Those arguing in favour of farm loan waivers have a point when they ask why it is okay to do this for industrialists but not agriculturists.
Those arguing in favour of farm loan waivers have a point when they ask why it is okay to do this for industrialists but not agriculturists. If there is no moral hazard in doing a loan restructuring for industry, why should it be a problem for agriculture. Indeed, in the latter case, banks are not even taking a hit as they do for industrial loans since the loan is being repaid by, in this case, the UP government. Of course, if banks buy the bonds floated by UP to repay the loans—as they did in the case of UDAY bonds—things are different.
That, of course, is the reason why the central government has, for over two years now, been grappling with resolving the bad loans tangle—any haircut will seem like doing fat-cat industrialists a favour. There is, though, a vital difference in that, if done correctly via the bad bank/PARA route, promoters will totally lose their companies in cases of big haircuts; in cases where they don’t, banks will get a larger share of equity. In the case of agriculture loans, there is no question of taking over part of the landholding.
While it is now up to the Yogi Adityanath government to figure out a way to ensure the waiver doesn’t throw its finances out of kilter, the obvious question is how long the bailout will keep farmers in the black. Certainly, the immediate loan repayment pressure will ease but if farmers don’t get more for their wheat/rice or milk or sugarcane, they will be in trouble again. This is why Adityanath has no option but to get his policies right immediately.
He has made a start by announcing FCI-style procurement of 8 million tonnes of wheat immediately. Whether this can be achieved remains to be seen, but if it can, it will be a big step in getting farmers the right price for the 37-38 million tonnes of wheat/rice they produce. ICRIER’s agriculture team headed by Ashok Gulati has recommended this as an agriculture-revival strategy for several states other than UP—UP farmers end up getting 15-20% less than the minimum support price (MSP) only because of very limited procurement in the state.
But if FCI is to buy so much foodgrain from the likes of UP and Bihar, it has to lower this from states like Punjab, Haryana and Andhra Pradesh—of the 55-60 million tonnes it procures, roughly 60% comes from these three states. So, even if chief ministers want to procure more, how much more depends on the central government. If FCI procures more from states like UP and eastern ones, it can reduce the dependence on states like Punjab which also levy exorbitant 14.5% mandi tax on any purchases—so, of the total mandi taxes of `12,000-13,000 crore paid by FCI, around 60% goes to just Punjab and Haryana; were this not be to paid, FCI could buy more from other states like UP and Bihar.
Over the medium-term, the Centre has to replace FCI-style procurement with flat payments to farmers on the basis of their land-holdings, but it has not even made a start. All input subsidies, for instance, should move to DBT but, as FE reported on Wednesday, even other DBT payments have stagnated. A completely free export market, extensive use of futures and a healthy food retail market are also critical for stability in farmer incomes—with the food ministry pushing hard, there could just be a breakthrough here.
Given the dairy industry’s importance, that’s another core area for the UP chief minister to concentrate upon. With 49% of Gujarat’s milk processed versus a mere 12% in Uttar Pradesh, getting in Amul-type cooperatives in the state is critical to farmers earning more. That is why, while Gujarat’s cow population has more or less kept pace with that of buffaloes (while cows grew from 7.4 million in 2003 to 10 million in 2012, buffaloes grew from 7.1 million to 10.4 million), the same does not apply to UP (cows grew from 18.6 million to just 19.6 million while buffaloes grew from 5.2 million to 30.6 million). The sharp fall in the proportion of male animals—in both cows and buffaloes—reinforces the need for a robust meat industry. It is true though, at 32% of the total, the Gujarati farmer is able to look after more male cows than the UP farmer can (25%). In both states, the proportion of male buffaloes is low—under a fifth—suggesting they are either killed for meat or simply allowed to roam and die.
In the case of sugar, if the government goes ahead and guarantees loans to sugar mills so that farmers can be paid off, this will be a one-season relief. With the mills cash-strapped due to the faulty policy of forcing them to buy cane at artificially high prices, the arrears saga will soon start again. A reforms roadmap in the form of the Rangarajan committee exists, it is now up to Adityanath to adopt it. If not, the loan waiver will have been for nothing.