Populist vs proper economy: Farmers gain more from better roads & irrigation, not subsidies, MSPs and loan waivers

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Published: October 27, 2018 4:16:50 AM

Farmers gain from better roads & irrigation, not subsidies

proper economy, Populist, farmers loan waivers, hike msp, marginal farmers, ICRIERWhat both the BJP and the Congress miss is that farmers are better served by free markets and more sensible expenditure on roads and irrigation, not by subsidies that only the rich farmers avail.

While the BJP’s pre-election promise to hike MSPs to 1.5 times the farmers’ cost appears to have come a cropper, with market prices of most crops way below the recently-hiked MSPs since few state governments have been able to cobble up a credible procurement mechanism, the Congress party has decided to do one better. The party has said it will waive all farm loans if it comes to power next year. The last time Congress announced a far waiver, in 2008, it was for Rs 60,000 crore. What party chief Rahul Gandhi, who had announced the new waiver proposition as early as May this year, is talking of adds up to over Rs 10 lakh crore—around 40% of this would be to small and marginal farmers. This means the party is either willing to wreck the banking system along with government finances or it feels that an election promise can be made without any serious application of mind.

That, of course, is the problem with all poll promises, such as the BJP’s MSP one or the doubling of farmers’ incomes that is being talked of now. When the BJP promised the 1.5x MSP, it is not clear whether it knew what it would cost or how it was to be implemented. While FE has estimated the plan will cost Rs 175,000 crore—for all crops except sugarcane—in a full year if market prices fall to 20% below the MSP since the government will have to buy all the output under those circumstances, not just the marketable surplus, the fact that the government has made no significant budgetary allocation this year makes it clear it doesn’t plan to honour the promise—between October 1 to 23, FE found that market prices for most crops were 25-30% below MSPs in major mandis.

Apart from the costs, the plan also distorts cropping patterns and also makes exports unviable; when they were announced, the MSP hikes threatened to hit $7.8 billion of rice exports and $19.3 billion of cotton-based exports since the MSP hikes ensured their prices rose above global levels; the rupee’s collapse has, since, mitigated this risk.

What both the BJP and the Congress miss is that farmers are better served by free markets and more sensible expenditure on roads and irrigation, not by subsidies that only the rich farmers avail. While farm subsidies rose from 2.8% of agri-GDP in 1980-81 to 8% in 2014-15, government investments fell from 3.9% to just 2.2% in the same period. And when the UP government announced its loan waiver, ICRIER professor Ashok Gulati pointed out that the size was roughly equal to what the farmer lost out over three years by not getting the MSP that the government had promised to pay for wheat and rice. Free markets would have helped farmers get at least this much since global prices would have determined local prices. Indeed, while farmers benefit from increased R&D, the Modi government has hounded Monsanto in various ways—by capping seed prices, trying to cap royalties and even telling the court that the patent it had been granted in India was illegal. As long as politicians don’t understand these realities, more such empty poll promises will continue to be made.

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