A race to the bottom: Is there a better way to help farmers?

By: and |
Updated: Dec 24, 2018 7:20 AM

The marginal farmers, who constitute 68.5% of peasantry, actually take more than half of their loans from informal sources at interest rates that range from 24-36%.

loan waiver, farm loan waiver, farm loanCan there be a better method to support farmers instead of this haphazard manner of loan waivers, or through higher MSPs which are market distorting?

The flavour of the season on the farm front is loan waivers! Farmers’ leaders are asking for it and those looking for power are ready to oblige. Newly elected chief ministers of Madhya Pradesh, Chhattisgarh and Rajasthan all have announced loan waivers within their promised time of 10 days. It may cost the state exchequers more than Rs 50,000 crore. The Congress president has also challenged the prime minister that he will not let him sleep unless loans of all farmers are waived off. He also scores a brownie point by saying if the government can “waive off” Rs 3.5 lakh crore for 15 business families, why not for millions of farmers.

So, now, as most professional economists say, it is a race to the bottom! But we call it an atonement for not reforming agriculture, and instead following restrictive trade and marketing policies, which, as per OECD-ICRIER report (oe.cd/ag-india) inflicted an implicit tax on farmers to the tune of 14% of their gross farm receipts over the period of 2000-01 to 2016-17. Needless to say, it is bait for fishing voters. Anyway, the big question now is how much will a pan-India loan waiver cost, and is there a better way to distribute these resources? Our rough calculation is that it will cost anywhere between Rs 4-5 lakh crore, including states that have waived farm loans since 2017.

In this context, it may be noted that in September 2018, total outstanding credit from scheduled commercial banks (SCBs), including regional rural banks (RRBs), to agriculture and allied sector was about Rs 10.5 lakh crore. If one adds to it the share of primary agricultural societies (PACs), the total outstanding credit to agriculture currently is likely to be around Rs 12-13 lakh crore. And, if all of this is waived off, as the rhetoric of loan waivers goes, it will simply blow up the budget.

It is not feasible. So, everyone will cut corners, sometimes drastically, to sift between rhetoric and reality of budgets. Several restrictions will be put, such as limiting it to short-term crop loans only (the ratio of short-terms loans to long-term ones is generally 70:30), implementing a maximum limit of, say, Rs 2 lakh per farmer, and sourcing them only from nationalised banks and PACs (as the Madhya Pradesh order suggests), etc. Despite these restrictions, we feel the total bill is not likely to settle below Rs 4 lakh crore, and may even touch Rs 5 lakh crore. Ironically, the current spate of loan waivers was triggered by the prime minister himself who dangled this bait first to voters just before the UP elections, and now the Congress president is beating him with the same trick.

Interestingly, although loans have been waived within hours/days of taking oath by new CMs, it may take quite a long time, maybe even 2-3 years, to really honour this commitment. To get a sense of this, one may look at the 2008 mega loan waiver of Rs 71,680 crore announced by the UPA government. It amounted to 20% of total outstanding loans to agriculture in 2008, but the actual disbursement was just Rs 52,516 crore over a period of four years, as per the CAG report on implementation of agricultural debt waiver and debt relief scheme (2013).

In any case, we feel that a loan waiver is only a temporary relief and that too tilted towards larger farmers. It may be noted that institutional credit comprises about 64% of total credit taken by all farmers, with the remaining 36% coming from non-institutional sources. Further, it is highly iniquitous as it is the large farmers who take up a larger proportion of their credit from institutional sources (about 80%). The marginal farmers with holdings of less than one hectare, who constitute 68.5% of peasantry, actually take more than half of their loans from non-institutional sources at interest rates that range from 24-36%, and sometimes even higher.

Can there be a better method to support farmers instead of this haphazard manner of loan waivers, or through higher MSPs which are market distorting? The alternative option is to think of a structured and stable income/investment support policy for farmers. An improvised version of Telangana’s Rythu Bandhu scheme could serve as a starting point. Under this scheme, the government can give Rs 10,000/ha as investment support to cultivators. Payments under this scheme could be inversely related to the holding size, making it more pro-small holders. Farms can be geo-tagged to ensure that only those farmers that are cultivating lands get benefits.

Land records will have to be upgraded to include tenants. Government records still show only 10% of tenancy in the country while ground realities are very different. In any case, if this scheme is implemented over 20 crore hectares of gross cropped area of the country, it will cost about Rs 2 lakh crore per annum, which could be equally distributed between the Centre and the states.

The Centre should also include its fertiliser subsidy into this, and encourage states to transfer their power subsidy through this platform based on a per hectare basis. Such a policy can reach a larger number of farmers, be more equitable and predictable and less market distorting. The costs are high, but so are the costs of food subsidy for consumers (Rs 1,69,000 crore). Striking a right balance between consumers and farmers is the need of the hour.

Gulati is Infosys chair professor for agriculture and Terway is research associate at ICRIER

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