Clouds of despair

Print edition : July 10, 2015

A group of farmers in a field at Rajpur in Uttar Pradesh. Photo: Prashanth Vishwanathan/Bloomberg

INDIA'S beleaguered farmers are facing another threat to what is now a tenuous livelihood. That threat is the real prospect of a poor south-west monsoon that would substantially reduce agricultural production during the 2015-16 crop year (July to June). In its second-stage updated forecast of the south-west monsoon, which arrived a few days late in early June, the India Meteorological Department (IMD) has predicted that the monsoon is likely to be “deficient”, as opposed to just “below normal” as it had earlier indicated.

The revised forecast suggests that during the peak rainfall months from June to September, precipitation is likely to be around 88 per cent of its long period average and not 93 per cent that the IMD had predicted earlier. The figures by region are currently placed at 85 per cent over north-western India, 90 per cent over Central India, 92 per cent over the southern peninsula and 90 per cent over the north-eastern region.

Thus, north-western and Central India, which together account for more than 60 per cent of India’s foodgrain production, are expected to be hit badly. Moreover, the media have been reporting predictions from a range of global forecasters that this is likely to be an El Nino year, with the probability of an El Nino event placed as high as 90 per cent. Such an event would have unpredictable effects on rainfall distribution—drought in some parts of the country and heavy rainfall and floods in others—and significantly damage agricultural production.

This is particularly bad news for two reasons. The first is that the Indian economy has already experienced one truant monsoon with unseasonal rainfall that affected crop production adversely. Thus, according to the official third advanced estimate of foodgrain production during the just completed 2014-15 crop year (July to June), output is likely to fall by 5.3 per cent. An additional year of production decline following this will not only worsen the demand-supply imbalance and possibly lead to shortages that herald the return of inflation, but encourage speculative holding that converts that inflationary trend into a price spiral, especially in the case of food crops.

Handling this situation will be a challenge for a government committed to prioritising fiscal consolidation and fiscal deficit reduction above all else. Any attempt to counter inflation by distributing either domestically procured or imported foodgrain through the public distribution system (PDS) at subsidised prices will require an enhancement of the subsidy bill paid out from the government’s Budget. Given the government’s revenue mobilisation record, this will definitely increase the budgetary deficit. So, it is likely to hold back on that option.

On the other hand, merely releasing grain from its reserves through open market sales at a price that covers “economic cost” or the cost of procurement plus storage and transportation would do little to hold down prices. That will only increase the volume of stocks held by the private sector, which will worsen rather than resolve the inflation problem.

The problem in India is that if the minimum support price (MSP) at which grain is procured, which covers cost and provides a reasonable margin, is attractive for farmers in a poor harvest year, the floor price it sets for food tends to be too high for a large section of the population. Hence, grain released at an MSP-linked price will not find adequate takers. Thus, government subsidy matters for sustained offtake from the PDS.

The government, however, is overcommitted to reducing the per unit subsidy on food. It does this in three ways. Firstly, it has adopted the targeted PDS (TPDS) system, which separates the population into households below poverty line (BPL) and a substantial section above poverty line (APL). Secondly, it plans to do away with any subsidy on sale to the APL population, making food unaffordable for those who are just above or near the so-called poverty line. Thirdly, the government restricts allocations of food stocks at subsidised prices to the States, especially those States with a strong PDS that serves the APL population as well. In such a situation, sale of PDS grain does not rise adequately even during periods when the harvest is reasonable and procurement is high, and the result is a growing discrepancy between procurement and off-take from the PDS, with stocks accumulating with the government. When the harvest is deficient or poor, the impact on prices of the resulting “hoarding” by the government is likely to be adverse.

Thus, the as-yet-brief period when inflation has come down under the National Democratic Alliance (NDA) government’s watch is likely to be short-lived. However, for much of the rural population and farmers badly hit by the unseasonal rainfall during the 2015-16 crop year, higher market prices are unlikely to provide much comfort. A very large section of them, especially agricultural labourers and small and marginal farmers, are net buyers of food and will lose from higher food prices. Others produce very little of the marketed surplus, though they will gain from food price inflation. But any shortfall in production would adversely hit these peasants as well. Given the losses these sections suffered during the previous year, which triggered a number of suicides, this additional burden would be difficult to carry.

