Seeds of distress

Print edition : April 01, 2016

Farmers mixing potash and urea to use in a paddy field at Vayalur village near Tiruchi in Tamil Nadu. Photo: R.M. RAJARATHINAM

Arun Jaitley’s latest budget, which refuses to address issues such as the crisis of profitability or paucity of state credit, fails to make any effort to improve the economics of cultivation.

PERHAPS no other government in independent India has been so adept at offering promises as bombastic as the Narendra Modi government. The most recent promise has come from Arun Jaitley in Budget 2016-17; he said that his “government will… double the income of the farmers by 2022”.

To begin with, Jaitley deliberately kept his promise unclear. First, he did not mention if he was referring to nominal incomes or real incomes (adjusted for inflation). If the former, there have been earlier instances, such as between 2004-05 and 2011-12, where nominal incomes in agriculture indeed doubled. If the latter, agriculture needs to grow at insanely high rates every year until 2022.

Secondly, Jaitley did not mention if he was referring to incomes from agriculture or incomes of households involved in agriculture. The former would include only incomes from cultivation, including livestock. In 2012-13, the average annual income of an “agricultural household” from cultivation, livestock and farm business was Rs.4,356. Thus, the corresponding (nominal) income in 2022 should be Rs.8,712. In the latter, however, total household income would include agricultural wages, non-agricultural wages/incomes, salaries and urban remittances. In 2012-13, non-agricultural enterprises were the principal source of income for 5 per cent of agricultural households. Similarly, wages or salaried employment was the principal source of income for 22 per cent of agricultural households. The implications of such diversity of income sources for public policy are not to be underestimated. Let us assume here that Jaitley’s claim refers only to incomes from agriculture.

Incomes from cultivation are dependent on multiple factors. These include the ratio between the input price and the output price; the type of crops grown; the yields of crops; the number of crops grown in a year; the ability to raise credit; the size of the farm; and, finally, the ratio between farm income and the cost of living index. A rise in incomes from cultivation, then, requires addressing concerns relating to a wide array of factors. Admittedly, some of these factors, such as administering output prices, cropping pattern and structural features like farm size, are beyond the scope of an annual Budget. Limits of scope, however, did not prevent Jaitley from going for the hyperbole.

Yet, budgets and fiscal policy can make a difference to farmer incomes. Input prices can be moderated through higher public expenditure on subsidies. Better-yielding seeds can be the outcome of higher public expenditure in agricultural research and extension. The number of crops grown in a year can be influenced by higher public investment in irrigation. Overall costs of living can be moderated through higher public expenditure on education, health and social security cover.

Before examining the Budget proposals, let us first map out a few major contemporary challenges in raising farmers’ incomes in India.

Crisis of farm profitability

Improving the output-input price ratio, ceteris paribus, is absolutely essential to raise farm incomes. Figure 1 shows the movement of the wholesale price indices of selected farm inputs between 2004-05 and 2014-15. A sharp rise in the prices of farm inputs, such as fertilizers, electricity, pesticides, diesel, cattle feed and fodder, is a striking feature of the period after 2008-09, particularly after 2011-12. Figure 2 shows the movement of indices of Minimum Support Prices (MSPs) of selected crops. For paddy, wheat, cotton, toor dal and jowar, a striking feature is the near flattening of curves after 2011-12; in other words, during the same period that input prices rose sharply, the government refused to raise MSPs. As a result, profit margins shrank, or at best stagnated. Figures 1 and 2 capture the proximate cause of the current agrarian “distress”. This crisis of profitability in agriculture is policy-induced. On one hand, the government’s conservative fiscal policies led to a decline in subsidies and an increase in input costs. On the other hand, the government refused to announce higher MSPs to reflect the rise in costs of production. Surprisingly, many commentaries cite the slow growth of MSPs as an achievement; Economic Survey 2015-2016 cites the “moderate increase” in MSPs as evidence of “astute policies and management of inflation”.

A qualification may be in order here. Higher MSPs do influence the market prices of commodities. However, even if MSPs had risen, it is unlikely that the full benefits of a higher MSP would have reached the farmers. First, a large proportion of farmers do not generate marketable surplus and would not be the beneficiaries of higher MSPs; on the contrary, they would continue to be adversely affected by higher input prices. Second, owing to the lack of adequate procurement centres, a majority of farmers sell at prices lower than the MSP. National Sample Survey Office (NSSO) data for 2012-13 show that only 13.5 per cent of paddy farmers and 16.2 per cent of wheat farmers sold their harvest to procurement agencies. The crisis of profitability in cultivation is further exacerbated by a few other policy-induced constraints. The first is in the sphere of agricultural credit and the second in the sphere of public spending and investment.

