Farm subsidy to loan waivers: A race to compensate farmers for their losses

Despite last ditch attempts by election-minded political parties to atone for farmers’ losses, these are not a substitute for the structural reforms that are needed.

Farm subsidy to loan waivers: A race to compensate farmers for their losses
The exports of agri-produce have fallen since the peak of $42.5 billion achieved in 2013-14.

With elections approaching, every party is swearing by farmers and trying to woo them for their votes. The Modi government has already announced a package of Rs 75,000 crore for about 12.6 crore small and marginal farmers. While in absolute terms it looks sizeable, when it is divided by the number of farm families to be covered, it is miniscule—just `6,000 per family per year, which is about 6% of their annual income. This level of support, unless augmented further, may not go far to win farmers’ confidence. Majority would agree that farmers have been under stress for quite some time, and have not got justice so far.

While the Modi government claims that its record of overall growth (GDP) is better than the UPA government (notwithstanding the suspicion that many have on the GDP revised series), the nature of growth matters as well. In a country where 47% of the workforce is engaged in agriculture, it is the growth of agri-GDP that is even more critical for the alleviation of poverty and providing nutritious food. The average annual agri-GDP growth in the first four years of Modi government, for which data is available, is just 2.5% compared to 5.2% in the last four years of Manmohan Singh’s government. The exports of agri-produce have fallen since the peak of $42.5 billion achieved in 2013-14, giving a negative growth in agri-exports during the Modi period.

On the other hand, agri-imports have consistently increased, reducing the net export surplus (exports minus imports) from about $25 billion in 2013-14 to less than $10 billion in 2017-18. This has led to a glut of agri-produce at home and, consequently, agri-prices have fallen, reducing profitability ratios significantly across most of the crops since 2013-14. And so is the case in dairy. The government is saddled with massive stocks of grains, way above the buffer stock norms. For example, rice stocks with government agencies touched about 37 million metric tonnes (MMTs) on January 1, 2019, as against a buffer norm of only 7.6 MMTs for that date. This speaks of massive inefficiency in the grain management system.

Needless to say that agriculture has been crying for wholesale structural reforms, especially in agri-marketing, from abolition/pruning of the Essential Commodities Act, to reforming the APMC, to futures trading, to negotiable warehouse receipt systems, to building commodity-specific value chains on the lines of Amul’s milk model, etc. But the time for structural reforms has run out. And, now there is a race to compensate farmers for their losses, an admission of the failure of the agriculture policy followed so far, which has a massive in-built consumer bias.

India wants to compete with China and become a force in the world. It cannot do so, unless it supports its farmers in a systematic manner. The Producer Support Estimates (PSEs) of India, China and OECD clearly show that India has been implicitly taxing its farmers through restrictive trade and marketing policies. On the contrary, China supported its farmers to the tune of $232 billion and OECD countries by $235 billion in 2016-17 alone (see graphic). No wonder that China produces more than triple of India’s agri-output from a lesser cropped area.

Congress president Rahul Gandhi is going around the country promising loan waivers to farmers, even higher MSPs (in Chhattisgarh, he raised MSP of paddy from Rs 1,750/quintal to Rs 2,500/quintal), and, now, a minimum monthly income for the poor. He has not spelt out yet what would be its size, and who all would be covered under it. Loan waivers and higher MSPs have serious limitations in terms of their reach. They cannot reach more than 30% of the peasantry. Direct income support has much better reach but will also cost more. My guess is that the package could be anywhere between Rs 2-3 lakh crore, almost three to four times higher than the package announced by the Modi government. And this can swing farmers’ votes.

If the fisc has to be kept within reasonable bounds, money has to be found by rationalising some other programmes. My two penny unsolicited advice to all political parties is that it is time to revisit the food subsidy and MGNREGA programmes and rationalise them.

Food subsidy for consumers is Rs 184,220 crore and MGNREGA is budgeted for Rs 60,000 crore in the current Union budget. On top of this, there are pending bills of the Food Corporation of India, which totalled to about Rs 1.35 lakh crore in April 2018, and may not be much less in April 2019. So, in a way, for the so-called ‘poor’, the safety nets cost anywhere between Rs 3.5-4 lakh crore. The problem is that food subsidy covers 67% of the population with massive leakages.

This needs restructuring and rationalisation. For example, if one restricts food subsidy to the bottom 20-25% of the population, and link the issue price to at least half of the economic cost of FCI, give cash in lieu of grains to farmers, and restrict MGNREGA to drought years and/or merge with agri-operations, it can easily save more than Rs 1 lakh crore per annum. This can be diverted to farmers. Similarly, put fertiliser subsidy directly into the accounts of farmers, and let them choose whether they want to do organic farming or use chemicals. DBT through cash into farmers’ accounts with linkage to Aadhaar, their bank accounts, geo-tagging of farms, and updation of land records is a better way to support farmers than loan waivers and higher MSPs. It may be noted that they are not a substitute of either structural reforms or investments that are needed in agriculture. In fact, it is a sort of atonement for not acting on those fronts.

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