Onion tears again, to make farmers cry

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Published: September 27, 2019 2:33:21 AM

Ironically, when a committee of chief ministers was formed to examine how agriculture could be given a boost, one of the proposals mooted was to ease, if not altogether eliminate, any restrictions on agriculture.

Onion prices, like those of most agriculture products, have sharp ups and downsOnion prices, like those of most agriculture products, have sharp ups and downs

It will be unfortunate if the government, as a response to the spurt in onion prices, imposes stocking limits on onion traders; it would make clear that like all past governments, the Narendra Modi-led one, too, is driven by short-term considerations, with little or no understanding of their long-term impact.

Onion prices, like those of most agriculture products, have sharp ups and downs, primarily due to inadequate storage and processing; having large retailers, including overseas ones, is the best way to fix this since only the presence of large buyers will trigger the creation of the necessary infrastructure, but that is a separate story.

What is relevant here is that each time such curbs are imposed, they end up hurting farmers more. A higher price for rice in export markets, for instance, will benefit farmers, but putting a cap on how much can be exported, as has happened in the past, or even an outright ban would end up hurting them. And, if price caps are so important to keep inflation in check, why not put a cap on how much house or car prices can go up by? In this case, while the argument is that traders’ hoarding of onions is driving up prices, anyone with even an elementary understanding of economics would know that the shortfall in output—excess rains have meant crop arrivals in wholesale mandis are around 40-50% lower than last year—is the main culprit.

Ironically, when a committee of chief ministers was formed to examine how agriculture could be given a boost, one of the proposals mooted was to ease, if not altogether eliminate, any restrictions on agriculture. Within just a month or two of that discussion, the government plans to put restrictions on onion supplies! While onion costs form a minuscule part of the household budget, if the government wanted to insulate them, it would have been better served by giving a cash dole to vulnerable sections; the large Aadhaar-cum-PDS database makes it much easier to do these direct cash transfers.

Two other news stories over this week are equally disturbing. A Reuters report talks of traders struggling to sign export contracts for cotton as local prices are higher than those prevailing in export markets; in FY19, India exported raw cotton worth $2.1 bn, cotton yarn worth$3.9 bn, fabric and made-ups worth $5.9 bn, and readymade garments worth $8.7 bn. That this should happen, though, can hardly be a surprise since, when Minimum Support Prices (MSP) were raised by a whopping 28% last year, this newspaper had pointed out that Indian prices would become higher than global ones. The MSPs of other crops were hiked as well, as part of the double-farm-income target, but if independent sources of demand, such as exports, get hit, the only way for farmers to gain requires the government to buy up all the farm output. But, it doesn’t have the money to be able to do that.

It gets worse. While agriculture credit continues to grow, as it should, given the law mandates 18% of bank lending be directed to this sector, there has been a dramatic contraction in loans in certain states. In the case of Uttar Pradesh, an RTI inquiry by The Indian Express showed, agriculture credit fell to Rs 91,628 crore in FY19, from Rs 97,707 crore in the previous year. For Karnataka, the numbers contracted to Rs 78,517 crore from Rs 90,195 crore, and for Punjab, to Rs 66,766 crore from Rs 72,020 crore. All states, the Express posits, were those that had loan waivers in the past, and this made bankers reduce credit levels.

Of course, the correlation isn’t quite as straightforward as is made out since, while Maharashtra also had large loan waivers—at Rs 34,000 crore, it was just marginally lower than Uttar Pradesh’s Rs 36,400 crore waiver—agriculture credit in the state actually rose in FY19. So, while the mandatory 18% rule ensures that farm loans can’t contract on a sustained basis, banks try to shift the loans to states where there isn’t a loan waiver. Nor does this always happen, though, and that’s why Maharashtra’s farm loans grew despite the loan waivers. But, at a broad level, an RBI internal working group on agricultural credit found ‘a deceleration in agriculture credit outstanding and decline in agriculture credit disbursements in the years of loan waiver programmes’ (see graphic). While the mandated lending rule ensures that credit levels can’t fall in the medium term, in the short-term, these do fall as beneficiary farmers aren’t able to get fresh loans till the loan-waiver program is fully implemented.

The study also found that ‘NPA level increased for all states that have announced farm loan waiver programme in 2017-18 and 2018-19’ while there was almost no change in states that didn’t have such schemes; ‘taken together’, the RBI working group report says, ‘this could be indicative of the presence of moral hazard, with borrowers defaulting strategically in anticipation of loan waiver’.

An additional problem relates to the fact that loan waivers are funded through state budgets, and that, in turn, leaves less money with the state governments for agricultural capex-spend; given that capex levels in the sector are falling, and that the impact of capex is far greater in terms of what it does for output, this deals a double blow to the sector. None of this week’s news—on cotton exports or agriculture credit—should come as a surprise, but, hopefully, this should underscore the adverse impact of unthinking policies that are meant to help farmers. The way to hell, the saw goes, is paved with good intentions.

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