Crisis in farm credit

Over the period of financial liberalisation in India, farmers have been pushed out of the ambit of public banking and forced to depend increasingly on informal lenders. The immediate reason for most suicides by farmers has been, also, their inability to repay loans.

Between 1992 and 2013, the share of cultivator households in India who were indebted increased from 25.9 per cent to 45.9 per cent. A rise in the share of indebted households in itself is not alarming. What is alarming, however, is that there also was a rise in their debt-asset ratios (which shows the extent to which debt is a drain on the value of owned assets).

In 1992, the debt-asset ratio for cultivator households was 1.61 and it rose to 2.46 in 2013. There was, thus, a major intensification of debt burdens in agriculture. Where was all this additional credit borrowed from? Not public banks but informal lenders. For instance, the share of debt outstanding of cultivator households from private moneylenders increased from 17.5 per cent in 1992 to 29.6 per cent in 2013. These three results reveal three realities of rural India. First, financial liberalisation after 1991 undermined the improvements in agricultural credit achieved after the bank nationalisation of 1969. Secondly, though the United Progressive Alliance (UPA) government in 2004 announced a scheme to double the supply of agricultural credit, the increase in credit flow from banks did not reach farmers. Thirdly, ad hoc measures like the debt waiver scheme or relief packages improved neither the conditions of farmers on the ground nor the overall credit supply to rural areas.

Indian agriculture has historically been starved of public resources. However, particularly after 1991, a number of public schemes have faced sharp budget cuts with onerous consequences. Let us take the example of public agricultural extension. New policies after 1991 treated agricultural extension as a private good that should ensure financial sustainability and cost recovery. Consequently, public spending on agricultural extension declined and the rural extension infrastructure collapsed. A Planning Commission review in 2005 admitted that the poor record of agricultural growth after 1991 was due to “weakened support systems” and “nearly broken down extension”. In States like Andhra Pradesh, the poor quality of extension systems contributed to a rise in the quantity of spurious seeds sold. Many farmer suicides were the outcome of crop failures caused by the use of spurious seeds.

The case of agricultural research is similar. In the developed world, public spending on agricultural research as a share of agricultural GDP ranges between 2 and 3 per cent. In India, public spending on agricultural research and education is between 0.6 and 0.7 per cent of the agricultural GDP. A spending target of 1 per cent of the agricultural GDP was fixed in the Ninth Plan, but that has not been achieved even today. Instead, policy has focussed on encouraging private research, especially that led by large multinational enterprises. As a result, the capability of public research institutions to compete with private sector firms was thoroughly weakened.

Let us now consider the proposals in Budget 2016-17. If farm incomes are to rise, cultivation has to become adequately profitable. Rural banks have to resume supporting investments by farmers. Public expenditure and investment should rejuvenate public support institutions in agriculture.

Budget and farm profitability

To begin with, Jaitley’s Budget has no proposal to ameliorate the crisis of profitability in agriculture. Two important subsidies are to fall in 2016-17. The food subsidy will decline from Rs.1,39,419 crore in 2015-16 to Rs.1,34,835 crore in 2016-17. Over the last 22 months, the National Democratic Alliance (NDA) government has expressed no interest in implementing the National Food Security Act (NFSA). It has also declared its preference to convert in-kind transfers in the Public Distribution System (PDS) to in-cash bank transfers. If no food is to be distributed through the PDS, procurement and MSPs become redundant. Regardless of the much-trumpeted announcement on decentralised procurement in the Budget, the reduction in food subsidy appears to be a pointer to this larger plan: dismantle the PDS and move to direct cash transfers; minimise the amount of grains procured; open up rural markets to multinational aggregating firms. Such a plan would ultimately end up eliminating the MSP itself.

