1. Why Punjab needs incentives, not loan waivers

Why Punjab needs incentives, not loan waivers

Punjab farmers would benefit if the state govt subsidised the adoption of appropriate technology and diversification of crops.

Published: May 3, 2017 5:46 AM
Punjab government, Punjab farmers, loan waivers, Situation Assessment Survey of Farmers, agriculture in Punjab, Overexploitation, PMFBY, Fasal Bima Yojana Punjab farmers would benefit if the state govt subsidised the adoption of appropriate technology and diversification of crops. (Source: PTI)

PK Joshi, Tajuddin Khan & Avinash Kishore

The newly-elected government in Punjab is considering a loan waiver for farmers to reduce agrarian distress. According to the recent Situation Assessment Survey of Farmers (SASF), the average outstanding loan is nearly three times higher in Punjab compared with the rest of India (Rs 3.31 lakh versus Rs 1.22 lakh). Farmers in the state may be heavily indebted, but loan waiver is not the best way to help them. The SASF also shows that less than 20% of the marginal farmers in Punjab owed money to financial institutions, compared to nearly 80% of the large farmers ( with holdings of more than 4 hectares).

The loan waiver, therefore will be of little help to smallholders who need the relief the most. Past experience shows that loan waivers do not reinvigorate investment in agriculture. The need for loan waivers every few years is itself a sign that they are not effective in bringing any sustained benefits to farmers. Instead of loan waivers, the Punjab government should offer farmers incentives to adopt technologies and practices that can make agriculture more profitable and sustainable. We share some of our ideas for incentives that may help both farmers and the environment.

Incentives for crop diversification: Rice-wheat cropping pattern dominates agriculture in Punjab. This cropping pattern offers stable, but low returns to farmers. A farmer earns less than Rs 100,000/ha from growing rice and wheat and only about Rs 60,000/ha if we also account for opportunity costs of land, family labour and capital invested in farm machinery. These returns are too low for India’s most productive farmers. Even these low returns are sustained by heavy input and output subsidies and a huge cost to soil, water and air. All efforts to promote crop diversification in Punjab through input subsidies and extension have failed miserably as area under rice has only increased over the last 20 years. More than a decade ago, the state government had planned an initiative to bring the private sector, state government and farmers together to promote production and processing of kinnow (a citrous cultivar). The new government needs to revive such initiatives to accelerate crop diversification.

Farmers will switch to high-value crops more readily if they face lower production and price risks. Crop insurance, investment in food processing and storage and easier laws for land-leasing and contract-farming will enable faster crop diversification. Incentives to reduce water-use in agriculture: Overexploitation of groundwater is perhaps the most serious threat to the agrarian economy of Punjab. Annual groundwater withdrawal in the state exceeds net availability by 45%, and 103 of the 147 blocks are overexploited. Free electricity to farmers is a major driver of wasteful use of water. The state government may find it politically difficult to impose power tariffs high enough to trigger efficient use of water.

Paying farmers to reduce their electricity use from the current levels could save both electricity and water without affecting farmers’ income. Grid-connected solar pumps offer yet another opportunity to promote a healthy energy-irrigation nexus. Instead of offering heavy capital subsidy on solar pumps, the state should offer to buy surplus power generated by solar pumps at attractive prices. With this option, farmers will use both electricity and water judiciously and also earn a stable income on the side.

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Leveraging the Pradhan Mantri Fasal Bima Yojana (PMFBY): Till recently, only farmers who took crop loans from financial institutions had their crop insured in Punjab. Crop insurance was not available to other farmers in the state. The state government should leverage PMFBY to achieve universal coverage of crop insurance in the state. Not only that, the state should go a step ahead and use subsidies on insurance premium to incentivise adoption of sustainable agricultural technologies and practices and shift in cropping pattern to more remunerative crops. Farmers often hesitate to try new things for the fear of possible downside risks. A generous crop insurance scheme like PMFBY, if used well, can address many of these concerns and also reduce agrarian distress that necessitates the need for loan waivers in the first place. The state should implement PMFBY on a mission-mode, in ways that even the smallest farmers benefit from it.

Incentive for better rice-residue management: Every year after harvest, farmers in Punjab set fire to paddy residue to prepare their fields for the next crop. Burning crop residue is terrible for both soil and human health. The resulting air pollution affects people in Punjab and even affects Delhi where the air quality index (AQI) exceeded extremely hazardous level of 300 in the harvest season. Punjabi farmers burn rice residues because it is of little value to them (less than Rs 1,000/ha). The same farmers do not burn wheat residues because they use it as animal fodder. The government has announced penalties to discourage residue burning.

Penalising polluters is one way of controlling pollution, but providing technical support and cash incentives to encourage them to switch from residue destruction to residue management may work better. Happy seeders allow rabi sowing without removing paddy residue from the field. The government should promote happy seeders by making the machine widely available and its use more affordable to farmers. IFPRI research shows that first-use subsidy can be really effective in promoting adoption of a new technology. We prefer these incentives to a farm loan waiver because they can designed to be pro-poor and promote sustainable intensification of agriculture.

Joshi is director (South Asia), Khan is research analyst, and Kishore is research fellow, at the  International Food Policy Research Institute (IFPRI), New Delhi. (Views are personal)

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