Chief economic advisor Arvind Subramanian, it appears, will be red-flagging the impact of farm loan waivers in the second volume of the Economic Survey later this month. “We will provide”, he told The Hindu BusinessLine, “data and calculations to show how the farm loan waivers will impact not only the finances of the respective states but also those of the Centre”.
While the impact of any loan waiver on the fisc is well-known—see how it goes for a toss when the Centre has to provide for PSB NPAs—Subramanian would do well to look at the other side of loan waivers, that they are a direct response to poor government policy. If government policy is good, there will be little need for loan waivers.
When, in response to prime minister Modi’s election promise, UP chief minister Yogi Adityanath announced a farm loan waiver, ICRIER professor Ashok Gulati pointed out that the size of the loan waiver in the state was roughly equal to what the farmer lost out over three years by not getting the MSP that the government had promised to pay for wheat and rice—Gulati took data on how much wheat/rice prices in UP were lower than the MSP and multiplied this by the amount of production.
But, the argument goes, the MSP itself is a favour the government is doing for farmers. Price Distortions in Indian Agriculture by Shweta Saini (senior consultant at ICRIER) and Gulati provides evocative examples of what poor government policy has resulted in. The impact is not just in cereals like wheat and rice where there is an MSP, but in crops like onions and potatoes where there is no MSP and which are at the centre of the current farm crisis.
In the case of wheat, the export ban lasted more than four-and-a-half years, from February 9, 2007, to September 9, 2011. To put the loss to farmers in perspective, after the ban was lifted, wheat exports rose to over $5 billion in 2012-13. Saini–Gulati’s analysis of local prices and global prices shows that in five of the 10 years between 2004-05 and 2013-14, Indian wheat supplies were globally competitive, in four years, they could have held their own against imports—only in 2010-11, were imports cheaper.
In the case of rice, a host of restrictions by way of minimum export prices (MEP) were imposed between 2007 and 2011. On October 15, 2007, for instance, an export ban was imposed on non-basmati rice and, 15 days later, this was replaced with a MEP of $425 per tonne; this was raised to $500 on December 27. Exports were banned again on February 7, 2008 but on March 5, this was replaced with a MEP of $650. Between 2007-08 and 2011-12, Saini-Gulati point out, common rice export restrictions created an implicit export tax. Before the ban, between 2004– 05 and 2007–08, domestic prices were about 80-90% of world reference prices; however, during the ban period, these prices were 70% of world prices (except for the year 2010–11 when international prices fell).
Similar analysis has been done for most crops and even milk and meat. Dairy exports, for instance, were banned between February 8, 2011 and June 8, 2012 though the report shows milk was competitive in five of 10 years, could hold its own in one year and was uncompetitive in four years (see graphic). Had exports been allowed, for most crops, farmers wouldn’t need MSP-based procurement by government or even loan waivers.
In the case of onions which were not just export-competitive in all 10 years, but by a huge margin, MEPs were raised dramatically in 2013-14 and 2014-15 to stop exports. Exports were banned in December 2010 and September 2011 and, in November 2013, the MEP was raised to $1,150 per tonne; it was then lowered but increased dramatically, from $250 in April 2015 to $700 in August 2015, to return to being free by late December 2015. In the case of potatoes, too, except for one year in which they could hold their own against imports, they were very competitive—an MEP of $450 was put between June 2014 and February 2015 to restrict exports.
And while procurement by FCI is portrayed as another sign of pampering farmers, Saini-Gulati show rice stocks with FCI jumped from 8 mn tonnes to over 20 when, between October 2008 to September 2011, all manner of export restrictions were imposed. With the government squeezing farmer profits all the time in order to keep consumer prices low, MSPs, subsidies and loan waivers have emerged as a way to keep the opposition muted—they are most certainly not a favour being bestowed.