Few alternative thoughts to farm loan waivers

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A big development in the run-up to the General Elections to the Lok Sabha later this year has been around the announcements by few political parties to waive off farm loans if they are voted to power. I have no intention whatsoever to discuss the political dynamics of these poll promises. However, someone having an interest in agriculture policy space, I am happy to note that political parties are increasingly talking about the ongoing agrarian crisis. Farm loan waivers, though put a heavy strain on the state finances, are often preferred as a populist and politically rewarding solution to divert attention from the core issues of farm distress. Majority of agricultural economists, however, have not arguably aligned their considered viewpoints to such political manoeuvers. The central bank too has cautioned governments propagating these easy political options and has underlined the concerns that this may impact credit culture in the country.

Small size of land holdings; land degradation and depletion of ground water affecting natural resources, especially soil and water; multiple risks from increasing cost of inputs to vacillating prices for produce and volatility of markets and above all, the weather variabilities have put Indian agriculture at crossroads. There is no gainsaying the fact that tillers tilling hard to feed the nation need all required support to make farming viable and sustainable, both economically and environmentally. It is in this backdrop, I wish to offer few viable alternative thoughts to the farm loan waivers, keeping in view the crying needs of Indian farming at these critical times and to invest money from the same resource envelope ‘productively and purposefully’.

Expansion of Institutional lending:

Political parties are not talking of loan waivers for the first time. In the past, interest subventions and debt relief through waivers of loans and/or interest have been implemented with limited success. Empirical evidences and studies have clearly established the fact that it is not the majority in the lower rungs of farming community, who benefitted from such waiver schemes. As per available statistics, small and marginal farmers (owning arable lands of 2 hectares or less) amongst the 14 crores farm households in India constitute about 86% with an average land holding size of 1.15 hectares (2016 data). NABARD All India Rural Financial Inclusion Survey (NAFIS) 2016-17 reveals that only 43.5 % agricultural households borrowed any money in the previous year (2015-16) from some source or the other. Out of these, 60.4% agricultural households borrowed from institutional sources and 30.3% of the agricultural households borrowed from informal sources. The All India Debt and Investment survey (AIDIS) 70th round (2017) too reveals that institutional credit (cooperative societies/Banks; Commercial Banks) from amongst the total borrowers in agriculture is only 64%.

Loan waivers, benefitting mostly the institutional borrowers, will thus leave a significant part of agriculturist community, who are equally vulnerable. Loan waivers, as apprehended, would also affect future credit behavior of the borrowers and thus, adversely affect the agricultural credit culture altogether. In such a scenario, enhancing credit flow to agriculture sector and expansion of institutional finance seem to be a long-term solution. Interest subventions and incentivizing timely repayments would make better options than loan waiver by not destroying the credit repayment behavior of the borrowing farmers. It will also make the liquidity situation better.

Income Support to Farmers:

Income/investment support to farmers has recently been tried by few state governments. The Rythu Bandhu scheme of Telangana and KALIA (Krushak Assistance for Livelihood and Income Augmentation) of Odisha are setting trends through direct government payments to the farmers. The Odisha model seems to be an improved version that addresses the needs of even lessee farmers and has incorporated a package of other services like insurance products and exclusion criteria of non-poor farmers. Prima-facie, income-support to farmers, if implemented with transparency, seem to be a good alternative to the Loan-waiver proposition. However, availability of quality agro-inputs at the time of need will make proper use of the assistance, lest the support money should end up for consumption expenses of farmers.

Enhanced investments in agricultural research and education:

Evidence-based research has shown that it is prudent to raise investments in agricultural R&D so as to reap benefits in future. In a changing climate, challenges to the agriculture sector has increased. To counter all such adverse impacts, it is advisable to spend more on research and innovation in agriculture sector (present level of expenditure is only 0.3% of agricultural GDP). A recent study has pointed out that marginal returns on investment in agricultural R&D, irrigation and roads are 5 to 10 times higher than on input subsidies like fertilizers, power, etc. (ICRIER, 2018). We only wish, people at the helm make decisions with such solid evidences and not, with the sole aim to gain political dividends.

