Farm loan waivers look tempting, but won’t help

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New Delhi | Published: December 13, 2018 3:27:53 AM

Telangana-style UBI payments work better, but can only be funded by cutting other subsidies; start market reforms.

agriculture sector, agriculture industryThe Centre’s plan to hike MSPs to 1.5 times A2+FL costs—this raised MSPs by 40-50% in some cases—however, had little chance of succeeding since there is very little procurement that takes place for most crops other than wheat and rice.

Despite facing strong anti-incumbency headwinds in Madhya Pradesh, Rajasthan and Chhattisgarh, the BJP has actually done better than most commentary suggests; as the vote share in Madhya Pradesh shows, there is just a sliver of difference between the BJP and Congress. This would suggest the BJP’s defeat had mostly to do with farm distress in what are primarily agrarian states. There would have been an impact of GST and demonetisation as well, but this would be lower in states that are more driven by agriculture than industry; chances are this will be more important during the general elections next year since small businesses have been badly hurt, and business in general isn’t too happy with the increased policing by the tax authorities.

Though the washout for the BJP is undoubtedly a setback, as most commentators have noted, these results should not be used to try to predict the outcome of the Parliamentary polls in 2019. There are enough examples of Assembly and Parliamentary elections going opposite ways in the past. Issues such as Hindutva, jobs, corruption and governance, all of which featured prominently in 2014 will be important this time too. Unlike in 2014, the BJP may not talk as much about the economy, given the poor levels of growth and the high levels of joblessness. Also, the BJP cannot hope to undo the damage done by DeMo and GST, except by going slow on policing in the case of GST. The BJP also needs to learn from Madhya Pradesh, where the government tried the Bhaavantar scheme to compensate farmers for the difference in the market price and the MSP; this, though, had to be aborted due to the shortage of funds in the state. The Centre’s plan to hike MSPs to 1.5 times A2+FL costs—this raised MSPs by 40-50% in some cases—however, had little chance of succeeding since there is very little procurement that takes place for most crops other than wheat and rice. For most crops, as a result, market prices have remained far below the new MSPs. The stagnant prices, in turn, have slowed the rise in real rural wages significantly.

In contrast, Telangana’s Rythu Bandhu—directly transferring Rs 4,000 per acre per crop per season, irrespective of the crops grown—has clearly done the trick for the TRS which has been re-elected in the state. Former Chief Economic Advisor Arvind Subramanian had opined a modified version of the Rythu Bandhu could well be the future of India’s agricultural policy, and also the forerunner of a universal basic income (UBI). He had cautioned, though, that it could become financially unsustainable since the state would also need to cover the costs relating to subsidies for inputs like fertiliser, seeds, power and water. Nonetheless, Rythu Bandhu—under which around Rs 12,000 crore has been paid out—is clearly a hit. To be sure, this was preceded by a Rs 16,000 crore loan waiver. While the NDA has attempted to improve the infrastructure for the agri-economy, there aren’t enough non-cartelised mandis where farmers can sell their produce, nor are there enough market linkages since the e-NAM platform hasn’t taken off. Even if the government does make a start on these, given the urgency to placate farmers before the general elections in 2019, a big farm loan waiver—like the one announced by the UPA—is now a distinct possibility. How this is to be funded is not clear, unless the government hopes to get part of RBI’s ‘excess capital’ now that there is a new Governor in place. In addition, between them, various states have already waived farm debt to the tune of Rs 1.5 lakh crore. Ideally, both the Centre and the states need to cut other subsidies, and, as this newspaper has argued before, loan waivers can never match genuine market reforms’ efficacy as a solution.

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