Crumbs for farmers

Hidden in the Modi government’s Budget promises to India’s farmers, who are in distress, is the admission: we have failed you.

Published : Feb 13, 2019 12:30 IST

A farmer in his dried up paddy field at Thummalapalli in Penuballi mandal of Khammam district on January 25, 2019.

A farmer in his dried up paddy field at Thummalapalli in Penuballi mandal of Khammam district on January 25, 2019.

No section of society has perhaps fared worse under the Narendra Modi regime than small peasants and agricultural labourers. Rural India, particularly peasants, voted in large numbers for the Bharatiya Janata Party-led National Democratic Alliance (NDA) in 2014. Once in power, the NDA government promised to double the incomes of farmers between 2015 and 2022. But by the fag end of his term, Modi, taken down a peg by a restive peasantry, is reduced to the sorry state of offering Rs.17 a day to cajole them to vote again for his party.

There are two dimensions—one long term and another short term—of the current agrarian distress that are striking. Between 2003 and 2010, Indian agriculture grew commendably thanks to two fortuitous factors: externally, higher global prices and, internally, higher minimum support prices (MSPs). The terms of trade—the ratio of “prices received” to “prices paid out” by farmers for inputs—rose, allowing farmers to survive a period of rising costs of production. After 2011, however, global prices began to fall and the domestic policy atmosphere turned hostile to agriculture. The goal of inflation targeting became the cherished goal of monetary policy. The United Progressive Alliance (UPA)-2 government refused to raise MSPs at the same rate as earlier, fearing that higher MSPs would lead to higher inflation. This fear was passed on from the UPA-2 to the NDA government after 2014. In sum, MSPs rose only moderately between 2011 and 2018.

After 2011, terms of trade turned adverse for farmers (see Figure 1). Figure 2 plots data on the sectoral deflator in agriculture—the difference between the rates of growth of gross domestic product from agriculture at current and constant prices—up to the first half of 2018-19. The sectoral deflator rose between 2005-06 and 2009-10 and then fell sharply after 2010-11, even turning negative by the second quarter of 2018-19. In other words, the economics of agriculture under the UPA-2 and NDA governments’ tenures was marked by the presence of acute disincentives.

The second dimension of the agrarian distress is evident from Figures 3, 4, 5 and 6, which depict the movement of wholesale price indices (WPIs) for a selected but varied set of crops. Strikingly, the WPIs for wheat, pulses, oilseeds, and spices and condiments began to decline sharply after November 2016. November 2016 was the month of implementation of one of the most reactionary and illogical economic measures ever attempted in independent India: demonetisation.

Demonetisation had two levels of impact on agricultural markets. First, in the first few weeks or months, it disrupted agricultural supply chains across the country. November 2016 was the month when kharif harvests arrived in mandis. But cash shortages prevented the smooth sale of the harvest. In some regions, traders did not pick up farmers’ harvest from fields and yards. In other regions, farmers were forced to sell at lower-than-market prices to traders or sell in exchange for older notes of Rs.500 and Rs.1,000. There was a sharp decline of arrivals in agricultural markets in November and December 2016.

Secondly, demonetisation upset some systemic features of agricultural markets. Use of cash has always dominated mandi trade (see Frontline , “Monumental blunder”, December 12, 2016, and “Unkindest cut”, December 23, 2016). Traders regularly rolled over cash across commodities, other traders, markets, farmers and retailers. The success of traders was not decided by what they bought and sold, but by how best they kept the cash rolling. Payments between wholesalers and retailers were not always immediately realised. Many traders would play around with part payments and delayed payments. When cash was not immediately available, traders would borrow from informal sources and repay when cash arrived. In other words, cash was the lubricant that made mandis work smoothly.

All this came to a standstill after demonetisation. As cash was sucked out, the practice of rolling over cash became difficult. The basic rhythm of the market was upset. Many small traders exited the business. A few began to use cheques to delay payments, but few were ready to accept them. Banks were rarely approached for credit lines, as traders feared getting tracked by the authorities. But even when adequate cash was available, traders were circumspect about rolling over large amounts of cash after demonetisation. As a result, the vibrancy of mandi trade was undermined. Prices fell precipitously in most commodities.

But demonetisation was not the only factor responsible for the price crash. Alongside, there were two other important factors. The first was rising production. In pulses, higher production in 2017-18 was a response to the government’s promise of higher MSPs. However, when the harvest arrived, the government refused to procure beyond a limit. This contributed to the fall in pulse prices in 2017-18. In 2018-19 too, production of pulses matched the fervour of the previous year. But government procurement did not increase in 2018-19 either, ensuring that higher MSPs were inconsequential for farmers. Prices fell again.

In wheat too, higher production in 2016-17 was a factor that contributed to lower prices in 2017-18. However, in 2017-18 and 2018-19, in States such as Maharashtra, farmers did not continue with wheat as the second crop; they sowed crops such as onion, tomato and pomegranate. The rise of wheat prices in 2018-19 (see Figure 3) was an outcome of such a shift in sowing leading to lower market arrivals.

