Agricultural Distress

India is a country mired with agricultural distress. The government had promised to double farmer’s income by 2022  but the recent protests by farmers for loan waivers paint a different picture.

Indian agriculture is characterized by low scale and low productivity. About 85% of the operational landholdings in the country are below 5 acres and 67% farm households have holdings below 1 acre. The agriculture in India is exposed to vagaries of nature. Many households don’t have access to irrigation. The problem is exacerbated by market risks and institutional failures.

The latest National Sample Survey on Situation Assessment Survey of Agricultural Households (NSS-SAS) gives dismal figures. 13.9% farm households experienced negative returns from crop production during 2012-13. Non farm income comprised 40 % of the income of the households but the access is to non farm incomes is highly skewed.

The question now arises is that given this backdrop should government go for loan waivers to the farmers.

Firstly the waivers would mean waivers only for the loans that have been taken from banks. But mostly the poor farmers rely on non institutional sources for the loans which involve a higher rate of interest. This means that many of the potential beneficiaries would get excluded. The farmers borrowing from non institutional sources are equally vulnerable.

Secondly, the waivers might arise the classic case of moral hazard problem. It should be noted that farmers often take consumption loans and this pushes them towards a vicious cycle of debt. A loan waiver would encourage them in taking consumption loans. It severely erodes the credit culture, with dire consequences to the banking business. There is a strong need to change such kind of farmer’s mind set.

Thirdly, in many cases, one household has multiple loans either from different sources or in the name of different family members that entitles them to multiple loan waivers.

Loan waiver is not even a good short term palliative. The expenditure on loan waivers has serious drawback on developmental expenditure. For instance, loan waiver may cost UP government 36000 crore, which is 4.4 times the State’s capital expenditure in Agriculture including irrigation and flood management. The worst part is that due to inclusion and exclusion error such an enormous expenditure is likely to exclude most of the farm households in dire need of relief and include some who do not deserve such relief on economic backgrounds. The CAG findings in the Agricultural Debt Waiver and Debt Relief Scheme also highlighted this problem.

For providing immediate relief to the needy farmers, a more inclusive approach is to identify the vulnerable farmers’ based on certain criteria and give an equal amount as a financial relief to vulnerable and distressed families. The government can also utilize its machinery established for Direct Benefit Transfers for identification of vulnerable households.

The sustainable solution to indebtedness and agrarian distress lies in treating farmers as entrepreneurs. They must be incentivised to take calculated risks. This entails improving farmer’s knowledge about the market. The recent initiative of the government of e-NAM is a much-appreciated move.

As agriculture is a state subject so centre must promote states to engage in competitive federalism. A  state can reward its farmers for paying its loan on time , by increasing the development expenditure towards agriculture in the budget. This will not only improve the infrastructure in that state but will also create demonstration effect for the farmers in other states. Centre can come with policies such as giving more guarantees to loans to such states. This will provide an added impetus to the state government .

Agro processing industries and the non farm sector should be encouraged and farmers should be made aware of how non farm sectors help in diversifying the risks. The success of agro processing industries lies in consolidation of farms. This requires computerized land records. Economists have long argued for taxation of farmer’s income above a certain threshold as an effective measure to reduce inequality in rural areas and increased revenue for rural infrastructure. This solution albeit  a right one , often invites political complexities .The success of all these schemes requires awareness of the farmers mainly the middle and small scale farmers. Farmer’s Friends initiative in ATMA is a step in the right direction.

India’s geography has blessed her with vast and fertile Indo-Gangetic plains. Doubling farmer’s incomes is not a piped dream. We cannot alter the circumstances overnight. But to achieve great reforms, one must continue to move towards the goal with sincerity.  In order to translate “Jai Jawan , Jai Kisan” into reality there is a strong need to uplift farmers’ position atleast near to that of jawans.

(This article has borrowed some facts and ideas from "Think beyond loan waivers", which appeared in The Hindu dated 20 July 2017)