On the input side, the Budget offers no respite for farmers who currently pay exorbitant prices for fertilizers. Among all farm inputs, fertilizer prices have recorded the sharpest rise in recent years. Still, fertilizer subsidy is to decline from Rs.72,438 crore in 2015-16 to Rs.70,000 crore in 2016-17. The effort in the Budget is also to focus on paying fertilizer subsidies directly to farmers. However, it is totally unclear how the direct transfer of fertilizer subsidies would be implemented and how the quantum of transfer and eligibility would be fixed. In reality, it is likely that the farmers will be left completely unprotected from future increases in fertilizer prices. And this is likely to render the crisis of agriculture even more acute.

In his speech, Jaitley promised to raise the supply of agricultural credit from Rs.8.5 lakh crore to Rs.9 lakh crore. Over the last decade, it has become customary for Finance Ministers to take credit for the rising supply of agricultural credit. The fallacy of these claims was pointed out by this writer in Frontline in 2011 itself (see “In farmer’s name”, March 25, 2011).

The upshot is that less than half of the agricultural credit appears to be actually reaching the farmers. In 2014, about 58 per cent of the agricultural credit was composed of loans above Rs 2 lakh; no average “farmer” actually takes a crop loan of more than Rs 2 lakh. More than a quarter of agricultural loans is disbursed from urban and metropolitan branches of banks. A major proportion of agricultural credit is supplied from the bank branches in February and March, when very little agricultural activity takes place. Large amounts of agricultural credit are also given out as indirect finance. In other words, agricultural credit is increasingly being diverted to urban areas and large corporate groups involved in agri-business activities.

Jaitley does not critically look at this humongous diversion of agricultural credit away from farmers to the benefit of corporations. He seems oblivious of the close links between farmer’s suicides and informal loans. He has no relief to offer for farmers who are denied credit by public banks. As the agrarian distress deepens, the continuing withdrawal of banks is likely to push more farmers into the hands of private moneylenders.

Budget spending on agriculture

Jaitley’s tenure as Finance Minister after May 2014 has had a common feature: he has consistently cut expenditure on agriculture.

Take the revenue head under crop husbandry. In 2013-14, Rs.51,087 crore was spent. For 2014-15, Jaitley budgeted for a lower amount of Rs.41,681 crore but only Rs.36,628 crore was spent. The cut between 2013-14 and 2014-15 was, thus, Rs.14,459 crore. For 2015-16, he budgeted an amount of Rs.39,868 crore but only Rs.39,324 crore was spent. For 2016-17, Jaitley has budgeted just Rs.25,756 crore.

There is more. On “Agriculture and Irrigation”, the total amount spent in 2014-15 was Rs.31,497 crore. The amount spent in 2015-16 was just Rs.25,988 crore, or Rs.5,509 crore less. For 2016-17, the budgeted amount (excluding the new head of interest subvention brought in from the Ministry of Finance) is Rs.32,912 crore. This is about Rs.6,924 crore, or 26 per cent, higher than in 2015-16. However, if we account for the amount of Rs.5,509 crore that Jaitley himself cut in 2015-16, it would appear that he has just about redeemed himself and nothing more.

The trend is the same in the case of specific schemes in agriculture. For the Rashtriya Krishi Vikas Yojana (RKVY), Jaitley cut the outlay from Rs.8,443 crore in 2014-15 to Rs.3,900 crore in 2015-16. The proposed amount for 2016-17 has been jacked up to Rs.5,400 crore, but it remains to be seen if this amount is actually spent. For the Krishi Unnathi Yojana, the amount was cut from Rs.9,823 crore in 2014-15 to Rs.8,884 crore in 2015-16. The budgeted amount for 2016-17 is even lower at Rs.7,580 crore.

For agricultural research and education, there is only a marginal rise in expenditure, from Rs.4,840 crore in 2014-15 to Rs.5,586 crore in 2015-16. Even the budgeted amount of Rs.6,620 crore in 2016-17, though nominally higher, appears hardly adequate to either meet the investment needs in the public sector or account for inflation. Jaitley’s budget offers no solutions to the major causes of agrarian distress. It makes no contribution to improving the economics of cultivation; it fails to plug the leakage of agricultural credit to large agri-business corporations; and it fails to finance and rejuvenate public support institutions in agriculture. Jaitley, and Modi, may do well to appreciate that the route to achhe din for farmers lies in the reversal of neoliberal policies in agriculture and not in further entrenching them.

R. Ramakumar is Professor, Tata Institute of Social Sciences, Mumbai.

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