The government needs to stay with the modest hikes and concentrate on reforms. Speeding cash transfers for fertilisers and pricing them at market rates will ensure correct usage and benefit all farmers instead of just the rich ones as happens right now.
Given how the BJP lost a lot of votes in rural Gujarat, the government is very likely to focus on alleviating stress in the farm sector ahead of the elections in four key states in 2018 and the general elections in 2019. Although we have now seen two good monsoons, after two bad ones in 2014 and 2015, prices of several agri-commodities—such as pulses—have crashed after bumper harvests, depriving farmers of a remunerative price for their crops. While real rural wages have been rising fairly sharply since July 2016, and rural unemployment too has been falling since then, the rise in nominal wages has been slower. As Pranjul Bhandari, chief economist at HSBC, wrote recently, this has increased the real indebtedness of land-owning farmers. Nevertheless, the pick-up in sales of two-wheelers and tractors, which have grown about 14% y-o-y between April and October, suggests the distress isn’t universal. Which is why, the government needs to desist from populist measures such as loan waivers that only end up creating a moral hazard. Instead, it could look at other steps such as framing a more liberal export policy that will fetch farmers better prices. Moreover, it should also refrain from bigger hikes in the MSPs, which are popular because they are visible, but just 5-6% of farmers in the country actually benefit from this since effective procurement takes place for 2-3 commodities in 4-5 states. Also, this distorts cropping preferences in favour of a few crops. Between 2014 and 2016, the NDA government increased the support prices of rice by an average of 3.9% annually versus around 9.5% for the first three years of the UPA.
The government needs to stay with the modest hikes and concentrate on reforms. Speeding cash transfers for fertilisers and pricing them at market rates will ensure correct usage and benefit all farmers instead of just the rich ones as happens right now. More cash transfers for PDS and winding down the FCI will save the exchequer money and stop distorting price signals. Spending more on irrigation and crop insurance may not give immediate benefits, but over even the medium term will do more for farmers. Since agriculture is a state subject, several reforms like contract farming or abolishing APMC require state governments to come on board, but a more stable export policy, greater use of cash transfers for fertilisers and food subsidies or allowing 100% FDI in food retail—this will ensure farmers get a higher share of retail prices—are all within the purview of the Union government. Greater construction activities—rural roads, housing and irrigation—will also do a lot to raise rural incomes and jobs and to take the pressure off the farm sector.