Needless to say, the impact of a poor harvest is much wider than just on grain producers. For example, among the worst sufferers of a failed agricultural policy are sugarcane growers, who have not been paid their dues by sugar mills for consecutive seasons. Cane arrears in the current sugar season stretching from December 2014 to September 2015 are estimated at Rs.21,000 crore. Such arrears reportedly arise when the price realised by sugar mills is not remunerative enough for them to pay the farmers for the cane they provide. Each time arrears accumulate, governments sympathetic to the corporate sector come out in support of the sugar mills, which complain that low sugar prices make it difficult for them to pay the ostensibly high prices for sugar cane set by the Centre and the even higher State advised prices recommended by certain State governments. This year, too, the government has announced that it will grant up to Rs.6,000 crore of loans free of interest for one year to sugar mills so that they can clear at least a part of their arrears. (The burden on the Budget on account of interest foregone would be Rs.600 crore.) After a Cabinet Committee meeting that took the decision, Union Minister for Road Transport and Highways Nitin Gadkari told reporters that the committee had “taken this decision in the interest of farmers”.

But the truth seems to be different. Sugar production this year, at more than 28 million tonnes, has been estimated to be far in excess of demand (around 24 million tonnes), resulting in subdued prices, but the practice of holding back on payments to cane growers has become routine. This is the third time in recent years that the government has provided such support to the mills. The government had provided a similar interest-free loan package to the tune of Rs.6,600 crore in December 2013 and a further Rs.4,400 crore in June 2014.

It is not clear if the benefits of such support went to the farmers or were absorbed by the industry. That the government suspects the latter is happening is clear from certain features accompanying the most recent package. To start with, sugar mills have been requested to provide banks with a list of names and bank account details of sugarcane growers to whom payments are due. This is to transfer the sums directly to those accounts to ensure that the farmers concerned receive them. Only arrears due to those without known accounts are to be transferred to the mills. What is unclear is why mills are expected to obtain and provide bank account details of the cane suppliers if they prefer to absorb the interest subvention themselves. Secondly, the interest-free loans are to be provided only to mills that have cleared at least 50 per cent of their outstanding arrears by June 30. Some evidence of commitment to pay is required to obtain government support.

Such clauses suggest that the government suspects the mills are not using the subsidised credit to pay farmers. Suspicion is also aroused by the fact that mill owners, including many belonging to leading business groups, have criticised the government’s decision to adopt such measures to ensure that arrears are paid to the farmers. Meanwhile, stock prices of listed sugar mills have risen after the government’s announcement, suggesting that the “market” expects the mills to gain. Thus, even when the government claims it is acting in the interests of farmers, the benefits do not always accrue to them. If, in addition, sugarcane producers are adversely affected by weather conditions and experience crop failure, their plight would be a cause for much concern.

It remains to be seen whether the government will do whatever it takes, regardless of cost, to mitigate the adverse effects of a bad monsoon in a bid to prevent any political damage if conditions worsen for an already neglected peasantry. It has every reason to do so. It is faced with the prospect of the return of inflation soon after celebrating a year in office, on the heels of its claims that it has reversed a record of poor economic governance, conquered inflation and restored investor confidence.

Inflation, in turn, can impact other variables. It could adversely affect foreign investor confidence and trigger the exit of investors already spooked by the prospect of an increase in interest rates in the United States. Domestically, higher inflation could force the Reserve Bank of India to hold back its hesitant efforts to reduce interest rates to stimulate growth. All told, an economic downturn could follow another episode of inflation. It is to be seen whether the government’s commitment to neoliberal reform paralyses it into inaction, despite the political damage that can cause. Even worse, it could limit action to those measures which hurt farmers even more, such as the amended land acquisition Bill, in order to please the corporate sector. That would be disastrous for an already beleaguered peasantry.

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