Targeting subsidies:

Economists across the spectrum have always advocated to reform the input subsidy regime prevailing in the country. Not defining entitlements or quantum of subsidy in inputs such as fertilizers and power has led to environmental problems like declining soil health and depleting ground water table. There have been studies which point out that input subsidies have largely benefitted the big farmers at the cost of small and marginal ones. I don’t advocate to do away with the subsidies for the marginalized; what I suggest is to ensure efficient and equitable use of the resources to ensure environmental sustainability. While the soil health card scheme of government aims to ensure balanced fertilization to raise crop productivity, it is mired with the excessive use of Urea (the price is comparatively very less vis-a-vis the P&K fertilizers) and non-availability of customized fertilizers. Subsidies on irrigation, agro-chemicals, etc. have also led to undesirable situations of environmental pollution and degradation. The need of the hour is to define eligibility for subsidies in agro-inputs and provision of adequate information for correct usages. Direct Benefit Transfer (DBT) of the subsidies, wherever possible, will lead to prevention of leakages, thus making precious resources available for benefit of needy farmers. A farmer wanting to irrigate his/her crop fields needs water and not, free power. Balancing all these dynamics will need great amount of political will and not just freebies that mostly drain out resources with plethora of alternative usages. Productive investments in agriculture sector would be rewarding for the economy in the long run.

Promotion of organic farming and agro-ecological approach:

Excessive use of chemicals and its adverse effects on agri-food system and the ecology and environment has already led to awareness to promote organic agriculture. The Zero budget natural farming (ZBNF) is being seen as an alternative to high input intensive agriculture. Ensuring proper certification and premium price for such farm produce would sustain ecological farming, which are environmentally sustainable. Growing awareness amongst consumers in upper middle class and urban dwellers is a positive development in creation of demand for organic produce. Integrated nutrient and pest management, conservation agriculture, etc. have been gaining momentum in recent years. Low external input sustainable agriculture using the eco-system services is expected to make the agri-food value chain more robust. Reducing cost of inputs and ensuring proper price for produce obviously would lead to enhanced farm income and thus, expected to reduce agrarian distress.

Linking Farmers to the Markets:

Policy instruments like MSP (Minimum Support Price) have not fully addressed the issues concerning better price realization of marketable surplus because of inadequate and much-desired implementation. Collectivization of farmers (FPOs/FPCs); private sector participation in the entire value chain, etc. have often been advocated to raise farm incomes. It is to be borne in mind that till we come to a good shape of organized marketing structure through retail chains or private mandis or enhanced role of e-NAM, APMCs can’t be wished away. Modernization of APMC markets would thus be an imperative for the present. Farmers must be connected with the consumers with less and less role for the middle men. We must bear in mind that a farmer with remunerative returns would never hanker for political allurements.

Digital Agriculture:

Use of mobile telephony; internet of things (IOTs); drones; advanced analytics, etc. have shown great potential in revolutionizing the agriculture sector in several countries as a whole with positive impact on farmers’ incomes. Weather and crop advisories; market intelligence by using smart phones have already proven beneficial to farmers in many parts of the country. At a time when the traditional agricultural extension system is not in proper shape (due to large scale vacancies; inadequate training and capacity building of existing personnels, etc.), digital means to transfer farm knowledge to crop fields would be desirable. This would lessen the burden of farm distress indirectly.

As clearly established through empirical studies, large chunk of farmers don’t get relief from loan-waivers. Moreover, after-effects of such populist schemes have adverse consequences on the sector itself and on the economy as a whole. Thus, it is worthwhile to make productive investments that would raise and stabilize income of farmers. The income-support schemes like Rythu Bandhu and KALIA seem to be better options to stabilize farm incomes in the short to medium term. States should endeavor to shift significant number of cultivators to non-farm jobs through creation of opportunities in other sectors. The surplus farmers moving into other professions would offer a long-term solution for the ongoing agriculture crisis. Productive investments in Agri R&D; rural infrastructure including roads, irrigation, etc. can only sustain growth of the agriculture sector. The only worrisome fact is that good economics is often bad politics in Indian agriculture.

About the author:

Dr Arabinda Kumar Padhee
Director, Country Relations and Business Affairs

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