Loan waivers to farmers are no favour, they are being given to compensate for not giving them market prices for crops
Given how prime minister Narendra Modi announced the Rs 36,000 crore farm loan waiver in the Uttar Pradesh election campaign last year – and the BJP-ruled Maharashtra announced a Rs 34,000 crore loan waiver the same year – it is a bit rich to hear Niti Aayog vice chairman pooh pooh Congress chief Rahul Gandhi’s call for an all-India farm loan waiver (the three states the Congress just won announced Rs 62,000 crore of waivers); no statements on farm loans not really addressing the sector’s problems, after all, were made when Modi made his announcements.
It is not clear if the Modi-led government will announce loan waivers of the type the UPA did in 2008, but the rising farm distress, identified as the major reason for the BJP’s loss in the last set of assembly elections, could well force the government’s hands.
While the immediate impact of this is a big relief for farmers, as has been pointed out by many, this causes a spurt in NPAs as farmers across the board stop repaying loans in the hope their loans are also repaid by the government. A graphic by Macquarie Research (see graphics) shows how farm-loan NPAs for SBI rose from around 3% when the UPA announced its loan waiver in 2008 to around 12% now; in the interim, several states also announced their own loan waivers, adding to the pressure to default.
As a result, a study by Kotak Institutional Equities Research shows a sharp dip in loan growth at the national level after the 2008 writeoff and, in Andhra Pradesh and Tamil Nadu after their writeoffs in 2014 and 2016 respectively. This is especially important given that it is only a small proportion of farmers that get bank loans; any reduction in this means they too have to borrow in informal markets at very high rates of interest.
And, as FE reported last week, there is a large amount of false reporting in farm loans; the amount of farm loans given is greater than the total value of the crop in several states, and that is when 45-50% of farm loans are supposed to be coming from the informal sector. Indeed, in the past, some studies have shown that around half the bank credit is disbursed after the sowing was over.
What is even more important, a large part of what both Modi and Gandhi feel is largesse to the farmers is nothing but a form of atonement, an unconscious attempt to compensate farmers for the loss in their revenues due to the fact that they do not get the market price for their crops. It is difficult to identify what market prices are since they could be local prices or they could be global prices; ideally, in fact, the two should be 10-15% of each other to take into account transportation costs. According to an OECD-Icrier report, farmers got prices that were 14% lower than global prices due to various export barriers imposed between 2000-01 and 2016-17; based on today’s crop output of around Rs 18 lakh crore, that works out to a loss of Rs 2.5 lakh crore for farmers as compared to loan waivers of around Rs 1 lakh crore announced this year.
Another way to measure prices is to take the Minimum Support Price (MSP) announced by the government, and calculate the losses based on this. Right now, for instance, prices in the markets are around 25-30% below the MSPs announced for most crops since, in the absence of government procurement, the MSP amounts to nothing. Based on market prices being 20% below the MSPs, Icrier calculated the costs to farmers were around Rs 113,035 crore; this would rise to Rs 169,553 crore if prices fell to 30% below the MSPs. Icrier’s numbers are based on the marketable surplus, so the 58-60 mn tonnes of wheat and rice already procured today are not accounted for. This 58-60 mn tonne-procurement ensures a higher price for these crops, but think of the farmers whose crops aren’t procured and who have to accept lower market prices.
In other words, unless there is a farm loan waiver of around Rs 1.5-2 lakh crore every year, farmers will continue to be shortchanged; in the last decade, including the loans waived by the three states the Congress won in just now, loan waivers have averaged around Rs 28,000 crore each year; the actual process take 2-3 years to complete, so farmers get no relief till then. So, while it is not clear if prime minister Modi will succumb to pressure to win the farmer vote, it is clear that loan waivers are not a substitute for freeing markets, a task that no government, including Modi’s, has been able to achieve in the last 70 years. Giving farmers an area-based Telangana-style Rhythu Bandhu cash transfer is one possibility, one that has been dismissed by Niti Aayog Member Ramesh Chand as too expensive since it will cost around Rs 2 lakh crore per year. But compare this with what farmers lose every year and the waste in terms of subsidies – also, roughly Rs 2 lakh crore a year – and it is a win-win solution. Pity few in the government or its Niti Aayog think tank feel the same way.