted kudos from agricultural economists is the direct farm subsidy. Applied across the country, it has been estimated to cost around Rs 2 lakh crore, half as much as a pan-Indian loan waiver.
Politicians’ interest in a direct farm subsidy was piqued when Telangana chief minister K Chandrashekar Rao decimated the Congress in the November 2018 assembly elections.
The Congress was stunned: its pre-poll promise of farm loan waivers and bonus on MSP had clicked in the north but fell miserably flat in the south. A curious outcome, given that the incidence of rural indebtedness in Telangana is two-and-a-half times that in Chhattisgarh (NABARD, 2017).
KCR’s Rythu Bandhu or direct farm subsidy scheme has the advantage of being truly universal. It gives an annual payout of Rs 8,000 per acre to all farmers, big or small, irrespective of crops. It is intended to cover the farmer’s input costs but does not demand any proof of utilisation.
The farmer is free to spend the money as he pleases. As power to the agricultural sector is free, it will ensure that the farmer is not cash-starved, or dependent on money-lenders, at the beginning of the crop season.
The subsidy is given in the form of a cheque, rather than through direct benefit transfer (DBT). Launched from May 2018, the scheme is believed to have benefited 93 per cent of actual land-holders. Direct farm subsidies have the advantage of having the least distortionary impact on our food economy, according to research body ICRIER.
The KCR effect is now visible. Jharkhand adopted the direct subsidy scheme last month, whereas Assam chose the tried-and-tested loan waiver route (perhaps anticipating that the centre would come out with a direct subsidy, as suggested by KCR, thereby delivering a double benefit to farmers).
Even as the policy-makers struggle to determine the best way forward, the Economic Survey of 2017-18 raised the biggest red flag yet, when it estimated the impact of climate change on farmers. Farm incomes, it said, may shrink by as much as 25 per cent as a result of crop losses due to water-stress. At that point, our food sovereignty may stand compromised.