The second factor was indiscriminate imports. Take pulses. India’s demand for pulses was estimated at 23.6 million metric tons (MMT) in 2015-16, while production stood at 16.4 MMT. To cover the deficit of about 7.5 MMT, India imported 5.8 MMT of pulses. In 2016-17, the production of pulses shot up to 22.3 MMT while the projected demand was 24.6 MMT. The deficit was only 1.8 MMT, yet imports rose from 5.8 MMT to 6.6 MMT. Take wheat. In 2014-15, India imported only 29,494 MT of wheat. However, wheat imports in 2015-16 were 5.2 lakh MT; in 2016-17 it was 57.5 lakh MT; and in 2017-18 it was 16.5 lakh MT.

The decline of agricultural prices after demonetisation was a proximate rallying factor in the spate of farmers’ protests, led by the All India Kisan Sabha, which swept the Indian countryside in 2017 and 2018. The two major demands were the waiver of outstanding farm loans and the fixing of MSPs at 150 per cent of the cost of production.

Loan waivers

Loan waivers are similar to band-aids on wounds. They, however, provide immediate relief to farmers from the crushing burden of debt when prices are crashing. While this has been the rationale behind the demand from farmers, its opponents put forward two major criticisms. First, loan waivers have “reputational consequences”; that is, they adversely affect the repayment discipline of farmers, leading to a rise in future defaults. Secondly, after the implementation of debt-waiver schemes, farmers’ access to formal sector lenders decline, leading to a rise in dependence on informal sector lenders.

Both the arguments are false. First, farmers are disciplined borrowers. In September 2018, agricultural non-performing assets, or NPAs (8.4 per cent), were far lower than industrial NPAs (21 per cent). Furthermore, agricultural NPAs fell continuously between 2001 and 2008. Secondly, there is no evidence to argue that default rates among farmers rose after the 2008 waiver. The lowest of all NPAs was recorded in March 2009 (2.1 per cent), which was just after the implementation of the 2008 scheme. The reason was the cleaning up of the account books of banks by the government. Once the cleaning up was complete, it was expected that NPAs would rise again to settle within a normal range. This was exactly what happened; agricultural NPAs rose and settled at about 5 per cent in 2011. There was one additional reason. D. Subbarao, as Reserve Bank of India Governor, pointed out in 2012 that agricultural NPAs rose between 2009 and 2011 owing to the “general economic slowdown” after 2009 and the introduction of new norms in the “system-wide identification of NPAs”.

After 2011, agricultural NPAs remained range-bound between 4 and 5 per cent until 2015 and then began to rise. As we have seen, there is enough evidence that this rise was not the result of any moral hazard; it was real, policy-induced and a direct consequence of an acute agrarian distress that spread across rural India after 2015 and, in particular, after demonetisation.

The second argument, that loan waivers shrink access to formal credit sector for farmers, is only partly true. But the culprits here are banks and not farmers. After every waiver, banks become conservative in issuing fresh loans to beneficiaries, as they are perceived to be less creditworthy. As a result, the scheme’s objective of expanding the issue of fresh loans to farmers is never fully achieved. But to cite such opportunistic actions of banks to deny fresh credit to farmers would be perverse policy.

It is only natural that when the bottom line of an economic enterprise shrinks, it instinctively attempts a reduction of debt. However, while firms have always received debt waivers, though they are tactfully termed as “loan restructuring” or “one-time settlements”, farmers are made to believe that waivers are largesse. This is despite the fact that farms, just as firms, also need a reduction of their debt burden, followed by fresh infusion of credit, especially during a downturn. The demand for loan waivers is absolutely logical when viewed from such a standpoint.

But loan waivers only address the distress partially. They cover only formal sector loans. Small and marginal farmers borrow less from formal lenders and more from informal sources. This leads to the exclusion of many small and marginal farmers and a disproportionate inclusion of large farmers in the ambit of waivers. Even as such an inbuilt bias exists, loan waivers do benefit in unburdening farmers of at least a part of their outstanding debt. States such as Kerala have tried to include loans from moneylenders also under debt-relief programmes. These interventions may be useful blueprints to design more comprehensive, inclusive and less leaky loan-waiver schemes in other States.

The second demand of farmers’ organisations was the fixing of MSPs at 50 per cent higher than the cost of production, an idea that originated in the report of the National Commission for Farmers (NCF) in 2006. The “cost of production” referred to by the NCF was the “C2” cost of production (i.e., sum of paid-out costs, imputed value of family labour, interest on the value of owned capital assets, rent paid for leased-in land and the rental value of owned land). However, the Modi government chose to interpret it as the “A2+FL” cost of production (i.e., sum of paid-out costs and the imputed value of family labour) and announced MSPs at 50 per cent above it in Budget 2018-19.

Members of NITI Aayog and bureaucrats have justified the use of A2+FL cost in estimating MSPs. According to them, 88 per cent of India’s farmers do not lease in land, and hence the rental value of owned land need not be considered an imputed cost. Such justification is but a poor excuse to ignore a cogent economic argument. For farmers cultivating their own land, the land could always be not self-cultivated and leased out for rent. This opportunity cost is in no way dissimilar to the imputation of family labour at the market wage rate. In the latter too, farmers are not actually earning a wage outside the farm; yet, it constitutes a wage lost because farmers forgo it and choose to cultivate their own farm. That we allow the opportunity cost of family labour to stay but exclude that of owned land makes poor economic sense.

But, like for loan waivers, we cannot consider MSPs too as a panacea for agrarian distress. Even if MSPs rise, there is no evidence that its benefits reach the farmer. Official surveys show that only 13.5 per cent of paddy farmers and 16.2 per cent of wheat farmers sell their harvest to procurement agencies. The rest sell to private traders at prices lower than the designated MSP. In fact, this not only makes a mockery of the MSP but also undermines the logic of the claim that higher MSPs automatically translate into higher rates of inflation.

It was to ensure that farmers obtain the full MSP that the Shivraj Singh Chouhan government in Madhya Pradesh initiated the Bhavantar Bhugtan Yojana (BBY).

The BBY option

The BBY is a scheme that pays into the farmer’s bank account an amount equivalent to the difference between the MSP and a modal price in the market. The BBY, however, has been found to be a failure, for two reasons.

First, a BBY-type scheme is deeply vulnerable to collusion among traders. In Madhya Pradesh, traders actively colluded to pull down the prices of soybean soon after farmers began to bring their produce to the market. They paid the farmers around Rs.300 less than the prevailing market price and asked farmers to collect the rest from the government under the BBY. But as soon as the window for BBY payments closed, soybean prices were pushed up to their original levels.

The second problem is more fundamental: with schemes such as the BBY, there will always be a perverse incentive for governments to not expand procurement by investing in warehousing and storage. With less food procured, less food will be available for distribution through the public distribution system. As long as the option of deficit payments to farmers exists, governments would constantly aim to exit procurement, and thus distribution, altogether. Many statements of NITI Aayog members suggest that this is not just a fear but a real possibility.

Direct Cash Transfers

With both loan waiver and higher MSPs ruled out ideologically and given the BBY’s failure, the government’s attention has now turned towards direct cash payments. Thus, Budget 2019-20 announced the “PM-Kisan” scheme to give each farmer household Rs.6,000 a year. Before the Budget announcement, two other States had already announced similar schemes. Telangana announced its Rythu Bandhu scheme in 2018, where each farmer would receive Rs.8,000 per acre (0.4 hectare) as investment support in a year. Odisha announced the KALIA (Krushak Assistance for Livelihood and Income Augmentation) scheme in 2018, where each family of small and marginal farmers would receive Rs.10,000 a year. Thus, while PM-Kisan and KALIA payments are for families, Rythu Bandhu payments are for per acre owned.

For a while now, there have been discussions about the idea of universal basic income (UBI). We note that the PM-Kisan, Rythu Bandhu and KALIA schemes are not universal schemes but targeted ones. In the UBI, the government pays everyone a fixed amount; in these three schemes an eligible household has to be identified. The total number of farmer households with a particular characteristic (say, owning less than five acres) can be easily estimated from sample surveys of the National Sample Survey Office. But identification follows estimation, where the government has to prepare a list of households with one such characteristic. It is here that troubles begin, as our earlier experience with dividing the population into those below and above the poverty line showed.

Targeted schemes are prone to a number of errors, such as errors of exclusion and errors of inclusion. Households that should be beneficiaries are left out, and those that should not be beneficiaries are listed in. In our case, tenants cultivate land but are excluded as they do not own the land. Agricultural labourers are left out because they neither own nor operate land. At the same time, in schemes such as Rythu Bandhu, the more land you own, the more money you get; the scheme, thus, is regressive in design.

There are administrative costs too. State machinery is mobilised on a large scale to ensure that ineligible households are strictly kept out. For instance, an absolute necessity for such schemes to work is updated land records so that the cash transfer reaches the right person. However, the status of our land records in States is nothing short of abysmal. Unless land records are updated and modernised (which Telangana did on a war footing before implementing its scheme), any cash transfer programme such as PM-Kisan will end up as a huge failure in even identifying a “farmer”.

Finally, targeted schemes are not self-selecting. Schemes such as the MGNREGS are self-selecting, as only those who are in need and willing to work will offer themselves for work. As everyone loves a bit of cash, no beneficiary would drop out of targeted cash transfer schemes, which would be a drain on public resources.

The larger problem with cash transfer schemes in agriculture is that they are cop-outs, an abdication of responsibility. It signals the inability of a government to raise productivity in agriculture and, thus, the incomes of farmers, through decisive investments. The government plans to spend Rs.75,000 crore for the scheme. This rather large amount could be productively invested in a number of spheres in agriculture and could, over a horizon of five or 10 years, become a substantial investment leading to the overall development of agriculture and farm incomes. That instead, narrow electoral considerations have come to dominate policymaking is indeed the sad part of the story. Hidden in it is the Modi regime’s admission: we have failed you.

R. Ramakumar teaches at the Tata Institute of

Social Sciences, Mumbai.

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